Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedOctober 31, 2010**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from              to             **

 

**Commission file number:0-29939**

 

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**OMNIVISION TECHNOLOGIES, INC.**

(Exact name of registrant as specified in itscharter)

** **

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

 

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

(Address of Principal Executive Offices) (ZipCode)

 

Registrant’s telephonenumber, including area code:  **(408) 567-3000**

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securitiesand Exchange Act of 1934 during the preceding 12 months (or for shorter periodthat the registrant was required to file such reports); and (2) has beensubject to such filing requirements for the past 90 days. Yes x  No o

 

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

 

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

 

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

 

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

 

At December 6, 2010, 55,652,113 shares of common stock of theregistrant were outstanding, exclusive of 12,541,000 shares of treasurystock.

 

 

 

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **                              | ** **                                                                                                                               | **Page**   |
|-----------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** **                                                                                                                               | ** ** |
| **PART I.  FINANCIAL INFORMATION** |
| ** **                              | ** **                                                                                                                               | ** ** |
| **Item 1.**                             | Financial  Statements:                                                                                                                   | 3          |
|                                    |                                                                                                                                     |       |
|                                    | Condensed  Consolidated Balance Sheets (unaudited) — October 31, 2010 and  April 30, 2010                       | 3          |
|                                    |                                                                                                                                     |       |
|                                    | Condensed  Consolidated Statements of Operations (unaudited) — Three and Six Months  Ended October 31, 2010 and 2009 | 4          |
|                                    |                                                                                                                                     |       |
|                                    | Condensed  Consolidated Statements of Cash Flows (unaudited) — Six Months  Ended October 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                                              | 24         |
|                                    |                                                                                                                                     |       |
| **Item 3.**                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                              | 40         |
|                                    |                                                                                                                                     |       |
| **Item 4.**                             | Controls and  Procedures                                                                                                                 | 41         |
|                                    |                                                                                                                                     |       |
| **PART II.  OTHER INFORMATION**    |
|                                    |                                                                                                                                     |       |
| **Item 1.**                             | Legal Proceedings                                                                                                                        | 42         |
|                                    |                                                                                                                                     |       |
| **Item 1A.**                            | Risk Factors                                                                                                                             | 44         |
|                                    |                                                                                                                                     |       |
| **Item 6.**                             | Exhibits                                                                                                                                 | 60         |
|                                    |                                                                                                                                     |       |
| Signatures                              | 61                                                                                                                                       |
|                                    |                                                                                                                                     |       |
| Exhibit Index                      | 62                                                                                                                                       |

 

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Table of Contents

 

**PART I — FINANCIALINFORMATION**

 

**ITEM 1.   FINANCIAL STATEMENTS**

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**(in thousands, except per shareamounts)**

**(unaudited)**

** **
| ** **                                                                                                                                                                                                                                       | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                       | ** ** | **2010**             | ** ** | **2010**           | ** ** |
| **ASSETS**                                                                                                                                                                                                                                       |       |                 |       |               |       |
| Current assets:                                                                                                                                                                                                                                  |       |                 |       |               |       |
| Cash and cash equivalents                                                                                                                                                                                                                        |       | $                    | 340,693    |               | $          | 234,023 |   |
| Short-term investments                                                                                                                                                                                                                           |       | 56,007               |       | 99,555             |       |
| Accounts receivable, net of allowances for  doubtful accounts and sales returns                                                                                                                                                                  |       | 113,072              |       | 74,261             |       |
| Inventories                                                                                                                                                                                                                                      |       | 121,260              |       | 133,993            |       |
| Refundable and deferred income taxes                                                                                                                                                                                                             |       | 5,910                |       | 1,990              |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                        |       | 7,370                |       | 9,380              |       |
| Total current assets                                                                                                                                                                                                                             |       | 644,312              |       | 553,202            |       |
| Property, plant and equipment, net                                                                                                                                                                                                               |       | 118,432              |       | 121,547            |       |
| Long-term investments                                                                                                                                                                                                                            |       | 101,826              |       | 92,121             |       |
| Goodwill                                                                                                                                                                                                                                         |       | 1,122                |       | 439                |       |
| Intangibles, net                                                                                                                                                                                                                                 |       | 7,004                |       | 4,891              |       |
| Other long-term assets                                                                                                                                                                                                                           |       | 24,359               |       | 25,493             |       |
| Total assets                                                                                                                                                                                                                                     |       | $                    | 897,055    |               | $          | 797,693 |   |
|                                                                                                                                                                                                                                             |       |                 |       |               |       |
| **LIABILITIES  AND EQUITY**                                                                                                                                                                                                                      |       |                 |       |               |       |
| Current liabilities:                                                                                                                                                                                                                             |       |                 |       |               |       |
| Accounts payable                                                                                                                                                                                                                                 |       | $                    | 91,944     |               | $          | 85,487 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                                   |       | 18,642               |       | 19,506             |       |
| Deferred revenues, less cost of revenues                                                                                                                                                                                                         |       | 13,387               |       | 10,661             |       |
| Current portion of long-term debt                                                                                                                                                                                                                |       | 4,301                |       | 4,286              |       |
| Total current liabilities                                                                                                                                                                                                                        |       | 128,274              |       | 119,940            |       |
| Long-term liabilities:                                                                                                                                                                                                                           |       |                 |       |               |       |
| Long-term income taxes payable                                                                                                                                                                                                                   |       | 92,547               |       | 90,626             |       |
| Non-current portion of long-term debt                                                                                                                                                                                                            |       | 43,977               |       | 45,428             |       |
| Other long-term liabilities                                                                                                                                                                                                                      |       | 7,887                |       | 4,727              |       |
| Total long-term liabilities                                                                                                                                                                                                                      |       | 144,411              |       | 140,781            |       |
| Total liabilities                                                                                                                                                                                                                                |       | 272,685              |       | 260,721            |       |
|                                                                                                                                                                                                                                             |       |                 |       |               |       |
| Commitments and contingencies (Note 13)                                                                                                                                                                                                     |       |                 |       |               |       |
|                                                                                                                                                                                                                                             |       |                 |       |               |       |
| Equity:                                                                                                                                                                                                                                          |       |                 |       |               |       |
| OmniVision Technologies, Inc. stockholders’  equity:                                                                                                                                                                                   |       |                 |       |               |       |
| Common stock, $0.001 par value;  100,000 shares authorized; 67,253 shares issued and  54,712 outstanding at October 31, 2010 and 64,616 shares  issued and 52,075 outstanding at April 30, 2010, respectively |       | 67                   |       | 65                 |       |
| Additional paid-in capital                                                                                                                                                                                                                       |       | 485,387              |       | 441,077            |       |
| Accumulated other comprehensive income                                                                                                                                                                                                           |       | 1,541                |       | 870                |       |
| Treasury stock, 12,541 shares at October 31,  2010 and April 30, 2010, respectively                                                                                                                                                    |       | (178,683             | )          | (178,683           | )          |
| Retained earnings                                                                                                                                                                                                                                |       | 316,058              |       | 270,253            |       |
| Total OmniVision Technologies, Inc.  stockholders’ equity                                                                                                                                                                              |       | 624,370              |       | 533,582            |       |
| Noncontrolling interest                                                                                                                                                                                                                          |       | —               |       | 3,390              |       |
| Total equity                                                                                                                                                                                                                                     |       | 624,370              |       | 536,972            |       |
| Total  liabilities and equity                                                                                                                                                                                                                    |       | $                    | 897,055    |               | $          | 797,693 |   |

 

The accompanying notes arean integral part of these Condensed Consolidated Financial Statements(unaudited).

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**(in thousands, except per shareamounts)**

**(unaudited)**

 
| ** **                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                    | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                                                                                                                    | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                                                                                      |       | $                                | 239,460    |                           | $          | 183,344 |   | $ | 432,531 |   | $ | 288,904 |   |
| Cost of revenues                                                                                                              |       | 172,013                          |       | 139,382                        |       | 313,129 |   | 221,272 |   |
| Gross profit                                                                                                                  |       | 67,447                           |       | 43,962                         |       | 119,402 |   | 67,632 |   |
|                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Operating expenses:                                                                                                           |       |                             |       |                           |       |   |   |   |   |
| Research, development and related                                                                                             |       | 20,894                           |       | 18,853                         |       | 41,126 |   | 37,285 |   |
| Selling, general and administrative                                                                                           |       | 14,741                           |       | 16,209                         |       | 29,070 |   | 30,369 |   |
| Total operating expenses                                                                                                      |       | 35,635                           |       | 35,062                         |       | 70,196 |   | 67,654 |   |
|                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Income (loss) from operations                                                                                                 |       | 31,812                           |       | 8,900                          |       | 49,206 |   | (22 | ) |
| Interest expense, net                                                                                                         |       | (434                             | )          | (244                           | )          | (634 | ) | (448 | ) |
| Other income (expense), net                                                                                                   |       | (421                             | )          | 223                            |       | 1,072 |   | 791 |   |
| Income before income taxes                                                                                                    |       | 30,957                           |       | 8,879                          |       | 49,644 |   | 321 |   |
|                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Provision for income taxes                                                                                                    |       | 2,090                            |       | 961                            |       | 3,871 |   | 2,149 |   |
| Net income (loss)                                                                                                             |       | 28,867                           |       | 7,918                          |       | 45,773 |   | (1,828 | ) |
| Net loss attributable to noncontrolling interest                                                                              |       | —                           |       | (166                           | )          | (32 | ) | (56 | ) |
| Net income (loss) attributable to OmniVision  Technologies, Inc.                                                         |       | $                                | 28,867     |                           | $          | 8,084 |   | $ | 45,805 |   | $ | (1,772 | ) |
|                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Net income (loss) per share attributable to  OmniVision Technologies, Inc. common stockholders:                          |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                         |       | $                                | 0.53       |                           | $          | 0.16 |   | $ | 0.85 |   | $ | (0.03 | ) |
| Diluted                                                                                                                       |       | $                                | 0.50       |                           | $          | 0.16 |   | $ | 0.80 |   | $ | (0.03 | ) |
|                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Shares used in computing net income (loss) per  share attributable to OmniVision Technologies, Inc. common stockholders: |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                         |       | 54,235                           |       | 50,763                         |       | 53,724 |   | 50,668 |   |
| Diluted                                                                                                                       |       | 57,680                           |       | 51,769                         |       | 57,230 |   | 50,668 |   |

 

The accompanying notes arean integral part of these Condensed Consolidated Financial Statements(unaudited).

 

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**OMNIVISION TECHNOLOGIES, INC.**

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

**(in thousands, unaudited)**

 
| ** **                                                                                    | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                    | ** ** | **October 31,**           | ** ** |
| ** **                                                                                    | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                                        |       |                           |       |   |   |
| Net income (loss)                                                                             |       | $                              | 45,773     |   | $ | (1,828 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities:     |       |                           |       |   |   |
| Depreciation and amortization                                                                 |       | 9,292                          |       | 11,662 |   |
| Change in fair value of interest rate swap                                                    |       | 1,450                          |       | (645 | ) |
| Stock-based compensation                                                                      |       | 10,257                         |       | 12,201 |   |
| Tax effect from stock-based compensation                                                      |       | 1,825                          |       | — |   |
| (Gain) loss on equity investments, net                                                        |       | (6,135                         | )          | (1,398 | ) |
| Write-down of inventories                                                                     |       | 10,443                         |       | 10,149 |   |
| Loss on disposal of property, plant and equipment                                             |       | —                         |       | 108 |   |
| Excess tax benefit from stock-based compensation                                              |       | (1,249                         | )          | — |   |
| Changes in assets and liabilities, net of  acquisition and deconsolidation:                   |       |                           |       |   |   |
| Accounts receivable, net                                                                      |       | (38,901                        | )          | (23,735 | ) |
| Inventories                                                                                   |       | 31                             |       | 7,696 |   |
| Refundable and deferred income taxes                                                          |       | (3,181                         | )          | (1,260 | ) |
| Prepaid expenses and other assets                                                             |       | 1,455                          |       | 235 |   |
| Accounts payable                                                                              |       | 6,189                          |       | 53,713 |   |
| Accrued expenses and other current liabilities                                                |       | 321                            |       | 2,957 |   |
| Income taxes payable                                                                          |       | 2,301                          |       | 3,975 |   |
| Deferred revenues, less cost of revenues                                                      |       | 2,701                          |       | 2,233 |   |
| Deferred tax liabilities                                                                      |       | 1,457                          |       | (967 | ) |
| Net cash provided by operating activities                                                     |       | 44,029                         |       | 75,096 |   |
| Cash flows from investing activities:                                                         |       |                           |       |   |   |
| Purchases of short-term investments                                                           |       | (37,356                        | )          | (45,140 | ) |
| Proceeds from sales or maturities of short-term  investments                                  |       | 78,277                         |       | 23,916 |   |
| Purchases of property, plant and equipment, net of  sales                                     |       | (3,350                         | )          | (4,257 | ) |
| Purchases of long-term investments                                                            |       | (282                           | )          | — |   |
| Purchase of intangible and other assets                                                       |       | (5,000                         | )          | — |   |
| Deconsolidation of SOI                                                                        |       | (2,816                         | )          | — |   |
| Net cash provided by (used in) investing  activities                                          |       | 29,473                         |       | (25,481 | ) |
| Cash flows from financing activities:                                                         |       |                           |       |   |   |
| Proceeds from long-term borrowings                                                            |       | —                         |       | 6,590 |   |
| Repayment of long-term borrowings                                                             |       | (1,777                         | )          | (1,778 | ) |
| Cash contribution by noncontrolling interest                                                  |       | —                         |       | 4 |   |
| Excess tax benefits from stock-based compensation                                             |       | 1,249                          |       | — |   |
| Proceeds from exercise of stock options and  employee stock purchase plan                     |       | 33,418                         |       | 3,610 |   |
| Net cash provided by financing activities                                                     |       | 32,890                         |       | 8,426 |   |
| Effect of exchange rate changes on cash and cash  equivalents                                 |       | 278                            |       | 82 |   |
| Net increase in cash and cash equivalents                                                     |       | 106,670                        |       | 58,123 |   |
| Cash and cash equivalents at beginning of period                                              |       | 234,023                        |       | 257,808 |   |
| Cash and cash equivalents at end of period                                                    |       | $                              | 340,693    |   | $ | 315,931 |   |
| Supplemental cash flow information:                                                           |       |                           |       |   |   |
| Taxes paid                                                                                    |       | $                              | 1,364      |   | $ | 472 |   |
| Interest paid (net of amount capitalized)                                                     |       | $                              | 1,448      |   | $ | 1,085 |   |
| Supplemental schedule of non-cash investing and  financing activities:                        |       |                           |       |   |   |
| Additions to property, plant and equipment  included in accounts payable and accrued expenses |       | $                              | 842        |   | $ | 2,592 |   |
| Capitalized interest and other costs                                                          |       | $                              | 102        |   | $ | 46 |   |

 

The accompanying notes are an integral partof these Condensed Consolidated Financial Statements (unaudited).

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three and Six MonthsEnded October 31, 2010 and 2009**

**(unaudited)**

 

**Note 1 — Basis ofPresentation**

 

***Overview***

 

The accompanying interim unaudited condensed consolidated financialstatements as of October 31, 2010 and April 30, 2010 and for thethree and six months ended October 31, 2010 and 2009 have been prepared byOmniVision Technologies, Inc., and its subsidiaries (“OmniVision” or the “Company”)in accordance with the rules and regulations of the U.S. Securities andExchange Commission (“SEC”). The amounts as of April 30, 2010 are derivedfrom the Company’s audited annual financial statements. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted in accordance with 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, 2010 (the “Form 10-K”).

 

***Use of Estimates***

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses 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.Actual results could differ from these estimates.

 

**Note 2 — RecentAccounting Pronouncements**

 

In October 2009, the FASB revised the authoritative guidance forrevenue recognition for arrangements with multiple deliverables. The newguidance modifies the requirements for determining whether a deliverable can betreated as a separate unit of accounting by removing the criteria thatverifiable and objective evidence of fair value exists for the undeliveredelements. In allocating transaction consideration among the deliverables, theguidance also introduced the concept of using management’s best estimate of astandalone selling price as an alternate basis for allocation. The guidance iseffective in fiscal years beginning on or after June 15, 2010, and theCompany is required to adopt this guidance in its first quarter of fiscal 2012.The Company is currently evaluating the impact this guidance may have on itsfinancial position, results of operations and cash flows.

 

In October 2009, the FASB issued authoritative guidance addressingcertain revenue arrangements that include software elements. This guidancestates that tangible products with hardware and software components that worktogether to deliver the product functionality are considered non-softwareproducts, and the accounting guidance under the revenue arrangements withmultiple deliverables is to be followed. The guidance is effective in fiscalyears beginning on or after June 15, 2010, and the Company is required toadopt this guidance in its first quarter of fiscal 2012. The Company iscurrently evaluating the impact this guidance may have on its financialposition, results of operations and cash flows.

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six MonthsEnded October 31, 2010 and 2009**

**(unaudited)**

 

**Note 3 — Short-TermInvestments**

 

Available-for-sale securities as of the dates presented were as follows(in thousands):

 
| ** **                                                          | ** ** | **As of October 31, 2010** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                          | ** ** | **Amortized**                                  | ** ** | **Gross********Unrealized** | ** ** | **Gross********Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Cost**                                       | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| U.S. government debt securities with maturities  less than one year |       | $                                              | 26,702     |   | $ | 4 |   | $ | (12 | ) | $ | 26,694 |   |
| U.S. government debt securities with maturities  over one year      |       | 8,023                                          |       | 5 |   | — |   | 8,028 |   |
| Commercial paper and bond funds                                     |       | 21,287                                         |       | 2 |   | (4 | ) | 21,285 |   |
|                                                                |       | $                                              | 56,012     |   | $ | 11 |   | $ | (16 | ) | $ | 56,007 |   |
|                                                                |       |                                           |       |   |   |   |   |   |   |
| Contractual maturity dates, less than one year                      |       |                                           |       |   |   |   |   | $ | 47,979 |   |
| Contractual maturity dates, one year to two years                   |       |                                           |       |   |   |   |   | 8,028 |   |
|                                                                |       |                                           |       |   |   |   |   | $ | 56,007 |   |

 
| ** **                                                          | ** ** | **As of April 30, 2010** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                          | ** ** | **Amortized**                                | ** ** | **Gross********Unrealized** | ** ** | **Gross********Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Cost**                                     | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Certificates of deposit                                             |       | $                                            | 2,285      |   | $ | — |   | $ | — |   | $ | 2,285 |   |
| U.S. government debt securities with maturities  less than one year |       | 77,128                                       |       | 12 |   | — |   | 77,140 |   |
| U.S. government debt securities with maturities  over one year      |       | 8,145                                        |       | 5 |   | — |   | 8,150 |   |
| Commercial paper and bond funds                                     |       | 11,999                                       |       |   |   | (19 | ) | 11,980 |   |
|                                                                |       | $                                            | 99,557     |   | $ | 17 |   | $ | (19 | ) | $ | 99,555 |   |
|                                                                |       |                                         |       |   |   |   |   |   |   |
| Contractual maturity dates, less than one year                      |       |                                         |       |   |   |   |   | $ | 91,405 |   |
| Contractual maturity dates, one year to two years                   |       |                                         |       |   |   |   |   | 8,150 |   |
|                                                                |       |                                         |       |   |   |   |   | $ | 99,555 |   |

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six MonthsEnded October 31, 2010 and 2009**

**(unaudited)**

 

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

 
| ** **                                                             | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                             | ** ** | **2010**             | ** ** | **2010**           | ** ** |
| Cash and cash equivalents:                                             |       |                 |       |               |       |
| Cash                                                                   |       | $                    | 211,096    |               | $          | 183,393 |   |
| Money market funds, certificates of deposit and  U.S. government bonds |       | 129,597              |       | 50,630             |       |
|                                                                   |       | $                    | 340,693    |               | $          | 234,023 |   |
| Accounts receivable, net:                                              | ** ** | ** **           | ** ** | ** **         | ** ** |
| Accounts receivable                                                    |       | $                    | 115,515    |               | $          | 75,908 |   |
| Less: Allowance for doubtful accounts                                  |       | (918                 | )          | (711               | )          |
| Allowance for sales returns                                            |       | (1,525               | )          | (936               | )          |
|                                                                   |       | $                    | 113,072    |               | $          | 74,261 |   |
| Inventories:                                                           |       |                 |       |               |       |
| Work in progress                                                       |       | $                    | 49,177     |               | $          | 76,845 |   |
| Finished goods                                                         |       | 72,083               |       | 57,148             |       |
|                                                                   |       | $                    | 121,260    |               | $          | 133,993 |   |
| Prepaid expenses and other current assets:                             |       |                 |       |               |       |
| Prepaid expenses                                                       |       | $                    | 5,324      |               | $          | 6,398 |   |
| Deposits and other                                                     |       | 1,604                |       | 2,686              |       |
| Interest receivable                                                    |       | 442                  |       | 296                |       |
|                                                                   |       | $                    | 7,370      |               | $          | 9,380 |   |
| Property, plant and equipment, net:                                    |       |                 |       |               |       |
| Land                                                                   |       | $                    | 13,000     |               | $          | 13,000 |   |
| Buildings and land use right                                           |       | 56,602               |       | 37,877             |       |
| Buildings/leasehold improvements                                       |       | 24,860               |       | 19,148             |       |
| Machinery and equipment                                                |       | 67,388               |       | 64,894             |       |
| Furniture and fixtures                                                 |       | 5,008                |       | 4,810              |       |
| Software                                                               |       | 6,369                |       | 5,873              |       |
| Construction in progress                                               |       | 239                  |       | 23,419             |       |
|                                                                   |       | 173,466              |       | 169,021            |       |
| Less: Accumulated depreciation and amortization                        |       | (55,034              | )          | (47,474            | )          |
|                                                                   |       | $                    | 118,432    |               | $          | 121,547 |   |
| Other long-term assets:                                                |       |                 |       |               |       |
| Deferred income tax assets – non-current                |       | $                    | 18,898     |               | $          | 20,440 |   |
| Prepaid wafer credits                                                  |       | 3,343                |       | 2,826              |       |
| Long-term employee loan receivable                                     |       | 1,000                |       | 1,000              |       |
| Other long-term assets                                                 |       | 1,118                |       | 1,227              |       |
|                                                                   |       | $                    | 24,359     |               | $          | 25,493 |   |
| Accrued expenses and other current liabilities:                        |       |                 |       |               |       |
| Employee compensation                                                  |       | $                    | 9,420      |               | $          | 7,490 |   |
| Third party commissions                                                |       | 710                  |       | 1,004              |       |
| Professional services                                                  |       | 1,426                |       | 2,383              |       |
| Noncancelable purchase commitments                                     |       | 2,844                |       | 4,689              |       |
| Distributor pricing adjustments                                        |       | 2,493                |       | 1,871              |       |
| Other                                                                  |       | 1,749                |       | 2,069              |       |
|                                                                   |       | $                    | 18,642     |               | $          | 19,506 |   |
| Other long-term liabilities:                                           |       |                 |       |               |       |
| Deferred income tax liabilities – non-current           |       | $                    | 2,499      |               | $          | 1,040 |   |
| Interest rate swaps                                                    |       | 5,138                |       | 3,687              |       |
| Other                                                                  |       | 250                  |       | —             |       |
|                                                                   |       | $                    | 7,887      |               | $          | 4,727 |   |

 

8

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six MonthsEnded October 31, 2010 and 2009**

**(unaudited)**

 

**Note 5 — Long-termInvestments**

 

Long-term investments as of the dates indicatedconsisted of the following (in thousands):

 
| ** **  | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|-------------|------------|----------------------|------------|--------------------|------------|
| ** **  | ** ** | **2010**             | ** ** | **2010**           | ** ** |
| VisEra      |       | $                    | 75,605     |               | $          | 72,170 |   |
| WLCSP       |       | 13,199               |       | 11,819             |       |
| XinTec      |       | 4,661                |       | 4,661              |       |
| Tong  Hsing |       | 4,574                |       | 3,471              |       |
| SOI         |       | 3,787                |       | —             |       |
| Total       |       | $                    | 101,826    |               | $          | 92,121 |   |

 

***VisEra TechnologiesCompany, Ltd.***

 

On October 29, 2003, the Company and Taiwan SemiconductorManufacturing Company Limited (“TSMC”) entered into an agreement to form VisEraTechnologies Company, Ltd. (“VisEra”), a joint venture in Taiwan, for thepurposes of providing certain manufacturing and automated final testingservices related to complementary metal oxide semiconductor (“CMOS”) imagesensors. In August 2005, under an amendment to the original 2003joint-venture agreement, the Company and TSMC formed VisEra Holding Company (“VisEraCayman”), a company incorporated in the Cayman Islands, and VisEra became asubsidiary of VisEra Cayman. The Company and TSMC have equal interests inVisEra Cayman.

