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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 July 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**

 

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**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 allreports required to be filed by Section 13 or 15(d) of the Securitiesand Exchange Act of 1934 during the preceding 12 months (or for shorter periodthat the registrant was required to file such reports); and (2) has beensubject to such filing 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   o (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 September 3, 2009, 50,690,917 shares of common stock ofthe registrant were outstanding, exclusive of 12,541,000 shares oftreasury stock.

 

 

 

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Tableof Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **         | ** **                                                                                                                   | **Page**   |
|--------------------|------------------------------------------------------------------------------------------------------------------------------|------------|
|               |                                                                                                                         |       |
| ** **         | **PART I. FINANCIAL INFORMATION**                                                                                       | ** ** |
|               |                                                                                                                         |       |
| **Item 1.**        | Financial Statements:                                                                                                        | 3          |
|               |                                                                                                                         |       |
|               | Condensed  Consolidated Balance Sheets (unaudited) – July 31, 2009 and  April 30, 2009              | 3          |
|               |                                                                                                                         |       |
|               | Condensed Consolidated Statements of Operations  (unaudited) – Three Months Ended July 31, 2009 and 2008 | 4          |
|               |                                                                                                                         |       |
|               | Condensed Consolidated Statements of Cash Flows (unaudited) – Three  Months Ended July 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                                  | 27         |
|               |                                                                                                                         |       |
| **Item 3.**        | Quantitative  and Qualitative Disclosures About Market Risk                                                                  | 41         |
|               |                                                                                                                         |       |
| **Item 4.**        | Controls and Procedures                                                                                                      | 42         |
|               |                                                                                                                         |       |
| ** **         | **PART II.  OTHER INFORMATION**                                                                                         |       |
|               |                                                                                                                         |       |
| **Item 1.**        | Legal Proceedings                                                                                                            | 43         |
|               |                                                                                                                         |       |
| **Item 1A.**       | Risk Factors                                                                                                                 | 44         |
|               |                                                                                                                         |       |
| **Item 2.**        | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                 | 59         |
|               |                                                                                                                         |       |
| **Item 6.**        | Exhibits                                                                                                                     | 59         |
|               |                                                                                                                         |       |
| Signatures         |                                                                                                                         | 60         |
|               |                                                                                                                         |       |
| Exhibit Index |                                                                                                                         |

 

2

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**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.    FINANCIAL STATEMENTS**

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

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

**(unaudited)**

** **
| ** **                                                                                                                                                                                                                           | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                           | ** ** | **2009**          | ** ** | **2009 (1)**       | ** ** |
| **ASSETS**                                                                                                                                                                                                                           |       |              |       |               |       |
| Current assets:                                                                                                                                                                                                                      |       |              |       |               |       |
| Cash and cash  equivalents                                                                                                                                                                                                           |       | $                 | 258,928    |               | $          | 257,808 |   |
| Short-term investments                                                                                                                                                                                                               |       | 50,076            |       | 16,973             |       |
| Accounts receivable,  net of allowances for doubtful accounts and sales returns                                                                                                                                                      |       | 48,367            |       | 43,978             |       |
| Inventories                                                                                                                                                                                                                          |       | 99,160            |       | 105,024            |       |
| Deferred income taxes                                                                                                                                                                                                                |       | 1,171             |       | 1,092              |       |
| Prepaid expenses and  other current assets                                                                                                                                                                                           |       | 7,620             |       | 7,779              |       |
| Total current assets                                                                                                                                                                                                                 |       | 465,322           |       | 432,654            |       |
| Property, plant and  equipment, net                                                                                                                                                                                                  |       | 119,295           |       | 119,071            |       |
| Long-term investments                                                                                                                                                                                                                |       | 84,950            |       | 85,469             |       |
| Intangibles, net                                                                                                                                                                                                                     |       | 5,763             |       | 7,396              |       |
| Other long-term assets                                                                                                                                                                                                               |       | 23,065            |       | 22,341             |       |
| Total assets                                                                                                                                                                                                                         |       | $                 | 698,395    |               | $          | 666,931 |   |
|                                                                                                                                                                                                                                 |       |              |       |               |       |
| **LIABILITIES  AND EQUITY**                                                                                                                                                                                                          |       |              |       |               |       |
| Current liabilities:                                                                                                                                                                                                                 |       |              |       |               |       |
| Accounts payable                                                                                                                                                                                                                     |       | $                 | 56,723     |               | $          | 28,775 |   |
| Accrued expenses and  other current liabilities                                                                                                                                                                                      |       | 12,283            |       | 12,153             |       |
| Income taxes payable                                                                                                                                                                                                                 |       | 2,078             |       | 692                |       |
| Deferred revenues, less  cost of revenues                                                                                                                                                                                            |       | 11,931            |       | 7,176              |       |
| Current portion of  long-term debt                                                                                                                                                                                                   |       | 3,554             |       | 3,555              |       |
| Total current  liabilities                                                                                                                                                                                                           |       | 86,569            |       | 52,351             |       |
| Long-term liabilities:                                                                                                                                                                                                               |       |              |       |               |       |
| Long-term income taxes  payable                                                                                                                                                                                                      |       | 81,946            |       | 81,266             |       |
| Non-current portion of  long-term debt                                                                                                                                                                                               |       | 31,979            |       | 32,867             |       |
| Other long-term  liabilities                                                                                                                                                                                                         |       | 6,747             |       | 8,109              |       |
| Total long-term  liabilities                                                                                                                                                                                                         |       | 120,672           |       | 122,242            |       |
| Total liabilities                                                                                                                                                                                                                    |       | 207,241           |       | 174,593            |       |
|                                                                                                                                                                                                                                 |       |              |       |               |       |
| Commitments and  contingencies (Note 16)                                                                                                                                                                                             |       |              |       |               |       |
|                                                                                                                                                                                                                                 |       |              |       |               |       |
| Equity:                                                                                                                                                                                                                              |       |              |       |               |       |
| OmniVision  Technologies, Inc. stockholders’ equity:                                                                                                                                                                       |       |              |       |               |       |
| Common stock, $0.001 par  value; 100,000 shares authorized; 63,224 shares issued and 50,683   outstanding at July 31, 2009 and 62,590 shares issued and  50,049 outstanding at April 30, 2009, respectively |       | 63                |       | 63                 |       |
| Additional paid-in  capital                                                                                                                                                                                                          |       | 411,647           |       | 403,159            |       |
| Accumulated other comprehensive  income                                                                                                                                                                                              |       | 818               |       | 773                |       |
| Treasury stock, 12,541  at July 31, 2009 and April 30, 2009, respectively                                                                                                                                                  |       | (178,683          | )          | (178,683           | )          |
| Retained earnings                                                                                                                                                                                                                    |       | 253,673           |       | 263,529            |       |
| Total OmniVision  Technologies, Inc. stockholders’ equity                                                                                                                                                                  |       | 487,518           |       | 488,841            |       |
| Noncontrolling interest                                                                                                                                                                                                              |       | 3,636             |       | 3,497              |       |
| Total equity                                                                                                                                                                                                                         |       | 491,154           |       | 492,338            |       |
| Total  liabilities and equity                                                                                                                                                                                                        |       | $                 | 698,395    |               | $          | 666,931 |   |

 

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(1)          As adjusted due to the adoption of SFAS No. 160.See Note 1 – *“Basis of Presentation.”*

 

Theaccompanying notes are an integral part of these Condensed ConsolidatedFinancial Statements (unaudited).

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

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

**(unaudited)**

 
| ** **                                                                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                     | ** ** | **July 31,**      | ** ** |
| ** **                                                                                                                     | ** ** | **2009**               | ** ** | **2008****(1)** | ** ** |
| Revenues                                                                                                                       |       | $                      | 105,560    |   | $ | 174,279 |   |
| Cost of revenues                                                                                                               |       | 81,890                 |       | 130,386 |   |
| Gross profit                                                                                                                   |       | 23,670                 |       | 43,893 |   |
|                                                                                                                           |       |                   |       |   |   |
| Operating expenses:                                                                                                            |       |                   |       |   |   |
| Research, development  and related                                                                                             |       | 18,432                 |       | 20,300 |   |
| Selling, general and  administrative                                                                                           |       | 14,160                 |       | 17,382 |   |
| Total operating  expenses                                                                                                      |       | 32,592                 |       | 37,682 |   |
|                                                                                                                           |       |                   |       |   |   |
| Income (loss) from  operations                                                                                                 |       | (8,922                 | )          | 6,211 |   |
| Interest income  (expense), net                                                                                                |       | (204                   | )          | 1,276 |   |
| Other income, net                                                                                                              |       | 568                    |       | 49 |   |
| Income (loss) before  income taxes                                                                                             |       | (8,558                 | )          | 7,536 |   |
|                                                                                                                           |       |                   |       |   |   |
| Provision for income  taxes                                                                                                    |       | 1,188                  |       | 1,413 |   |
| Net income (loss)                                                                                                              |       | (9,746                 | )          | 6,123 |   |
| Net income (loss)  attributable to noncontrolling interest                                                                     |       | 110                    |       | (105 | ) |
| Net income (loss)  attributable to OmniVision Technologies, Inc.                                                          |       | $                      | (9,856     | ) | $ | 6,228 |   |
|                                                                                                                           |       |                   |       |   |   |
| Net income (loss) per  share attributable to OmniVision Technologies, Inc. common stockholders:                           |       |                   |       |   |   |
| Basic                                                                                                                          |       | $                      | (0.19      | ) | $ | 0.12 |   |
| Diluted                                                                                                                        |       | $                      | (0.19      | ) | $ | 0.12 |   |
|                                                                                                                           |       |                   |       |   |   |
| Shares used in  computing net income (loss) per share attributable to OmniVision  Technologies, Inc. common stockholders: |       |                   |       |   |   |
| Basic                                                                                                                          |       | 50,574                 |       | 51,257 |   |
| Diluted                                                                                                                        |       | 50,574                 |       | 51,878 |   |

 

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(1)          As adjusted due to the adoption of SFAS No. 160.See Note 1* – “Basis of Presentation.”*

 

The accompanyingnotes are an integral part of these Condensed Consolidated Financial Statements(unaudited).

 

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**OMNIVISIONTECHNOLOGIES, INC.**

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

**(inthousands, unaudited)**

** **
| ** **                                                                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                     | ** ** | **July 31,**      | ** ** |
| ** **                                                                                     | ** ** | **2009**               | ** ** | **2008 (1)** | ** ** |
| Cash flows from operating  activities:                                                         |       |                   |       |   |   |
| Net  income (loss)                                                                             |       | $                      | (9,746     | ) | $ | 6,123 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:      |       |                   |       |   |   |
| Depreciation  and amortization                                                                 |       | 5,743                  |       | 4,019 |   |
| Change  in fair value of interest rate swap                                                    |       | (881                   | )          | (433 | ) |
| Stock-based  compensation                                                                      |       | 6,098                  |       | 6,945 |   |
| (Gain)  loss on equity investments, net                                                        |       | 401                    |       | (1,728 | ) |
| Write-down  of inventories                                                                     |       | 3,747                  |       | 2,478 |   |
| (Gain)  loss on disposal of property, plant and equipment                                      |       | —                 |       | 504 |   |
| Changes  in assets and liabilities:                                                            |       |                   |       |   |   |
| Accounts  receivable, net                                                                      |       | (4,386                 | )          | (16,643 | ) |
| Inventories                                                                                    |       | 3,670                  |       | 4,010 |   |
| Deferred  income taxes                                                                         |       | (637                   | )          | (751 | ) |
| Prepaid  expenses and other assets                                                             |       | 106                    |       | 701 |   |
| Accounts  payable                                                                              |       | 27,630                 |       | 6,778 |   |
| Accrued  expenses and other current liabilities                                                |       | (1,468                 | )          | (1,177 | ) |
| Income  taxes payable                                                                          |       | 2,069                  |       | 368 |   |
| Deferred  revenues, less cost of revenues                                                      |       | 4,748                  |       | 3,007 |   |
| Deferred  tax liabilities                                                                      |       | (483                   | )          | (485 | ) |
| Net  cash provided by operating activities                                                     |       | 36,611                 |       | 13,716 |   |
| Cash  flows from investing activities:                                                         |       |                   |       |   |   |
| Purchases  of short-term investments                                                           |       | (34,537                | )          | (10,113 | ) |
| Proceeds  from sales or maturities of short-term investments                                   |       | 1,373                  |       | 33,605 |   |
| Purchases  of property, plant and equipment, net of sales                                      |       | (3,902                 | )          | (10,495 | ) |
| Purchases  of long-term investments                                                            |       | —                 |       | (1,376 | ) |
| Net  cash provided by (used in) investing activities                                           |       | (37,066                | )          | 11,621 |   |
| Cash  flows from financing activities:                                                         |       |                   |       |   |   |
| Proceeds  from long-term borrowings                                                            |       | —                 |       | 6,000 |   |
| Repayment  of long-term borrowings                                                             |       | (889                   | )          | (341 | ) |
| Proceeds  from exercise of stock options and from employee stock purchase plan                 |       | 2,442                  |       | 2,679 |   |
| Net  cash provided by financing activities                                                     |       | 1,553                  |       | 8,338 |   |
| Effect  of exchange rate changes on cash and cash equivalents                                  |       | 22                     |       | 6 |   |
| Net  increase in cash and cash equivalents                                                     |       | 1,120                  |       | 33,681 |   |
| Cash  and cash equivalents at beginning of period                                              |       | 257,808                |       | 217,340 |   |
| Cash  and cash equivalents at end of period                                                    |       | $                      | 258,928    |   | $ | 251,021 |   |
| Supplemental  cash flow information:                                                           |       |                   |       |   |   |
| Taxes  paid                                                                                    |       | $                      | 239        |   | $ | 2,285 |   |
| Interest  paid                                                                                 |       | $                      | 549        |   | $ | 2 |   |
| Supplemental  schedule of non-cash investing and financing activities:                         |       |                   |       |   |   |
| Additions  to property, plant and equipment included in accounts payable and accrued  expenses |       | $                      | 325        |   | $ | 9,010 |   |
| Affiliate  cash dividend payable to noncontrolling interest                                    |       | $                      | —     |   | $ | 201 |   |
| Capitalized  interest and other costs                                                          |       | $                      | —     |   | $ | 183 |   |

 

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(1)          As adjusted due to the adoption of SFAS No. 160.See Note 1 – *“Basis of Presentation.”*

 

The accompanyingnotes are an integral part of these Condensed Consolidated Financial Statements(unaudited).

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**For theThree Months Ended July 31, 2009 and 2008**

**(unaudited)**

 

**Note 1 — Basis ofPresentation**

 

## ***Overview***

 

The accompanying interimunaudited condensed consolidated financial statements as of July 31, 2009and April 30, 2009 and for the three months ended July 31, 2009 and2008 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 Statement of FinancialAccounting Standard (“SFAS”) No. 160, *“Noncontrolling Interestsin Consolidated Financial Statements,”* (“SFAS No. 160”) asdiscussed in further detail below, the amounts as of April 30, 2009 comefrom the Company’s audited annual financial statements. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted in accordance with such rules and regulations. In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments, consisting only of normal recurringadjustments, necessary to state fairly the financial position of the Companyand its results of operations and cash flows as of and for the periodspresented. These condensed consolidated financial statements should be read inconjunction with the audited annual financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the fiscal yearended April 30, 2009 (the “Form 10-K”).

###### ** **

On May 1, 2009, theCompany adopted SFAS No. 160. SFAS No. 160 establishes accounting andreporting standards that require the ownership interests in subsidiaries heldby parties other than the parent, and income attributable to those parties, beclearly identified and distinguished in the parent’s condensed consolidatedfinancial statements. Consequently, the Company’s noncontrolling interest isnow disclosed as a separate component of the Company’s consolidated equity onthe balance sheet, rather than a “mezzanine” item between liabilities andequity. Further, earnings and other comprehensive income are now separatelyattributed to both the controlling and noncontrolling interests. Earnings pershare continues to be calculated based on net income attributable to theCompany’s controlling interest. The impact on the Company’s financial positionas of April 30, 2009, results of operations for the three months ended July 31,2008, and cash flows for the three months ended July 31, 2008 from theadoption of SFAS No. 160 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  July 31, 2008  Condensed Consolidated  Statement of Operations** |       |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **As Reported**                                                                              | ** ** | **As Adjusted** | ** ** |
| Minority  interest                                             |       | $                                                                                            | (105       | ) | $ | — |   |
| Net  income                                                    |       | 6,228                                                                                        |       | 6,123 |   |
| Net  loss attributable to noncontrolling interest              |       | —                                                                                       |       | (105 | ) |
| Net  income attributable to OmniVision Technologies, Inc. |       | —                                                                                       |       | 6,228 |   |
|                                                                |            |                                                                                              |            |  |  |  |  |

 
| ** **                                                | ** ** | **Three  months ended  July 31, 2008  Condensed Consolidated  Statement of Cash flows** |       |
|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **As Reported**                                                                              | ** ** | **As Adjusted** | ** ** |
| Net  income                                               |       | $                                                                                            | 6,228      |   | $ | 6,123 |   |
| Minority  interest in net loss of consolidated affiliates |       | (105                                                                                         | )          | — |   |
|                                                           |            |                                                                                              |            |  |  |  |  |

 

The results of operationsfor the three months ended July 31, 2009 are not necessarily indicative ofthe results that may be expected for the fiscal year ending April 30, 2010or any other future period.

 

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** **

**OMNIVISIONTECHNOLOGIES, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For theThree Months Ended July 31, 2009 and 2008**

**(unaudited)**

 

## ***Use of Estimates***

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America (“GAAP”) requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities,the disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting 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 — Summaryof Significant Accounting 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***

 

The functional currencyof the Company is the U.S. dollar. For subsidiaries or consolidatedaffiliates with a functional currency other than the U.S. dollar, theassets and liabilities of the subsidiaries are translated intoU.S. dollars at the rates of exchange prevailing on the balance sheetdate. Revenue and expense items are translated into U.S. dollars at theaverage rate of exchange for the period. Unrealized gains and losses fromforeign currency translation are included in “Accumulated other comprehensiveincome,” a component of stockholders’ equity. For subsidiaries with theU.S. dollar as the functional currency, and with assets or liabilitiesdenominated in currencies other than the U.S. dollar, non-monetary assetsare remeasured into U.S. dollars using historical rates of exchange.Monetary assets are remeasured into U.S. dollars using exchange ratesprevailing on the balance sheet date. The remeasurement gains or losses areincluded in “Other income, net.” For the three months ended July 31, 2009,the Company recorded remeasurement gains of $292,000 as compared toremeasurement losses of $18,000 for the three months ended July 31, 2008.

 

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

 

The Company considers allhighly liquid investments purchased with a maturity at the date of purchase ofthree months or less to be cash equivalents. Cash equivalents consistprincipally of government bonds, certificates of deposit and money marketfunds. (See Note 10.)

 

The Company maintains themajority of its cash and cash equivalent balances with major financialinstitutions 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***

 

Inventories are stated atthe lower of cost, determined on a first-in, first-out (“FIFO”) basis, ormarket.

 

The Company records aprovision to reduce the carrying value of inventories to their net realizablevalue when the Company believes that the net realizable value is less thancost. The Company also records a provision for the cost of inventories when thenumber of units on hand exceeds the number of units that the Company forecastswill be sold over a certain period of time, generally 12 months. Wherenecessary, these provisions take into account the inventories owned and not yetsold by certain of the Company’s distributors. The recording of theseprovisions establishes a new and lower cost basis for each specificallyidentified inventory item, and the Company does not restore the cost basis toits original level regardless of any subsequent changes in facts orcircumstances. Recoveries are only recognized upon the sale of previouslywritten-down inventories.

