Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**x****      QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended July 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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**OMNIVISIONTECHNOLOGIES, 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 (Do not  check if a smaller reporting company) |   | Smaller  reporting company o |

 

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

 

At September 3, 2010, 53,955,019 shares of common stock ofthe registrant were outstanding, exclusive of 12,541,000 shares oftreasury stock.

 

 

 

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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) — July 31, 2010 and April 30, 2010               |       | 3          |
|               |                                                                                                                         |       |       |
|               | Condensed Consolidated Statements of Operations  (unaudited) — Three Months Ended July 31, 2010 and 2009 |       | 4          |
|               |                                                                                                                         |       |       |
|               | Condensed Consolidated Statements of Cash Flows  (unaudited) — Three Months Ended July 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                                  |       | 22         |
|               |                                                                                                                         |       |       |
| **Item 3.**        | Quantitative  and Qualitative Disclosures About Market Risk                                                                  |       | 35         |
|               |                                                                                                                         |       |       |
| **Item 4.**        | Controls and  Procedures                                                                                                     |       | 36         |
|               |                                                                                                                         |       |       |
| ** **         | **PART II.  OTHER INFORMATION**                                                                                         |       |       |
|               |                                                                                                                         |       |       |
| **Item 1.**        | Legal Proceedings                                                                                                            |       | 37         |
|               |                                                                                                                         |       |       |
| **Item 1A.**       | Risk Factors                                                                                                                 |       | 39         |
|               |                                                                                                                         |       |       |
| **Item 6.**        | Exhibits                                                                                                                     |       | 55         |
|               |                                                                                                                         |       |       |
| Signatures         |                                                                                                                         | 56         |
|               |                                                                                                                         |       |       |
| Exhibit Index |                                                                                                                         | 57         |

 

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Table ofContents

 

**PART I — FINANCIALINFORMATION**

 

**ITEM 1.   FINANCIAL STATEMENTS**

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

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

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                    | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                    | ** ** | **2010**          | ** ** | **2010**           | ** ** |
| **ASSETS**                                                                                                                                                                                                                                    |       |              |       |               |       |
| Current assets:                                                                                                                                                                                                                               |       |              |       |               |       |
| Cash and cash equivalents                                                                                                                                                                                                                     |       | $                 | 277,564    |               | $          | 234,023 |   |
| Short-term investments                                                                                                                                                                                                                        |       | 71,460            |       | 99,555             |       |
| Accounts receivable, net of allowances for  doubtful accounts and sales returns                                                                                                                                                               |       | 93,744            |       | 74,261             |       |
| Inventories                                                                                                                                                                                                                                   |       | 140,960           |       | 133,993            |       |
| Refundable and deferred income taxes                                                                                                                                                                                                          |       | 2,445             |       | 1,990              |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                     |       | 6,552             |       | 9,380              |       |
| Total current assets                                                                                                                                                                                                                          |       | 592,725           |       | 553,202            |       |
| Property, plant and equipment, net                                                                                                                                                                                                            |       | 121,760           |       | 121,547            |       |
| Long-term investments                                                                                                                                                                                                                         |       | 99,198            |       | 92,121             |       |
| Goodwill                                                                                                                                                                                                                                      |       | 1,122             |       | 439                |       |
| Intangibles, net                                                                                                                                                                                                                              |       | 7,806             |       | 4,891              |       |
| Other long-term assets                                                                                                                                                                                                                        |       | 25,082            |       | 25,493             |       |
| Total assets                                                                                                                                                                                                                                  |       | $                 | 847,693    |               | $          | 797,693 |   |
|                                                                                                                                                                                                                                          |       |              |       |               |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                                                                                    |       |              |       |               |       |
| Current liabilities:                                                                                                                                                                                                                          |       |              |       |               |       |
| Accounts payable                                                                                                                                                                                                                              |       | $                 | 95,924     |               | $          | 85,487 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                                |       | 17,399            |       | 19,506             |       |
| Deferred revenues, less cost of revenues                                                                                                                                                                                                      |       | 11,776            |       | 10,661             |       |
| Current portion of long-term debt                                                                                                                                                                                                             |       | 4,292             |       | 4,286              |       |
| Total current liabilities                                                                                                                                                                                                                     |       | 129,391           |       | 119,940            |       |
| Long-term liabilities:                                                                                                                                                                                                                        |       |              |       |               |       |
| Long-term income taxes payable                                                                                                                                                                                                                |       | 90,688            |       | 90,626             |       |
| Non-current portion of long-term debt                                                                                                                                                                                                         |       | 44,661            |       | 45,428             |       |
| Other long-term liabilities                                                                                                                                                                                                                   |       | 6,075             |       | 4,727              |       |
| Total long-term liabilities                                                                                                                                                                                                                   |       | 141,424           |       | 140,781            |       |
| Total liabilities                                                                                                                                                                                                                             |       | 270,815           |       | 260,721            |       |
|                                                                                                                                                                                                                                          |       |              |       |               |       |
| Commitments and contingencies (Note 13)                                                                                                                                                                                                  |       |              |       |               |       |
|                                                                                                                                                                                                                                          |       |              |       |               |       |
| Equity:                                                                                                                                                                                                                                       |       |              |       |               |       |
| OmniVision Technologies, Inc. stockholders’  equity:                                                                                                                                                                                |       |              |       |               |       |
| Common stock, $0.001 par value;  100,000 shares authorized; 66,392 shares issued and  53,851 outstanding at July 31, 2010 and 64,616 shares issued  and 52,075 outstanding at April 30, 2010, respectively |       | 66                |       | 65                 |       |
| Additional paid-in capital                                                                                                                                                                                                                    |       | 467,049           |       | 441,077            |       |
| Accumulated other comprehensive income                                                                                                                                                                                                        |       | 1,255             |       | 870                |       |
| Treasury stock, 12,541 shares at July 31,  2010 and April 30, 2010, respectively                                                                                                                                                    |       | (178,683          | )          | (178,683           | )          |
| Retained earnings                                                                                                                                                                                                                             |       | 287,191           |       | 270,253            |       |
| Total OmniVision Technologies, Inc.  stockholders’ equity                                                                                                                                                                           |       | 576,878           |       | 533,582            |       |
| Noncontrolling interest                                                                                                                                                                                                                       |       | —            |       | 3,390              |       |
| Total equity                                                                                                                                                                                                                                  |       | 576,878           |       | 536,972            |       |
| Total  liabilities and equity                                                                                                                                                                                                                 |       | $                 | 847,693    |               | $          | 797,693 |   |

 

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

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

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

**(unaudited)**

 
| ** **                                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                    | ** ** | **July 31,**      | ** ** |
| ** **                                                                                                                    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Revenues                                                                                                                      |       | $                      | 193,071    |   | $ | 105,560 |   |
| Cost of revenues                                                                                                              |       | 141,116                |       | 81,890 |   |
| Gross profit                                                                                                                  |       | 51,955                 |       | 23,670 |   |
|                                                                                                                          |       |                   |       |   |   |
| Operating expenses:                                                                                                           |       |                   |       |   |   |
| Research, development and related                                                                                             |       | 20,232                 |       | 18,432 |   |
| Selling, general and administrative                                                                                           |       | 14,329                 |       | 14,160 |   |
| Total operating expenses                                                                                                      |       | 34,561                 |       | 32,592 |   |
|                                                                                                                          |       |                   |       |   |   |
| Income (loss) from operations                                                                                                 |       | 17,394                 |       | (8,922 | ) |
| Interest expense, net                                                                                                         |       | (200                   | )          | (204 | ) |
| Other income, net                                                                                                             |       | 1,493                  |       | 568 |   |
| Income (loss) before income taxes                                                                                             |       | 18,687                 |       | (8,558 | ) |
|                                                                                                                          |       |                   |       |   |   |
| Provision for income taxes                                                                                                    |       | 1,781                  |       | 1,188 |   |
| Net income (loss)                                                                                                             |       | 16,906                 |       | (9,746 | ) |
| Net income (loss) attributable to noncontrolling  interest                                                                    |       | (32                    | )          | 110 |   |
| Net income (loss) attributable to OmniVision  Technologies, Inc.                                                         |       | $                      | 16,938     |   | $ | (9,856 | ) |
|                                                                                                                          |       |                   |       |   |   |
| Net income (loss) per share attributable to  OmniVision Technologies, Inc. common stockholders:                          |       |                   |       |   |   |
| Basic                                                                                                                         |       | $                      | 0.32       |   | $ | (0.19 | ) |
| Diluted                                                                                                                       |       | $                      | 0.30       |   | $ | (0.19 | ) |
|                                                                                                                          |       |                   |       |   |   |
| Shares used in computing net income (loss) per  share attributable to OmniVision Technologies, Inc. common stockholders: |       |                   |       |   |   |
| Basic                                                                                                                         |       | 53,214                 |       | 50,574 |   |
| Diluted                                                                                                                       |       | 56,572                 |       | 50,574 |   |

 

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)**

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                    | ** ** | **July 31,**      | ** ** |
| ** **                                                                                    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                                        |       |                   |       |   |   |
| Net income (loss)                                                                             |       | $                      | 16,906     |   | $ | (9,746 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities:     |       |                   |       |   |   |
| Depreciation and amortization                                                                 |       | 4,358                  |       | 5,743 |   |
| Change in fair value of interest rate swap                                                    |       | 1,098                  |       | (881 | ) |
| Stock-based compensation                                                                      |       | 5,136                  |       | 6,098 |   |
| Tax effect from stock-based compensation                                                      |       | 1,082                  |       | — |   |
| (Gain) loss on equity investments, net                                                        |       | (3,309                 | )          | 401 |   |
| Write-down of inventories                                                                     |       | 5,096                  |       | 3,747 |   |
| Excess tax benefit from stock-based compensation                                              |       | (1,498                 | )          | — |   |
| Changes in assets and liabilities, net of  acquisition and deconsolidation:                   |       |                   |       |   |   |
| Accounts receivable, net                                                                      |       | (19,574                | )          | (4,386 | ) |
| Inventories                                                                                   |       | (13,575                | )          | 3,670 |   |
| Refundable and deferred income taxes                                                          |       | (396                   | )          | (637 | ) |
| Prepaid expenses and other assets                                                             |       | 2,353                  |       | 106 |   |
| Accounts payable                                                                              |       | 9,537                  |       | 27,630 |   |
| Accrued expenses and other current liabilities                                                |       | (2,613                 | )          | (1,468 | ) |
| Income taxes payable                                                                          |       | 420                    |       | 2,069 |   |
| Deferred revenues, less cost of revenues                                                      |       | 1,389                  |       | 4,748 |   |
| Deferred tax liabilities                                                                      |       | (15                    | )          | (483 | ) |
| Net cash provided by operating activities                                                     |       | 6,395                  |       | 36,611 |   |
| Cash flows from investing activities:                                                         |       |                   |       |   |   |
| Purchases of short-term investments                                                           |       | (12,374                | )          | (34,537 | ) |
| Proceeds from sales or maturities of short-term  investments                                  |       | 38,077                 |       | 1,373 |   |
| Purchases of property, plant and equipment, net of  sales                                     |       | (2,083                 | )          | (3,902 | ) |
| Purchases of long-term investments                                                            |       | (282                   | )          | — |   |
| Purchase of intangible and other assets                                                       |       | (4,715                 | )          | — |   |
| Deconsolidation of SOI                                                                        |       | (2,816                 | )          | — |   |
| Net cash provided by (used in) investing  activities                                          |       | 15,807                 |       | (37,066 | ) |
| Cash flows from financing activities:                                                         |       |                   |       |   |   |
| Repayment of long-term borrowings                                                             |       | (888                   | )          | (889 | ) |
| Excess tax benefits from stock-based compensation                                             |       | 1,498                  |       | — |   |
| Proceeds from exercise of stock options and  employee stock purchase plan                     |       | 20,636                 |       | 2,442 |   |
| Net cash provided by financing activities                                                     |       | 21,246                 |       | 1,553 |   |
| Effect of exchange rate changes on cash and cash  equivalents                                 |       | 93                     |       | 22 |   |
| Net increase in cash and cash equivalents                                                     |       | 43,541                 |       | 1,120 |   |
| Cash and cash equivalents at beginning of period                                              |       | 234,023                |       | 257,808 |   |
| Cash and cash equivalents at end of period                                                    |       | $                      | 277,564    |   | $ | 258,928 |   |
| Supplemental cash flow information:                                                           |       |                   |       |   |   |
| Taxes paid                                                                                    |       | $                      | 367        |   | $ | 239 |   |
| Interest paid (net of amount capitalized)                                                     |       | $                      | 498        |   | $ | 549 |   |
| Supplemental schedule of non-cash investing and  financing activities:                        |       |                   |       |   |   |
| Additions to property, plant and equipment  included in accounts payable and accrued expenses |       | $                      | 1,409      |   | $ | 325 |   |
| Capitalized interest and other costs                                                          |       | $                      | 102        |   | $ | — |   |
| Write-off of employee stock-based  compensation-related deferred tax assets                   |       | $                      | 151        |   | $ | — |   |

 

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

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

**Note 1 — Basis ofPresentation**

 

***Overview***

 

The accompanying interim unaudited condensedconsolidated financial statements as of July 31, 2010 and April 30,2010 and for the three months ended July 31, 2010 and 2009 have beenprepared by OmniVision Technologies, Inc., and its subsidiaries(“OmniVision” or the “Company”) in accordance with the rules andregulations of the U.S. Securities and Exchange Commission (“SEC”). The amountsas of April 30, 2010 are derived from the Company’s audited annualfinancial statements. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted in accordance with SECrules and regulations. In the opinion of management, the accompanyingunaudited condensed consolidated financial statements reflect all adjustments,consisting only of normal recurring adjustments, necessary to state fairly thefinancial position of the Company and its results of operations and cash flowsas of and for the periods presented. These condensed consolidated financialstatements should be read in conjunction with the audited annual financialstatements and notes thereto included in the Company’s Annual Report onForm 10-K for the fiscal year ended April 30, 2010 (the“Form 10-K”).

