Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended January 31,2010**

 

**OR**

 

**o**         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

** **

**For the transition period from                     to                    **

 

**Commission file number: 0-29939**

 

----

 

**OMNIVISION TECHNOLOGIES, INC.**

(Exact name ofregistrant as specified in its charter)

** **

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

 

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

(Address ofPrincipal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including areacode: **(408) 567-3000**

 

----

 

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 March 8, 2010, 51,447,954 shares of common stock of theregistrant were outstanding, exclusive of 12,541,000 shares of treasurystock.

 

 

 

----

Tableof Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **                             | ** **                                                                                                                                | **Page** |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                   |                                                                                                                                      |     |
| **PART I. FINANCIAL INFORMATION** |
|                                   |                                                                                                                                      |     |
| **Item 1.**                            | Financial  Statements:                                                                                                                    | 3        |
|                                   |                                                                                                                                      |     |
|                                   | Condensed Consolidated Balance Sheets  (unaudited) — January 31, 2010 and April 30, 2009                         | 3        |
|                                   |                                                                                                                                      |     |
|                                   | Condensed Consolidated Statements of Operations  (unaudited) — Three and Nine Months Ended January 31, 2010 and  2009 | 4        |
|                                   |                                                                                                                                      |     |
|                                   | Condensed Consolidated Statements of Cash Flows (unaudited) — Nine  Months Ended January 31, 2010 and 2009            | 5        |
|                                   |                                                                                                                                      |     |
|                                   | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                         | 6        |
|                                   |                                                                                                                                      |     |
| **Item 2.**                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               | 28       |
|                                   |                                                                                                                                      |     |
| **Item 3.**                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                               | 45       |
|                                   |                                                                                                                                      |     |
| **Item 4.**                            | Controls and  Procedures                                                                                                                  | 46       |
|                                   |                                                                                                                                      |     |
| **PART II.  OTHER INFORMATION**   |
|                                   |                                                                                                                                      |     |
| **Item 1.**                            | Legal Proceedings                                                                                                                         | 47       |
|                                   |                                                                                                                                      |     |
| **Item 1A.**                           | Risk Factors                                                                                                                              | 48       |
|                                   |                                                                                                                                      |     |
| **Item 2.**                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                              | 63       |
|                                   |                                                                                                                                      |     |
| **Item 6.**                            | Exhibits                                                                                                                                  | 64       |
|                                   |                                                                                                                                      |     |
| Signatures                             |                                                                                                                                      | 65       |
|                                   |                                                                                                                                      |     |
| Exhibit Index                     |                                                                                                                                      |

 

2

----

Table ofContents

 

**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.    FINANCIAL STATEMENTS**

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

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

**(unaudited)**

** **
| ** **                                                                                                                                                                                                                                       | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                       | ** ** | **2010**             | ** ** | **2009(1)**        | ** ** |
| **ASSETS**                                                                                                                                                                                                                                       |       |                 |       |               |       |
| Current assets:                                                                                                                                                                                                                                  |       |                 |       |               |       |
| Cash and cash  equivalents                                                                                                                                                                                                                       |       | $                    | 274,517    |               | $          | 257,808 |   |
| Short-term investments                                                                                                                                                                                                                           |       | 68,325               |       | 16,973             |       |
| Accounts receivable,  net of allowances for doubtful accounts and sales returns                                                                                                                                                                  |       | 67,685               |       | 43,978             |       |
| Inventories                                                                                                                                                                                                                                      |       | 109,820              |       | 105,024            |       |
| Refundable and deferred  income taxes                                                                                                                                                                                                            |       | 5,183                |       | 1,092              |       |
| Prepaid expenses and  other current assets                                                                                                                                                                                                       |       | 7,562                |       | 7,779              |       |
| Total current assets                                                                                                                                                                                                                             |       | 533,092              |       | 432,654            |       |
| Property, plant and  equipment, net                                                                                                                                                                                                              |       | 119,439              |       | 119,071            |       |
| Long-term investments                                                                                                                                                                                                                            |       | 90,783               |       | 85,469             |       |
| Intangibles, net                                                                                                                                                                                                                                 |       | 2,570                |       | 7,396              |       |
| Other long-term assets                                                                                                                                                                                                                           |       | 21,971               |       | 22,341             |       |
| Total assets                                                                                                                                                                                                                                     |       | $                    | 767,855    |               | $          | 666,931 |   |
|                                                                                                                                                                                                                                             |       |                 |       |               |       |
| **LIABILITIES  AND EQUITY**                                                                                                                                                                                                                      |       |                 |       |               |       |
| Current liabilities:                                                                                                                                                                                                                             |       |                 |       |               |       |
| Accounts payable                                                                                                                                                                                                                                 |       | $                    | 83,850     |               | $          | 28,775 |   |
| Accrued expenses and  other current liabilities                                                                                                                                                                                                  |       | 19,173               |       | 12,153             |       |
| Income taxes payable                                                                                                                                                                                                                             |       | —               |       | 692                |       |
| Deferred revenues, less  cost of revenues                                                                                                                                                                                                        |       | 10,774               |       | 7,176              |       |
| Current portion of  long-term debt                                                                                                                                                                                                               |       | 4,286                |       | 3,555              |       |
| Total current  liabilities                                                                                                                                                                                                                       |       | 118,083              |       | 52,351             |       |
| Long-term liabilities:                                                                                                                                                                                                                           |       |                 |       |               |       |
| Long-term income taxes  payable                                                                                                                                                                                                                  |       | 83,710               |       | 81,266             |       |
| Non-current portion of  long-term debt                                                                                                                                                                                                           |       | 38,991               |       | 32,867             |       |
| Other long-term  liabilities                                                                                                                                                                                                                     |       | 7,152                |       | 8,109              |       |
| Total long-term  liabilities                                                                                                                                                                                                                     |       | 129,853              |       | 122,242            |       |
| Total liabilities                                                                                                                                                                                                                                |       | 247,936              |       | 174,593            |       |
|                                                                                                                                                                                                                                             |       |                 |       |               |       |
| Commitments and  contingencies (Note 16)                                                                                                                                                                                                    |       |                 |       |               |       |
|                                                                                                                                                                                                                                             |       |                 |       |               |       |
| Equity:                                                                                                                                                                                                                                          |       |                 |       |               |       |
| OmniVision  Technologies, Inc. stockholders’ equity:                                                                                                                                                                                   |       |                 |       |               |       |
| Common stock, $0.001  par value; 100,000 shares authorized; 63,848 shares issued and  51,307 outstanding at January 31, 2010 and 62,590 shares  issued and 50,049 outstanding at April 30, 2009, respectively |       | 64                   |       | 63                 |       |
| Additional paid-in  capital                                                                                                                                                                                                                      |       | 427,493              |       | 403,159            |       |
| Accumulated other  comprehensive income                                                                                                                                                                                                          |       | 898                  |       | 773                |       |
| Treasury stock, 12,541  at January 31, 2010 and April 30, 2009, respectively                                                                                                                                                           |       | (178,683             | )          | (178,683           | )          |
| Retained earnings                                                                                                                                                                                                                                |       | 266,707              |       | 263,529            |       |
| Total OmniVision  Technologies, Inc. stockholders’ equity                                                                                                                                                                              |       | 516,479              |       | 488,841            |       |
| Noncontrolling interest                                                                                                                                                                                                                          |       | 3,440                |       | 3,497              |       |
| Total equity                                                                                                                                                                                                                                     |       | 519,919              |       | 492,338            |       |
| Total  liabilities and equity                                                                                                                                                                                                                    |       | $                    | 767,855    |               | $          | 666,931 |   |

 

----

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

 

The accompanying notes are an integral part of theseCondensed Consolidated Financial Statements (unaudited).

 

3

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

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

**(unaudited)**

 
| ** **                                                                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                     | ** ** | **January 31,**   | ** ** | **January 31,**  | ** ** |
| ** **                                                                                                                     | ** ** | **2010**               | ** ** | **2009(1)**           | ** ** | **2010** | ** ** | **2009(1)** | ** ** |
| Revenues                                                                                                                       |       | $                      | 156,935    |                  | $          | 80,046 |   | $ | 445,839 |   | $ | 418,260 |   |
| Cost of revenues                                                                                                               |       | 118,396                |       | 62,142                |       | 339,668 |   | 315,546 |   |
| Gross profit                                                                                                                   |       | 38,539                 |       | 17,904                |       | 106,171 |   | 102,714 |   |
|                                                                                                                           |       |                   |       |                  |       |   |   |   |   |
| Operating expenses:                                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Research, development  and related                                                                                             |       | 20,414                 |       | 20,812                |       | 57,699 |   | 64,311 |   |
| Selling, general and  administrative                                                                                           |       | 15,587                 |       | 13,949                |       | 45,956 |   | 48,221 |   |
| Goodwill impairment                                                                                                            |       | —                 |       | —                |       | — |   | 7,541 |   |
| Total operating  expenses                                                                                                      |       | 36,001                 |       | 34,761                |       | 103,655 |   | 120,073 |   |
|                                                                                                                           |       |                   |       |                  |       |   |   |   |   |
| Income (loss) from  operations                                                                                                 |       | 2,538                  |       | (16,857               | )          | 2,516 |   | (17,359 | ) |
| Interest income  (expense), net                                                                                                |       | (145                   | )          | 424                   |       | (593 | ) | 2,178 |   |
| Other income (expense),  net                                                                                                   |       | 2,881                  |       | (2,914                | )          | 3,672 |   | (3,719 | ) |
| Income (loss) before  income taxes                                                                                             |       | 5,274                  |       | (19,347               | )          | 5,595 |   | (18,900 | ) |
|                                                                                                                           |       |                   |       |                  |       |   |   |   |   |
| Provision for (benefit  from) income taxes                                                                                     |       | 467                    |       | (921                  | )          | 2,616 |   | (1,002 | ) |
| Net income (loss)                                                                                                              |       | 4,807                  |       | (18,426               | )          | 2,979 |   | (17,898 | ) |
| Net loss attributable  to noncontrolling interest                                                                              |       | (143                   | )          | (235                  | )          | (199 | ) | (627 | ) |
| Net income (loss)  attributable to OmniVision Technologies, Inc.                                                          |       | $                      | 4,950      |                  | $          | (18,191 | ) | $ | 3,178 |   | $ | (17,271 | ) |
|                                                                                                                           |       |                   |       |                  |       |   |   |   |   |
| Net income (loss) per  share attributable to OmniVision Technologies, Inc. common stockholders:                           |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                                                                          |       | $                      | 0.10       |                  | $          | (0.36 | ) | $ | 0.06 |   | $ | (0.34 | ) |
| Diluted                                                                                                                        |       | $                      | 0.09       |                  | $          | (0.36 | ) | $ | 0.06 |   | $ | (0.34 | ) |
|                                                                                                                           |       |                   |       |                  |       |   |   |   |   |
| Shares used in  computing net income (loss) per share attributable to OmniVision  Technologies, Inc. common stockholders: |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                                                                          |       | 51,273                 |       | 50,036                |       | 50,870 |   | 50,682 |   |
| Diluted                                                                                                                        |       | 52,554                 |       | 50,036                |       | 52,007 |   | 50,682 |   |

 

----

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

 

The accompanying notes are an integral part of theseCondensed Consolidated Financial Statements (unaudited).

 

4

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

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

**(inthousands, unaudited)**

** **
| ** **                                                                                     | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **January 31,**  | ** ** |
| ** **                                                                                     | ** ** | **2010**              | ** ** | **2009(1)** | ** ** |
| Cash flows from operating  activities:                                                         |       |                  |       |   |   |
| Net  income (loss)                                                                             |       | $                     | 2,979      |   | $ | (17,898 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:      |       |                  |       |   |   |
| Depreciation  and amortization                                                                 |       | 17,440                |       | 13,750 |   |
| Change  in fair value of interest rate swap                                                    |       | (839                  | )          | 2,875 |   |
| Stock-based  compensation                                                                      |       | 18,225                |       | 20,131 |   |
| Gain  on equity investments, net                                                               |       | (5,206                | )          | (2,393 | ) |
| Write-down  of inventories                                                                     |       | 13,515                |       | 17,507 |   |
| Loss  on disposal of property, plant and equipment                                             |       | 108                   |       | 550 |   |
| Goodwill  impairment                                                                           |       | —                |       | 7,541 |   |
| Changes  in assets and liabilities:                                                            |       |                  |       |   |   |
| Accounts  receivable, net                                                                      |       | (23,690               | )          | 58,998 |   |
| Inventories                                                                                    |       | (13,990               | )          | (47,226 | ) |
| Refundable  and deferred income taxes                                                          |       | (2,641                | )          | (3,501 | ) |
| Prepaid  expenses and other assets                                                             |       | 1,191                 |       | (561 | ) |
| Accounts  payable                                                                              |       | 52,768                |       | (14,978 | ) |
| Accrued  expenses and other current liabilities                                                |       | 1,380                 |       | (5,794 | ) |
| Income  taxes payable                                                                          |       | 642                   |       | 827 |   |
| Deferred  revenues, less cost of revenues                                                      |       | 3,590                 |       | 517 |   |
| Deferred  tax liabilities                                                                      |       | (122                  | )          | (1,370 | ) |
| Net  cash provided by operating activities                                                     |       | 65,350                |       | 28,975 |   |
| Cash  flows from investing activities:                                                         |       |                  |       |   |   |
| Purchases  of short-term investments                                                           |       | (96,842               | )          | (45,813 | ) |
| Proceeds  from sales or maturities of short-term investments                                   |       | 45,328                |       | 58,734 |   |
| Purchases  of property, plant and equipment, net of sales                                      |       | (10,238               | )          | (27,758 | ) |
| Purchases  of long-term investments                                                            |       | —                |       | (1,376 | ) |
| Net  cash used in investing activities                                                         |       | (61,752               | )          | (16,213 | ) |
| Cash  flows from financing activities:                                                         |       |                  |       |   |   |
| Proceeds  from long-term borrowings                                                            |       | 9,521                 |       | 6,000 |   |
| Repayment  of long-term borrowings                                                             |       | (2,666                | )          | (2,155 | ) |
| Cash  contribution by noncontrolling interest                                                  |       | 24                    |       | — |   |
| Affiliate  cash dividend paid to noncontrolling interest                                       |       | —                |       | (201 | ) |
| Proceeds  from exercise of stock options and from employee stock purchase plan                 |       | 6,167                 |       | 4,441 |   |
| Payments  for repurchases of common stock                                                      |       | —                |       | (12,915 | ) |
| Net  cash provided by (used in) financing activities                                           |       | 13,046                |       | (4,830 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                                  |       | 65                    |       | (259 | ) |
| Net  increase in cash and cash equivalents                                                     |       | 16,709                |       | 7,673 |   |
| Cash  and cash equivalents at beginning of period                                              |       | 257,808               |       | 217,340 |   |
| Cash  and cash equivalents at end of period                                                    |       | $                     | 274,517    |   | $ | 225,013 |   |
| Supplemental  cash flow information:                                                           |       |                  |       |   |   |
| Taxes  paid                                                                                    |       | $                     | 4,785      |   | $ | 3,049 |   |
| Interest  paid                                                                                 |       | $                     | 1,609      |   | $ | 1,288 |   |
| Supplemental  schedule of non-cash investing and financing activities:                         |       |                  |       |   |   |
| Additions  to property, plant and equipment included in accounts payable and accrued  expenses |       | $                     | 2,343      |   | $ | 8,335 |   |
| Capitalized  interest and other costs                                                          |       | $                     | 170        |   | $ | 183 |   |
| Deferred  tax asset write-off                                                                  |       | $                     | —     |   | $ | 381 |   |

 

----

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

 

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

 

5

----

Table ofContents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

**Note 1 — Basis of Presentation**

 

## ***Overview***

## *** ***

Theaccompanying interim unaudited condensed consolidated financial statements asof January 31, 2010 and April 30, 2009 and for the three and ninemonths ended January 31, 2010 and 2009 have been prepared by OmniVisionTechnologies, Inc., and its subsidiaries (“OmniVision” or the “Company”)in accordance with the rules and regulations of the U.S. Securities andExchange Commission (“SEC”). Except for the retrospective adjustments relatedto the adoption of authoritative accounting guidance for noncontrollinginterests as discussed below, the amounts as of April 30, 2009 come fromthe 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 SEC 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, the Company adopted authoritative accounting guidance that requires theownership interests in subsidiaries held by parties other than the parent, andincome attributable to those parties, be clearly identified and distinguishedin the parent’s condensed consolidated financial statements. Consequently, theCompany’s noncontrolling interest is now disclosed as a separate component ofthe Company’s consolidated equity on the balance sheet, rather than a “mezzanine”item between liabilities and equity. Further, earnings and other comprehensiveincome are now separately attributed to both the controlling and noncontrollinginterests. Earnings per share continues to be calculated based on net incomeattributable to the Company’s controlling interest. The impact on the Company’sfinancial position as of April 30, 2009, results of operations for thethree and nine months ended January 31, 2009, and cash flows for the ninemonths ended January 31, 2009 from the adoption of this authoritativeaccounting guidance is presented in the tables below (in thousands):

 
| ** **              | ** ** | **April 30, 2009  Condensed Consolidated  Balance Sheet** | ** ** |
|-------------------------|------------|----------------------------------------------------------------|------------|
| ** **              | ** ** | **As Reported**                                                | ** ** | **As Adjusted** | ** ** |
| Minority interest       |       | $                                                              | 3,497      |   | $ | — |   |
| Noncontrolling interest |       | —                                                         |       | 3,497 |   |
|                         |            |                                                                |            |  |  |  |  |

 
| ** **                                                   | ** ** | **Three Months Ended  January 31, 2009  Condensed Consolidated  Statement of Operations** | ** ** | **Nine months ended  January 31, 2009  Condensed Consolidated  Statement of Operations** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **As Reported**                                                                                | ** ** | **As Adjusted**                                                                               | ** ** | **As Reported** | ** ** | **As Adjusted** | ** ** |
| Minority interest                                            |       | $                                                                                              | (235       | )                                                                                             | $          | — |   | $ | (627 | ) | $ | — |   |
| Net loss                                                     |       | (18,191                                                                                        | )          | (18,426                                                                                       | )          | (17,271 | ) | (17,898 | ) |
| Net loss attributable to noncontrolling interest             |       | —                                                                                         |       | (235                                                                                          | )          | — |   | (627 | ) |
| Net loss attributable to OmniVision  Technologies, Inc. |       | $                                                                                              | —     |                                                                                          | $          | (18,191 | ) | $ | — |   | $ | (17,271 | ) |

 
| ** **                                                | ** ** | **Nine Months Ended  January 31, 2009  Condensed Consolidated  Statement of Cash flows** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **As Reported**                                                                               | ** ** | **As Adjusted** | ** ** |
| Net loss                                                  |       | $                                                                                             | (17,271    | ) | $ | (17,898 | ) |
| Minority interest in net loss of consolidated  affiliates |       | (627                                                                                          | )          | — |   |
|                                                           |            |                                                                                               |            |  |  |  |  |

 

6

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

Theresults of operations for the three and nine months ended January 31, 2010are not necessarily indicative of the results that may be expected for thefiscal year ending April 30, 2010 or any other future period.

 

## ***Use of Estimates***

## *** ***

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“GAAP”) requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. The Company bases its estimates andjudgments on its historical experience, knowledge of current conditions andbeliefs of what could occur in the future considering available information. Actualresults could differ from these estimates.

 

**Note 2 — Summary of SignificantAccounting Policies**

 

## ***Principles ofConsolidation***

## *** ***

Thecondensed consolidated financial statements include the accounts of theCompany, its wholly-owned subsidiaries and its consolidated affiliate. Allsignificant inter-company accounts and transactions have been eliminated.