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For theThree Months Ended July 31, 2009 and 2008**

**(unaudited)**

 

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

 

Comprehensive income(loss) is defined as the change in the equity of a company during a period fromtransactions and other events and circumstances excluding transactionsresulting from investments by owners and distributions to owners. The followingtable sets forth the calculation of comprehensive income (loss) for all periodspresented (in thousands):

 
|                                                                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|
|                                                                            | ** ** | **July 31**       | ** ** |
|                                                                            | ** ** | **2009**               | ** ** | **2008 (1)** | ** ** |
| Net income (loss)                                                               |       | $                      | (9,746     | ) | $ | 6,123 |   |
| Translation gains (losses)                                                      |       | 71                     |       | (51 | ) |
| Unrealized gains (losses) on available-for-sale  securities, net                |       | 3                      |       | (66 | ) |
| Comprehensive income (loss)                                                     |       | (9,672                 | )          | 6,006 |   |
| Comprehensive income (loss) attributable to  noncontrolling interest            |       | 139                    |       | (105 | ) |
| Comprehensive income (loss) attributable to  OmniVision Technologies, Inc. |       | $                      | (9,811     | ) | $ | 6,111 |   |

 

----

(1)   As adjusted due to the adoptionof SFAS No. 160. See Note 1 — “*Basis ofPresentation.”*

 

The following tablereconciles equity attributable to noncontrolling interest (in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **July 31**       | ** ** |
| ** **                                                 | ** ** | **2009**               | ** ** | **2008 (1)** | ** ** |
| Noncontrolling interest, May 1                        |       | $                      | 3,497      |   | $ | 4,444 |   |
| Dividend distributed to noncontrolling interest            |       | —                 |       | (201 | ) |
| Net income (loss) attributable to noncontrolling  interest |       | 110                    |       | (105 | ) |
| Translation gain                                           |       | 29                     |       | — |   |
| Noncontrolling interest, July 31                      |       | $                      | 3,636      |   | $ | 4,138 |   |

 

## ***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 theirrequirements, and accordingly, in determining the appropriate level ofprovision for excess and obsolete inventory, the Company takes into account theinventories held by its distributors. For these reasons, prices and revenuesare not fixed or determinable until the distributor resells the products to theCompany’s end-user customers and the distributor notifies the Company inwriting of the details of such sales transactions. Accordingly, the Companyrecognizes revenue using the “sell-through” method. Under the “sell-through”method, the Company defers the revenue, adjustments to revenue and the relatedcosts of revenue until the final resale of such products to end customers. Theamounts billed 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.”

 

8

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**OMNIVISIONTECHNOLOGIES, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For theThree Months Ended July 31, 2009 and 2008**

**(unaudited)**

 

In addition, the Companyrecognizes revenue from the performance of services to a limited number ofcustomers by its wholly-owned subsidiary, OmniVision CDM Optics, Inc.(“CDM”), and by its consolidated affiliate, Silicon Optronics, Inc.(“SOI”). The Company recognizes the CDM-associated revenue under either thecompleted-contract or the percentage-of-completion methods. Thepercentage-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. CDM-associated revenue has not been material in any ofthe periods presented. The Company recognizes the limited amount of SOI-relatedservice revenue on a completed-contract basis.

 

## ***Recent Accounting Pronouncements***

 

In April 2009, FASBissued FSP SFAS No. 115-2 and SFAS No. 124-2, *“Recognitionand Presentation of Other-Than-Temporary Impairments”* (“FSP SFAS No. 115-2and SFAS No. 124-2”). FSP SFAS No. 115-2 and SFAS No. 124-2provides new guidance on the recognition and presentation of another-than-temporary impairment for debt securities classified asavailable-for-sale or held-to-maturity. The Company adopted the provisions ofFSP SFAS No. 115-2 and No. 124-2 on May 1, 2009, and theadoption did not have any material effect on the Company’s financial position,results of operations or cash flows.

 

In June 2009, theFASB issued SFAS No. 167, *“Amendments to FASB InterpretationNo. 46(R)”* (“SFAS No. 167”). SFAS No. 167 amends theconsolidation guidance under FASB Interpretation No. 46(R), *“Consolidation of Variable Interest Entities”*(“FIN 46(R)”) by requiring an enterprise to qualitatively assess thedetermination of the primary beneficiary of a variable interest entity (“VIE”)based on whether the enterprise: (1) has the power to direct matters thatmost significantly impact the activities of the VIE; and (2) has theobligation to absorb losses or the right to receive benefits of the VIE thatcould potentially be significant to the VIE. SFAS No. 167 also requires anongoing reconsideration of the primary beneficiary of a VIE, and amends theevents that trigger a reassessment of whether an entity is a VIE. SFAS No. 167is effective in fiscal years beginning after November 15, 2009, and theCompany is required to adopt SFAS No. 167 in its first quarter offiscal 2011. The Company is currently evaluating the impact SFAS No. 167may have on its financial position, results of operations and cash flows.

 

In June 2009, theFASB issued SFAS No. 168, *“The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples — a replacement of FASB Statement No. 162,”* (“SFAS No. 168”)which approved the FASB Accounting Standards Codification (“Codification”) asthe single source of authoritative United States accounting and reportingstandards for all non-governmental entities, except for guidance issued by theSEC. The Codification, which changes the referencing of financial standards, iseffective for interim or annual financial periods ending after September 15,2009, and the Company is required to adopt it in its second quarter of fiscal2010. Upon adoption, all references made to generally accepted accountingprinciples in the United States (“U.S. GAAP”) will use the new Codificationnumbering system prescribed by the FASB. As the Codification is not intended tochange or alter existing U.S. GAAP, the Company does not expect the adoption ofSFAS No. 168 to have any material impact on its financial position,results of operations and cash flows.

 

9

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**OMNIVISIONTECHNOLOGIES, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For theThree Months Ended July 31, 2009 and 2008**

**(unaudited)**

 

**Note 3 — Short-TermInvestments**

 

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

 
| ** **                                                          | ** ** | **As of July 31, 2009** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **Amortized**                | ** ** | **Gross  Unrealized** | ** ** | **Gross  Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Cost**                     | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Certificates of deposit                                             |       | $                            | 3,669      |   | $ | — |   | $ | — |   | $ | 3,669 |   |
| U.S. government debt securities with maturities less  than one year |       | 35,014                       |       | 4 |   | (1 | ) | 35,017 |   |
| U.S. government debt securities with maturities over  one year      |       | 5,000                        |       | 19 |   | — |   | 5,019 |   |
| Commercial paper and bond fund                                      |       | 6,368                        |       | 5 |   | (2 | ) | 6,371 |   |
|                                                                |       | $                            | 50,051     |   | $ | 28 |   | $ | (3 | ) | $ | 50,076 |   |
| Contractual maturity dates, less than one year                      |       |                         |       |   |   |   |   | $ | 45,057 |   |
| Contractual maturity dates, one year to two years                   |       |                         |       |   |   |   |   | 5,019 |   |
|                                                                |       |                         |       |   |   |   |   | $ | 50,076 |   |

 
| ** **                                                          | ** ** | **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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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

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

 
| ** **                                                       | ** **                       | **July 31,** | ** ** | **April 30,** | ** ** |
|------------------------------------------------------------------|----------------------------------|-------------------|------------|--------------------|------------|
| ** **                                                       | ** **                       | **2009**          | ** ** | **2009**           | ** ** |
| Cash and cash equivalents:                                       |                             |              |       |               |       |
| Cash                                                             |                             | $                 | 155,920    |               | $          | 120,754 |   |
| Money market funds, certificates of deposit and government bonds |                             | 103,008           |       | 137,054            |       |
|                                                             |                             | $                 | 258,928    |               | $          | 257,808 |   |
| Accounts receivable, net:                                        | ** **                       | ** **        | ** ** | ** **         | ** ** |
| Accounts receivable                                              |                             | $                 | 51,598     |               | $          | 48,105 |   |
| Less:                                                            | Allowance for doubtful  accounts |              | (642       | )                  | (691       | ) |
|                                                             | Allowance for sales returns      |              | (2,589     | )                  | (3,436     | ) |
|                                                             |                             | $                 | 48,367     |               | $          | 43,978 |   |
| Inventories:                                                     |                             |              |       |               |       |
| Work in progress                                                 |                             | $                 | 44,453     |               | $          | 26,860 |   |
| Finished goods                                                   |                             | 54,707            |       | 78,164             |       |
|                                                             |                             | $                 | 99,160     |               | $          | 105,024 |   |
| Prepaid expenses and other current assets:                       |                             |              |       |               |       |
| Prepaid expenses                                                 |                             | $                 | 4,991      |               | $          | 5,254 |   |
| Deposits and other                                               |                             | 2,427             |       | 2,439              |       |
| Interest receivable                                              |                             | 202               |       | 86                 |       |
|                                                             |                             | $                 | 7,620      |               | $          | 7,779 |   |
| Property, plant and equipment, net:                              |                             |              |       |               |       |
| Land                                                             |                             | $                 | 13,000     |               | $          | 13,000 |   |
| Buildings and land use right                                     |                             | 39,428            |       | 39,428             |       |
| Buildings/leasehold improvements                                 |                             | 17,141            |       | 17,110             |       |
| Machinery and equipment                                          |                             | 58,991            |       | 58,641             |       |
| Furniture and fixtures                                           |                             | 4,827             |       | 4,825              |       |
| Software                                                         |                             | 6,261             |       | 6,188              |       |
| Construction in progress                                         |                             | 15,654            |       | 11,878             |       |
|                                                             |                             | 155,302           |       | 151,070            |       |
| Less: Accumulated depreciation and amortization                  |                             | (36,007           | )          | (31,999            | )          |
|                                                             |                             | $                 | 119,295    |               | $          | 119,071 |   |
| Other long-term assets:                                          |                             |              |       |               |       |
| Deferred income tax assets – non-current          |                             | $                 | 17,877     |               | $          | 17,233 |   |
| Prepaid wafer credits                                            |                             | 2,990             |       | 2,990              |       |
| Long-term employee loan receivable                               |                             | 1,000             |       | 1,000              |       |
| Other long-term assets                                           |                             | 1,198             |       | 1,118              |       |
|                                                             |                             | $                 | 23,065     |               | $          | 22,341 |   |
| Accrued expenses and other current liabilities:                  |                             |              |       |               |       |
| Employee compensation                                            |                             | $                 | 3,773      |               | $          | 4,848 |   |
| Third party commissions                                          |                             | 926               |       | 1,532              |       |
| Professional services                                            |                             | 1,562             |       | 1,269              |       |
| Noncancelable purchase commitments                               |                             | 1,919             |       | 411                |       |
| Distributor pricing adjustments                                  |                             | 2,438             |       | 2,399              |       |
| Deferred income tax liabilities – current         |                             | 9                 |       | 8                  |       |
| Other                                                            |                             | 1,656             |       | 1,686              |       |
|                                                             |                             | $                 | 12,283     |               | $          | 12,153 |   |
| Other long-term liabilities:                                     |                             |              |       |               |       |
| Deferred income tax liabilities – non-current     |                             | $                 | 3,165      |               | $          | 3,646 |   |
| Interest rate swaps                                              |                             | 3,582             |       | 4,463              |       |
|                                                             |                             | $                 | 6,747      |               | $          | 8,109 |   |

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

**Note 5 — Long-term Investments**

 

Long-term investments as of July 31, 2009 andApril 30, 2009 consisted of the following (in thousands):

 
| ** ** | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|------------|------------|-------------------|------------|--------------------|------------|
| ** ** | ** ** | **2009**          | ** ** | **2009**           | ** ** |
| VisEra     |       | $                 | 67,578     |               | $          | 67,619 |   |
| WLCSP      |       | 11,447            |       | 10,996             |       |
| XinTec     |       | 4,661             |       | 4,661              |       |
| ImPac      |       | 1,264             |       | 2,193              |       |
| Total      |       | $                 | 84,950     |               | $          | 85,469 |   |

 

## ***VisEra TechnologiesCompany, Ltd.***

 

On October 29, 2003, the Company and TaiwanSemiconductor Manufacturing Company Limited (“TSMC”) entered into an agreementto form VisEra Technologies Company, Ltd. (“VisEra”), a joint venture in Taiwan,for the purposes of providing certain manufacturing and automated final testingservices related to complementary metal oxide semiconductor (“CMOS”) imagesensors. In August 2005, under an amendment to the original 2003joint-venture agreement, the Company and TSMC formed VisEra Holding Company(“VisEra Cayman”), a company incorporated in the Cayman Islands, and VisErabecame a subsidiary of VisEra Cayman. The Company and TSMC have equal interestsin VisEra Cayman.

 

Through April 2007, the Company’s contribution toVisEra and VisEra Cayman totaled $51.6 million, effectively meeting itscommitment under the terms of a January 2007 amendment to thejoint-venture agreement, in which the Company and TSMC have agreed to commit atotal of $112.9 million to the joint venture. The Company has not made anysubsequent contributions into VisEra and VisEra Cayman.

 

The Company initially accounted for its investment inVisEra under the equity method. Between August 1, 2005 andDecember 31, 2006, VisEra was considered a variable interest entity(“VIE”), and the Company was the primary beneficiary under FIN 46(R).Accordingly, the Company consolidated VisEra’s operating results. OnJanuary 1, 2007, VisEra ceased to meet the definition of a VIE.Consequently, we deconsolidated VisEra on January 1, 2007, and haveaccounted for our investment in VisEra under the equity method. (SeeNote 17.)

 

## ***China WLCSP Limited***

 

China WLCSP Limited (“WLCSP”) is in the business ofdesigning, manufacturing, packaging and selling certain wafer level chip scalepackaging related services, for which the Company is currently a customer. InMay 2007, the Company acquired 2,500,000 units of WLCSP’s equity interestsfrom WLCSP at a per unit price of $2.00 for an aggregate purchase amount of $5.0 million.Concurrently, the Company purchased from Infinity-CSVC Venture CapitalEnterprise 2,000,000 units of WLCSP’s outstanding equity interests at a priceper unit of $2.00 for an aggregate purchase amount of $4.0 million.Following the completion of the two transactions, the Company ownsapproximately 20.0% of WLCSP’s registered capital on a fully-diluted basis andhas appointed a member to WLCSP’s board of directors and a supervisor tomonitor the actions of WLCSP’s board of directors and officers.

 

At the date of the transaction, the Company’s$9.0 million investment in WLCSP exceeded its share of the book value ofWLCSP’s assets by $5.7 million. Of this $5.7 million difference,$4.1 million represents equity method goodwill which, in accordance withSFAS No. 142, *“Goodwill and OtherIntangible Assets”*(“SFAS No. 142”), and APB Opinion No. 18, *“The Equity Method of Accounting for Investments inCommon Stock”*(“APB 18”), is not subject to amortization. Thisamount is recorded as a portion of the Company’s investment in WLCSP. TheCompany is amortizing the remaining basis difference of $1.6 million,which is attributable to intangible assets of WLCSP, over various periods up toa maximum of five years.

 

The Company accounts forits investment in WLCSP under the equity method. For the three months endedJuly 31, 2009 and 2008, the Company recorded equity income of $451,000 and$7,000, respectively, in “Other income, net,” consisting of its portion of thenet income recorded by WLCSP during those periods, partially offset by equitymethod investment adjustments. (See Note 17.)

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

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

 

XinTec, Inc. (“XinTec”) is a Taiwan-basedsupplier of chip scale packaging services. The Company first made investmentsin XinTec in April 2003, for $2.8 million. As of July 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%. In accordance withAPB 18, the Company accounts for XinTec as a cost method investment.

 

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

 

In June 2003, in order to enhance its access toplastic and ceramic packaging services, the Company invested $2.0 millionin ImPac Technology Co., Ltd. (“ImPac”), a privately-held company based inTaiwan. After additional cash contributions of approximately $0.8 millionin December 2003 and $1.4 million in July 2008, the Company owns25.7% of ImPac. The Company’s purchases from ImPac are at arm’s length, and theCompany accounts for this investment using the equity method. The Companyrecorded an equity loss of $0.9 million and $395,000, respectively, in“Other income, net,” as its portion of ImPac’s net loss for the three months endedJuly 31, 2009 and 2008.

 

The following table presents the summary combinedfinancial information of ImPac, VisEra and WLCSP, as derived from theirfinancial statements for the three months ended July 31, 2009 and 2008,are prepared under GAAP (in thousands):

 
| ** **                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **July 31,**      | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ***Operating data:***          |       |                   |       |   |   |
| Revenues                       |       | $                      | 20,326     |   | $ | 26,336 |   |
| Gross profit                   |       | 1,030                  |       | 6,100 |   |
| Income (loss) from  operations |       | (1,894                 | )          | 2,784 |   |
| Net income (loss)              |       | $                      | (1,357     | ) | $ | 1,230 |   |

 

The Company’s share of undistributed earnings of theinvestees accounted for by the equity method totaled $13.6 million and$14.1 million at July 31, 2009 and April 30, 2009, respectively.

 

**Note 6 — ConsolidatedAffiliate — Silicon Optronics, Inc.**

 

In May 2004, the Company entered into anagreement with Powerchip Semiconductor Corporation (“PSC”), a Taiwan basedcompany that produces memory chips and provides semiconductor foundry services,to establish SOI, a joint venture in Taiwan. The purpose of SOI is to conductmanufacturing, marketing and selling of certain of the Company’s legacyproducts. Toward the end of fiscal 2009, SOI began to investigate the marketpotential of touch panels that track touches with optical sensors. Thesedevices compete with the current resistive and capacitive touch panels. TheCompany contributed approximately $2.1 million to SOI in exchange for anownership percentage of 49.0%. In March 2005, the Company assumed controlof the board of directors of SOI and the Company has consolidated SOI sinceApril 30, 2005. As of July 31, 2009, the Company owned 43.9% of SOI.(See Note 17.)

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

**Note 7 — Intangible Assets**

 

Intangible assets as of July 31, 2009 consist ofthe following (in thousands):

 
| ** **                 | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|----------------------------|------------|----------|------------|-------------------------------|------------|---------------------|------------|
| Core technology            |       | $        | 17,800     |                          | $          | 15,130              |       | $ | 2,670 |   |
| Patents and  licenses      |       | 13,487   |       | 10,604                        |       | 2,883               |       |
| Trademarks and  tradenames |       | 1,400    |       | 1,190                         |       | 210                 |       |
| Customer  relationships    |       | 100      |       | 100                           |       | —              |       |
| Intangible  assets, net    |       | $        | 32,787     |                          | $          | 27,024              |       | $ | 5,763 |   |

 

Intangible assets as of April 30, 2009 consist ofthe 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 the three months ended July 31, 2009and 2008, the Company amortized $1.6 million, respectively, of itsintangible assets. The total expected future annual amortization of theseintangible assets is as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------|------------|
| 2010                       |       | $          | 4,753      |   |
| 2011                       |       | 973        |       |
| 2012                       |       | 37         |       |
| Total                      |       | $          | 5,763      |   |

 

**Note 8 — Borrowing Arrangements**

 

The following table shows the Company’s debt andcapital lease obligations (in thousands):

 
| ** **                             | ** ** | **July 31,  2009** | ** ** | **April 30,  2009** | ** ** |
|----------------------------------------|------------|-------------------------|------------|--------------------------|------------|
|                                   |       |                    |       |                     |       |
| Mortgage loan                          |       | $                       | 26,283     |                     | $          | 26,421 |   |
| Term loan                              |       | 9,250                   |       | 10,000                   |       |
| Capital lease  obligations             |       | —                  |       | 1                        |       |
|                                   |       | 35,533                  |       | 36,422                   |       |
| Less: amount  due within one year |       | (3,554                  | )          | (3,555                   | )          |
| Non-current  portion of long-term debt |       | $                       | 31,979     |                     | $          | 32,867 |   |

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

At July 31, 2009, aggregate debt maturities wereas follows (in thousands):

 
| **Years Ending April 30,** | ** ** | **Mortgage  and Term  Loan** | ** ** |
|---------------------------------|------------|------------------------------|------------|
| 2010                            |       | $                            | 2,666      |   |
| 2011                            |       | 3,554                        |       |
| 2012                            |       | 3,554                        |       |
| 2013                            |       | 1,554                        |       |
| 2014                            |       | 554                          |       |
| Thereafter                      |       | 23,651                       |       |
| Total                           |       | $                            | 35,533     |   |

 

## ***Mortgage Loan and TermLoan***

 

On March 16, 2007, the Company entered into aLoan and Security Agreement with a domestic bank for the purchase of a complexof four buildings located in Santa Clara, California (the “Santa ClaraProperty”). The Loan and Security Agreement provides for a mortgage loan in theprincipal amount of $27.9 million (the “Mortgage Loan”) and a secured lineof credit with an aggregate maximum principal amount of up to$12.0 million (the “Term Loan”). In March 2008, the Company borrowed$6.0 million under the Term Loan to finance improvements to the SantaClara Property. The Company drew down the remaining $6.0 million under theTerm Loan in July 2008.