 

***Use of Estimates***

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”) requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. TheCompany bases its estimates and judgments on its historical experience,knowledge of current conditions and beliefs of what could occur in the futureconsidering available information. Actual results could differ from theseestimates.

 

**Note 2 — RecentAccounting Pronouncements**

 

In October 2009, the FASB revised theauthoritative guidance for revenue recognition for arrangements with multipledeliverables. The new guidance modifies the requirements for determiningwhether a deliverable can be treated as a separate unit of accounting byremoving the criteria that verifiable and objective evidence of fair valueexists for the undelivered elements. In allocating transaction considerationamong the deliverables, the guidance also introduced the concept of usingmanagement’s best estimate of a standalone selling price as an alternate basisfor allocation. The guidance is effective in fiscal years beginning on or afterJune 15, 2010, and the Company is required to adopt this guidance in itsfirst quarter of fiscal 2012. The Company is currently evaluating the impactthis guidance may have on its financial position, results of operations andcash flows.

 

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

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

**Note 3 — Short-TermInvestments**

 

Available-for-sale securities at July 31, 2010and April 30, 2010 were as follows (in thousands):

 
| ** **                                                          | ** ** | **As of July 31, 2010** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **Amortized**                | ** ** | **Gross********Unrealized** | ** ** | **Gross********Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Cost**                     | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| U.S. government debt securities with maturities  less than one year |       | $                            | 53,166     |   | $ | 13 |   | $ | — |   | $ | 53,179 |   |
| U.S. government debt securities with maturities  over one year      |       | 8,084                        |       | 13 |   | — |   | 8,097 |   |
| Commercial paper and bond funds                                     |       | 10,186                       |       | 1 |   | (3 | ) | 10,184 |   |
|                                                                |       | $                            | 71,436     |   | $ | 27 |   | $ | (3 | ) | $ | 71,460 |   |
|                                                                |       |                         |       |   |   |   |   |   |   |
| Contractual maturity dates, less than one year                      |       |                         |       |   |   |   |   | $ | 63,363 |   |
| Contractual maturity dates, one year to two years                   |       |                         |       |   |   |   |   | 8,097 |   |
|                                                                |       |                         |       |   |   |   |   | $ | 71,460 |   |

 
| ** **                                                          | ** ** | **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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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

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

 
| ** **                                                             | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                             | ** ** | **2010**          | ** ** | **2010**           | ** ** |
| Cash and cash equivalents:                                             |       |              |       |               |       |
| Cash                                                                   |       | $                 | 167,185    |               | $          | 183,393 |   |
| Money market funds, certificates of deposit and  U.S. government bonds |       | 110,379           |       | 50,630             |       |
|                                                                   |       | $                 | 277,564    |               | $          | 234,023 |   |
| Accounts receivable, net:                                              | ** ** | ** **        | ** ** | ** **         | ** ** |
| Accounts receivable                                                    |       | $                 | 95,794     |               | $          | 75,908 |   |
| Less: Allowance for doubtful accounts                             |       | (726              | )          | (711               | )          |
|  Allowance for sales returns                                      |       | (1,324            | )          | (936               | )          |
|                                                                   |       | $                 | 93,744     |               | $          | 74,261 |   |
| Inventories:                                                           |       |              |       |               |       |
| Work in progress                                                       |       | $                 | 57,561     |               | $          | 76,845 |   |
| Finished goods                                                         |       | 83,399            |       | 57,148             |       |
|                                                                   |       | $                 | 140,960    |               | $          | 133,993 |   |
| Prepaid expenses and other current assets:                             |       |              |       |               |       |
| Prepaid expenses                                                       |       | $                 | 4,785      |               | $          | 6,398 |   |
| Deposits and other                                                     |       | 1,619             |       | 2,686              |       |
| Interest receivable                                                    |       | 148               |       | 296                |       |
|                                                                   |       | $                 | 6,552      |               | $          | 9,380 |   |
| Property, plant and equipment, net:                                    |       |              |       |               |       |
| Land                                                                   |       | $                 | 13,000     |               | $          | 13,000 |   |
| Buildings and land use right                                           |       | 37,877            |       | 37,877             |       |
| Buildings/leasehold improvements                                       |       | 19,138            |       | 19,148             |       |
| Machinery and equipment                                                |       | 65,200            |       | 64,894             |       |
| Furniture and fixtures                                                 |       | 4,806             |       | 4,810              |       |
| Software                                                               |       | 6,060             |       | 5,873              |       |
| Construction in progress                                               |       | 26,783            |       | 23,419             |       |
|                                                                   |       | 172,864           |       | 169,021            |       |
| Less: Accumulated depreciation and amortization                        |       | (51,104           | )          | (47,474            | )          |
|                                                                   |       | $                 | 121,760    |               | $          | 121,547 |   |
| Other long-term assets:                                                |       |              |       |               |       |
| Deferred income tax assets — non-current                |       | $                 | 19,772     |               | $          | 20,440 |   |
| Prepaid wafer credits                                                  |       | 3,136             |       | 2,826              |       |
| Long-term employee loan receivable                                     |       | 1,000             |       | 1,000              |       |
| Other long-term assets                                                 |       | 1,174             |       | 1,227              |       |
|                                                                   |       | $                 | 25,082     |               | $          | 25,493 |   |
| Accrued expenses and other current liabilities:                        |       |              |       |               |       |
| Employee compensation                                                  |       | $                 | 6,930      |               | $          | 7,490 |   |
| Third party commissions                                                |       | 754               |       | 1,004              |       |
| Professional services                                                  |       | 1,547             |       | 2,383              |       |
| Noncancelable purchase commitments                                     |       | 4,356             |       | 4,689              |       |
| Distributor pricing adjustments                                        |       | 1,908             |       | 1,871              |       |
| Deferred income tax  liabilities — current              |       | 8                 |       | —             |       |
| Other                                                                  |       | 1,896             |       | 2,069              |       |
|                                                                   |       | $                 | 17,399     |               | $          | 19,506 |   |
| Other long-term liabilities:                                           |       |              |       |               |       |
| Deferred income tax  liabilities — non-current          |       | $                 | 1,040      |               | $          | 1,040 |   |
| Interest rate swaps                                                    |       | 4,785             |       | 3,687              |       |
| Other                                                                  |       | 250               |       | —             |       |
|                                                                   |       | $                 | 6,075      |               | $          | 4,727 |   |

 

8

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Table of Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

**Note 5 — Long-termInvestments**

 

Long-term investments as of July 31, 2010 andApril 30, 2010 consisted of the following (in thousands):

 
| ** **  | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|-------------|------------|-------------------|------------|--------------------|------------|
| ** **  | ** ** | **2010**          | ** ** | **2010**           | ** ** |
| VisEra      |       | $                 | 73,378     |               | $          | 72,170 |   |
| WLCSP       |       | 12,804            |       | 11,819             |       |
| XinTec      |       | 4,661             |       | 4,661              |       |
| Tong  Hsing |       | 4,161             |       | 3,471              |       |
| SOI         |       | 4,194             |       | —             |       |
| Total       |       | $                 | 99,198     |               | $          | 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(“VisEra Cayman”), a company incorporated in the Cayman Islands, and VisErabecame a subsidiary of VisEra Cayman. The Company and TSMC have equal interestsin VisEra Cayman.

 

Through April 2007, the Company’s 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. For the three monthsended July 31, 2010 and 2009, the Company recorded equity income (loss) of$1.1 million and $(116,000), respectively, in “Cost of revenues,”consisting of its portion of the net income recorded by VisEra during thoseperiods. (See Note 14.)

 

***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 supervisorto monitor the actions of WLCSP’s board of directors and officers.

 

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.

 

The Company accounts for its investment in WLCSP under the equitymethod. For the three months ended July 31, 2010 and 2009, the Companyrecorded equity income of $1.0 million and $451,000, respectively, in“Other income, net,” consisting of its portion of the net income recorded byWLCSP during those periods, partially offset by equity method investmentadjustments. (See Note 14.)

 

***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 July 31, 2010, the Company’sdirect ownership percentage in XinTec was 4.2%. Separately, VisEra Cayman ownsa 16.1% interest in XinTec. Consequently, the Company’s beneficial ownershippercentage in XinTec was approximately 12.1%. The Company accounts for XinTecas a cost method investment.

 

9

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Table of Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

***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 Companyowned 25.7% of ImPac. In June 2010, the Company participated in TongHsing’s secondary offering and purchased an additional 95,570 shares forapproximately $282,000. The Company’s ownership in Tong Hsing remained at 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 three months ended July 31, 2010, theCompany recorded unrealized holding gains of $408,000 in “Accumulated othercomprehensive income.”

 

***SiliconOptronics, Inc.***

 

In May 2004, the Company entered into an agreement with PowerchipTechnology Corporation (“PTC”), formerly Powerchip Semiconductor Corporation, a Taiwan based company thatproduces memory chips and provides semiconductor foundry services, to establishSilicon Optronics, Inc. (“SOI”), a joint venture in Taiwan. The Companycontributed approximately $2.1 million to SOI in exchange for an ownershippercentage of 49.0%. In March 2005, the Company assumed control of theboard of directors of SOI and the Company has consolidated SOI sinceApril 30, 2005. The purpose of SOI is to manufacture, market and sellcertain of the Company’s legacy products. Toward the end of fiscal 2010, SOI beganto ship niche products into other markets, including touch panels that tracktouches with optical sensors, and linear sensors.

 

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“Other income, 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. For the three months ended July 31,2010, the Company recorded equity income of $37,000 in “Other income, net” forits portion of the net income recorded by SOI.

 

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

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **July 31,**      | ** ** |
| ** **                                                  | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Noncontrolling interest, May 1                         |       | $                      | 3,390      |   | $ | 3,497 |   |
| Net income  (loss) attributable  to noncontrolling interest |       | (32                    | )          | 110 |   |
| Translation gain (loss)                                     |       | (70                    | )          | 29 |   |
| Deconsolidation                                             |       | (3,288                 | )          | — |   |
| Noncontrolling interest, July 31                       |       | $                      | —     |   | $ | 3,636 |   |

 

10

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Table of Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

The following table presents the summary financial information of SOI,VisEra and WLCSP, as derived from their financial statements for the threemonths ended July 31, 2010 and 2009, and prepared under GAAP (inthousands):

 

***Silicon Optronics, Inc***

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **July 31,**      | ** ** |
| ** **              | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ***Operating data:***   |       |                   |       |   |   |
| Revenues                |       | $                      | 2,437      |   | $ | 1,681 |   |
| Gross  profit           |       | 461                    |       | 456 |   |
| Income  from operations |       | 8                      |       | 170 |   |
| Net  income             |       | $                      | 29         |   | $ | 196 |   |

 

***VisEra TechnologiesCompany, Ltd.***

 
| ** **                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **July 31,**      | ** ** |
| ** **                     | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ***Operating data:***          |       |                   |       |   |   |
| Revenues                       |       | $                      | 26,445     |   | $ | 11,643 |   |
| Gross  profit                  |       | 5,450                  |       | (94 | ) |
| Income  (loss) from operations |       | 2,818                  |       | (1,869 | ) |
| Net  income                    |       | $                      | 1,146      |   | $ | 5 |   |

 

***China WLCSP Limited***

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **July 31,**      | ** ** |
| ** **              | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ***Operating data:***   |       |                   |       |   |   |
| Revenues                |       | $                      | 10,837     |   | $ | 5,391 |   |
| Gross  profit           |       | 6,131                  |       | 2,572 |   |
| Income  from operations |       | 5,223                  |       | 1,833 |   |
| Net  income             |       | $                      | 5,012      |   | $ | 2,259 |   |

 

The Company’s share of undistributed earnings of investees accountedfor by the equity method totaled $16.4 million and $20.8 million atJuly 31, 2010 and April 30, 2010, respectively.