 

## ***Foreign CurrencyTranslation***

## *** ***

Certainof the Company’s subsidiaries or consolidated affiliates have functionalcurrencies other than the U.S. dollar and the assets and liabilities ofthe subsidiaries are translated into U.S. dollars at the rates of exchangeprevailing on the balance sheet date. Revenue and expense items are translatedinto U.S. dollars at the average rate of exchange for the period. Unrealizedgains and losses from foreign currency translation are included in “Accumulatedother comprehensive income,” a component of stockholders’ equity. Forsubsidiaries with the U.S. dollar as the functional currency, and withassets or liabilities denominated in currencies other than theU.S. dollar, non-monetary assets are remeasured into U.S. dollarsusing historical rates of exchange. Monetary assets are remeasured intoU.S. dollars using exchange rates prevailing on the balance sheet date.The remeasurement gains or losses are included in “Other income (expense), net.”For the three and nine months ended January 31, 2010, the Company recordedremeasurement gains of $157,000 and $114,000, respectively. For the three andnine months ended January 31, 2009, the Company recorded remeasurementlosses of $98,000 and $0.9 million, respectively.

 

## ***Cash and CashEquivalents***

## *** ***

TheCompany considers all highly liquid investments purchased with a maturity atthe date of purchase of three months or less to be cash equivalents. Cashequivalents consist principally of government bonds, certificates of depositand money market funds. (See Note 10.)

 

TheCompany maintains the majority of its cash and cash equivalent balances withmajor financial institutions in the United States. These balances are subjectto a concentration of credit risk and only a small proportion of these balancesare covered by Federal Deposit Insurance Corporation (“FDIC”) insurance. TheCompany places its cash investments in instruments that meet high creditquality standards, as specified in the Company’s investment policy guidelines.

 

## ***Inventories***

## *** ***

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

 

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

 

7

----

Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

## ***Goodwill***

## *** ***

TheCompany records goodwill when the consideration paid for an acquisition exceedsthe fair value of net tangible and intangible assets acquired, includingrelated tax effects. Goodwill is not amortized; instead goodwill is tested forimpairment on an annual basis, or more frequently if the Company believesindicators of impairment exist. During the second quarter of fiscal 2009,based on a combination of factors, including the significant decline in theCompany’s market capitalization and the global economic downturn then, theCompany concluded that there were sufficient factual circumstances for interimimpairment analyses. Based on the analyses, the Company wrote off the carryingvalue of goodwill and recorded an impairment charge of $7.5 million, whichwas included in “Goodwill impairment” for the nine months ended January 31,2009.

 

## ***ComprehensiveIncome (Loss)***

## *** ***

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

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **January 31,**   | ** ** | **January 31,**  | ** ** |
| ** **                                                                      | ** ** | **2010**               | ** ** | **2009 (1)**          | ** ** | **2010** | ** ** | **2009 (1)** | ** ** |
| Net income (loss)                                                               |       | $                      | 4,807      |                  | $          | (18,426 | ) | $ | 2,979 |   | $ | (17,898 | ) |
| Translation gains (losses)                                                      |       | 106                    |       | (132                  | )          | 231 |   | (798 | ) |
| Unrealized gains (losses) on available-for-sale  securities, net                |       | 4                      |       | (116                  | )          | 12 |   | (49 | ) |
| Comprehensive income (loss)                                                     |       | 4,917                  |       | (18,674               | )          | 3,222 |   | (18,745 | ) |
| Comprehensive loss attributable to noncontrolling  interest                     |       | (85                    | )          | (235                  | )          | (81 | ) | (626 | ) |
| Comprehensive income (loss) attributable to  OmniVision Technologies, Inc. |       | $                      | 5,002      |                  | $          | (18,439 | ) | $ | 3,303 |   | $ | (18,119 | ) |

 

----

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

 

Thefollowing table reconciles equity attributable to noncontrolling interest (inthousands):

 
| ** **                                       | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **January 31,**  | ** ** |
| ** **                                       | ** ** | **2010**              | ** ** | **2009 (1)** | ** ** |
| Noncontrolling interest, May 1              |       | $                     | 3,497      |   | $ | 4,444 |   |
| Cash contribution by noncontrolling interest     |       | 24                    |       | — |   |
| Dividend distributed to noncontrolling interest  |       | —                |       | (201 | ) |
| Net loss attributable to noncontrolling interest |       | (199                  | )          | (627 | ) |
| Translation gain                                 |       | 118                   |       | 1 |   |
| Noncontrolling interest, January 31         |       | $                     | 3,440      |   | $ | 3,617 |   |

 

----

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

 

8

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

## ***RevenueRecognition***

 

Forshipments to customers without agreements that allow for returns or credits,principally original equipment manufacturers (“OEMs”) and value added resellers(“VARs”), the Company recognizes revenue using the “sell-in” method. Under thismethod, the Company recognizes revenue upon the shipment of products to thecustomer provided that the Company has received a signed purchase order, theprice is fixed or determinable, title and risk of loss has transferred to thecustomer, collection of resulting receivables is considered reasonably assured,product returns are reasonably estimable, there are no customer acceptancerequirements and there are no remaining material obligations. At the timerevenue is recognized, the Company provides for future returns of potentiallydefective product based on historical experience. For cash consideration givento customers for which the Company does not receive a separately identifiablebenefit or cannot reasonably estimate fair value, the Company records theamounts as reductions of revenue.

 

Forshipment of products sold to distributors under agreements allowing for returnsor credits, title and the risk of ownership to the products transfer to thedistributor upon shipment, and the distributor is obligated to pay for theproducts whether or not the distributor has sold them at the time payment isdue. Under the terms of the Company’s agreements with such distributors andsubject to the Company’s prior approval, distributors are entitled to reclaimfrom the Company as price adjustments the difference, if any, between theprices at which the Company sold the product to the distributors and the pricesat which the product is subsequently sold by the distributor. In addition,distributors have limited rights to return inventory that they determine is inexcess of their requirements, and accordingly, in determining the appropriatelevel of provision for excess and obsolete inventory, the Company takes intoaccount the inventories held by its distributors. For these reasons, prices andrevenues are not fixed or determinable until the distributor resells theproducts to the Company’s end-user customers and the distributor notifies theCompany in writing of the details of such sales transactions. Accordingly, theCompany recognizes 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.”

 

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

 

## ***Recent AccountingPronouncements***

## *** ***

In January 2010,the Financial Accounting Standards Board updated the authoritative guidance forfair value measurements with new disclosure requirements. These requirementsinclude disclosures on the transfers of assets and liabilities between Level 1(measurements based on quoted prices in active markets for identical assets orliabilities) and Level 2 (measurements based on significant otherobservable inputs) of the fair value measurement hierarchy, and a roll-forwardof activities on purchases, sales, issuance, and settlements of Level 3(measurements based on significant unobservable inputs) assets and liabilities.The Company is required to follow the disclosure requirements in its fourthquarter of fiscal 2010, except for the disclosure on roll-forwardactivities for Level 3 fair value measurements, which will becomeeffective for the Company in its first quarter of fiscal 2012. Other thanrequiring additional disclosures, the adoption of this new guidance will nothave any material impact on the Company’s financial position, results ofoperations or cash flows.

 

9

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

**Note 3 — Short-TermInvestments**

 

Available-for-salesecurities at January 31, 2010 and April 30, 2009 were as follows (inthousands):

 
| ** **                                                          | ** ** | **As of January 31, 2010** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **Amortized**                   | ** ** | **Gross  Unrealized** | ** ** | **Gross  Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Certificates of deposit                                             |       | $                               | 3,533      |   | $ | — |   | $ | — |   | $ | 3,533 |   |
| U.S. government debt securities with maturities less  than one year |       | 44,949                          |       | 22 |   | — |   | 44,971 |   |
| U.S. government debt securities with maturities over  one year      |       | 13,204                          |       | 25 |   | — |   | 13,229 |   |
| Commercial paper and bond fund                                      |       | 6,598                           |       | 1 |   | (7 | ) | 6,592 |   |
|                                                                |       | $                               | 68,284     |   | $ | 48 |   | $ | (7 | ) | $ | 68,325 |   |
|                                                                |       |                            |       |   |   |   |   |   |   |
| Contractual maturity dates, less than one year                      |       |                            |       |   |   |   |   | $ | 55,096 |   |
| Contractual maturity dates, one year to two years                   |       |                            |       |   |   |   |   | 13,229 |   |
|                                                                |       |                            |       |   |   |   |   | $ | 68,325 |   |

 
| ** **                                                          | ** ** | **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

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

**Note 4 — Supplemental Balance SheetAccount Information (in thousands)**

 
| ** **                                                        | ** **                       | **January 31,** | ** ** | **April 30,** | ** ** |
|-------------------------------------------------------------------|----------------------------------|----------------------|------------|--------------------|------------|
| ** **                                                        | ** **                       | **2010**             | ** ** | **2009**           | ** ** |
| Cash and cash equivalents:                                        |                             |                 |       |               |       |
| Cash                                                              |                             | $                    | 197,673    |               | $          | 120,754 |   |
| Money market funds,  certificates of deposit and government bonds |                             | 76,844               |       | 137,054            |       |
|                                                              |                             | $                    | 274,517    |               | $          | 257,808 |   |
| Accounts receivable, net:                                         | ** **                       | ** **           | ** ** | ** **         | ** ** |
| Accounts receivable                                               |                             | $                    | 70,710     |               | $          | 48,105 |   |
| Less:                                                             | Allowance for doubtful  accounts |                 | (740       | )                  | (691       | ) |
|                                                              | Allowance for sales returns      |                 | (2,285     | )                  | (3,436     | ) |
|                                                              |                             | $                    | 67,685     |               | $          | 43,978 |   |
| Inventories:                                                      |                             |                 |       |               |       |
| Work in progress                                                  |                             | $                    | 49,969     |               | $          | 26,860 |   |
| Finished goods                                                    |                             | 59,851               |       | 78,164             |       |
|                                                              |                             | $                    | 109,820    |               | $          | 105,024 |   |
| Prepaid expenses and other  current assets:                       |                             |                 |       |               |       |
| Prepaid expenses                                                  |                             | $                    | 6,313      |               | $          | 5,254 |   |
| Deposits and other                                                |                             | 1,164                |       | 2,439              |       |
| Interest receivable                                               |                             | 85                   |       | 86                 |       |
|                                                              |                             | $                    | 7,562      |               | $          | 7,779 |   |
| Property, plant and  equipment, net:                              |                             |                 |       |               |       |
| Land                                                              |                             | $                    | 13,000     |               | $          | 13,000 |   |
| Buildings and land use  right                                     |                             | 39,686               |       | 39,428             |       |
| Buildings/leasehold  improvements                                 |                             | 17,310               |       | 17,110             |       |
| Machinery and equipment                                           |                             | 63,826               |       | 58,641             |       |
| Furniture and fixtures                                            |                             | 4,819                |       | 4,825              |       |
| Software                                                          |                             | 5,840                |       | 6,188              |       |
| Construction in progress                                          |                             | 18,919               |       | 11,878             |       |
|                                                              |                             | 163,400              |       | 151,070            |       |
| Less: Accumulated  depreciation and amortization                  |                             | (43,961              | )          | (31,999            | )          |
|                                                              |                             | $                    | 119,439    |               | $          | 119,071 |   |
| Other long-term assets:                                           |                             |                 |       |               |       |
| Deferred income tax  assets — non-current          |                             | $                    | 17,214     |               | $          | 17,233 |   |
| Prepaid wafer credits                                             |                             | 2,990                |       | 2,990              |       |
| Long-term employee loan receivable                                |                             | 1,000                |       | 1,000              |       |
| Other long-term assets                                            |                             | 767                  |       | 1,118              |       |
|                                                              |                             | $                    | 21,971     |               | $          | 22,341 |   |
| Accrued expenses and other  current liabilities:                  |                             |                 |       |               |       |
| Employee compensation                                             |                             | $                    | 6,232      |               | $          | 4,848 |   |
| Third party commissions                                           |                             | 1,017                |       | 1,532              |       |
| Professional services                                             |                             | 2,166                |       | 1,269              |       |
| Noncancelable purchase  commitments                               |                             | 5,711                |       | 411                |       |
| Distributor pricing  adjustments                                  |                             | 2,568                |       | 2,399              |       |
| Deferred income tax  liabilities — current         |                             | 15                   |       | 8                  |       |
| Other                                                             |                             | 1,464                |       | 1,686              |       |
|                                                              |                             | $                    | 19,173     |               | $          | 12,153 |   |
| Other long-term  liabilities:                                     |                             |                 |       |               |       |
| Deferred income tax liabilities — non-current      |                             | $                    | 3,528      |               | $          | 3,646 |   |
| Interest rate swaps                                               |                             | 3,624                |       | 4,463              |       |
|                                                              |                             | $                    | 7,152      |               | $          | 8,109 |   |

 

11

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

**Note 5 — Long-term Investments**

 

Long-terminvestments as of January 31, 2010 and April 30, 2009 consisted ofthe following (in thousands):

 
| ** **                                             | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                             | ** ** | **2010**             | ** ** | **2009**           | ** ** |
| VisEra                                                 |       | $                    | 70,846     |               | $          | 67,619 |   |
| WLCSP                                                  |       | 11,741               |       | 10,996             |       |
| XinTec                                                 |       | 4,661                |       | 4,661              |       |
| ImPac                                                  |       | —               |       | 2,193              |       |
| Tong Hsing (acquired ImPac on December 31,  2009) |       | 3,535                |       | —             |       |
| Total                                                  |       | $                    | 90,783     |               | $          | 85,469 |   |

 

## ***VisEraTechnologies Company, Ltd.***

## *** ***

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

 

ThroughApril 2007, the Company’s contributions to VisEra and VisEra Caymantotaled $51.6 million, effectively meeting its commitment under the termsof a January 2007 amendment to the joint-venture agreement, in which theCompany and TSMC have agreed to commit a total of $112.9 million to the jointventure. The Company has not made any subsequent contributions into VisEra orVisEra Cayman.

 

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

 

## ***China WLCSPLimited***

## *** ***

ChinaWLCSP Limited (“WLCSP”) is in the business of designing, manufacturing,packaging and selling certain wafer level chip scale packaging relatedservices. In May 2007, the Company acquired 4,500,000 units of WLCSP’sequity interests, or 20.0% of WLCSP’s registered capital on a fully-dilutedbasis, for an aggregate purchase amount of $9.0 million. The Company hasappointed a member to WLCSP’s board of directors and a supervisor to monitorthe actions of WLCSP’s board of directors and officers.

 

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

 

The Company accounts for its investment in WLCSP underthe equity method. During the three months ended January 31, 2010, WLCSPdeclared a cash dividend on its equity interests. As a result, the Companyrecorded a $0.6 million dividend receivable as of January 31, 2010,and a corresponding reduction to its investment in WLCSP. For the three andnine months ended January 31, 2010, the Company recorded equity income of$0.6 million and $1.3 million, respectively, in “Other income(expense), net,” consisting of its portion of the net income recorded by WLCSPduring those periods, partially offset by equity method investment adjustments.For the three and nine months ended January 31, 2009, the Company recordedequity income of $39,000 and $451,000, respectively, in “Other income(expense), net,” consisting of its portion of the net income recorded by WLCSPduring the periods, partially offset by equity method investment adjustments.(See Note 17.)

 

12

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

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

## *** ***

XinTec, Inc.(“XinTec”) is a Taiwan-based supplier of chip scale packaging services. TheCompany first made investments in XinTec in April 2003, for$2.8 million. As of January 31, 2010, the Company’s direct ownershippercentage in XinTec was 4.2%. Separately, VisEra owns a 16.1% interest inXinTec. Consequently, the Company’s beneficial ownership percentage in XinTecwas approximately 12.1%. The Company accounts for XinTec as a cost methodinvestment.

 

## ***ImPac TechnologyCo., Ltd.***

## *** ***

In June 2003,in order to enhance its access to plastic and ceramic packaging services, theCompany invested $2.0 million in ImPac Technology Co., Ltd. (“ImPac”), aprivately-held company based in Taiwan. After additional cash contributions ofapproximately $0.8 million in December 2003 and $1.4 million in July 2008,the Company owned 25.7% of ImPac.

 

In December 2009,a listed company in Taiwan, Tong Hsing Electronic Industries, Limited (“TongHsing”), acquired ImPac in a stock-for-stock exchange. In return for theCompany’s ownership in ImPac, the Company received approximately 0.8% of TongHsing’s outstanding shares of common stock, or 996,250 shares. The Companyrecorded a gain of approximately $2.2 million in “Other income (expense),net,” which was the difference between the fair value of the Tong Hsing’sshares the Company received on December 31, 2009, and the carrying valueof the Company’s investment in ImPac on the same day. As the shares of TongHsing are traded on the Taiwan Stock Exchange and the share price is readilydeterminable, the Company will report the shares on a mark-to-market basis atsubsequent period-ends. Any unrealized holding gains and losses will bereported as part of “Accumulated other comprehensive income.”

 

Priorto ImPac’s acquisition by Tong Hsing, the Company accounted for its ImPacinvestment using the equity method. The Company recorded equity loss of$211,000 and $0.8 million, respectively, in “Other income (expense), net,”as its portion of ImPac’s net loss for the three and nine months ended January 31,2010. The Company recorded an equity loss of $150,000 and $0.7 million,respectively, in “Other income (expense), net,” as its portion of ImPac’s netloss for the three and nine months ended January 31, 2009.

 

Thefollowing table presents the summary combined financial information of ImPac, VisEraand WLCSP, as derived from their financial statements for the three and ninemonths ended January 31, 2010 and 2009, and prepared under GAAP (inthousands):

 
| ** **             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **January 31,**   | ** ** | **January 31,**  | ** ** |
| ** **             | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ***Operating data:***  |       |                   |       |                  |       |   |   |   |   |
| Revenues               |       | $                      | 33,905     |                  | $          | 19,280 |   | $ | 86,967 |   | $ | 77,274 |   |
| Gross profit           |       | 7,981                  |       | 4,139                 |       | 17,360 |   | 17,225 |   |
| Income from operations |       | 3,186                  |       | 1,261                 |       | 6,061 |   | 7,635 |   |
| Net income             |       | $                      | 4,679      |                  | $          | 2,901 |   | $ | 8,149 |   | $ | 5,480 |   |

 

TheCompany’s share of undistributed earnings of the investees accounted for by theequity method totaled $19.3 million and $14.1 million at January 31,2010 and April 30, 2009, respectively.

 

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

 

In May 2004,the Company entered into an agreement with Powerchip Semiconductor Corporation(“PSC”), a Taiwan based company that produces memory chips and providessemiconductor foundry services, to establish SOI, a joint venture in Taiwan.The purpose of SOI is to conduct manufacturing, marketing and selling ofcertain of the Company’s legacy products. Toward the end of fiscal 2009,SOI began to investigate the market potential of touch panels that tracktouches with optical sensors. These devices compete with the current resistiveand capacitive touch panels. The Company contributed approximately$2.1 million to SOI in exchange for an ownership percentage of 49.0%. In March 2005,the Company assumed control of the board of directors of SOI and the Companyhas consolidated SOI since April 30, 2005. As of January 31, 2010,the Company owned 43.8% of SOI. (See Note 17.)