 

Borrowings under the Mortgage Loan accrue interest atthe London Interbank Borrowing Rate (“LIBOR”) plus 90 basis points.Borrowings under the Term Loan accrue interest at the LIBOR rate plus125 basis points. The Mortgage and Term Loans mature on March 31,2017 and July 31, 2012, respectively.

 

Interest rates under the Mortgage Loan were 1.2% and1.4% at July 31, 2009 and April 30, 2009, respectively. Interestrates under the Term Loan were 1.6% and 1.8% at July 31, 2009 andApril 30, 2009, respectively. The Company was in compliance with thefinancial covenants of the Loan and Security Agreement as of July 31,2009.

 

In conjunction with the Mortgage Loan, the Companyentered into an interest rate swap with the same bank to effectively convert thevariable interest rate described above to a fixed rate. The swap is for aperiod of ten years, and the notional amount of the swap approximates theprincipal outstanding under the Mortgage Loan. The Company is the fixed ratepayer under the swap and the rate is fixed at 5.3% per annum and the effectiverate on the Mortgage Loan is fixed at approximately 6.2%. In July 2008, inconnection with the Term Loan, the Company entered into a second interest rateswap with the bank to effectively convert the variable interest rate describedabove to a fixed rate. This second swap is for a period of four years. TheCompany is the fixed rate payer and the rate is fixed at 4.3% per annum and theeffective rate on the Term Loan is fixed at approximately 5.5%.

 

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

 

SOI maintains four unsecured lines of credit withthree commercial banks, which provide a total of approximately$3.4 million in available credit. All borrowings under these lines ofcredit bear interest at the market interest rate prevailing at the time ofborrowing. There are no financial covenant requirements for these facilities.At July 31, 2009 and April 30, 2009, there were no borrowingsoutstanding under these facilities.

 

## ***Capital Lease Obligations***

 

In February 2006, the Company leasedtelecommunications equipment under a three-year capital lease at an imputedinterest rate of 7.5% per annum. The Company recorded a capital asset for$393,000 that is being depreciated over a five-year period in accordance withthe Company’s capitalization policy. The Company paid the remaining $1,000balance outstanding under the capital lease during the three months endedJuly 31, 2009, and consequently, there was no balance outstanding atJuly 31, 2009.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

## ***Derivative Instrumentsand Hedging Activities***

 

As indicated above, the Company holds two separateinterest rate swaps in connection with the Mortgage Loan and the Term Loan. TheCompany utilizes the swaps to reduce the effect of interest rate variability onthe two loans’ interest payments. The Company has not designated the twointerest rate swaps as hedging instruments, as defined in SFAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities.”*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.

 

The table below presents the location of the swaps onthe Condensed Consolidated Statements of Operations and Condensed ConsolidatedBalance Sheets, and the related effects on the Company’s results of operationsand financial positions (in thousands):

 
| ** **                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                    | ** ** | **July 31,**      | ** ** |
| ** **                                                                                                    | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ***Location of amounts recognized in Condensed Consolidated  Statements of Operations and amount of gains:*** |       |                   |       |   |   |
| Other income, net                                                                                             |       | $                      | 881        |   | $ | 433 |   |
|                                                                                                          |       |                   |       |   |   |
|                                                                                                          | ** ** | **July 31,**      | ** ** | **April 30,** | ** ** |
|                                                                                                          | ** ** | **2009**               | ** ** | **2009** | ** ** |
| ***Location of amounts on Condensed Consolidated Balance  Sheets and fair values:***                          |       |                   |       |   |   |
| Other long-term  liabilities                                                                                  |       | $                      | 3,582      |   | $ | 4,463 |   |

 

**Note 9 — Net Income (Loss) PerShare Attributable to OmniVision Technologies, Inc. Common Stockholders**

 

Basic net income (loss) per share attributable toOmniVision Technologies, Inc. common stockholders is computed by dividingnet income (loss) attributable to OmniVision Technologies, Inc. by theweighted average number of common shares outstanding during the period.

 

Diluted net income per share attributable toOmniVision Technologies, Inc. common stockholders is computed according tothe 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 July 31, 2009, the Company excluded all options andrestricted stock units outstanding as the Company recorded a net loss of $9.9 million.For the three months ended July 31, 2009, 12,040,066 shares of commonstock subject to outstanding options were not included in the calculation ofdiluted net income per share because they were antidilutive.

 

The Company’s earnings per share were calculated underthe provisions of the SFAS No. 128, *“EarningsPer Share,”* (“SFAS No. 128”). SFAS No. 128 requires thatthe Company take into account the effect on consolidated earnings per share ofoptions, warrants and convertible securities issued by its subsidiaries. Theeffect on consolidated earnings per share depends on whether the securitiesissued by the subsidiary enable their holders to obtain common stock of thesubsidiary company or common stock of the parent company. Securities issued bya subsidiary 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 July 31, 2009, SOI issued options tovarious of its employees exercisable for 3,300,000 shares of its commonstock. In the calculation of its earnings per share for the three months endedJuly 31, 2009 and 2008, the Company included the effect of SOI’s optionsin its consolidated earnings per share, if dilutive.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

The following table sets forth the computation ofbasic and diluted earnings (loss) per share for the periods indicated (inthousands, except per share data):

 
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                              | ** ** | **July 31,**      | ** ** |
| ** **                                                                                                                              | ** ** | **2009**               | ** ** | **2008 (1)** | ** ** |
| ***Basic:***                                                                                                                            |       |                   |       |   |   |
| Numerator:                                                                                                                              |       |                   |       |   |   |
| Net income (loss)  attributable to OmniVision Technologies, Inc.                                                                   |       | $                      | (9,856     | ) | $ | 6,228 |   |
|                                                                                                                                    |       |                   |       |   |   |
| Denominator:                                                                                                                            |       |                   |       |   |   |
| Weighted average  common shares for net income (loss) per share attributable to OmniVision  Technologies, Inc. common stockholders |       | 50,574                 |       | 51,257 |   |
|                                                                                                                                    |       |                   |       |   |   |
| Basic net income  (loss) per share attributable to OmniVision Technologies, Inc. common  stockholders                              |       | $                      | (0.19      | ) | $ | 0.12 |   |
|                                                                                                                                    |       |                   |       |   |   |
| ***Diluted:***                                                                                                                          |       |                   |       |   |   |
| Numerator:                                                                                                                              |       |                   |       |   |   |
| Net income  (loss) attributable to OmniVision Technologies. Inc.                                                                        |       | $                      | (9,856     | ) | $ | 6,228 |   |
|                                                                                                                                    |       |                   |       |   |   |
| Denominator:                                                                                                                            |       |                   |       |   |   |
| Denominator for  basic net income (loss) per share attributable to OmniVision  Technologies, Inc. common stockholders              |       | 50,574                 |       | 51,257 |   |
| Weighted average  effect of dilutive securities:                                                                                        |       |                   |       |   |   |
| Stock options,  restricted stock units and employee stock purchase plan shares                                                          |       | —                 |       | 621 |   |
| Weighted average  common shares for diluted net income (loss) per share                                                                 |       | 50,574                 |       | 51,878 |   |
|                                                                                                                                    |       |                   |       |   |   |
| Diluted net  income (loss) per share attributable to OmniVision Technologies, Inc.  common stockholders                            |       | $                      | (0. 19)    |   | $ | 0.12 |   |

 

----

(1)  As adjusted due to the adoption of SFASNo. 160. See Note 1 — *“Basis of Presentation.”*

 

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

 

SFAS No. 157 specifies a hierarchy of valuationtechniques based upon whether the inputs to those valuation techniques reflectassumptions other market participants would use based upon market data obtainedfrom independent sources (observable inputs) or reflect the Company’s ownassumption of market participant valuation (unobservable inputs). The fairvalue 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 forsimilar assets or liabilities in an active market, quoted prices for identicalor similar assets or liabilities in markets that are not active, inputs otherthan quoted prices that are observable and market-corroborated inputs which arederived principally from or corroborated by observable market data.

 

·                  *Level 3* – Inputs are derived fromvaluation techniques in which one or more significant inputs or value driversare unobservable.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

The following table presents the Company’s financialassets and liabilities that are measured at fair value on a recurring basiswhich were comprised of the following types of instruments as of July 31,2009 (in thousands):

 
| ** **                                                              | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------------------------------------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Money market  funds                                                     |       | $         | 52,748     |             | $          | 52,748           |       | $                | —     |   | $ | — |   |
| Certificates of  deposit                                                |       | 15,009    |       | —           |       | 15,009           |       | —           |       |
| Debt securities  issued by U.S. government and U.S. government agencies |       | 78,956    |       | —           |       | 78,956           |       | —           |       |
| Corporate debt  securities/commercial paper                             |       | 6,371     |       | —           |       | 6,371            |       | —           |       |
| Total assets                                                            |       | $         | 153,084    |             | $          | 52,748           |       | $                | 100,336    |   | $ | — |   |
| Interest rate  swaps                                                    |       | $         | (3,582     | )                | $          | —           |       | $                | (3,582     | ) | $ | — |   |
| Total  liabilities                                                      |       | $         | (3,582     | )                | $          | —           |       | $                | (3,582     | ) | $ | — |   |

 

The following table presents the Company’s financialassets and liabilities that are measured at fair value on a recurring basiswhich were presented on the Company’s Condensed Consolidated Balance Sheets asof July 31, 2009 (in thousands):

 
| ** **              | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Cash equivalents        |       | $         | 103,008    |             | $          | 52,748           |       | $                | 50,260     |   | $ | — |   |
| Short-term  investments |       | 50,076    |       | —           |       | 50,076           |       | —           |       |
| Total assets            |       | $         | 153,084    |             | $          | 52,748           |       | $                | 100,336    |   | $ | — |   |
| Interest rate  swaps    |       | $         | (3,582     | )                | $          | —           |       | $                | (3,582     | ) | $ | — |   |
| Total  liabilities      |       | $         | (3,582     | )                | $          | —           |       | $                | (3,582     | ) | $ | — |   |

 

Due to their short maturities, the reported amounts ofthe Company’s financial instruments, including cash and cash equivalents,short-term investments, accounts receivable, accounts payable and other currentliabilities approximate fair value. The fair values of the Company’s mortgageloan and term loan approximate book values as the underlying interest rates arebased on risk-adjusted market rates.

 

**Note 11 — Segment and GeographicInformation**

 

The Company identifies its business segments based onbusiness activities, management responsibility and geographic location. For allperiods presented, the Company operated in a single reportable businesssegment.

 

The Company sells its image-sensor products eitherdirectly to OEMs and VARs or indirectly through distributors. The followingtable illustrates the percentage of revenues from sales to OEMs and VARs and todistributors for the three months ended July 31, 2009 and 2008, respectively:

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **July 31,**      | ** ** |
|          | ** ** | **2009**               | ** ** | **2008** | ** ** |
| OEMs and VARs |       | 49.8                   | %          | 58.3 | % |
| Distributors  |       | 50.2                   |       | 41.7 |   |
| Total         |       | 100.0                  | %          | 100.0 | % |

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

Since the Company’s end-user customers market and selltheir products worldwide, its revenues by geographic location are notnecessarily indicative of the geographic distribution of end-user sales, butrather indicate where their components are sourced. The revenues by geographyin the following table are based on the country or region in which theCompany’s customers issue their purchase orders (in thousands):

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **July 31,**      | ** ** |
| ** **    | ** ** | **2009**               | ** ** | **2008** | ** ** |
| China         |       | $                      | 88,416     |   | $ | 128,026 |   |
| Malaysia      |       | 4,352                  |       | 18,534 |   |
| United States |       | 669                    |       | 10,244 |   |
| Taiwan        |       | 9,722                  |       | 14,338 |   |
| All other     |       | 2,401                  |       | 3,137 |   |
| Total         |       | $                      | 105,560    |   | $ | 174,279 |   |

 

The Company’s long-lived assets, including its equitymethod investments, are located in the following countries (in thousands):

 
| ** **    | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|---------------|------------|-------------------|------------|--------------------|------------|
| ** **    | ** ** | **2009**          | ** ** | **2009**           | ** ** |
| Taiwan        |       | $                 | 87,381     |               | $          | 88,814 |   |
| United States |       | 63,360            |       | 65,276             |       |
| China         |       | 57,234            |       | 54,166             |       |
| All other     |       | 458               |       | 392                |       |
| Total         |       | $                 | 208,433    |               | $          | 208,648 |   |

 

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

 

## ***2007 Equity IncentivePlan***

 

In September 2007, on the recommendation of theCompany’s board of directors, the stockholders of the Company approved the2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Planreplaced the Company’s 2000 Stock Plan. The Company has reserved 6,000,000shares of common stock for issuance under the 2007 Plan. The2007 Plan provides for the grant of the following types of incentiveawards: (i) stock options; (ii) stock appreciation rights;(iii) restricted stock; (iv) restricted stock units;(v) performance shares and performance units; and (vi) other stock orcash awards. In general, stock option and stock appreciation right awards underthe 2007 Plan will be granted at a price not less than 100% of the fairmarket value of the Company’s common stock on the date of grant. The Company’sstock option awards generally have a maximum contractual term of ten years andvest over four years. Restricted stock units granted under the 2007 Plangenerally vest over three years. The 2007 Plan also covers grants ofequity-based compensation to the Company’s directors.

 

The Company’s equity incentive and stock-basedcompensation plans as of July 31, 2009 are summarized as follows (inthousands):

 
| ** **                      | ** ** | ** **     | ** ** | **Shares**    | ** ** | ** **      | ** ** | **Restricted**  | ** ** | **Performance** | ** ** |
|---------------------------------|------------|----------------|------------|---------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                      | ** ** | **Shares**     | ** ** | **Available** | ** ** | **Options**     | ** ** | **Stock Units** | ** ** | **Shares**      | ** ** |
| **Name of Plan**                | ** ** | **Authorized** | ** ** | **for Grant** | ** ** | **Outstanding** | ** ** | **Outstanding** | ** ** | **Outstanding** | ** ** |
| 1995 Stock  Plan           |       | —         |       | —        |       | 24              |       | —          |       | —          |       |
| 2000 Stock  Plan           |       | —         |       | —        |       | 11,972          |       | —          |       | —          |       |
| 2000 Director  Option Plan |       | —         |       | —        |       | 287             |       | —          |       | —          |       |
| 2007 Plan                  |       | 6,000          |       | 2,575         |       | 980             |       | 1,073           |       | —          |       |
| Total                           |       | 6,000          |       | 2,575         |       | 13,263          |       | 1,073           |       | —          |       |

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

## ***Stock-Based CompensationAward Activity***

 

The following table summarizes the equity awardactivities under the 2000 Stock Plan, the 2000 Director Option Planand the 2007 Plan, for the three months ended July 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                                                          |       | —                           |       | (34                     | )          | 3.48                                              |       | —                               |       | —                                               |       | — |   |
| Stock options expired  or forfeited                                              |       | 18                               |       | (617                    | )          | 19.03                                             |       | —                               |       | —                                               |       | — |   |
| Restricted stock units  granted (1)                                              |       | (1,444                           | )          | —                  |       | —                                            |       | 722                                  |       | —                                               |       | 10.41 |   |
| Restricted stock units  exercised (1)                                            |       | —                           |       | —                  |       | —                                            |       | (150                                 | )          | —                                               |       | 10.41 |   |
| Restricted stock units  expired or forfeited (1)                            |       | 38                               |       | —                  |       | —                                            |       | (19                                  | )          | —                                               |       | 10.27 |   |
| Performance shares  granted (1) (2)                                         |       | —                           |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Performance shares  expired or forfeited (1) (2)                       |       | —                           |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Balance at  July 31, 2009 – shares available for grant                 |       | 2,575                            |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Balance at  July 31, 2009 – options                                    |       |                             |       | 13,263                  |       | 17.89                                             |       | —                               |       | —                                               |       | — |   |
| Balance at  July 31, 2009 – restricted stock units                     |       | —                           |       | —                  |       | —                                            |       | 1,073                                |       | —                                               |       | 10.66 |   |
| Balance at  July 31, 2009 – performance shares                         |       | —                           |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Exercisable at  July 31, 2009                                               |       | —                           |       | 10,517                  |       | 18.27                                             |       | —                               |       | —                                               |       | — |   |
| Vested and expected to  vest at July 31, 2009 – options                |       | —                           |       | 12,972                  |       | $                                                 | 17.97      |                                 | —     |                                                 | —     |   | — |   |
| Vested and expected to  vest at July 31, 2009 – restricted stock units |       | —                           |       | —                  |       | —                                            |       | 827                                  |       | —                                               |       | $ | 10.66 |   |
| Vested and expected to  vest at July 31, 2009 – performance shares     |       | —                           |       | —                  |       | —                                            |       | —                               |       | —                                               |       | $ | — |   |
|                                                                                  |            |                                  |            |                         |            |                                                   |            |                                      |            |                                                      |            |  |  |  |  |

 

----

(1)         Shares subjectto awards granted for less than fair market value on the date of grant countagainst the share reserve as two shares for every one share subject to such anaward. When a share is returned to the plan, two shares will be credited backto the reserve.

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

 

The total intrinsic value of options exercised andrestricted stock units vested during the three months ended July 31, 2009was $269,000 and $1.6 million, respectively. Total cash received fromemployees as a result of employee stock option exercises during the threemonths ended July 31, 2009 was approximately $120,000.

 

As of July 31, 2009, net of forfeitures, therewas $20.4 million of unrecognized compensation expense related to unvestedstock options, which the Company expects to recognize over a weighted averageperiod of 1.9 years. As of July 31, 2009, net of forfeitures, therewas $10.0 million of unrecognized compensation expense related to unvested

 

20

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

restricted stock units, which the Company expects torecognize over a weighted average period of 2.6 years. For the Company’s2000 Employee Stock Purchase Plan (the “2000 Purchase Plan”), as ofJuly 31, 2009, there was $365,000 of unrecognized compensation expensewhich the Company expects to recognize over a weighted average period of0.3 years. As of April 30, 2009, net of forfeitures, there was$23.5 million of unrecognized compensation cost related to unvested stockoptions, which the Company expects to recognize over a weighted average periodof 1.8 years. As of April 30, 2009, net of forfeitures, there was$4.0 million of unrecognized compensation expense related to unvestedrestricted stock units, which the Company expects to recognize over a weighted averageperiod of 2.4 years. For the 2000 Purchase Plan, as of April 30,2009, there was $1.8 million of unrecognized compensation cost which theCompany expected to be recognized over a weighted average period of0.8 years. The Company’s current policy is to issue new shares to settlethe exercise of stock options and prospectively, the vesting of restrictedstock units.

 

***ValuationAssumptions***

 

SFAS No. 123(R),“*Share-Based Payment,”*(“SFASNo. 123(R)”) requires companies to estimate the fair value of stock-basedcompensation awards on the grant date. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice period in the Company’s Condensed Consolidated Statements ofOperations.

 

Forrestricted stock unit awards, the per-share fair value is the closing marketprice of the Company’s common stock as reported on the NASDAQ Global Market onthe grant date. For performance share awards, the per share fair value is alsothe closing 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, fullytransferable options without vesting restrictions. These assumptions differsignificantly 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.