 

**Note 6 — Goodwilland Intangible Assets**

 

***Goodwill***

 

The change to the carrying value of the Company’s goodwill from May 1,2010 through July 31, 2010 is reflected below:

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

 

11

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Table of Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

Intangible assets as of July 31, 2010 consist of the following (inthousands):

 
| ** **                          | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|-------------------------------------|------------|----------|------------|-------------------------------|------------|---------------------|------------|
| Core technology(1)                  |       | $        | 24,410     |                          | $          | 18,023              |       | $ | 6,387 |   |
| Patents and licenses                |       | 13,460   |       | 12,760                        |       | 700                 |       |
| Trademarks and tradenames           |       | 1,400    |       | 1,400                         |       | —              |       |
| Customer relationships              |       | 340      |       | 111                           |       | 229                 |       |
| In-process research and development |       | 490      |       | —                        |       | 490                 |       |
| Intangible assets, net              |       | $        | 40,100     |                          | $          | 32,294              |       | $ | 7,806 |   |

 

----

| (1) | During  the three months ended July 31, 2010, the Company purchased certain  intangible and other assets, of which $3.4 million was allocated to “Core  technology” based on their fair values as of the purchase date. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Intangible assets as of April 30, 2010 consist of the following(in thousands):

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

 

For the three months ended July 31, 2010 and 2009, the Companyamortized $458,000 and $1.6 million, respectively, of its intangibleassets. The total expected future annual amortization of these intangibleassets is as follows (in thousands):

 
| **Years  Ending April 30,** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| 2011                             |       | $          | 1,190      |   |
| 2012                             |       | 1,142      |       |
| 2013                             |       | 1,142      |       |
| 2014                             |       | 1,142      |       |
| 2015                             |       | 1,142      |       |
| Thereafter                       |       | 2,048      |       |
| Total                            |       | $          | 7,806      |   |

 

**Note 7 — BorrowingArrangements**

 

The following table shows the Company’s debt (inthousands):

 
| ** **                            | ** ** | **July 31,********2010** | ** ** | **April 30,********2010** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
|                                  |       |                          |       |                           |       |
| Mortgage loan                         |       | $                             | 25,729     |                           | $          | 25,867 |   |
| Term loan                             |       | 6,250                         |       | 7,000                          |       |
| Construction loan                     |       | 16,974                        |       | 16,847                         |       |
|                                  |       | 48,953                        |       | 49,714                         |       |
| Less: amount due within one year |       | (4,292                        | )          | (4,286                         | )          |
| Non-current portion of long-term debt |       | $                             | 44,661     |                           | $          | 45,428 |   |

 

12

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Table of Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

At July 31, 2010, aggregate debt maturitieswere as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | **Mortgage  and Term  Loan** | ** ** | **Construction  Loan** | ** ** | **Total** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------|------------|-----------|------------|
| 2011                            |       | $                            | 2,665      |                   | $          | 738       |       | $ | 3,403 |   |
| 2012                            |       | 3,554                        |       | 738                    |       | 4,292     |       |
| 2013                            |       | 1,554                        |       | 1,476                  |       | 3,030     |       |
| 2014                            |       | 554                          |       | 2,952                  |       | 3,506     |       |
| 2015                            |       | 554                          |       | 2,952                  |       | 3,506     |       |
| Thereafter                      |       | 23,098                       |       | 8,118                  |       | 31,216    |       |
| Total                           |       | $                            | 31,979     |                   | $          | 16,974    |       | $ | 48,953 |   |

 

***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 “TermLoan”). In March 2008, the Company borrowed $6.0 million under theTerm Loan to finance improvements to the Santa Clara Property. The Company drewdown the remaining $6.0 million under the Term Loan in July 2008.

 

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.

 

Interest rates under the Mortgage Loan were 1.3% and 1.2% atJuly 31, 2010 and April 30, 2010, respectively. Interest rates underthe Term Loan were 1.6% and 1.5% at July 31, 2010 and April 30, 2010,respectively. The Company was in compliance with the financial covenants of theLoan and Security Agreement as of July 31, 2010.

 

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 with thebank 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 FixedAssets Loan Agreement with a bank in China (the “Construction Loan”). The purposeof the Construction Loan is to construct a research center for the Company inPudong Development Zone, the Zhang Jiang Science Park in Shanghai, China. Theloan amount is Chinese Yuan 140.0 million or approximately$20.5 million based on exchange rate in effect at the time of the loanorigination. As of July 31, 2010, the Company has borrowed Chinese Yuan115.0 million, or approximately $17.0 million, under the ConstructionLoan. The Company is scheduled to draw down the remaining $3.5 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 everySeptember to the then current published rate. The interest rate under theConstruction Loan was 5.3% at July 31, 2010. The Company was in compliancewith the financial covenants of the Fixed Assets Loan Agreement as ofJuly 31, 2010.

 

13

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Table of Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

***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.

 

The table below presents the location of the swapson the Condensed Consolidated Statements of Operations and CondensedConsolidated Balance Sheets, and the related effects on the Company’s resultsof operations and financial positions (in thousands):

 
| ** **                                                                                                             | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                             | ** ** | **July 31,**      | ** ** |
| ** **                                                                                                             | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ***Location of amounts recognized in  Condensed Consolidated Statements of Operations and amount of gains (losses):*** |       |                   |       |   |   |
| Other  income, net                                                                                                     |       | $                      | (1,098     | ) | $ | 881 |   |
|                                                                                                                        |            |                        |            |  |  |  |  |

 
| ** **                                                                           | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                           | ** ** | **2010**          | ** ** | **2010**           | ** ** |
| ***Location of amounts on Condensed  Consolidated Balance Sheets and fair values:*** |       |              |       |               |       |
| Other  long-term liabilities                                                         |       | $                 | 4,785      |               | $          | 3,687 |   |
|                                                                                      |            |                   |            |                    |            |  |  |

 

**Note 8 — NetIncome (Loss) Per Share Attributable to OmniVision Technologies, Inc.Common Stockholders**

 

Basic net income (loss) per share attributable to OmniVision commonstockholders is computed by dividing net income (loss) attributable toOmniVision by the weighted average number of common shares outstanding duringthe period.

 

Diluted net income per share attributable to OmniVision commonstockholders is computed according to the treasury stock method using the weightedaverage number of common and potentially dilutive common shares outstandingduring the period. Potentially dilutive common shares represent the effect ofstock options. For the three months ended July 31, 2010, 885,000 of commonstock subject to outstanding options were not included in the calculation ofdiluted net income per share because they were antidilutive. For the threemonths ended July 31, 2009, the Company excluded all options andrestricted stock units outstanding as the Company recorded a net loss of$9.9 million.

 

14

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Table of Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

The following table sets forth the computation of basic and dilutedearnings (loss) per share for the periods indicated (in thousands, except pershare data):

 
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                              | ** ** | **July 31,**      | ** ** |
| ** **                                                                                                                              | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ***Basic:***                                                                                                                            |       |                   |       |   |   |
| *Numerator:*                                                                                                                            |       |                   |       |   |   |
| Net income (loss) attributable to OmniVision  Technologies, Inc.                                                                   |       | $                      | 16,938     |   | $ | (9,856 | ) |
|                                                                                                                                    |       |                   |       |   |   |
| *Denominator:*                                                                                                                          |       |                   |       |   |   |
| Weighted average common shares for net income  (loss) per share attributable to OmniVision Technologies, Inc. common  stockholders |       | 53,214                 |       | 50,574 |   |
|                                                                                                                                    |       |                   |       |   |   |
| Basic net income (loss) per share attributable to  OmniVision Technologies, Inc. common stockholders                               |       | $                      | 0.32       |   | $ | (0.19 | ) |
|                                                                                                                                    |       |                   |       |   |   |
| ***Diluted:***                                                                                                                          |       |                   |       |   |   |
| *Numerator:*                                                                                                                            |       |                   |       |   |   |
| Net income (loss) attributable to OmniVision  Technologies. Inc.                                                                        |       | $                      | 16,938     |   | $ | (9,856 | ) |
|                                                                                                                                    |       |                   |       |   |   |
| *Denominator:*                                                                                                                          |       |                   |       |   |   |
| Denominator for basic net income (loss) per share  attributable to OmniVision Technologies, Inc. common stockholders               |       | 53,214                 |       | 50,574 |   |
| Weighted average effect of dilutive securities:                                                                                         |       |                   |       |   |   |
| Stock options, restricted stock units and employee  stock purchase plan shares                                                          |       | 3,358                  |       | — |   |
| Weighted average common shares for diluted net  income (loss) per share                                                                 |       | 56,572                 |       | 50,574 |   |
|                                                                                                                                    |       |                   |       |   |   |
| Diluted net income (loss) per share attributable  to OmniVision Technologies, Inc. common stockholders                             |       | $                      | 0. 30      |   | $ | (0. 19 | ) |

 

**Note 9 — ****Fair Value Measurements**

 

The authoritative guidance for fair value measurements specifies ahierarchy of valuation 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* — Inputs arequoted 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* — Inputs arederived from valuation techniques in which one or more significant inputs orvalue drivers are unobservable.

 

15

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Table of Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

***Assets and LiabilitiesMeasured and Recorded at Fair Value on a Recurring Basis***

 

The following table presents the Company’s financial assets andliabilities that are measured at fair value on a recurring basis which werecomprised of the following types of instruments as of July 31, 2010 (inthousands):

 
| ** **                                                              | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------------------------------------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Money market funds                                                      |       | $         | 89,951     |             | $          | 89,951           |       | $                | —     |   | $ | — |   |
| Debt securities issued by U.S. government and U.S.  government agencies |       | 61,276    |       | —           |       | 61,276           |       | —           |       |
| Corporate debt securities/commercial paper                              |       | 27,183    |       | —           |       | 27,183           |       | —           |       |
| Equity investment in Tong Hsing                                         |       | 4,161     |       | 4,161            |       | —           |       | —           |       |
| Total assets                                                            |       | $         | 182,571    |             | $          | 94,112           |       | $                | 88,459     |   | $ | — |   |
| Interest rate swaps                                                     |       | $         | (4,785     | )                | $          | —           |       | $                | (4,785     | ) | $ | — |   |
| Total liabilities                                                       |       | $         | (4,785     | )                | $          | —           |       | $                | (4,785     | ) | $ | — |   |

 

The following table presents the Company’s financial assets andliabilities that are measured at fair value on a recurring basis which werepresented on the Company’s Condensed Consolidated Balance Sheets as ofJuly 31, 2010 (in thousands):

 
| ** **             | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Cash equivalents       |       | $         | 106,950    |             | $          | 89,951           |       | $                | 16,999     |   | $ | — |   |
| Short-term investments |       | 71,460    |       | —           |       | 71,460           |       | —           |       |
| Long-term investments  |       | 4,161     |       | 4,161            |       | —           |       | —           |       |
| Total assets           |       | $         | 182,571    |             | $          | 94,112           |       | $                | 88,459     |   | $ | — |   |
| Interest rate swaps    |       | $         | (4,785     | )                | $          | —           |       | $                | (4,785     | ) | $ | — |   |
| Total liabilities      |       | $         | (4,785     | )                | $          | —           |       | $                | (4,785     | ) | $ | — |   |

 

The following table presents the Company’s financial assets andliabilities that are measured at fair value on a recurring basis which werecomprised of the following types of instruments as of April 30, 2010 (inthousands):

 
| ** **                                                              | ** ** | **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     | ) | $ | — |   |

 

The following table presents the Company’s financial assets andliabilities that are measured at fair value on a recurring basis which werepresented on the Company’s Consolidated Balance Sheets as of April 30,2010 (in thousands):

 
| ** **             | ** ** | **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     | ) | $ | — |   |

 

As of July 31, 2010 and April 30, 2010, the Company hadcertificates of deposit recorded as cash equivalents, totaling approximately$3.4 million and $9.4 million, respectively, and as short-terminvestments, totaling 

 

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** **

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

approximatelyzero and $2.3 million, respectively. These assets are not measured at fairvalue on a recurring basis and as such are not included in the tables above.

 

For the Company’s interest rate swaps, the Company obtains fair valuequotes from the issuing bank and assesses the quotes for reasonableness bycomparing them to the present values of expected cash flows. The present valueapproach is based on observable market interest rate curves that arecommensurate with the terms of the interest rate swaps. The carrying valuerepresents the fair value of the swaps, as adjusted for any non-performancerisk associated with the Company.

 

Due to their short maturities, the reported amounts of the Company’sfinancial instruments, including cash and cash equivalents, short-terminvestments, accounts receivable, accounts payable and other currentliabilities approximate fair value. The fair values of the Mortgage Loan, TermLoan and Construction Loan approximate book values as the underlying interestrates are based on risk-adjusted market rates.

 

***Assets Measured andRecorded at Fair Value on a Non-Recurring Basis***

 

The following table presents the Company’s financial assets that weremeasured and recorded at fair value on a non-recurring basis during the threemonths ended July 31, 2010, and the gain recorded on the assets during thesame period (in thousands):

 
| ** **               | ** ** | **Carrying  Value**    | ** ** | **Fair Value Measured and Recorded Using** | ** ** | **Gain for  Three Months  Ended** | ** ** |
|--------------------------|------------|------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **July 31, 2010** | ** ** | **Level 1**                           | ** ** | **Level 2**                  | ** ** | **Level 3** | ** ** | **July 31, 2010** | ** ** |
| Equity investment in SOI |       | $                      | 4,194      |                                       | $          | —                            |       | $ | — |   | $ | 4,157 |   | $ | 1,648 |   |
| Total gain               |       |                   |       |                                       |       |                              |       |   |   | $ | 1,648 |   |
|                          |            |                        |            |                                            |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

The Company did not have any assets or liabilities that were measuredat fair value on a non-recurring basis during the three months endedJuly 31, 2009. For the Company’s equity investment in SOI, theauthoritative guidance for deconsolidation required the Company to record itsretained interest in SOI at fair value in June 2010, when the Company nolonger held the majority representation on SOI’s board. (See Note 5.) TheCompany classified the fair value measurement as Level 3 as the Company usedunobservable inputs for the valuation methodologies that were significant tothe fair value measurements. The Company determined the fair value of itsretained interest in SOI by using the market and income approaches. The marketapproach included the use of financial metrics from comparable publiccompanies. The selection of comparable companies required management judgmentand was based on a number of factors, including comparable companies’ sizes,industries, and other relevant factors. The income approach included the use ofa discounted cash flow model that required significant estimates for SOI,including revenues, costs, risk adjusted discount rates and other relevantprojections.

 

**Note 10 — Segmentand Geographic Information**

 

The Company identifies its business segments based on businessactivities, management responsibility and geographic location. For all periodspresented, the Company operated in a single reportable business segment.