 

13

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

**Note 7 — IntangibleAssets**

 

Intangibleassets as of January 31, 2010 consist of the following (in thousands):

 
| ** **                | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|---------------------------|------------|----------|------------|-------------------------------|------------|---------------------|------------|
| Core technology           |       | $        | 17,800     |                          | $          | 16,910              |       | $ | 890 |   |
| Patents and licenses      |       | 13,487   |       | 11,877                        |       | 1,610               |       |
| Trademarks and tradenames |       | 1,400    |       | 1,330                         |       | 70                  |       |
| Customer relationships    |       | 100      |       | 100                           |       | —              |       |
| Intangible assets, net    |       | $        | 32,787     |                          | $          | 30,217              |       | $ | 2,570 |   |

 

Intangibleassets as of April 30, 2009 consist of the following (in thousands):

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

 

Forthe three and nine months ended January 31, 2010, the Company amortized$1.6 million and $4.8 million, respectively, of its intangibleassets. For the three and nine months ended January 31, 2009, the Companyamortized $1.6 million and $4.9 million, respectively, of itsintangible assets. The total expected future annual amortization of theseintangible assets is as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------|------------|
| 2010                            |       | $          | 1,560      |   |
| 2011                            |       | 973        |       |
| 2012                            |       | 37         |       |
| Total                           |       | $          | 2,570      |   |

 

**Note 8 — Borrowing Arrangements**

 

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

 
| ** **                            | ** ** | **January 31,  2010** | ** ** | **April 30,  2009** | ** ** |
|---------------------------------------|------------|----------------------------|------------|--------------------------|------------|
|                                  |       |                       |       |                     |       |
| Mortgage loan                         |       | $                          | 26,006     |                     | $          | 26,421 |   |
| Term loan                             |       | 7,750                      |       | 10,000                   |       |
| Construction loan                     |       | 9,521                      |       | —                   |       |
| Capital lease obligations             |       | —                     |       | 1                        |       |
|                                  |       | 43,277                     |       | 36,422                   |       |
| Less: amount due within one year |       | (4,286                     | )          | (3,555                   | )          |
| Non-current portion of long-term debt |       | $                          | 38,991     |                     | $          | 32,867 |   |

 

14

----

Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

At January 31,2010, aggregate debt maturities were as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | **Mortgage  and Term  Loan** | ** ** | **Construction  Loan** | ** ** | **Total** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------|------------|-----------|------------|
| 2010                            |       | $                            | 888        |                   | $          | —    |       | $ | 888 |   |
| 2011                            |       | 3,554                        |       | 732                    |       | 4,286     |       |
| 2012                            |       | 3,554                        |       | 732                    |       | 4,286     |       |
| 2013                            |       | 1,554                        |       | 1,465                  |       | 3,019     |       |
| 2014                            |       | 554                          |       | 2,930                  |       | 3,484     |       |
| Thereafter                      |       | 23,652                       |       | 3,662                  |       | 27,314    |       |
| Total                           |       | $                            | 33,756     |                   | $          | 9,521     |       | $ | 43,277 |   |

 

## ***Mortgage Loan andTerm Loan***

## *** ***

On March 16,2007, the Company entered into a Loan and Security Agreement with a domesticbank for the purchase of a complex of four buildings located in Santa Clara,California (the “Santa Clara Property”). The Loan and Security Agreementprovides for a mortgage loan in the principal amount of $27.9 million (the“Mortgage Loan”) and a secured line of credit with an aggregate maximumprincipal amount of up to $12.0 million (the “Term Loan”). In March 2008,the Company borrowed $6.0 million under the Term Loan to financeimprovements to the Santa Clara Property. The Company drew down the remaining$6.0 million under the Term Loan in July 2008.

 

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

 

Interest ratesunder the Mortgage Loan were 1.1% and 1.4% at January 31, 2010 and April 30,2009, respectively. Interest rates under the Term Loan were 1.5% and 1.8% at January 31,2010 and April 30, 2009, respectively. The Company was in compliance withthe financial covenants of the Loan and Security Agreement as of January 31,2010.

 

In conjunctionwith the Mortgage Loan, the Company entered into an interest rate swap with thesame bank to effectively convert the variable interest rate described above toa fixed rate. The swap is for a period of ten years, and the notional amount ofthe swap approximates the principal outstanding under the Mortgage Loan. TheCompany is the fixed rate payer under the swap and the rate is fixed at 5.3%per annum and the effective rate on the Mortgage Loan is fixed at approximately6.2%. In July 2008, in connection with the Term Loan, the Company enteredinto a second interest rate swap with the bank to effectively convert thevariable interest rate described above to a fixed rate. This second swap is fora period of four years. The Company is the fixed rate payer and the rate isfixed at 4.3% per annum and the effective rate on the Term Loan is fixed at approximately5.5%.

 

## ***Construction Loan***

## *** ***

On August 3,2009, OmniVision Technologies (Shanghai) Co., Ltd., a wholly-owned subsidiaryof the Company, entered into a Fixed Assets Loan Agreement with a bank inChina. The Fixed Assets Loan Agreement provides for a fixed asset loan in theprincipal amount of Chinese Yuan 159.0 million, which is equal toapproximately $23.3 million (the “Construction Loan”). The purpose of theConstruction Loan is to construct a research center for the Company in PudongDevelopment Zone, the Zhang Jiang Science Park in Shanghai, China.Subsequently, on August 27, 2009, the Construction Loan was approved bythe Chinese government and the final loan amount was modified to Chinese Yuan140.0 million or approximately $20.5 million. As of January 31,2010, the Company borrowed Chinese Yuan 65.0 million, or approximately$9.5 million, under the Construction Loan. The Company is scheduled todraw down the remaining $11.0 million by December 2011. The ConstructionLoan matures on June 30, 2016.

 

Interest rateunder the Construction Loan is based on an indicative rate as published by theChinese government, and will be adjusted every September to the thencurrent published rate. Interest rate under the Construction Loan was 5.3% at January 31,2010. The Company was in compliance with the financial covenants of the FixedAssets Loan Agreement as of January 31, 2010.

 

15

----

Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

## ***Lines of Credit atSOI***

## *** ***

SOI maintains fourunsecured lines of credit with three commercial banks, which provide a total ofapproximately $3.5 million in available credit. All borrowings under theselines of credit bear interest at the market interest rate prevailing at thetime of borrowing. There are no financial covenant requirements for thesefacilities. At January 31, 2010 and April 30, 2009, there were noborrowings outstanding under these facilities.

 

## ***DerivativeInstruments and Hedging Activities***

## *** ***

As indicatedabove, the Company holds two separate interest rate swaps in connection withthe Mortgage Loan and the Term Loan. The Company utilizes the swaps to reducethe effect of interest rate variability on the two loans’ interest payments.The Company has not designated the two interest rate swaps as hedginginstruments. Consequently, the Company remeasures the two interest rate swapsat fair value at each balance sheet date, and immediately recognizes anychanges to the fair values in earnings. On the balance sheet, the Companyrecords the swaps as either assets or liabilities, depending on whether thefair value represents net gains or net losses.

 

The table belowpresents the location of the swaps on the Condensed Consolidated Statements ofOperations and Condensed Consolidated Balance Sheets, and the related effects onthe Company’s results of operations and financial positions (in thousands):

 
| ** **                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                              | ** ** | **January 31,**   | ** ** | **January 31,**  | ** ** |
| ** **                                                                                                              | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ***Location of  amounts recognized in Condensed Consolidated Statements of Operations and  amount of gains (losses):*** |       |                   |       |                  |       |   |   |   |   |
| Other income (expense), net                                                                                             |       | $                      | 194        |                  | $          | (2,710 | ) | $ | 839 |   | $ | (2,875 | ) |
|                                                                                                                         |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 
| ** **                                                                           | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                           | ** ** | **2010**             | ** ** | **2009**           | ** ** |
| ***Location of  amounts on Condensed Consolidated Balance Sheets and fair values:*** |       |                 |       |               |       |
| Other long-term liabilities                                                          |       | $                    | 3,624      |               | $          | 4,463 |   |
|                                                                                      |            |                      |            |                    |            |  |  |

 

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

 

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

 

Diluted net incomeper share attributable to OmniVision common stockholders is computed accordingto the treasury stock method using the weighted average number of common andpotentially dilutive common shares outstanding during the period. Potentiallydilutive common shares represent the effect of stock options. For the three andnine months ended January 31, 2010, 7,527,000 and 7,611,000 shares,respectively, of common stock subject to outstanding options were not includedin the calculation of diluted net income per share because they wereantidilutive. For the three and nine months ended January 31, 2009, theCompany excluded all options and restricted stock units outstanding as theCompany recorded a net loss of $18.2 million and $17.3 million,respectively.

 

The Company takesinto account the effect on consolidated earnings per share of options, warrantsand convertible securities issued by its subsidiaries. The effect onconsolidated earnings per share depends on whether the securities issued by thesubsidiary enable their holders to obtain common stock of the subsidiarycompany or common stock of the parent company. Securities issued by a subsidiarythat enable their holders to obtain the subsidiary’s common stock are includedin computing the subsidiary’s earnings per share data. The diluted per-shareearnings of the subsidiary are included in the Company’s consolidated earningsper share computations based on the consolidated group’s holding of thesubsidiary’s securities. Through January 31, 2010, 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 and ninemonths ended January 31, 2010 and 2009, the Company included the effect ofSOI’s options in its consolidated earnings per share, if dilutive.

 

16

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

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

 
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **January 31,**   | ** ** | **January 31,**  | ** ** |
| ** **                                                                                                                              | ** ** | **2010**               | ** ** | **2009 (1)**          | ** ** | **2010** | ** ** | **2009 (1)** | ** ** |
| ***Basic:***                                                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Numerator:                                                                                                                              |       |                   |       |                  |       |   |   |   |   |
| Net income (loss) attributable to OmniVision  Technologies, Inc.                                                                   |       | $                      | 4,950      |                  | $          | (18,191 | ) | $ | 3,178 |   | $ | (17,271 | ) |
|                                                                                                                                    |       |                   |       |                  |       |   |   |   |   |
| Denominator:                                                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Weighted average common shares for net income (loss)  per share attributable to OmniVision Technologies, Inc. common  stockholders |       | 51,273                 |       | 50,036                |       | 50,870 |   | 50,682 |   |
|                                                                                                                                    |       |                   |       |                  |       |   |   |   |   |
| Basic net income (loss) per share attributable to  OmniVision Technologies, Inc. common stockholders                               |       | $                      | 0.10       |                  | $          | (0.36 | ) | $ | 0.06 |   | $ | (0.34 | ) |
|                                                                                                                                    |       |                   |       |                  |       |   |   |   |   |
| ***Diluted:***                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Numerator:                                                                                                                              |       |                   |       |                  |       |   |   |   |   |
| Net income (loss) attributable to OmniVision  Technologies. Inc.                                                                        |       | $                      | 4,950      |                  | $          | (18,191 | ) | $ | 3,178 |   | $ | (17,271 | ) |
|                                                                                                                                    |       |                   |       |                  |       |   |   |   |   |
| Denominator:                                                                                                                            |       |                   |       |                  |       |   |   |   |   |
| Denominator for basic net income (loss) per share  attributable to OmniVision Technologies, Inc. common stockholders               |       | 51,273                 |       | 50,036                |       | 50,870 |   | 50,682 |   |
| Weighted average effect of dilutive securities:                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Stock options, restricted stock units and employee  stock purchase plan shares                                                          |       | 1,281                  |       | —                |       | 1,137 |   | — |   |
| Weighted average common shares for diluted net  income (loss) per share                                                                 |       | 52,554                 |       | 50,036                |       | 52,007 |   | 50,682 |   |
|                                                                                                                                    |       |                   |       |                  |       |   |   |   |   |
| Diluted net income (loss) per share attributable to  OmniVision Technologies, Inc. common stockholders                             |       | $                      | 0.09       |                  | $          | (0.36 | ) | $ | 0.06 |   | $ | (0.34 | ) |

 

----

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

 

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

 

The authoritativeguidance for fair value measurements 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.

 

17

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

The followingtable presents the Company’s financial assets and liabilities that are measuredat fair value on a recurring basis which were comprised of the following typesof instruments as of January 31, 2010 (in thousands):

 
| ** **                                                              | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------------------------------------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Money market funds                                                      |       | $         | 73,574     |             | $          | 73,574           |       | $                | —     |   | $ | — |   |
| Certificates of deposit                                                 |       | 6,803     |       | —           |       | 6,803            |       | —           |       |
| Debt securities issued by U.S. government and U.S.  government agencies |       | 58,200    |       | —           |       | 58,200           |       | —           |       |
| Corporate debt securities/commercial paper                              |       | 6,592     |       | —           |       | 6,592            |       | —           |       |
| Investment in Tong Hsing                                                |       | 3,535     |       | 3,535            |       | —           |       | —           |       |
| Total assets                                                            |       | $         | 148,704    |             | $          | 77,109           |       | $                | 71,595     |   | $ | — |   |
| Interest rate swaps                                                     |       | $         | (3,624     | )                | $          | —           |       | $                | (3,624     | ) | $ | — |   |
| Total liabilities                                                       |       | $         | (3,624     | )                | $          | —           |       | $                | (3,624     | ) | $ | — |   |

 

The followingtable presents the Company’s financial assets and liabilities that are measuredat fair value on a recurring basis which were presented on the Company’sCondensed Consolidated Balance Sheets as of January 31, 2010 (inthousands):

 
| ** **             | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Cash equivalents       |       | $         | 76,844     |             | $          | 73,574           |       | $                | 3,270      |   | $ | — |   |
| Short-term investments |       | 68,325    |       | —           |       | 68,325           |       | —           |       |
| Long-term investments  |       | 3,535     |       | 3,535            |       | —           |       | —           |       |
| Total assets           |       | $         | 148,704    |             | $          | 77,109           |       | $                | 71,595     |   | $ | — |   |
| Interest rate swaps    |       | $         | (3,624     | )                | $          | —           |       | $                | (3,624     | ) | $ | — |   |
| Total liabilities      |       | $         | (3,624     | )                | $          | —           |       | $                | (3,624     | ) | $ | — |   |

 

For the Company’sinterest rate swaps, the Company obtains fair value quotes from the issuingbank and assesses the quotes for reasonableness by comparing them to thepresent values of expected cash flows. The present value approach is based onobservable market interest rate curves that are commensurate with the terms ofthe interest rate swaps. The carrying value represents the fair value of theswaps, as adjusted for any non-performance risk associated with the Company.

 

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

 

**Note 11 — Segment and GeographicInformation**

 

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

 

18

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

The Company sellsits image-sensor products either directly to OEMs and VARs or indirectlythrough distributors. The following table illustrates the percentage ofrevenues from sales to OEMs and VARs and to distributors for the three and ninemonths ended January 31, 2010 and 2009, respectively:

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|------------------------|------------|-----------------------|------------|
| ** **    | ** ** | **January 31,**   | ** ** | **January 31,**  | ** ** |
| ** **    | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| OEMs and VARs |       | 54.9                   | %          | 63.6                  | %          | 53.1 | % | 59.9 | % |
| Distributors  |       | 45.1                   |       | 36.4                  |       | 46.9 |   | 40.1 |   |
| Total         |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |

 

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

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|------------------------|------------|-----------------------|------------|
| ** **    | ** ** | **January 31,**   | ** ** | **January 31,**  | ** ** |
| ** **    | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| China         |       | $                      | 130,388    |                  | $          | 58,417 |   | $ | 372,831 |   | $ | 315,517 |   |
| Taiwan        |       | 13,645                 |       | 4,387                 |       | 39,462 |   | 29,902 |   |
| Malaysia      |       | 6,621                  |       | 2,185                 |       | 17,757 |   | 32,842 |   |
| United States |       | 837                    |       | 12,991                |       | 2,388 |   | 30,262 |   |
| All other     |       | 5,444                  |       | 2,066                 |       | 13,401 |   | 9,737 |   |
| Total         |       | $                      | 156,935    |                  | $          | 80,046 |   | $ | 445,839 |   | $ | 418,260 |   |

 

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

 
| ** **    | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|---------------|------------|----------------------|------------|--------------------|------------|
| ** **    | ** ** | **2010**             | ** ** | **2009**           | ** ** |
| Taiwan        |       | $                    | 91,254     |               | $          | 88,814 |   |
| United States |       | 60,105               |       | 65,276             |       |
| China         |       | 61,670               |       | 54,166             |       |
| All other     |       | 950                  |       | 392                |       |
| Total         |       | $                    | 213,979    |               | $          | 208,648 |   |

 

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

 

## ***2007 EquityIncentive Plan***

## *** ***

In September 2007,on the recommendation of the Company’s board of directors, the stockholders ofthe Company approved the 2007 Equity Incentive Plan (the “2007 Plan”).The 2007 Plan replaced the Company’s 2000 Stock Plan. The Company hasreserved 6,000,000 shares of common stock for issuance under the2007 Plan. The 2007 Plan provides for the grant of the followingtypes of incentive awards: (i) stock options; (ii) stock appreciationrights; (iii) restricted stock; (iv) restricted stock units; (v) performanceshares and performance units; and (vi) other stock or cash awards. Ingeneral, stock option and stock appreciation right awards under the2007 Plan will be granted at a price not less than 100% of the fair marketvalue of the Company’s common stock on the date of grant. With the approval ofthe Company’s stockholders in September 2009, the Company modified certainterms of the 2007 Plan. Under the modified 2007 Plan, the Company’sstock option awards generally have a maximum contractual term of seven yearsand vest over four years. Restricted stock units granted under the2007 Plan generally vest over three years. The 2007 Plan also coversgrants of equity-based compensation to the Company’s directors.

 

19

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

The Company’sequity incentive and stock-based compensation plans as of January 31, 2010are summarized as follows (in thousands):

 
| ** **                     | ** ** | ** **     | ** ** | **Shares**    | ** ** | ** **      | ** ** | **Restricted**  | ** ** | **Performance** | ** ** |
|--------------------------------|------------|----------------|------------|---------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                     | ** ** | **Shares**     | ** ** | **Available** | ** ** | **Options**     | ** ** | **Stock Units** | ** ** | **Shares**      | ** ** |
| **Name of Plan**               | ** ** | **Authorized** | ** ** | **for Grant** | ** ** | **Outstanding** | ** ** | **Outstanding** | ** ** | **Outstanding** | ** ** |
| 2000 Stock Plan           |       | —         |       | —        |       | 8,005           |       | —          |       | —          |       |
| 2000 Director Option Plan |       | —         |       | —        |       | 287             |       | —          |       | —          |       |
| 2007 Plan                 |       | 6,000          |       | 4,391         |       | 902             |       | 2,093           |       | —          |       |
| Total                          |       | 6,000          |       | 4,391         |       | 9,194           |       | 2,093           |       | —          |       |

 

## ***2009 EmployeeStock Purchase Plan***

## *** ***

The2009 Employee Stock Purchase Plan (the “2009 Purchase Plan”) wasadopted by the board of directors in July 2009 and was approved by thestockholders of the Company in September 2009. The 2009 Purchase Planreplaced the Company’s 2000 Employee Stock Purchase Plan (the “2000 PurchasePlan”) in December 2009. The board of directors has reserved a total of2,500,000 shares of common stock for issuance under the 2009 PurchasePlan. Each offering period under the 2009 Purchase Plan will have aduration of approximately 24 months, commencing on the first trading dayon or after June 1 and December 1 of each year and terminating on thelast trading day in the period ending 24 months later. Each offering periodwill generally consist of four six-month purchase periods in which shares maybe purchased on a participant’s behalf. The purchase price will be 85% of thelesser of the fair market value of the common stock on the first trading day ofthe offering period or on the last day of the purchase period. If the fairmarket value of the common stock on the last day of the purchase period islower than the fair market value of the common stock on the enrollment date ofthe associated offering period, all participants in such offering period willautomatically be rolled over to the immediately following offering period.Employees may end their participation in an offering period at any time, andtheir participation ends automatically on termination of employment with theCompany. The first offering period under the 2009 Purchase Plan began on December 1,2009.

 

## ***Stock OptionExchange***

## *** ***

At the Company’sannual meeting of stockholders held on September 24, 2009, thestockholders of the Company approved a one-time stock option exchange programfor employees to exchange eligible stock options for restricted stock units.Under the option exchange program, eligible employees were able to exchangetheir outstanding options granted before November 1, 2008 under theCompany’s 2000 Stock Plan or the 2007 Plan with an exercise pricegreater than or equal to $23.01 per share, for new restricted stock units.The Company issued one restricted stock unit for every 3.4 stock optionstendered for exchange. The vesting schedule for these restricted stock unitswas determined by the remaining vesting period of the exchanged options. Theoption exchange program commenced on November 18, 2009, and expired on December 16,2009. The Company accepted for exchange options to purchase3,566,192 shares of the Company’s common stock. All surrendered optionswere cancelled, and immediately thereafter, the Company issued a total of1,048,707 restricted stock units in exchange. One share of the Company’scommon stock is issuable upon the vesting of each restricted stock unit. Thefair value of the restricted stock units issued was measured as the total ofthe unrecognized compensation cost of the options surrendered and theincremental value of the restricted stock units issued, measured as the excessof the fair value of the restricted stock units over the fair value of theoptions tendered immediately before the exchange. The incremental cost of therestricted stock units was $1.5 million. The value of the restricted stockunits, totaling $3.9 million, will be amortized over a weighted averagevesting period of two years.