 

Thefair value for these options was estimated using the Black-Scholes optionpricing model. The per share weighted average estimated grant date fair valuefor employee options granted was $4.49 and $5.27 in the three months endedJuly 31, 2009 and 2008, respectively. The following weighted averageassumptions are included in the estimated fair value calculations for stockoptions granted in the three months ended July 31, 2009 and 2008:

 
| ** **                           | ** ** | **Employee Stock Option  Plans** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended**           | ** ** |
| ** **                           | ** ** | **July 31,**                | ** ** |
| ** **                           | ** ** | **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 | % |

 

UsingBlack-Scholes, the per share weighted average estimated fair value of rightsissued pursuant to the Company’s 2000 Purchase Plan during the three monthsended July 31, 2009 and 2008 was $2.07 and $5.65, respectively.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

Thefollowing weighted average assumptions are included in the estimated grant datefair value calculations for rights to purchase stock under the 2000 PurchasePlan:

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

 

Thedefinitions of the 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:* Upon the adoption of SFAS No. 123(R), theCompany determined expected volatility based on an average between thehistorical volatility of the Company’s common stock and the implied volatilitybased on the Company’s traded options with lives of six months or more.Averaging two data sources may provide a better proxy to what market placeparticipants would use to value the Company’s options. Previously, the Companydetermined expected volatility based on the historical volatility of theCompany’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**

 

Thefollowing table shows the amounts recorded to “Additional paid-in capital” forthe three months ended July 31, 2009 (in thousands):

 
| ** **                                           | ** ** | **Additional** | ** ** |
|------------------------------------------------------|------------|----------------|------------|
| ** **                                           | ** ** | **Paid-in**    | ** ** |
| ** **                                           | ** ** | **Capital**    | ** ** |
| Balance at May 1,  2009                         |       | $              | 403,159    |   |
| Employee stock-based  compensation                   |       | 6,098          |       |
| Employee stock purchase  plan                        |       | 2,321          |       |
| Exercise of common  stock options                    |       | 120            |       |
| Withholding tax  deduction on restricted stock units |       | (51            | )          |
| Balance at  July 31, 2009                       |       | $              | 411,647    |   |

 

**Note 14 — Treasury Stock**

 

InJune 2005, the Company’s board of directors authorized the repurchase inan open-market program of up to an aggregate of $100 million of theCompany’s common stock. At the time that the program expired in June 2006,and at April 30, 2007, the Company had cumulatively repurchased5,870,000 shares of its common stock for an aggregate cost ofapproximately $79.6 million.

 

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. Subject to applicablesecurities laws, such repurchases will be at such times and in such amounts asit deems appropriate, based on factors such as market conditions, legalrequirements and other corporate considerations. As of July 31, 2009, the Companyhad cumulatively repurchased 6,671,000 shares of its common stock underthe open-market program for an aggregate cost of approximately$99.1 million.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

**Note 15 — IncomeTaxes**

 

The Company recorded a provision for income taxes ofapproximately $1.2 million and $1.4 million for the three months endedJuly 31, 2009 and 2008, respectively, resulting in effective tax rates of(13.9)% and 18.8% for the respective periods. As required by FinancialAccounting Standard Board interpretation No.18 (“FIN 18”), *“Accounting for Income Taxes in Interim Periods, an interpretation ofAccounting Principal Board Opinion No. 28,”* 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 July 31, 2009, the Company accruedan additional $0.4 million of interest related to the Company’sunrecognized tax benefits determined in accordance with FinancialInterpretation No. 48, “*Accounting for Uncertaintyin Income Taxes — an interpretation of FASB Statement No. 109*”(“FIN 48”).

 

On September 3, 2009, one of the foreignjurisdictions in which the Company operates published new legislation thatchanged the computation of income attributable to that jurisdiction.  This may reduce the Company’s unrecognizedtax benefits under FIN 48. The Company is currently evaluating the impact thisnew legislation may have on its financial position, results of operations and cashflows.

 

**Note 16 — Commitments and Contingencies**

 

***Commitments***

 

TheCompany maintains a wholly-owned subsidiary in Shanghai, China, OmniVisionTechnologies (Shanghai) Co. Ltd. (“OTC”) which provides assistance to theCompany in various product design projects and in marketing and sales support.On January 10, 2007, OTC entered into a Land-Use-Right Purchase Agreement(the “Purchase Agreement”) with the Construction and Transportation Commissionof the Pudong New District, Shanghai. The Purchase Agreement has an effectivedate of December 31, 2006. Under the terms of the Purchase Agreement, theCompany agreed to pay an aggregate amount of approximately $0.6 million(the “Purchase Price”) in exchange for the right to use approximately323,000 square feet of land located in Shanghai for a period of50 years. In addition, the Company is obligated to invest a minimum ofapproximately $33.7 million to develop the land and construct facilities,which amount includes the Purchase Price. As of July 31, 2009, the Companyhas already contributed $12.0* *million of the$33.7 million total investment. Construction of the facilities on the landhas commenced and according to the Purchase Agreement, construction must becompleted by June 30, 2010. The Company may use the land solely for thepurposes of industrial use and/or scientific research. The Company intends touse OTC’s registered capital to partially fund its commitment to this project.

 

Duringthe three months ended October 31, 2008, the Company formed ShanghaiOmniVision Semiconductor Technology, Co. Ltd, a new wholly-owned subsidiary inShanghai, China, for the purpose of expanding its testing capabilities. As ofJuly 31, 2009, the Company had contributed $1.5 million, as requiredunder the terms of its capital commitment. The Company is required to contributethe remaining $8.5 million of a $10.0 million commitment byOctober 2010.

 

***Litigation***

 

Fromtime to time, the Company has been subject to legal proceedings and claims withrespect to such matters as patents, product liabilities and other actions arisingout of the normal course of business.

 

OnNovember 29, 2001, a complaint captioned *McKee v.OmniVision Technologies, 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 

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

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 betweenJuly 14, 2000 and December 6, 2000. Substantially similar actionshave been filed concerning the initial public offerings for more than300 different issuers, and the cases have been coordinated as *In re Initial Public Offering Securities Litigation, 21 MC 92*.Claims against 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.

 

In2007, a settlement that had been pending with the Court since 2004, wasterminated by stipulation of the parties to the settlement, after a ruling bythe Second Circuit Court of Appeals in six “focus” cases in the coordinatedproceeding (the action involving the Company is not one of the six focus cases)made it unlikely that the settlement would receive final court approval.Plaintiffs filed amended master allegations and amended complaints in the sixfocus cases. In 2008, the Court largely denied the focus case defendants’ motionto dismiss the amended complaints.

 

Theparties have reached a global settlement of the litigation. A motion forpreliminary approval of the settlement was filed on April 2, 2009. Underthe settlement, which is subject to final Court approval, the insurerswould pay the full amount of settlement share allocated to the Company,and the Company would bear no financial liability. The Company, aswell as the officer and director defendants who were previously dismissed fromthe action pursuant to tolling agreements, would receive completedismissals from the case. On June 9, 2009, the Court entered an ordergranting preliminary approval of the settlement. It is uncertain whether thesettlement will receive final Court approval. If thesettlement does not receive final Court approval, and litigation againstthe Company proceeds, the Company believes that it has meritorious defenses toplaintiffs’ claims and intends to defend the action vigorously.

 

OnOctober 12, 2007, a purported OmniVision stockholder filed a complaintagainst certain of the Company’s underwriters for its initial public offering.The complaint, *Vanessa Simmonds v. Bank of AmericaCorporation, et al.*, Case No. C07-1668, filed in District Courtfor the Western District of Washington, makes similar allegations to those madein *In re Initial Public Offering Securities Litigation*and seeks the recovery of short-swing trading profits underSection 16(b) of the Securities Exchange Act of 1934. The Company isnamed as a nominal defendant, and no  recoverywas sought from it. The plaintiff filed an amended complaint inFebruary 2008. On March 12, 2009, the Court granted the motion todismiss without prejudice, filed by 30 of the issuer defendants, including theCompany, and the motion to dismiss with prejudice, filed by all of theunderwriter defendants. The plaintiff timely appealed the Court’s Order to theUnited States Court of Appeals for the Ninth Circuit, which remains pending. Atthe end of May 2009, plaintiff sent a Demand for Inspection of Books andRecords to certain of the nominal defendants named in theSection 16(b) litigation seeking the companies to produce any tollingagreements 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, theCompany has not received a demand for inspection of books and records from theplaintiff.

 

OnMarch 6, 2009, Panavision Imaging, LLC (“Panavision”) filed a complaintagainst the Company alleging patent infringement in the District Court for theCentral District of California. The case is entitled Panavision Imaging, LLC v.OmniVision Technologies, Inc., Canon U.S.A., Inc., MicronTechnology, Inc. and Aptina Imaging Corporation, Case No. CV09-1577.In its complaint, Panavision asserts that the Company makes, has made, uses,sells and/or imports products that infringe U.S. Patent Nos. 6,818,877(“Pre-charging a Wide Analog Bus for CMOS Image Sensors”), 6,663,029 (“VideoBus for High Speed Multi-resolution Imagers and Method Thereof”) and 7,057,150(“Solid State Imager with Reduced Number of Transistors per Pixel”). Thecomplaint seeks unspecified monetary damages, fees and expenses and injunctiverelief against the Company. The Company expects to vigorously defend itselfagainst Panavision’s allegations. The Court has scheduled a claim constructionhearing for December 10, 2009. At this time, the Company cannot estimateany possible loss or predict whether this matter will result in any materialexpense to the Company.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

**Note 17 — Related PartyTransactions**

 

InMay 2006, the Company consummated a loan agreement with one of itsemployees. Under the terms of the agreement, which the board of directorsapproved in fiscal 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.

 

Duringthe three months ended January 31, 2007, the Company and ImPac agreed toinitiate payment of licensing fees for the use of certain software developed byImPac at OmniVision Semiconductor (Shanghai) Co. Ltd., the Company’swholly-owned subsidiary in China. During the three months ended July 31,2009 and 2008, the Company paid ImPac a nominal amount for software licensingfees. In addition, the Company paid ImPac approximately $1.4 million and$2.7 million for manufacturing services for the three months endedJuly 31, 2009 and 2008, respectively. During fiscal 2008, the Companyloaned $1.3 million to ImPac for the purpose of expanding itsmanufacturing capacities for a term of one year, which has been extended uponmutual consent of the parties for one year. The loan is fully collateralized byassets held by ImPac. In August, 2008, the Company entered into an additionalagreement with ImPac under which the Company agreed to place certainmanufacturing equipment with ImPac on a consignment basis for a period of up tofive years.

 

Forthe three months ended July 31, 2009 and 2008, the Company paid$11.1 million and $17.1 million, respectively, to VisEra forcolor filter and other manufacturing services. For the three months endedJuly 31, 2008, the Company paid $433,000to WLCSP for chip scale packaging services.

 

Thefollowing table summarizes the transactions that the Company’s consolidatedaffiliate, SOI, and its affiliate, VisEra, engaged with related parties in thethree months ended July 31, 2009 and 2008 (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **July 31,**      | ** ** |
| ** **                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ***SOI  transactions with:***          | ** ** | ** **             | ** ** | ** ** | ** ** |
| ImPac:                                 |       |                   |       |   |   |
| Purchases of manufacturing services    |       | $                      | 120        |   | $ | 297 |   |
| Balance payable at  period end, net    |       | 93                     |       | 238 |   |
| PSC:                                   |       |                   |       |   |   |
| Purchases of wafers                    |       | 91                     |       | 1,035 |   |
| Rent and other services                |       | 19                     |       | 16 |   |
| Balance payable at  period end, net    |       | 55                     |       | 300 |   |
| VisEra:                                |       |                   |       |   |   |
| Purchases of manufacturing services    |       | 64                     |       | — |   |
| Balance payable at  period end         |       | 44                     |       | — |   |
|                                   |       |                   |       |   |   |
| ***VisEra  transactions with:***       |       |                   |       |   |   |
| TSMC:                                  |       |                   |       |   |   |
| Sales to TSMC                          |       | 269                    |       | 658 |   |
| Balance receivable at  period end, net |       | 199                    |       | 473 |   |
| SOI:                                   |       |                   |       |   |   |
| Sales to SOI                           |       | 64                     |       | — |   |
| Balance receivable at  period end      |       | $                      | 44         |   | $ | — |   |

 

TheCompany purchases a substantial portion of its wafers from TSMC. The Companyalso purchases a portion of its wafers from PSC.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three Months Ended July31, 2009 and 2008**

**(unaudited)**

 

**Note 18 — Subsequent Events**

 

OnMay 1, 2009, the Company adopted SFAS No. 165, “*SubsequentEvents,”*which modified the definition of subsequent events torefer to events or transactions that occur after the balance sheet date, butbefore the financial statements are issued or available to be issued. TheCompany evaluated events that occurred subsequent to July 31, 2009, forrecognition or disclosure in the Company’s financial statements. The Companyperformed its subsequent event review through September 9, 2009, the datethese financials were issued.

 

OnAugust 3, 2009, OmniVision Technologies (Shanghai) Co., Ltd., a whollyowned subsidiary of the Company, entered into a Fixed Assets Loan Agreement(the “Loan Agreement”) with Industrial and Commercial Bank of China Ltd. TheLoan Agreement provides for a fixed asset loan in the principal amount ofChinese Yuan 159.0 million, which is equal to approximately $23.3 million (the“Loan”). The purpose of the Loan is to construct a research center for theCompany in Pudong Development Zone, the Zhang Jiang Science Park in Shanghai,China. Subsequently, on August 27, 2009, the Loan was approved by theChinese government and the final loan amount was modified to Chinese Yuan140.0 million or approximately $20.5 million. The Loan Agreement was re-executedon August 27, 2009, to reflect the final loan amount.

 

OnAugust 27, 2009, ImPac’s board of directors accepted a merger proposalfrom a listed company in Taiwan, Tong Hsing Electronic Industries, Limited(“Tong Hsing”). Tong Hsing is a current investor in ImPac, and will become thesurviving entity after consummation of the transaction. The transaction iscurrently pending approval by ImPac’s shareholders.

 

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| **ITEM 2.** | **MANAGEMENT’S DISCUSSION 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 inItem 1 of this Quarterly Report on Form 10-Q. The followingdiscussion**contains forward-looking statements, within the meaning of**Section 27Aof the Securities Act of 1933 and Section 21E of the Securities**Exchange Act of 1934, which involverisks and uncertainties.**Forward-looking statementsgenerally include words such as “anticipates,” “believes,” “expects,” “intends,” “may,”“outlook,” “plans,” “seeks,” “will”  andwords of similar import as well as the negative of those terms. In addition,any statements that refer to expectations, projections or othercharacterizations of future events or circumstances, including any underlyingassumptions, are forward-looking statements. All forward-looking statements included in this Annual Report on Form 10-K,including, but not limited to, statements regarding our projected results of operations forfuture reporting periods,  theextent of future sales throughoriginal equipment manufacturers, or OEMs, and distributors, futuregrowth trends and opportunities in certain markets, the capabilities of newproducts, the increasing competition in our industry, the continued importanceof the mobile phone market to our business, continued price competition and theconsequent reduction in the average selling prices of our products, anticipatedbenefits of our joint ventures and alliances, the development of our businessand manufacturing capacity, future expenses we expect to incur, our future investments,our future working capital requirements, the effect of a change in marketinterest rates, and the sufficiency of our available cash, cash equivalents andshort-term investments are based on current expectations and are subject toimportant factors that could cause actual results to differ materially fromthose projected in the forward-looking statements. Such important factors include, but are not limited to, those setforth under the caption “Item 1A. Risk Factors,” beginning on page 44of this Quarterly Report and elsewhere in this Quarterly Report and in otherdocuments we file with the U.S. Securities and Exchange Commission, orSEC. All subsequent written and oral forward-looking statements by orattributable to us or persons acting on our behalf are expressly qualified intheir entirety by such factors.*

 

*OmniVision, OmniPixel and TrueFocus are registeredtrademarks of OmniVision Technologies, Inc. the OmniVision logo,CameraChip, CameraCube, OmniBSI, OmniPixel2, OmniPixel3, OmniPixel3-HS, OmniQSPand SquareGA are trademarks of OmniVision Technologies, Inc. WavefrontCoded is a registered trademark of OmniVision CDM Optics, Inc., awholly-owned subsidiary of OmniVision Technologies, Inc. Wavefront Codingis a trademark of OmniVision CDM Optics, 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 announced the introduction of our OmniPixel3TM architecture. The OmniPixel3architecture represents a further refinement and pixel size reduction of ourOmniPixel2TM and OmniPixel® architectures, which we introduced in September 2005and 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 architecture significantlyenhances image capture under very low lighting conditions, and thereby, webelieve, allows for a new generation of compact camera solutions for mobilephones, notebook computers and other applications that require exceptionallow-light performance.

 

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

 

In May 2008, we announced a new approach to CMOS image sensordesign we call OmniBSITM technology. OmniBSI technologyis based on an idea called back sideillumination, or BSI. Our first OmniBSI product, an 8-megapixel image sensor isbuilt using an advanced 1.4 μm pixel, and we believe we are the firstimage sensor company to announce a viable process for the mass production ofBSI 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 new OmniBSI architecture,the image 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 with futureproducts. During the early stages of production, production yields and grossmargins for products based on new technology are typically lower than those ofestablished products.

 

## ***New Products***

 

In September 2008, we introduced two devices based on our 1.4micron OmniBSI architecture. The OmniBSI technology delivers best-in-class lowlight sensitivity, greater quantum efficiency and significantly reducedcross-talk, which allows our customers to introduce cameras that deliversharper images across broader lighting conditions, with more vibrant,true-to-life colors. Additionally the OmniBSI architecture’s wide angle oflight acceptance is designed for ultra-thin camera modules for thenext-generation mobile phones and other product applications.

 

The first OmniBSI device introduced, the OV8810, is a 1/3-inch,8-megapixel CameraChip image sensor targeted at the mobile phone market. Thedevice is small enough to fit within an 8.5 x 8.5 x 7 mm camera module andoutputs data in full 8-megapixel resolution at 10 frames per second, orFPS, and records 720p high-definition, or HD, video at 60 FPS, or 1080p at30 FPS. In quarter video graphics array, or QVGA, resolution, the OV8810can output data at 120 FPS, ideal for slow motion preview. For fast transfer ofimage data, the OV8810 is outfitted with a parallel interface and a two-lane,high-speed mobile industry processor interface, or MIPI. This enables mobilephone makers to use the OV8810’s parallel interface as input for a secondarycamera, while alternately providing output via the MIPI interface.

 

The second OmniBSI product, the OV5642, is a 1/4-inch, 5-megapixelfully integrated system-on-chip, or SOC, image sensor with integratedTrueFocus® ISP, our most advanced image-signal-processor, or ISP, technology.The TrueFocus ISP increases picture clarity and sharpness and offers extendeddepth of field, or EDoF, capabilities. EDoF enables customers to utilize fixedfocus lenses which reduces overall cost of their camera modules.  The OV5642 can output video in full resolutionat 15 FPS, supports 720p HD video at 60 FPS and 1080p at 30 FPS.An integrated JPEG compression engine simplifies data transfer for bandwidthlimited interfaces.  For fast transfer ofimage data, the OV5642 has a two-lane, high-speed MIPI interface.

 

In October 2008, we announced that the 1/4-inch, all digitalOV7710 VGA CameraChip image sensor is in volume production and has shipped tomultiple top-tier automotive customers.

 

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

 

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 uses3 μm OmniPixel3-HS pixels, which enables it to achieve low-lightperformance of 3,300 mV/(Lux-sec). OV6930 is positioned for the medicaldevice market. The second device is the OV9710 in quad flat package, or QFP. Itis a 1-megapixel image sensor designed specifically for advanced automotivevision and sensing systems.

 

In January 2009, we introduced the OV7740, a 1/5-inch VGACameraChip image sensor with 4.2 μm pixels based on the OmniPixel3-HSarchitecture. It is capable of operating at 60 FPS in VGA resolution, and 120FPS in QVGA resolution. OV7740 is appropriate for leading-edge notebookcomputer and webcam designs. OV7740 is also an ideal solution for security,surveillance, automotive and games and toy applications.

 

In February 2009, as part of our CameraCube technologyannouncement, we introduced two new CameraCube imaging devices. The firstproduct is the OVM6680. It has a SquareGA resolution. The second product is theOVM7680, and it has a VGA resolution.

 

In February 2009, we also introduced the OV3650, a 1⁄4-inch3-megapixel image sensor with 1.75 μm OmniPixel3-HS pixels. This imagesensor is designed for mobile phones, notebook, webcam and other applicationsthat require exceptional low-light performance without the need for flash.