 

The Company sells its image-sensor products either directly to OEMs andVARs or indirectly through distributors. The following table illustrates thepercentage of revenues from sales to OEMs and VARs and to distributors for thethree months ended July 31, 2010 and 2009, respectively:

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **July 31,**      | ** ** |
| ** **    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| OEMs and VARs |       | 68.4                   | %          | 49.8 | % |
| Distributors  |       | 31.6                   |       | 50.2 |   |
| Total         |       | 100.0                  | %          | 100.0 | % |

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

Since the Company’s end-user customers market and sell their productsworldwide, its revenues by geographic location are not necessarily indicativeof the geographic distribution of end-user sales, but rather indicate wheretheir components are sourced. The revenues by geography in the following tableare based on the country or region in which the Company’s customers issue theirpurchase orders (in thousands):

 
| ** **    | ** ** | **Three Months Ended  July 31,** | ** ** |
|---------------|------------|---------------------------------------|------------|
| ** **    | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| China         |       | $                                     | 127,452    |   | $ | 88,416 |   |
| South Korea   |       | 36,698                                |       | 315 |   |
| Malaysia      |       | 19,175                                |       | 4,352 |   |
| Taiwan        |       | 4,582                                 |       | 9,722 |   |
| United States |       | 1,231                                 |       | 669 |   |
| All other     |       | 3,933                                 |       | 2,086 |   |
| Total         |       | $                                     | 193,071    |   | $ | 105,560 |   |

 

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

 
| ** **    | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|---------------|------------|-------------------|------------|--------------------|------------|
| ** **    | ** ** | **2010**          | ** ** | **2010**           | ** ** |
| Taiwan        |       | $                 | 93,498     |               | $          | 92,092 |   |
| China         |       | 67,095            |       | 64,558             |       |
| United States |       | 59,078            |       | 59,602             |       |
| All other     |       | 5,597             |       | 928                |       |
| Total         |       | $                 | 225,268    |               | $          | 217,180 |   |

 

**Note 11 — SupplementalFinancial Information**

 

***Additional Paid-in Capital***

 

The following table shows the amounts recorded to “Additional paid-incapital” for the three months ended July 31, 2010 (in thousands):

 
| ** **                                                                  | ** ** | **Additional** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                  | ** ** | **Paid-in**    | ** ** |
| ** **                                                                  | ** ** | **Capital**    | ** ** |
| Balance  at May 1, 2010                                                |       | $              | 441,077    |   |
| Exercise  of common stock options                                           |       | 18,010         |       |
| Employee  stock purchase plan                                               |       | 2,625          |       |
| Employee  stock-based compensation                                          |       | 5,136          |       |
| Withholding  tax deduction on restricted stock units                        |       | (730           | )          |
| Tax  effect from stock-based compensation                                   |       | 1,082          |       |
| Write-off  of employee stock-based compensation related deferred tax assets |       | (151           | )          |
| Balance  at July 31, 2010                                              |       | $              | 467,049    |   |

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

***Comprehensive Income(Loss)***

 

Comprehensive income (loss) is defined as the change in the equity of acompany during a period from transactions and other events and circumstancesexcluding transactions resulting from investments by owners and distributionsto owners. The following table sets forth the calculation of comprehensiveincome (loss) for all periods presented (in thousands):

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | **July 31,**      | ** ** |
| ** **                                                                      | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net income (loss)                                                               |       | $                      | 16,906     |   | $ | (9,746 | ) |
| Translation gains (losses)                                                      |       | (112                   | )          | 71 |   |
| Unrealized gains on available-for-sale securities,  net                         |       | 427                    |       | 3 |   |
| Comprehensive income (loss)                                                     |       | 17,221                 |       | (9,672 | ) |
| Comprehensive income (loss) attributable to noncontrolling  interest            |       | (102                   | )          | 139 |   |
| Comprehensive income (loss) attributable to  OmniVision Technologies, Inc. |       | $                      | 17,323     |   | $ | (9,811 | ) |

 

**Note 12 — IncomeTaxes**

 

The Company generated approximately $18.7 million in income beforeincome taxes and $8.6 million in loss before income taxes for the three monthsended July 31, 2010 and 2009, respectively. The Company recordedprovisions for income taxes of $1.8 million and $1.2 million for thethree months ended July 31, 2010 and 2009, respectively, resulting in effectivetax rates of 9.5% and (13.9)% for the respective periods. The Company’seffective tax rate reflects the impact of a significant amount of the Company’searnings or losses being taxed in foreign jurisdictions at rates below the U.S.statutory tax rate.

 

The Company’s quarterly income taxes reflect an estimate of thecorresponding fiscal year’s annual effective tax rate and include, whenapplicable, adjustments from discrete tax items. For the current fiscal year’soverall estimation of annual effective tax rate, the Company excluded the taxeffect associated with the SOI deconsolidation. (See Note 5.) The taxeffect associated with the SOI deconsolidation was recorded through a discreteadjustment to the provision for income taxes for the three months endedJuly 31, 2010. Other discrete adjustments to the Company’s provision forincome taxes for the three months ended July 31, 2010 included a favorableadjustment for the difference between the Company’s finalized tax return andthe provision for income taxes recorded for fiscal 2010, the tax benefitrealized by the Company as a result of the employees’ dispositions of incentivestock awards, and other adjustments to tax provisions associated with theCompany’s unrecognized tax benefits.

 

It is reasonably possible that the balance of gross unrecognized taxbenefits will decrease by $13.1 million within the next twelve months dueto the lapse of applicable statute of limitations in multiple tax jurisdictionsthat the Company operated in. During the three months ended July 31, 2010,the Company accrued an additional $0.5 million of interest related to theCompany’s unrecognized tax benefits.

 

**Note 13 — Commitmentsand Contingencies**

 

***Commitments***

 

The Company maintains a wholly-owned subsidiary in Shanghai, China,OmniVision Technologies (Shanghai) Co. Ltd. (“OTC”) which provides assistanceto the Company in various product design projects and in marketing and salessupport. On January 10, 2007, OTC entered into a Land-Use-Right PurchaseAgreement (the “Purchase Agreement”) with the Construction and TransportationCommission of the Pudong New District, Shanghai. The Purchase Agreement has aneffective date of December 31, 2006. Under the terms of the PurchaseAgreement, the Company agreed to pay an aggregate amount of approximately$0.6 million (the “Purchase Price”) in exchange for the right to useapproximately 323,000 square feet of land located in Shanghai for a periodof 50 years. The Company may use the land solely for the purposes ofindustrial use and/or scientific research. As of July 31, 2010, theconstruction of a research facility on the land was substantially complete, inaccordance with the Purchase Agreement. The Company obtained a ConstructionLoan to finance the construction. (See Note 7.)

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

During the three months ended October 31, 2008, the Company formedShanghai OmniVision Semiconductor Technology, Co. Ltd, a wholly-ownedsubsidiary in Shanghai, China, for the purpose of expanding its testing capabilities.As of July 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 2010.

 

***Litigation***

 

From time to time, the Company has been subject to legal proceedingsand claims with respect to such matters as patents, product liabilities andother actions arising out of the normal course of business.

 

On November 29, 2001, a complaint captioned *McKee v.OmniVision Technologies, Inc., et. al., Civil Action No. 01 CV 10775*,was filed in the United States District Court for the Southern District of NewYork against OmniVision, some of the Company’s directors and officers, andvarious underwriters for the Company’s initial public offering. Plaintiffsgenerally allege that the named defendants violated federal securities lawsbecause the prospectus related to the Company’s offering failed to disclose,and contained false and misleading statements regarding, certain commissionspurported to have been received by the underwriters, and other purportedunderwriter practices in connection with their allocation of shares in theCompany’s offering. The complaint seeks unspecified damages on behalf of apurported class of purchasers of the Company’s common stock betweenJuly 14, 2000 and December 6, 2000. Substantially similar actionshave been filed concerning the initial public offerings for more than300 different issuers, and the cases have been coordinated as *In re Initial Public Offering Securities Litigation, 21 MC 92*.Claims against the Company’s directors and officers have been dismissed withoutprejudice pursuant to a stipulation. On February 19, 2003, the Courtissued an order dismissing all claims against the Company except for a claimbrought under Section 11 of the Securities Act of 1933.

 

The parties have reached a global settlement of the coordinatedlitigation. Under the settlement, the insurers will pay the full amount ofsettlement share allocated to the Company, and the Company will bear nofinancial liability. The Company, as well as the officer and directordefendants who were previously dismissed from the action pursuant to tollingagreements, will receive complete dismissals from the case. On October 5,2009, the Court entered an order granting final approval of the settlement.Certain objectors have appealed the Court’s October 5, 2009 final approvalorder to the Second Circuit Court of Appeals. If for any reason the settlementdoes not become effective, and litigation against the Company proceeds, theCompany believes that it has meritorious defenses to plaintiffs’ claims andintends 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. The Company 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, including the Company, and the motion todismiss with prejudice, filed by all of the underwriter defendants. Theplaintiff timely appealed the Court’s Order to the United States Court ofAppeals for the Ninth Circuit, which remains pending. In accordance with thebriefing schedule set by the Ninth Circuit on August 18, 2009, plaintifffiled her opening brief on August 26, 2009. On October 2, 2009, theunderwriter defendants/appellees/cross-appellants filed their answering brief,and the moving issuers/appellees filed their principal brief as well.  Plaintiff/appellant/cross-appellee filed herresponse and reply briefs on November 2, 2009. The underwriterdefendants/appellees/cross-appellants filed their reply brief onNovember 17, 2009. The Ninth Circuit Court of Appeals has not set ahearing date. No discovery has taken place.

 

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

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three Months EndedJuly 31, 2010 and 2009**

**(unaudited)**

 

nominal defendants who received such ademand. As of the date of this filing, the Company has not received a demandfor inspection of books and records from the plaintiff.

 

On March 6, 2009, Panavision Imaging, LLC (“Panavision”) filed acomplaint against the Company alleging patent infringement in the DistrictCourt for the Central 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 the Companymakes, has made, uses, sells and/or imports products that infringe U.S. PatentNos. 6,818,877 (“Pre-charging a Wide Analog Bus for CMOS Image Sensors”),6,663,029 (“Video Bus for High Speed Multi-resolution Imagers and MethodThereof”) and 7,057,150 (“Solid State Imager with Reduced Number of Transistorsper Pixel”). The complaint seeks unspecified monetary damages, fees andexpenses and injunctive relief against the Company. 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. The Company expects tovigorously defend itself against Panavision’s allegations. At this time, theCompany cannot estimate any possible loss or predict whether this matter willresult in any material expense to the Company.

 

**Note 14 — RelatedParty Transactions**

 

In May 2006, the Company consummated a loan agreement with one ofits employees. The loan agreement was approved by the Company’s board ofdirectors in fiscal 2004. Under the terms of the agreement, as amended,the Company extended to the employee a $1.0 million loan with a nominalimputed interest rate and a maturity date of May 12, 2011. The loan issecured by a deed of trust and may be extended, subject to mutual consent ofthe parties.

 

For the three months ended July 31, 2010 and 2009, the Companypaid $24.1 million and $11.1 million, respectively, to VisEra forcolor filter and other manufacturing services. For the three months endedJuly 31, 2010 and 2009, the Company paid zero to WLCSP for chip scalepackaging services.

 

The following table summarizes the transactions that the Company’sequity method investees, SOI and VisEra, engaged with related parties in thethree months ended July 31, 2010 and 2009 (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **July 31,**      | ** ** |
| ** **                             | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ***SOI transactions with:***           | ** ** | ** **             | ** ** | ** ** | ** ** |
| ImPac:                                 |       |                   |       |   |   |
| Purchases of manufacturing services    |       | $                      | —     |   | $ | 120 |   |
| Balance  payable at period end, net    |       | —                 |       | 93 |   |
| PTC:                                   |       |                   |       |   |   |
| Purchases of wafers                    |       | 917                    |       | 91 |   |
| Rent  and other services               |       | 25                     |       | 19 |   |
| Balance  payable at period end, net    |       | 382                    |       | 55 |   |
| VisEra:                                |       |                   |       |   |   |
| Purchases of manufacturing services    |       | 179                    |       | 64 |   |
| Balance  payable at period end         |       | 79                     |       | 44 |   |
|                                   |       |                   |       |   |   |
| ***VisEra transactions with:***        |       |                   |       |   |   |
| TSMC:                                  |       |                   |       |   |   |
| Sales to TSMC                          |       | 499                    |       | 269 |   |
| Purchase manufacturing services        |       | 10                     |       | 6 |   |
| Balance  receivable at period end, net |       | 388                    |       | 199 |   |
| SOI:                                   |       |                   |       |   |   |
| Sales to SOI                           |       | 179                    |       | 64 |   |
| Balance  receivable at period end      |       | $                      | 79         |   | $ | 44 |   |

 

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 ourunaudited condensed interim financial statements and the notes thereto includedin Item 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 continued importanceof the mobile phone market to our business, continued price competition and theconsequent reduction in the average selling prices of our products, anticipatedbenefits of our joint ventures and alliances, the development of our businessand manufacturing capacity, future expenses we expect to incur, our futureinvestments, our future working capital requirements, the effect of a change inmarket interest rates, the geographic distribution of our sales and end usersof our products and the sufficiency of our available cash, cash equivalents andshort-term investments are based on current expectations and are subject toimportant factors that could cause actual results to differ materially fromthose projected in the forward-looking statements. Such important factors include, but are not limited to, those setforth in Part II under the caption “Item 1A. Risk Factors,”beginning on page 39 of this Quarterly Report and elsewhere in thisQuarterly Report and in other documents we file with the U.S. Securitiesand Exchange Commission, or SEC. All subsequent written and oralforward-looking statements by or attributable to us or persons acting on ourbehalf are expressly qualified in their entirety by such factors.*

 

*OmniVision, 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 ofOmniVision Technologies, Inc. Wavefront Coded is a registered trademark ofOmniVision CDM Optics, Inc., a wholly-owned subsidiary of OmniVisionTechnologies, Inc. Wavefront Coding is a trademark of OmniVision CDMOptics, 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 sensordesign we call OmniBSITM technology. OmniBSI technology is based on an ideacalled back side illumination, or BSI. Our first OmniBSI product, an8-megapixel image sensor, is built using an advanced 1.4 μm pixel. Webelieve we are the first image sensor company to announce a viable process forthe mass production of BSI sensors.