 

20

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

## ***Stock-BasedCompensation Award Activity***

## *** ***

The followingtable summarizes the equity award activities under the 2000 Stock Plan,the 2000 Director Option Plan and the 2007 Plan, for the nine monthsended January 31, 2010:

 
| ** **                                                                          | ** ** | ** **                        | ** ** | **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                                                             |       | —                            |       | (197                    | )          | 7.79                                              |       | —                               |       | —                                               |       | — |   |
| Stock options cancelled in stock option exchange                                    |       | 3,378                             |       | (3,566                  | )          | 24.76                                             |       | —                               |       | —                                               |       | — |   |
| Stock options expired or forfeited                                                  |       | 93                                |       | (957                    | )          | 16.32                                             |       | —                               |       | —                                               |       | — |   |
| Restricted stock units granted (1)                                                  |       | (1,526                            | )          | —                  |       | —                                            |       | 773                                  |       | —                                               |       | 10.69 |   |
| Restricted stock units issued in stock option  exchange (1)                    |       | (1,678                            | )          | —                  |       | —                                            |       | 1,049                                |       | —                                               |       | 12.60 |   |
| Restricted stock units vested (1)                                              |       | —                            |       | —                  |       | —                                            |       | (168                                 | )          | —                                               |       | 11.48 |   |
| Restricted stock units expired or forfeited (1)                                     |       | 161                               |       | —                  |       | —                                            |       | (81                                  | )          | —                                               |       | 10.57 |   |
| Performance shares granted (1) (2)                                        |       | —                            |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Performance shares expired or  forfeited (1) (2)                          |       | —                            |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Balance at January 31, 2010 — shares available  for grant                 |       | 4,391                             |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Balance at January 31, 2010 — options                                     |       |                              |       | 9,194                   |       | 15.39                                             |       | —                               |       | —                                               |       | — |   |
| Balance at January 31, 2010 — restricted stock  units                     |       | —                            |       | —                  |       | —                                            |       | 2,093                                |       | —                                               |       | 11.75 |   |
| Balance at January 31, 2010 — performance  shares                         |       | —                            |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Exercisable at January 31, 2010                                                |       | —                            |       | 7,558                   |       | 15.69                                             |       | —                               |       | —                                               |       | — |   |
| Vested and expected to vest at January 31, 2010  — options                |       | —                            |       | 9,079                   |       | $                                                 | 15.43      |                                 | —     |                                                 | —     |   | — |   |
| Vested and expected to vest at January 31, 2010  — restricted stock units |       | —                            |       | —                  |       | —                                            |       | 1,728                                |       | —                                               |       | $ | 11.75 |   |
| Vested and expected to vest at January 31, 2010  — performance shares     |       | —                            |       | —                  |       | —                                            |       | —                               |       | —                                               |       | $ | — |   |

 

----

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

 

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

 

21

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

The totalintrinsic value of options exercised during the three and nine months ended January 31,2010 was $494,000 and $1.4 million, respectively. The total intrinsicvalue of restricted stock units vested during the three and nine months ended January 31,2010 was $158,000 and $1.8 million, respectively. Total cash received fromemployees as a result of employee stock option exercises during the three andnine months ended January 31, 2010 was approximately $247,000 and$1.5 million, respectively.  Thetotal intrinsic value of options exercised during the three and nine monthsended January 31, 2009 was $7,000 and $493,000, respectively. Total cashreceived from employees as a result of employee stock option exercises duringthe three and nine months ended January 31, 2009 was approximately $15,000and $315,000, respectively.

 

As of January 31,2010, net of forfeitures, there was $10.7 million of unrecognizedcompensation expense related to unvested stock options, which the Companyexpects to recognize over a weighted average period of 1.9 years. As of January 31,2010, net of forfeitures, there was $11.7 million of unrecognizedcompensation expense related to unvested restricted stock units, which theCompany expects to recognize over a weighted average period of 2.01 years. Forthe Company’s 2009 Purchase Plan, as of January 31, 2010, there was$3.9 million of unrecognized compensation expense which the Company expects torecognize over a weighted average period of 1.2 years. As of April 30,2009, net of forfeitures, there was $23.5 million of unrecognizedcompensation cost related to unvested stock options, which the Company expectsto recognize over a weighted average period of 1.8 years. As of April 30,2009, net of forfeitures, there was $4.0 million of unrecognizedcompensation expense related to unvested restricted stock units, which theCompany expects to recognize over a weighted average period of 2.4 years.For the 2000 Purchase Plan, as of April 30, 2009, there was$1.8 million of unrecognized compensation cost which the Company expectedto be recognized over a weighted average period of 0.8 years. The Company’scurrent policy is to issue new shares to settle the exercise of stock optionsand prospectively, the vesting of restricted stock units.

 

## ***ValuationAssumptions***

## *** ***

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

 

For restrictedstock unit awards, the per-share fair value is the closing market price of theCompany’s common stock as reported on the NASDAQ Global Market (“NASDAQ”) 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 expense is adjusted by theestimated probable outcome of the predetermined performance conditions. Thecompensation expense will be adjusted for subsequent changes in the estimatedand actual outcome. For stock option awards and rights issued under the Company’semployee stock purchase plans, the Company measures the fair value using theBlack-Scholes option pricing model. Black-Scholes was developed to estimate thefair value of freely tradable, fully transferable options without vestingrestrictions. These assumptions differ significantly from the characteristicsof the Company’s stock-based compensation awards. Black-Scholes also requiresthe use of highly subjective, complex assumptions, including expected term andthe price volatility of the Company’s stock.

 

22

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

The Company didnot grant any employee options in the three months ended January 31, 2010.The per share weighted average estimated grant date fair value for employeeoptions granted was $4.49 in the nine months ended January 31, 2010. Theper share weighted average estimated grant date fair value for employee optionsgranted was $3.19 and $5.02 in the three and nine months ended January 31,2009, respectively. The following weighted average assumptions are included inthe estimated fair value calculations for stock options granted in the threeand nine months ended January 31, 2010 and 2009:

 
| ** **                          | ** ** | **Employee Stock Option Plan** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended**         | ** ** | **Nine Months Ended** | ** ** |
| ** **                          | ** ** | **January 31,**           | ** ** | **January 31,** | ** ** |
| ** **                          | ** ** | **2010**                       | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Risk-free interest rate             |       | —                         | %          | 1.89 | % | 2.00 | % | 2.96 | % |
| Expected term of options (in years) |       | —                         |       | 4.6 |   | 4.2 |   | 4.1 |   |
| Expected volatility                 |       | —                         | %          | 67.0 | % | 56.0 | % | 50.5 | % |
| Expected dividend yield             |       | —                         | %          | 0 | % | 0 | % | 0 | % |

 

UsingBlack-Scholes, the per share weighted average estimated fair value of rightsissued pursuant to the Company’s employee stock purchase plans during the threeand nine months ended January 31, 2010 was $3.38 and $2.87, respectively.Using Black-Scholes, the per share weighted average estimated fair value ofrights issued pursuant to the Company’s employee stock purchase plans duringthe three and nine months ended January 31, 2009 was $2.66 and $4.21,respectively.

 

The followingweighted average assumptions are included in the estimated grant date fairvalue calculations for rights to purchase stock under the Company’s employeestock purchase plans:

 
| ** **                          | ** ** | **Employee Stock Purchase Plans** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended**            | ** ** | **Nine Months Ended** | ** ** |
| ** **                          | ** ** | **January 31,**              | ** ** | **January 31,** | ** ** |
| ** **                          | ** ** | **2010**                          | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Risk-free interest rate             |       | 1.4                               | %          | 1.92 | % | 1.4 | % | 3.33 | % |
| Expected term of options (in years) |       | 0.5                               |       | 0.5 |   | 0.5 |   | 0.5 |   |
| Expected volatility                 |       | 63.0                              | %          | 52.7 | % | 63.0 | % | 46.1 | % |
| Expected dividend yield             |       | 0                                 | %          | 0 | % | 0 | % | 0 | % |

 

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

 

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

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

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

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

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

 

23

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

**Note 13 — AdditionalPaid-in Capital**

 

The followingtable shows the amounts recorded to “Additional paid-in capital” for the ninemonths ended January 31, 2010 (in thousands):

 
| ** **                                          | ** ** | **Additional** | ** ** |
|-----------------------------------------------------|------------|----------------|------------|
| ** **                                          | ** ** | **Paid-in**    | ** ** |
| ** **                                          | ** ** | **Capital**    | ** ** |
| Balance at May 1, 2009                         |       | $              | 403,159    |   |
| Exercise of common stock options                    |       | 1,536          |       |
| Employee stock purchase plan                        |       | 4,630          |       |
| Employee stock-based compensation                   |       | 18,225         |       |
| Withholding tax deduction on restricted stock units |       | (57            | )          |
| Balance at January 31, 2010                    |       | $              | 427,493    |   |

 

**Note 14 — Treasury Stock**

 

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

 

In February 2007,the Company’s board of directors approved an additional stock repurchaseprogram that provided for the repurchase of up to $100 million of itsoutstanding common stock in an open-market program. At the time that theprogram expired in November 2009, the Company had cumulatively repurchased6,671,000 shares of its common stock under this open-market program for anaggregate cost of approximately $99.1 million.

 

**Note 15 — IncomeTaxes**

 

The Company recorded a provision for income taxes of$0.5 million and a benefit from income taxes of $0.9 million for the threemonths ended January 31, 2010 and 2009, respectively, resulting ineffective tax rates of 8.9% and 4.8% for the respective periods.

 

The Company’squarterly income taxes reflect an estimate of the corresponding fiscal year’sannual effective tax rate and include, when applicable, adjustments fromdiscrete tax items. The Company excluded from the current and prior fiscalyears’ overall estimation of annual effective tax rates one jurisdiction withlosses for which no benefit can be realized. For the current fiscal year’soverall estimation of annual effective tax rate, the Company also excluded thetax effect associated with a one-time stock option exchange program foremployees to exchange eligible stock options for restricted stock units. (SeeNote 12.) For the exchanged stock options, the Company recorded$2.1 million of additional deferred tax assets through a discreteadjustment to the provision for income taxes for the three months ended January 31,2010. Other discrete adjustments to the Company’s provision for income taxesfor the three months ended January 31, 2010 included an unfavorable impactfrom foreign exchange losses associated with the Company’s unrecognized taxbenefits, adjustments for differences between the Company’s finalized taxreturn and the provision for income taxes recorded for fiscal 2009, andother adjustments to tax provisions from prior years.

 

It is reasonablypossible that the balance of gross unrecognized tax benefits will decrease by$10.3 million within the next twelve months due to the lapse of applicablestatute of limitations in multiple tax jurisdictions that the Company operatedin. During the three months ended January 31, 2010, the Company accrued anadditional $0.5 million of interest related to the Company’s unrecognizedtax benefits.

 

24

----

Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

**Note 16 — Commitments andContingencies**

 

## ***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. Construction of the facilities on the land has commenced andaccording to the Purchase Agreement, construction must be completed by June 30,2010. The Company may use the land solely for the purposes of industrial useand/or scientific research. As of January 31, 2010, the Company hasalready contributed $21.1  millionof an estimated $33.7 million total investment. The remaining investmentamount will be financed via the Construction Loan. (See Note 8.)

 

Duringthe three months ended October 31, 2008, the Company formed ShanghaiOmniVision Semiconductor Technology, Co. Ltd, a wholly-owned subsidiary inShanghai, China, for the purpose of expanding its testing capabilities. As of January 31,2010, the Company had contributed $1.5 million, as required under theterms of its $10.0 million capital commitment. The Company is required tocontribute the remaining $8.5 million by October 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 actionsarising out of the normal course of business.

 

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

 

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 coordinated proceeding(the action involving the Company is not one of the six focus cases) made itunlikely that the settlement would receive final court approval. Plaintiffsfiled amended master allegations and amended complaints in the six focus cases.In 2008, the Court largely denied the focus case defendants’ motion to dismissthe amended complaints.

 

Theparties have reached a global settlement of the coordinated litigation. Underthe settlement, the insurers will pay the full amount of settlement shareallocated to the Company, and the Company will bear no financial liability. TheCompany, as well as the officer and director defendants who were previouslydismissed from the action pursuant to tolling agreements, will receive completedismissals from the case. On October 5, 2009, the Court entered an ordergranting final approval of the settlement. Certain objectors have appealed theCourt’s October 5, 2009 final approval order to the Second Circuit Courtof Appeals. If for any reason the settlement does not become effective, andlitigation against the Company proceeds, the Company believes that it hasmeritorious defenses to plaintiffs’ claims and intends to defend the actionvigorously.

 

25

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

On October 12,2007, a purported OmniVision stockholder filed a complaint against certain ofthe Company’s underwriters for its initial public offering. The complaint, *Vanessa Simmonds v. Bank of America Corporation, et al.*,Case No. C07-1668, filed in District Court for the Western District ofWashington, makes similar allegations to those made in *In reInitial Public Offering Securities Litigation* and seeks the recoveryof short-swing trading profits under Section 16(b) of the SecuritiesExchange Act of 1934. The Company is named as a nominal defendant, and norecovery was sought from it. The plaintiff filed an amended complaint in February 2008.On March 12, 2009, the Court granted the motion to dismiss withoutprejudice, filed by 30 of the issuer defendants, including the Company, and themotion to dismiss with prejudice, filed by all of the underwriter defendants.The plaintiff timely appealed the Court’s Order to the United States Court ofAppeals for the Ninth Circuit, which remains pending. In accordance with thebriefing schedule set by the Ninth Circuit on August 18, 2009, plaintifffiled her opening brief on August 26, 2009. On October 2, 2009, theunderwriter defendants/appellees/cross-appellants filed their answering brief,and the moving issuers/appellees filed their principal brief as well.  Plaintiff/appellant/cross-appellee filed herresponse and reply briefs on November 2, 2009. The underwriterdefendants/appellees/cross-appellants filed their reply brief on November 17,2009. The Ninth Circuit Court of Appeals has not set a hearing date. Nodiscovery has taken place.

 

At theend of May 2009, plaintiff sent a Demand for Inspection of Books andRecords to certain of the nominal defendants named in the Section 16(b) litigationseeking the companies to produce any tolling agreements entered into with thecompanies’ respective underwriters. Plaintiff’s counsel has agreed to anopen-ended extension for certain nominal defendants who received such a demand.As of the date of this filing, the Company has not received a demand forinspection of books and records from the plaintiff.

 

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

 

**Note 17 — Related PartyTransactions**

 

In May 2006,the Company consummated a loan agreement with one of its employees. The loanagreement was approved by the board of directors in fiscal 2004. Under theterms of the agreement, as amended, the Company extended to the employee a$1.0 million loan with a nominal imputed interest rate and a maturity dateof May 12, 2010. The loan is secured by a deed of trust and may beextended, subject to mutual consent of the parties. The Company intends toextend the term of the loan for one additional year.

 

TheCompany paid ImPac approximately $2.5 million and$8.0 million for manufacturing services for the three and nine monthsended January 31, 2010, respectively. For the three and nine months ended January 31,2009, the Company paid ImPac approximately $1.9 million and$7.8 million, respectively, for manufacturing services. In August 2008,the Company entered into an agreement with ImPac under which the Company agreedto place certain manufacturing equipment with ImPac on a consignment basis fora period of up to five years. During fiscal 2008, the Company loaned$1.3 million to ImPac for the purpose of expanding its manufacturingcapacities for a term of one year, which has been extended upon mutual consentof the parties for one year. The loan is fully collateralized by assets held byImPac. During the three months ended October 31, 2009, ImPac repaid theloan amount in full. In December 2009, Tong Hsing acquired ImPac andassumed control of its operations, including the consignment arrangement. (SeeNote 5.) ImPac ceased to be a related-party of the Company on December 31,2009.

 

Forthe three and nine months ended January 31, 2010, the Company paid$21.1 million and $51.6 million, respectively, to VisEra for colorfilter and other manufacturing services. For the three and nine months ended January 31,2009, the Company paid $12.7 million and $49.1 million, respectively,to VisEra for color filter and other manufacturing services.

 

26

----

Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2010 and 2009**

**(unaudited)**

 

Forthe three and nine months ended January 31, 2010, the Company paid $14,000and $14,000, respectively, to WLCSP for chip scale packaging services. For thethree and nine months ended January 31, 2009, the Company paid zero and$433,000, respectively, to WLCSP for such services.

 

Thefollowing table summarizes the transactions that the Company’s consolidatedaffiliate, SOI, and its affiliate, VisEra, engaged with related parties in thethree and nine months ended January 31, 2010 and 2009 (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **January 31,**   | ** ** | **January 31,**  | ** ** |
| ** **                             | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| ***SOI transactions with:***           | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ImPac:                                 |       |                   |       |                  |       |   |   |   |   |
| Purchases of manufacturing services    |       | $                      | 65         |                  | $          | 33 |   | $ | 305 |   | $ | 534 |   |
| Balance  payable at period end, net    |       | —                 |       | 18                    |       | — |   | 18 |   |
| PSC:                                   |       |                   |       |                  |       |   |   |   |   |
| Purchases of wafers                    |       | 230                    |       | 4                     |       | 502 |   | 1,872 |   |
| Rent  and other services               |       | 23                     |       | 18                    |       | 64 |   | 53 |   |
| Balance  payable at period end, net    |       | 89                     |       | 8                     |       | 89 |   | 8 |   |
| VisEra:                                |       |                   |       |                  |       |   |   |   |   |
| Purchases of manufacturing services    |       | 30                     |       | 5                     |       | 132 |   | 5 |   |
| Balance  payable at period end         |       | —                 |       | 5                     |       | — |   | 5 |   |
|                                   |       |                   |       |                  |       |   |   |   |   |
| ***VisEra transactions with:***        |       |                   |       |                  |       |   |   |   |   |
| TSMC:                                  |       |                   |       |                  |       |   |   |   |   |
| Sales to TSMC                          |       | 429                    |       | 192                   |       | 1,001 |   | 1,293 |   |
| Balance  receivable at period end, net |       | 255                    |       | 138                   |       | 255 |   | 138 |   |
| SOI:                                   |       |                   |       |                  |       |   |   |   |   |
| Sales to SOI                           |       | 30                     |       | 5                     |       | 132 |   | 5 |   |
| Balance  receivable at period end      |       | $                      | —     |                  | $          | 5 |   | $ | — |   | $ | 5 |   |

 

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

 

27

----

Table ofContents

 
| **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” and words of similar import as well as the negative ofthose terms. In addition, any statements that refer to expectations,projections or other characterizations of future events or circumstances,including any underlying assumptions, are forward-looking statements. All forward-looking statements included inthis Quarterly Report on Form 10-Q, including, but not limited to, statementsregarding our projected results ofoperations for future reporting periods, the extent of future salesthrough original equipmentmanufacturers, or OEMs, and distributors, future growth trends andopportunities in certain markets, the capabilities of new products, theincreasing competition in our industry, the continued importance of the mobilephone market to our business, continued price competition and the consequentreduction in the average selling prices of our products, anticipated benefitsof our joint ventures and alliances, the development of our business andmanufacturing capacity, future expenses we expect to incur, our futureinvestments, our future working capital requirements, the effect of a change inmarket interest rates, the geographic distribution of our sales and end usersof our products 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 in Part II under the caption “Item 1A. Risk Factors,”beginning on page 48 of this Quarterly Report and elsewhere in thisQuarterly Report and in other documents we file with the U.S. Securitiesand Exchange Commission, or SEC. All subsequent written and oralforward-looking statements by or attributable to us or persons acting on ourbehalf are expressly qualified in their entirety by such factors.*

 

*OmniVision, OmniPixel andTrueFocus are registered trademarks of OmniVision Technologies, Inc. theOmniVision logo, CameraChip, CameraCube, OmniBSI, OmniBSI-2, OmniPixel2,OmniPixel3, OmniPixel3-HS, OmniQSP and SquareGA are trademarks of OmniVisionTechnologies, Inc. Wavefront Coded is a registered trademark of OmniVisionCDM Optics, Inc., a wholly-owned subsidiary of OmniVision Technologies, Inc.Wavefront Coding is a trademark of OmniVision CDM Optics, Inc.*

 

**Overview**

 

Wedesign, develop and market high-performance, highly integrated andcost-efficient semiconductor image-sensor devices. Our main products,image-sensing devices which we refer to as CameraChipTM image sensors, capturean image electronically and are used in a number of consumer and commercialmass-market applications. Our CameraChip image sensors are manufactured usingthe complementary metal oxide semiconductor, or CMOS, fabrication process andare predominantly single-chip solutions that integrate several distinctfunctions including image capture, image processing, color processing, signalconversion and output of a fully processed image or video stream. Recently, wehave also integrated our CameraChip image sensors with wafer-level optics,which we refer to as CameraCubeTM imaging devices. Our CameraCube imaging deviceis a small footprint, total camera solution that we believe will enable thefurther miniaturization of camera products. We believe that our highlyintegrated image sensors and imaging devices enable camera device manufacturersto build high quality camera products that are smaller, less complex, morereliable, more cost-effective and more power-efficient than cameras usingtraditional charge-coupled devices, or CCDs.