 

Through April 2007, the Company’s contributions to VisEra andVisEra Cayman totaled $51.6 million, effectively meeting its commitmentunder the terms of a January 2007 amendment to the joint-ventureagreement, in which the Company and TSMC have agreed to commit a total of$112.9 million to the joint venture. The Company has not made anysubsequent contributions into VisEra or VisEra Cayman.

 

The following table presents equity income recorded by the Company forthe periods indicated in “Cost of revenues,” consisting of its portion of thenet income recorded by VisEra during the periods presented (in thousands) (SeeNote 14.):

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **    | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **    | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Equity income |       | $                                | 2,152      |                           | $          | 1,567 |   | $ | 3,285 |   | $ | 1,451 |   |
|               |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

***China WLCSP Limited***

 

China WLCSP Limited (“WLCSP”) is in the business of designing,manufacturing, packaging and selling certain wafer level chip scale packagingrelated services. In May 2007, the Company acquired 4,500,000 units ofWLCSP’s equity interests, or 20.0% of WLCSP’s registered capital on afully-diluted basis, for an aggregate purchase amount of $9.0 million. TheCompany has appointed a member to WLCSP’s board of directors and a supervisor.

 

At the date of the transaction, the Company’s $9.0 millioninvestment in WLCSP exceeded its share of the book value of WLCSP’s assets by$5.7 million. Of this $5.7 million difference, $4.1 millionrepresents equity method goodwill that is not subject to amortization. Thisamount is recorded as a portion of the Company’s investment in WLCSP. TheCompany is amortizing the remaining basis difference of $1.6 million,which is attributable to intangible assets of WLCSP, over various periods up toa maximum of five years.

 

9

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six MonthsEnded October 31, 2010 and 2009**

**(unaudited)**

 

The Company accounts for its investment in WLCSP under the equitymethod. The following table presents equity income recorded by the Company forthe periods indicated in “Other income (expense), net,” consisting of itsportion of the net income recorded by WLCSP during those periods and equitymethod investment adjustments (in thousands):

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **    | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **    | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Equity income |       | $                                | 395        |                           | $          | 245 |   | $ | 1,380 |   | $ | 696 |   |
|               |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

***XinTec, Inc.***

 

XinTec, Inc. (“XinTec”) is a Taiwan-based supplier of chip scalepackaging services. The Company first made investments in XinTec inApril 2003, for $2.8 million. As of October 31, 2010, theCompany’s direct ownership percentage in XinTec was 4.2%. Separately, VisEraCayman owns a 16.1% interest in XinTec. Consequently, the Company’s beneficialownership percentage in XinTec was approximately 12.1%. The Company accountsfor XinTec as a cost method investment.

 

***Tong Hsing ElectronicIndustries, Limited***

 

Tong Hsing Electronic Industries, Limited (“Tong Hsing”) is aTaiwan-based public company principally engaged in the development andproduction of microelectronic packaging. In December 2009, the Companyobtained 0.8% of the outstanding shares of common stock of Tong Hsing, or996,250 shares, when Tong Hsing acquired ImPac Technology Co., Ltd. (“ImPac”)in a stock-for-stock exchange. Prior to the exchange, the Company owned 25.7%of ImPac. In June 2010, the Company participated in Tong Hsing’s secondaryoffering and purchased an additional 95,570 shares for approximately $282,000.As of October 31, 2010, the Company’s ownership in Tong Hsing wasapproximately 0.8%.

 

As the shares of Tong Hsing are traded on the Taiwan Stock Exchange andthe share price is readily determinable, the Company reported the shares on amark-to-market basis. For the periods indicated, the Company recorded thefollowing unrealized holding gains in “Accumulated other comprehensive income”(in thousands):

 
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **               | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Unrealized holding gains |       | $                                | 413        |                           | $          | — |   | $ | 821 |   | $ | — |   |
|                          |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

***Silicon Optronics, Inc.***

 

In May 2004, the Company entered into an agreement with PowerchipTechnology Corporation (“PTC”), formerly Powerchip Semiconductor Corporation, aTaiwan based company that produces memory chips and provides semiconductorfoundry services, to establish Silicon Optronics, Inc. (“SOI”), a jointventure in Taiwan. The Company contributed approximately $2.1 million to SOI inexchange for an ownership percentage of 49.0%. In March 2005, the Companyassumed control of the board of directors of SOI and the Company hasconsolidated SOI since April 30, 2005. The purpose of SOI is tomanufacture, market and sell certain of the Company’s legacy products. Towardthe end of fiscal 2010, SOI began to ship niche products into other markets,including touch panels that track touches with optical sensors, and linearsensors.

 

In June 2010, SOI held its annual meeting of stockholders and newboard directors were elected. As a result, the Company no longer held themajority representation on the board of directors of SOI, and was required todeconsolidate SOI. The authoritative guidance for deconsolidation required theCompany to record its retained interest in SOI at fair value. Pursuant to theguidance, the Company recorded a gain of approximately $1.6 million in “Otherincome (expense), net,” which was the difference between the fair value of theCompany’s retained interest in SOI, and the carrying value of SOI’s net assetsand noncontrolling interest before the deconsolidation. (See Note 9).After the deconsolidation, the Company owned 43.8% of SOI, which the Companyaccounted for under the equity method. As of October 31, 2010, the Company’sownership in SOI was approximately 43.7%.

 

10

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six MonthsEnded October 31, 2010 and 2009**

**(unaudited)**

 

For the periods indicated, the Company recorded equity loss in “Otherincome (expense), net” for its portion of the net loss recorded by SOI (inthousands):

 
| ** **  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **  | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **  | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Equity loss |       | $                                | (304       | )                              | $          | — |   | $ | (267 | ) | $ | — |   |
|             |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Noncontrolling interest represents ownership interests in SOI held byparties other than the Company. The following table reconciles equityattributable to noncontrolling interest for the periods indicated (inthousands):

 
| ** **                                       | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **October 31,**           | ** ** |
| ** **                                       | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Noncontrolling interest, May 1              |       | $                              | 3,390      |   | $ | 3,497 |   |
| Cash contribution by noncontrolling interest     |       | —                         |       | 4 |   |
| Net loss attributable to noncontrolling interest |       | (32                            | )          | (56 | ) |
| Translation gain (loss)                          |       | (70                            | )          | 60 |   |
| Deconsolidation                                  |       | (3,288                         | )          | — |   |
| Noncontrolling interest, October 31         |       | $                              | —     |   | $ | 3,505 |   |

 

The following tables present the summary financial information of SOI,VisEra and WLCSP, as derived from their financial statements for the periodsindicated, and prepared under GAAP (in thousands):

 

***Silicon Optronics, Inc***

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                     | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ***Operating data:***          |       |                             |       |                           |       |   |   |   |   |
| Revenues                       |       | $                                | 2,367      |                           | $          | 614 |   | $ | 4,804 |   | $ | 2,294 |   |
| Gross  profit (loss)           |       | (227                             | )          | 82                             |       | 234 |   | 537 |   |
| Income  (loss) from operations |       | (727                             | )          | (318                           | )          | (719 | ) | (148 | ) |
| Net  loss                      |       | $                                | (695       | )                              | $          | (296 | ) | $ | (666 | ) | $ | (100 | ) |

 

***VisEra TechnologiesCompany, Ltd.***

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ***Operating data:***   |       |                             |       |                           |       |   |   |   |   |
| Revenues                |       | $                                | 26,709     |                           | $          | 20,142 |   | $ | 53,154 |   | $ | 31,785 |   |
| Gross  profit           |       | 7,249                            |       | 4,422                          |       | 12,699 |   | 4,328 |   |
| Income  from operations |       | 4,483                            |       | 2,455                          |       | 7,301 |   | 586 |   |
| Net  income             |       | $                                | 5,412      |                           | $          | 2,367 |   | $ | 6,558 |   | $ | 2,372 |   |

 

11

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six MonthsEnded October 31, 2010 and 2009**

**(unaudited)**

 

***China WLCSP Limited***

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ***Operating data:***   |       |                             |       |                           |       |   |   |   |   |
| Revenues                |       | $                                | 8,221      |                           | $          | 5,138 |   | $ | 19,058 |   | $ | 10,529 |   |
| Gross  profit           |       | 2,968                            |       | 1,962                          |       | 9,099 |   | 4,534 |   |
| Income  from operations |       | 951                              |       | 1,276                          |       | 6,174 |   | 3,109 |   |
| Net  income             |       | $                                | 990        |                           | $          | 1,227 |   | $ | 6,002 |   | $ | 3,486 |   |

 

The Company’s share of undistributed earnings of investees accountedfor by the equity method as of the dates indicated were as follows (inthousands):

 
| ** **                           | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                           | ** ** | **2010**             | ** ** | **2010**           | ** ** |
| Undistributed  earnings of investees |       | $                    | 19,000     |               | $          | 20,806 |   |
|                                      |            |                      |            |                    |            |  |  |

 

**Note 6 — Goodwilland Intangible Assets**

 

***Goodwill***

 

The change to the carrying value of the Company’s goodwill fromMay 1, 2010 through October 31, 2010 is reflected below (inthousands):

 
| ** **                       | ** ** | **Goodwill** | ** ** |
|----------------------------------|------------|--------------|------------|
| Balance at May 1, 2010      |       | $            | 439        |   |
| Goodwill from purchase of assets |       | 683          |       |
| Balance at October 31, 2010 |       | $            | 1,122      |   |

 

Intangible assets as of the dates indicated consisted of the following(in thousands):

 
| ** **                          | ** ** | **October 31, 2010** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **Cost**                       | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Core technology(1)                  |       | $                              | 24,410     |   | $ | 18,506 |   | $ | 5,904 |   |
| Patents and licenses                |       | 13,460                         |       | 13,070 |   | 390 |   |
| Trademarks and tradenames           |       | 1,400                          |       | 1,400 |   | — |   |
| Customer relationships              |       | 340                            |       | 120 |   | 220 |   |
| In-process research and development |       | 490                            |       | — |   | 490 |   |
| Intangible assets, net              |       | $                              | 40,100     |   | $ | 33,096 |   | $ | 7,004 |   |

 

----

(1)          During the six months endedOctober 31, 2010, the Company purchased certain intangible and otherassets, of which $3.4 million was allocated to “Core technology” based ontheir fair values as of the purchase date.

 
| ** **                          | ** ** | **April 30, 2010** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **Cost**                     | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Core technology                     |       | $                            | 21,010     |   | $ | 17,856 |   | $ | 3,154 |   |
| Patents and licenses                |       | 13,487                       |       | 12,477 |   | 1,010 |   |
| Trademarks and tradenames           |       | 1,400                        |       | 1,400 |   | — |   |
| Customer relationships              |       | 340                          |       | 103 |   | 237 |   |
| In-process research and development |       | 490                          |       | — |   | 490 |   |
| Intangible assets, net              |       | $                            | 36,727     |   | $ | 31,836 |   | $ | 4,891 |   |

 

12

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six MonthsEnded October 31, 2010 and 2009**

**(unaudited)**

 

The following table presents the amortization of intangibles recordedby the Company for the periods indicated (in thousands):

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                  | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Amortization of intangibles |       | $                                | 802        |                           | $          | 1,633 |   | $ | 1,260 |   | $ | 3,266 |   |
|                             |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

The total expected future annual amortization of these intangibleassets is as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| 2011                                      |       | $          | 1,338      |   |
| 2012                                      |       | 1,978      |       |
| 2013                                      |       | 1,902      |       |
| 2014                                      |       | 766        |       |
| 2015                                      |       | 377        |       |
| Thereafter                                |       | 643        |       |
| Total                                     |       | $          | 7,004      |   |

 

**Note 7 — BorrowingArrangements**

 

The following table sets forth the Company’s debt asof the dates indicated (in thousands):

 
| ** **                            | ** ** | **October 31,********2010** | ** ** | **April 30,********2010** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
|                                  |       |                             |       |                           |       |
| Mortgage loan                         |       | $                                | 25,590     |                           | $          | 25,867 |   |
| Term loan                             |       | 5,500                            |       | 7,000                          |       |
| Construction loan                     |       | 17,188                           |       | 16,847                         |       |
|                                  |       | 48,278                           |       | 49,714                         |       |
| Less: amount due within one year |       | (4,301                           | )          | (4,286                         | )          |
| Non-current portion of long-term debt |       | $                                | 43,977     |                           | $          | 45,428 |   |

 

As of October 31, 2010, aggregate debtmaturities were as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | **Mortgage  and Term  Loan** | ** ** | **Construction  Loan** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|------------------------|------------|-----------|------------|
| 2011                                      |       | $                                 | 1,777      |                   | $          | 747       |       | $ | 2,524 |   |
| 2012                                      |       | 3,554                             |       | 747                    |       | 4,301     |       |
| 2013                                      |       | 1,554                             |       | 1,495                  |       | 3,049     |       |
| 2014                                      |       | 554                               |       | 2,989                  |       | 3,543     |       |
| 2015                                      |       | 554                               |       | 2,989                  |       | 3,543     |       |
| Thereafter                                |       | 23,097                            |       | 8,221                  |       | 31,318    |       |
| Total                                     |       | $                                 | 31,090     |                   | $          | 17,188    |       | $ | 48,278 |   |

 

***Mortgage Loan and TermLoan***

 

On March 16, 2007, the Company entered into a Loan and SecurityAgreement with a domestic bank for the purchase of a complex of four buildingslocated in Santa Clara, California (the “Santa Clara Property”). The Loan andSecurity Agreement provides for a mortgage loan in the principal amount of$27.9 million (the “Mortgage Loan”) and a secured line of credit with anaggregate maximum principal amount of up to $12.0 million (the “Term Loan”).In March 2008, the Company borrowed $6.0 million under the Term Loanto finance improvements to the Santa Clara Property. The Company drew down theremaining $6.0 million under the Term Loan in July 2008.

 

13

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six MonthsEnded October 31, 2010 and 2009**

**(unaudited)**

 

Borrowings under the Mortgage Loan accrue interest at the LondonInterbank Borrowing Rate (“LIBOR”) plus 90 basis points. Borrowings underthe Term Loan accrue interest at the LIBOR rate plus 125 basis points. TheMortgage and Term Loans mature on March 31, 2017 and July 31, 2012,respectively.  The Company was incompliance with the financial covenants of the Loan and Security Agreement asof October 31, 2010.

 

Interest rates under the Mortgage Loan and the Term Loan for the datesindicated are set forth below:

 
| ** **     | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|----------------|------------|----------------------|------------|--------------------|------------|
| ** **     | ** ** | **2010**             | ** ** | **2010**           | ** ** |
| Mortgage  Loan |       | 1.2                  | %          | 1.2                | %          |
| Term  Loan     |       | 1.5                  |       | 1.5                |       |

 

In conjunction with the Mortgage Loan, the Company entered into aninterest rate swap with the same bank to effectively convert the variableinterest rate described above to a fixed rate. The swap is for a period of tenyears, and the notional amount of the swap approximates the principaloutstanding under the Mortgage Loan. The Company is the fixed rate payer underthe swap and the rate is fixed at 5.3% per annum and the effective rate on theMortgage Loan is fixed at approximately 6.2%. In July 2008, in connectionwith the Term Loan, the Company entered into a second interest rate swap withthe bank to effectively convert the variable interest rate described above to afixed rate. This second swap is for a period of four years. The Company is thefixed rate payer and the rate is fixed at 4.3% per annum and the effective rateon the Term Loan is fixed at approximately 5.5%.

 

***Construction Loan***

 

On August 3, 2009, OmniVision Technologies (Shanghai) Co., Ltd.,a wholly-owned subsidiary of the Company, entered into a Fixed Assets LoanAgreement with a bank in China (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. The loanamount is Chinese Yuan 140.0 million or approximately $20.5 millionbased on exchange rate in effect at the time of the loan origination. As ofOctober 31, 2010, the Company has borrowed Chinese Yuan115.0 million, or approximately $17.2 million, under the ConstructionLoan. The Company is scheduled to draw down the remaining $3.3 million byDecember 2011. The Construction Loan matures on June 30, 2016.

 

The interest rate under the Construction Loan is based on an indicativerate as published by the Chinese government, and will be adjusted every September tothe then current published rate. The interest rate under the Construction Loanwas 5.3% at October 31, 2010. The Company was in compliance with thefinancial covenants of the Fixed Assets Loan Agreement as of October 31,2010.

 

***Derivative Instruments andHedging Activities***

 

As indicated above, the Company holds two separate interest rate swapsin connection with the Mortgage Loan and the Term Loan. The Company utilizesthe swaps to reduce the effect of interest rate variability on the two loans’interest payments. The Company has not designated the two interest rate swapsas hedging instruments. Consequently, the Company remeasures the two interestrate swaps at fair value at each balance sheet date, and immediately recognizesany changes 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.

 

14

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31, 2010 and 2009**

**(unaudited)**

 

Thefollowing table presents the location of the swaps on the CondensedConsolidated Statements of Operations and Condensed Consolidated BalanceSheets, and the related effects on the Company’s results of operations andfinancial positions (in thousands):

 
| ** **                                                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                             | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                                                                                                             | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ***Location of amounts recognized in  Condensed Consolidated Statements of Operations and amount of gains (losses):*** |       |                             |       |                           |       |   |   |   |   |
| Other  income (expense), net                                                                                           |       | $                                | (353       | )                              | $          | (236 | ) | $ | (1,451 | ) | $ | 645 |   |
|                                                                                                                   |       |                             |       |                           |       |   |   |   |   |
|                                                                                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|                                                                                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | **2010** | ** ** | **2010** | ** ** |
| ***Location of amounts on Condensed  Consolidated Balance Sheets and fair values:***                                   |       |                             |       |                           |       |   |   |   |   |
| Other  long-term liabilities                                                                                           |       |                             |       |                           |       | $ | 5,138 |   | $ | 3,687 |   |
|                                                                                                                        |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

**Note 8 — Net Income (Loss) Per Share Attributable toOmniVision Technologies, Inc. Common Stockholders**

 

Basicnet income (loss) per share attributable to OmniVision common stockholders iscomputed by dividing net income (loss) attributable to OmniVision by theweighted average number of common shares outstanding during the period.

 

Dilutednet income per share attributable to OmniVision common stockholders is computedaccording to the treasury stock method using the weighted average number ofcommon and potentially dilutive common shares outstanding during the period.Potentially dilutive common shares represent the effect of stock options andrestricted stock units. The following table sets forth the number of stockoptions and restricted stock units that were excluded from the periodsindicated:

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                                                                           | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Antidilutive  common stock subject to outstanding options and restricted stock units |       | 410,000                          |       | 11,012,000                     |       | 878,000 |   | 11,291,000 |   |

 

15

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31, 2010 and 2009**

**(unaudited)**

 

Thefollowing table sets forth the computation of basic and diluted earnings (loss)per share for the periods indicated (in thousands, except per share data):

 
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                              | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                                                                                                                              | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ***Basic:***                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| *Numerator:*                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Net income (loss) attributable to OmniVision  Technologies, Inc.                                                                        |       | $                                | 28,867     |                           | $          | 8,084 |   | $ | 45,805 |   | $ | (1,772 | ) |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| *Denominator:*                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares for net income  (loss) per share attributable to OmniVision Technologies, Inc. common  stockholders |       | 54,235                           |       | 50,763                         |       | 53,724 |   | 50,668 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Basic net income (loss) per share attributable to  OmniVision Technologies, Inc. common stockholders                               |       | $                                | 0.53       |                           | $          | 0.16 |   | $ | 0.85 |   | $ | (0.03 | ) |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| ***Diluted:***                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| *Numerator:*                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Net income (loss) attributable to OmniVision  Technologies. Inc.                                                                        |       | $                                | 28,867     |                           | $          | 8,084 |   | $ | 45,805 |   | $ | (1,772 | ) |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| *Denominator:*                                                                                                                          |       |                             |       |                           |       |   |   |   |   |
| Denominator for basic net income (loss) per share  attributable to OmniVision Technologies, Inc. common stockholders               |       | 54,235                           |       | 50,763                         |       | 53,724 |   | 50,668 |   |
| Weighted average effect of dilutive securities:                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Stock options, restricted stock units and employee  stock purchase plan shares                                                          |       | 3,445                            |       | 1,006                          |       | 3,506 |   | — |   |
| Weighted average common shares for diluted net  income (loss) per share                                                                 |       | 57,680                           |       | 51,769                         |       | 57,230 |   | 50,668 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Diluted net income (loss) per share attributable  to OmniVision Technologies, Inc. common stockholders                             |       | $                                | 0.50       |                           | $          | 0.16 |   | $ | 0.80 |   | $ | (0.03 | ) |

 

**Note 9 — ****Fair ValueMeasurements**

 

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

 

·                  *Level 1 — *Inputs arequoted prices in active markets for identical assets or liabilities.