 

All traditionally designed CMOS image sensors capture light on thefront side of the chip, so the photo-sensitive portion has to share the surfaceof the image sensor with the metal wiring of the transistors in the pixel andthe metal

 

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wiring acts to limit the amount of imagelight that reaches the photo-sensitive portion of the image sensor. With ourOmniBSI architecture, the image sensor receives light through the back side ofthe chip. As a result, there is no metal wiring to block the image light, andthe entire backside of the image sensor can be photo-sensitive. Not only doesthis enable us to produce a superior image, it also permits the front of thechip surface area to be devoted entirely to processing, and permits an increasein the number of metal layers, both of which result in greater functionality.Capturing light on the back side of the image sensor also allows us to reduce thedistance the light has to travel to the pixels, and thus provide a wider angleof light acceptance. Widening the angle of acceptance in turn makes it possibleto reduce the height of the camera module, and thus the height of the devicewhich 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 newOmniBSI-2TM architecture. The OmniBSI-2 architecture represents oursecond-generation BSI technology, and forms the basis of our first 1.1 μmimaging pixel, built on the advanced 300 mm copper process at TaiwanSemiconductor Manufacturing 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 August 2009, we introduced the OV2710, a 1/3-inch 2-megapixelimage sensor with 3 μm OmniPixel3-HS pixels. The OV2710 is a native 1080pHD image sensor with a low-light performance of 3,300 mV/(Lux-sec), darkcurrent of 20 mV/sec and a dynamic range of 72dB. This allows the OV2710to operate in low-light situations down to 15 lux and below, enabling it todeliver high-end video conferencing and recording capabilities in a widevariety of applications including notebooks, webcams, digital video camcorders,DSCs, mobile phones and other ultra portable devices.

 

In September 2009, we introduced the OV2715, a 1/3-inch 1080p HDimage sensor with OmniPixel3-HS pixels. The OV2715 is designed for themainstream IP camera and HD closed caption television markets. It offers the HDvideo format with a display resolution of 1920 x 1080 pixels, and operates at30 FPS.

 

In October 2009, we introduced the OV7675, a 1/9-inch VGA imagesensor with 2.5 μm OmniPixel3-HS pixels. This image sensor is designed forthe entry-level and mainstream mobile phone markets. The OV7675’s small formfactor also enables ultra-thin camera modules that notebook and webcam manufacturersrequire. This device has a low-light sensitivity of 1,800 mV/(Lux-sec) andis capable of operating at 30 FPS in full resolution.

 

In January 2010, we 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 FPS in fullresolution, or delivering full 1080p HD video at 60 FPS, using a binningfeature to achieve higher sensitivity. In full HD video mode, the sensor alsoprovides additional pixels for electronic image stabilization. The new OV14810allows consumers to use one device for capturing both photo and HD videomoments.

 

In January 2010, we also added the new OVM7692 VGA CameraCubesolution to our portfolio of CameraCube imaging devices. The OVM7692 is acomplete VGA camera solution, including digital video port, or DVP, and mobileindustry processor interface, or MIPI, serial output interface support,automatic luminance detection and an integrated electromagnetic interference,or EMI, solution. The OVM7692 features our proprietary OmniPixel3-HSarchitecture. The OVM7692’s compact size (2.8 x 3.2 x 2.5 mm) also ranks amongthe smallest VGA modules in the industry.

 

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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, portablemedia players, or PMPs, and other mobile entertainment devices. The OV9726achieves excellent low-light sensitivity of 1,480 mV/lux-sec in the smallestavailable form 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 image processingfunctions. The OV5647 also delivers 720p HD video at 60 FPS and 1080p HD videoat 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 110dB dynamic range in black and white, and 100dB + in color,providing clear, fully-processed YUV color HDR video output. By integrating afull image processing pipeline, the OV10630 accelerates time-to-market andreduces the system 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 OmniBSI technology,the new 1080p sensor captures videoconference quality HD video in a form factorthat meets the module size and height requirements of advanced thin notebookdesigns.

 

In June 2010, we announced the OV5640, a one-quarter inch5-megapixel system-on-chip sensor built on our 1.4 μm OmniBSI technology.The device offers a cost-optimized, complete camera solution with excellentpixel performance for 5-megapixel photography and 720p or 1080p HD video forcamera phones.  The sensor’s embeddedautofocus control with voice coil motor driver offers further cost savings tothe end customer.

 

Finally, in June 2010, we also announced the high-speed OV7735 VGAsensor providing one of the thinnest VGA camera solutions available at lessthan 3-mm in height. The OV7735 is designed for portable applications,including digital video cameras, portable media players, as well as gamingdevices and webcams.

 

***Capital Resources***

 

As of July 31, 2010, we held approximately $277.6 million incash and cash equivalents and approximately $71.4 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,including, among others, the subprime-mortgage crisis in the housing market,going concern threats to investment and commercial banks, other financialinstitutions and major automobile companies, reduced corporate and consumerspending, and decreased consumer confidence. These economic conditions resultedin our facing one of the most challenging periods in our history. In

 

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particular,we believe consumers and businesses in markets into which we sell our productsreduced spending in response to the tightening of lending standards byfinancial institutions, negative financial news and the continued uncertaintyin the global economy. For example, beginning in our fiscal 2009,end-customer demand decreased significantly, negatively affecting demand forall consumer electronic products, security products and products for theautomotive industry. Consequently, the overall demand for image sensors alsodecreased. This decrease in demand had a significant impact on our revenues,results of operations, 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 improved sequentially during the first quarter of fiscal 2011. Webelieve that our sales trend will continue to improve in our second quarter offiscal 2011. However, it is uncertain whether the current resumption ofeconomic growth will be sustained. If the economic recovery slows down or evendissipates, our business, financial condition and results of operations andcash flows could be further materially and adversely affected.

 

***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 than1.9 billion image sensors, including approximately 134 million in thethree months ended July 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. TSMC is one of the largest wafer fabrication companies in theworld, to increase, as necessary, the number of its fabrication facilities atwhich our products can be produced. VisEra Technologies Company, Ltd., orVisEra, our joint venture with TSMC, and our investments in three key back-endpackaging suppliers 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 generally close.Consequently, demand for our image sensors has historically been stronger inthe second and third quarters of our fiscal year and weaker in the first andfourth quarters of our fiscal year. However, because of the global economicdownturn, we experienced weaker than normal conditions in all of our markets inthe third and fourth quarters of fiscal 2009. With the return to profitability in our business since the second fiscalquarter of 2010, we believe the historical seasonal cycle to our business has returned.In addition to being stronger than our first and fourth fiscal quarters,historically our gross revenues in our second and third fiscal quarters havetypically been comparable. However, an increase during fiscal 2010 inend-customer demand related to the holiday season accelerated the timing of ourcustomers’ purchases from our third fiscal quarter to our second fiscalquarter. If this trend continues in future years, it could result in thequarter-to-quarter fluctuation of our revenues differing from our historicalseasonal 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,notebook and webcams and digital cameras as those markets continue to grow.Although we believe that we currently compete effectively in those markets, ourcompetitive position could be impaired by companies that have greaterfinancial, technical, marketing, manufacturing and distribution resources,broader product lines, better access to large customer bases, greater namerecognition, longer operating histories and more established strategic andfinancial relationships than we do. Such companies may be able to adapt morequickly to new or emerging technologies and customer requirements or devotegreater resources to the promotion and sale of their products. Many of these competitors own and operatetheir own fabrication facilities, which in certain circumstances may give themthe ability to price their products more aggressively than we can or may allowthem to respond more rapidly than we can to changing market opportunities.

 

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

 

In common 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 rateand unit volume, we believe these products may partially mitigate the rate ofASP decline. In order to maintain our gross margins, we and our suppliers mustwork continuously 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 

 

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largeenough amount to offset the effect of declining ASPs. In addition, if we areunable to timely introduce new products that can take advantage of smallerprocess geometries or new products that incorporate more advanced technologyand include more advanced features that can be sold at higher ASPs, our grossmargin may decline.

 

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 fromshortages of certain products and build inventories in excess of demand forother products. We carefully consider the risk that our inventories may be inexcess of expected future demand and record appropriate reserves. If, assometimes happens, we are subsequently able to sell these reserved products,the sales have little or no associated cost and consequently, they have afavorable impact on gross margins.

 

***Sources 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 to revenue and the related costs of revenue until the final resaleof such products 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.

 

***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.

 

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**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** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                            | ** ** | **July 31,**      | ** ** |
| ** **                                                            | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Revenues                                                              |       | 100.0                  | %          | 100.0 | % |
| Cost of revenues                                                      |       | 73.1                   |       | 77.6 |   |
| Gross margin                                                          |       | 26.9                   |       | 22.4 |   |
|                                                                  |       |                   |       |   |   |
| Operating expenses:                                                   |       |                   |       |   |   |
| Research, development and related                                     |       | 10.5                   |       | 17.4 |   |
| Selling, general and administrative                                   |       | 7.4                    |       | 13.4 |   |
| Total operating expenses                                              |       | 17.9                   |       | 30.8 |   |
|                                                                  |       |                   |       |   |   |
| Income (loss) from operations                                         |       | 9.0                    |       | (8.4 | ) |
| Interest expense, net                                                 |       | (0.1                   | )          | (0.2 | ) |
| Other income, net                                                     |       | 0.8                    |       | 0.5 |   |
| Income (loss) before income taxes                                     |       | 9.7                    |       | (8.1 | ) |
|                                                                  |       |                   |       |   |   |
| Provision for income taxes                                            |       | 0.9                    |       | 1.1 |   |
| Net income (loss)                                                     |       | 8.8                    |       | (9.2 | ) |
| Net income (loss) attributable to noncontrolling  interest            |       | —                 |       | 0.1 |   |
| Net income (loss) attributable to OmniVision  Technologies, Inc. |       | 8.8                    | %          | (9.3 | )% |

 

*Three Months Ended July 31,2010 as Compared to Three Months Ended July 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 endedJuly 31, 2010 increased by 82.9% to $193.1 million from$105.6 million for the three months ended July 31, 2009. The increasein revenues was primarily due to a 79.1% increase in unit sales of ourimage-sensor products, reflecting a recovery in product demand from the prioryear period, and a 2.9% increase in our ASPs as a result of a favorable productmix shift in our higher megapixel products from the prior year period.

 

***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 July 31, 2010than 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 July 31, 2010 and 2009:

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **July 31,**      | ** ** |
| ** **    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| OEMs and VARs |       | 68.4                   | %          | 49.8 | % |
| Distributors  |       | 31.6                   |       | 50.2 |   |
| Total         |       | 100.0                  | %          | 100.0 | % |

 

*OEMs and VARs.*   In the three months endedJuly 31, 2010, two OEM customers accounted for approximately 12.9% and15.1% of our revenues. In the three months ended July 31, 2009, one OEM customeraccounted for approximately 13.0% of our revenues. For the three monthsended July 31, 2010 and 2009, no other OEM or VAR customer accounted for10% or more of our revenues.

 

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*Distributors.*   In the three months endedJuly 31, 2010, one distributor customer accounted for approximately 16.5%of our revenues. In the three months ended July 31, 2009, one distributorcustomer accounted for approximately 28.7% of our revenues. For the threemonths ended July 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 three months ended July 31, 2010 and 2009:

 
| ** **     | ** ** | **Three Months Ended** | ** ** |
|----------------|------------|------------------------|------------|
| ** **     | ** ** | **July 31,**      | ** ** |
| ** **     | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Domestic sales |       | 0.6                    | %          | 0.6 | % |
| Foreign sales  |       | 99.4                   |       | 99.4 |   |
| 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 July 31, 2010 and 2009 is 0.6% and 0.6%, respectively. Our revenuesas reported on a geographical basis reflect the country or region in which ourcustomers issue their purchase orders.

 

**Gross Profit**

 

Our gross margin in the three months ended July 31, 2010 increasedto 26.9% from 22.4% for the three months ended July 31, 2009. Theyear-over-year increase in gross margin reflected: a 2.9% increase in our ASPsas a result of a favorable shift in product mix from VGA to 2-megapixel andhigher products, and a reduction in our production costs. The year-over-yearincrease was partially offset by an increase in the write-down of inventorieswhich totaled approximately $5.1 million during the three months endedJuly 31, 2010, as compared to $3.7 million in the prior year period;and a decrease in the sales of previously written-down products in the threemonths ended July 31, 2010, which totaled $1.2 million as compared to$2.2 million during the same period in the prior fiscal year. We recordedapproximately $0.5 million in stock-based compensation expense to cost ofrevenues during the three months ended July 31, 2010, as compared to$0.8 million in the similar prior year period.

 

**Research, Development and RelatedExpenses**

 

Research, development and related expenses consist primarily of compensationand personnel-related expenses, non-recurring engineering costs relatedprincipally to the costs of the masks we buy when we release new productdesigns to the manufacturing foundry, costs for purchased materials, designs,tooling, depreciation of computers and workstations, and amortization ofacquired intangible intellectual property and computer aided design software.Research, development and related expenses may fluctuate significantly as thenumber of new designs we release to the foundry can fluctuate from period toperiod. Research, development and related expenses for the three months endedJuly 31, 2010 increased to approximately $20.2 million fromapproximately $18.4 million for the three months ended July 31, 2009.As a percentage of revenues, research, development and related expenses for thethree months July 31, 2010 and 2009 represented 10.5% and 17.4%,respectively.

 

The increase in research, development and related expenses ofapproximately $1.8 million, or 9.8%, for the three months ended July 31,2010 from the similar period in the prior year resulted from: a$1.9 million increase in salary and payroll-related expenses resultingfrom a headcount increase and a company-wide annual salary increase; a$0.8 million increase in non-recurring engineering expenses related to newproduct development; and a $0.6 million increase in legal expensesprimarily 

 

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relatedto patent registration activities.  Theseincreases were partially offset by a $1.4 million decrease indepreciation and amortization expenses and a $332,000 decrease in office andfacilities expenses. We anticipate that research, development and relatedexpenses will increase for our second quarter of fiscal 2011 as the annualcompany-wide salary increase will have been in effect for the full quarter.