 

In March 2009,we introduced the OV9810, a new 1/2.3-inch 9-megapixel image sensor with1.75 μm OmniPixel3-HS pixels. This sensor is designed for the digitalstill camera, or DSC, and HD camcorder markets. It combines 9-megapixelphotography with 1080p HD video on a single chip, eliminating the trade-offsbetween high quality still photography and high performance HD video. The OV9810is capable of operating at 8.9 FPS in full 9-megapixel resolution, and offerstrue HD quality, or 1080p, video at 30 FPS.

 

In April 2009,we introduced the OV7960, a 1/4-inch VGA image sensor with 6 μmOmniPixel3-HS pixels. It has a low-light sensitivity of 12V/(Lux-sec) and isoptimized for interlaced NTSC/PAL formats to directly interface with TVs andLCD screens. With the ability to capture images in the most challenginglighting conditions, OV7960 can be used in both professional closed-circuit TVapplications and automobile driver assistance applications.

 

In June 2009,we introduced 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 exceeds1,400 mV/(Lux-sec) and its signal-to-noise ratio is less than 70 lux. Thesecond device is the OV2665, a 2-megapixel image sensor with the same1.75 μm OmniBSI architecture. It has an integrated ISP with features suchas lens correction, auto exposure, auto white balance, and auto flicker. Thelast device is the OV5653. It is also based on our latest 1.75 μm OmniBSIarchitecture, but designed specifically for the DSC and digital video market.In video mode, OV5653 can deliver 720p at 60 FPS and full HD 1080p at 30 FPS.

 

In July 2009,we introduced the OV9715, a 1/4-inch 1-megapixel image sensor withOmniPixel3-HS pixels. The OV9715 is specifically designed for advancedautomotive imaging applications, such as advanced forward-looking,360 degree bird’s eye view, and parking assistance systems. It is alsooptimized for use in automotive vision and sensing system combinations, such asrear view and trajectory based lane departure warning systems.

 

In July 2009,we also 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.

 

## ***Joint Venture withTaiwan Semiconductor Manufacturing Company 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 2003joint-venture agreement, we and TSMC formed VisEra Holding Company, or VisEraCayman, a company incorporated in the Cayman Islands, and VisEra became asubsidiary of VisEra Cayman. We and TSMC have equal interests in VisEra Cayman.

 

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

 

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, in accordance withFinancial Accounting Standards Board Interpretation No. 46(R), *“Consolidation of Variable Interest Entities,”* orFIN 46(R), we consolidated VisEra’s operating results. On January 1,2007, VisEra ceased to meet the definition of a VIE. Consequently, wedeconsolidated on January 1, 2007, and has accounted for its investment inVisEra under the equity method.

 

Sincethe deconsolidation on January 1, 2007, we have accounted for ourinvestment in VisEra under the equity method. See Note 5 — “*Long-Term Investments”* and Note 17 — “*Related Party Transactions”* to our condensed consolidatedfinancial statements.

 

## ***Joint Venture withPowerchip Semiconductor Corporation***

 

In May 2004,we entered into an agreement with Powerchip Semiconductor Corporation, or PSC,a Taiwan based company that produces memory chips and provides semiconductorfoundry services, to establish Silicon Optronics, Inc., or SOI, a jointventure in 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 SOIin exchange for an ownership percentage of 49.0%. In March 2005, weassumed control of the board of directors of SOI and we have consolidated SOIsince April 30, 2005.

 

As of July 31,2009, we owned 43.9% of SOI. See Note 6 — “*ConsolidatedAffiliate — Silicon Optronics, Inc.”*and Note 17 — “*Related Party Transactions”* to our condensed consolidatedfinancial statements.

 

## ***Capital Resources***

 

As of July 31,2009, we held approximately $258.9 million in cash and cash equivalentsand approximately $50.1 million in short-term investments. To mitigatemarket risk related to short-term investments, we have an investment policydesigned to preserve the value of capital and to generate interest income fromthese investments without material exposure to market fluctuations. Market riskis the potential loss due to the change in value of a financial instrument as aresult of changes in interest rates or bond prices, and changes in marketliquidity and in the pricing of risk. Our policy is to invest in financialinstruments with short maturities, limiting interest rate exposure, and tomeasure performance against comparable benchmarks. We maintain our portfolio ofcash equivalents and short-term investments in a variety of securities,including both government and corporate obligations with ratings of “A” orbetter and money market funds. We do not believe that the value of our cash andshort-term investments will be significantly affected by recent instability inthe global financial markets.

 

In June 2005,our board of directors authorized us to use up to $100.0 million of ouravailable cash under an open-market program to repurchase our common stock. Atthe expiration of the program in June 2006, we had cumulatively repurchased5,870,000 shares of our common stock for an aggregate cost ofapproximately $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 outstandingcommon stock. Subject to applicable securities laws, such repurchases will beat times and in amounts as we deem appropriate, based on factors such as marketconditions, legal requirements and other corporate considerations. As of July 31,2009, we had cumulatively repurchased 6,671,000 shares of our common stockunder this open-market program for an aggregate cost of approximately$99.1 million. See Note 14 *— “Treasury Stock”*to ourcondensed consolidated financial statements.

 

## ***Current EconomicEnvironment***

 

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.

 

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Recently, general domestic and global economic conditions have beennegatively impacted by several factors, including, among others, thesubprime-mortgage crisis in the housing market, going concern threats toinvestment and commercial banks, other financial institutions and majorautomobile companies, reduced corporate and consumer spending, and decreasedconsumer confidence. These economic conditions have resulted in our facing oneof the most challenging periods in our history. In particular, we believeconsumers and businesses in markets into which we sell our products havereduced 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 and associateddiversion of management’s attention, excess inventory and increased difficultyin accurately forecasting product demand and planning future businessactivities. It is uncertain how long the current economic conditions will lastor how quickly any subsequent economic recovery will occur. If the economy ormarkets into which we sell our products continue to slow or any subsequenteconomic recovery is slow to occur, our business, financial condition andresults of operations and cash flows could be further materially and adverselyaffected.

 

## ***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 digital still camera, or DSC, market, the security andsurveillance market, the toys and games market, and the automotive and medicalmarkets.

 

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 onebillion CameraChip image sensors, including approximately 75 million inthe three months ended July 31, 2009. We believe that thesequantities demonstrate the continuing capabilities of our production system,including our sources of offshore fabrication.

 

We currentlyoutsource the wafer fabrication and packaging of our image-sensor products tothird parties. We outsource the color filter and micro-lens phases of productionto an investee joint venture company. With our new CameraCube products, we alsocollaborated with the industry’s leading wafer-level lens suppliers, andoutsourced the assembly process. This approach allows us to focus our resourceson the design, development, marketing and testing of our products andsignificantly reduces our capital requirements.

 

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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 broadstrategy to ensure that we have sufficient back-end capacity for the processingof our image 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.

 

Many of theproducts using our image sensors, such as mobile phones, notebook and webcams,DSCs and cameras for toys and games, are consumer electronics goods. Thesemass-market camera devices generally have seasonal cycles which historicallyhave caused the sales of our customers to fluctuate quarter-to-quarter.Historically, demand from OEMs and distributors that serve such consumerproduct markets has been stronger in the second and third quarters of ourfiscal year and weaker in the first and fourth quarters of our fiscal year.However, because of the current economic downturn, we experienced weaker thannormal conditions in all of these markets in the third and fourth quarters offiscal 2009. We saw early signs ofimprovement in our business during the first quarter and we believe thehistorical seasonal cycle to our business has returned. In addition,****since a very large number of the manufacturers who use ourproducts are located in China, Hong Kong and Taiwan, the pattern of demand forour image sensors has been increasingly influenced by the timing of theextended lunar or Chinese New Year holiday, a period in which the factorieswhich use our image sensors generally close.

 

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. We recently introduced our new CameraCube products. Depending onthe adoption rate and unit volume, we believe these products may partiallymitigate the rate of ASP decline. In order to maintain our 

 

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grossmargins, we and our suppliers must work continuously to lower our manufacturingcosts and increase our production yields, and in order to maintain or grow ourrevenues, we need to increase the number of units we sell by a large enoughamount to offset the effect of declining ASPs. In addition, if we are unable totimely introduce new products that can take advantage of smaller processgeometries or new products that incorporate more advanced technology andinclude more advanced features that can be sold at higher ASPs, our grossmargin will decline.

 

As part of ourongoing efforts to achieve both higher resolutions and smaller chip sizes, weinitiated mass production volumes of our OmniPixel3 sensors with 0.11 μmprocess technologies in January 2008. More recently, in September 2008,we introduced two devices based on our latest 1.4 μm OmniBSI architecture.Given the rapidly changing nature of our technology, there can be no assurancethat we will not encounter delays or other unexpected yield issues with futureproducts. During the early stages of production, production yields and grossmargins for new products are typically lower than those of establishedproducts. We can encounter unexpected manufacturing issues, such as unexpectedback-end yield problems. In addition, in preparation for new productintroductions, we gradually decrease production of established products. Due toour 12-14 week production cycle, it is extremely difficult to predictprecisely how many units of established products we will need. It is alsodifficult to accurately predict the speed of the ramp of new products. Giventhe current economic downturn, the visibility of our business outlook isextremely limited and forecasting is even more difficult than under normalmarket conditions. As a result, it is possible that we could suffer fromshortages for certain products and build inventories in excess of demand forother products. We carefully consider the risk that our inventories may beexcess to expected future demand and record appropriate reserves. If, assometimes happens, we are subsequently able to sell these reserved products,the sales have little or no associated cost and consequently they have afavorable impact on gross margins.

 

## ***Sources ofRevenues***

 

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 by our wholly-owned subsidiary, OmniVision CDM Optics, Inc., orCDM, and by our consolidated affiliate, SOI. We recognize the CDM-associatedrevenue 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 

 

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recognizedare that portion of the total contract price equal to the ratio of costsexpended to date to the anticipated final total costs based on currentestimates of the costs to complete the projects. CDM-associated revenue has notbeen material in any of the periods presented. We recognize the limited amountof SOI-related service revenue on a completed-contract basis.

 

## ***CriticalAccounting 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 have been no material changes in any of our critical accounting policiessince April 30, 2009.

 

**Resultsof Operations**

 

The following table sets forth the results of ouroperations as a percentage of revenues. Our historical operating results arenot necessarily indicative of the results we can expect for any future period.

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | **July 31,**      | ** ** |
| ** **                                                           | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Revenues                                                             |       | 100.0                  | %          | 100.0 | % |
| Cost of revenues                                                     |       | 77.6                   |       | 74.8 |   |
| Gross margin                                                         |       | 22.4                   |       | 25.2 |   |
|                                                                 |       |                   |       |   |   |
| Operating expenses:                                                  |       |                   |       |   |   |
| Research, development and related                                    |       | 17.4                   |       | 11.6 |   |
| Selling, general and administrative                                  |       | 13.4                   |       | 10.0 |   |
| Total operating expenses                                             |       | 30.8                   |       | 21.6 |   |
|                                                                 |       |                   |       |   |   |
| Income (loss) from operations                                        |       | (8.4                   | )          | 3.6 |   |
| Interest income (expense), net                                       |       | (0.2                   | )          | 0.7 |   |
| Other income, net                                                    |       | 0.5                    |       | — |   |
| Income (loss) before income taxes                                    |       | (8.1                   | )          | 4.3 |   |
|                                                                 |       |                   |       |   |   |
| Provision for income taxes                                           |       | 1.1                    |       | 0.8 |   |
| Net income (loss)                                                    |       | (9.2                   | )          | 3.5 |   |
| Net income (loss) attributable to noncontrolling  interest           |       | 0.1                    |       | (0.1 | ) |
| Net income (loss) attributable to OmniVision Technologies, Inc. |       | (9.3                   | )%         | 3.6 | % |

 

*Three Months Ended July 31,2009 as Compared to Three Months Ended July 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, interactive video and toy cameras, and automotiveand medical products. Revenues for the three months ended July 31, 2009 decreasedby 39.4% to approximately $105.6 million from $174.3 million for thethree months ended July 31, 2008. The decrease in revenues was due to adecline in unit sales of our image-sensor products across all productcategories and a decrease in our ASPs.

 

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## ***Revenues fromSales to OEMs and VARs as Compared to Distributors***

 

We sell our image-sensor products either directly toOEMs and VARs or indirectly through distributors. The percentage of revenuesfrom sales to OEMs and VARs was lower in the three months ended July 31, 2009than in the prior-year period. We expect that the percentage of revenues fromsales through OEMs and VARs will vary from year to year in response to changesin the make-up of our customer list. The gross margin that we earn on sales toOEMs and VARs or through distributors is not significantly different. Thefollowing table shows the percentage of revenues from sales to OEMs and VARsand distributors in the three months ended July 31, 2009 and 2008:

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **July 31,**      | ** ** |
| ** **    | ** ** | **2009**               | ** ** | **2008** | ** ** |
| OEMs and VARs |       | 49.8                   | %          | 58.3 | % |
| Distributors  |       | 50.2                   |       | 41.7 |   |
| Total         |       | 100.0                  | %          | 100.0 | % |

 

*OEMs andVARs.*   Inthe three months ended July 31, 2009, one OEM customer accounted forapproximately 13.0% of our revenues. In the three months ended July 31,2008, two OEM customers accounted for approximately 12.3% and 10.2% of ourrevenues. For the three months ended July 31, 2009 and 2008, no other OEMor VAR customer accounted for 10% or more of our revenues.

 

*Distributors.*   In the three monthsended July 31, 2009, one distributor customer accounted for approximately28.7% of our revenues. In the three months ended July 31, 2008, onedistributor customer accounted for approximately 22.2% of our revenues. For thethree months ended July 31, 2009 and 2008, no other distributor customeraccounted for 10% or more of our revenues.

 

## ***Revenues fromDomestic Sales as Compared to Foreign Sales***

 

The followingtable shows the percentage of our revenues derived from sales of ourimage-sensor products to domestic customers as compared to foreign customersfor the three months ended July 31, 2009 and 2008:

 
| ** **     | ** ** | **Three Months Ended** | ** ** |
|----------------|------------|------------------------|------------|
| ** **     | ** ** | **July 31,**      | ** ** |
| ** **     | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Domestic sales |       | 0.6                    | %          | 5.9 | % |
| Foreign sales  |       | 99.4                   |       | 94.1 |   |
| Total          |       | 100.0                  | %          | 100.0 | % |

 

We derive themajority of our foreign sales from customers in Asia and, to a lesser extent,in Europe. Over time, our sales to Asia-Pacific customers have increasedprimarily as a result of the continuing trend of outsourcing the production ofconsumer electronics products to Asia-Pacific manufacturers and facilities andto the increasing markets in Asia for consumer products. Because of thepreponderance of Asia-Pacific manufacturers and the fact that virtually allproducts incorporating our image-sensor products are sold globally, we believethat the geographic distribution of our sales does not accurately reflect thegeographic distribution of sales into end-user markets of products whichincorporate our image sensors.

 

### **Gross Profit**

 

Our gross marginin the three months ended July 31, 2009 declined to 22.4% from 25.2% forthe three months ended July 31, 2008. The principal contributorsto the year-over-year decrease ingross margin were thedecline in our ASPs and the write-down of inventories which totaledapproximately $3.7 million during the three months ended July 31, 2009, as compared to $2.5 million in the similarprior year period. The write-down of inventories in the three months ended July 31,2009 represented a proportionatelygreater percentage of revenues than in the prior year period as a consequenceof a significant decline in revenue levels. These contributors to thereduction in gross profit were compounded by the under-absorption of overheaddue to reduced production volumes. During the three months ended July 31, 2009, the ASPs ofour products were lower than they were in the year-earlier period. The declinein ASPs was due, in part, to a general price decline as a result of usualcompetitive pressures.We recorded approximately $0.8 million in stock-based compensation expenseto cost of revenues during the three-month period ended July 31, 

 

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2009,in accordance with SFAS No. 123(R), as compared to approximately$0.9 million in the prior fiscal year. Revenue from sales ofpreviously written-down products in the three months ended July 31, 2009was $2.2 million, as compared to $2.5 million during the same periodin the prior fiscal year.

 

**Research, Development and RelatedExpenses**

 

Research,development and related expenses consist primarily of compensation andpersonnel-related expenses, non-recurring engineering costs related principallyto the costs of the masks we buy when we release new product designs to themanufacturing foundry, costs for purchased materials, designs, tooling,depreciation of computers and workstations, and amortization of acquiredintangible intellectual property and computer aided design software. Becausethe number of new designs we release to the foundry can fluctuate from periodto period, research, development and related expenses may fluctuate significantly.Research, development and related expenses for the three months ended July 31,2009 decreased to approximately $18.4 million from approximately$20.3 million for the three months ended July 31, 2008. As apercentage of revenues, research, development and related expenses for thethree months ended July 31, 2009 and 2008 represented 17.4% and 11.6%,respectively.

 

The decrease inresearch, development and related expenses of approximately $1.9 million,or 9.2%, for the three months ended July 31, 2009 from the similarperiod in the prior year resulted primarily from a$0.8 million decrease in non-recurring engineering expenses relatedto new product development, a $463,000 decrease in stock-basedcompensation expense recognized in accordance with SFAS No. 123(R), a$399,000 decrease in patent-related legal expenses, a $229,000 decrease in feesfor outside services and a $209,000 decrease in travel-related expenses,partially offset by $335,000 increase in depreciation and amortizationexpenses of acquired intangible assets and a $246,000 increase in softwareexpenses. We anticipate that research, development and related expenses willfluctuate on a quarterly basis as we develop and introduce new products,including those employing our CameraCube and OmniBSI technologies and as wedevelop other new technologies related to image sensors.

 

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

 

Selling, generaland administrative expenses consist primarily of compensation and personnelrelated expenses, commissions paid to distributors and manufacturers’representatives and insurance and legal expenses. Selling, general andadministrative expenses for the three months ended July 31, 2009 decreasedto approximately $14.2 million from $17.4 million for the three monthsended July 31, 2008. As a percentage of revenues, selling, general andadministrative expenses for the three months ended July 31, 2009 and 2008represented 13.4% and 10.0%, respectively.

 

The decrease inselling, general and administrative expenses of approximately$3.2 million, or 18.5%, for the three months ended July 31, 2009 fromthe similar period in the prior year resulted primarily from a $1.1 milliondecrease in fees for outside services, a $0.9 million decrease in salary andpayroll-related expenses, a $0.9 million decrease in commissions paidprimarily to distributors and sales representatives, a $346,000 decrease infacility and office expenses, a $320,000 decrease in travel-related expenses,and a $319,000 decrease in stock-based compensation expense recognized inaccordance with SFAS No. 123(R), partially offset by a $480,000 increasein depreciation expense and a $377,000 increase in legal and accountingexpenses. We anticipate that our selling, general and administrative expensesmay remain unchanged as we continue to control discretionary expenditures.

 

**Interest Income (Expense), Net**

 

We invest ourcash, cash equivalents and short-term investments in interest-bearing accountsconsisting primarily of money market funds, commercial paper, certificates ofdeposit, high-grade corporate securities and government bonds. Interest income(expense), net, declined to a interest expense, net, of approximately $204,000for the three months ended July 31, 2009 from interest income, net, of$1.3 million in the similar prior year period. The $1.5 milliondecline in interest income (expense), net, resulted from a $0.9 millionreduction in interest income and a $0.6 million increase in interestexpense associated with long-term borrowing for the three months ended July 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.

 

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**Other income, Net**

 

Other income, net,for the three months ended July 31, 2009 totaled $0.6 million. Otherincome, net, for the three months ended July 31, 2009 included a$0.9 million gain on the interest rate swap agreements related to themortgage on our complex of four buildings located in Santa Clara, California,or Santa Clara Property, a $0.5 million gain, representing our portion ofthe net income recorded by China WLCSP Limited, or WLCSP, which we account forunder the equity method of accounting, partially offset by a $0.9 millionloss that represented our portion of the net loss recorded by ImPac TechnologyCo., Ltd., or ImPac, which we account for under the equity method ofaccounting. Other income, net, for the three months ended July 31, 2008totaled $49,000. The amount for the quarter ended July 31, 2008 included a$433,000 gain on the interest rate swap agreements related to the mortgage onour complex of four buildings located in Santa Clara, California, or SantaClara Property, partially offset by a $395,000 loss that represented ourportion of the net loss recorded by ImPac Technology Co., Ltd., or ImPac, whichwe account for under the equity method of accounting.