·                  *Level 2* — Inputsare quoted prices for similar assets or liabilities in an active market, quotedprices for identical or similar assets or liabilities in markets that are notactive, inputs other than quoted prices that are observable andmarket-corroborated inputs which are derived principally from or corroboratedby observable market data.

·                  *Level 3* — Inputsare derived from valuation techniques in which one or more significant inputsor value drivers are unobservable.

 

16

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31, 2010 and 2009**

**(unaudited)**

 

***Assets and Liabilities Measuredand Recorded at Fair Value on a Recurring Basis***

 

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

 
| ** **                                                              | ** ** | **October 31, 2010** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **Total**                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Money market funds                                                      |       | $                              | 107,268    |   | $ | 107,268 |   | $ | — |   | $ | — |   |
| Debt securities issued by U.S. government and U.S.  government agencies |       | 34,722                         |       | — |   | 34,722 |   | — |   |
| Corporate debt securities/commercial paper                              |       | 36,182                         |       | — |   | 36,182 |   | — |   |
| Equity investment in Tong Hsing                                         |       | 4,574                          |       | 4,574 |   | — |   | — |   |
| Total assets                                                            |       | $                              | 182,746    |   | $ | 111,842 |   | $ | 70,904 |   | $ | — |   |
| Interest rate swaps                                                     |       | $                              | (5,138     | ) | $ | — |   | $ | (5,138 | ) | $ | — |   |
| Total liabilities                                                       |       | $                              | (5,138     | ) | $ | — |   | $ | (5,138 | ) | $ | — |   |

 

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

 
| ** **             | ** ** | **October 31, 2010** | ** ** |
|------------------------|------------|--------------------------------|------------|
| ** **             | ** ** | **Total**                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Cash equivalents       |       | $                              | 122,165    |   | $ | 107,268 |   | $ | 14,897 |   | $ | — |   |
| Short-term investments |       | 56,007                         |       | — |   | 56,007 |   | — |   |
| Long-term investments  |       | 4,574                          |       | 4,574 |   | — |   | — |   |
| Total assets           |       | $                              | 182,746    |   | $ | 111,842 |   | $ | 70,904 |   | $ | — |   |
| Interest rate swaps    |       | $                              | (5,138     | ) | $ | — |   | $ | (5,138 | ) | $ | — |   |
| Total liabilities      |       | $                              | (5,138     | ) | $ | — |   | $ | (5,138 | ) | $ | — |   |

 

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

 
| ** **                                                              | ** ** | **April 30, 2010** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **Total**                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Money market funds                                                      |       | $                            | 41,211     |   | $ | 41,211 |   | $ | — |   | $ | — |   |
| Debt securities issued by U.S. government and U.S.  government agencies |       | 85,290                       |       | — |   | 85,290 |   | — |   |
| Corporate debt securities/commercial paper                              |       | 11,980                       |       | — |   | 11,980 |   | — |   |
| Equity investment in Tong Hsing                                         |       | 3,471                        |       | 3,471 |   | — |   | — |   |
| Total assets                                                            |       | $                            | 141,952    |   | $ | 44,682 |   | $ | 97,270 |   | $ | — |   |
| Interest rate swaps                                                     |       | $                            | (3,687     | ) | $ | — |   | $ | (3,687 | ) | $ | — |   |
| Total liabilities                                                       |       | $                            | (3,687     | ) | $ | — |   | $ | (3,687 | ) | $ | — |   |

 

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31, 2010 and 2009**

**(unaudited)**

 

Thefollowing table presents the Company’s financial assets and liabilities thatare measured at fair value on a recurring basis which were presented on theCompany’s Consolidated Balance Sheets as of the date indicated (in thousands):

 
| ** **             | ** ** | **April 30, 2010** | ** ** |
|------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **Total**                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Cash equivalents       |       | $                            | 41,211     |   | $ | 41,211 |   | $ | — |   | $ | — |   |
| Short-term investments |       | 97,270                       |       | — |   | 97,270 |   | — |   |
| Long-term investments  |       | 3,471                        |       | 3,471 |   | — |   | — |   |
| Total assets           |       | $                            | 141,952    |   | $ | 44,682 |   | $ | 97,270 |   | $ | — |   |
| Interest rate swaps    |       | $                            | (3,687     | ) | $ | — |   | $ | (3,687 | ) | $ | — |   |
| Total liabilities      |       | $                            | (3,687     | ) | $ | — |   | $ | (3,687 | ) | $ | — |   |

 

Certificatesof deposit recorded as cash equivalents and short-term investments are notmeasured at fair value on a recurring basis and as such are not included in thetables above. The following table sets forth the carrying value of certificatesof deposit recorded as cash equivalents and short-term investments for thedates presented (in thousands):

 
| ** **                                                  | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **2010**             | ** ** | **2010**           | ** ** |
| Certificates  of deposit recorded as cash equivalents       |       | $                    | 7,432      |               | $          | 9,419 |   |
| Certificates  of deposit recorded as short-term investments |       | $                    | —     |               | $          | 2,285 |   |

 

Forthe Company’s interest rate swaps, the Company obtains fair value quotes fromthe issuing bank and assesses the quotes for reasonableness by comparing themto the present values of expected cash flows. The present value approach isbased on observable market interest rate curves that are commensurate with theterms of the interest rate swaps. The carrying value represents the fair valueof the swaps, as adjusted for any non-performance risk associated with theCompany.

 

Dueto their short maturities, the reported amounts of the Company’s financialinstruments, including cash and cash equivalents, short-term investments,accounts receivable, accounts payable and other current liabilities approximatefair value. The fair values of the Mortgage Loan, Term Loan and ConstructionLoan approximate book values as the underlying interest rates are based onrisk-adjusted market rates.

 

***Assets Measured and Recorded atFair Value on a Non-Recurring Basis***

 

Thefollowing table presents the Company’s financial assets that were measured andrecorded at fair value on a non-recurring basis during the three and six monthsended October 31, 2010, and the gain recorded on the assets during thesame period (in thousands):

 
| ** **               | ** ** | **Carrying********Value  October 31,** | ** ** | **Fair Value Measured and Recorded Using** | ** ** | **Gain for********Three Months********Ended** | ** ** | **Gain for********Six Months********Ended** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **               | ** ** | **2010**                                    | ** ** | **Level 1**                                                    | ** ** | **Level 2**                                        | ** ** | **Level 3**                                      | ** ** | **October 31, 2010** | ** ** |
| Equity investment in SOI |       | $                                           | 3,787      | (1)                                                                 | $          | —                                                  |       | $                                                     | —     |   | $ | 4,157 |   | $ | — |   | $ | 1,648 |   |
| Total gain               |       |                                        |       |                                                                |       |                                                    |       |                                                  |       |   |   | $ | 1,648 |   |
|                          |            |                                             |            |                                                                     |            |                                                         |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)         The carryingvalue as presented as of October 31, 2010, reflects subsequent equity income(loss) adjustments to the fair value. These adjustments represented the Company’sportion of the net income or losses recorded by SOI.

 

TheCompany did not have any assets or liabilities that were measured at fair valueon a non-recurring basis during the three and six months ended October 31,2009. For the Company’s equity investment in SOI, the authoritative guidancefor deconsolidation required the Company to record its retained interest in SOIat fair value in June 2010, when the Company no longer held the majorityrepresentation on SOI’s board. (See Note 5.) The Company classified thefair value measurement as Level 3 as the Company used unobservable inputsfor the valuation methodologies that 

 

18

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31, 2010 and 2009**

**(unaudited)**

 

weresignificant to the fair value measurements. The Company determined the fairvalue of its retained interest in SOI by using the market and incomeapproaches. The market approach included the use of financial metrics fromcomparable public companies. The selection of comparable companies requiredmanagement judgment and was based on a number of factors, including comparablecompanies’ sizes, industries, and other relevant factors. The income approachincluded the use of a discounted cash flow model that required significantestimates for SOI, including revenues, costs, risk adjusted discount rates andother relevant projections.

 

**Note 10 — Segment and Geographic Information**

 

TheCompany identifies its business segments based on business activities,management responsibility and geographic location. For all periods presented,the Company operated in a single reportable business segment.

 

TheCompany sells its image-sensor products either directly to OEMs and VARs orindirectly through distributors. The following table illustrates the percentageof revenues from sales to OEMs and VARs and to distributors for the periodsindicated, respectively:

 
| ** **     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **     | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **     | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| OEMs  and VARs |       | 73.9                             | %          | 53.4                           | %          | 71.4 | % | 52.1 | % |
| Distributors   |       | 26.1                             |       | 46.6                           |       | 28.6 |   | 47.9 |   |
| Total          |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

Sincethe Company’s end-user customers market and sell their products worldwide, itsrevenues by geographic location are not necessarily indicative of thegeographic distribution of end-user sales, but rather indicate where theircomponents are sourced. The revenues by geography in the following table arebased on the country or region in which the Company’s customers issue theirpurchase orders (in thousands):

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **    | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **    | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| China         |       | $                                | 166,421    |                           | $          | 154,027 |   | $ | 293,872 |   | $ | 242,443 |   |
| South Korea   |       | 42,642                           |       | 528                            |       | 79,341 |   | 844 |   |
| Malaysia      |       | 14,927                           |       | 6,784                          |       | 34,101 |   | 11,136 |   |
| Taiwan        |       | 8,391                            |       | 16,095                         |       | 12,973 |   | 25,817 |   |
| United States |       | 731                              |       | 883                            |       | 1,962 |   | 1,552 |   |
| All other     |       | 6,348                            |       | 5,027                          |       | 10,282 |   | 7,112 |   |
| Total         |       | $                                | 239,460    |                           | $          | 183,344 |   | $ | 432,531 |   | $ | 288,904 |   |

 

TheCompany’s long-lived assets, including its long-term investments, are locatedin the following countries (in thousands):

 
| ** **    | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|---------------|------------|----------------------|------------|--------------------|------------|
| ** **    | ** ** | **2010**             | ** ** | **2010**           | ** ** |
| Taiwan        |       | $                    | 95,503     |               | $          | 92,092 |   |
| China         |       | 66,573               |       | 64,558             |       |
| United States |       | 57,537               |       | 59,602             |       |
| All other     |       | 5,106                |       | 928                |       |
| Total         |       | $                    | 224,719    |               | $          | 217,180 |   |

 

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31, 2010 and 2009**

**(unaudited)**

 

**Note 11 — Supplemental Financial Information**

 

***Additional Paid-in Capital***

 

Thefollowing table shows the amounts recorded to “Additional paid-in capital” forthe six months ended October 31, 2010 (in thousands):

 
| ** **                                                                  | ** ** | **Additional** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                  | ** ** | **Paid-in**    | ** ** |
| ** **                                                                  | ** ** | **Capital**    | ** ** |
| Balance  at May 1, 2010                                                |       | $              | 441,077    |   |
| Exercise  of common stock options                                           |       | 30,791         |       |
| Employee  stock purchase plan                                               |       | 2,625          |       |
| Employee  stock-based compensation                                          |       | 10,257         |       |
| Withholding  tax deduction on restricted stock units                        |       | (743           | )          |
| Tax  effect from stock-based compensation                                   |       | 1,825          |       |
| Write-off  of employee stock-based compensation related deferred tax assets |       | (445           | )          |
| Balance  at October 31, 2010                                           |       | $              | 485,387    |   |

 

***Comprehensive Income (Loss)***

 

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

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                                                                      | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income (loss)                                                               |       | $                                | 28,867     |                           | $          | 7,918 |   | $ | 45,773 |   | $ | (1,828 | ) |
| Translation gains (losses)                                                      |       | (106                             | )          | 54                             |       | (148 | ) | 125 |   |
| Unrealized gains on available-for-sale securities,  net                         |       | 392                              |       | 5                              |       | 819 |   | 8 |   |
| Comprehensive income (loss)                                                     |       | 29,153                           |       | 7,977                          |       | 46,444 |   | (1,695 | ) |
| Comprehensive income (loss) attributable to  noncontrolling interest            |       | —                           |       | (135                           | )          | (102 | ) | 4 |   |
| Comprehensive income (loss) attributable to  OmniVision Technologies, Inc. |       | $                                | 29,153     |                           | $          | 8,112 |   | $ | 46,546 |   | $ | (1,699 | ) |

 

**Note 12 — Income Taxes**

 

TheCompany reported the following operating results for the periods presented:

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                 | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Income before income taxes |       | $                                | 30,957     |                           | $          | 8,879 |   | $ | 49,644 |   | $ | 321 |   |
| Provision for income taxes |       | $                                | 2,090      |                           | $          | 961 |   | $ | 3,871 |   | $ | 2,149 |   |
| Effective tax rate         |       | 6.8                              | %          | 10.8                           | %          | 7.8 | % | 669.5 | % |

 

TheCompany’s effective tax rate reflects the impact of a significant amount of theCompany’s earnings or losses being taxed in foreign jurisdictions at ratesbelow the U.S. statutory tax rate.

 

TheCompany’s quarterly income taxes reflect an estimate of the correspondingfiscal year’s annual effective tax rate and include, when applicable,adjustments from discrete tax items. The discrete adjustments to the Company’sprovision for income taxes for the three months ended October 31, 2010included favorable adjustments to tax provisions from prior years, the taxbenefit realized by the Company as a result of the employees’ disposition of 

 

20

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Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31, 2010 and 2009**

**(unaudited)**

 

incentivestock awards and a reduction of unrecognized tax benefits due to the lapse ofapplicable statute of limitations in a foreign jurisdiction. These favorableadjustments to the Company’s provision for income taxes for the three monthsended October 31, 2010 were partially offset by an unfavorable impact fromforeign exchange losses associated with the Company’s unrecognized taxbenefits.

 

Duringthe three months ended October 31, 2010, the Company reduced unrecognizedtax benefits by approximately $248,000 due to the lapse of applicable statuteof limitations in a foreign jurisdiction. It is reasonably possible that thebalance of gross unrecognized tax benefits will decrease by $13.3 millionwithin the next twelve months due to the lapse of applicable statute oflimitations in multiple tax jurisdictions that the Company operated in. Duringthe three months ended October 31, 2010, the Company accrued an additional$472,000 of interest related to the Company’s unrecognized tax benefits. TheCompany is under tax examination in a foreign jurisdiction for the fiscal yearsended April 30, 2004 through April 30, 2009, which represent all ofthe years for which tax returns have been filed with that jurisdiction and thestatute of limitations has not expired.

 

**Note 13 — Commitments and Contingencies**

 

***Commitments***

 

TheCompany maintains a wholly-owned subsidiary in Shanghai, China, OmniVisionTechnologies (Shanghai) Co. Ltd. (“OTC”) which provides assistance to theCompany in various product design projects and in marketing and sales support.On January 10, 2007, OTC entered into a Land-Use-Right Purchase Agreement(the “Purchase Agreement”) with the Construction and Transportation Commissionof the Pudong New District, Shanghai. The Purchase Agreement has an effectivedate of December 31, 2006. Under the terms of the Purchase Agreement, theCompany agreed to pay an aggregate amount of approximately $0.6 million(the “Purchase Price”) in exchange for the right to use approximately323,000 square feet of land located in Shanghai for a period of50 years. The Company may use the land solely for the purposes ofindustrial use and/or scientific research. As of October 31, 2010, theconstruction of a research facility on the land was complete, in accordancewith the Purchase Agreement. The Company obtained a Construction Loan tofinance the construction. (See Note 7.)

 

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 ofOctober 31, 2010, the Company had contributed $1.5 million, asrequired under the terms of its $10.0 million capital commitment. TheCompany is required to contribute the remaining $8.5 million byOctober 2011, which represents a one-year extension from the original duedate of 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.

 

OnNovember 29, 2001, a complaint captioned *McKee v.OmniVision Technologies, Inc., et. al., Civil Action No. 01 CV 10775*,was filed in the United States District Court for the Southern District of NewYork against OmniVision, some of the Company’s directors and officers, andvarious underwriters for the Company’s initial public offering.Du1978Plaintiffs generally allege that the defendants violated federalsecurities laws because the prospectus related to the Company’s offering failedto disclose, and contained false and misleading statements regarding, certaincommissions purported to have been received by the underwriters, and otherpurported underwriter practices in connection with their allocation of sharesin the Company’s offering. The complaint seeks unspecified damages on behalf ofa purported class of purchasers of the Company’s common stock betweenJuly 14, 2000 and December 6, 2000. Substantially similar actionshave been filed concerning the initial public offerings for more than300 different issuers, and the cases have been coordinated as *In re Initial Public Offering Securities Litigation, 21 MC 92*.On February 19, 2003, the Court issued an order dismissing all claimsagainst the Company except for a claim brought under Section 11 of theSecurities Act of 1933.

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31, 2010 and 2009**

**(unaudited)**

 

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 and the other defendants will receive complete dismissals from thecase. On October 5, 2009, the Court entered an order granting finalapproval of the settlement. Certain objectors have filed appeals. If for anyreason the settlement does not become effective, and litigation against theCompany proceeds, the Company believes that it has meritorious defenses toplaintiffs’ claims and intends to defend the action vigorously.

 

OnOctober 12, 2007, a purported OmniVision stockholder filed a complaintagainst certain of the Company’s underwriters for its initial public offering.The complaint, *Vanessa Simmonds v. Bank of AmericaCorporation, et al.*, Case No. C07-1668, filed in District Courtfor the Western District of Washington, makes similar allegations to those madein *In re Initial Public Offering Securities Litigation*and seeks the recovery of short-swing trading profits under Section 16(b) ofthe Securities Exchange Act of 1934. The Company is named as a nominaldefendant, and no recovery was sought from it. The plaintiff filed an amendedcomplaint in February 2008. On March 12, 2009, the Court granted themotion to dismiss without prejudice, filed by 30 of the issuer defendants andthe motion to dismiss with prejudice, filed by all of the underwriterdefendants, which included the suit against the Company.  The plaintiff timely appealed the Court’sOrder to the United States Court of Appeals for the Ninth Circuit. OnDecember 3, 2010, the Ninth Circuit entered its opinion and order in thismatter. The Court affirmed the dismissal of the suits against the 30 movingissuer defendants on the grounds that the demand letters sent to those issuerswere inadequate under Delaware law, and converted the dismissals from withoutprejudice to with prejudice. The Court also reversed the dismissal of the suitsagainst the remaining 24 issuer defendants, including the Company, but isallowing those issuer defendants, including the Company, to challenge theadequacy of the demand letters that the plaintiff sent to the issuers beforefiling suit. No discovery has taken place.

 

Atthe end 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.

 

OnMarch 6, 2009, Panavision Imaging, LLC (“Panavision”) filed a complaintagainst the Company alleging patent infringement in the District Court for theCentral District of California. The case is entitled *PanavisionImaging, LLC v. OmniVision Technologies, Inc., Canon U.S.A., Inc.,Micron Technology, Inc. and Aptina Imaging Corporation, CaseNo. CV09-1577.* In its complaint, Panavision asserts that theCompany makes, has made, uses, sells and/or imports products that infringe U.S.Patent Nos. 6,818,877 (“Pre-charging a Wide Analog Bus for CMOS ImageSensors”), 6,663,029 (“Video Bus for High Speed Multi-resolution Imagers andMethod Thereof”) and 7,057,150 (“Solid State Imager with Reduced Number ofTransistors per Pixel”). The complaint seeks unspecified monetary damages, feesand expenses and injunctive relief against the Company. On April 19, 2010,the court stayed the case pending reexamination of all of the asserted patents,as the U.S. Patent and Trademark Office has granted reexamination requests forall of the asserted claims of the asserted patents. On October 22, 2010,the U.S. Patent and Trademark Office issued an Action Closing Prosecution ofthe *inter partes* reexamination of U.S.Patent No. 6,818,877 and confirmed the four claims submitted for *inter partes* reexamination by co-defendants MicronTechnology, Inc. and Aptina Imaging Corporation.  On October 27, 2010, the Court held acase status conference and scheduled a further case management conference on December 13,2010.  The Company expects to vigorouslydefend itself against Panavision’s allegations. At this time, the Companycannot estimate any possible loss or predict whether this matter will result inany material expense to the Company.

 

OnDecember 6, 2010, Ziptronix, Inc., or Ziptronix, filed a complaintagainst the Company alleging patent infringement in the District Court for theNorthern District of California. The case is entitled *Ziptronix, Inc.v. OmniVision Technologies, Inc., Taiwan Semiconductor ManufacturingCompany Ltd., and TSMC North America Corp., Case No. CV10-05525*.In its complaint, Ziptronix asserts that the Company has made, used, offered tosell, sold and/or imported into the United States products that infringeU.S. Patent Nos. 7,387,944 (“Method for Low Temperature Bonding andBonded Structure”), 7,335,572 (“Method for Low Temperature Bonding andBonded Structure”), 7,553,744 (“Method for Low Temperature Bonding andBonded Structure”), 7,037,755 (“Three Dimensional Device 

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31, 2010 and 2009**

**(unaudited)**

 

IntegrationMethod and Integrated Device”), 6,864,585 (“Three Dimensional DeviceIntegration Method and Integrated Device”), and 7,807,549 (“Method for LowTemperature Bonding and Bonded Structure”). The complaint seeks unspecifiedmonetary damages, fees and expenses and injunctive relief against the Company.The Company expects to vigorously defend itself against Ziptronix’sallegations. At this time, the Company cannot estimate any possible loss orpredict whether this matter will result in any material expense to it.

 

**Note 14 — Related Party Transactions**

 

InMay 2006, the Company consummated a loan agreement with one of itsemployees. The loan agreement was approved by the Company’s board of directorsin fiscal 2004. Under the terms of the agreement, as amended, the Companyextended to the employee a $1.0 million loan with a nominal imputedinterest rate and a maturity date of May 12, 2011. The loan is secured bya deed of trust and may be extended, subject to mutual consent of the parties.