 

## ***Technology***

## *** ***

In February 2008,we announced the introduction of our OmniPixel3-HSTM architecture. It is ourmost advanced generation of front side illumination, or FSI, OmniPixel®architecture. With OmniPixel3-HS, light is captured on the front side of thechip, and it forms the basis of our 1.75 μm FSI imaging pixel.

 

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,is built using an advanced 1.4 μm pixel. We believe we are the first imagesensor company to announce a viable process for the mass production of BSIsensors.

 

28

----

Table of Contents

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

 

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

 

In February 2009,we announced the introduction of our CameraCube technology. This is athree-dimensional, reflowable, total camera solution that combines the fullfunctionality of our CameraChip image sensors and wafer-level optics in one compact,small-footprint package. Our CameraCube devices can be soldered directly toprinted circuit boards, with no socket or insertion requirements. We believeour CameraCube solution can streamline the mobile phone manufacturing process,thus resulting in lower cost and faster time-to-market for our customers.  Although currently our customers primarilyuse our Camera Cube devices as secondary cameras in mobile handsets, goingforward we anticipate that they will be used as the primary camera in mobilehandsets.

 

In February 2010,we announced the introduction of our new OmniBSI-2TM architecture. The OmniBSI-2architecture represents our second-generation BSI technology, and forms thebasis of our first 1.1 μm imaging pixel, built on the advanced 300 mmcopper process at Taiwan Semiconductor Manufacturing Company Limited, or TSMC.

 

Giventhe rapidly changing nature of our technology, there can be no assurance thatwe will not encounter delays or other unexpected production or performanceissues with future products. During the early stages of production, productionyields and gross margins for products based on new technology are typicallylower than those of established products.

 

## ***New Products***

## *** ***

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 video graphics array, or 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 high-definition, or HD, camcorder markets. Itcombines 9-megapixel photography with 1080p HD video on a single chip,eliminating the trade-offs between high quality still photography and highperformance HD video. The OV9810 is capable of operating at 8.9 frames persecond, or FPS, in full 9-megapixel resolution, and offers true HD quality, or1080p, 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 National Television System Committee/phase alternateline, or NTSC/PAL, formats to directly interface with TVs and LCD screens. Withthe ability to capture images in the most challenging lighting conditions,OV7960 can be used in both professional closed-circuit TV applications andautomobile 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 signal processor withfeatures such as lens correction, auto exposure, auto white balance, and autoflicker. The last device is the OV5653. It is also based on our latest1.75 μm OmniBSI architecture, but designed specifically for the DSC anddigital video market. In video mode, OV5653 can deliver 720p at 60 FPS and fullHD 1080p at 30 FPS.

 

29

----

Table ofContents

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

 

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 quarter-VGA, or QVGA,resolution.

 

In August 2009,we introduced the OV2710, a 1/3-inch 2-megapixel image sensor with 3 μmOmniPixel3-HS pixels. The OV2710 is a native 1080p HD image sensor with alow-light performance of 3,300 mV/(Lux-sec), dark current of20 mV/sec and a dynamic range of 72dB. This allows the OV2710 to operatein low-light situations down to 15 lux and below, enabling it to deliverhigh-end video conferencing and recording capabilities in a wide variety of applicationsincluding notebooks, netbooks, PC cameras, digital video camcorders, DSCs,mobile phones and other ultra portable devices.

 

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

 

In October 2009,we introduced the OV7675, a 1/9-inch VGA image sensor with 2.5 μmOmniPixel3-HS pixels. This image sensor is designed for the entry-level andmainstream mobile phone markets. The OV7676’s small form factor also enablesultra-thin camera modules that notebook, netbook and webcam manufacturersrequire. This device has a low-light sensitivity of 1,800 mV/(Lux-sec) andis capable of operating at 30 FPS in full resolution.

 

In January 2010,we launched the OV14810, a 14.6-megapixel image sensor built on our 1.4 μmOmniBSI technology. The 1/2.33-inch OV14810 has an active array of 4,416 x3,312 BSI pixels, operating at 15 FPS in full resolution, or delivering full1080p HD video at 60 FPS, using a binning feature to achieve highersensitivity. In full HD video mode, the sensor also provides additional pixelsfor electronic image stabilization. The new OV14810 allows consumers to use onedevice for capturing both photo and HD video moments.

 

In January 2010,we also added the new OVM7692 VGA CameraCube solution to our portfolio ofCameraCube imaging devices. The OVM7692 is a complete VGA camera solutionincluding digital video port, or DVP, and mobile industry processor interface,or MIPI, serial output interface support, automatic luminance detection and anintegrated electromagnetic interference, or EMI, solution. The OVM7692 featuresour proprietary OmniPixel3-HS architecture. The OVM7692’s compact size (2.8 x3.2 x 2.5 mm) also ranks among the smallest VGA modules in the industry.

 

Finally,in January 2010, we also introduced the OV9726, our first native HD videosensor built on our 1.75 μm OmniBSI pixel technology. The compact 1/6-inchOV9726 delivers 720p HD video at 30 FPS, making it ideal for high-performanceHD cameras in notebooks, netbooks, webcams, mobile phones, portable mediaplayers, or PMPs, and other mobile entertainment devices. The OV9726 achievesexcellent low-light sensitivity of 1,480 mV/lux-sec in the smallest availableform factor of 1/6.5-inch.

 

## ***Joint Venture withTaiwan Semiconductor Manufacturing Company Limited***

## *** ***

On October 29,2003, we entered into an agreement with TSMC, to form VisEra TechnologiesCompany, Ltd., or VisEra, a joint venture in Taiwan, for the purposes ofproviding certain manufacturing and automated final testing services related toCMOS image sensors. In August 2005, under an amendment to the original2003 joint-venture agreement, we and TSMC formed VisEra Holding Company, orVisEra Cayman, a company incorporated in the Cayman Islands, and VisEra becamea subsidiary of VisEra Cayman. We and TSMC have equal interests in VisEraCayman.

 

ThroughApril 2007, our contribution to VisEra and VisEra Cayman totaledapproximately $51.6 million, effectively meeting our commitment under the termsof a January 2007 amendment to the joint-venture agreement, in which weand TSMC have agreed to commit a total of $112.9 million to the joint venture.We have not made any subsequent contributions into VisEra and VisEra Cayman.

 

30

----

Table ofContents

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

 

We initially accounted for our investment in VisEraunder the equity method. Between August 1, 2005 and December 31,2006, VisEra was considered a variable interest entity, or VIE, and we were theprimary beneficiary, as defined under the accounting guidance for consolidatingVIEs. Accordingly, we consolidated VisEra’s operating results. On January 1,2007, VisEra ceased to meet the definition of a VIE. Consequently, wedeconsolidated VisEra on January 1, 2007, and has 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 semiconductor foundryservices, to establish Silicon Optronics, Inc., or SOI, a joint venture inTaiwan. The purpose of SOI is to conduct manufacturing, marketing and sellingof certain of our legacy products. Toward the end of fiscal 2009, SOI began toinvestigate the market potential of touch panels that track touches withoptical sensors. These devices compete with the current resistive andcapacitive touch panels. 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 January 31, 2010, we owned 43.8% of SOI.See Note 6 — “*ConsolidatedAffiliate — Silicon Optronics, Inc.”*andNote 17 — “*Related Party Transactions”*to our condensed consolidated financial statements.

 

## ***Capital Resources***

## *** ***

As of January 31,2010, we held approximately $274.5 million in cash and cash equivalentsand approximately $68.3 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 February 2007,our board of directors approved a stock repurchase program that provided forthe repurchase of up to $100.0 million of our outstanding commonstock.  Our board of directors ended thisprogram in November 2009. Prior to the termination of this program, we hadcumulatively repurchased 6,671,000 shares of our common stock for anaggregate cost of approximately $99.1 million. See Note 14 *— “TreasuryStock”*to our condensed 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.

 

During the second half of our fiscal 2009 and through the first quarterof our fiscal 2010, general domestic and global economic conditions werenegatively 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 resulted in our facing one of themost challenging periods in our history. In particular, we believe consumersand businesses in markets into which we sold our products had reduced spendingin response to the tightening of lending standards by financial institutions,negative financial news and the continued uncertainty in the global economy.This had negatively affected demand for all consumer electronic products,security products and products for the automotive industry. Consequently, theoverall demand for image sensors also decreased during that time frame. Thisdecrease in demand had a significant impact on our revenues, results ofoperations and cash flows and overall business.

 

31

----

Table ofContents

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

 

Sincethen, we continued to see early signs suggesting that some major economies arereturning to positive growth. We also believe our sales trend will improve,beginning with our first quarter of fiscal 2011. However, it is uncertainwhether the current resumption of economic growth will be sustained. If theeconomic recovery slows down or even dissipates, our business, financialcondition and results of operations and cash flows could be further materiallyand adversely affected.

 

## ***Market Environment***

## *** ***

Wesell our products worldwide directly to original equipment manufacturers, orOEMs, which include branded customers and contract manufacturers, and valueadded resellers, or VARs, and indirectly through distributors. In order toensure that we address all available markets for our image sensors, we organizeour marketing efforts into end-use market groups, each of which concentrates ona particular product or, in some cases, customer within a product group. Thuswe have marketing teams that address the mobile phone market, the notebook andwebcam market, the DSC market, the security and surveillance market, theentertainment market, and the automotive and medical markets.

 

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

 

The overwhelming majority of our sales depend on decisions by theengineering designers for manufacturers of products that incorporate imagesensors to specify one of our products rather than one made by a competitor. Inmost cases, the decision to specify a particular image sensor requiresconforming other specifications of the product to the chosen image sensor andmakes subsequent changes both difficult and expensive. Accordingly, the abilityto timely produce and deliver reliable products in large quantities is a keycompetitive differentiator. Since our inception, we have shipped more than1.6 billion image sensors, including approximately 130 million in thethree months ended January 31, 2010. We believe that these quantitiesdemonstrate the continuing capabilities of our production system, including oursources of offshore fabrication.

 

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

 

Toincrease and enhance our production capabilities, we work closely with TSMC,our principal wafer supplier and one of the largest wafer fabrication companiesin the world, to increase, as necessary, the number of its fabricationfacilities, at which our products can be produced. VisEra, our joint venturewith TSMC, and our investments in two key back-end packaging suppliers are partof a broad strategy to ensure that we have sufficient back-end capacity for theprocessing of our image sensors in the various formats required by ourcustomers.

 

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.

 

Sinceour end-user customers market and sell their products worldwide, our revenuesby geographic location are not necessarily indicative of the geographicdistribution of end-user sales, but rather indicate where the products and/ortheir components are manufactured or sourced. The revenues we report bygeography are based on the country or region in which our customers issue theirpurchase orders to us.

 

32

----

Table ofContents

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

 

Manyof the products using our image sensors, such as mobile phones, notebook andwebcams, DSCs and cameras for entertainment applications, are consumerelectronics goods. These mass-market camera devices generally have seasonalcycles which historically have caused the sales of our customers to fluctuatequarter-to-quarter. In addition,****since a verylarge number of the manufacturers who use our products are located in China,Hong Kong and Taiwan, the pattern of demand for our image sensors has beenincreasingly influenced by the timing of the extended lunar or Chinese New Yearholiday, a period in which the factories which use our image sensors generallyclose. Consequently, demand for our image sensors has historically beenstronger in the second and third quarters of our fiscal year and weaker in thefirst and fourth quarters of our fiscal year. However, because of the globaleconomic downturn, we experienced weaker than normal conditions in all of ourmarkets in the third and fourth quarters of fiscal 2009. Recently, with the return to profitability inour business during the second and third fiscal quarter of 2010, we believe thehistorical seasonal cycle to our business has returned. In addition to beingstronger than our first and fourth fiscal quarters, historically our grossrevenues in our second and third fiscal quarters have typically beencomparable. Recently, however, an increase in end-customer demand in NorthAmerica related to the holiday season accelerated the timing of our customers’purchases from our third fiscal quarter to our second fiscal quarter. If thistrend continues in future years, it could result in the quarter-to-quarterfluctuation of our revenues differing from our historical seasonal cycles.

 

Webelieve that the market opportunity represented by mobile phones remains verylarge, although the opportunities presented will be deferred because of theuncertainty surrounding the sustainability of the current global economicrecovery. We also believe that, like the DSC market, mobile phone and notebookand webcam demand will not only continue to shift toward higher resolutions,but also will increasingly fragment into multiple market segments withdiffering product attributes. For example, we see the further expansion of thesmartphone segment within the mobile phone market and the recent introductionof the netbook product segment within the notebook computer market. In addition,there is increased demand for customization, and several different interfacestandards are coming to maturity. All of these trends will require thedevelopment 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.

 

Incommon with many other semiconductor products and as a response to competitivepressures, the average selling prices, or ASPs, of image-sensor products havedeclined steadily since their introduction, and we expect ASPs to continue todecline in the future. Some of this ASP decline may be offset by the adoptionof some of our newer and higher resolution products. Also, we recentlyintroduced our new CameraCube products. Depending on the adoption rate and unitvolume, we believe these products may partially mitigate the rate of ASPdecline. In order to maintain our gross margins, we and our suppliers must workcontinuously to lower our manufacturing costs and increase our productionyields, and in order to maintain or grow our revenues, we need to increase thenumber of units we sell by a large enough amount to offset the effect ofdeclining ASPs. In addition, if we are unable to timely introduce new productsthat can take advantage of smaller process geometries or new products thatincorporate more advanced technology and include more advanced features thatcan be sold at higher ASPs, our gross margin may decline.

 

33

----

Table ofContents

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

 

Giventhe rapidly changing nature of our technology, there can be no assurance thatwe 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 uncertainty, 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***

## *** ***

Forshipments to customers without agreements that allow for returns or credits,principally OEMs and VARs, we recognize revenue using the “sell-in” method.Under this method, we recognize revenue when title passes to the customerprovided that we have received a signed purchase order, the price is fixed ordeterminable, title and risk of loss has transferred to the customer, collectionof resulting receivables is considered reasonably assured, product returns arereasonably estimable, there are no customer acceptance requirements and thereare no remaining material obligations. We provide for future returns ofpotentially defective products based on historical experience at the time werecognize revenue. For cash consideration given to customers for which we donot receive a separately identifiable benefit or cannot reasonably estimatefair value, we record the amounts as reductions of revenue.

 

Forshipment of products sold to distributors under agreements allowing for returnsor credits, title and the risk of ownership to the products transfer to thedistributor upon shipment, and the distributor is obligated to pay for the productswhether or not the distributor has sold them at the time payment is due. Underthe terms 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.”

 

Inorder to determine whether collection is probable, we assess a number offactors, 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.

 

Inaddition, we recognize revenue from the performance of services to a limitednumber of our customers, under either the completed-contract or thepercentage-of-completion methods. The percentage-of-completion method ofaccounting is used for cost reimbursement-type contracts, where revenuesrecognized are that portion of the total contract price equal to the ratio ofcosts expended to date to the anticipated final total costs based on currentestimates of the costs to complete the projects. The amount of service-relatedrevenue has not been material in any of the periods presented. At SOI, werecognize the limited amount of SOI-related service revenue on acompleted-contract basis.

 

## ***CriticalAccounting Policies and Estimates***

## *** ***

For adiscussion of our critical accounting policies, please refer to the discussionin our Annual Report on Form 10-K for the fiscal year ended April 30,2009. There have been no material changes in any of our critical accountingpolicies since April 30, 2009.

 

34

----

Table of Contents

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

 

**Resultsof Operations**

 

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

 
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **January 31,**   | ** ** | **January 31,**  | ** ** |
| ** **                                                            | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                              |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                                      |       | 75.4                   |       | 77.6                  |       | 76.2 |   | 75.4 |   |
| Gross margin                                                          |       | 24.6                   |       | 22.4                  |       | 23.8 |   | 24.6 |   |
|                                                                  |       |                   |       |                  |       |   |   |   |   |
| Operating expenses:                                                   |       |                   |       |                  |       |   |   |   |   |
| Research, development and related                                     |       | 13.0                   |       | 26.0                  |       | 12.9 |   | 15.4 |   |
| Selling, general and administrative                                   |       | 10.0                   |       | 17.4                  |       | 10.3 |   | 11.5 |   |
| Goodwill impairment                                                   |       | —                 |       | —                |       | — |   | 1.8 |   |
| Total operating expenses                                              |       | 23.0                   |       | 43.4                  |       | 23.2 |   | 28.7 |   |
|                                                                  |       |                   |       |                  |       |   |   |   |   |
| Income (loss) from operations                                         |       | 1.6                    |       | (21.0                 | )          | 0.6 |   | (4.1 | ) |
| Interest income (expense), net                                        |       | (0.1                   | )          | 0.5                   |       | (0.1 | ) | 0.5 |   |
| Other income (expense), net                                           |       | 1.9                    |       | (3.7                  | )          | 0.8 |   | (0.9 | ) |
| Income (loss) before income taxes                                     |       | 3.4                    |       | (24.2                 | )          | 1.3 |   | (4.5 | ) |
|                                                                  |       |                   |       |                  |       |   |   |   |   |
| Provision for (benefit from) income taxes                             |       | 0.3                    |       | (1.2                  | )          | 0.6 |   | (0.2 | ) |
| Net income (loss)                                                     |       | 3.1                    |       | (23.0                 | )          | 0.7 |   | (4.3 | ) |
| Net loss attributable to noncontrolling interest                      |       | (0.1                   | )          | (0.3                  | )          | — |   | (0.2 | ) |
| Net income (loss) attributable to OmniVision  Technologies, Inc. |       | 3.2                    | %          | (22.7                 | )%         | 0.7 | % | (4.1 | )% |

 

*Three Months Ended January 31,2010 as Compared to Three Months Ended January 31, 2009*

 

### **Revenues**

### ** **

We derivesubstantially all of our revenues from the sale of our image-sensor productsthat are used in a wide variety of consumer and commercial mass-marketapplications including mobile phones, notebooks and personal computers,security and surveillance cameras, DSCs, entertainment devices, automotive andmedical products. Revenues for the three months ended January 31, 2010increased by 96.1% to $156.9 million from $80.0 million for the threemonths ended January 31, 2009. The increase in revenues was due to a136.7% increase in unit sales of our image-sensor products, reflecting arecovery in product demand from the prior year period, when the economicdownturn had negatively affected such demand. The increase in revenues was partiallyoffset by a 17.5% decrease in our average selling prices, or ASPs, a result ofcompetitive pricing pressures.

 

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

## *** ***

We sell ourimage-sensor products either directly to OEMs and VARs or indirectly throughdistributors. The percentage of revenues from sales to OEMs and VARs was lowerin the three months ended January 31, 2010 than in the prior-year period.We expect that the percentage of revenues from sales through OEMs and VARs willvary from year to year in response to changes in the make-up of our customerlist. The gross margin that we earn on sales to OEMs and VARs or throughdistributors is not significantly different. The following table shows thepercentage of revenues from sales to OEMs and VARs and distributors in thethree months ended January 31, 2010 and 2009:

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **January 31,**   | ** ** |
| ** **    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| OEMs and VARs |       | 54.9                   | %          | 63.6 | % |
| Distributors  |       | 45.1                   |       | 36.4 |   |
| Total         |       | 100.0                  | %          | 100.0 | % |

 

*OEMs andVARs.*   Inthe three months ended January 31, 2010, one OEM customer accounted forapproximately 11.0% of our revenues. In the three months ended January 31,2009, two OEM customers accounted for approximately 15.7% and 15.0% of ourrevenues. For the three months ended January 31, 2010 and 2009, noother OEM or VAR customer accounted for 10% or more of our revenues.