 

**Provision for Income Taxes**

 

We generatedapproximately $8.6 million in loss before income taxes and$7.5 million in income before income taxes for the three months ended July 31,2009 and 2008, respectively. We recorded a provision for income taxes ofapproximately $1.2 million and $1.4 million for the three monthsended July 31, 2009 and 2008, respectively, resulting in effective taxrates of (13.9)% and 18.8% for the respective periods. As required byFIN 18, *“Accounting for Income Taxes in InterimPeriods, an interpretation of Accounting Principal Board Opinion No. 28,”*orFIN 18, we excluded from the current fiscal year’s overall estimation ofthe annual effective tax rate one jurisdiction with losses for which no benefitcan be realized.

 

**Net Income (Loss) Attributable to NoncontrollingInterest**

 

Net income (loss)attributable to noncontrolling interest for the three months ended July 31,2009 and 2008 was $110,000 and $(105,000), respectively, which represents the56.1% interest that we did not own in the net income (loss) of SOI.

 

**Liquidityand Capital Resources**

 

Our principalsources of liquidity at July 31, 2009 consisted of cash, cash equivalentsand short-term investments totaling $309.0 million.

 

## ***Liquidity***

 

Our workingcapital declined to $378.8 million as of July 31, 2009 as compared to$380.3 million as of April 30, 2009. Our working capital decreased asa result of: a $27.9 million increase in accounts payable resulting fromthe new purchase of inventory; a $5.9 million decrease in inventories; a$4.8 million increase in deferred revenue, less cost of revenue; and  a $1.4 million increase in income taxespayable. These decreases in working capital were partially offset by: a$33.1 million increase in short-term investments; a $4.4 millionincrease in accounts receivable, net, resulting from a sequential revenueincrease of $16.5 million for the three months ended July 31, 2009; and a$1.1 million increase in cash and cash equivalents primarily due to cashprovided by operating activities.

 

In March 2007,we purchased a complex of four buildings in Santa Clara, California, or theSanta Clara Property. In connection with the purchase, we entered into a Loanand Security Agreement with a domestic bank on March 16, 2007. The Loanand Security Agreement provides for a term mortgage loan in the principalamount of $27.9 million, or the Mortgage Loan, and a secured line ofcredit with an aggregate maximum principal amount of up to $12.0 million,or the Term Loan. In March 2008, we borrowed $6.0 million under theTerm Loan to finance improvements to our Santa Clara Property. We drew down theremaining $6.0 million under the Term Loan in July 2008.

 

SOI maintains fourunsecured lines of credit with three commercial banks, which provide a total ofapproximately $3.4 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 July 31, 2009 and April 30, 2009, there were noborrowings outstanding under these facilities.

 

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

 

## ***Cash Flows fromOperating Activities***

 

For the threemonths ended July 31, 2009, net cash provided by operating activitiestotaled approximately $36.6 million as compared to $13.7 million forthe corresponding period in the prior year. The principal components of thecurrent year amount were: a net loss of approximately $9.7 million for thethree months ended July 31, 2009; adjustments for non-cash charges of$6.1 million in stock-based compensation, $5.7 million indepreciation and amortization, $3.7 million in write-down of inventories, $0.9 millionfrom gain on interest rate swaps and $401,000 of losses in equity investments;a $27.6 million increase in accounts payable; a $4.7 million increase indeferred revenue, less cost of revenue; a $3.7 million decrease ininventories and a $2.1 million increase in income taxes payable. Theseincreases were partially offset by: a $4.4 million increase in accountsreceivable, net; a $1.5 million decrease in accrued expenses and othercurrent liabilities; a $0.6 million increase in deferred income taxes anda $483,000 decrease in deferred tax liabilities. The $4.4 million increasein accounts receivable, net, reflects the increased level of revenues duringthe three months ended July 31, 2009, with the days of sales outstanding declining to 42 days as of July 31,2009 from 44 days as of April 30, 2009. The $3.7 milliondecrease in inventories resulted in an increase in annualized inventory turnsto 3.3 as of July 31, 2009 from 2.8 as of April 30, 2009.

 

For the threemonths ended July 31, 2008, net cash provided by operating activitiestotaled approximately $13.7 million. The principal components of thecurrent year amount were: net income of approximately $6.1 million for thethree months ended July 31, 2008, adjusted for non-cash charges of$6.9 million in stock-based compensation, $4.0 million indepreciation and amortization; $2.5 million in write-down of inventories,$1.7 million of gains in equity investments and a $6.8 millionincrease in accounts payable; a $4.0 million decrease in inventories; a$3.0 million increase in deferred income; a $0.7 million decrease inprepaid expenses and other current assets; and a $368,000 increase in incometaxes payable. These increases were partially offset by: a $16.6 millionincrease in accounts receivable, net; a $1.2 million decrease in accruedexpenses and other current liabilities; and a $485,000 decrease in deferred taxliabilities. The $16.6 million increase in accounts receivable, net,reflects the higher level of revenues during the three months ended July 31,2008, combined with an increase in days of sales outstanding as of July 31,2008 to 64 days from 56 days as of April 30, 2008. The$4.0 million decrease in inventories was a reflection of an improvement inannualized inventory turns to 4.7 as of July 31, 2008 from 4.3 as of April 30,2008.

 

## ***Cash Flows FromInvesting Activities***

 

For the threemonths ended July 31, 2009, our cash used in investing activities totaled$37.1 million as compared to approximately $11.6 million in cashprovided by investing activities for the corresponding period in the prioryear, due to $33.2 million in net purchases of short-term investments and$3.9 million in purchases of property, plant and equipment. For the threemonths ended July 31, 2008, our cash provided by investing activitiestotaled $11.6 million due primarily to: $23.5 million in net sales ofshort-term investments, partially offset by $10.5 million in purchases ofproperty, plant and equipment and $1.4 million in a long-term investmentin ImPac.

 

## ***Cash Flows FromFinancing Activities***

 

For the threemonths ended July 31, 2009, net cash provided by financing activitiestotaled approximately $1.6 million as compared to net cash provided byfinancing activities of $8.3 million during the corresponding period inthe prior year. This change was due to $2.4 million in proceeds from theexercise of stock options and employee purchases through our employee stockpurchase plan, partially offset by $0.9 million used to repay long-termborrowings. For the three months ended July 31, 2008, net cash provided byfinancing activities totaled approximately $8.3 million due primarily to$6.0 million in proceeds from long-term borrowings and $2.7 millionin proceeds from the exercise of stock options and employee purchases throughour employee stock purchase plan.

 

## ***CapitalCommitments and Resources***

 

Over the next twoyears, we expect to invest a total of approximately $33.7 million in ourwholly-owned subsidiary in Shanghai, OmniVision Technologies (Shanghai) Co.Ltd., or OTC, of which we have already contributed $12.0 million. Thefunding requirement arises from our execution of a Land-Use-Right PurchaseAgreement with the Construction and Transportation Commission of the Pudong NewDistrict, Shanghai with a concomitant commitment to spend approximately $33.7 millionto develop the land. See Note 16* — “Commitmentsand Contingencies”*to our condensed consolidated financialstatements. We expect to fund our capital commitments to OTC from our availableworking capital.

 

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

 

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 outstandingcommon stock in an open-market program. Subject to applicable securities laws,such repurchases will be at such times and in such amounts as we deemappropriate, based on factors such as market conditions, legal requirements andother corporate considerations. As of July 31, 2009, we had cumulativelyrepurchased 6,671,000 shares of our common stock under the open-marketprogram for an aggregate cost of approximately $99.1 million. SeeNote 14 *— “Treasury Stock”*to ourcondensed consolidated financial statements.

 

Wecurrently expect our available cash, cash equivalents and short-terminvestments, together with cash that we anticipate generating from operatingactivities, will be sufficient to satisfy our capital requirements overapproximately the next twelve months. Other than normal working capitalrequirements, we expect our capital requirements totaling approximately$40.0 million over approximately the next twelve months will consistprimarily of funding capital investments in our wholly-owned subsidiaries,OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, OTC and ShanghaiOmniVision Semiconductor Technology, Co. Ltd, or OST. We formed OST during thethree months ended October 31, 2008, for the purpose of expanding ourtesting capabilities in Shanghai, China. In August 2009, we obtained afixed asset loan in the amount of approximately $23.5 million to partiallyfinance the construction cost of the OTC facility. Subsequently, this loan wasapproved by the Chinese government and the final loan amount was modified toapproximately $20.5 million.

 

Our ability togenerate cash from operations is subject to substantial risks described belowunder the caption Part II Item 1A. *“RiskFactors.”*We encourage you to review these risks carefully.

 

**Contractual Obligations and Commercial Commitments**

 

The following table summarizes our contractualobligations and commercial commitments as of July 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                                         |       | $                          | 12,014     |   | $ | 5,415 |   | $ | 5,516 |   | $ | 1,083 |   | $ | — |   |
| Mortgage obligation                                      |       | 35,533                     | (1)        | 3,554 |   | 7,107 |   | 1,357 |   | 23,515 |   |
| Noncancelable orders                                     |       | 60,369                     |       | 60,369 |   | — |   | — |   | — |   |
| Total contractual obligations                            |       | 107,916                    |       | 69,338 |   | 12,623 |   | 2,440 |   | 23,515 |   |
|                                                     |       |                       |       |   |   |   |   |   |   |   |   |
| Other Commercial Commitments:                            |       |                       |       |   |   |   |   |   |   |   |   |
| OST                                                      |       | 8,500                      | (2)        | — |   | 8,500 |   | — |   | — |   |
| OTC                                                      |       | 21,663                     | (3)        | 19,980 |   | 1,683 |   | — |   | — |   |
| Total commercial commitments                             |       | 30,163                     |       | 19,980 |   | 10,183 |   | — |   | — |   |
| Total contractual obligations and commercial commitments |       | $                          | 138,079    |   | $ | 89,318 |   | $ | 22,806 |   | $ | 2,440 |   | $ | 23,515 |   |

 

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| (1)    | In  March 2007, we entered into the Mortgage Loan with a domestic bank in  the amount of $27.9 million.  In March 2008, we borrowed $6.0 million under the Term Loan for  building improvement of the Santa Clara Property. We drew down the remaining  $6.0 million under the Term Loan in July 2008. See  Note 8 —“*Borrowing Arrangements”*  to our condensed consolidated financial statements.                                                                                                  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (2)    | During  the three months ended October 31, 2008, we formed OST, a new  wholly-owned subsidiary in Shanghai, China, for the purpose of expanding our  testing capabilities. We contributed $1.5 million in January 2009,  as required under the terms of our capital commitment. We are required to  contribute the remaining $8.5 million of a $10.0 million commitment  by October 2010. See Note 16 — “*Commitments  and Contingencies”* to our condensed consolidated financial  statements. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (3)    | Over  the next two years, we expect to invest a total of approximately  $33.7 million in our subsidiary, OTC, of which we have already invested  $12.0 million. OTC will use the funds to develop land and construct  facilities for its use. In August 2009, we obtained a fixed asset loan  in the amount of approximately $20.5 million to                                                                                                                                                                                           |

 

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

 
|   | partially  finance the construction cost of the OTC facility. See  Note 16 — “*Commitments and  Contingencies”* to our condensed consolidated financial statements. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As of July 31,2009, the long-term income taxes payable under FIN 48 was$81.9 million. We are unable to make a reasonably reliable estimate of thetiming 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 July 31, 2009 presented above.

 

### **Off-BalanceSheet Arrangements**

 

We did not haveany off-balance sheet arrangements during the period covered by this QuarterlyReport on Form 10-Q.

 

### **RecentAccounting Pronouncements**

 

In April 2009,FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, *“Recognition and Presentation of Other-Than-Temporary Impairments,”*or FSP SFAS No. 115-2 and SFAS No. 124-2. FSP SFAS No. 115-2 andSFAS No. 124-2 provides new guidance on the recognition and presentationof an other-than-temporary impairment for debt securities classified asavailable-for-sale or held-to-maturity. We adopted the provisions of FSP SFAS No. 115-2and No. 124-2 on May 1, 2009, and the adoption did not have anymaterial effect on our financial position, results of operations or cash flows.

 

In June 2009,the FASB issued SFAS No. 167, *“Amendments to FASBInterpretation No. 46(R),”* or SFAS No. 167. SFAS No. 167amends the consolidation guidance under FIN 46(R) by requiring anenterprise to qualitatively assess the determination of the primary beneficiaryof a VIE based on whether the enterprise: (1) has the power to directmatters that most significantly impact the activities of the VIE; and (2) hasthe obligation to absorb losses or the right to receive benefits of the VIEthat could potentially be significant to the VIE. SFAS No. 167 alsorequires an ongoing reconsideration of the primary beneficiary of a VIE, andamends the events that trigger a reassessment of whether an entity is a VIE.SFAS No. 167 is effective in fiscal years beginning after November 15,2009, and we are required to adopt SFAS No. 167 in our first quarter offiscal 2011. We are currently evaluating the impact SFAS No. 167 mayhave on our financial position, results of operations and cash flows.

 

In June 2009,the FASB issued SFAS No. 168, *“The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples — a replacement of FASB Statement No. 162,”* or SFAS No. 168,which approved the FASB Accounting Standards Codification, or Codification, asthe single source of authoritative United States accounting and reportingstandards for all non-governmental entities, except for guidance issued by theSEC. The Codification, which changes the referencing of financial standards, iseffective for interim or annual financial periods ending after September 15,2009, and we are required to adopt it in our second quarter of fiscal 2010.Upon adoption, all references made to generally accepted accounting principlesin the United States, or U.S. GAAP, will use the new Codification numberingsystem prescribed by the FASB. As the Codification is not intended to change oralter existing U.S. GAAP, we do not expect the adoption of SFAS No. 168 tohave any material impact on our financial position, results of operations andcash flows.

 

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| **ITEM 3.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK** |
|-------------|-----------------------------------------------------------------|

 

We sell ourproducts globally, in particular to branded customers, contract manufacturers,VARs and distributors in China, Japan, Korea and Taiwan.

 

The great majorityof our transactions with our customers and vendors are denominated in U.S.dollars. The expenses we incur in currencies other than U.S. dollars affectgross profit, selling, general and administrative expenses, research,development and related expenses and income taxes, and are primarily incurredin China, where the Chinese Yuan, or CNY, is the local currency and in Taiwan,where the New Taiwan dollar is the local currency.

 

Asof July 31, 2009, the functional currency of our wholly-owned subsidiarieslocated in Hong Kong, OmniVision Technologies (Hong Kong) Company Limited,OmniVision Trading (Hong Kong) Company Ltd., and OmniVision Holding (Hong Kong)Co., Ltd.; in the Cayman Islands, OmniVision International Holding, Ltd. andOmniVision Technology International Ltd. (formerly HuaWei TechnologyInternational, Ltd.); in China, OSC and OTC and OST, and in Taiwan, TaiwanOmniVision Technologies Co., Ltd., Taiwan OmniVision International TechnologiesCo., Ltd., and Taiwan OmniVision Investment Holding Co., Ltd., is the U.S.dollar. Our other wholly-owned subsidiaries have their respective localcurrencies as their functional currencies. The functional currency of ourconsolidated affiliate, SOI, is the New Taiwan dollar. Transaction gains andlosses resulting from transactions denominated in currencies other than therespective functional currencies are included in “Other income, net” for theperiods presented. The amounts of transaction gains and losses for the threemonths ended July 31, 2009 and 2008 were not material.

 

Given that theexpenses that we incur in currencies other than U.S. dollars have not been asignificant percentage of our revenues, we do not believe that our foreigncurrency exchange rate fluctuation risk is significant. Consequently, we do notbelieve that a ten percent change in foreign currency exchange rates would havea significant effect on our future net income or cash flows.

 

Because we do notbelieve that we currently have any significant direct foreign currency exchangerate risk, we have not hedged exposures denominated in foreign currencies orused any other derivative financial instruments. Although we transact theoverwhelming majority of our business in U.S. dollars, future fluctuations inthe value of the U.S. dollar may affect the competitiveness of our products andthus may impact our results of operations.

 

## ***Market InterestRate Risk***

 

Our cashequivalents and short-term investments are exposed to financial market risk dueto fluctuation in interest rates, which may affect our interest income and,from time to time, the fair market value of our investments. We manage ourexposure to financial market risk by performing ongoing evaluations of ourinvestment portfolio. We presently invest in money market funds, certificatesof deposit issued by banks, commercial paper, certificates of deposit,high-grade corporate securities and government bonds maturing approximately 18months or less from the date of purchase. In the past, we also invested inauction rate securities and in variable rate demand notes, which have a finalmaturity date of up to 39 years but whose interest rate is reset at varyingintervals typically between seven and 35 days. As of July 31, 2009,we did not hold any auction rate securities or variable rate demand notes.

 

Due to the shortmaturities of our investments, the carrying value should approximate the fairmarket value. In addition, we do not use our investments for trading or otherspeculative purposes. Due to the short duration of our investment portfolio, wedo not expect that an immediate 10% change in interest rates would have amaterial effect on the fair market value of our portfolio. Therefore, we wouldnot expect our operating results or cash flows to be affected to anysignificant degree by the effect of a sudden change in market interest rates.We do not believe that the recent instability in global financial markets hassignificantly affected the value of our cash and short-term investments.

 

Duringfiscal 2007, we financed the purchase of the Santa Clara Property with a$27.9 million mortgage loan. The mortgage loan is a variable rate loanwhich bears interest at LIBOR plus 90 basis points and changes in the interestrate affect our interest payments. However, concurrent with the mortgage loan, wealso entered into an interest rate swap with a notional amount thatapproximates the principal outstanding under the mortgage loan. We are thefixed rate payer under the swap with a fixed rate of 5.27%. By July 2008,we drew down $12.0 million under a related term loan. Concurrent with theterm loan, we also entered into an interest rate swap with a notional amountthat approximates the principal outstanding under the term loan. We are thefixed rate payer under the swap with a fixed rate of 4.26%. Consequently,although we are required to mark the value of the swaps to market at eachbalance sheet date and record the associated non-cash cost or benefit as partof “Other income, net,” a hypothetical ten percent change in LIBOR would nothave a material effect on our annual interest expense.

 

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| **ITEM 4.** | **CONTROLS AND PROCEDURES** |
|-------------|-----------------------------|

 

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

 

Under thesupervision and with the participation of our chief executive officer and ourchief financial officer, our management conducted an evaluation of theeffectiveness of our disclosure controls and procedures, as defined in theSecurities Exchange Act of 1934, as of the end of the period covered by thisQuarterly Report on Form 10-Q. Based on this evaluation, our chiefexecutive officer and chief financial officer have concluded that, at the levelof reasonable assurance, our disclosure controls and procedures are effectiveto ensure that the information we are required to disclose in reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms and thatsuch information is accumulated and communicated to our management includingour principal executive and principal financial officers, as appropriate, toallow timely decisions regarding required disclosure.

 

**(b)  Changesin Internal Controls.**

 

There have been nochanges in our internal control over financial reporting during the three-monthperiod ended July 31, 2009, as covered by this Quarterly Report on Form 10-Q,that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PART II — OTHERINFORMATION**

 

**ITEM 1.   LEGALPROCEEDINGS**

 

From time to time,we have been subject to legal proceedings and claims with respect to suchmatters as patents, product liabilities and other actions arising out of thenormal course of business.