 

Thefollowing table presents the amounts paid for services provided by relatedparties for the periods indicated (in thousands):

 
| ** **  | ** ** | ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------|------------|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **Related** | ** ** | ** **                                     | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| **Party**   | ** ** | **Services**                                   | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| VisEra      |       | Color  filter and other manufacturing services |       | $                                | 26,285     |                           | $          | 19,458 |   | $ | 50,392 |   | $ | 30,535 |   |
|             |            |                                                |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Thefollowing table summarizes the transactions that the Company’s equity methodinvestees, SOI and VisEra, engaged with related parties for the periods indicated(in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                             | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ***SOI transactions with:***           | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ImPac:                                 |       |                             |       |                           |       |   |   |   |   |
| Purchases of manufacturing services    |       | $                                | —     |                           | $          | 120 |   | $ | — |   | $ | 240 |   |
| Balance  payable at period end, net    |       | —                           |       | 35                             |       | — |   | 35 |   |
| PTC:                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of wafers                    |       | 364                              |       | 181                            |       | 1,281 |   | 272 |   |
| Rent  and other services               |       | 25                               |       | 7                              |       | 50 |   | 26 |   |
| Balance  payable at period end, net    |       | 29                               |       | 8                              |       | 29 |   | 8 |   |
| VisEra:                                | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of manufacturing services    |       | 15                               |       | 38                             |       | 194 |   | 102 |   |
| Balance  payable at period end         |       | —                           |       | —                         |       | — |   | — |   |
|                                   |       |                             |       |                           |       |   |   |   |   |
| ***VisEra transactions with:***        | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| TSMC:                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales to TSMC                          |       | 754                              |       | 303                            |       | 1,253 |   | 572 |   |
| Purchase manufacturing services        |       | 146                              |       | —                         |       | 156 |   | — |   |
| Balance  receivable at period end, net |       | 352                              |       | 169                            |       | 352 |   | 169 |   |
| SOI:                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales to SOI                           |       | 15                               |       | 38                             |       | 194 |   | 102 |   |
| Balance  receivable at period end      |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |

 

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

 

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

 

*The following 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-lookingstatements, within the meaning of**Section 27A of the Securities Act of 1933 andSection 21E of the Securities**ExchangeAct of 1934, which involve risks and uncertainties.**Forward-looking statements generally include words such as “anticipates,”“believes,” “expects,” “intends,”“may,” “outlook,” “plans,” “seeks,” “will” and words of similar import as wellas the negative of those terms. In addition, any statements that refer toexpectations, projections or other characterizations of future events orcircumstances, including any underlying assumptions, are forward-lookingstatements. All forward-lookingstatements included in this Quarterly Report on Form 10-Q, including, butnot limited to, statements regarding our projected results of operations for future reporting periods, theextent of future sales throughoriginal equipment manufacturers, or OEMs, and distributors, futuregrowth trends and opportunities in certain markets, the capabilities of newproducts, the increasing competition in our industry, the effect of supplyconstraints, the continued importance of the mobile phone market to ourbusiness, continued price competition and the consequent reduction in theaverage selling prices of our products, anticipated benefits of our jointventures and alliances, the development of our business and manufacturingcapacity, future expenses we expect to incur, our future investments, ourfuture working capital requirements, the effect of a change in market interest rates,the geographic distribution of our sales and end users of our products and thesufficiency of our available cash, cash equivalents and short-term investmentsare based on current expectations and are subject to important factors thatcould cause actual results to differ materially from those projected in theforward-looking statements. Suchimportant factors include, but are not limited to, those set forth inPart II under the caption “Item 1A. Risk Factors,” beginningon page 44 of this Quarterly Report and elsewhere in this Quarterly Reportand in other documents we file with the U.S. Securities and ExchangeCommission, or SEC. All subsequent written and oral forward-looking statementsby or attributable to us or persons acting on our behalf are expresslyqualified in their entirety by such factors.*

 

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

 

**Overview**

 

We design, 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. We have alsointegrated our CameraChip image sensors with wafer-level optics, which we referto as CameraCubeTM imaging devices. Our CameraCube imaging device is a smallfootprint, total camera solution that we believe will enable the furtherminiaturization of camera products. We believe that our highly integrated imagesensors and imaging devices enable camera device manufacturers to build highquality camera products that are smaller, less complex, more reliable, morecost-effective and more power-efficient than cameras using traditionalcharge-coupled devices, or CCDs.

 

***Technology***

 

In February 2008, we announced the introduction of ourOmniPixel3-HSTM architecture. It is our most advanced generation of front sideillumination, or FSI, OmniPixel® architecture. With OmniPixel3-HS, light iscaptured on the front side of the chip, and it forms the basis of our1.75 μm FSI imaging pixel.

 

In May 2008, we announced a new approach to CMOS image sensor design wecall OmniBSITM technology. OmniBSI technology is based on an idea called backside illumination, or BSI. Our first OmniBSI product, an 8-megapixel imagesensor, is built using an advanced 1.4 μm pixel. We believe we are thefirst image sensor company to announce a viable process for the mass productionof BSI sensors.

 

All traditionally designed CMOS image sensors capture light on the frontside of the chip, so the photo-sensitive portion has to share the surface ofthe image sensor with the metal wiring of the transistors in the pixel and themetal 

 

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|------------------|------------|---------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                          |

wiringacts to limit the amount of image light that reaches the photo-sensitive portionof the image sensor. With our OmniBSI architecture, the image sensor receiveslight through the back side of the chip. As a result, there is no metal wiringto block the image light, and the entire backside of the image sensor can bephoto-sensitive. Not only does this enable us to produce a superior image, italso permits the front of the chip surface area to be devoted entirely toprocessing, and permits an increase in the number of metal layers, both ofwhich result in greater functionality. Capturing light on the back side of theimage sensor also allows us to reduce the distance the light has to travel tothe pixels, and thus provide a wider angle of light acceptance. Widening theangle of acceptance in turn makes it possible to reduce the height of thecamera module, and thus the height of the device which incorporates the camera.

 

In February 2009, we announced the introduction of our CameraCubetechnology. This is a three-dimensional, reflowable, total camera solution thatcombines the full functionality of our CameraChip image sensors and wafer-leveloptics in one compact, small-footprint package. Our CameraCube devices can besoldered directly to printed circuit boards, with no socket or insertionrequirements. We believe our CameraCube solution can streamline the mobilephone manufacturing process, thus resulting in lower cost and fastertime-to-market for our customers. Although currently our customers primarily use our Camera Cube devicesas secondary cameras in mobile handsets, going forward we anticipate that theywill be used as the primary camera in mobile handsets.

 

In February 2010, we announced the introduction of our new OmniBSI-2TMarchitecture. The OmniBSI-2 architecture represents our second-generation BSItechnology, and forms the basis of our first 1.1 μm imaging pixel, builton the advanced 300 mm copper process at Taiwan SemiconductorManufacturing Company Limited, or TSMC.

 

Given the rapidly changing nature of our technology, there can be noassurance that we will not encounter delays or other unexpected production orperformance issues with future products. During the early stages of production,production yields and gross margins for products based on new technology aretypically lower than those of established products.

 

***New Products***

 

In January 2010, we introduced the OV14810, a 14.6-megapixel imagesensor built on our 1.4 μm OmniBSI technology. The 1/2.33-inch OV14810 hasan active array of 4,416 x 3,312 BSI pixels, operating at 15 frames persecond, or FPS, in full resolution, or delivering full 1080p HD video at 60FPS, using a binning feature to achieve higher sensitivity. In full HD videomode, the sensor also provides additional pixels for electronic imagestabilization. The new OV14810 allows consumers to use one device for capturingboth photo and HD video moments.

 

In January 2010, we also added the new OVM7692 VGA CameraCubesolution to our portfolio of CameraCube imaging devices. The OVM7692 is acomplete video graphics array, or VGA, camera solution, including digital videoport, or DVP, and mobile industry processor interface, or MIPI, serial outputinterface support, automatic luminance detection and an integratedelectromagnetic interference, or EMI, solution. The OVM7692 features ourproprietary OmniPixel3-HS architecture. The OVM7692’s compact size (2.8 x 3.2 x2.5 mm) also ranks among the smallest VGA modules in the industry.

 

In January 2010, we also introduced the OV9726, our first nativeHD video sensor built on our 1.75 μm OmniBSI pixel technology. The compact1/6-inch OV9726 delivers 720p HD video at 30 FPS, making it ideal forhigh-performance HD cameras in notebooks, 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.

 

In February 2010, we introduced the OV5647, a 1/4-inch 5-megapixelraw image sensor with 1.4 μm OmniBSI pixels. The OV5647 is acost-effective, high-performance mobile imaging solution, offering theperformance and size benefits of BSI technology while allowing mobile phonedesigns to utilize existing baseband or applications processors for imageprocessing functions. The OV5647 also delivers 720p HD video at 60 FPS and1080p HD video at 30 FPS.

 

In April 2010, we introduced the OV10630 which expanded ourportfolio of security products. This system-on-a-chip, or SOC, sensor capturesHD-quality color video in any environment, including low-light scenes orhigh-contrast lighting conditions, by combining 720p HD video with advancedlow-light sensitivity and color high dynamic range, or HDR, in a 1/2.7 inchoptical format. Using our proprietary new HDR processing technology, theOV10630 delivers 

 

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|------------------|------------|---------------------------------------------------------------------------------------------------------------------|

 

110dBdynamic range in black and white, and 100dB + in color, providing clear,fully-processed YUV color HDR video output. By integrating a full imageprocessing pipeline, the OV10630 accelerates time-to-market and reduces thesystem bill of materials.

 

In May 2010, we introduced the OV2720, the world’s first 1/6-inch,native 1080p HD CMOS image sensor designed for notebook, netbook, webcam andvideo conferencing applications. Based on OmniVision’s 1.4 μm OmniBSItechnology, the new 1080p sensor captures videoconference quality HD video in aform factor that meets the module size and height requirements of advanced thinnotebook designs.

 

In June 2010, we announced the OV5640, a one-quarter inch 5-megapixelsystem-on-chip sensor built on our 1.4 μm OmniBSI technology. The deviceoffers a cost-optimized, complete camera solution with excellent pixelperformance for 5-megapixel photography and 720p or 1080p HD video for cameraphones.  The sensor’s embedded autofocuscontrol with voice coil motor driver offers further cost savings to the endcustomer.

 

In June 2010, we also announced the high-speed OV7735 VGA sensorproviding one of the thinnest VGA camera solutions available at less than 3-mmin height. The OV7735 is designed for portable applications, including digitalvideo cameras, portable media players, as well as gaming devices and webcams.

 

In August 2010, we introduced the OV7727, an advanced VGA sensorfor the high-end ultra-thin notebook market. The 1/13-inch OV7727 is the firstVGA sensor built with our OmniBSI technology. It combines high performance andsensitivity with an ultra-compact form factor, enabling camera integration withsub-2 mm liquid crystal displays for next-generation notebooks, netbooks andtablet computers.

 

In August 2010, we also introduced the OV9740, a 1/6.5-inch SOCCMOS image sensor designed for video applications in PMPs, home entertainmentdevices and notebooks. Because all image quality tuning and processing is doneon-chip, the OV9740 enables customers to simplify product development andaccelerate time-to-market. The OV9740 combines our 1.75-micron OmniBSI pixelarchitecture and our proprietary high-end image signal processor to deliver720p native HD video.

 

In September 2010, we introduced two new SOC CMOS image sensors,the OV2643 and OV2659. Both sensors are designed to address the increaseddemand for 2-megapixel resolution cameras in the mid- to low-end feature phonesegment. The two new SOC sensors with advanced image signal processing offerquality and functionality comparable to many high-performance digital stillcameras, including 720p native HD video at 30 FPS, excellent sensitivityand high quality image capture.

 

***Capital Resources***

 

As of October 31, 2010, we held approximately $340.7 millionin cash and cash equivalents and approximately $56.0 million in short-terminvestments. To mitigate market risk related to short-term investments, we havean investment policy designed to preserve the value of capital and to generateinterest income from these investments without material exposure to marketfluctuations. Market risk is the potential loss due to the change in value of afinancial instrument as a result of changes in interest rates or bond prices,and changes in market liquidity and in the pricing of risk. Our policy is toinvest in financial instruments with short maturities, limiting interest rateexposure, and to measure performance against comparable benchmarks. We maintainour portfolio of cash equivalents and short-term investments in a variety ofsecurities, including both government and corporate obligations with ratings of“A” or better and money market funds. We do not believe that the value of ourcash and short-term investments will be significantly affected by recentinstability in the global financial markets.

 

***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.

 

Beginning with the second half of our fiscal 2009, general domestic andglobal economic conditions have been negatively impacted by several factors.These economic conditions resulted in our facing one of the most challengingperiods in our history. In particular, we believe consumers and businesses inmarkets into which we sell our products 

 

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|------------------|------------|---------------------------------------------------------------------------------------------------------------------|

 

reducedspending in response to the tightening of lending standards by financialinstitutions, negative financial news and the continued uncertainty in theglobal economy. For example, beginning in our fiscal 2009, end-customerdemand decreased significantly, negatively affecting demand for all consumerelectronic products, security products and products for the automotiveindustry. Consequently, the overall demand for image sensors also decreased.This decrease in demand had a significant impact on our revenues, results ofoperations, cash flows and overall business.

 

Since our second quarter of fiscal 2010, we have seen indicationsthat certain major economies are returning to positive growth. Our quarterlysales have improved sequentially during the first two quarters offiscal 2011. We believe that demand for our products will remain strong inour third quarter of fiscal 2011. However, it is uncertain whether thecurrent resumption of economic growth will be sustained. If the economicrecovery slows down or even dissipates, our business, financial condition,results of operations and cash flows could be further materially and adverselyaffected.

 

***Market Environment***

 

We sell our products worldwide directly to original equipmentmanufacturers, or OEMs, which include branded customers and contractmanufacturers, and value added resellers, or VARs, and indirectly throughdistributors. In order to ensure that we address all available markets for ourimage sensors, we organize our marketing efforts into end-use market groups,each of which concentrates on a particular product or, in some cases, customerwithin a product group. Thus we have marketing teams that address the mobilephone market, the notebook and webcam market, the digital still camera, or DSC,market, the security and surveillance market, the entertainment market, and theautomotive 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 thantwo billion image sensors, including approximately 185 million in thethree months ended October 31, 2010. We believe that these quantitiesdemonstrate the continuing capabilities of our production system, including oursources of offshore fabrication.

 

We 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 CameraCubeproducts, we also collaborated with the industry’s leading wafer-level lenssuppliers, and outsourced the assembly process. This approach allows us tofocus our resources on the design, development, marketing and testing of ourproducts and significantly reduces our capital requirements.

 

To increase and enhance our production capabilities, we work closelywith Taiwan Semiconductor Manufacturing Company Limited, or TSMC, our principalwafer supplier and one of the largest wafer fabrication companies in the world,to increase, as necessary, the number of its fabrication facilities at whichour products can be produced. VisEra Technologies Company, Ltd., or VisEra, ourjoint venture with TSMC, and our investments in three key back-end packagingsuppliers are part of a broad strategy to ensure that we have sufficientback-end capacity for the processing of our image sensors in the variousformats required by our customers.

 

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

 

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|------------------|------------|---------------------------------------------------------------------------------------------------------------------|

 

Since our end-user customers market and sell their products worldwide,our revenues by geographic location are not necessarily indicative of thegeographic distribution of end-user sales, but rather indicate where theproducts and/or their components are manufactured or sourced. The revenues wereport by geography are based on the country or region in which our customersissue their purchase orders to us.

 

Many of the products using our image sensors, such as mobile phones,notebook and webcams, DSCs and cameras for entertainment applications, areconsumer electronics goods. These mass-market camera devices generally haveseasonal cycles which historically have caused the sales of our customers tofluctuate quarter-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. With the return to profitability in ourbusiness since the second fiscal quarter of 2010, we believe the historicalseasonal cycle to our business has returned. In addition to being stronger thanour first and fourth fiscal quarters, historically our gross revenues in oursecond and third fiscal quarters have typically been comparable. However, anincrease during fiscal 2010 in end-customer demand related to the holidayseason accelerated the timing of our customers’ purchases from our third fiscalquarter to our second fiscal quarter. If this trend were to repeat itself infuture years, it could result in the quarter-to-quarter fluctuation of ourrevenues differing from our historical seasonal cycles.

 

We believe that the market opportunity represented by mobile phonesremains very large, although the opportunities presented could be deferredbecause of the uncertainty surrounding the sustainability of the current globaleconomic recovery. We also believe that, like the DSC market, mobile phone andnotebook and webcam demand will not only continue to shift toward higherresolutions, but also will increasingly fragment into multiple market segmentswith differing product attributes. For example, we see the further expansion ofthe smartphone segment within the mobile phone market. In addition, there isincreased demand for customization, and several different interface standardsare coming to maturity. All of these trends will require the development of anincreasing 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,notebooks and webcams, security and surveillance systems, digital still andvideo cameras, entertainment devices, automotive and medical imaging systems asthose markets continue to grow. Although we believe that we currently competeeffectively in those markets, our competitive position could be impaired bycompanies that have greater financial, technical, marketing, manufacturing anddistribution resources, broader product lines, better access to large customerbases, greater name recognition, longer operating histories and moreestablished strategic and financial relationships than we do. Such companiesmay be able to adapt more quickly to new or emerging technologies and customerrequirements or devote greater resources to the promotion and sale of theirproducts. Many of these competitors ownand operate their own fabrication facilities, which in certain circumstancesmay give them the ability to price their products more aggressively than we canor may allow them to respond more rapidly than we can to changing marketopportunities.

 

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

 

In common with many other semiconductor products and as a response tocompetitive pressures, the average selling prices, or ASPs, of image-sensorproducts have declined steadily since their introduction, and we expect ASPs tocontinue to decline in the future. Some of this ASP decline may be offset bythe adoption of some of our newer and higher resolution products. We introducedour CameraCube products in February 2009. Depending on the adoption rate andunit volume, we believe these products may also 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 

 

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

 

takeadvantage of smaller process geometries or new products that incorporate moreadvanced technology and include more advanced features that can be sold athigher ASPs, our gross margin may decline.

 

Recently, the entire semiconductor industry, including us, hasexperienced supply constraints.  Due tothe lack of availability of products, supply constraints have forced companiesin the industry to be unable to meet the product demands of their customers andto take certain actions such as allocating available products among theircustomers or, in some cases, increasing the prices of their products.  This results in harm to customer relationsand the loss of sales to customers.  Wehave faced these same challenges as we sought to meet our customers’ increasingdemand for more of our products.  Despitethese challenges, through careful strategic planning relating to our productsand the technologies that we deliver to market, we have been able to achieverevenue growth and unit growth.  However,if our customers’ demand remains at current levels or continues to increase, wewill experience even greater challenges related to supply constraints and maybe unable to achieve future growth, which could result in our revenues, grossmargins and other financial results being materially and adversely affected.

 

Given the rapidly changing nature of our technology, there can be noassurance that we will not encounter delays or other unexpected yield issueswith future products. During the early stages of production, production yieldsand gross margins for new products are typically lower than those ofestablished products. We can encounter unexpected manufacturing issues, such asunexpected back-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 from shortagesof certain products and build inventories in excess of demand for otherproducts. We carefully consider the risk that our inventories may be in excessof expected future demand and record appropriate reserves. If, as sometimeshappens, we are subsequently able to sell these reserved products, the saleshave little or no associated cost and consequently, they have a favorableimpact on gross margins.

 

***Sources of Revenues***

 

For shipments to customers without agreements that allow for returns orcredits, principally OEMs and VARs, we recognize revenue using the “sell-in”method. Under this method, we recognize revenue when title passes to thecustomer provided that we have received a signed purchase order, the price isfixed or determinable, title and risk of loss has transferred to the customer,collection of resulting receivables is considered reasonably assured, productreturns are reasonably estimable, there are no customer acceptance requirementsand there are no remaining material obligations. We provide for future returnsof potentially 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.

 

For shipment of products sold to distributors under agreements allowingfor returns or credits, title and the risk of ownership to the productstransfer to the distributor upon shipment, and the distributor is obligated topay for the products whether or not the distributor has sold them at the timepayment is due. Under the terms of our agreements with such distributors andsubject to our prior approval, distributors are entitled to reclaim from us asprice adjustments the difference, if any, between the prices at which we soldthe product to the distributors and the prices at which the product issubsequently sold by the distributor. In addition, distributors have limitedrights to return inventory that they determine is in excess of theirrequirements, and accordingly, in determining the appropriate level ofprovision for excess and obsolete inventory, we take into account theinventories held by our distributors. For these reasons, prices and revenuesare not fixed or determinable until the distributor resells the products to ourend-user customers and the distributor notifies us in writing of the details ofsuch sales transactions. Accordingly, we recognize revenue using the “sell-through”method. Under the “sell-through” method, we defer the revenue, adjustments torevenue and the related costs of revenue until the final resale of suchproducts to end customers. The amounts billed to these distributors andadjustments to revenue and the cost of inventory shipped to, but not yet soldby, the distributors are shown net on the Condensed Consolidated Balance Sheetsas “Deferred revenues, less cost of revenues.”

 

In order to determine whether collection is probable, we assess anumber of factors, including our past transaction history with the customer andthe creditworthiness 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.

 

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

 

***Critical AccountingPolicies and Estimates***

 

For a discussion of our critical accounting policies, please refer tothe discussion in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2010. There have been no material changes in any of our criticalaccounting policies since April 30, 2010.

 

**Results of Operations**

 

The following table sets forth the results of our operations as apercentage of revenues. Our historical operating results are not necessarilyindicative of the results we can expect for any future period.