 

**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 July 31,2010 increased to approximately $14.3 million from $14.2 million forthe three months ended July 31, 2009. As a percentage of revenues,selling, general and administrative expenses for the three months endedJuly 31, 2010 and 2009 represented 7.4% and 13.4%, respectively.

 

The increase in selling, general and administrative expenses ofapproximately $169,000, or 1.2%, for the three months ended July 31, 2010from the similar period in the prior year resulted primarily from: a$0.7 million increase in salary and payroll-related expenses resultingfrom a company-wide annual salary increase; a $205,000 increase in fees foroutside services; and a $140,000 increase in travel and entertainment expenses;partially offset by a $160,000 decrease in legal expenses related to patentdefense and a $159,000 decrease in other taxes. We anticipate that our selling,general and administrative expenses will rise during the second quarter offiscal 2011 due to the increase in compensation noted above and tocommission 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, declined to $200,000 for the threemonths ended July 31, 2010 from $204,000 in the prior year period. The$4,000 decline in interest expense, net, resulted from a $47,000 reductionin interest income and a $51,000 reduction in interest expense primarilyassociated with long-term borrowings for the three months ended July 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-bearingaccounts than in the same period in the prior year.

 

**Other Income, Net**

 

Other income, net, for the three months ended July 31, 2010totaled $1.5 million, as compared to $0.6 million in the prior year.Other income, net, for the three months ended July 31, 2010 included a$1.6 million gain that represented the difference between the fair valueof our retained interest in SOI and the carrying value of SOI’s net assets andnoncontrolling interest before the deconsolidation; a$1.0 million gain that represented our portion of the net incomerecorded by China WLCSP Limited, or WLCSP, which we account for under theequity method of accounting; and a $1.1 million loss on the interest rate swapagreements related to the mortgage on our complex of four buildings located inSanta Clara, California, or Santa Clara Property. Other income, net, for thethree months ended July 31, 2009 included a $0.9 million gain on theinterest rate swap agreements related to the mortgage on our Santa ClaraProperty, a $0.5 million gain, representing our portion of the net incomerecorded by WLCSP, partially offset by a $0.9 million loss thatrepresented our portion of the net loss recorded by ImPac Technology Co., Ltd.,or ImPac, which we accounted for under the equity method of accounting.

 

**Provision for Income Taxes**

 

We generated approximately $18.7 million in income before incometaxes and $8.6 million in loss before income taxes for the three monthsended July 31, 2010 and 2009, respectively. We recorded a provision forincome taxes of $1.8 million and $1.2 million for the three months endedJuly 31, 2010 and 2009, respectively, resulting in effective tax rates of9.5% and (13.9)% for the respective periods. Our effective tax rate reflects the impact of a significant amount ofour earnings or losses being taxed in foreign jurisdictions at rates below theU.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. For the current fiscal year’s overallestimation of annual effective tax rate, we excluded the tax effect associatedwith the SOI deconsolidation. The tax effect associated with the SOIdeconsolidation was recorded through a discrete adjustment to the provision forincome taxes for the three months ended July 31, 2010. Other discreteadjustments to our provision for income taxes for the three months endedJuly 31, 

 

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2010included a favorable adjustment for the difference between our finalized taxreturn and the provision for income taxes recorded for fiscal 2010, thetax benefit that we realized from our employees’ dispositions of incentivestock awards, and other adjustments to tax provisions associated with ourunrecognized tax benefits.

 

It is reasonably possible that the balance of gross unrecognized taxbenefits will decrease by $13.1 million within the next twelve months dueto the lapse of applicable statute of limitations in multiple jurisdictions inwhich we operated. During the three months ended July 31, 2010, we accruedan additional $0.5 million of interest related to our unrecognized taxbenefits.

 

**Net Income (Loss) Attributable toNoncontrolling Interest**

 

Net income (loss) attributable to noncontrolling interest for the threemonths ended July 31, 2010 and 2009 was $(32,000) and $110,000,respectively, which represents the respective 56.3% and 56.1% interest that wedid not own in the net income (loss) of SOI. In June 2010, SOI held itsannual meeting of stockholders and new board directors were elected. As aresult, we no longer held the majority representation on the board of directorsof SOI, and we were required to deconsolidate SOI.

 

**Liquidity and Capital Resources**

 

Our principal sources of liquidity at July 31, 2010 consisted ofcash, cash equivalents and short-term investments totaling $349.0 million.

 

***Liquidity***

 

Our working capital increased to $463.3 million as ofJuly 31, 2010 as compared to $433.3 million as of April 30,2010. Our working capital increased as a result of: a $19.5 millionincrease in accounts receivable, net, resulting from a revenue increase of $35.9 millionfor the three months ended July 31, 2010 from the three months endedApril 30, 2010; a $43.5 million increase in cash and cash equivalentsprimarily due to cash provided by operating activities; a $7.0 millionincrease in inventories; a $455,000 increase in refundable and deferred incometaxes; and a $2.1 million decrease in accrued liabilities. These increasesin working capital were partially offset by: a $28.1 million decrease inshort-term investments; a $10.4 million increase in accounts payableresulting from an increase in production activities; and a $1.1 millionincrease in deferred revenues, less cost of revenues.

 

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 ofJuly 31, 2010, the principal amounts outstanding under the Mortgage Loanand Term Loan were $25.7 million and $6.3 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 in to 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 July 31, 2010, we had borrowed approximately$17.0 million under the Construction Loan.

 

***Cash Flows from OperatingActivities***

 

For the three months ended July 31, 2010, net cash provided byoperating activities totaled approximately $6.4 million as compared to$36.6 million for the corresponding period in the prior year. Theprincipal components of the current year amount were: net income ofapproximately $16.9 million for the three months ended July 31, 2010;adjustments for non-cash charges of $5.1 million in stock-based compensation,$4.4 million in depreciation and amortization, $5.1 million inwrite-down of inventories, $3.3 million in gains on equity investments,net, and $1.1 million in losses on interest rate swaps; a$9.5 million increase in accounts payable; a $1.4 million increase indeferred revenues, less cost of revenues; and a $2.4 million decrease inprepaid expenses and other current assets. These increases were partiallyoffset by: a $19.6 million increase in accounts receivable, net; a$13.6 million increase in inventories; a $2.6 million decrease inaccrued expenses and other current liabilities; and a $0.4 millionincrease in refundable and deferred income taxes. The $19.6 millionincrease in accounts receivable, net, reflects the increased level of revenuesduring the three months ended July 31, 2010, as days of sales outstandingincreased to 45 days as of July 31, 2010 from 42 days as ofApril 30, 2010. The $13.6 million increase in inventories resultedfrom need to support 

 

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

 

ananticipated increase in sales activity during the second quarter of fiscal 2011.The $1.4 million increase in deferred revenues, less cost of revenues, wasdue to an increase in sales to distributors during the three months endedJuly 31, 2010.

 

For the three months ended July 31, 2009, net cash provided byoperating activities totaled approximately $36.6 million. The principalcomponents of the current year amount were: a net loss of approximately$9.7 million for the three months ended July 31, 2009; adjustmentsfor non-cash charges of $6.1 million in stock-based compensation,$5.7 million in depreciation and amortization, $3.7 million inwrite-down of inventories, $0.9 million from gain on interest rate swapsand $401,000 of losses in equity investments; a $27.6 million increase inaccounts payable; a $4.7 million increase in deferred revenue, less cost ofrevenue; a $3.7 million decrease in inventories and a $2.1 millionincrease in income taxes payable. These increases were partially offset by: a$4.4 million increase in accounts receivable, net; a $1.5 milliondecrease in accrued expenses and other current liabilities; a $0.6 millionincrease in deferred income taxes and a $483,000 decrease in deferred taxliabilities. The $4.4 million increase in accounts receivable, net,reflects the increased level of revenues during the three months endedJuly 31, 2009, with the days of sales outstanding declining to 42 days asof July 31, 2009 from 44 days as of April 30, 2009. The$3.7 million decrease in inventories resulted in an increase in annualizedinventory turns to 3.3 as of July 31, 2009 from 2.8 as ofApril 30, 2009.

 

***Cash Flows From InvestingActivities***

 

For the three months ended July 31, 2010, our cash provided byinvesting activities totaled $15.8 million as compared to cash used ininvesting activities of approximately $37.1 million for the correspondingperiod in the prior year, primarily due to $25.7 million in proceeds fromsales or maturities of short-term investments, partially offset by$4.7 million in purchases of intangible and other assets, $2.8 milliondue to the deconsolidation of SOI, $2.1 million in purchases of property,plant and equipment and $282,000 in purchases of long-term investments. For thethree months ended July 31, 2009, our cash used in investing activitiestotaled $37.1 million due to $33.2 million in net purchases ofshort-term investments and $3.9 million in purchases of property, plantand equipment.

 

***Cash Flows From FinancingActivities***

 

For the three months ended July 31, 2010, net cash provided byfinancing activities totaled approximately $21.2 million, as compared to$1.6 million during the corresponding period in the prior year. Thisincrease was due to $20.6 million in proceeds from the exercise of stockoptions and employee purchases through our employee stock purchase plan and$1.5 million in excess tax benefits from stock-based compensation,partially offset by $0.9 million used to repay long-term borrowings. Forthe three months ended July 31, 2009, net cash provided by financingactivities totaled approximately $1.6 million and resulted from$2.4 million in proceeds from the exercise of stock options and employeepurchases through our employee stock purchase plan, partially offset by$0.9 million used to repay long-term borrowings.

 

***Capital Commitments andResources***

 

We are constructing a research facility at OTC. Over the next year, weexpect to cover additional construction costs associated with OTC by drawingdown the remaining $3.5 million of available funding under theConstruction Loan. When the construction is complete, we anticipate that wewill meet our commitment of investing a total of approximately$33.9 million in OTC. The investment requirement arises from our executionof a Land-Use-Right Purchase Agreement with the Construction and TransportationCommission of the Pudong New District, Shanghai with a concomitant commitmentto spend approximately $33.9 million to develop the land. See Note 13* — “Commitments and Contingencies”*to ourcondensed consolidated financial statements.

 

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 $20.0 million over approximately the next twelvemonths will consist primarily of funding capital investments in ourwholly-owned subsidiaries, OmniVision Semiconductor (Shanghai) Co. Ltd., orOSC, and Shanghai OmniVision Semiconductor Technology, Co. Ltd, or OST. Weformed OST during the three months ended October 31, 2008, for the purposeof expanding our testing capabilities in Shanghai, China.

 

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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 July 31, 2010 and the effect such obligationsand commitments are expected to have on our liquidity and cash flows in futureperiods (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                                          |       | $                          | 9,957      |   | $ | 4,564 |   | $ | 5,320 |   | $ | 73 |   | $ | — |   |
| Debt obligations (1)                                 |       | 48,953                     |       | 4,292 |   | 6,572 |   | 7,012 |   | 31,077 |   |
| Noncancelable orders (2)                             |       | 99,837                     |       | 99,837 |   | — |   | — |   | — |   |
| Total contractual obligations                             |       | 158,747                    |       | 108,693 |   | 11,892 |   | 7,085 |   | 31,077 |   |
|                                                      |       |                       |       |   |   |   |   |   |   |   |   |
| Other Commercial Commitments:                             |       |                       |       |   |   |   |   |   |   |   |   |
| OST (3)                                              |       | 8,500                      |       | 8,500 |   | — |   | — |   | — |   |
| Total commercial commitments                              |       | 8,500                      |       | 8,500 |   | — |   | — |   | — |   |
| Total contractual obligations and commercial  commitments |       | $                          | 167,247    |   | $ | 117,193 |   | $ | 11,892 |   | $ | 7,085 |   | $ | 31,077 |   |

 

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(1)          InMarch 2007, we entered into the Mortgage Loan with a domestic bank in theamount of $27.9 million.In March 2008, we borrowed $6.0 million under the Term Loan forbuilding improvement of the Santa Clara Property. We drew down the remaining$6.0 million under the Term Loan in July 2008. In August 2009,we entered into the Construction Loan with a bank in China to finance costsassociated with the construction of a research center for OTC. As ofJuly 31, 2010, we borrowed approximately $17.0 million under theConstruction Loan. See Note 7 —“*Borrowing Arrangements”*to our condensed consolidated financial statements.

 

(2)          Noncancelableorders represent outstanding purchase orders that we have placed with oursuppliers at period-ends. The lead time for delivery is long, typically 12 to14 weeks, and suppliers must prepare unique materials for us at the beginningof the fabrication process. Accordingly, we are precluded from cancelling ourorders once placed and the production process has begun.

 

(3)          During thethree months ended October 31, 2008, we formed OST, a new wholly-ownedsubsidiary in Shanghai, China, for the purpose of expanding our testingcapabilities. We contributed $1.5 million in January 2009, asrequired under the terms of our capital commitment. We are required tocontribute the remaining $8.5 million of a $10.0 million commitmentby October 16, 2010. See Note 13 — “*Commitmentsand Contingencies”* to our condensed consolidated financialstatements.

 

As of July 31, 2010, the long-term income taxes payable, includingestimated interest and penalties, was $90.7 million. We are unable to makea reasonably reliable estimate of the timing of payments in individual yearsbeyond twelve months due to uncertainties in the timing of tax audit, if any,or their outcomes. Accordingly, we have excluded this obligation from theschedule summarizing our significant obligations to make future payments undercontractual obligations as of July 31, 2010 presented above.