 

On November 29,2001, a complaint captioned *McKee v. OmniVision Technologies, Inc.,et. al., Civil Action No. 01 CV 10775*, was filed in the UnitedStates District Court for the Southern District of New York against us, some ofour directors and officers, and various underwriters for our initial publicoffering. Plaintiffs generally allege that the named defendants violatedfederal securities laws because the prospectus related to our offering failedto disclose, and contained false and misleading statements regarding, certaincommissions purported to have been received by the underwriters, and otherpurported underwriter practices in connection with their allocation of sharesin our offering. The complaint seeks unspecified damages on behalf of apurported class of purchasers of our common stock between July 14, 2000and 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 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, 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 OmniVision 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 litigation. A motion for preliminaryapproval of the settlement was filed on April 2, 2009. Under thesettlement, which is subject to final Court approval, the insurers would paythe full amount of settlement share allocated to us, and we would bear nofinancial liability. Our company, as well as our company’s officer and directordefendants who were previously dismissed from the action pursuant to tollingagreements, would receive complete dismissals from the case. On June 9,2009, the Court entered an order granting preliminary approval of thesettlement. It is uncertain whether the settlement will receive final Courtapproval. If the settlement does not receive final Court approval, andlitigation against us proceeds, we believe that we have meritorious defenses toplaintiffs’ claims and intend 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 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. At the end of May 2009, plaintiff sent aDemand for Inspection of Books and Records to certain of the nominal defendantsnamed in the Section 16(b) litigation seeking the companies toproduce any tolling agreements entered into with the companies’ respectiveunderwriters. Plaintiff’s counsel has agreed to an open-ended extension for certainnominal defendants who received such a demand. As of the date of this filing,we have not received a demand for inspection of books and records from theplaintiff.

 

On March 6,2009, Panavision Imaging, LLC, or Panavision, filed a complaint against usalleging patent infringement in the District Court for the Central District ofCalifornia. The case is entitled Panavision Imaging, LLC v. OmniVisionTechnologies, 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/or import productsthat infringe U.S. Patent Nos. 6,818,877 (“Pre-charging a Wide AnalogBus for CMOS Image Sensors”), 6,663,029 (“Video Bus for High Speed Multi-resolutionImagers and Method Thereof”) and 7,057,150 (“Solid State Imager with ReducedNumber of Transistors per Pixel”). The complaint seeks unspecified monetarydamages, fees and expenses and injunctive relief against us. We expect tovigorously defend ourselves against Panavision’s allegations. The Court hasscheduled a claim construction hearing for December 10, 2009. At thistime, we cannot estimate any possible loss or predict whether this matter willresult in any material expense to us.

 

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**ITEM 1A.   RISKFACTORS**

 

*ThisQuarterly Report on Form 10-Q, including Management’s Discussion andAnalysis of Financial Condition and Results of Operations, containsforward-looking statements. These forward-looking statements are subject tosubstantial risks and uncertainties that could cause our future business,financial condition or results of operations to differ materially from ourhistorical results or currently anticipated results, including those set forthbelow.*

 

*Thefollowing description of these risk factors includes any material changes toand supersedes the description of the risk factors associated with our businesspreviously disclosed in Item 1A of our 2009 Annual Report on Form 10-Kfiled with the SEC on July 1, 2009. As a result of the following riskfactors, as well as of other variables affecting our operating results, pastfinancial performance may not be a reliable indicator of future performance,and historical trends should not be used to anticipate results or trends infuture 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, general domestic and global economic conditions have beennegatively impacted by several factors, including, among others, thesubprime-mortgage crisis in the housing market, going concern threats toinvestment and commercial banks, other financial institutions and majorautomobile companies, reduced corporate and consumer spending, and decreasedconsumer confidence. These economic conditions have resulted in our facing oneof the most challenging periods in our history. The image-sensor market hasbeen negatively impacted by the current global economic environment. Inparticular, we believe the current economic conditions have reduced spending byconsumers and businesses in markets into which we sell our products in responseto tighter credit, negative financial news and the continued uncertainty of theglobal economy. End customer demand has decreased significantly throughout theindustry, affecting all consumer electronic products, security products andproducts for the automotive industry. Consequently, the overall demand forimage sensors has also decreased. This decrease in demand has had a significantimpact on our revenues, results of operations and overall business. Forexample, our revenues for the three-month period ended July 31, 2009 werelower than similar historical periods.

 

These conditions could also have a number of additional effects on ourbusiness, including insolvency of key suppliers or manufacturers resulting inproduct delays, inability of customers to obtain credit to finance purchases ofour products, customer insolvencies, increased pricing pressures, restructuringexpenses and associated diversion of management’s attention, excess inventoryand increased difficulty in accurately forecasting product demand and planningfuture business activities. It is uncertain how long the current economicconditions will last or how quickly any subsequent economic recovery willoccur. If the economy or markets into which we sell our products continue toslow or any subsequent economic recovery is slow to occur, our business,financial condition and results of operations could be further materially andadversely affected.

 

## ***We face intensecompetition in our markets from CMOS and CCD image***-sensor manufacturers, and if we areunable to compete successfully we may not be able to maintain or grow ourbusiness.

 

The image-sensormarket is intensely competitive, and we expect competition in this industry tocontinue to increase. This competition has resulted in rapid technologicalchange, evolving standards, reductions in product selling prices and rapidproduct obsolescence. If we are unable to successfully meet these competitivechallenges, we may be unable to maintain and grow our business. Any inabilityon our part to compete successfully would also adversely affect our results ofoperations and impair our financial condition.

 

Our image-sensor products face competition from other companies that sellCMOS image sensors and from companies that sell CCD image sensors. Many of ourcompetitors have longer operating histories, greater presence in key markets,greater name recognition, larger customer bases, more established strategic andfinancial relationships and significantly greater financial, sales andmarketing, distribution, technical and other resources than we do. Many of themalso have their own manufacturing facilities which may give them a competitiveadvantage. As a result, they may be able to adapt more quickly to new oremerging technologies and customer requirements or devote greater resources tothe promotion and sale of their products. Our competitors include establishedCMOS image-sensor manufacturers such as Aptina Imaging, Samsung, Sharp, Sony, STMicroelectronicsand Toshiba as well as CCD image-sensor

 

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manufacturers such as Fuji, Kodak, NEC, Panasonic, Sanyo, Sharp,Sony and Toshiba. Many of these competitors own and operate their ownfabrication facilities, which in certain circumstances may give them theability to price their products more aggressively than we can or may allow themto respond more rapidly than we can to changing market opportunities. 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 competitorsmay acquire or enter into strategic or commercial agreements or arrangementswith foundries or providers of color filter processing, assembly or packagingservices. These strategic arrangements between our competitors and third partyservice providers could involve preferential or exclusive arrangements for ourcompetitors. Such strategic alliances could impair our ability to securesufficient capacity from foundries and service providers to meet our demand forwafer manufacturing, color filter processing, assembly or packaging services,adversely affecting our ability to meet customer demand for our products. Inaddition, competitors may enter into exclusive relationships with distributors,which could reduce available distribution channels for our products and impairour ability to sell our products and grow our business. Further, some of ourcustomers could also become developers of image sensors, and this couldpotentially adversely affect our results of operations, business and prospects.

 

## ***Reductions in ouraverage selling prices may lower our revenues and, as a result, may reduce ourgross margins.***

 

We have experienced and expect to continue to experience pressure toreduce the selling prices of our products, and our average selling prices havedeclined as a result. Competition in our product markets is intense and as thiscompetition continues to intensify, we anticipate that these pricing pressureswill increase. We expect that the average selling prices for many of ourproducts will continue to decline over time. Unless we can increase unit salessufficiently to offset these declines in our average selling prices, ourrevenues will decline. Reductions in our average selling prices have adverselyaffected our gross margins, and unless we can reduce manufacturing costs tocompensate, additional reductions in our average selling prices will continueto adversely affect our gross margins and could materially and adversely affectour operating results and impair our financial condition. Although we maydecrease our research, development and related expenses in the short-term as weimplement certain cost reduction measures, historically we have increased andmay continue to increase our research, development and related expenses in thelong-term to continue the development of new image-sensor products that can besold at higher selling prices and/or manufactured at lower cost. However, if weare unable to timely introduce new products that incorporate more advancedtechnology and include more advanced features that can be sold at higheraverage selling prices, or if we are unable to successfully develop morecost-effective technologies, our financial results could be adversely affected.

 

## ***Sales of ourimage-sensor products for mobile phones account for a large portion of ourrevenues, and any decline in sales to the mobile phone market or failure ofthis market and other emerging markets to continue to grow as expected couldadversely affect our results of operations.***

 

Sales to themobile phone market account for a large portion of our revenues. Although wecan only estimate the percentages of our products that are used in the mobilephone market due to the significant number of our image-sensor products thatare sold to module makers or through distributors and VARs, we believe that themobile phone market accounted for approximately 65% and  60% of our revenues in fiscal 2009 andthe three months ended July 31, 2009, respectively. We expect thatrevenues from sales of our image-sensor products to the mobile phone marketwill continue to account for a significant portion of our revenues duringfiscal 2010 and beyond. Any factors adversely affecting the demand for ourimage sensors in this market could cause our business to suffer and adverselyaffect our operating results. The digital image- sensor market for mobilephones is extremely competitive, and we expect to face increased competition inthis market in the future. In addition, we believe the market for mobile phonesis also relatively concentrated and the top five producers account for morethan 80% of the annual sales of these products. If we do not continue toachieve design wins with key mobile phone manufacturers, our market share orrevenues could decrease. The mobile phone image-sensor market is also subjectto rapid technological change. In order to compete successfully in this market,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 

 

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prospects would be materially and adversely affected.In the past, we have experienced problems accurately forecasting customerdemand in other markets. In addition, current domestic and global economicconditions could negatively affect the mobile phone market if consumers and/orbusinesses defer purchases in this market in response to tighter credit,negative financial news, and/or decreased corporate or consumer spending.

 

Wealso expect that image sensors will become of greater importance in thesecurity, medical and automotive industries. As image sensors begin to fill a greater role in these other markets,the challenges and risks that we face in these other markets could increase andcould be similar to some of the challenges and risks that we face in the mobilephone market. If our sales to the mobile phone market and other emergingmarkets do not increase and/or the mobile phone market and other emerging marketsdo not grow as expected, our results of operations, business and prospectswould be materially adversely affected.

 

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

 

Ourfailure to successfully develop new products that achieve market acceptance ina timely fashion would adversely affect our ability to grow our business andour operating results. The development, introduction and market acceptance ofnew products is critical to our ability to sustain and grow our business. Anyfailure to successfully develop, introduce, market and sell new products couldmaterially adversely affect our business and operating results. The developmentof new products is highly complex, and we have in the past experienced delaysin completing the development and introduction of new products. From time totime, we have also encountered unexpected manufacturing problems as we increasethe production of new products. Consumers continue to expect the sophisticationof image sensors in consumer products to increase, and the number of consumerproducts that use image 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 product developmentand introduction depends on a number of factors, including:

 

·                  accurate prediction of market requirements andevolving standards, including pixel resolution, output interface standards,power requirements, optical lens size, input standards and operating systemsfor webcams and other platforms;

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

·                  definition, timely completion and introduction of newCMOS image sensors that satisfy customer requirements;

·                  development of products that maintain a technologicaladvantage over the products of our competitors, including our advantages withrespect to the functionality and pixel capability of our image-sensor productsand our proprietary testing processes; and

·                  market acceptance of the new products.

 

Accomplishing all of these steps is difficult, timeconsuming and expensive. We may be unable to develop new products or productenhancements in time to capture market opportunities or achieve significant orsustainable acceptance in new and existing markets. In addition, our productscould become obsolete sooner than anticipated because of a rapid change in oneor more of the technologies related to our products or the reduced life cyclesof 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 successis, dependent upon manufacturers designing our image-sensor products into theirproducts. To achieve design wins, which are decisions by manufacturers todesign our products into their systems, we must define and deliver costeffective and innovative image-sensor solutions on a timely basis that satisfythe manufacturers’ requirements. Our ability to achieve design wins is subjectto numerous risks including competitive pressures as well as technologicalrisks. If we do not achieve a design win with a prospective customer, it may bedifficult to sell our image-sensor products to such prospective customer in thefuture because once a manufacturer has designed a supplier’s products into itssystems, the manufacturer may be reluctant to change its source of componentsdue to the significant costs, time, effort and risk associated with qualifyinga new supplier and modifying 

 

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its design platforms.Accordingly, if we fail to achieve design wins with key device manufacturersthat embed image sensors in their products, our market share or revenues coulddecrease. Furthermore, to the extent that our competitors secure design wins,our ability to expand our business in the future will be impaired.

 

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

 

Unlike some of our larger competitors, we do not ownor operate a semiconductor fabrication facility. Instead, we rely on TSMC, PSCand other subcontract foundries to produce all of our wafers. Historically, wehave relied on TSMC to provide us with a substantial majority of our wafers. Asa part of our joint venture agreement with TSMC, TSMC has agreed to commitsubstantial wafer manufacturing capacity to us in exchange for our commitmentto purchase a substantial portion of our wafers from TSMC, subject to pricingand technology requirements.

 

In addition, we have entered into a foundrymanufacturing agreement with PSC pursuant to which we and PSC have agreed tojointly develop certain pixel-related process technology and for PSC to processcertain of our CMOS image sensors at PSC’s facilities in accordance with thescheduled development approved by both parties.

 

Under the terms of these supply agreements, wesecure manufacturing capacity in any particular period on a purchase orderbasis. The foundries have no obligation to supply products to us for anyspecific period, in any specific quantity or at any specific price, except asset forth in a particular purchase order. In general, our reliance on thirdparty foundries involves a number of significant risks, including:

 

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

·                  lack of guaranteed production capacity or productsupply;

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

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

 

If for any reason the foundries are unable toprovide a sufficient number of products to us on a timely basis, we may beunable to meet the demands of our customers, which could have a material adverseaffect on our revenues and other financial results.

 

The current global economic conditions couldmaterially affect our foundries and cause them to be unable to providenecessary services to us. If TSMC, PSC, or any of our other foundries wereunable 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 to fabricateour companion DSP chips for competitive or other reasons, we would have toidentify 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 joint venture with TSMC, forthe color filter processing of our completed wafers and the assembly of ourCameraCube imaging devices. In addition, we rely on Advanced SemiconductorEngineering, Inc. and on ImPac, our equity investee, for substantially allof our ceramic chip packages. We rely on XinTec and WLCSP, two investeecompanies, for chip scale packages, which are generally used in our productsdesigned for the smallest form factor applications. We rely on severalspecialized service providers, one of which is ImPac, to perform the necessarywafer probe tests and prepare good die for use in a form called chip-on-board,a process called reconstructing wafers. The current global economic conditionscould adversely affect these service providers’ ability to continue to fulfillour packaging, color filter processing and related requirements. If for anyreason one or more of these service providers were to become unable orunwilling to continue to provide services of acceptable quality, at acceptablecosts or in a timely manner, our ability to deliver our products to ourcustomers could be severely impaired. We would have to 

 

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identify and qualifysubstitute service providers, which could be time consuming and difficult andcould result in unforeseen operational problems. Substitute service providersmight not be available or, if available, might be unwilling or unable to offerservices on acceptable terms.

 

In addition, if competition for color filterprocessing, packaging, capacity or other back-end services increases, we may berequired to pay or invest significant amounts to secure access to theseservices, which could adversely impact our operating results. The number of companiesthat provide these services is limited and some of them have limited operatinghistories and financial resources. In the event our current providers refuse orare unable to continue to provide these services to us, we may be unable toprocure services from alternate service providers. Furthermore, if customerdemand for our products increases, we may be unable to secure sufficientadditional capacity from our current service providers on commerciallyreasonable terms, if at all. These factors may cause unforeseen productshortages or may increase our costs of manufacturing, assembling or testing ofour 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 operating results have variedsignificantly from quarter to quarter in the past and are likely to varysignificantly in the future based on a number of factors, many of which arebeyond our control. These factors and other industry risks, many of which aremore fully discussed in our other risk factors, include, but are not limitedto:

 

·                  adverse changes in domestic or global economicconditions, including the current economic crisis;

·                  the volume and mix of our product sales;

·                  competitive pricing pressures;

·                  our ability to accurately forecast demand for ourproducts;

·                  our ability to achieve acceptable wafer manufacturingor back-end processing yields;

·                  our gain or loss of a large customer;

·                  our ability to manage our product transitions;

·                  the availability of production capacity at thesuppliers that manufacture our products or process our products;

·                  the growth of the market for products and applicationsusing CMOS image sensors;

·                  the timing and size of orders from our customers;

·                  the volume of our product returns;

·                  the seasonal nature of customer demand for ourproducts;

·                  the deferral of customer orders in anticipation of newproducts, product designs or enhancements;

·                  the announcement and introduction of products andtechnologies by our competitors;

·                  the fair value of our interest rate swaps;

·                  the impairment of our intangible assets or otherlong-lived assets;

·                  the level of our operating expenses; and

·                  fluctuations in our effective tax rate from quarter toquarter.

 

Our introduction of new products and our product mixhave affected and may continue to affect our quarterly operating results.Changes in our product mix could adversely affect our operating results,because some products provide higher margins than others. We typicallyexperience lower yields when manufacturing new products through the initialproduction phase, and consequently our gross margins on new products havehistorically been lower than our gross margins on our more establishedproducts. We also anticipate that the rate of orders from our customers mayvary significantly from quarter to quarter. Our operating expenses arerelatively fixed in the short-term, and our inventory levels are based on ourexpectations of future revenues. Consequently, if we do not achieve therevenues we expect in any quarter, expenses and inventory levels could bedisproportionately high, adversely impacting our operating results for thatquarter, and potentially in future quarters.

 

All of these factors are difficult to forecast andcould result in fluctuations in our quarterly operating results. Our operatingresults in a given quarter could be substantially less than anticipated, and,if we fail to meet market analysts’ expectations, a substantial decline in ourstock price could result. Fluctuations in our quarterly operating results couldadversely affect the price of our common stock in a manner unrelated to ourlong-term operating performance.

 

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***Our use of derivative financial instruments to reduce interest raterisk may result in added volatility in our quarterly operating results***

 

We do not hold or issuederivative financial instruments for trading purposes. However, we do utilizederivative financial instruments to reduce interest rate risk. We have avariable rate mortgage loan that totaled $35.5 million as of July 31,2009. To manage the related interest rate risk, we entered into two interestrate swap agreements, effectively converting our mortgage loan into a fixedrate loan. Under generally accepted accounting principles, the fair values ofthe swap contracts, which will either be amounts receivable from or payable tocounterparties, are reflected as either assets or liabilities on ourconsolidated balance sheets. Also, we have to record their fair value changesin our consolidated statements of operations, in “Other income, net.” Theassociated impact on our quarterly operating results is directly related tochanges in prevailing interest rates. If interest rates increase, we would havea non-cash gain on the swap, and vice versa. Consequently, these swap contractswill introduce volatility to our operating results.

 

We are also exposed tocredit loss in the event of non-performance by the counterparties to theinterest rate swap agreements. However, we do not anticipate non-performance bythe 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 using our image sensors, suchas mobile phones, notebooksand webcams, DSCs and cameras for toysand games, 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, since a very large number of themanufacturers who use our products are located in China and Taiwan, the patternof demand for our image sensors has been increasingly influenced by the timingof 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 foundries manufacturing the wafers used in ourproducts cannot achieve the yields we expect, we will incur higher unit costsand reduced product availability. Foundries that supply our wafers haveexperienced problems in the past achieving acceptable wafer manufacturingyields. Wafer yields are a function both of our design technology and theparticular foundry’s manufacturing process technology. Certain risks areinherent in the introduction of new products and technology. Low yields mayresult from design errors or manufacturing failures in new or existingproducts. During the early stages of production, production yields for newproducts are typically lower than those of established products. Unlike manyother semiconductor products, optical products can be effectively tested onlywhen they are complete. Accordingly, we perform final testing of our productsonly after they are assembled. As a result, yield problems may not beidentified until our products are well into the production process. The risksassociated with low yields could be increased because we rely on third partyoffshore 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.