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                                                       | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                         |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                                 |       | 71.8                             |       | 76.0                           |       | 72.4 |   | 76.6 |   |
| Gross margin                                                     |       | 28.2                             |       | 24.0                           |       | 27.6 |   | 23.4 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Operating expenses:                                              |       |                             |       |                           |       |   |   |   |   |
| Research, development and related                                |       | 8.7                              |       | 10.3                           |       | 9.5 |   | 12.9 |   |
| Selling, general and administrative                              |       | 6.2                              |       | 8.9                            |       | 6.7 |   | 10.5 |   |
| Total operating expenses                                         |       | 14.9                             |       | 19.2                           |       | 16.2 |   | 23.4 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Income (loss) from operations                                    |       | 13.3                             |       | 4.8                            |       | 11.4 |   | — |   |
| Interest expense, net                                            |       | (0.2                             | )          | (0.1                           | )          | (0.1 | ) | (0.2 | ) |
| Other income (expense), net                                      |       | (0.2                             | )          | 0.1                            |       | 0.2 |   | 0.3 |   |
| Income before income taxes                                       |       | 12.9                             |       | 4.8                            |       | 11.5 |   | 0.1 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Provision for income taxes                                       |       | 0.8                              |       | 0.5                            |       | 0.9 |   | 0.7 |   |
| Net income (loss)                                                |       | 12.1                             |       | 4.3                            |       | 10.6 |   | (0.6 | ) |
| Net loss attributable to noncontrolling interest                 |       | —                           |       | (0.1                           | )          | — |   | — |   |
| Net income (loss) attributable to OmniVision  Technologies, Inc. |       | 12.1                             | %          | 4.4                            | %          | 10.6 | % | (0.6 | )% |

 

*Three Months EndedOctober 31, 2010 as Compared to Three Months Ended October 31, 2009*

 

**Revenues**

 

We derive substantially all of our revenues from the sale of ourimage-sensor products that are used in a wide variety of consumer andcommercial mass-market applications including mobile phones, notebooks andpersonal computers, security and surveillance cameras, DSCs, entertainmentdevices, automotive and medical products. Revenues for the three months endedOctober 31, 2010 increased by 30.6% to $239.5 million from$183.3 million for the three months ended October 31, 2009. Theincrease in revenues was primarily due to a 27.2% increase in unit sales of ourimage-sensor products, reflecting a continuing recovery in product demand fromthe prior year period when the economic downturn had negatively affected suchdemand, and a 2.0% increase in our ASPs as a result of a product mix shift inour higher megapixel products from the prior year period.

 

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

 

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

 

We sell our image-sensor products either directly to OEMs and VARs orindirectly through distributors. The percentage of revenues from sales to OEMsand VARs was significantly higher in the three months ended October 31,2010 than in the prior-year period due to increased orders from our OEM and VARcustomers. We expect that the percentage of revenues from sales through OEMsand VARs will vary from year to year in response to changes in the make-up ofour customer list. The gross margin that we earn on sales to OEMs and VARs orthrough distributors is not significantly different. The following table showsthe percentage of revenues from sales to OEMs and VARs and distributors in thethree months ended October 31, 2010 and 2009:

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **October 31,**             | ** ** |
| ** **    | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| OEMs and VARs |       | 73.9                             | %          | 53.4 | % |
| Distributors  |       | 26.1                             |       | 46.6 |   |
| Total         |       | 100.0                            | %          | 100.0 | % |

 

*OEMs and VARs.*   In the three months endedOctober 31, 2010, one OEM customer accounted for approximately 13.6% ofour revenues. In the three months ended October 31, 2009, one OEM customeraccounted for approximately 10.3% of our revenues. For the three monthsended October 31, 2010 and 2009, no other OEM or VAR customer accountedfor 10% or more of our revenues.

 

*Distributors.*   In the three months endedOctober 31, 2010, one distributor customer accounted for approximately14.5% of our revenues. In the three months ended October 31, 2009, onedistributor customer accounted for approximately 27.5% of our revenues. For thethree months ended October 31, 2010 and 2009, no other distributorcustomer accounted for 10% or more of our revenues.

 

***Revenues from DomesticSales as Compared to Foreign Sales***

 

The following table shows the percentage of our revenues derived fromsales of our image-sensor products to domestic customers as compared to foreigncustomers for the three months ended October 31, 2010 and 2009:

 
| ** **     | ** ** | **Three Months Ended** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **October 31,**             | ** ** |
| ** **     | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Domestic sales |       | 0.3                              | %          | 0.5 | % |
| Foreign sales  |       | 99.7                             |       | 99.5 |   |
| Total          |       | 100.0                            | %          | 100.0 | % |

 

We derive the majority of our foreign sales from customers in Asia and,to a lesser extent, in Europe. Over time, our sales to Asia-Pacific customershave increased primarily as a result of the continuing trend of outsourcing theproduction of consumer electronics products to Asia-Pacific manufacturers andfacilities and to the increasing markets in Asia for consumer products. Becauseof the preponderance of Asia-Pacific manufacturers and the fact that virtuallyall products incorporating our image-sensor products are sold globally, webelieve that the geographic distribution of our sales does not accuratelyreflect the geographic distribution of sales into end-user markets of productswhich incorporate our image sensors.

 

Our domestic sales as a percentage of revenues for the three monthsended October 31, 2010 and 2009 was 0.3% and 0.5%, respectively. Ourrevenues as reported on a geographical basis reflect the country or region inwhich our customers issue their purchase orders.

 

**Gross Profit**

 

Our gross margin in the three months ended October 31, 2010increased to 28.2% from 24.0% for the three months ended October 31, 2009.The year-over-year increase in gross margin reflected: a favorable product mixshift between VGA and 2-megapixel and above products, primarily attributable toan increase in shipments of our BSI 5-megapixel and 8-megapixel image sensors,as well as a decrease in the write-down of inventories which totaledapproximately $5.3 million during the three months ended October 31,2010 as compared to $6.4 million in the similar 

 

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

 

prioryear period. The year-over-year increase was partially offset by a decrease inthe sale of previously written-down products which totaled approximately $3.4million during the three months ended October 31, 2010, as compared to$4.1 million in the similar prior year period. We recorded approximately$0.5 million in stock-based compensation expense to cost of revenuesduring the three months ended October 31, 2010, as compared to$0.6 million in the similar prior year period.

 

**Research, Development and RelatedExpenses**

 

Research, development and related expenses consist primarily ofcompensation and personnel-related expenses, non-recurring engineering costsrelated principally to the costs of the masks we buy when we release newproduct designs to the manufacturing foundry, costs for purchased materials,designs, tooling, depreciation of computers and workstations, and amortizationof acquired intangible intellectual property and computer aided designsoftware. Research, development and related expenses may fluctuatesignificantly as the number of new designs we release to the foundry canfluctuate from period to period. Research, development and related expenses forthe three months ended October 31, 2010 increased to approximately$20.9 million from approximately $18.9 million for the three monthsended October 31, 2009. As a percentage of revenues, research, developmentand related expenses for the three months October 31, 2010 and 2009 represented8.7% and 10.3%, respectively.

 

The increase in research, development and related expenses ofapproximately $2.0 million, or 10.8%, for the three months endedOctober 31, 2010 from the similar period in the prior year resulted from:a $1.8 million increase in salary and payroll-related expenses resultingfrom a headcount increase and a company-wide annual salary increase; a$0.7 million increase in non-recurring engineering expenses related to newproduct development; and a $0.5 million increase in legal expenses primarilyrelated to patent registration activities. These increases were partially offset by a$1.0 million decrease in depreciation and amortization expenses and a$213,000 decrease in stock-based compensation expense. We anticipate thatresearch, development and related expenses will increase for our third quarterof fiscal 2011 due to an anticipated increase in mask-design releasesduring the third quarter from second quarter levels.

 

**Selling, General andAdministrative****Expenses**

 

Selling, general and administrative expenses consist primarily ofcompensation and personnel-related expenses, commissions paid to distributorsand manufacturers’ representatives, and insurance and legal expenses. Selling,general and administrative expenses for the three months ended October 31,2010 decreased to approximately $14.7 million from $16.2 million forthe three months ended October 31, 2009. As a percentage of revenues,selling, general and administrative expenses for the three months ended October 31,2010 and 2009 represented 6.2% and 8.9%, respectively.

 

The decrease in selling, general and administrative expenses ofapproximately $1.5 million, or 9.1%, for the three months endedOctober 31, 2010 from the similar period in the prior year resultedprimarily from: a $0.7 million decrease in stock-based compensationexpenses; a $0.6 million decrease in legal expenses related to patentdefense; and a $0.6 million decrease in commission expenses. Thesedecreases were partially offset by a $211,000 increase in facility expenses. Weanticipate that our selling, general and administrative expenses will increaseduring the third quarter of fiscal 2011 due to expected increases incommission payments to our channel partners.

 

**Interest Expense, Net**

 

We invest our cash, cash equivalents and short-term investments ininterest-bearing accounts consisting primarily of money market funds,commercial paper, certificates of deposit, high-grade corporate securities andgovernment bonds. Interest expense, net, increased to $434,000 for the threemonths ended October 31, 2010 from $244,000 in the prior year period. The$190,000 increase in interest expense, net, resulted from a$70,000 reduction in interest income and a $120,000 increase in interestexpense. The increase in interest expense was primarily associated with anincrease in long-term borrowings for the three months ended October 31,2010 as compared to the similar period in the prior year. The decline ininterest income was the result of lower interest rates on interest-bearing accountsthan in the same period in the prior year.

 

**Other Income (Expense), Net**

 

Other income (expense), net, for the three months endedOctober 31, 2010 totaled $(421,000), as compared to $223,000 in the prioryear. Other income (expense), net, for the three months ended October 31,2010 included a 

 

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

 

$353,000loss on the interest rate swap agreements related to the mortgage on ourcomplex of four buildings located in Santa Clara, California, or Santa ClaraProperty and a $304,000 loss that represented our portion of the net lossrecorded by Silicon Optronics, Inc, or SOI, partially offset by a$395,000 gain that represented our portion of the net income recorded byChina WLCSP Limited, or WLCSP. Other income (expense), net, for the threemonths ended October 31, 2009 included a $317,000 gain that representedour portion of the net income recorded by ImPac Technology Co., Ltd., orImPac, and a $245,000 gain, that represented our portion of the net incomerecorded by WLCSP, both of which we account for under the equity method ofaccounting, partially offset by a $236,000 loss on the interest rate swapagreements related to the mortgage on our Santa Clara Property.

 

**Provision for Income Taxes**

 

We generated approximately $31.0 million and $8.9 million inincome before income taxes for the three months ended October 31, 2010 and2009, respectively. We recorded a provision for income taxes of approximately$2.1 million and $1.0 million for the three months endedOctober 31, 2010 and 2009, respectively, resulting in effective tax ratesof 6.8% and 10.8% for the respective periods. Our effective tax rate reflectsthe impact of a significant amount of our earnings or losses being taxed inforeign jurisdictions at rates below the U.S. statutory tax rate.

 

Our quarterly income taxes reflect an estimate of the correspondingfiscal year’s annual effective tax rate and include, when applicable,adjustments from discrete tax items. The discrete adjustments to our provisionfor income taxes for the three months ended October 31, 2010 includedfavorable adjustments to tax provisions from prior years, the tax benefit thatwe realized from our employees’ disposition of incentive stock awards and areduction of unrecognized tax benefits due to the lapse of applicable statuteof limitations in a foreign jurisdiction. These favorable adjustments to ourprovision for income taxes for the three months ended October 31, 2010were partially offset by an unfavorable impact from foreign exchange lossesassociated with our unrecognized tax benefits.

 

During the three months ended October 31, 2010, we reducedunrecognized tax benefits by approximately $248,000 due to the lapse ofapplicable statute of limitations in a foreign jurisdiction. It is reasonablypossible that the balance of gross unrecognized tax benefits will decrease by$13.3 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 October 31, 2010, we accrued an additional $472,000of interest related to our unrecognized tax benefits. We are under taxexamination in a foreign jurisdiction for the fiscal years ended April 30,2004 through April 30, 2009, which represent all of the years for whichtax returns have been filed with that jurisdiction and the statute oflimitations has not expired.

 

**Net Loss Attributable toNoncontrolling Interest**

 

Net loss attributable to noncontrolling interest represented ownershipinterests in Silicon Optronics, Inc., or SOI, that we did not own. The netloss attributable to noncontrolling interest was zero for the three monthsended October 31, 2010, representing the deconsolidation of SOI in June 2010.In June 2010, SOI held its annual meeting of stockholders and new boarddirectors were elected. As a result, we no longer held the majorityrepresentation on the board of directors of SOI, and we were required todeconsolidate SOI. The net loss attributable to noncontrolling interest was$166,000 for the three months ended October 31, 2009, which representedthe 56.1% interest that we did not own in the net loss of SOI.

 

*Six Months Ended October 31,2010 as Compared to Six Months Ended October 31, 2009*

 

**Revenues**

 

Revenues for the six months ended October 31, 2010 increased by49.7% to approximately $432.5 million from $288.9 million for the sixmonths ended October 31, 2009. The increase in revenues was due to a 44.9%increase in the unit sales of our image-sensor products, reflecting acontinuing recovery in product demand from the prior year period, when theeconomic downturn had negatively affected such demand. This unit increase wascombined with a 3.2% increase in our ASPs as a result of a product mix shift inour higher megapixel products from the prior year period.

 

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

 

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

 

The following table shows the percentage of revenues from sales to OEMsand VARs and distributors in the six months ended October 31, 2010 and2009:

 
| ** **    | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|--------------------------------|------------|
| ** **    | ** ** | **October 31,**           | ** ** |
| ** **    | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| OEMs and VARs |       | 71.4                           | %          | 52.1 | % |
| Distributors  |       | 28.6                           |       | 47.9 |   |
| Total         |       | 100.0                          | %          | 100.0 | % |

 

*OEMs and VARs.*   In the six months endedOctober 31, 2010, two OEM customers accounted for approximately 14.2% and10.8% of our revenues, respectively. In the six months ended October 31,2009, one OEM customer accounted for approximately 11.8% of our revenues. Forthe six months ended October 31, 2010 and 2009, no other OEM or VARcustomer accounted for 10% or more of our revenues.

 

*Distributors.*   In the six months endedOctober 31, 2010, one distributor customer accounted for approximately15.4% of our revenues. In the six months ended October 31, 2009, onedistributor customer accounted for approximately 27.9% of our revenues. For thesix months ended October 31, 2010 and 2009, no other distributor customeraccounted for 10% or more of our revenues.

 

***Revenues from DomesticSales as Compared to Foreign Sales***

 

The following table shows the percentage of our revenues derived fromsales of our image-sensor products to domestic customers as compared to foreigncustomers for the six months ended October 31, 2010 and 2009:

 
| ** **     | ** ** | **Six Months Ended** | ** ** |
|----------------|------------|--------------------------------|------------|
| ** **     | ** ** | **October 31,**           | ** ** |
| ** **     | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| Domestic sales |       | 0.5                            | %          | 0.5 | % |
| Foreign sales  |       | 99.5                           |       | 99.5 |   |
| Total          |       | 100.0                          | %          | 100.0 | % |

 

We derive the majority of our foreign sales from customers in Asia and,to a lesser extent, in Europe. Over time, our sales to Asia-Pacific customershave increased primarily as a result of the continuing trend of outsourcing theproduction of consumer electronics products to Asia-Pacific manufacturers andfacilities and to the increasing markets in Asia for consumer products. Becauseof the preponderance of Asia-Pacific manufacturers and the fact that virtuallyall products incorporating our image-sensor products are sold globally, webelieve that the geographic distribution of our sales does not accuratelyreflect the geographic distribution of sales into end-user markets of productswhich incorporate our image sensors.

 

**Gross Profit**

 

Our gross margin in the six months ended October 31, 2010increased to 27.6% from 23.4% for the six months ended October 31, 2009.The year-over-year increase in gross margin reflected: a favorable product mixshift between VGA and 2-megapixel and above products, primarily attributable toan increase in shipments of our BSI 5-megapixel and 8-megapixel image sensors,as well as the favorable impact of the write-down of inventories which declinedas a percentage of the cost of revenues and totaled approximately$10.4 million during the six months ended October 31, 2010, as comparedto $10.1 million in the similar prior year period. The year-over-yearincrease was partially offset by a reduction in the sales of previouslywritten-down products which totaled approximately $4.6 million during the sixmonths ended October 31, 2010, as compared to $6.3 million in thesimilar prior year period. In the sixth months ended October 31, 2010, werecorded approximately $1.1 million in stock-based compensation expense tocost of revenues, as compared to $1.4 million in the six months ended October 31,2009.

 

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

 

**Research, Development and RelatedExpenses**

 

Research, development and related expenses for the six months endedOctober 31, 2010 increased to approximately $41.1 million fromapproximately $37.3 million for the six months ended October 31, 2009.As a percentage of revenues, research, development and related expenses for thesix months ended October 31, 2010 and 2009 represented 9.5% and 12.9%,respectively.

 

The increase in research, development and related expenses ofapproximately $3.8 million, or 10.3%, for the six months endedOctober 31, 2010 from the similar prior year period resulted primarilyfrom a $3.7 million increase in salary and payroll-related expenses, a$1.5 million increase in non-recurring engineering expenses related to newproduct development and a $1.1 million increase in patent-relatedexpenses. These increases were partially offset by a $2.4 million decreasein depreciation and amortization expenses, a $328,000 decrease in office andfacility expenses and a $102,000 decrease in stock-based compensationexpense.

 

**Selling, General andAdministrative****Expenses**

 

Selling, general and administrative expenses for the six months endedOctober 31, 2010 decreased to approximately $29.1 million from$30.4 million for the six months ended October 31, 2009. As apercentage of revenues, selling, general and administrative expenses for thesix months ended October 31, 2010 and 2009 represented 6.7% and 10.5%,respectively.

 

The decrease in selling, general and administrative expenses of approximately$1.3 million, or 4.3%, for the six months ended October 31, 2010 fromthe similar period in the prior year resulted primarily from a$1.5 million decrease in stock-based compensation expense, a$0.8 million decrease in legal expenses related to patent defense and a$0.6 million decrease in commissions paid primarily to distributors andsales representatives. These decreases were partially offset by a$0.7 million increase in compensation and personnel-related expenses, a$430,000 increase in office and facility expenses, a $227,000 increase inbad debt expenses and a $200,000 increase in fees for outside services.

 

**Interest Expense, Net**

 

Interest expense, net, for the six months ended October 31, 2010increased to approximately $0.6 million from $448,000 for the six monthsended October 31, 2009. The increase in interest expense, net, for the sixmonths ended October 31, 2010 as compared to the corresponding period inthe prior year was the result of a $118,000 reduction in interest income and a$69,000 increase in interest expense associated with long-term borrowings.

 

**Other Income (Expense), Net**

 

Other income (expense), net, for the six months ended October 31,2010 totaled $1.1 million, as compared to $0.8 million in the prioryear. Other income (expense), net, for the six months ended October 31,2010 included a $1.6 million gain that represented the difference betweenthe fair value of our retained interest in SOI and the carrying value of SOI’snet assets and noncontrolling interest before the deconsolidation; a$1.4 million gain that represented our portion of the net income recordedby WLCSP, partially offset by a $1.4 million loss on the interest rateswap agreements related to the mortgage on the Santa Clara Property and  a $267,000 loss that represented our portionof the net loss recorded by SOI. Other income (expense), net, for the sixmonths ended October 31, 2009 included a $0.7 million gain,representing our portion of the net income recorded by WLCSP, a$0.6 million gain on interest rate swap agreements related to the mortgageon the Santa Clara Property, partially offset by a $0.6 million loss thatrepresented our portion of the net loss recorded by ImPac.

 

**Provision for Income Taxes**

 

We generated approximately $49.6 million and $321,000 in incomebefore income taxes for the six months ended October 31, 2010 and 2009,respectively. We recorded a provision for income taxes of approximately$3.9 million and $2.1 million for the six months endedOctober 31, 2010 and 2009, respectively, resulting in effective tax ratesof 7.8% and 669.5% for the respective periods.

 

Our quarterly income taxes reflect an estimate of the correspondingfiscal year’s annual effective tax rate and include, when applicable,adjustments from discrete tax items. For the current fiscal year’s overallestimation of annual effective tax rate, we excluded the tax effect associatedwith the SOI deconsolidation. See Note 5. The tax effect 

 

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

 

associatedwith the SOI deconsolidation was recorded through a discrete adjustment to theprovision for income taxes for the six months ended October 31, 2010.Other discrete adjustments to our provision for income taxes for the six monthsended October 31, 2010 included favorable adjustments to tax provisionsfrom prior years, a favorable impact from the difference between our finalizedtax return and the provision for income taxes recorded for fiscal 2010,the tax benefit that we realized from our employees’ disposition of incentivestock awards and a reduction of unrecognized tax benefits due to the lapse ofapplicable statute of limitations in a foreign jurisdiction. These favorableadjustments to our provision for income taxes for the six months endedOctober 31, 2010 were partially offset by an unfavorable impact fromforeign exchange losses associated with our unrecognized tax benefits.

 

During the six months ended October 31, 2010, we reducedunrecognized tax benefits by approximately $248,000 due to the lapse ofapplicable statute of limitations in a foreign jurisdiction. It is reasonablypossible that the balance of gross unrecognized tax benefits will decrease by$13.3 million within the next twelve months due to the lapse of applicablestatute of limitations in multiple jurisdictions in which we operated. Duringthe six months ended October 31, 2010, we accrued an additional$0.9 million of interest related to our unrecognized tax benefits. We areunder tax examination in a foreign jurisdiction for the fiscal years ended April 30,2004 through April 30, 2009, which represent all of the years for whichtax returns have been filed with that jurisdiction and the statute oflimitations has not expired.

 

**Net Loss Attributable toNoncontrolling Interest**

 

Net loss attributable to noncontrolling interest for the six monthsended October 31, 2010 and 2009 was $32,000 and $56,000, respectively,which represented the respective 56.3% and 56.1% interest that we did not ownin the net loss of SOI. In June 2010, SOI held its annual meeting ofstockholders and new board directors were elected. As a result, we no longerheld the majority representation on the board of directors of SOI, and we wererequired to deconsolidate SOI.

 

**Liquidity and Capital Resources**

 

Our principal sources of liquidity at October 31, 2010 consistedof cash, cash equivalents and short-term investments totaling$396.7 million.

 

***Liquidity***

 

Our working capital increased to $516.0 million as ofOctober 31, 2010 as compared to $433.3 million as of April 30,2010. Our working capital increased as a result of: a $106.7 million increasein cash and cash equivalents primarily due to cash provided by operatingactivities; a $38.8 million increase in accounts receivable, net,resulting from a revenue increase of $82.3 million for the three monthsended October 31, 2010 from the three months ended April 30, 2010 anda $3.9 million increase in refundable and deferred income taxes. Theseincreases in working capital were partially offset by: a $43.5 milliondecrease in short-term investments; a $12.7 million decrease ininventories; a $6.5 million increase in accounts payable resulting from anincrease in production activities; a $2.7 million increase in deferredrevenues, less cost of revenues and a $2.0 million decrease in prepaidexpenses and other current assets.