 

**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 

 

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asa separate unit of accounting by removing the criteria that verifiable andobjective evidence of fair value exists for the undelivered elements. Inallocating transaction consideration among the deliverables, the guidance alsointroduced the concept of using management’s best estimate of a standaloneselling price as an alternate basis for allocation. The guidance is effectivein fiscal years beginning on or after June 15, 2010, and we are requiredto adopt this guidance in our first quarter of fiscal 2012. We are currently evaluatingthe impact this guidance may have on our financial position, results ofoperations 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 July 31, 2010, the functional currency of our wholly-ownedsubsidiaries located in Hong Kong, OmniVision Technologies (Hong Kong) CompanyLimited, OmniVision Trading (Hong Kong) Company Ltd., and OmniVision Holding(Hong Kong) Co., Ltd.; in the Cayman Islands, OmniVision InternationalHolding, Ltd. and OmniVision Technology International Ltd. (formerlyHuaWei Technology International, Ltd.); in China, OSC and OTC and OST, andin Taiwan, Taiwan OmniVision Technologies Co., Ltd., Taiwan OmniVisionInternational Technologies Co., Ltd., and Taiwan OmniVision InvestmentHolding Co., Ltd., is the U.S. dollar. Our other wholly-owned subsidiarieshave their respective local currencies as their functional currencies.Transaction gains and losses resulting from transactions denominated incurrencies other than the respective functional currencies are included in“Other income, net” for the periods presented. The amounts of transaction gainsand losses for the three months ended July 31, 2010 and 2009 were notmaterial.

 

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 thecompetitiveness of 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. In the past, we also invested in auctionrate securities and in variable rate demand notes, which have a final maturitydate of up to 39 years but whose interest rate is reset at varying intervalstypically between seven and 35 days. As of July 31, 2010, we did nothold any auction rate securities or variable rate demand notes.

 

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 short durationof our investment portfolio, we do not expect that an immediate 10% change ininterest rates would have a material effect on the fair market value of ourportfolio. Therefore, we would not expect our operating results or cash flowsto be affected to any significant degree by the effect of a sudden change inmarket interest rates. We do not believe that the recent instability in globalfinancial 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%. ByJuly 2008, we drew down the total available amount of $12.0 millionunder a related term loan. Concurrent with the term loan, we also entered intoan interest rate swap with a notional amount that approximates the principaloutstanding under the term loan. We are the fixed rate payer under the swap 

 

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witha fixed rate of 4.3%. Consequently, although we are required to mark the valueof the swaps to market at each balance sheet date and record the associated non-cashcost or benefit as part of “Other income, net,” a hypothetical 10% change inLIBOR would not have a material effect on our interest expense for the threemonths ended July 31, 2010.

 

In August 2009, in order to finance costs associated with the constructionof a research center for OTC, we entered into a fixed asset loan agreement witha bank in China. The agreement provides for a fixed asset loan in the principalamount of approximately $20.5 million based on the exchange rate in effectat the time of the loan origination, or the Construction Loan. As ofJuly 31, 2010, we borrowed approximately $17.0 million under theConstruction Loan. Interest rate under the Construction Loan is based on anindicative rate as published by the Chinese government, and will be adjustedevery September to the then current published rate. Interest rate underthe Construction Loan was 5.3% at July 31, 2010. We do not hedge againstthe risk of interest rate changes for the Construction Loan. However, since thecurrent interest rate is published by the Chinese government and will not beadjusted until September 2010, any hypothetical 10% shifts in yield willnot cause a significant adverse impact to our results of operations, cash flowsor to our financial position for the three months ended July 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 chief executiveofficer and chief financial officer have concluded that, at the level ofreasonable assurance, our disclosure controls and procedures are effective toensure that the information we are required to disclose in reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms and thatsuch information is accumulated and communicated to our management includingour principal executive and principal financial officers, as appropriate, toallow timely decisions regarding required disclosure.

 

**(b)  Changesin Internal Controls.**

 

There have been no changes in our internal control over financialreporting during the three-month period ended July 31, 2010, as covered bythis Quarterly Report on Form 10-Q, that have materially affected, or arereasonably 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 the nameddefendants violated federal securities laws because the prospectus related toour offering failed to disclose, and contained false and misleading statementsregarding, certain commissions purported to have been received by theunderwriters, and other purported underwriter practices in connection withtheir allocation of shares in our offering. The complaint seeks unspecifieddamages on behalf of a purported class of purchasers of our common stockbetween July 14, 2000 and December 6, 2000. Substantially similaractions have been filed concerning the initial public offerings for more than300 different issuers, and the cases have been coordinated as *In re Initial Public Offering Securities Litigation, 21 MC 92*.Claims against our directors and officers have been dismissed without prejudicepursuant to a stipulation. On February 19, 2003, the Court issued an orderdismissing all claims against us except for a claim brought underSection 11 of the Securities Act 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, as well as our company’s officer and director defendants who werepreviously dismissed from the action pursuant to tolling agreements, willreceive complete dismissals from the case. On October 5, 2009, the Courtentered an order granting final approval of the settlement. Certain objectorshave appealed the Court’s October 5, 2009 final approval order to theSecond Circuit Court of Appeals. If for any reason the settlement does notbecome effective, and litigation against us proceeds, we believe that we havemeritorious defenses to plaintiffs’ claims and intend to defend the actionvigorously.

 

On October 12, 2007, a purported OmniVision stockholder filed 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. The Company 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, including the Company, and the motion todismiss with prejudice, filed by all of the underwriter defendants. Theplaintiff timely appealed the Court’s Order to the United States Court ofAppeals for the Ninth Circuit, which remains pending. In accordance with thebriefing schedule set by the Ninth Circuit on August 18, 2009, plaintifffiled her opening brief on August 26, 2009. On October 2, 2009, theunderwriter defendants/appellees/cross-appellants filed their answering brief,and the moving issuers/appellees filed their principal brief as well.Plaintiff/appellant/cross-appellee filed her response and reply briefs onNovember 2, 2009. The underwriter defendants/appellees/cross-appellantsfiled their reply brief on November 17, 2009. The Ninth Circuit Court ofAppeals has not set a hearing date. No discovery has taken place.

 

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’s counsel has agreed to an open-ended extension for certain nominaldefendants who received such a demand. As of the date of this filing, we havenot received a demand for inspection of books and records from the plaintiff.

 

On March 6, 2009, Panavision Imaging, LLC, or Panavision, filed acomplaint against us alleging patent infringement in the District Court for theCentral District of California. The case is entitled Panavision Imaging, LLC v.OmniVision Technologies, Inc., Canon U.S.A., Inc., Micron Technology, Inc.and Aptina Imaging Corporation, Case No. CV09-1577. In its complaint,Panavision asserts that we make, have made, use, sell and/or import productsthat infringe U.S. Patent Nos. 6,818,877 (“Pre-charging a Wide AnalogBus for CMOS Image Sensors”), 6,663,029 (“Video Bus for High SpeedMulti-resolution Imagers and Method Thereof”) and 7,057,150 (“Solid StateImager with Reduced Number of Transistors per Pixel”). The complaint seeksunspecified monetary damages, fees and expenses and injunctive relief againstus. On April 19, 2010, the court stayed the case pending reexamination ofall of the asserted

 

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patents,as the U.S. Patent and Trademark Office has granted reexamination requests forall of the asserted claims of the asserted patents. We expect to vigorouslydefend ourselves against Panavision’s allegations. At this time, we cannotestimate any possible loss or predict whether this matter will result in anymaterial 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 ofOperations, contains forward-looking statements. These forward-lookingstatements are subject to substantial risks and uncertainties that could causeour future business, financial condition or results of operations to differmaterially from our historical results or currently anticipated results,including those set 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 areliable indicator of future performance, and historical trends should not beused to anticipate results or trends in future periods.*

 

***Risks Related to Our Business***

 

***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,including, among others, the subprime-mortgage crisis in the housing market,going concern threats to investment and commercial banks, other financial institutionsand major automobile companies, reduced corporate and consumer spending, anddecreased consumer confidence. These economic conditions resulted in our facingone of the most challenging periods in our history. In particular, we believeconsumers and businesses in markets into which we sell our products reducedspending in response to the tightening of lending standards by financialinstitutions, negative financial news and the continued uncertainty of 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. Thisdecrease in demand had a significant impact on our revenues, results ofoperations, cash flows and overall 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 we have continued to see signs suggesting that some majoreconomies are returning to positive growth, it is uncertain whether suchresumption of growth will be sustained. If the economy or markets into which wesell our products fail to continue to recover or the current recovery slows,our business, financial condition, results of operations and cash flows couldbe materially and adversely affected.

 

***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 competition fromother companies that sell CMOS image sensors and from companies that sell CCDimage sensors. Many of our competitors have longer operating histories, greaterpresence in key markets, greater name recognition, larger customer bases, moreestablished strategic and financial relationships and significantly greaterfinancial, sales and marketing, distribution, technical and other resourcesthan we do. Many of them also have their own manufacturing facilities, whichmay give them a competitive advantage. As a result, they may be able to adaptmore quickly to new or emerging technologies and customer requirements ordevote greater resources to the promotion and sale of their products. Ourcompetitors include established CMOS image-sensor manufacturers such as AptinaImaging, Samsung, Sharp, Sony, STMicroelectronics and Toshiba as well as CCD image-sensor 

 

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manufacturers such as Fuji, Kodak, NEC, Panasonic, Sanyo, Sharp, Sony and Toshiba. Many of thesecompetitors own and operate their own fabrication facilities, which in certaincircumstances may give them the ability to price their products moreaggressively than we can, respond more rapidly than we can to changing marketopportunities or more easily meet increased demands for their products. Inaddition, we compete with a large number of smaller CMOS 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 filterprocessing, assembly or packaging services. These strategic arrangementsbetween our competitors and third party service providers could involvepreferential or exclusive arrangements for our competitors. Such strategicalliances could impair our ability to secure sufficient capacity from foundriesand service providers to meet our demand for wafer manufacturing, color filterprocessing, assembly or packaging services, adversely affecting our ability tomeet customer demand for our products. In addition, competitors may enter intoexclusive relationships with distributors, which could reduce availabledistribution channels for our products and impair our ability to sell ourproducts and grow our business. Further, some of our customers could also becomedevelopers of image sensors, and this could potentially adversely affect ourresults of operations, business and prospects.

 

***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 three months endedJuly 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 fiscal 2011 and beyond. Anyfactors adversely affecting the demand for our image sensors in this marketcould cause our business to suffer and adversely affect our financialcondition, operating results and cash flows. The digital image-sensor marketfor mobile phones is extremely competitive, and we expect to face increasedcompetition in this market in the future. In addition, we continue to believethe market for mobile phones is also relatively concentrated and the top fiveproducers account for approximately 80% of the annual sales of these products.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 

 

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wefail to do this, our results of operations, business and prospects would bematerially and adversely affected. In the past, we have experienced problemsaccurately forecasting customer demand in other markets. In addition, currentdomestic and global economic conditions could negatively affect the mobilephone market if consumers and/or businesses defer purchases in this market inresponse to tighter credit, negative financial news, and/or decreased corporateor 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:

 

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

·                         development of advancedtechnologies and capabilities, including our new CameraCube, OmniBSI andOmniBSI-2 technologies;

·                         definition, timelycompletion and introduction of new CMOS image sensors that satisfy customerrequirements;

·                         development of products thatmaintain a technological advantage over the products of our competitors,including our advantages with respect to the functionality and pixel capabilityof our image-sensor products and our proprietary testing processes; and

·                         market acceptance of the newproducts.

 

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.

 

***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. Such adelay, cancellation or reduction could be caused by, among other things,customers or distributors being materially and adversely affected by thecurrent domestic and global economic conditions. In addition, if we are unableto retain one or more of our largest OEM, VAR or distributor customers, if weare unable to maintain our current level of revenues from one or more of thesesignificant customers, or if our distributors are unable to retain one or moreof 

 

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theirkey end user customers, our business and results of operation would be impairedand our stock price could decrease, potentially significantly. Infiscal 2010, approximately 60.0% of our revenues came from sales to ourtop five customers. In addition, in the three months ended July 31, 2010,two OEM customers accounted for approximately 28.0% of our revenues, and onedistributor customer accounted for approximately 16.5% of our revenues. Ourbusiness, financial condition, results of operations and cash flows willcontinue to depend significantly on our ability to retain our current keycustomers and to attract new customers, as well as on the financial conditionand success of our OEMs, VARs and distributors.

 

***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 sensors intheir products, our market share or revenues could decrease. Furthermore, tothe extent that our competitors secure design wins, our ability to grow ourbusiness 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, PTC and other subcontract foundries to produce all of our wafers.Historically, we have relied on TSMC to provide us with a substantial majorityof our wafers. As a part of our joint venture agreement with TSMC, TSMC hasagreed to commit substantial wafer manufacturing capacity to us in exchange forour commitment to purchase a substantial portion of 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 control overdelivery schedules, quality assurance, manufacturing yields and productioncosts;

·                         lack of guaranteedproduction capacity or product supply;

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

·                         financial difficulties ordisruptions in the operations of third party foundries due to causes beyond ourcontrol.

 

If our unit sales continue to increase infiscal 2011 as they did in fiscal 2010, the size of the orders we place withour foundries could 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 or may subordinate ourrequest to the requests of other larger companies. If for any reason thefoundries are unable to provide a sufficient number of products to us on atimely basis and at acceptable yields and cost, we may be unable to meet thedemands of our customers and our revenues, gross margins and other financialresults could be materially 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 to 

 

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identify and qualify substitute foundries, whichwould be time consuming and difficult, and could increase our costs or resultin unforeseen manufacturing problems. In addition, if competition for foundrycapacity increases we may be required to pay increased amounts formanufacturing services. We are also exposed to additional risks if we transferour production of semiconductors from one foundry to another, as such transfercould interrupt our manufacturing process. Further, some of our foundries mayalso develop their own image-sensor products and if one or more of our otherfoundries were to decide not to fabricate our companion DSP chips forcompetitive or other reasons, we would have to identify and qualify othersources for these products.