 

35

----

Table of Contents

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

 

*Distributors.*   In the three monthsended January 31, 2010, one distributor customer accounted forapproximately 24.6% of our revenues. In the three months ended January 31,2009, two distributor customers accounted for approximately 15.4% and 14.4% ofour revenues. For the three months ended January 31, 2010 and 2009, noother distributor customer accounted 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 January 31, 2010 and 2009:

 
| ** **     | ** ** | **Three Months Ended** | ** ** |
|----------------|------------|------------------------|------------|
| ** **     | ** ** | **January 31,**   | ** ** |
| ** **     | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Domestic sales |       | 0.5                    | %          | 16.2 | % |
| Foreign sales  |       | 99.5                   |       | 83.8 |   |
| 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 the preponderanceof Asia-Pacific manufacturers and the fact that virtually all productsincorporating our image-sensor products are sold globally, we believe that thegeographic distribution of our sales does not accurately reflect the geographicdistribution of sales into end-user markets of products which incorporate ourimage sensors.

 

Our domestic salesas a percentage of revenues declined for the three months ended January 31,2010 to 0.5% from 16.2% for the three months ended January 31, 2009. Ourrevenues as reported on a geographical basis reflect the country or region inwhich our customers issue their purchase orders. This decline reflected achange in purchase order procedures by one of our customers which changed thelocation of its purchase order issuance from their U.S. office during the threemonths ended January 31, 2009 to its foreign office during the threemonths ended January 31, 2010.

 

### **Gross Profit**

### ** **

Our gross marginin the three months ended January 31, 2010 increased to 24.6% from 22.4%for the three months ended January 31, 2009. The year-over-year increasein gross margin reflected: a reduction in our production costs; a decline inthe write-down of inventories which totaled approximately $3.4 million during the threemonths ended January 31,2010, as compared to$5.9 million in the similarprior year period; and the increase in the sales of previously written-down products in the three monthsended January 31, 2010, which totaled $2.4 million as compared to$0.6 million during the same period in the prior fiscal year. Theyear-over-year increase was partially offset by the 17.5% decrease in our ASPs as a result of competitive pricingpressures. We recorded approximately $0.8 million in stock-based compensationexpense to cost of revenues during each of the three-month periods ended January 31,2010 and 2009, respectively.

 

**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. Research,development and related expenses may fluctuate significantly as the number ofnew designs we release to the foundry can fluctuate from period to period.Research, development and related expenses for the three months ended January 31,2010 decreased to approximately $20.4 million from approximately$20.8 million for the three months ended January 31, 2009. As apercentage of revenues, research, development and related expenses for the threemonths January 31, 2010 and 2009 represented 13.0% and 26.0%,respectively.

 

36

----

Table of Contents

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

 

The decrease inresearch, development and related expenses of approximately $398,000, or 1.9%,for the three months ended January 31, 2010 from the similar period in theprior year resulted from a $0.9 million decrease in office and facilitiesexpenses, a $478,000 decrease in legal expense primarily related to patentregistration activities, a $381,000 decrease in stock-based compensationexpense and a $262,000 decline in software expenses, partially offset by an$0.9 million increase in non-recurring engineering expenses related to newproduct development, a $364,000 increase in depreciation and amortizationexpenses and a $334,000 increase in salary and payroll-related expenses. Weanticipate that research, development and related expenses may decrease slightlyfor our fourth quarter of fiscal 2010.

 

**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 January 31, 2010increased to approximately $15.6 million from $13.9 million for thethree months ended January 31, 2009. As a percentage of revenues, selling,general and administrative expenses for the three months ended January 31,2010 and 2009 represented 10.0% and 17.4%, respectively.

 

The increase inselling, general and administrative expenses of approximately$1.6 million, or 11.7%, for the three months ended January 31, 2010from the similar period in the prior year resulted primarily from a$1.1 million increase in legal expenses related to patent defense, a$0.8 million increase in commissions due to an increase in sales to ourdistributors and sales representatives, a $245,000 increase in salary andpayroll-related expenses, partially offset by a $206,000 decrease in marketingexpenses, and a $194,000 decrease in fees for outside services. We anticipatethat our selling, general and administrative expenses may remain unchanged aswe continue to control discretionary expenditures.

 

**InterestIncome (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 an interest expense, net, of approximately $145,000for the three months ended January 31, 2010 from interest income, net, of$424,000 in the prior year period. The $0.6 million decline in interest income(expense), net, resulted from a $0.6 million reduction in interest income and a$51,000 reduction in interest expense primarily associated with long-termborrowings for the three months ended January 31, 2010 as compared to thecorresponding period in the prior year. The decline in interest income was theresult of lower interest rates on interest-bearing accounts than in the sameperiod in the prior year.

 

**Other Income (Expense), Net**

 

Other income(expense), net, for the three months ended January 31, 2010 totaled $2.9million. Other income (expense), net, for the three months ended January 31,2010 included a $2.2 million gain that represented the difference between996,250 shares of common stock of Tong Hsing Electronic Industries,Limited, or Tong Hsing, that we received in connection with Tong Hsing’sacquisition of ImPac Technology Co., Ltd., or ImPac, and the carrying value ofour investment in ImPac, and a $0.6 million gain that represented ourportion of the net income recorded by China WLCSP Limited, or WLCSP, which weaccount for under the equity method of accounting, and a $194,000 gain on theinterest rate swap agreements related to the mortgage on our complex of fourbuildings located in Santa Clara, California, or Santa Clara Property, and a$211,000 loss that represented our portion of the net loss recorded by ImPac,prior to its acquisition by Tong Hsing. Other income (expense), net, for thethree months ended January 31, 2009 included a $2.7 million loss onthe interest rate swap agreements related to the mortgage on our Santa ClaraProperty, a $150,000 loss that represented our portion of the net lossrecorded by ImPac and a $98,000 exchange loss, partially offset by a $39,000gain that represented our portion of the net income recorded by WLCSP.

 

**Provisionfor Income Taxes**

 

We generatedapproximately $5.3 million in income before income taxes and$19.3 million in loss before income taxes for the three months ended January 31,2010 and 2009, respectively. We recorded a provision for income taxes of$467,000 and a benefit from income taxes of $0.9 million for the threemonths ended January 31, 2010 and 2009, respectively, resulting ineffective tax rates of 8.9% and 4.8% for the respective periods.

 

37

----

Table of Contents

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

 

Our quarterlyincome taxes reflect an estimate of the corresponding fiscal year’s annualeffective tax rate and include, when applicable, adjustments from discrete taxitems. We excluded from the current and prior fiscal years’ overall estimationof annual effective tax rate one jurisdiction with losses for which no benefitcan be realized. For the current fiscal year’s overall estimation of annualeffective tax rate, we also excluded the tax effect associated with a one-timestock option exchange program for employees to exchange eligible stock optionsfor restricted stock units. See Note 12 — *“EmployeeStock Purchase, Equity Incentive and Stock Option Plans”* to ourcondensed consolidated financial statements. For the exchanged stock options,we recorded $2.1 million of additional deferred tax assets through adiscrete adjustment to the provision for income taxes for the three monthsended January 31, 2010. Other discrete adjustments to the Company’sprovision for income taxes for the three months ended January 31, 2010included unfavorable impact from foreign exchange losses associated with ourunrecognized tax benefits, adjustments for differences between our finalizedtax return and the provision for income taxes recorded for fiscal 2009,and other adjustments to tax provisions from prior years.

 

It is reasonablypossible that the balance of gross unrecognized tax benefits will decrease by$10.3 million within the next twelve months due to the lapse of applicablestatute of limitations in multiple jurisdictions in which we operated. Duringthe three months ended January 31, 2010, we accrued an additional$0.5 million of interest related to our unrecognized tax benefits.

 

**Net LossAttributable to Noncontrolling Interest**

 

Net lossattributable to noncontrolling interest for the three months ended January 31,2010 and 2009 was $143,000 and $235,000, respectively, which represents therespective 56.2% and 56.1% interest that we did not own in the net loss of SOI.

 

*Nine Months Ended January 31,2010 as Compared to Nine Months Ended January 31, 2009*

 

### **Revenues**

### ** **

Revenues for thenine months ended January 31, 2010 increased by 6.6% to approximately$445.8 million from $418.3 million for the nine months ended January 31,2009. The increase in revenues was due to a 29.4% increase in the unit sales ofour image sensor products, reflecting a recovery in product demand from theprior year period, when the economic downturn had negatively affected suchdemand. This was partially offset by a 17.7% decrease in our ASPs, a result ofcompetitive pricing pressures.

 

## ***Revenues from Sales toOEMs and VARs as Compared to Distributors***

## *** ***

The following tableshows the percentage of revenues from sales to OEMs and VARs and distributorsin the nine months January 31, 2010 and 2009:

 
| ** **    | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **January 31,**  | ** ** |
| ** **    | ** ** | **2009**              | ** ** | **2008** | ** ** |
| OEMs and VARs |       | 53.1                  | %          | 59.9 | % |
| Distributors  |       | 46.9                  |       | 40.1 |   |
| Total         |       | 100.0                 | %          | 100.0 | % |

 

*OEMs andVARs.*   Inthe nine months ended January 31, 2010, one OEM customer accounted forapproximately 11.6% of our revenues. In the nine months ended January 31,2009, two OEM customers accounted for approximately 11.1% and 10.3% of ourrevenues. For the nine months ended January 31, 2010 and 2009, no otherOEM or VAR customer accounted for 10% or more of our revenues.

 

*Distributors.*   In the nine monthsended January 31, 2010, one distributor customer accounted forapproximately 26.8% of our revenues. In the nine months ended January 31,2009, one distributor customer accounted for approximately 22.5% of ourrevenues. For the nine months ended January 31, 2010 and 2009, no otherdistributor customer accounted for 10% or more of our revenues.

 

38

----

Table of Contents

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

 

## ***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 nine months ended January 31, 2010 and 2009:

 
| ** **     | ** ** | **Nine Months Ended** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **January 31,**  | ** ** |
| ** **     | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Domestic sales |       | 0.5                   | %          | 7.2 | % |
| Foreign sales  |       | 99.5                  |       | 92.8 |   |
| 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 nine months ended January 31, 2010 was 23.8%, a decrease from 24.6%for the nine months ended January 31, 2009. The principal contributor tothe year-over-year decrease in gross margin was the 17.7% decrease in ASP. Thiswas partially offset by: a reduction in our production costs; a decline in thewrite-down of inventories which totaled approximately $13.5 million duringthe nine months ended January 31, 2010, as compared to $17.5 millionin the nine months ended January 31, 2009; and the increase in the salesof previously written-down products in the nine months ended January 31,2010 which totaled $8.7 million as compared to $4.2 million in thesimilar prior year period. In the nine months ended January 31, 2010, werecorded approximately $2.2 million in stock-based compensation expense tocost of revenues, as compared to $2.4 million in the nine months ended January 31,2009.

 

**Research, Development and RelatedExpenses**

 

Research,development and related expenses for the nine months ended January 31,2010 decreased to approximately $57.7 million from approximately$64.3 million for the nine months ended January 31, 2009. As apercentage of revenues, research, development and related expenses for the ninemonths ended January 31, 2010 and 2009 represented 12.9% and 15.4%,respectively.

 

The decrease inresearch, development and related expenses of approximately $6.6 million,or 10.3%, for the nine months ended January 31, 2010 from the similarprior year period resulted primarily from a $2.0 million decrease innon-recurring engineering expenses related to new product development, a$1.5 million decrease in legal expenses primarily related to patentregistration activities, a $1.3 million decrease in stock-basedcompensation expense, a $1.3 million decrease in office and facilityexpenses, a $477,000 decrease in travel-related expenses and a $385,000decrease in salary and payroll-related expenses, partially offset by a$0.6 million increase in depreciation and amortization expenses.

 

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

 

Selling, generaland administrative expenses for the nine months ended January 31, 2010decreased to approximately $46.0 million from $48.2 million for thenine months ended January 31, 2009. As a percentage of revenues, selling,general and administrative expenses for the nine months ended January 31,2010 and 2009 represented 10.3% and 11.5%, respectively.

 

The decrease inselling, general and administrative expenses of approximately$2.3 million, or 4.7%, for the nine months ended January 31, 2010from the similar period in the prior year resulted primarily from a$1.9 million decrease in fees for outside services, a $0.8 milliondecrease in travel-related expenses, a $0.7 million decrease in office andfacility expenses, a $0.7 million decrease in marketing expenses, a$408,000 decrease in stock-based compensation expense and a $245,000 decreasein software expenses, partially offset by a $2.1 million increase in legalexpenses related to patent defense and a $0.6 million increase indepreciation expenses.

 

39

----

Table of Contents

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

 

**GoodwillImpairment**

 

During the secondquarter of fiscal 2009, based on a combination of factors, including thesignificant decline in our market capitalization and the then-existing globaleconomic downturn, we concluded that there were sufficient factualcircumstances for interim impairment analyses. Based on the analyses, we recordeda non-cash goodwill impairment charge of $7.5 million, or 1.8% ofrevenues, which we included in “Goodwill impairment” for the nine months ended January 31,2009.

 

**InterestIncome (Expense), Net**

 

Interest income(expense), net, for the nine months ended January 31, 2010 declined to aninterest expense, net, of approximately $0.6 million from interest income,net, of $2.2 million for the nine months ended January 31, 2009. Thereduction in interest income (expense), net, for the nine months ended January 31,2010 as compared to the corresponding period in the prior year was the resultof a $2.4 million reduction in interest income as a result of lowerinterest rates on our interest-bearing accounts and a $382,000 increase ininterest expense associated with long-term borrowings.

 

**Other Income (Expense), Net**

 

Other income(expense), net, for the nine months ended January 31, 2010 totaled$3.7 million. Other income (expense), net, for the nine months ended January 31,2010 included a $2.2 million gain that represented the difference between996,250 shares of common stock of Tong Hsing that we received in connectionwith its acquisition of ImPac and the carrying value of our investment inImPac, a $1.3 million gain, representing our portion of the net income recordedby WLCSP, a $0.8 million gain on interest rate swap agreements related tothe mortgage on the Santa Clara Property, partially offset by a$0.8 million loss that represented our portion of the net loss recorded byImPac, prior to its acquisition by Tong Hsing. Other income (expense), net, forthe nine months ended January 31, 2009 totaled $(3.7 million). Otherincome (expense), net, for the nine months ended January 31, 2009 includeda $0.9 million exchange loss, a $0.7 million loss that represented ourportion of the net loss recorded by ImPac and a $2.9 million loss oninterest rate swap agreements related to the mortgage on the Santa ClaraProperty, partially offset by a gain of $451,000, representing our portion ofthe net income recorded by WLCSP.

 

**Provisionfor Income Taxes**

 

We generated$5.6 million in income before income taxes for the nine months ended January 31,2010 and approximately $18.9 million in loss before income taxes for thenine months ended January 31, 2009. We recorded a provision for incometaxes of approximately $2.6 million and a benefit from income taxes ofapproximately $1.0 million for the nine months ended January 31, 2010and 2009, respectively, resulting in effective tax rates of 46.8% and 5.3% forthe respective periods.

 

Our quarterlyincome taxes reflect an estimate of the corresponding fiscal year’s annualeffective tax rate and include, when applicable, adjustments from discrete taxitems. We excluded from the current and prior fiscal years’ overall estimationof annual effective tax rate one jurisdiction with losses for which no benefitcan be realized. For the current fiscal year’s overall estimation of annualeffective tax rate, we also excluded the tax effect associated with a one-timestock option exchange program for employees to exchange eligible stock optionsfor restricted stock units.  SeeNote 12 — “*Employee Stock Purchase,Equity Incentive and Stock Option Plans”* to our condensedconsolidated financial statements. For the exchanged stock options, we recorded$2.1 million of additional deferred tax assets through a discreteadjustment to the provision for income taxes for the nine months ended January 31,2010. Other discrete adjustments to the Company’s provision for income taxesfor the nine months ended January 31, 2010 included unfavorable impactfrom foreign exchange losses associated with our unrecognized tax benefits,adjustments for differences between our finalized tax return and the provisionfor income taxes recorded for fiscal 2009, and other adjustments to taxprovisions from prior years.

 

During the ninemonths ended January 31, 2009, the Emergency Economic Stabilization Act of2008 reinstated the U.S. federal research and development tax credit,retroactive to January 1, 2008. As a result, our benefit for income taxesfor the nine months ended January 31, 2009 reflected a $0.6 milliontax benefit related to fiscal 2008 research and development expenses. Ourbenefit from income taxes for the nine months ended January 31, 2009 alsoreflected the unfavorable impact of the $7.5 million goodwill impairmentcharge, partially offset by the favorable impact of foreign exchange gainsrelated to our unrecognized tax benefits.

 

40

----

Table of Contents

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

 

It is reasonablypossible that the balance of gross unrecognized tax benefits will decrease by$10.3 million within the next twelve months due to the lapse of applicablestatute of limitations in multiple jurisdictions that we operated in.  During the nine months ended January 31,2010, we accrued an additional $1.4 million of interest related to ourunrecognized tax benefits.

 

**Net LossAttributable to Noncontrolling Interest**

 

Net lossattributable to noncontrolling interest for the nine months ended January 31,2010 and 2009 was $199,000 and $0.6 million, respectively, whichrepresents the respective 56.2% and 56.1% interest that we did not own in thenet loss of SOI.

 

**Liquidityand Capital Resources**

 

Our principalsources of liquidity at January 31, 2010 consisted of cash, cashequivalents and short-term investments totaling $342.8 million.

 

## ***Liquidity***

## *** ***

Our workingcapital increased to $415.0 million as of January 31, 2010 ascompared to $380.3 million as of April 30, 2009. Our working capitalincreased as a result of: a $51.4 million increase in short-terminvestments; a $23.7 million increase in accounts receivable, net,resulting from a revenue increase of $67.9 million for the three monthsended January 31, 2010 from the three months ended April 30, 2009; a$16.7 million increase in cash and cash equivalents primarily due to cashprovided by operating activities; a $4.8 million increase in inventories;a $4.1 million increase in refundable and deferred income taxes; and a$0.7 million decrease in income taxes payable. These increases in workingcapital were partially offset by: a $55.1 million increase in accountspayable resulting from an increase in production activities; a$7.0 million increase in accrued liabilities and a $3.6 millionincrease in deferred revenues, less cost of revenues.

 

In March 2007,we purchased the Santa Clara Property. In connection with the purchase, weobtained from a domestic bank a mortgage loan with a principal amount of $27.9million, or the Mortgage Loan, and a term loan with a principal amount of$12.0 million, or the Term Loan. As of January 31, 2010, the principalamounts outstanding under the Mortgage Loan and Term Loan were$26.0 million and $7.8 million, respectively.

 

In August 2009,in order to finance costs associated with the construction of a research centerfor our wholly-owned subsidiary in Shanghai, OmniVision Technologies (Shanghai)Co. Ltd., or OTC, we entered in to a fixed asset loan agreement with a bank inChina. The agreement provides for a fixed asset loan in the principal amount ofapproximately $20.5 million, or the Construction Loan. As of January 31,2010, we had borrowed approximately $9.5 million under the ConstructionLoan.

 

SOI maintains fourunsecured lines of credit with three commercial banks, which provide a total ofapproximately $3.5 million in available credit. All borrowings under theselines of credit bear interest at the market interest rate prevailing at thetime of borrowing. There are no financial covenant requirements for thesefacilities. At January 31, 2010 and April 30, 2009, there were noborrowings outstanding under these facilities.