 

In March 2007, we purchased the Santa Clara Property. Inconnection with the purchase, we obtained from a domestic bank a mortgage loanwith a principal amount of $27.9 million, or the Mortgage Loan, and a term loanwith a principal amount of $12.0 million, or the Term Loan. As ofOctober 31, 2010, the principal amounts outstanding under the MortgageLoan and Term Loan were $25.6 million and $5.5 million, respectively.

 

In August 2009, in order to finance costs associated with theconstruction of a research center for our wholly-owned subsidiary in Shanghai,OmniVision Technologies (Shanghai) Co. Ltd., or OTC, we entered into a fixedasset loan agreement with a bank in China. The agreement provides for a fixedasset loan in the principal amount of approximately $20.5 million based onthe exchange rate in effect at the time of the loan origination, or theConstruction Loan. As of October 31, 2010, we had borrowed approximately$17.2 million under the Construction Loan.

 

***Cash Flows from OperatingActivities***

 

For the six months ended October 31, 2010, net cash provided byoperating activities totaled approximately $44.0 million as compared to$75.1 million for the corresponding period in the prior year. Theprincipal components of the current year amount were: net income of approximately$45.8 million for the six months ended October 31, 2010; 

 

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

 

adjustmentsfor non-cash charges of $10.4 million in write-down of inventories,$10.3 million in stock-based compensation, $9.3 million indepreciation and amortization, $6.1 million in gains on equityinvestments, net, $1.8 million in the tax effect from stock-basedcompensation, $1.5 million in losses on interest rate swaps and$1.2 million in the excess tax benefit from stock-based compensation; a$6.2 million increase in accounts payable; a $2.7 million increase indeferred revenues, less cost of revenues; a $2.3 million increase inincome taxes payable; a $1.5 million increase in deferred tax liabilitiesand a $1.5 million decrease in prepaid expenses and other current assets.These increases were partially offset by: a $38.9 million increase inaccounts receivable, net and a $3.2 million increase in refundable anddeferred income taxes. The $38.9 million increase in accounts receivable,net, reflects the increased level of revenues during the three months endedOctober 31, 2010, as days of sales outstanding increased only slightly, to43 days as of October 31, 2010 from 42 days as of April 30,2010. The $2.7 million decrease in deferred revenues, less cost ofrevenues, was due to a decrease in inventories at our distributors as ofOctober 31, 2010.

 

For the six months ended October 31, 2009, net cash provided byoperating activities totaled approximately $75.1 million. The principalcomponents of the prior year amount were: a net loss of approximately$1.8 million for the six months ended October 31, 2009; adjustmentsfor non-cash charges of $12.2 million in stock-based compensation,$11.7 million in depreciation and amortization, $10.1 million inwrite-down of inventories, $1.4 million of gain in equity investments and$0.6 million from gain on interest rate swaps; a $53.7 millionincrease in accounts payable; a $7.7 million decrease in inventories; a$4.0 million increase in income taxes payable; a $3.0 million increasein accrued expenses and other current liabilities and a $2.2 millionincrease in deferred revenues, less cost of revenues. These increases werepartially offset by: a $23.7 million increase in accounts receivable, net;a $1.3 million increase in deferred income taxes and a $1.0 milliondecrease in deferred tax liabilities. The $23.7 million increase inaccounts receivable, net, reflects the increased level of revenues during thesix months ended October 31, 2009, partially offset by faster collection,as reflected in days of sales outstanding which declined to 34 days as ofOctober 31, 2009 from 44 days as of April 30, 2009. The$7.7 million decrease in inventories resulted in an increase in annualizedinventory turns to 6.0 as of October 31, 2009 from 2.8 as ofApril 30, 2009.

 

***Cash Flows From InvestingActivities***

 

For the six months ended October 31, 2010, our cash provided byinvesting activities totaled $29.5 million as compared to cash used ininvesting activities of approximately $25.5 million for the correspondingperiod in the prior year, primarily due to $40.9 million in net proceedsfrom sales or maturities of short-term investments, partially offset by$5.0 million in purchases of intangible and other assets, $2.8 milliondue to the deconsolidation of SOI, $3.4 million in purchases of property,plant and equipment and $282,000 in purchases of long-term investments. For thesix months ended October 31, 2009, our cash used in investing activitiestotaled $25.5 million due to $21.2 million in net purchases ofshort-term investments and $4.3 million in purchases of property, plantand equipment.

 

***Cash Flows From FinancingActivities***

 

For the six months ended October 31, 2010, net cash provided byfinancing activities totaled approximately $32.9 million, as compared to$8.4 million during the corresponding period in the prior year. Thisincrease was due to $33.4 million in proceeds from the exercise of stockoptions and employee purchases through our employee stock purchase plan and$1.2 million in excess tax benefits from stock-based compensation,partially offset by $1.8 million used to repay long-term borrowings. Forthe six months ended October 31, 2009, net cash provided by financingactivities totaled approximately $8.4 million. This change was due to $6.6 millionin borrowings and $3.6 million in proceeds from the exercise of stockoptions and employee purchases through our employee stock purchase plan,partially offset by $1.8 million used to repay long-term borrowings.

 

***Capital Commitments andResources***

 

We completed the construction of a research facility at OTC during thethree months ended October 31, 2010. Over the next year, we expect to drawdown the remaining $3.3 million of available funding under theConstruction Loan to pay amounts due our construction contractors.

 

We currently expect our available cash, cash equivalents and short-terminvestments, together with cash that we anticipate generating from operatingactivities, will be sufficient to satisfy our capital requirements overapproximately the next twelve months. Other than normal working capitalrequirements and capital investment in OTC, we expect our capital requirementstotaling approximately $50.0 million over approximately the next twelvemonths will consist 

 

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

 

primarily of funding capital investments in our wholly-ownedsubsidiaries, OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, andShanghai OmniVision Semiconductor Technology, Co. Ltd, or OST. We formedOST during the three months ended October 31, 2008, for the purpose ofexpanding our testing capabilities in Shanghai, China.

 

Our ability to generate cash from operations is subject to substantialrisks described below under the caption Part II Item 1A, *“Risk Factors.”*We encourage you to reviewthese risks carefully.

 

**Contractual Obligations andCommercial Commitments**

 

The following table summarizes our contractual obligations andcommercial commitments as of October 31, 2010 and the effect suchobligations and commitments are expected to have on our liquidity and cashflows in future periods (in thousands):

 
| ** **                                                | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                                                | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **5 Years** | ** ** |
| Contractual Obligations:                                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating leases                                          |       | $                                         | 9,022      |   | $ | 4,734 |   | $ | 4,263 |   | $ | 25 |   | $ | — |   |
| Debt obligations (1)                                 |       | 48,277                                    |       | 4,301 |   | 5,849 |   | 7,086 |   | 31,041 |   |
| Noncancelable orders (2)                             |       | 100,030                                   |       | 100,030 |   | — |   | — |   | — |   |
| Total contractual obligations                             |       | 157,329                                   |       | 109,065 |   | 10,112 |   | 7,111 |   | 31,041 |   |
|                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Other Commercial Commitments:                             |       |                                      |       |   |   |   |   |   |   |   |   |
| OST (3)                                              |       | 8,500                                     |       | 8,500 |   | — |   | — |   | — |   |
| Total commercial commitments                              |       | 8,500                                     |       | 8,500 |   | — |   | — |   | — |   |
| Total contractual obligations and commercial  commitments |       | $                                         | 165,829    |   | $ | 117,565 |   | $ | 10,112 |   | $ | 7,111 |   | $ | 31,041 |   |

 

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| (1)    | In March 2007, we  entered into the Mortgage Loan with a domestic bank in the amount of $27.9 million. In  March 2008, we borrowed $6.0 million under the Term Loan for  building improvement of the Santa Clara Property. We drew down the remaining  $6.0 million under the Term Loan in July 2008. In August 2009,  we entered into the Construction Loan with a bank in China to finance costs  associated with the construction of a research center for OTC. As of  October 31, 2010, we borrowed approximately $17.2 million under the  Construction Loan. See Note 7 —“*Borrowing Arrangements”*  to our condensed consolidated financial statements. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    | Noncancelable orders  represent outstanding purchase orders that we have placed with our suppliers  at period-ends. The lead time for delivery is long, typically 12 to 14 weeks,  and suppliers must prepare unique materials for us at the beginning of the  fabrication process. Accordingly, we are precluded from cancelling our orders  once placed and the production process has begun.                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    | During the three months  ended October 31, 2008, we formed OST, a wholly-owned subsidiary in  Shanghai, China, for the purpose of expanding our testing capabilities. We  contributed $1.5 million in January 2009, as required under the  terms of our capital commitment. We are required to contribute the remaining  $8.5 million of a $10.0 million commitment by October 16,  2011, which represents a one-year extension from the original due date of  October 16, 2010. See Note 13 — “*Commitments  and Contingencies”* to our condensed consolidated financial  statements.                                                                             |

 

As of October 31, 2010, the long-term income taxes payable,including estimated interest and penalties, was $92.5 million. We areunable to make a reasonably reliable estimate of the timing of payments inindividual years beyond twelve months due to uncertainties in the timing of taxaudits, if any, or their outcomes. Accordingly, we have excluded thisobligation from the schedule summarizing our significant obligations to makefuture payments under contractual obligations as of October 31, 2010presented above.

 

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

 

**Off-Balance Sheet Arrangements**

 

We did not have any off-balance sheet arrangements during the periodscovered by this Quarterly Report on Form 10-Q.

 

**Recent Accounting Pronouncements**

 

In October 2009, the FASB revised the authoritative guidance forrevenue recognition for arrangements with multiple deliverables. The newguidance modifies the requirements for determining whether a deliverable can betreated as a separate unit of accounting by removing the criteria thatverifiable and objective evidence of fair value exists for the undeliveredelements. In allocating transaction consideration among the deliverables, theguidance also introduced the concept of using management’s best estimate of astandalone selling price as an alternate basis for allocation. The guidance iseffective in fiscal years beginning on or after June 15, 2010, and we arerequired to adopt this guidance in our first quarter of fiscal 2012. We arecurrently evaluating the impact this guidance may have on our financialposition, results of operations and cash flows.

 

In October 2009, the FASB issued authoritative guidance addressingcertain revenue arrangements that include software elements. This guidancestates that tangible products with hardware and software components that worktogether to deliver the product functionality are considered non-softwareproducts, and the accounting guidance under the revenue arrangements withmultiple deliverables is to be followed. The guidance is effective in fiscalyears beginning on or after June 15, 2010, and we are required to adoptthis guidance in our first quarter of fiscal 2012. We are currentlyevaluating the impact this guidance may have on our financial position, resultsof operations and cash flows.

 

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

 

***Foreign Currency ExchangeRisk***

 

We sell our products globally, in particular to OEMs, VARs anddistributors in China, Japan, Korea and Taiwan.

 

The great majority of our transactions with our customers and vendorsare denominated 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 October 31, 2010, the functional currency of ourwholly-owned subsidiaries located in Hong Kong, OmniVision Technologies (HongKong) Company Limited, OmniVision Trading (Hong Kong) Company Ltd., andOmniVision Holding (Hong Kong) Co., Ltd.; in the Cayman Islands,OmniVision International Holding, Ltd. and OmniVision TechnologyInternational Ltd. (formerly HuaWei Technology International, Ltd.); inChina, OSC and OTC and OST, and in Taiwan, Taiwan OmniVision Technologies Co., Ltd.,Taiwan OmniVision International Technologies Co., Ltd., and TaiwanOmniVision Investment Holding Co., Ltd., is the U.S. dollar. Our otherwholly-owned subsidiaries have their respective local currencies as theirfunctional currencies. Transaction gains and losses resulting from transactionsdenominated in currencies other than the respective functional currencies areincluded in “Other income (expense), net” for the periods presented. Theamounts of transaction gains and losses for the three months endedOctober 31, 2010 and 2009 were not material.

 

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

 

Because we do not believe that we currently have any significant directforeign currency exchange rate risk, we have not hedged exposures denominatedin foreign currencies or used any other derivative financial instruments.Although we transact the overwhelming majority of our business in U.S. dollars,future fluctuations in the value of the U.S. dollar may affect the competitivenessof our products and thus may impact our results of operations.

 

***Market Interest Rate Risk***

 

Our cash equivalents and short-term investments are exposed tofinancial market risk due to fluctuation in interest rates, which may affectour interest income and, from time to time, the fair market value of ourinvestments. We manage our exposure to financial market risk by performingongoing evaluations of our investment portfolio. We presently invest in moneymarket funds, certificates of deposit issued by banks, commercial paper,high-grade corporate securities and government bonds maturing approximately 18months or less from the date of purchase.

 

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

 

During fiscal 2007, we financed the purchase of the Santa ClaraProperty with a $27.9 million mortgage loan. The mortgage loan is avariable rate loan which bears interest at LIBOR plus 90 basis points andchanges in the interest rate affect our interest payments. However, concurrentwith the mortgage loan, we also entered into an interest rate swap with anotional amount that approximates the principal outstanding under the mortgageloan. We are the fixed rate payer under the swap with a fixed rate of 5.3%. By July 2008,we drew down the total available amount of $12.0 million under a relatedterm loan. Concurrent with the term loan, we also entered into an interest rateswap with a notional amount that approximates the principal outstanding underthe term loan. We are the fixed rate payer under the swap with a fixed rate of4.3%. Consequently, although we are required to mark the value of the swaps tomarket at each balance sheet date and record the associated non-cash cost orbenefit as part of “Other income (expense), net,” a 

 

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hypothetical10% change in LIBOR would not have a material effect on our interest expensefor the three and six months ended October 31, 2010.

 

In August 2009, in order to finance costs associated with theconstruction of a research center for OTC, we entered into a fixed asset loanagreement with a bank in China. The agreement provides for a fixed asset loanin the principal amount of approximately $20.5 million based on theexchange rate in effect at the time of the loan origination, or the ConstructionLoan. As of October 31, 2010, we borrowed approximately $17.2 millionunder the Construction Loan. Interest rate under the Construction Loan is basedon an indicative rate as published by the Chinese government, and will beadjusted every September to the then current published rate. Interest rateunder the Construction Loan was 5.3% at October 31, 2010. We do not hedgeagainst the risk of interest rate changes for the Construction Loan. However,since the current interest rate is published by the Chinese government and willnot be adjusted until September 2011, any hypothetical 10% shifts in yieldwill not cause a significant adverse impact to our results of operations, cashflows or to our financial position for the three and six months ended October 31,2010.

 

**ITEM 4.   CONTROLSAND PROCEDURES**

 

**(a)  ****Evaluationof Disclosure Controls and Procedures****.**

 

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

 

**(b)  Changesin Internal Controls.**

 

There have been no changes in our internal control over financialreporting during the three-month period ended October 31, 2010, as coveredby this Quarterly Report on Form 10-Q, that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II — OTHERINFORMATION**

 

**ITEM 1.   LEGALPROCEEDINGS**

 

From time to time, we have been subject to legal proceedings and claimswith respect 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.OmniVision Technologies, Inc., et. al., Civil Action No. 01 CV 10775*,was filed in the United States District Court for the Southern District of NewYork against us, some of our directors and officers, and various underwritersfor our initial public offering. Plaintiffs generally allege that thedefendants 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*.On February 19, 2003, the Court issued an order dismissing all claimsagainst us except for a claim brought under Section 11 of the SecuritiesAct of 1933.

 

The parties have reached a global settlement of the coordinatedlitigation. Under the settlement, the insurers will pay the full amount ofsettlement share allocated to us, and we will bear no financial liability. Ourcompany and the other defendants will receive complete dismissals from thecase. On October 5, 2009, the Court entered an order granting finalapproval of the settlement. Certain objectors have filed appeals. If for anyreason the settlement does not become effective, and litigation against usproceeds, we believe that we have meritorious defenses to plaintiffs’ claimsand intend to defend the action vigorously.

 

On October 12, 2007, a purported OmniVision stockholder filed acomplaint against certain of the Company’s underwriters for its initial publicoffering. The complaint, *Vanessa Simmonds v. Bankof America Corporation, et al.*, Case No. C07-1668, filed inDistrict Court for the Western District of Washington, makes similarallegations to those made in *In re Initial PublicOffering Securities Litigation* and seeks the recovery of short-swingtrading profits under Section 16(b) of the Securities Exchange Act of1934. OmniVision is named as a nominal defendant, and no recovery was soughtfrom it. The plaintiff filed an amended complaint in February 2008. OnMarch 12, 2009, the Court granted the motion to dismiss without prejudice,filed by 30 of the issuer defendants and the motion to dismiss withprejudice, filed by all of the underwriter defendants, which included the suitagainst us. The plaintiff timely appealed the Court’s Order to the UnitedStates Court of Appeals for the Ninth Circuit. On December 3, 2010, theNinth Circuit entered its opinion and order in this matter. The Court affirmedthe dismissal of the suits against the 30 moving issuer defendants on thegrounds that the demand letters sent to those issuers were inadequate underDelaware law, and converted the dismissals from without prejudice to withprejudice. The Court also reversed the dismissal of the suits against theremaining 24 issuer defendants, including us, but is allowing those issuerdefendants, including us, to challenge the adequacy of the demand letters thatthe plaintiff sent to the issuers before filing suit. No discovery has takenplace.

 

At the end of May 2009, plaintiff sent a Demand for Inspection ofBooks and Records to certain of the nominal defendants named in theSection 16(b) litigation seeking the companies to produce any tollingagreements entered into with the companies’ respective underwriters. Plaintiff’scounsel has agreed to an open-ended extension for certain nominal defendantswho received such a demand. As of the date of this filing, we have not receiveda demand for inspection of books and records from the plaintiff.

 

On March 6, 2009, Panavision Imaging, LLC, or Panavision, filed acomplaint against us alleging patent infringement in the District Court for theCentral District of California. The case is entitled *PanavisionImaging, LLC v. OmniVision Technologies, Inc., Canon U.S.A., Inc.,Micron Technology, Inc. and Aptina Imaging Corporation, CaseNo. CV09-1577*. In its complaint, Panavision asserts that wemake, have made, use, sell and/or import products that infringeU.S. Patent Nos. 6,818,877 (“Pre-charging a Wide Analog Bus for CMOSImage Sensors”), 6,663,029 (“Video Bus for High Speed Multi-resolution Imagersand Method Thereof”) and 7,057,150 (“Solid State Imager with Reduced Number ofTransistors per Pixel”). The complaint seeks unspecified monetary damages, feesand expenses and injunctive relief against us. On April 19, 2010, thecourt stayed the case pending reexamination of all of the asserted patents, asthe U.S. Patent and Trademark Office has granted reexamination requests for allof the asserted claims of the asserted patents. On October 22, 2010, theU.S. Patent and Trademark Office issued an Action Closing Prosecution of 

 

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the*inter partes* reexamination of U.S. PatentNo. 6,818,877 and confirmed the four claims submitted for *inter partes* reexamination by co-defendants MicronTechnology, Inc. and Aptina Imaging Corporation.  On October 27, 2010, the Court held acase status conference and scheduled a further case management conference on December 13,2010.  We expect to vigorously defendourselves against Panavision’s allegations. At this time, we cannot estimateany possible loss or predict whether this matter will result in any materialexpense to us.

 

On December 6, 2010, Ziptronix, Inc., or Ziptronix, filed acomplaint against us alleging patent infringement in the District Court for theNorthern District of California. The case is entitled *Ziptronix, Inc.v. OmniVision Technologies, Inc., Taiwan Semiconductor ManufacturingCompany Ltd., and TSMC North America Corp., Case No. CV10-05525*. In its complaint, Ziptronix asserts that we have made, used, offered tosell, sold and/or imported into the United States products that infringeU.S. Patent Nos. 7,387,944 (“Method for Low Temperature Bonding andBonded Structure”), 7,335,572 (“Method for Low Temperature Bonding andBonded Structure”), 7,553,744 (“Method for Low Temperature Bonding andBonded Structure”), 7,037,755 (“Three Dimensional Device IntegrationMethod and Integrated Device”), 6,864,585 (“Three Dimensional DeviceIntegration Method and Integrated Device”), and 7,807,549 (“Method for LowTemperature Bonding and Bonded Structure”). The complaint seeks unspecifiedmonetary damages, fees and expenses and injunctive relief against us. We expectto vigorously defend ourselves against Ziptronix’s allegations. At this time,we cannot estimate any possible loss or predict whether this matter will resultin any material expense to us.

 

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**ITEM 1A.   RISK FACTORS**

 

*This Quarterly Report on Form 10-Q, includingManagement’s Discussion and Analysis of Financial Condition and Results of Operations,contains forward-looking statements. These forward-looking statements aresubject to substantial risks and uncertainties that could cause our futurebusiness, financial condition or results of operations to differ materiallyfrom our historical results or currently anticipated results, including thoseset forth below.*

 

*The following description of these risk factorsincludes any material changes to and supersedes the description of the riskfactors associated with our business previously disclosed in Item 1A ofour 2010 Annual Report on Form 10-K filed with the SEC on June 30,2010. As a result of the following risk factors, as well as of other variablesaffecting our operating results, past financial performance may not be a reliableindicator of future performance, and historical trends should not be used toanticipate results or trends in future periods.*

 

***Risks Related to Our Business***

 

***We face intensecompetition in our markets from CMOS and CCD image-sensor manufacturers, and ifwe are unable to compete successfully we may not be able to maintain or growour business.***

 

The image-sensor market is intensely competitive, and we expectcompetition in this industry to continue to increase. This competition hasresulted in rapid technological change, evolving standards, reductions inproduct selling prices and rapid product obsolescence. If we are unable tosuccessfully meet these competitive challenges, we may be unable to maintainand grow our business. Any inability on our part to compete successfully wouldalso adversely affect our results of operations and impair our financialcondition.

 

Our image-sensor products face competitionfrom other companies that sell CMOS image sensors and from companies that sellCCD image sensors. Many of our competitors have longer operating histories,greater presence in key markets, greater name recognition, larger customerbases, more established strategic and financial relationships and significantlygreater financial, sales and marketing, distribution, technical and otherresources than we do. Many of them also have their own manufacturingfacilities, which may give them a competitive advantage. As a result, they maybe able to adapt more quickly to new or emerging technologies and customerrequirements or devote greater resources to the promotion and sale of theirproducts. Our competitors include established CMOS image-sensor manufacturerssuch as Aptina Imaging, Samsung, Sharp, Sony, STMicroelectronics and Toshiba as well as CCD image-sensor manufacturerssuch 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 manufacturers thathas required, and in the future mayrequire, us to reduce our prices. For instance, we have seen increasedcompetition in the markets for VGA image-sensor products with resultingpressures on product pricing. Downward pressure on pricing could result both indecreased revenues and lower gross margins, which would adversely affect ourprofitability. From time to time, other companies enter the CMOSimage-sensor market by using obsolete and available manufacturing equipment.These new entrants 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.