 

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

 

Oursales are generally made on the basis of purchase orders rather than long-termpurchase commitments; however, we manufacture products and build inventorybased on our estimates of customer demand. Accordingly, we must rely onmultiple assumptions to forecast customer demand. We are continually working toimprove our sales forecasting procedures. The current domestic and globaleconomic conditions have made it extremely challenging to 

 

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accurately predict customer demand because recentdemand has significantly 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 substantial declinein 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 thecontinued growth of various markets into which we sell our image-sensorproducts, including the markets for mobile phones, notebook and webcams, digital still and video cameras, commercial and security andsurveillance applications, toys and games, including interactive video games,automotive and medical applications. If these markets do not grow and developas we anticipate, we may be unable to sustain or grow the sales of ourproducts. Each of these markets has already been, and may continue to be,adversely impacted by current global economic conditions where consumersand businesses have deferred purchases of products in these markets as a resultof tighter credit, negative financial news, and decreased corporate or consumerspending. Such conditions havenegatively affected, and may continue to negatively affect, our business.

 

In addition, the market price of our common stockmay be adversely affected if certain of these new markets do not emerge ordevelop as expected. Securities analysts may already factor revenue from suchnew markets into their future estimates of our financial performance and shouldsuch markets not develop as expected by such securities analysts the tradingprice of our common stock 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 alengthy manufacturing, packaging and assembly process, typically lastingapproximately 12-14 weeks. Additional time may pass before a customer commencestaking volume shipments of products that incorporate our image sensors. Evenwhen a manufacturer decides to design our image sensors into its products, themanufacturer may never ship final products incorporating our image sensors.Given this lengthy cycle, we experience a delay between the time we incurexpenditures for research and development and sales and marketing efforts andthe time we generate revenue, if any, from these expenditures. This delay makesit more difficult to forecast customer demand, which adds uncertainty to themanufacturing planning process and could adversely affect our operatingresults. In addition, the product life cycle for certain of our image-sensorproducts designed for use in certain applications can be relatively short. Ifwe fail to appropriately manage the manufacturing, packaging and assemblyprocess, our products may become obsolete before they can be incorporated intoour customers’ products and we may never realize a return on investment for theexpenditures we incur in developing and producing 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 meettechnological advances and new and changing industry and customer demands, ourcolor filter application and ceramic, plastic and chip scale packagingrequirements will also evolve. Our ability to continue to profitably deliverproducts that meet customer demand is dependent upon our ability to obtain thirdparty services that meet these new requirements on a cost-effective basis.There can be no assurances that any of these parties will be able to developenhancements to the services they provide to us to meet these new and changingindustry and customer requirements. Furthermore, even if these serviceproviders are able to develop their services to meet new and evolvingrequirements, these services may not be available at a cost that enables us tosustain 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, andbecause we integrate many functions on a single chip, are highly complex. Theintegration of additional functions into already complex products could resultin a greater risk that customers or end users could discover latent defects orsubtle faults after we have already shipped significant quantities of aproduct. Although we test our products, we have in the past and may in thefuture encounter defects or errors. For example, in the third quarter offiscal 2005, we recorded a provision of $2.7 million related to thepossible replacement of products that did not meet a particular customer’sstandards. Delivery of products with defects or reliability, quality orcompatibility problems may damage our reputation and ability to retain existingcustomers and attract new customers. In addition, product defects and errorscould result in additional development costs, diversion of technical resources,delayed product shipments, increased product returns, product warranty costsfor recall and replacement and product liability claims against us which maynot 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.***

 

Arelatively small number of OEMs, VARs and distributors account for asignificant portion of our revenues. Any material delay, cancellation orreduction of purchase orders from one or more of our major customers ordistributors could result in our failure to achieve anticipated revenue for aparticular period. Such a delay, cancellation or reduction could be caused by,among other things, such customers or distributors being materially andadversely affected by the current domestic and global economic conditions. Inaddition, if we are unable to retain one or more of our largest OEM,distributor or VAR customers, or if we are unable to maintain our current levelof revenues from one or more of these significant customers, our business andresults of operation would be impaired and our stock price could decrease,potentially significantly. In the three months ended July 31, 2009, oneOEM customer accounted for approximately 13.0% of our revenues, and onedistributor customer accounted for approximately 28.7% of our revenues. Inaddition, in fiscal 2009, approximately 59.5% of our revenues came from salesto our top five customers. Our business, financial condition, results ofoperations and cash flows will continue to depend significantly on our abilityto retain our current key customers and to attract new customers, as well as onthe financial condition and success of our 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 arerequired to review our intangible assets for impairment when events or changesin circumstances indicate the carrying value may not be recoverable. Factorsthat may be considered a change in circumstances indicating that the carryingvalue of our intangible assets may not be recoverable include a decline instock price and market capitalization, and slower growth rates in our industry.

 

We maybe required to record a significant charge to earnings in our financialstatements during the period in which we determine that our intangible assetsor long-term investments have been impaired. Any such charge would adverselyimpact our results of operations. As of July 31, 2009, our intangibleassets totaled approximately $5.8 million and our long-term investmentstotaled approximately $85.0 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.***

 

Oursales are generally made pursuant to standard purchase orders. We include inour backlog only those customer orders for which we have accepted purchaseorders and assigned shipment dates within the upcoming 12 months. Ordersconstituting our current backlog are subject to cancellation or changes indelivery schedules, and backlog may not necessarily be an indication of futurerevenue. Any cancellation or delay in orders which constitute our current orfuture backlog may 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 arerequired to comply with the rules promulgated under Section 404 ofthe Sarbanes-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.

 

Wehave in the past discovered, and may in the future discover, areas of ourinternal control that need improvement. For example, we restated our financialstatements for the first, second and third quarters of fiscal 2004. If these orsimilar types of issues were to arise with respect to our internal controls infuture periods, they could impair our ability to produce accurate and timelyfinancial reports.

 

As ourbusiness changes, ongoing compliance with the provisions of Section 404 ofthe Sarbanes-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 aresubject to corporate governance laws and regulations affecting publiccompanies, including the provisions of the Sarbanes-Oxley Act, that imposecertain requirements on us and on our officers, directors, attorneys and independentregistered public accounting firm. In order to comply with these rules, weadded internal resources and have utilized additional outside legal, accountingand advisory services, which increased our operating expenses. We expect toincur ongoing operating expenses as we maintain compliance with Section 404.In addition, if we undergo significant modifications to our structure throughpersonnel or system changes, acquisitions, or otherwise, it may be increasinglydifficult to maintain compliance with the existing and evolving corporategovernance regulations.

 

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

 

As of July 31,2009, we held cash and cash equivalents totaling $258.9 million, andshort-term investments totaling $50.1 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 our investmentsto a maximum maturity of 18 months and to investment-grade instruments. Asof July 31, 2009, we did not hold any illiquid investments and we have notrealized any losses. However, recent uncertainties in global capital marketsassociated with a repricing of risk have caused disruptions in the orderlyfunction of markets where ordinarily there is virtually unlimited liquidity. Ifwe were to make a future investment in certain illiquid securities that aredependent on the orderly functioning of the capital markets, and if we wererequired to liquidate this type of securities at short notice, such liquidationcould result in losses of principal.

 

## ***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 

 

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China. Through our wholly-owned subsidiary, OmniVisionTechnologies (Shanghai) Co. Ltd., or OTC, we are also developing land andconstructing research facilities in Shanghai. There are certain administrative,legal and governmental risks to operating in China that could result inincreased operating expenses or could hamper us in the development of ouroperations in China. More recently we invested in a company in China that isproviding a portion of our chip scale package packaging requirements. The risksfrom operating in China that could increase our operating expenses andadversely affect our operating results, financial condition and ability todeliver 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 mayin the future make acquisitions of, or investments in, businesses that offerproducts, services and technologies that we believe would complement ourproducts, including CMOS image-sensor manufacturers. We may also makeacquisitions of or investments in, businesses that we believe could expand ourdistribution channels. Even if we were to announce an acquisition, we may notbe able to complete it. In addition, any future acquisition or substantialinvestment could 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.

 

Weexpect that any future acquisitions could include consideration to be paid incash, shares of our common stock or a combination of cash and our common stock.If and when consideration for a transaction is paid in common stock, it willresult in dilution to our existing stockholders.

 

## ***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.

 

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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.***

 

Weexpect to develop our business partly through forming alliances or jointventures with and making strategic investments in other companies, some ofwhich may be companies at a relatively early stage of development. For example,in April 2003, we made an investment in XinTec, a company that provideschip scale packaging services, and in June 2003 we made an investment inImPac, a packaging service company. In December 2005, VisEra, our jointventure with TSMC, completed the acquisition of additional shares ofXinTec.  In May 2007, we acquired aportion of the registered capital of WLCSP, a company that also provides chipscale packaging services.

 

Inaddition, in May 2004, we entered into an agreement with PSC under whichwe established SOI, a joint venture as a company incorporated under the laws ofTaiwan. The purpose of the joint venture is to conduct the business ofmanufacturing, marketing and selling of certain of our legacy products. In March 2005,we assumed control of the board of directors of SOI and we have consolidatedSOI since April 30, 2005.

 

Ourinvestments in these and other companies may negatively impact our operatingresults, because, under certain circumstances, we are required to recognize ourportion of any loss recorded by each of these companies or to consolidate theminto our operating results. We expect to continue to utilize partnerships,strategic alliances and investments, particularly those that enhance ourmanufacturing capacity and those that provide manufacturing services andtesting capability. These investments and partnering arrangements are crucialto our ability to grow our business and meet the increasing demands of ourcustomers. However, we cannot ensure that we will achieve the benefits weexpect from these alliances. For example, we may not be able to obtainacceptable quality and/or wafer manufacturing yields from these companies,which could result in higher operating costs and could impair our ability tomeet customer demand for our products. In addition, certain of these investmentsor partnering relationships may place restrictions on the scope of ourbusiness, the geographic areas in which we can sell our products and the typesof products that we can manufacture and sell. For example, our agreement withTSMC provides that we may not engage in business that will directly competewith the business of VisEra. This type of non-competition provision may impactour ability to grow our business and to meet the demands of our customers.

 

## ***Changes in our relationships with our joint venturesand/or companies in which we hold less than a majority interest could changethe way we account for such interests in the future.***

 

Aspart of our strategy, we have formed joint ventures with two of our foundrypartners, and we hold a noncontrolling interest in three companies from whichwe purchase certain manufacturing services. Under the applicable provisions ofgenerally accepted accounting principles in the United States of America, wecurrently consolidate one of these joint ventures into our consolidatedfinancial statements and results of operations, and record the equity intereststhat we do not own as noncontrolling interests. For the investments that weaccount for under the equity method, we record as part of other income orexpense our share of the increase or decrease in the equity of the companies inwhich we have invested. It is possible that, in the future, our relationshipsand/or our interests in or with these joint ventures or other investees couldchange. Such changes have in the past, and could in the future result indeconsolidation or consolidation of such entities, as the case may be, whichcould result in changes 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.***

 

Werely on a combination of patent, copyright, trademark and trade secret laws aswell as nondisclosure 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 patent infringementaction in Taiwan, Republic of China against IC Media Corporation of SanJose, California for infringement of a Taiwanese patent that had been issued tous. 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.***

 

Inrecent years, there has been significant litigation in the United Statesinvolving intellectual property rights, including in the semiconductorindustry. We have in the past been, currently are and may in the future be,subject to legal proceedings and claims with respect to our intellectualproperty, including such matters as trade secrets, patents, product liabilitiesand other actions arising out of the normal course of business. These claimsmay increase as our intellectual property portfolio becomes larger or morevaluable. Intellectual property claims against us, and any resulting lawsuit,may cause us to incur significant expenses, subject us to liability for damagesand invalidate our proprietary rights. Any potential intellectual property litigationagainst us would likely be time-consuming and expensive to resolve and woulddivert management’s time and attention and could also force us to take actionssuch as:

 

·                  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 that incorporatethe disputed intellectual property, which could result in substantialunanticipated development expenses and delay and prevent us from selling theproducts until the redesign is completed, if at all.

 

If weare subject to a successful claim of infringement and we fail to developnon-infringing intellectual property or license the infringed intellectualproperty on acceptable terms and on a timely basis, we may be unable to sellsome or all of our products, and our operating results could be adverselyaffected. We may in the future initiate claims or litigation against thirdparties for infringement of our intellectual property rights or to determinethe scope and validity of our proprietary rights or the proprietary rights ofcompetitors. These claims could also result in significant expense and thediversion of technical and management attention.

 

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

 

Ourgrowth has placed, and will continue to place, a significant strain on ourmanagement and other 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.

 

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Forexample, our failure to effectively manage our inventory levels could resulteither in excess inventories, which could adversely affect our gross marginsand operating results, or lead to an inability to fill customer orders, whichwould result in lower sales and could harm our relationships with existing andpotential customers.

 

Wemust also manage multiple relationships with customers, business partners and otherthird parties, such as our foundries and process and assembly vendors.Moreover, future growth could significantly overburden our management andfinancial systems and other resources. We may not make adequate allowances forthe costs and risks associated with our expansion. In addition, our systems,procedures or 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 could be higher than weanticipate and may harm our results of operations.***

 

As amultinational corporation, we conduct our business in many countries and aresubject to taxation in many jurisdictions. The taxation of our business issubject to the application of multiple and sometimes conflicting tax laws andregulations as well as multinational tax conventions. The application of taxlaw is subject to legal and factual interpretation, judgment and uncertainty,and tax laws themselves are subject to change. Consequently, taxing authoritiesmay impose tax assessments or judgments against us that could result in asignificant charge to our earnings.

 

Anumber of other factors will also affect our future tax rate, and certain ofthese factors could increase our effective tax rate in future periods, whichcould adversely impact our operating results. These factors include changes innon-deductible share-based compensation, changes in tax laws or theinterpretation of tax laws, changes in the proportion and geographic mix of ourrevenue or earnings, changes in the valuation of our deferred tax assets and liabilities,changes in available tax credits and the repatriation of non-U.S. earnings forwhich we have 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 three months ended July 31, 2009, approximately42.0% and 50.2%, 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;

·                  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.

 

Anyfailure to manage these challenges could cause us to inaccurately forecastsales and carry excess or insufficient inventory, thereby adversely affectingour operating results.

 

## ***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.***

 

Weface difficulties 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.

 

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Salesoutside of the United States accounted for substantially all of our revenuesfor fiscal 2008 and 2009. We anticipate that sales outside of the UnitedStates will continue to account for a substantial portion of our revenues infuture periods. Dependence on sales to foreign customers involves certainrisks, 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.

 

Salesof our products have to date been denominated principally in U.S. dollars. Overthe last several years, the U.S. dollar has weakened against most othercurrencies. Future increases in the value of the U.S. dollar, if any, wouldincrease the price of our products in the currency of the countries in whichour customers are located. This may result in our customers seekinglower-priced suppliers, which could adversely impact our operating results. Ifa larger portion of our international revenues were to be denominated inforeign currencies in the future, we would be subject to increased risksassociated with fluctuations in foreign 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.***

 

Theloss of the services of one or more of our executive officers or key employees,which has occurred from time to time, or the decision of one or more of theseindividuals to join a competitor, could adversely affect our business and harmour operating results and financial condition. Our success depends to asignificant extent on the continued service of our senior management andcertain other key technical personnel. None of our senior management is boundby an employment or non-competition agreement. We do not maintain key man lifeinsurance on any of our employees.

 

Oursuccess also depends on our ability to identify, attract and retain qualifiedsales, marketing, finance, management and technical personnel. We haveexperienced, and may continue to experience, difficulty in hiring and retainingcandidates with appropriate qualifications. If we do not succeed in hiring andretaining candidates with appropriate qualifications, our revenues, operationsand product 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.***

 

As our business grows and becomes more complex, it isnecessary that we expand and upgrade our enterprise resource planning system,or ERP, and other management information systems which are critical to theoperational, accounting and financial functions of our company. We evaluatedalternative solutions, both short-term and long-term, to meet the operating,administrative and financial reporting requirements of our business. During thethree months ended July 31, 2008, we substantially completed theimplementation of the first phase of a new ERP based on a suite of applicationsoftware developed by Oracle Corporation. We will continue to make furtherenhancements and upgrades to the ERP, as necessary. Significant managementattention and resources have been used and extensive planning has occurred tosupport effective implementation of the new ERP system, however, suchimplementation carries certain risks, including the risk of significant designerrors that could materially and adversely affect our operating results andimpact our ability to manage our business. As a result, there is a risk thatdeficiencies may exist in the future and that they could constitute significantdeficiencies, or, in the aggregate, a material weakness in internal controlover financial reporting.

 

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

 

Disastersand business interruptions such as earthquakes, water, fire, electricalfailure, accidents and epidemics affecting our operating activities, majorfacilities, and employees’ and customers’ health could materially and adverselyaffect our operating results and financial condition. In particular, our Asianoperations and most of our third party service providers involved in themanufacturing of our products are located within relative close proximity.Therefore, any disaster that strikes within or close to that geographic area,such as the recent earthquake and flooding that occurred in China, could beextremely disruptive to our business and could materially and adversely affectour operating results and financial condition. We are currently developing andimplementing a disaster recovery plan.

 

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

 

Actsof war or terrorist acts, wherever they occur around the world, may causedamage or disruption to our business, employees, facilities, suppliers,distributors or customers, which could significantly impact our revenue, costs,expenses and financial condition. In addition, as a company with significantoperations and major distributors and customers located in Asia, we may beadversely impacted by heightened tensions and acts of war that occur inlocations such as the Korean Peninsula, Taiwan and China. The potential forfuture terrorist attacks, the national and international responses to terroristattacks or perceived threats to national security, and other acts of war orhostility have created many economic and political uncertainties that couldadversely affect our business and results of operations in ways that cannotpresently be predicted. We are uninsured for losses and interruptions caused byterrorist acts and acts of 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.***

 

Provisionsof our certificate of incorporation and bylaws may discourage, delay or preventa merger 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.

 

Provisionsof Delaware 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.

 

## ***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.***

 

Themarket price of our common stock has fluctuated substantially, and there can beno assurance that such volatility will not continue. Since the beginning offiscal 2002 through April 30, 2009, the closing sales price of our commonstock has ranged 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 September 3,2009 was $14.62 per share. The securities markets have experiencedsignificant price and volume fluctuations in the past, and the market prices ofthe securities 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.

 

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Due tothese factors, the price of our stock may decline and investors may be unableto resell their 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 did not repurchase any shares of our common stockin the first quarter of fiscal 2010.

 

**ITEM 6.   EXHIBITS**

 

| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                       |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.32               |       | Fixed Assets Loan Agreement dated August 27,  2009, by and between OmniVision Technologies (Shanghai) Co., Ltd., a wholly  owned subsidiary of the Registrant, and Industrial and Commercial Bank of  China Ltd. |
| 10.33               |       | Mortgage Agreement dated August 27, 2009, by  and between OmniVision Technologies (Shanghai) Co., Ltd., a wholly owned  subsidiary of the Registrant, and Industrial and Commercial Bank of China  Ltd.          |
| 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**

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
|   |   | **OMNIVISION TECHNOLOGIES, INC**. |
|--------|--------|-----------------------------------|
|   |   | *(Registrant)*                    |

 

 

Dated:  September 9, 2009

 
| ** ** | By:    | **/s/ SHAW HONG**                                 |
|------------|--------|---------------------------------------------------|
|       |   | **Shaw Hong**                                     |
|       |   | *Chief Executive Officer, President and Director* |
|       |   | *(Principal Executive Officer)*                   |

 

 

Dated: September 9,2009

 
|   | By:    | **/s/ ANSON CHAN**                             |
|--------|--------|------------------------------------------------|
|   |   | **Anson Chan**                                 |
|   |   | *Chief Financial Officer*                      |
|   |   | *(Principal Financial and Accounting Officer)* |

 

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**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                       |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.32               |       | Fixed Assets Loan Agreement dated August 27,  2009, by and between OmniVision Technologies (Shanghai) Co., Ltd., a wholly  owned subsidiary of the Registrant, and Industrial and Commercial Bank of  China Ltd. |
| 10.33               |       | Mortgage Agreement dated August 27, 2009, by  and between OmniVision Technologies (Shanghai) Co., Ltd., a wholly owned  subsidiary of the Registrant, and Industrial and Commercial Bank of China  Ltd.          |
| 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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