 

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

## *** ***

For the ninemonths ended January 31, 2010, net cash provided by operating activitiestotaled approximately $65.4 million as compared to $29.0 million forthe corresponding period in the prior year. The principal components of thecurrent year amount were: a net income of approximately $3.0 million for thenine months ended January 31, 2010; adjustments for non-cash charges of$18.2 million in stock-based compensation, $17.4 million indepreciation and amortization, $13.5 million in write-down of inventories,$5.2 million in gains on equity investments and $0.8 million in gainson interest rate swaps; a $52.8 million increase in accounts payable; a$3.6 million increase in deferred revenues, less cost of revenues; a$1.4 million increase in accrued expenses and other current liabilities;and a $1.2 million decrease in prepaid expenses and other current assets.These increases were partially offset by: a $23.7 million increase inaccounts receivable, net; a $14.0 million increase in inventories; a$2.6 million increase in refundable and deferred income taxes and a$122,000 decrease in deferred tax liabilities. The $23.7 million increasein accounts receivable, net, reflects the increased level of revenues duringthe nine months ended January 31, 2010, partially offset by fastercollection, as reflected in days of sales outstanding which declined to 40 daysas of January 31, 2010 from 44 days as of April 30, 2009. The$14.0 million increase in inventories resulted from the need to support anincreased level of revenues during the nine months ended January 31, 2010. The$3.6 million increase in deferred revenues, less cost of revenues, was dueto an increase in sales to distributors during the nine months ended January 31,2010.

 

41

----

Table of Contents

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

 

For the ninemonths ended January 31, 2009, net cash provided by operating activitiestotaled approximately $29.0 million. The principal components of theamount were: a net loss of approximately $17.9 million for the nine monthsended January 31, 2009; adjustments for non-cash charges of$20.1 million in stock-based compensation, $17.5 million inwrite-down of inventories, $13.8 million in depreciation and amortization,$7.5 million in goodwill impairment charges, $2.9 million from losson interest rate swaps and $2.4 million of gains in equity investments; a$59.0 million decrease in accounts receivable, net, and a$0.8 million increase in income taxes payable. These increases werepartially offset by: a $47.2 million increase in inventories; a$15.0 million decrease in accounts payable; a $5.8 million decreasein accrued expenses and other current liabilities; a $3.5 million increasein deferred income taxes and a $1.4 million decrease in deferred taxliabilities. The $59.0 million decrease in accounts receivable, net,reflects the lower level of revenues during the nine months ended January 31,2009, with the days of sales outstanding declining to 53 days as of January 31,2009 from 56 days as of April 30, 2008. The $47.2 million increase ininventories resulted in a decrease in annualized inventory turns to 1.7 asof January 31, 2009 from 4.3 as of April 30, 2008.

 

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

## *** ***

For the ninemonths ended January 31, 2010, our cash used in investing activities totaled$61.8 million as compared to approximately $16.2 million for thecorresponding period in the prior year, due to $51.5 million in netpurchases of short-term investments and $10.2 million in purchases ofproperty, plant and equipment. For the nine months ended January 31, 2009,our cash used in investing activities totaled $16.2 million, due primarilyto: $27.8 million in purchases of property, plant and equipment and$1.4 million in a long-term investment in ImPac, partially offset by$12.9 million in net sales of short-term investments.

 

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

## *** ***

For the ninemonths ended January 31, 2010, net cash provided by financing activitiestotaled approximately $13.0 million as compared to net cash used byfinancing activities of $4.8 million during the corresponding period inthe prior year. This change was due to $9.5 million in borrowings and$6.2 million in proceeds from the exercise of stock options and employeepurchases through our employee stock purchase plan, partially offset by$2.7 million used to repay long-term borrowings. For the nine months endedJanuary 31, 2009, net cash used in financing activities totaledapproximately $4.8 million. This net use of cash by financing activitieswas due primarily to $12.9 million in repurchases of our common stock,partially offset by $4.4 million in proceeds from the exercise of stockoptions and employee purchases through our employee stock purchase plan and$3.8 million in proceeds from net long-term borrowings.

 

## ***Capital Commitmentsand Resources***

## *** ***

Over the next twoyears, we expect to invest a total of approximately $33.7 million in OTC,of which we have already contributed $21.1 million. The fundingrequirement arises from our execution of a Land-Use-Right Purchase Agreementwith the Construction and Transportation Commission of the Pudong New District,Shanghai with a concomitant commitment to spend approximately$33.7 million to develop the land. The remainder of our capitalcommitments to OTC will be financed via the Construction Loan. See Note 16* — “Commitments and Contingencies”*to ourcondensed consolidated financial statements.

 

We currently expect our available cash, cashequivalents and short-term investments, together with cash that we anticipategenerating from operating activities, will be sufficient to satisfy our capitalrequirements over approximately the next twelve months. Other than normalworking capital requirements and capital investment in OTC, we expect ourcapital requirements totaling approximately $10.0 million overapproximately the next twelve months will consist primarily of funding capitalinvestments in our wholly-owned subsidiaries, OmniVision Semiconductor(Shanghai) Co. Ltd., or OSC, and Shanghai OmniVision Semiconductor Technology,Co. Ltd, or OST. We formed OST during the three months ended October 31,2008, for the purpose of expanding our testing capabilities in Shanghai, China.

 

42

----

Table of Contents

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

 

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.

 

**ContractualObligations and Commercial Commitments**

 

The followingtable summarizes our contractual obligations and commercial commitments as of January 31,2010 and the effect such obligations and commitments are expected to have onour liquidity and cash flows 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                                          |       | $                          | 12,398     |   | $ | 4,934 |   | $ | 6,575 |   | $ | 889 |   | $ | — |   |
| Debt obligations (1)                                 |       | 43,277                     |       | 4,286 |   | 8,054 |   | 6,966 |   | 23,971 |   |
| Noncancelable orders (2)                             |       | 89,489                     |       | 89,489 |   | — |   | — |   | — |   |
| Total contractual obligations                             |       | 145,164                    |       | 98,709 |   | 14,629 |   | 7,855 |   | 23,971 |   |
|                                                      |       |                       |       |   |   |   |   |   |   |   |   |
| Other Commercial Commitments:                             |       |                       |       |   |   |   |   |   |   |   |   |
| OST (3)                                              |       | 8,500                      |       | 8,500 |   | — |   | — |   | — |   |
| Total commercial commitments                              |       | 8,500                      |       | 8,500 |   | — |   | — |   | — |   |
| Total contractual obligations and commercial  commitments |       | $                          | 153,664    |   | $ | 107,209 |   | $ | 14,629 |   | $ | 7,855 |   | $ | 23,971 |   |

 

----

(1)          In March 2007, we entered into the Mortgage Loanwith a domestic bank in the amount of $27.9 million.In March 2008, we borrowed $6.0 million under the Term Loan forbuilding improvement of the Santa Clara Property. We drew down the remaining$6.0 million under the Term Loan in July 2008. In August 2009,we entered into the Construction Loan with a bank in China to finance costsassociated with the construction of a research center for OTC. As of January 31,2010, we borrowed approximately $9.5 million under the Construction Loan.See Note 8 —“*Borrowing Arrangements”*to our condensed consolidated financial statements.

 

(2)          Noncancelable orders represent outstanding purchaseorders that we have placed with our suppliers at period-ends. The lead time fordelivery is long, typically 12 to 14 weeks, and suppliers must prepare uniquematerials for us at the beginning of the fabrication process. Accordingly, weare precluded from cancelling our orders once placed and the production processhas begun.

 

(3)          During the three months ended October 31,2008, we formed OST, a new wholly-owned subsidiary in Shanghai, China, for thepurpose of expanding our testing capabilities. We contributed $1.5 millionin January 2009, as required under the terms of our capital commitment. Weare required to contribute the remaining $8.5 million of a$10.0 million commitment by October 16, 2010. See Note 16 — “*Commitments and Contingencies”* to our condensed consolidatedfinancial statements.

 

As of January 31,2010, the long-term income taxes payable was $83.7 million. We are unableto make a reasonably reliable estimate of the timing of payments in individualyears beyond twelve months due to uncertainties in the timing of tax audit, ifany, or their outcomes. Accordingly, we have excluded this obligation from theschedule summarizing our significant obligations to make future payments undercontractual obligations as of January 31, 2010 presented above.

 

### **Off-BalanceSheet Arrangements**

### ** **

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

 

43

----

Table of Contents

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

 

### **RecentAccounting Pronouncements**

### ** **

In January 2010,the Financial Accounting Standards Board updated the authoritative guidance forfair value measurements with new disclosure requirements. These requirementsinclude disclosures on the transfers of assets and liabilities between Level 1(measurements based on quoted prices in active markets for identical assets orliabilities) and Level 2 (measurements based on significant other observableinputs) of the fair value measurement hierarchy, and a roll-forward ofactivities on purchases, sales, issuance, and settlements of Level 3(measurements based on significant unobservable inputs) assets and liabilities.We are required to follow the disclosure requirements in our fourth quarter offiscal 2010, except for the disclosure on roll-forward activities for Level 3fair value measurements, which will become effective for us in our firstquarter of fiscal 2012. Other than requiring additional disclosures, theadoption of this new guidance will not have any material impact on ourfinancial position, results of operations or cash flows.

 

44

----

Table ofContents

 

**ITEM 3.   QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

## ***Foreign CurrencyExchange Risk***

## *** ***

Wesell our products globally, in particular to OEMs, VARs and distributors inChina, Japan, Korea and Taiwan.

 

Thegreat majority of our transactions with our customers and vendors aredenominated in U.S. dollars. The expenses we incur in currencies other thanU.S. dollars affect gross profit, selling, general and administrative expenses,research, development and related expenses and income taxes, and are primarilyincurred in China, where the Chinese Yuan, or CNY, is the local currency and inTaiwan, where the New Taiwan dollar is the local currency.

 

As of January 31, 2010, the functional currencyof our wholly-owned subsidiaries located in Hong Kong, OmniVision Technologies(Hong Kong) Company Limited, OmniVision Trading (Hong Kong) Company Ltd., andOmniVision Holding (Hong Kong) Co., Ltd.; in the Cayman Islands, OmniVisionInternational Holding, Ltd. and OmniVision Technology International Ltd.(formerly HuaWei Technology International, Ltd.); in China, OSC and OTC andOST, and in Taiwan, Taiwan OmniVision Technologies Co., Ltd., Taiwan OmniVisionInternational Technologies Co., Ltd., and Taiwan OmniVision Investment HoldingCo., Ltd., is the U.S. dollar. Our other wholly-owned subsidiaries have theirrespective local currencies as their functional currencies. The functionalcurrency of our consolidated affiliate, SOI, is the New Taiwan dollar.Transaction gains and losses resulting from transactions denominated incurrencies other than the respective functional currencies are included in “Otherincome (expense), net” for the periods presented. The amounts of transactiongains and losses for the three and nine months ended January 31, 2010and 2009 were not material.

 

Giventhat the expenses that we incur in currencies other than U.S. dollars have notbeen a significant percentage of our revenues, we do not believe that ourforeign currency exchange rate fluctuation risk is significant. Consequently,we do not believe that a 10% change in foreign currency exchange rates wouldhave a significant effect on our future net income or cash flows.

 

Becausewe do not believe that we currently have any significant direct foreigncurrency exchange rate risk, we have not hedged exposures denominated inforeign currencies or used any other derivative financial instruments. Althoughwe transact the overwhelming majority of our business in U.S. dollars, futurefluctuations in the value of the U.S. dollar may affect the competitiveness ofour products and thus may impact our results of operations.

 

## ***Market InterestRate Risk***

## *** ***

Ourcash equivalents and short-term investments are exposed to financial marketrisk due to fluctuation in interest rates, which may affect our interest incomeand, 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, high-grade corporate securitiesand government bonds maturing approximately 18 months or less from the date ofpurchase. In the past, we also invested in auction rate securities and invariable rate demand notes, which have a final maturity date of up to 39 yearsbut whose interest rate is reset at varying intervals typically between sevenand 35 days. As of January 31, 2010, we did not hold any auction ratesecurities or variable rate demand notes.

 

Due tothe short maturities of our investments, the carrying value should approximatethe fair market value. In addition, we do not use our investments for tradingor other speculative purposes. Due to the short duration of our investmentportfolio, we do not expect that an immediate 10% change in interest rateswould have a material effect on the fair market value of our portfolio.Therefore, we would not expect our operating results or cash flows to beaffected to any significant degree by the effect of a sudden change in marketinterest rates. We do not believe that the recent instability in globalfinancial markets has significantly affected the value of our cash andshort-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,we also 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 5.3%. 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 4.3%. Consequently, althoughwe are required to mark the value of the swaps to market at each balance sheetdate and record the associated non-cash cost or benefit as part of “Otherincome (expense), net,” a hypothetical 10% change in LIBOR would not have amaterial effect on our interest expense for the three and nine months ended January 31,2010.

 

45

----

Table ofContents

 

In August 2009,in order to finance costs associated with the construction of a research centerfor OTC, we entered into a fixed asset loan agreement with a bank in China. Theagreement provides for a fixed asset loan in the principal amount ofapproximately $20.5 million, or the Construction Loan. As of January 31,2010, we borrowed approximately $9.5 million under the Construction Loan.Interest rate under the Construction Loan is based on an indicative rate aspublished by the Chinese government, and will be adjusted every September tothe then current published rate. Interest rate under the Construction Loan was5.3% at January 31, 2010. We do not hedge against the risk of interestrate changes for the Construction Loan. However, since the current interestrate is published by the Chinese government and will not be adjusted until September 2010,any hypothetical 10% shifts in yield will not cause a significant adverseimpact to our results of operations, cash flows or to our financial positionfor the three and nine months ended January 31, 2010.

 

**ITEM4.   CONTROLS AND PROCEDURES**

 

**(a)  ****Evaluation of Disclosure Controlsand Procedures****.**

 

Underthe supervision and with the participation of our chief executive officer andour chief financial officer, our management conducted an evaluation of the effectivenessof our disclosure controls and procedures, as defined in the SecuritiesExchange Act of 1934, as of the end of the period covered by this QuarterlyReport on Form 10-Q. Based on this evaluation, our chief executive officerand chief financial officer have concluded that, at the level of reasonableassurance, our disclosure controls and procedures are effective to ensure thatthe information we are required to disclose in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in SEC rules and forms and that suchinformation is accumulated and communicated to our management including ourprincipal executive and principal financial officers, as appropriate, to allowtimely decisions regarding required disclosure.

 

**(b)  Changesin Internal Controls.**

 

Therehave been no changes in our internal control over financial reporting duringthe three-month period ended January 31, 2010, as covered by thisQuarterly Report on Form 10-Q, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

46

----

Table of Contents

 

**PART II — OTHERINFORMATION**

 

**ITEM 1.   LEGALPROCEEDINGS**

 

Fromtime to time, we have been subject to legal proceedings and claims with respectto such matters as patents, product liabilities and other actions arising outof the normal course of business.

 

On November 29,2001, a complaint captioned *McKee v. OmniVisionTechnologies, Inc., et. al., Civil Action No. 01 CV 10775*,was filed in the United States District Court for the Southern District of NewYork against us, some of our directors and officers, and various underwritersfor our initial public offering. Plaintiffs generally allege that the nameddefendants violated federal securities laws because the prospectus related toour offering failed to disclose, and contained false and misleading statementsregarding, certain commissions purported to have been received by theunderwriters, and other purported underwriter practices in connection withtheir allocation of shares in our offering. The complaint seeks unspecifieddamages on behalf of a purported class of purchasers of our common stockbetween July 14, 2000 and December 6, 2000. Substantially similaractions have 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 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.

 

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 OmniVision 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’motion to dismiss the amended complaints.

 

Theparties have reached a global settlement of the coordinated litigation. Under the settlement, the insurers will pay the full amount of settlementshare allocated to us, and we will bear no financial liability. Ourcompany, as well as our company’s officer and director defendants who were previouslydismissed from the action pursuant to tolling agreements, will receivecomplete dismissals from the case. On October 5, 2009, the Courtentered an order granting final approval of the settlement. Certain objectorshave appealed the Court’s October 5, 2009 final approval order to theSecond Circuit Court of Appeals. If for any reason the settlement does notbecome effective, and litigation against us proceeds, we believe that we havemeritorious defenses to plaintiffs’ claims and intend to defend the actionvigorously.

 

On October 12,2007, a purported OmniVision stockholder filed a complaint against certain ofthe Company’s underwriters for its initial public offering. The complaint, *Vanessa Simmonds v. Bank of America Corporation, et al.*,Case No. C07-1668, filed in District Court for the Western District ofWashington, makes similar allegations to those made in *In reInitial Public Offering Securities Litigation* and seeks the recoveryof short-swing trading profits under Section 16(b) of the SecuritiesExchange Act of 1934. The Company is named as a nominal defendant, and norecovery was sought from it. The plaintiff filed an amended complaint in February 2008.On March 12, 2009, the Court granted the motion to dismiss withoutprejudice, filed by 30 of the issuer defendants, including the Company, and themotion to dismiss with prejudice, filed by all of the underwriter defendants.The plaintiff timely appealed the Court’s Order to the United States Court ofAppeals for the Ninth Circuit, which remains pending. In accordance with thebriefing schedule set by the Ninth Circuit on August 18, 2009, plaintifffiled her opening brief on August 26, 2009.  On October 2, 2009, the underwriterdefendants/appellees/cross-appellants filed their answering brief, and themoving issuers/appellees filed their principal brief as well.  Plaintiff/appellant/cross-appellee filed herresponse and reply briefs on November 2, 2009. The underwriterdefendants/appellees/cross-appellants filed their reply brief on November 17,2009. The Ninth Circuit Court of Appeals has not set a hearing date. Nodiscovery has taken place.

 

At theend of May 2009, plaintiff sent a Demand for Inspection of Books andRecords to certain of the nominal defendants named in the Section 16(b) litigationseeking the companies to produce any tolling agreements entered into with thecompanies’ respective underwriters. Plaintiff’s counsel has agreed to anopen-ended extension for certain nominal defendants who received such a demand.As of the date of this filing, we have not received a demand for inspection ofbooks and records from the plaintiff.

 

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.  OmniVision Technologies, Inc., CanonU.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 products that infringe U.S. PatentNos. 6,818,877 (“Pre-charging a Wide Analog Bus for CMOS Image Sensors”),6,663,029 (“Video Bus for High Speed Multi-resolution Imagers and MethodThereof”) and 7,057,150 (“Solid State Imager with Reduced Number of Transistorsper Pixel”). The complaint seeks unspecified monetary damages, fees andexpenses and injunctive relief against us. We expect to vigorously defendourselves against Panavision’s allegations.  At this time, we cannotestimate any possible loss or predict whether this matter will result in anymaterial expense to us.

 

47

----

Table ofContents

 

**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 risk factors,as well as of other variables affecting our operating results, past financialperformance may not be a reliable indicator of future performance, andhistorical trends should not be used to anticipate results or trends in futureperiods.*

 

***Risks Related toOur Business***

 

***Recent domestic and worldwide economicconditions have adversely affected and may further adversely affect ourbusiness, results of operations, and financial condition.***

 

Recently,general domestic and global economic conditions have been negatively impactedby several factors, including, among others, the subprime-mortgage crisis inthe housing market, going concern threats to investment and commercial banks,other financial institutions and major automobile companies, reduced corporateand consumer spending, and decreased consumer confidence. These economicconditions have resulted in our facing one of the most challenging periods inour history. In particular, we believe consumers and businesses in markets intowhich we sell our products have reduced spending in response to tighter credit,negative financial news and the continued uncertainty of the global economy.End customer demand has decreased significantly throughout the industry,affecting all consumer electronic products, security products and products forthe automotive industry. Consequently, the overall demand for image sensors hasalso decreased. This decrease in demand has had a significant impact on ourrevenues, results of operations and overall business. For example, our revenuesfor the six-month period ended October 31, 2009 were lower than similarhistorical periods.

 

Theseconditions could also have a number of additional effects on our business,including insolvency of key suppliers or manufacturers resulting in productdelays, inability of customers to obtain credit to finance purchases of ourproducts, 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. If the economy or markets into which we sell ourproducts fail to recover, our business, financial condition, results ofoperations and cash flows could be materially and adversely affected.