 

Our competitors may acquire or enter into strategic or commercialagreements or arrangements with foundries or providers of color filter processing,assembly or packaging services. These strategic arrangements between ourcompetitors and third party service providers could involve preferential orexclusive arrangements for our competitors. Such strategic alliances couldimpair our ability to secure sufficient capacity from foundries and serviceproviders to meet our demand for wafer manufacturing, color filter processing,assembly or packaging services, adversely affecting our ability to meetcustomer demand for our products. In addition, competitors may enter intoexclusive relationships with distributors, which could reduce availabledistribution channels for our products and impair our ability to sell ourproducts and grow our business. Further, some of our customers could alsobecome developers of image sensors, and this could potentially adversely affectour results of operations, business and prospects.

 

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***For the majority of ourrevenues, we depend on a few key customers and, the loss of one or more of ourkey customers could significantly reduce our revenues.***

 

A relatively 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, or, if applicable, their key end user customers, could result inour failure to achieve anticipated revenue for a particular period. Inaddition, if we are unable to retain one or more of our largest OEM, VAR ordistributor customers, if we are unable to maintain our current level ofrevenues from one or more of these significant customers, or if ourdistributors are unable to retain one or more of their key end user customers,our business and results of operation would be impaired and our stock pricecould decrease, potentially significantly. Such a delay, cancellation orreduction of purchase orders or our inability to retain a key customer orseveral of our smaller customers could be caused by, among other things,failure to meet our customers’ demand for our products.  This has become even more challenging as ourcustomers’ demand has continued to increase. In fiscal 2010, approximately 60.0% of our revenues came from salesto our top five customers. In addition, in the six months endedOctober 31, 2010, two OEM customers accounted for approximately 14.2% and10.8% of our revenues, respectively, and one distributor customer accounted forapproximately 15.4% 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, as wellas on the financial condition and success of our OEMs, VARs and distributors.

 

***Reductions in our averageselling prices may lower our revenues and, as a result, may reduce our grossmargins.***

 

We have experienced and expect to continue toexperience pressure to reduce the selling prices of our products, and our ASPshave declined as a result. Competition in our product markets is intense and asthis competition continues to intensify, we anticipate that these pricingpressures will increase. We expect that the average selling prices for many ofour products will continue to decline over time. Unless we can increase unitsales sufficiently to offset these declines in our average selling prices, ourrevenues will decline. Reductions in our average selling prices have adverselyaffected our gross margins, and unless we can reduce manufacturing costs tocompensate, additional reductions in our average selling prices will continueto adversely affect our gross margins and could materially and adversely affectour operating results and impair our financial condition. Although we maydecrease our research, development and related expenses in the short-term fromtime-to-time, historically we have increased and are likely to continue toincrease our research, development and related expenses in the long-term tocontinue the development of new image-sensor products that can be sold athigher selling prices and/or manufactured at lower cost. If we are unable totimely introduce new products that incorporate more advanced technology andinclude more advanced features that can be sold at higher average sellingprices, or if we are unable to successfully develop more cost-effectivetechnologies, our financial results could be adversely affected.

 

***Sales of our image-sensorproducts for mobile phones account for a large portion of our revenues, and anydecline in sales to the mobile phone market or failure of this market and otheremerging markets to continue to grow as expected could adversely affect ourresults of operations.***

 

Sales to the mobile phone market account for a large portion of ourrevenues. Although we can only estimate the percentages of our products thatare used in the mobile phone market due to the significant number of ourimage-sensor products that are sold to module makers or through distributorsand VARs, we believe that the mobile phone market accounted for approximately60% and 65% of our revenues in fiscal 2010 and the six months endedOctober 31, 2010, respectively. We expect that revenues from sales of ourimage-sensor products to the mobile phone market will continue to account for asignificant portion of our revenues during the remainder of fiscal 2011and beyond. Any factors adversely affecting the demand for our image sensors inthis market could cause our business to suffer and adversely affect ourfinancial condition, operating results and cash flows. The digital image-sensormarket for mobile phones is extremely competitive, and we expect to faceincreased competition in this market in the future. In addition, we continue tobelieve the market for mobile phones is also relatively concentrated and thetop five producers account for approximately 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 phoneimage-sensor market is also subject to rapid technological change. In order tocompete successfully in this market, we will have to correctly forecastcustomer demand for technological improvements and be able to deliver suchproducts on a timely basis at competitive prices. If we fail to do this, ourresults of operations, business and prospects would be materially and adverselyaffected. In the past, we have experienced problems accurately forecastingcustomer demand in other markets. In addition, current domestic and globaleconomic conditions could negatively affect the mobile phone market ifconsumers and/or 

 

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businessesdefer purchases in this market in response to tighter credit, negativefinancial news, and/or decreased corporate or consumer spending.

 

We also expect that image sensors will become of greater importance inthe notebook and webcam, entertainment, security, medical and automotiveindustries. As image sensors begin to fill a greater role in these othermarkets, the challenges and risks that we face in these other markets couldincrease and could be similar to some of the challenges and risks that we facein the mobile phone market. If our sales to the mobile phone market and otheremerging markets do not increase and/or the mobile phone market and otheremerging markets do not grow as expected, our results of operations, businessand prospects would be materially adversely affected.

 

***Our future success dependson the timely development, introduction, marketing and selling of new products,which we might not be able to achieve.***

 

Our failure to successfully develop new products that achieve marketacceptance in a timely fashion could adversely affect our ability to grow ourbusiness and improve our operating results. The development, introduction andmarket acceptance of new products is critical to our ability to sustain andgrow our business. Any failure to successfully develop, introduce, market andsell new products could materially adversely affect our business and operatingresults. The development of new products is highly complex, and we have in thepast experienced delays in completing the development and introduction of newproducts. From time to time, we have also encountered unexpected manufacturingproblems as we increase the production of new products. Consumers continue toexpect the sophistication of image sensors in consumer products to increase,and the number of consumer products that use image sensors has continued togrow. This results in a requirement for us to continue to build and developimage sensors with advanced technologies that can be used in a variety ofconsumer products. As our products integrate new and more advanced technologiesand functions, they become more complex and increasingly difficult to design,debug and produce. Successful product development and introduction depends on anumber of factors, including:

 

·                  accurateprediction of market requirements and evolving standards, including pixelresolution, output interface standards, power requirements, optical lens size,input standards and operating systems for webcams and other platforms;

·                  development ofadvanced technologies and capabilities, including our new CameraCube, OmniBSIand OmniBSI-2 technologies;

·                  definition,timely completion and introduction of new CMOS image sensors that satisfycustomer requirements;

·                  development ofproducts that maintain a technological advantage over the products of ourcompetitors, including our advantages with respect to the functionality andpixel capability of our image-sensor products and our proprietary testingprocesses; and

·                  marketacceptance of the new products.

 

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

 

***Design wins are a keydeterminant of future revenues, and failure to obtain design wins adverselyaffects our revenues and impairs our ability to grow our business.***

 

Our success has been, and will continue tobe, 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 

 

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sensors in their products, our market share orrevenues could decrease. Furthermore, to the extent that our competitors securedesign wins, our ability to grow our business in the future will be impaired.

 

***We depend on a limitednumber of third party wafer foundries, which reduces our ability to control ourmanufacturing process.***

 

Unlike some of our larger competitors, we donot own or operate a semiconductor fabrication facility. Instead, we rely onTSMC, Powerchip Technology Corporation, or PTC, and other subcontract foundriesto produce all of our wafers. Historically, we have relied on TSMC to provideus with a substantial majority of our wafers. As a part of our joint ventureagreement with TSMC, TSMC has agreed to commit substantial wafer manufacturingcapacity to us in exchange for our commitment to purchase a substantial portionof our wafers from TSMC, subject to pricing and technology requirements.

 

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

 

Under the terms of these supply agreements,we secure 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 controlover delivery schedules, quality assurance, manufacturing yields and productioncosts;

·                  lack ofguaranteed production capacity or product supply;

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

·                  financial difficultiesor disruptions in the operations of third party foundries due to causes beyondour control.

 

If our unit sales continue to increase infiscal 2011 as they did in fiscal 2010, the size of the orders we place withour foundries will increase as well. Because our foundries provide services toa number of companies, in the event they receive increased orders from us orone or more of the other companies that they service, they may be unable toprovide us with the requested quantity of products, may subordinate our requestto the requests of other larger companies or may increase the prices theycharge us.  Recently, the entiresemiconductor industry, including us, has experienced supply constraints.  Due to the lack of availability of products,supply constraints have forced companies in the industry to be unable to meetcustomers’ product demands and to take certain actions such as allocatingavailable products among their customers or, in some cases, increasing theprices of their products.  These actionsresult in harm to customer relations and the loss of sales to customers.  We have faced these same challenges as we soughtto meet our customers’ increasing demand for more of our products.  If our customers’ demand remains at currentlevels or continues to increase or if for any reason our foundries are unableto provide a sufficient number of products to us on a timely basis and atacceptable yields and cost, we will experience even greater challenges relatedto supply constraints and may be unable to achieve future growth, which couldresult in our revenues, gross margins and other financial results beingmaterially and adversely affected.

 

The current global economic conditions couldmaterially affect our foundries and cause them to be unable to providenecessary services to us. If TSMC, PTC, 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.

 

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***We rely on a joint venturecompany for color filter application and on third party service providers forpackaging and other back-end services, which reduces our control over deliveryschedules, product quality and cost, and could adversely affect our ability todeliver products to customers.***

 

We rely on VisEra, our joint venture withTSMC, for the color filter processing of our completed wafers and the assemblyof our CameraCube imaging devices. In addition, we rely on AdvancedSemiconductor Engineering, Inc. and on ImPac, our former equity investee,for substantially all of our ceramic chip packages. In December 2009, TongHsing acquired ImPac and assumed control of its operations. We rely on XinTec, an investee company, forchip scale packages, which are generally used in our products designed for thesmallest form factor applications. We rely on several specialized serviceproviders, one of which is Tong Hsing, to perform the necessary wafer probetests and prepare good die for use in COB packaging, a delivery format referredto as reconstructed wafer. The current global economic conditions could adverselyaffect these service providers’ ability to continue to fulfill our packaging,color filter processing and related requirements. If for any reason one or moreof these service providers were to become unable or unwilling to continue toprovide services of acceptable quality, at acceptable costs or in a timelymanner, our ability to deliver our products to our customers could be severelyimpaired. We would have to identify and qualify substitute service providers,which could be time consuming and difficult and could result in unforeseenoperational problems. Substitute service providers might not be available or,if available, might be unwilling or unable to offer services on acceptableterms.

 

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 andcash flows.

 

***If we do not forecastcustomer demand correctly, our business could be impaired and our stock pricemay decline.***

 

Our sales are generally made on the basis of purchase orders ratherthan long-term purchase commitments; however, we manufacture products and buildinventory based on our estimates of customer demand. Accordingly, we must relyon multiple assumptions to forecast customer demand. Recently, the domestic andglobal economic conditions have made it extremely challenging to accuratelypredict customer demand because recent demand has demonstrated increasedvolatility and historical models for predicting customer demand may no longerbe reliable. If we overestimate customer demand, we may manufacture productsthat we may be unable to sell, or we may have to sell at lower prices. Thiscould materially and adversely affect our results of operations and financial condition.In addition, our customers may cancel or defer orders at any time by mutualwritten consent. We have experienced problems with accurately forecastingcustomer demand in the past. For example, there was a significant decline inproduct demand in the third quarter of fiscal 2009, and as a result ourinventories at the end of the third quarter of fiscal 2009 were higherthan we intended them to be. We need to accurately predict customer demandbecause we must often place noncancelable orders with our manufacturers to haveproducts manufactured before we receive firm purchase orders from ourcustomers. Conversely, if we underestimate customer demand, we may be unable tomanufacture sufficient products quickly enough to meet actual demand, whichcould damage our reputation, impair our relationships with our customers, causeus to lose one or more customers and impair our ability to grow our business.In preparation for new product introductions, we gradually ramp down productionof established products. With our 12-14 week production cycle, it is extremelydifficult to predict precisely how many units of established products we will need.It is also difficult to accurately predict the speed of the ramp of our newproducts and the impact on inventory levels presented by the shorter lifecycles of end-user products. The shorter product life cycle is a result of anincrease in competition and the growth of various consumer-product applicationsfor image sensors. Under these circumstances, it is possible that we couldsuffer from shortages of certain products and, if we underestimate marketdemand, we face the risk of being unable to fulfill customer orders. We alsoface the risk of excess inventory and product obsolescence if we overestimatemarket demand for our products and build inventories in excess of demand. Ourability to accurately forecast sales is also a critical factor in our abilityto meet analyst expectations for our quarterly and annual operating results.Any failure to meet these expectations would likely lead to a substantialdecline in our stock price.

 

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***Recent domestic and worldwide economic conditions have adverselyaffected and may further adversely affect our business, results of operations,financial condition and cash flows.***

 

Beginning with the second half of our fiscal 2009, general domestic andglobal economic conditions have been negatively impacted by several factors.These economic conditions resulted in our facing one of the most challengingperiods in our history. In particular, we believe consumers and businesses inmarkets into which we sell our products reduced spending in response to thetightening of lending standards by financial institutions, negative financialnews and the continued uncertainty of the global economy. For example,beginning in our fiscal 2009, end-customer demand decreased significantly,negatively affecting demand for all consumer electronic products, securityproducts and products for the automotive industry. Consequently, the overalldemand for image sensors also decreased. This decrease in demand had asignificant impact on our revenues, results of operations, cash flows andoverall business.

 

These conditions could also have a number of additional effects on ourbusiness, including insolvency of key suppliers or manufacturers resulting inproduct delays, inability of customers to obtain credit to finance purchases ofour products, customer insolvencies, increased pricing pressures, restructuringexpenses and associated diversion of management’s attention, excess inventoryand increased difficulty in accurately forecasting product demand and planningfuture business activities.

 

Although since our second quarter of fiscal 2010, we have seenindications that certain major economies are returning to positive growth, itis uncertain whether such resumption of growth will be sustained. If theeconomic recovery slows down or even dissipates, our business, financialcondition, results of operations and cash flows could be materially andadversely affected.

 

***Fluctuations in ourquarterly operating results have caused volatility in the market price of ourcommon 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 changesin domestic or global economic conditions, including the current economiccrisis;

·                  the volume andmix of our product sales;

·                  competitivepricing pressures;

·                  our ability toaccurately forecast demand for our products;

·                  our ability toachieve acceptable wafer manufacturing or back-end processing yields;

·                  our gain orloss of a large customer;

·                  our ability tomanage our product transitions;

·                  theavailability of production capacity at the suppliers that manufacture ourproducts or process our products;

·                  the growth ofthe market for products and applications using CMOS image sensors;

·                  the timing andsize of orders from our customers;

·                  the volume ofour product returns;

·                  the seasonalnature of customer demand for our products;

·                  the deferral ofcustomer orders in anticipation of new products, product designs orenhancements;

·                  theannouncement and introduction of products and technologies by our competitors;

·                  the fair valueof our interest rate swaps;

·                  the impairmentof our intangible assets or other long-lived assets;

·                  the level ofour operating expenses; and

·                  fluctuations inour effective tax rate from quarter to quarter.

 

Our introduction of new products and ourproduct mix have affected, and may continue to affect, our quarterly operatingresults. Changes in our product mix could adversely affect our operatingresults, 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 

 

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levels are based on our expectations of futurerevenues. Consequently, if we do not achieve the revenues we expect in anyquarter, expenses and inventory levels could be disproportionately high,adversely impacting our operating results and cash flows for that quarter, andpotentially in future quarters.

 

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

 

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

 

We do not hold or issue derivative financialinstruments for trading purposes. However, we do utilize derivative financialinstruments to reduce interest rate risk. We have a variable rate mortgage andterm loans that totaled $31.1 million as of October 31, 2010. Tomanage the related 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. We record their fair value changes in ourconsolidated statements of operations, in “Other income (expense), net.” Theassociated impact on our quarterly operating results is directly related tochanges in prevailing interest rates. If interest rates increase, we would havea non-cash gain on the swap, and vice versa. Consequently, these swap contractswill introduce volatility to our operating results.

 

We are also exposed 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 is subject toseasonal fluctuations which may in turn cause fluctuations in our results ofoperations and cash flows from period to period.***

 

Many of the products using our image sensors,such as mobile phones, notebooks and webcams, DSCs and cameras for entertainment applications, are consumer electronicsgoods. These mass-market camera devices generally have seasonal cycles whichhistorically have caused the sales of our customers to fluctuatequarter-to-quarter. In addition, since a very large number of the manufacturerswho use our products are located in China and Taiwan, the pattern of demand forour image sensors has been influenced by the timing of the extended lunar orChinese New Year holiday, a period in which the factories which use our imagesensors generally close. Consequently, demand for our image sensors hashistorically been stronger in thesecond and third quarters of our fiscal year and weaker in the first and fourthquarters of our fiscal year. In addition, our gross revenues in our second andthird fiscal quarters have typically been comparable. However, an increase duringfiscal 2010 in end-customer demand related to the holiday seasonaccelerated the timing of our customers’ purchases from our third fiscalquarter to our second fiscal quarter. If this trend continues in future years,it could result in the quarter-to-quarter fluctuation of our revenues differingfrom our historical seasonal cycles.

 

***Problems with wafermanufacturing and/or back-end processing yields could result in higher productcosts and could impair our ability to meet customer demand for our products.***

 

If the foundries manufacturing the wafersused in our products cannot achieve the yields we expect, we could incur higherunit costs and reduced product availability. Foundries that supply our wafershave experienced problems in the past achieving acceptable wafer manufacturingyields. Wafer yields are a function of both our design technology and theparticular foundry’s manufacturing process technology. These risks increasewith our introduction of more advanced and novel products and technology, aswell as with increased customer demand that requires these new products to beproduced more quickly and in greater quantities than our historical volume.Certain risks are inherent in the introduction of new products and technology.Low yields may result from design errors or manufacturing failures in new orexisting products. During the early stages of production, production yields fornew products are typically lower than those of established products. Unlikemany other semiconductor products, optical products can be effectively testedonly when they are complete. Accordingly, we perform final testing of ourproducts only 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 

 

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the effort and time required to identify,communicate and resolve manufacturing yield problems. In addition to wafermanufacturing yields, our products are subject to yield loss in subsequentmanufacturing steps, often referred to as back-end processing, such as theapplication of color filters and micro-lenses, dicing (cutting the wafer intoindividual devices, or die) and packaging. Any of these potential problems withwafer manufacturing and/or back-end processing yields could result in areduction in our gross margins and/or our ability to timely deliver products tocustomers, which could adversely affect our customer relations and make it moredifficult to sustain and grow our business.

 

***We depend on the increasedacceptance of mass-market image-sensor applications to grow our business andincrease our revenues.***

 

Our business strategy depends in large parton the continued growth of the various markets into which we sell ourimage-sensor products, including the markets for mobile phones, notebook andwebcams, digital still and videocameras, commercial and security and surveillance applications, entertainmentdevices, automotive and medical applications. If these markets do not grow anddevelop as we anticipate, we may be unable to sustain or grow the sales of ourproducts. Each of these markets has already been, and may continue to be,adversely impacted by current global economic conditions where consumersand businesses have deferred purchases of products in these markets as a resultof tighter credit, negative financial news, and decreased corporate or consumerspending. Such conditions havenegatively affected, and may continue to negatively affect, our business.

 

In addition, the market price of our commonstock may be adversely affected if certain of these new markets do not emergeor develop as expected. Securities analysts may already factor revenue fromsuch new markets into their future estimates of our financial performance andshould such markets not develop as expected by such securities analysts thetrading price of our common stock could be adversely affected.

 

***Our lengthy manufacturing,packaging and assembly cycle, in addition to our customers’ design cycle, mayresult in uncertainty and delays in generating revenues.***

 

The production of our image sensors requiresa lengthy 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 incur expendituresfor research and development and sales and marketing efforts and the time wegenerate revenue, if any, from these expenditures. This delay makes it moredifficult 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.

 

***Our ability to deliverproducts that meet customer demand is dependent upon our ability to meet newand changing requirements for color filter application and image-sensorpackaging.***

 

We expect that as we develop new products tomeet technological advances and new and changing industry and customer demands,our color 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 evolvingtechnology, and because we integrate many functions on a single chip, arehighly complex. The integration of additional functions into already complexproducts could result in a greater risk that customers or end users coulddiscover latent defects or subtle faults after we have already shippedsignificant quantities of a product. Although we test our products, we have inthe past and may in the future encounter defects or errors. For 

 

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example, in the third quarter of fiscal 2005,we recorded a provision of $2.7 million related to the possiblereplacement of products that did not meet a particular customer’s standards.Delivery of products with defects or reliability, quality or compatibilityproblems may damage our reputation and ability to retain existing customers andattract new customers. In addition, product defects and errors could result inadditional development costs, diversion of technical resources, delayed productshipments, increased product returns, product warranty costs for recall andreplacement and product liability claims against us which may not be fullycovered by insurance.

 

***We may be required torecord a significant charge to earnings if our goodwill, 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.

 

We may be required to record a significant charge to earnings in ourfinancial statements during the period in which we determine that ourintangible assets or long-term investments have been impaired. Any such chargewould adversely impact our results of operations. As of October 31, 2010,our goodwill totaled approximately $1.1 million, our intangible assetstotaled approximately $7.0 million and our long-term investments totaledapproximately $101.8 million.

 

***We maintain a backlog ofcustomer orders that is subject to cancellation or delay in delivery schedules,and any cancellation or delay may result in lower than anticipated revenues.***

 

Our sales are generally made pursuant to standard purchase orders. Weinclude in our backlog only those customer orders for which we have acceptedpurchase orders and assigned shipment dates within the upcoming 12 months.Orders constituting our current backlog are subject to cancellation or changesin delivery schedules, and backlog may not necessarily be an indication of futurerevenue. Any cancellation or delay in orders which constitute our current orfuture backlog may result in lower than expected revenues.

 

***If we are unable tomaintain 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 are required 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.

 

We have in the past discovered, and may in the future discover, areasof our internal control that need improvement. For example, we restated ourfinancial statements for the first, second and third quarters of fiscal 2004.If these or similar types of issues were to arise with respect to our internalcontrols in future periods, they could impair our ability to produce accurateand timely financial reports.

 

As our business changes, ongoing compliance with the provisions ofSection 404 of the Sarbanes-Oxley Act and maintenance of effective internal control over financialreporting will require that we hire additional qualified finance and accountingpersonnel. Because other businesses face similar challenges, there issignificant competition for such personnel, and there can be no assurance thatwe will be able to attract and/or retain suitably qualified employees.

 

***Corporate governanceregulations have increased our compliance costs and could further increase ourexpenses if changes occur within our business.***

 

We are subject to corporate governance laws and regulations affectingpublic companies, including the provisions of the Sarbanes-Oxley Act, thatimpose certain 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 withSection 404. In addition, if we undergo 

 

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significantmodifications to our structure through personnel or system changes,acquisitions, or otherwise, it may be increasingly difficult to maintaincompliance with the existing and evolving corporate governance regulations.

 

***We hold a significantamount of marketable securities which are subject to general market risks overwhich we have no control.***

 

As of October 31, 2010, we held cash and cash equivalents totaling$340.7 million, and short-term investments totaling $56.0 million.These assets are managed on our behalf by unrelated third parties in accordancewith a cash management policy that has been approved by our board of directorsand restricts our investments to a maximum maturity of 18 months and toinvestment-grade instruments. As of October 31, 2010, we did not hold anyilliquid investments and we have not realized any losses. However, ongoinguncertainties in global capital markets associated with a repricing of riskhave caused disruptions in the orderly function of markets which are ordinarilycharacterized by virtually unlimited liquidity. If we were to make a futureinvestment in certain illiquid securities that are dependent on the orderlyfunctioning of the capital markets, and if we were required to liquidate thesetypes of securities at short notice, such liquidation could result in losses ofprincipal, which would have a negative impact on our results of operations andcash flows.

 

***There are risks associatedwith our operations in China.***

 

In December 2000, we established OmniVision Semiconductor(Shanghai) Co. Ltd., or OSC, as part of our efforts to streamline ourmanufacturing process and reduce the costs and working capital associated withthe testing of our image-sensor products, and relocated our automated imagetesting equipment from the United States to China. We are currently expandingour testing capabilities with additional automated testing equipment, whichwill also be located in China. Through our wholly-owned subsidiary, OmniVisionTechnologies (Shanghai) Co. Ltd., or OTC, we are also developing land andconstructing research facilities in Shanghai. There are certain administrative,legal and governmental risks to operating in China that could result inincreased operating expenses or could hamper us in the development of ouroperations in China. The risks from operating in China that could increase ouroperating expenses and adversely affect our operating results, financialcondition and ability to deliver our products and grow our business include,without limitation:

 

·                  difficulties instaffing and managing foreign operations, particularly in attracting andretaining personnel qualified to design, sell, test and support CMOS imagesensors;

·                  difficulties inmanaging employee relations;

·                  implications ofthe ongoing general labor disputes in China;

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

·                  difficulties incoordinating our operations in China with those in California;

·                  difficulties inenforcing contracts in China;

·                  difficulties inprotecting intellectual property;

·                  diversion ofmanagement attention;

·                  imposition ofburdensome governmental regulations;

·                  difficulties inmaintaining uniform standards, controls, procedures and policies across ourglobal operations, including inventory management and financial consolidation;

·                  political andeconomic instability, which could have an adverse impact on foreign exchangerates in Asia and could impair our ability to conduct our business in China;and

·                  inadequacy ofthe local infrastructure to support our operations.

 

***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 may acquire, or invest in, businesses that offer products, servicesand technologies that we believe would complement our products, including CMOSimage-sensor manufacturers. We may also make acquisitions of, or investmentsin, businesses that we believe could expand our distribution channels. Even ifwe were to announce an acquisition, we may not be able to complete it. Inaddition, any future acquisition or substantial investment could presentnumerous risks, including:

 

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·                  difficulty inrealizing the potential technological benefits of the transaction;

·                  difficulty inintegrating the technology, operations or work force of the acquired businesswith our existing business;

·                  unanticipatedexpenses related to technology integration;

·                  disruption ofour ongoing business;

·                  difficulty inrealizing the potential financial or strategic benefits of the transaction;

·                  difficulty inmaintaining uniform standards, controls, procedures and policies;

·                  possibleimpairment of relationships with employees, customers, suppliers and strategicpartners as a result of integration of new businesses and management personnel;

·                  reductions inour future operating results from amortization of intangible assets;

·                  impairment ofresulting goodwill; and

·                  potentialunknown or unexpected liabilities associated with acquired businesses.

 

We expect that any future acquisitions could include consideration tobe paid in cash, shares of our common stock or a combination of cash and ourcommon stock. If and when consideration for a transaction is paid in commonstock, it will result in dilution to our existing stockholders.

 

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

 

In October 2003, together with TSMC, we formed VisEra, a joint venturein Taiwan, for the purposes of providing manufacturing services. Since itsformation, TSMC and we have expanded the scope of VisEra’s activities throughthe provision of additional funding.

 

In January 2006, VisEra acquired certain color filter processingequipment from TSMC and assumed direct responsibility for providing the colorfilter processing services that had previously been provided to us by TSMC. Weexpect that VisEra will be able to provide us with a committed supply of highquality manufacturing services at competitive prices. However, there aresignificant legal, governmental and relationship risks to developing VisEra,and we cannot ensure that we will continue to receive the expected benefitsfrom the joint venture. For example, VisEra may not be able to providemanufacturing services that have competitive technology or prices, which couldadversely affect our product offerings and our ability to meet customerrequirements for our products. In addition, the existence of VisEra may also makeit more difficult for us to secure dependable services from competing merchantvendors who provide similar manufacturing services.

 

***We may not achieve all ofthe anticipated benefits of our alliances with, and strategic investments in,third parties.***

 

We expect to develop our business partly through forming alliances orjoint ventures with and making strategic investments in other companies, someof which may be companies at a relatively early stage of development. Forexample, in April 2003, we made an investment in XinTec, a company thatprovides chip scale packaging services, and in June 2003 we made aninvestment in ImPac, a packaging service company. In December 2005,VisEra, our joint venture with TSMC, completed the acquisition of additionalshares of XinTec. In May 2007, we acquired a portion of the registeredcapital of WLCSP, a company that also provides chip scale packaging services.In December 2009, Tong Hsing acquired ImPac in a stock-for-stock exchangeand we now hold shares in Tong Hsing.

 

Our investments in these and other companies may negatively impact ouroperating results, because, under certain circumstances, we are required torecognize our portion of any loss recorded by each of these companies or toconsolidate them into our operating results. We expect to continue to utilizepartnerships, strategic alliances and investments, particularly those thatenhance our manufacturing capacity and those that provide manufacturingservices and testing capability. These investments and partnering arrangementsare crucial to our ability to grow our business and meet the increasing demandsof our customers. However, we cannot ensure that we will achieve the benefitswe expect from these alliances. For example, we may not be able to obtain acceptablequality and/or wafer manufacturing yields from these companies, which couldresult in higher operating costs and could impair our ability to meet customerdemand for our products. In addition, certain of these investments orpartnering relationships may place restrictions on the scope of our business,the geographic areas in which we can sell our products and the types ofproducts that we can manufacture and sell. For example, our agreement with TSMCprovides that we may not engage in business that will 

 

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directlycompete with the business of VisEra. This type of non-competition provision mayimpact our ability to grow our business and to meet the demands of ourcustomers.

 

***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.***

 

As part of our strategy, we have formed joint ventures with two of ourfoundry partners, and we hold equity interests in three other companies fromwhich we purchase certain manufacturing services. For the investments that weaccount for under the equity method, we record as part of income or expense ourshare of the increase or decrease in the equity of the companies in which wehave invested. It is possible that, in the future, our relationships and/or ourinterests in or with these joint ventures or other investees could change. Suchchanges have resulted in the past, and could result in the future, indeconsolidation or consolidation of such entities, as the case may be, whichcould result in changes in our reported results.

 

***We may be unable toadequately protect our intellectual property, and therefore we may lose some ofour competitive advantage.***

 

We rely on a combination of patent, copyright, trademark and tradesecret laws as well as nondisclosure agreements and other methods to protectour proprietary technologies. We have been issued patents and have a number ofpending United States and foreign patent applications. However, we cannotprovide assurance that any patent will be issued as a result of anyapplications or, if issued, that any claims allowed will be sufficiently broadto protect our technology. It is possible that existing or future patents maybe challenged, invalidated or circumvented. For example, in August 2002,we initiated a patent infringement action in Taiwan, Republic of China againstIC Media Corporation of San Jose, California for infringement of aTaiwanese patent that had been issued to us. In response to our patentinfringement action, in October 2002, IC Media Corporationinitiated a cancellation proceeding in the Taiwan Intellectual Property Officewith respect to our patent. In July 2003, the Taiwan Intellectual PropertyOffice made an initial determination to grant the cancellation of the subjectpatent, which decision was upheld by the Taiwan Ministry of Economic Affairs andthe High Administrative Court. We decided not to appeal such decision by theMay 31, 2005 deadline. Although we do not believe the cancellation of theTaiwanese patent at issue in the dispute described above has had a materialadverse effect on our business or prospects, there may be other situationswhere our inability to adequately protect our intellectual property rightscould materially and adversely affect our competitive position and operatingresults. If a third party can copy or otherwise obtain and use our products ortechnology without authorization, develop corresponding technologyindependently or design around our patents, this could materially adverselyaffect our business and prospects. Effective patent, copyright, trademark andtrade secret protection may be unavailable or limited in foreign countries. Anydisputes over our intellectual property rights, whatever the ultimateresolution of such disputes, may result in costly and time-consuming litigationor require the license of additional elements of intellectual property for afee.

 

***Litigation regardingintellectual property could divert management attention, be costly to defendand prevent us from using or selling the challenged technology.***

 

In recent years, there has been significant litigation in the UnitedStates involving 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 thesale or use of products or services that incorporate the infringed intellectualproperty;

·                  obtaining fromthe holder of the infringed intellectual property a license to sell or use therelevant technology, which license may not be available on acceptable terms, ifat all; or

·                  redesigningthose products or services that incorporate the disputed intellectual property,which could result in substantial unanticipated development expenses and delayand prevent us from selling the products until the redesign is completed, if atall.

 

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If we are subject to a successful claim of infringement and we fail todevelop non-infringing intellectual property or license the infringedintellectual property on acceptable terms and on a timely basis, we may beunable to sell some or all of our products, and our operating results could beadversely affected. We may in the future initiate claims or litigation againstthird parties for infringement of our intellectual property rights or todetermine the scope and validity of our proprietary rights or the proprietaryrights of competitors. These claims could also result in significant expenseand the diversion of technical and management attention.

 

***The use of our imagesensors in end user products in the medical and automotive industries couldresult in us being named as a defendant in product liability claims, whichcould adversely affect our business and reputation.***

 

Our image sensors have been incorporated into certain end user productsin the medical and automotive industries, and we expect that they will continueto increase as a percentage of our overall business. The use of the medical andautomotive industry products into which our image sensors are designed couldresult in an unsafe condition, injury, or even death as a result of, amongother factors, component failures, manufacturing flaws, design defects orinadequate disclosure of product-related risks or product-related information.These factors could result in product liability claims seeking damages forpersonal injury, and we could be named as a defendant in such claims. Becausethe outcome of product liability claims is not predictable and is difficult toassess or quantify, we cannot provide assurance that such claims will notmaterially adversely affect our business or damage the reputation of ourproducts or our company.

 

***If we do not effectivelymanage our growth, our ability to increase our revenues and improve ourearnings could be adversely affected.***

 

Our growth has placed, and will continue to place, a significant strainon our management and other resources. To manage our growth effectively, wemust, among other things:

 

·                  continuouslyimprove our operational, financial and accounting systems;

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

·                  attract andretain qualified personnel with relevant experience; and

·                  effectivelymanage accounts receivable and inventory.

 

For example, our failure to effectively manage our inventory levelscould result either in excess inventories, which could adversely affect ourgross margins and operating results, or lead to an inability to fill customerorders, which would result in lower sales and could harm our relationships withexisting and potential customers.

 

We must also manage multiple relationships with customers, businesspartners and other third parties, such as our foundries and process andassembly vendors. Moreover, future growth could significantly overburden ourmanagement and financial systems and other resources. We may not make adequateallowances for the 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 toexpand quickly enough to capitalize on potential market opportunities.Our future operating results will also depend, in part, on our ability toexpand sales and marketing, research and development, accounting, finance andadministrative support.

 

***Our future tax rates andtax payments could be higher than we anticipate and may harm our results ofoperations.***

 

As a multinational corporation, we conduct our business in manycountries and are subject to taxation in many jurisdictions. The taxation ofour business is subject to the application of multiple and sometimesconflicting tax laws and regulations as well as multinational tax conventions.The application of tax law is subject to legal and factual interpretation,judgment and uncertainty, and tax laws themselves are subject to change.Consequently, taxing authorities may impose tax assessments or judgmentsagainst us that could result in a significant charge to our earnings.

 

A number of other factors will also affect our future tax rate, andcertain of these factors could increase our effective tax rate in futureperiods, which could adversely impact our operating results. These factors includechanges in non-deductible share-based compensation, changes in tax laws or theinterpretation of tax laws, changes in the proportion and geographic mix of ourrevenue or earnings, changes in the valuation of our deferred tax assets and 

 

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liabilities,changes in available tax credits and the repatriation of non-U.S. earnings forwhich we have not previously provided for U.S. taxes.

 

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

 

During fiscal 2010 and the six months ended October 31, 2010,approximately 48.5% and 28.6%, respectively, of our revenues came from salesthrough distributors. We expect that revenues from sales through distributorswill vary from year to year, but will continue to represent a significantproportion of our total revenues. Selling through distributors reduces ourability to accurately forecast sales and increases the complexity of ourbusiness, requiring us to, among other matters:

 

·                  manage a morecomplex supply chain;

·                  manage thelevel of inventory at each distributor;

·                  provide forcredits, return rights and price protection;

·                  estimate theimpact of credits, return rights, price protection and unsold inventory atdistributors; and

·                  monitor thefinancial condition and creditworthiness of our distributors.

 

Any failure to manage these challenges could cause us to inaccuratelyforecast sales and carry excess or insufficient inventory, thereby adverselyaffecting our operating results and cash flows.

 

***We face foreign business,political and economic risks, because a majority of our products and those ofour customers are manufactured and sold outside of the United States.***

 

We face difficulties in managing our third party foundries, colorfilter application 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.

 

Sales outside of the United States accounted for substantially all ofour revenues for fiscal 2010 and the six months ended October 31,2010. We anticipate that sales outside of the United States will continue toaccount for a substantial portion of our revenues in future periods. Dependenceon sales to foreign customers involves certain risks, including:

 

·                  longer paymentcycles;

·                  the adverseeffects of tariffs, duties, price controls or other restrictions that impairtrade;

·                  decreasedvisibility as to future demand;

·                  difficulties inaccounts receivable collections; and

·                  burdens ofcomplying with a wide variety of foreign laws and labor practices.

 

Sales of our products have to date been denominated principally in U.S.dollars. Over the last several years, the U.S. dollar has weakened against mostother currencies. Future increases in the value of the U.S. dollar, if any,would increase the price of our products in the currency of the countries inwhich our 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 risks associatedwith fluctuations in foreign currency exchange rates.

 

***Our business could beharmed if we lose the services of one or more members of our senior managementteam, or if we are unable to attract and retain qualified personnel.***

 

The loss of the services of one or more of our executive officers orkey employees, which has occurred from time to time, or the decision of one ormore of these individuals to join a competitor, could adversely affect ourbusiness and harm our operating results and financial condition. Our successdepends to a significant extent on the continued service of our seniormanagement and certain other key technical personnel. None of our seniormanagement is bound by an employment or non-competition agreement. We do notmaintain key man life insurance on any of our employees.

 

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Our success also depends on our ability to identify, attract and retainqualified sales, marketing, finance, management and technical personnel. Wehave experienced, and may continue to experience, difficulty in hiring andretaining candidates with appropriate qualifications. If we do not succeed inhiring and retaining candidates with appropriate qualifications, our revenues,operations and product development efforts could be harmed.

 

***We substantially completedthe implementation of the first phase of a new enterprise resource planningsystem, a process which presents a number of significant operational risks.***

 

As our business grows and becomes more complex, it is necessary that weexpand and upgrade our enterprise resource planning system, or ERP, and othermanagement information systems which are critical to the operational,accounting and financial functions of our company. We evaluated alternativesolutions, both short-term and long-term, to meet the operating, administrativeand financial reporting requirements of our business. During the three monthsended July 31, 2008, we substantially completed the implementation of thefirst phase of a new ERP based on a suite of application software developed byOracle Corporation. We have made and will continue to make further enhancementsand upgrades to the ERP, as necessary. Significant management attention andresources have been used and extensive planning has occurred to supporteffective implementation of the new ERP system, however, such implementationcarries certain risks, including the risk of significant design errors thatcould materially and adversely affect our operating results and impact ourability to manage our business. As a result, there is a risk that deficienciesmay exist in the future and that they could constitute significantdeficiencies, or, in the aggregate, a material weakness in internal controlover financial reporting.

 

***Our operations may beimpaired as a result of disasters, business interruptions or similar events.***

 

Disasters and business interruptions such as earthquakes, water, fire,electrical failure, accidents and epidemics affecting our operating activities,major facilities, and employees’ and customers’ health could materially andadversely affect our operating results and financial condition. In particular,our Asian operations and most of our third party service providers involved inthe manufacturing of our products are located within relative close proximity.Therefore, any disaster that strikes within or close to that geographic area,such as the earthquake and flooding that occurred in China, could be extremelydisruptive to our business and could materially and adversely affect ouroperating results and financial condition. We are currently developing andimplementing a disaster recovery plan.

 

***Acts of war and terroristacts may seriously harm our business and revenue, costs and expenses andfinancial condition.***

 

Acts of war or terrorist acts, wherever they occur around the world,may cause damage or disruption to our business, employees, facilities,suppliers, distributors or customers, which could significantly impact ourrevenue, costs, expenses and financial condition. In addition, as a companywith significant operations and major distributors and customers located inAsia, we may be adversely impacted by heightened tensions and acts of war thatoccur in locations such as the Korean Peninsula, Taiwan and China. Thepotential for future terrorist attacks, the national and internationalresponses to terrorist attacks or perceived threats to national security, andother acts of war or hostility have created many economic and politicaluncertainties that could adversely affect our business and results ofoperations in ways that cannot presently be predicted. We are uninsured forlosses and interruptions caused by terrorist acts and acts of war.

 

***Risks Related to the Securities Markets andOwnership of Our Common Stock***

 

***Provisions in our charterdocuments and Delaware law, as well as our stockholders’ rights plan, couldprevent or delay a change in control of our company and may reduce the marketprice of our common stock.***

 

Provisions of our certificate of incorporation and bylaws maydiscourage, delay or prevent a merger or acquisition that a stockholder mayconsider favorable. These provisions include:

 

·                  adjusting theprice, rights, preferences, privileges and restrictions of preferred stockwithout stockholder approval;

·                  providing for aclassified board of directors with staggered, three-year terms;

·                  requiringsupermajority voting to amend some provisions in our certificate ofincorporation and bylaws;

·                  limiting thepersons who may call special meetings of stockholders; and

·                  prohibitingstockholder actions by written consent.

 

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Provisions of Delaware law also may discourage, delay or preventanother company from acquiring or merging with us. Our board of directorsadopted a preferred stock rights agreement in August 2001. Pursuant to therights agreement, our board of directors declared a dividend of one right topurchase one one-thousandth share of our Series A Participating PreferredStock for each outstanding share of our common stock. The dividend was paid onSeptember 28, 2001 to stockholders of record as of the close of businesson that date. Each right entitles the registered holder to purchase from us oneone-thousandth of a share of Series A Preferred at an exercise price of$176.00, subject to adjustment. The exercise of the rights could have theeffect of delaying, deferring or preventing a change of control of our company,including, without limitation, discouraginga proxy contest or making more difficult the acquisition of a substantial blockof our common stock. The rights agreement could also limit the price thatinvestors might be willing to pay in the future for our common stock.

 

***Our stock has been andwill likely continue to be subject to substantial price and volume fluctuationsdue to a number of factors, many of which are beyond our control that mayprevent our stockholders from selling our common stock at a profit.***

 

The market price of our common stock has fluctuated substantially, andthere can be no assurance that such volatility will not continue. Since thebeginning of fiscal 2002 through December 6, 2010, the closing sales priceof our common 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 December 6,2010 was $31.49 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 oranticipated fluctuations in our operating results;

·                  changes inexpectations as to our future financial performance;

·                  changes infinancial estimates of securities analysts;

·                  release oflock-up or other transfer restrictions on our outstanding shares of commonstock or sales of additional shares of common stock;

·                  sales or theperception in the market of possible sales of shares of our common stock by ourdirectors, officers, employees or principal stockholders;

·                  changes inmarket valuations of other technology companies; and

·                  announcementsby us or our competitors of significant technical innovations, design wins,contracts, standards or acquisitions.

 

Due to these factors, the price of our stock may decline and investorsmay be unable to resell their shares of our stock for a profit. In addition,the stock market experiences extreme volatility that often is unrelated to theperformance of particular companies. These market fluctuations may cause ourstock price to decline regardless of our performance.

 

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**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. |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

 
|                         |       | **OMNIVISION TECHNOLOGIES, INC**.            |
|------------------------------|------------|---------------------------------------------------|
|                         |       | *(Registrant)*                                    |
|                         |       |                                              |
|                         |       |                                              |
| Dated: December 9, 2010 |       |                                              |
|                         |       |                                              |
|                         | By:   | **/s/ SHAW HONG**                                 |
|                         |       | **Shaw Hong**                                     |
|                         |       | *Chief Executive Officer, President and Director* |
|                         |       | *(Principal Executive Officer)*                   |
|                         |       |                                              |
|                         |       |                                              |
| Dated: December 9, 2010 |       |                                              |
| ** **                   | ** ** | ** **                                        |
|                         | By:   | **/s/ ANSON CHAN**                                |
|                         |       | **Anson Chan**                                    |
|                         |       | *Chief Financial Officer*                         |
|                         |       | *(Principal Financial and Accounting Officer)*    |

 

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**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. |

 

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