 

## ***Weface intense competition in our markets from CMOS and CCD image-sensormanufacturers, and if we are unable to compete successfully we may not be ableto maintain or grow our business.***

## *** ***

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,STMicroelectronics and Toshiba as wellas CCD image-sensor 

 

48

----

Table ofContents

 

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

 

Our 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 may decreaseour 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. If we areunable 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 infiscal 2009 and the nine months ended January 31, 2010, respectively.We expect that revenues from sales of our image-sensor products to the mobilephone market will continue to account for a significant portion of our revenuesduring fiscal 2010 and beyond. Any factors adversely affecting the demandfor our image sensors in this market could cause our business to suffer andadversely affect our financial condition, operating results and cash flows. Thedigital image-sensor market for mobile phones is extremely competitive, and weexpect to face increased competition in this market in the future. In addition,we believe the market for mobile phones is also relatively concentrated and thetop five producers account for more than 80% of the annual sales of theseproducts. If we do not continue to achieve design wins with key mobile phonemanufacturers, our market share or revenues could decrease. The mobile phone image-sensormarket is also subject to rapid technological change. In order to competesuccessfully in this market, we will have to correctly forecast customer demandfor technological improvements and be able to deliver such products on a timelybasis at competitive prices. If we fail to do this, our results of operations,business and prospects would be materially and adversely affected. In the past,we have experienced problems accurately forecasting customer demand in othermarkets. In addition, current domestic and global economic conditions couldnegatively affect the mobile phone market if consumers and/or businesses deferpurchases in this market in response to tighter credit, negative financialnews, and/or decreased corporate or consumer spending.

 

49

----

Table ofContents

 

We also expectthat image sensors will become of greater importance in the security, medicaland automotive industries. As image sensors begin to fill a greater role inthese other markets, the challenges and risks that we face in these othermarkets could increase and could be similar to some of the challenges and risksthat we face in the mobile phone market. If our sales to the mobile phonemarket and other emerging markets do not increase and/or the mobile phonemarket and other emerging markets do not grow as expected, our results ofoperations, business and prospects would be materially adversely affected.

 

## ***Our future successdepends on the timely development, introduction, marketing and selling of newproducts, which we might not be able to achieve.***

## *** ***

Our failure tosuccessfully develop new products that achieve market acceptance in a timelyfashion would adversely affect our ability to grow our business and ouroperating results. The development, introduction and market acceptance of newproducts 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 arequirement for us to continue to build and develop image sensors with advancedtechnologies that can be used in a variety of consumer products. As ourproducts integrate new and more advanced technologies and functions, theybecome more complex and increasingly difficult to design, debug and produce.Successful product development and 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 technological advantageover the products of our competitors, including our advantages with respect tothe functionality and pixel capability of our image-sensor products and ourproprietary 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 akey determinant of future revenues, and failure to obtain design wins adverselyaffects our revenues and impairs our 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 its design platforms. Accordingly, if we fail toachieve design wins with key device manufacturers that embed image sensors intheir products, our market share or revenues could decrease. Furthermore, tothe extent that our competitors secure design wins, our ability to expand ourbusiness in the future will be impaired.

 

50

----

Table ofContents

 

## ***We depend on alimited number of third party wafer foundries, which reduces our ability tocontrol 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.

 

Because our foundries provide services to a numberof companies, in the event they receive increased orders from us or one or moreof the other companies that they service, they may be unable to provide us withthe requested quantity of products or may subordinate our request to therequests of other larger companies. If for any reason the foundries are unableto provide 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 materialadverse affect 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 tofabricate our companion DSP chips for competitive or other reasons, we wouldhave to identify and qualify other sources for these products.

 

## ***We rely on a jointventure company for color filter application and on third party serviceproviders for packaging and other back-end services, which reduces our controlover delivery schedules, product quality and cost, and could adversely affectour ability to deliver products to customers.***

## *** ***

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 former equity investee, forsubstantially all of our ceramic chip packages. In December 2009, Tong Hsing acquired ImPac andassumed control of its operations. Werely on XinTec and WLCSP, two investee companies, for chip scale packages,which are generally used in our products designed for the smallest form factorapplications. We rely on several specialized service providers, one of which isImPac, to perform the necessary wafer probe tests and prepare good die for usein a form called chip-on-board, a process called reconstructing wafers. Thecurrent global economic conditions could adversely affect these serviceproviders’ ability to continue to fulfill our packaging, color filterprocessing and related requirements. If for any reason one or more of theseservice providers were to become unable or unwilling to continue to provideservices of acceptable quality, at acceptable costs or in a timely manner, ourability to deliver our products to our customers could be severely impaired. Wewould have to identify and qualify substitute service providers, which could betime consuming and difficult and could result in unforeseen operationalproblems. Substitute service providers might not be available or, if available,might be unwilling or unable to offer services on acceptable terms.

 

51

----

Table ofContents

 

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 ofcompanies that provide these services is limited and some of them have limitedoperating histories and financial resources. In the event our current providersrefuse or are unable to continue to provide these services to us, we may beunable to procure services from alternate service providers. Furthermore, ifcustomer demand for our products increases, we may be unable to securesufficient additional capacity from our current service providers oncommercially reasonable terms, if at all. These factors may cause unforeseenproduct shortages or may increase our costs of manufacturing, assembling ortesting of our products, which would adversely affect our operating results.

 

## ***Fluctuations inour quarterly operating results have caused volatility in the market price ofour common stock and also make it difficult to predict our future operatingresults.***

## *** ***

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.

 

52

----

Table ofContents

 

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

 

We do not hold or issue derivative financialinstruments for trading purposes. However, we do utilize derivative financialinstruments to reduce interest rate risk. We have a variable rate mortgage loanthat totaled $33.8 million as of January 31, 2010. To manage therelated interest rate risk, we entered into two interest rate swap agreements,effectively converting our mortgage loan into a fixed rate loan. Undergenerally accepted accounting principles, the fair values of the swapcontracts, 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 (expense), net.”The associated 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 to credit loss in theevent of non-performance by the counterparties to the interest rate swapagreements. However, we do not anticipate non-performance by thecounterparties.

 

## ***Our business issubject to seasonal fluctuations which may in turn cause fluctuations in ourresults of operations from period to period.***

## *** ***

Many of the products using our image sensors, suchas mobile phones, notebooks,netbooks and webcams, DSCs and camerasfor entertainment applications, 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. Inaddition, since a very large number of the manufacturers who use our productsare located in China and Taiwan, the pattern of demand for our image sensorshas been influenced by the timing of the extended lunar or Chinese New Yearholiday, a period in which the factories which use our image sensors generallyclose. Consequently, demand for our image sensors has historically beenstronger in the second and third quarters of our fiscal year and weaker in thefirst and fourth quarters of our fiscal year. In addition, our gross revenuesin our second and third fiscal quarters have typically been comparable.Recently, however, an increase in end-customer demand in North America relatedto the holiday season accelerated the timing of our customers’ purchases fromour third fiscal quarter to our second fiscal quarter. If this trend continuesin future years, it could result in the quarter-to-quarter fluctuation of ourrevenues differing from our historical seasonal cycles.

 

## ***Problems withwafer manufacturing and/or back-end processing yields could result in higherproduct costs and could impair our ability to meet customer demand for ourproducts.***

## *** ***

If the foundries manufacturing the wafers used inour products cannot achieve the yields we expect, we will incur higher unitcosts and 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.

 

53

----

Table ofContents

 

## ***If we do notforecast customer demand correctly, our business could be impaired and ourstock 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 accurately predictcustomer demand because recent demand has decreased and historical models forpredicting customer demand may no longer be reliable. If we overestimatecustomer demand, we may manufacture products that we may be unable to sell, orwe may have to sell at lower prices. This could materially and adversely affectour results of operations and financial condition. In addition, our customersmay cancel or defer orders at any time by mutual written consent. We haveexperienced problems with accurately forecasting customer demand in the past.For example, there was a significant decline in product demand in the thirdquarter of fiscal 2009, and as a result our inventories at the end of thethird quarter of fiscal 2009 were higher than we intended them to be. Weneed to accurately predict customer demand because we must often placenoncancelable orders with our manufactures to have products manufactured beforewe receive firm purchase orders from our customers. Conversely, if weunderestimate customer demand, we may be unable to manufacture sufficient productsquickly enough to meet actual demand, causing us to lose customers andimpairing our ability to grow our business. In preparation for new productintroductions, we gradually ramp down production of established products. Withour 12-14 week production cycle, it is extremely difficult to predict preciselyhow many units of established products we will need. It is also difficult toaccurately predict the speed of the ramp of our new products and the impact oninventory levels presented by the shorter life cycles of end-user products. Theshorter product life cycle is a result of an increase in competition and thegrowth of various consumer-product applications for image sensors. Under thesecircumstances, it is possible that we could suffer from shortages for certainproducts and, if we underestimate market demand, we face the risk of beingunable to fulfill customer orders. We also face the risk of excess inventoryand product obsolescence if we overestimate market demand for our products andbuild inventories in excess of demand. Our ability to accurately forecast salesis also a critical factor in our ability to meet analyst expectations for ourquarterly and annual operating results. Any failure to meet these expectationswould likely lead to a substantial decline in our stock price.

 

## ***We depend on theincreased acceptance of mass-market image-sensor applications to grow ourbusiness 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, entertainment devices, automotive and medicalapplications. If these markets do not grow and develop as we anticipate, we maybe unable to sustain or grow the sales of our products. Each of these marketshas already been, and may continue to be, adversely impacted by current globaleconomic conditions where consumers and businesses have deferred purchases ofproducts in these markets as a result of tighter credit, negative financialnews, and decreased corporate or consumer spending. Such conditions have negatively affected, and may continue to negativelyaffect, 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 lengthymanufacturing, packaging and assembly cycle, in addition to our customers’ designcycle, may result in uncertainty and 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.

 

54

----

Table ofContents

 

## ***Our ability todeliver products that meet customer demand is dependent upon our ability tomeet new and changing requirements for color filter application andimage-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 obtainthird party services that meet these new requirements on a cost-effectivebasis. There can be no assurances that any of these parties will be able todevelop enhancements to the services they provide to us to meet these new andchanging industry 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 ofcomplexity and integration of our products increases the risk of latentdefects, which could damage customer relationships 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 themajority of our revenues on a few key customers and, the loss of one or more ofour key customers could significantly 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 fiscal 2009, approximately 59.5% of ourrevenues came from sales to our top five customers. In addition, in the ninemonths ended January 31, 2010, one OEM customer accounted forapproximately 11.6% of our revenues, and one distributor customer accounted forapproximately 26.8% of our revenues. Our business, financial condition, resultsof operations and cash flows will continue to depend significantly on ourability to retain our current key customers and to attract new customers, aswell as on the financial condition and success of our OEMs, VARs anddistributors.

 

## ***We may be requiredto record a significant charge to earnings if our intangible assets orlong-term investments become impaired.***

## *** ***

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

 

55

----

Table of Contents

 

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 January 31, 2010, our intangibleassets totaled approximately $2.6 million and our long-term investmentstotaled approximately $90.8 million.

 

## ***We maintain abacklog of customer orders that is subject to cancellation or delay in deliveryschedules, and any cancellation or delay may result in lower than anticipatedrevenues.***

## *** ***

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 unableto maintain processes and procedures to sustain effective internal control overour financial reporting, our ability to provide reliable and timely financialreports could be harmed and this could have a material adverse effect on ourstock price.***

## *** ***

We arerequired to comply with the rules promulgated under Section 404 ofthe Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Section 404requires that we prepare an annual management report assessing theeffectiveness of our internal control over financial reporting, and requires areport by our independent registered public accounting firm addressing theeffectiveness of our 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.

 

## ***Corporategovernance regulations have increased our compliance costs and could furtherincrease our expenses if changes occur within 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 andindependent registered public accounting firm. In order to comply with theserules, we added internal resources and have utilized additional outside legal,accounting and advisory services, which increased our operating expenses. Weexpect to incur 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 asignificant amount of marketable securities which are subject to general marketrisks over which we have no control.***

## *** ***

As of January 31,2010, we held cash and cash equivalents totaling $274.5 million, andshort-term investments totaling $68.3 million. These assets are managed onour behalf by unrelated third parties in accordance with a cash managementpolicy that has been approved by our board of directors and restricts ourinvestments to a maximum maturity of 18 months and to investment-gradeinstruments. As of January 31, 2010, we did not hold any illiquidinvestments and we have not realized any losses. However, recent uncertaintiesin global capital markets associated with a repricing of risk have causeddisruptions in the orderly function of markets where ordinarily there isvirtually unlimited liquidity. If we were to make a future investment incertain illiquid securities that are dependent on the orderly functioning ofthe capital markets, and if we were required to liquidate this type ofsecurities at short notice, such liquidation could result in losses ofprincipal.

 

56

----

Table ofContents

 

## ***There are risksassociated with our operations in China.***

## *** ***

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 to China.We are currently expanding our testing capabilities with additional automatedtesting equipment, which will also be located in China. Through ourwholly-owned subsidiary, OmniVision Technologies (Shanghai) Co. Ltd., or OTC,we are also developing land and constructing research facilities in Shanghai.There are certain administrative, legal and governmental risks to operating inChina that could result in increased operating expenses or could hamper us inthe development of our operations in China. More recently we invested in acompany in China that is providing a portion of our chip scale packagepackaging requirements. The risks from operating in China that could increaseour operating expenses and adversely affect our operating results, financial conditionand ability to deliver our products and grow our business include, withoutlimitation:

 

·                  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, including inventorymanagement 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 experienceintegration or other problems with potential future acquisitions, which couldhave an adverse effect on our business or results of operations. Newacquisitions could dilute the interests of existing stockholders, and theannouncement of new acquisitions could result in a decline in the price of ourcommon 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.

 

57

----

Table of Contents

 

## ***We may not achievecontinued benefits from our joint venture with TSMC.***

## *** ***

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

 

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

 

## ***We may not achieveall of the anticipated benefits of our alliances with, and strategicinvestments 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 of XinTec. InMay 2007, we acquired a portion of the registered capital of WLCSP, acompany that also provides chip scale packaging services. In December 2009,Tong Hsing acquired ImPac in a stock-for-stock exchange and we now hold sharesin Tong Hsing.

 

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 theseinvestments or partnering relationships may place restrictions on the scope ofour business, 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 ourrelationships with our joint ventures and/or companies in which we hold lessthan a majority interest could change the way we account for such interests inthe future.***

## *** ***

Aspart of our strategy, we have formed joint ventures with two of our foundrypartners, and we hold equity interests in three companies from which wepurchase 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.

 

58

----

Table ofContents

 

## ***We may be unableto adequately protect our intellectual property, and therefore we may lose someof our competitive advantage.***

## *** ***

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 patentinfringement action in Taiwan, Republic of China against IC MediaCorporation of San Jose, California for infringement of a Taiwanese patent thathad been issued to us. In response to our patent infringement action, in October 2002,IC Media Corporation initiated a cancellation proceeding in the TaiwanIntellectual Property Office with respect to our patent. In July 2003, theTaiwan Intellectual Property Office made an initial determination to grant thecancellation of the subject patent, which decision was upheld by the TaiwanMinistry of Economic Affairs and the High Administrative Court. We decided notto appeal such decision by the May 31, 2005 deadline. Although we do notbelieve the cancellation of the Taiwanese patent at issue in the disputedescribed above has had a material adverse effect on our business or prospects,there may be other situations where our inability to adequately protect ourintellectual property rights could materially and adversely affect ourcompetitive position and operating results. If a third party can copy orotherwise obtain and use our products or technology without authorization,develop corresponding technology independently or design around our patents,this could materially adversely affect our business and prospects. Effectivepatent, copyright, trademark and trade secret protection may be unavailable orlimited in foreign countries. Any disputes over our intellectual propertyrights, whatever the ultimate resolution of such disputes, may result in costlyand time-consuming litigation or require the license of additional elements ofintellectual property for a fee.

 

## ***Litigationregarding intellectual property could divert management attention, be costly todefend and prevent us from using or selling 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 propertylitigation against us would likely be time-consuming and expensive to resolveand would divert management’s time and attention and could also force us totake actions such 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 thatincorporate the disputed intellectual property, which could result insubstantial unanticipated development expenses and delay and prevent us fromselling the products until the redesign is completed, if at all.

 

If 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.

 

## ***The use of ourimage sensors in end user products in the medical and automotive industriescould result in us being named as a defendant in product liability claims,which could adversely affect our business and reputation.***

## *** ***

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

 

59

----

Table of Contents

 

## ***If we do noteffectively manage our growth, our ability to increase our revenues and improveour earnings could be adversely affected.***

## *** ***

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

 

·                  continuously improve our operational, financial andaccounting systems;

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

·                  attract and retain qualified personnel with relevantexperience; and

·                  effectively manage accounts receivable and inventory.

 

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 andother third 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 taxrates and tax payments could be higher than we anticipate and may harm ourresults 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 andliabilities, changes in available tax credits and the repatriation of non-U.S.earnings for which we have not previously provided for U.S. taxes.

 

## ***Our sales throughdistributors increase the complexity of our business and may reduce our abilityto forecast revenues.***

## *** ***

Duringfiscal 2009 and the nine months ended January 31, 2010, approximately42.0% and 46.9%, respectively, of our revenues came from sales throughdistributors. We expect that revenues from sales through distributors willcontinue to represent a significant proportion of our total revenues. Sellingthrough distributors reduces our ability to accurately forecast sales andincreases the complexity of our business, requiring us to, among other matters:

 

·                  manage a more complex supply chain;

·                  manage the level of inventory at each distributor;

·                  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.

 

60

----

Table ofContents

 

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

 

## ***We face foreignbusiness, political and economic risks, because a majority of our products andthose of our customers are manufactured and sold outside of the United States.***

## *** ***

Weface difficulties in managing our third party foundries, color filterapplication service providers, packaging and other manufacturing serviceproviders and our foreign distributors, most of whom are located in Asia. Inaddition, our presence in Asia presents the challenge of managing foreignoperations and maintaining good relations with our employees located there. Anypolitical and economic instability in Asia might have an adverse impact onforeign exchange rates and could cause service disruptions for our vendors anddistributors and adversely affect our customers.

 

Salesoutside of the United States accounted for substantially all of our revenuesfor fiscal 2009 and the nine-month period ended January 31, 2010. Weanticipate that sales outside of the United States will continue to account fora substantial portion of our revenues in future periods. Dependence on sales toforeign customers involves certain risks, including:

 

·                  longer payment cycles;

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

·                  decreased visibility as to future demand;

·                  difficulties in accounts receivable collections; and

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

 

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 couldbe harmed if we lose the services of one or more members of our seniormanagement team, or if we are unable to attract 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 and certainother key technical personnel. None of our senior management is bound by anemployment 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 substantiallycompleted the implementation of the first phase of a new enterprise resourceplanning system, a process which presents a number of significant operationalrisks.***

## *** ***

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.

 

61

----

Table ofContents

 

## ***Our operations maybe impaired as a result of disasters, 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 theearthquake and flooding that occurred in China, could be extremely disruptiveto our business and could materially and adversely affect our operating resultsand financial condition. We are currently developing and implementing adisaster recovery plan.

 

## ***Acts of war andterrorist acts may seriously harm our business and revenue, costs and expensesand 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 ourcharter documents and Delaware law, as well as our stockholders’ rights plan,could prevent or delay a change in control of our company and may reduce themarket 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.

 

62

----

Table ofContents

 

## ***Our stock has beenand will likely continue to be subject to substantial price and volumefluctuations due to a number of factors, many of which are beyond our controlthat may prevent our stockholders from 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 January 31, 2010, the closing sales price of ourcommon stock 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 March 8,2010 was $15.93 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.

 

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.   UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

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

 

63

----

Table ofContents

 

**ITEM 6.   EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                              |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of Chief  Executive Officer pursuant to Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.     |
| 31.2                |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                   |
| 32                  |       | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

64

----

Table ofContents

 

**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: March 12, 2010 |       |                                              |
|                       |       |                                              |
|                       | By:        | **/s/ SHAW HONG**                                 |
|                       |       | **Shaw Hong**                                     |
|                       |       | *Chief Executive Officer, President and Director* |
| ** **                 | ** ** | *(Principal Executive Officer)*                   |
| * *                   | ** ** | ** **                                        |
| * *                   | ** ** | ** **                                        |
| Dated: March 12, 2010 |       |                                              |
|                       |       |                                              |
|                       | By:        | **/s/ ANSON CHAN**                                |
|                       |       | **Anson Chan**                                    |
|                       |       | *Chief Financial Officer*                         |
| ** **                 | ** ** | *(Principal Financial and Accounting Officer)*    |

 

65

----

Table of Contents

 

**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                              |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of Chief  Executive Officer pursuant to Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.     |
| 31.2                |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                   |
| 32                  |       | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

66

----