 

***We rely on a joint venturecompany for color filter application and on third party service providers for packagingand other back-end services, which reduces our control over delivery schedules,product quality and cost, and could adversely affect our ability to deliverproducts 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 couldadversely affect these service providers’ ability to continue to fulfill ourpackaging, color filter processing and related requirements. If for any reasonone or more of these service providers were to become unable or unwilling tocontinue to provide services of acceptable quality, at acceptable costs or in atimely manner, our ability to deliver our products to our customers could beseverely impaired. We would have to identify and qualify substitute serviceproviders, which could be time consuming and difficult and could result inunforeseen operational problems. Substitute service providers might not beavailable or, if available, might be unwilling or unable to offer services onacceptable terms.

 

In addition, if competition for color filterprocessing, packaging, capacity or other back-end services increases, we may berequired to pay or invest significant amounts to secure access to theseservices, which could adversely impact our operating results. The number 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.

 

***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 are beyondour control. These factors and other industry risks, many of which are morefully discussed in our other risk factors, include, but are not limited to:

 

·                         adverse changes in domesticor global economic conditions, including the current economic crisis;

·                         the volume and mix of ourproduct sales;

·                         competitive pricingpressures;

·                         our ability to accuratelyforecast demand for our products;

·                         our ability to achieveacceptable wafer manufacturing or back-end processing yields;

·                         our gain or loss of a large customer;

·                         our ability to manage ourproduct transitions;

·                         the availability ofproduction capacity at the suppliers that manufacture our products or processour products;

·                         the growth of the market forproducts and applications using CMOS image sensors;

·                         the timing and size oforders from our customers;

·                         the volume of our productreturns;

·                         the seasonal nature ofcustomer demand for our products;

 

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·                         the deferral of customerorders in anticipation of new products, product designs or enhancements;

·                         the announcement andintroduction of products and technologies by our competitors;

·                         the fair value of ourinterest rate swaps;

·                         the impairment of ourintangible assets or other long-lived assets;

·                         the level of our operatingexpenses; and

·                         fluctuations in oureffective 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 levels are based on ourexpectations of future revenues. Consequently, if we do not achieve therevenues we expect in any quarter, expenses and inventory levels could bedisproportionately high, adversely impacting our operating results and cashflows for that quarter, and potentially 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 thananticipated, and, if we fail to meet market analysts’ expectations, asubstantial decline in our stock price could result. Fluctuations in ourquarterly operating results could adversely affect the price of our commonstock in a manner unrelated to our 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 $32.0 million as of July 31, 2010. To managethe related interest rate risk, we entered into two interest rate swapagreements, effectively converting our mortgage loan into a fixed rate loan.Under generally 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, net.” The associatedimpact on our quarterly operating results is directly related to changes inprevailing interest rates. If interest rates increase, we would have a non-cashgain on the swap, and vice versa. Consequently, these swap contracts willintroduce 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 season acceleratedthe timing of our customers’ purchases from our third fiscal quarter to oursecond fiscal quarter. If this trend continues in future years, it could resultin the quarter-to-quarter fluctuation of our revenues differing from ourhistorical seasonal cycles.

 

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***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. Certain risks areinherent in the introduction of new products and technology. These risksincrease with our introduction of more advanced and novel products andtechnology, as well as with increased customer demand that requires these newproducts to be produced more quickly and in greater quantities than ourhistorical volume. Low yields may result from design errors or manufacturingfailures in new or existing products. During the early stages of production,production yields for new products are typically lower than those ofestablished products. Unlike many other semiconductor products, opticalproducts can be effectively tested only when they are complete. Accordingly, weperform final testing of our products only after they are assembled. As aresult, yield problems may not be identified until our products are well intothe production process. The risks associated with low yields could be increasedbecause we rely on third party offshore foundries for our wafers, which canincrease the effort and time required to identify, communicate and resolvemanufacturing yield problems. In addition to wafer manufacturing yields, ourproducts are subject to yield loss in subsequent manufacturing steps, oftenreferred to as back-end processing, such as the application of color filtersand micro-lenses, dicing (cutting the wafer into individual devices, or die)and packaging. Any of these potential problems with wafer manufacturing and/orback-end processing yields could result in a reduction in our gross marginsand/or our ability to timely deliver products to customers, which couldadversely affect our customer relations and make it more difficult to sustainand grow our business.

 

***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. The current 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 financialcondition. In addition, our customers may cancel or defer orders at any time bymutual written consent. We have experienced problems with accuratelyforecasting customer demand in the past. For example, there was a significantdecline in product demand in the third quarter of fiscal 2009, and as aresult our inventories at the end of the third quarter of fiscal 2009 werehigher than we intended them to be. We need to accurately predict customerdemand because we must often place noncancelable orders with our manufacturesto have products manufactured before we receive firm purchase orders from ourcustomers. Conversely, if we underestimate customer demand, we may be unable tomanufacture sufficient products quickly enough to meet actual demand, causingus to lose customers and impairing our ability to grow our business. Inpreparation for new product introductions, we gradually ramp down production ofestablished products. With our 12-14 week production cycle, it is extremelydifficult to predict precisely how many units of established products we willneed. It is also difficult to accurately predict the speed of the ramp of ournew products and the impact on inventory levels presented by the shorter lifecycles of end-user products. The shorter product life cycle is a result of anincrease in competition and the growth of various consumer-product applicationsfor image sensors. Under these circumstances, it is possible that we couldsuffer from shortages 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.

 

***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 result

 

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oftighter 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 incurexpenditures for research and development and sales and marketing efforts andthe time we generate revenue, if any, from these expenditures. This delay makesit more difficult to forecast customer demand, which adds uncertainty to themanufacturing planning process and could adversely affect our operatingresults. In addition, the product life cycle for certain of our image-sensorproducts designed for use in certain applications can be relatively short. Ifwe fail to appropriately manage the manufacturing, packaging and assemblyprocess, our products may become obsolete before they can be incorporated intoour customers’ products and we may never realize a return on investment for theexpenditures we incur in developing and producing these products.

 

***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 example, in thethird quarter of fiscal 2005, we recorded a provision of $2.7 millionrelated to the possible replacement of products that did not meet a particularcustomer’s standards. Delivery of products with defects or reliability, qualityor compatibility problems may damage our reputation and ability to retain existingcustomers and attract new customers. In addition, product defects and errorscould result in additional development costs, diversion of technical resources,delayed product shipments, increased product returns, product warranty costsfor recall and replacement and product liability claims against us which maynot be fully covered by insurance.

 

***We 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.

 

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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 July 31, 2010, ourgoodwill totaled approximately $1.1 million, our intangible assets totaledapproximately $7.8 million and our long-term investments totaled approximately$99.2 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 offuture revenue. Any cancellation or delay in orders which constitute ourcurrent or future 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 significant modifications to ourstructure through personnel or system changes, acquisitions, or otherwise, itmay be increasingly difficult to maintain compliance with the existing and evolvingcorporate governance regulations.

 

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

 

As of July 31, 2010, we held cash and cash equivalents totaling$277.6 million, and short-term investments totaling $71.5 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 July 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.

 

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***There are risks associated with our operations in China.***

 

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

 

·                         difficulties in staffing and managingforeign operations, particularly in attracting and retaining personnelqualified to design, sell, test and support CMOS image sensors;

·                         difficulties in managing employeerelations;

·                         implications of the ongoing general labordisputes in China;

·                         increases in the value of the ChineseYuan, or CNY;

·                         difficulties in coordinating ouroperations in China with those in California;

·                         difficulties in enforcing contracts inChina;

·                         difficulties in protecting intellectualproperty;

·                         diversion of management attention;

·                         imposition of burdensome governmentalregulations;

·                         difficulties in maintaining uniformstandards, controls, procedures and policies across our global operations,including inventory management and financial consolidation;

·                         political and economic instability, whichcould have an adverse impact on foreign exchange rates in Asia and could impairour ability to conduct our business in China; and

·                         inadequacy of the local infrastructure tosupport our operations.

 

***We may experience integration or other problems with potentialfuture acquisitions, which could have an adverse effect on our business orresults of operations. New acquisitions could dilute the interests of existingstockholders, and the announcement of new acquisitions could result in adecline in the price of our common stock.***

 

We may acquire, or investin, businesses that offer products, services and technologies that we believewould complement our products, including CMOS image-sensor manufacturers. Wemay also make acquisitions of or investments in, businesses that we believecould expand our distribution channels. Even if we were to announce anacquisition, we may not be able to complete it. In addition, any futureacquisition or substantial investment could present numerous risks, including:

 

·                         difficulty in realizing the potentialtechnological benefits of the transaction;

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

·                         unanticipated expenses related totechnology integration;

·                         disruption of our ongoing business;

·                         difficulty in realizing the potentialfinancial or strategic benefits of the transaction;

·                         difficulty in maintaining uniformstandards, controls, procedures and policies;

·                         possible impairment of relationships withemployees, customers, suppliers and strategic partners as a result ofintegration of new businesses and management personnel;

·                         reductions in our future operatingresults from amortization of intangible assets;

·                         impairment of resulting goodwill; and

·                         potential unknown or unexpectedliabilities associated with acquired businesses.

 

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

 

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***We may not achieve continued benefits from our joint venturewith TSMC.***

 

In October 2003,together with TSMC, we formed VisEra, a joint venture in Taiwan, for thepurposes of providing manufacturing services. Since its formation, TSMC and wehave expanded the scope of VisEra’s activities through the provision ofadditional funding.

 

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

 

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

 

We expect to develop ourbusiness partly through forming alliances or joint ventures with and makingstrategic investments in other companies, some of which may be companies at arelatively early stage of development. For example, in April 2003, we madean investment in XinTec, a company that provides chip scale packaging services,and in June 2003 we made an investment in ImPac, a packaging servicecompany. In December 2005, VisEra, our joint venture with TSMC, completedthe acquisition of additional shares of XinTec. In May 2007, we acquired aportion of the registered capital of WLCSP, a company that also provides chipscale packaging services. In December 2009, Tong Hsing acquired ImPac in astock-for-stock exchange and we now hold shares in Tong Hsing.

 

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

 

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

 

As part of our strategy,we have formed joint ventures with two of our foundry partners, and we holdequity interests in three other companies from which we purchase certainmanufacturing services. For the investments that we account for under theequity method, we record as part of income or expense our share of the increaseor decrease in the equity of the companies in which we have invested. It ispossible that, in the future, our relationships and/or our interests in or withthese joint ventures or other investees could change. Such changes haveresulted in the past, and could result in the future, in deconsolidation orconsolidation of such entities, as the case may be, which could result inchanges in our reported results.

 

***We may be unable to adequately protect our intellectualproperty, and therefore we may lose some of our competitive advantage.***

 

We rely on a combinationof patent, copyright, trademark and trade secret laws as well as nondisclosureagreements and other methods to protect our proprietary technologies. We havebeen issued patents and have a number of pending United States and foreignpatent applications. However, we cannot provide assurance that any patent willbe 

 

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issued as a result of any applications or, if issued,that any claims allowed will be sufficiently broad to protect our technology.It is possible that existing or future patents may be challenged, invalidatedor circumvented. For example, in August 2002, we initiated a patentinfringement action in Taiwan, Republic of China against IC MediaCorporation of San Jose, California for infringement of a Taiwanese patent thathad been issued to us. In response to our patent infringement action, inOctober 2002, IC Media Corporation initiated a cancellationproceeding in the Taiwan Intellectual Property Office with respect to ourpatent. In July 2003, the Taiwan Intellectual Property Office made aninitial determination to grant the cancellation of the subject patent, whichdecision was upheld by the Taiwan Ministry of Economic Affairs and the HighAdministrative 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 rights couldmaterially and adversely affect our competitive position and operating results.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 regarding intellectual property could divertmanagement attention, be costly to defend and prevent us from using or sellingthe challenged technology.***

 

In recent years, therehas been significant litigation in the United States involving intellectualproperty rights, including in the semiconductor industry. We have in the pastbeen, currently are and may in the future be, subject to legal proceedings andclaims with respect to our intellectual property, including such matters astrade secrets, patents, product liabilities and other actions arising out ofthe normal course of business. These claims may increase as our intellectualproperty portfolio becomes larger or more valuable. Intellectual propertyclaims against us, and any resulting lawsuit, may cause us to incur significantexpenses, subject us to liability for damages and invalidate our proprietaryrights. Any potential intellectual property litigation against us would likelybe time-consuming and expensive to resolve and would divert management’s timeand attention and could also force us to take actions such as:

 

·                         ceasing the sale or use of products orservices that incorporate the infringed intellectual property;

·                         obtaining from the holder of theinfringed intellectual property a license to sell or use the relevanttechnology, which license may not be available on acceptable terms, if at all;or

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

 

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

 

***The use of our image sensors in end user products in themedical and automotive industries could result in us being named as a defendantin product liability claims, which could adversely affect our business andreputation.***

 

Our image sensors havebeen incorporated into certain end user products in the medical and automotiveindustries, and we expect that they will continue to increase as a percentageof our overall business. The use of the medical and automotive industryproducts into which our image sensors are designed could result in an unsafecondition, injury, or even death as a result of, among other factors, componentfailures, manufacturing flaws, design defects or inadequate disclosure ofproduct-related risks or product-related information. These factors couldresult in product liability claims seeking damages for personal injury, and wecould be named as a defendant in such claims. Because the outcome of productliability claims is not predictable and is difficult to assess or quantify, wecannot provide assurance that such claims will not materially adversely affectour business or damage the reputation of our products or our company.

 

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***If we do not effectively manage our growth, our ability toincrease our revenues and improve our earnings could be adversely affected.***

 

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

 

·                         continuously improve our operational,financial and accounting systems;

·                         train, manage and maintain good relationswith our existing employee base in both our U.S. and international locations;

·                         attract and retain qualified personnelwith relevant experience; and

·                         effectively manage accounts receivableand inventory.

 

For example, our failureto effectively manage our inventory levels could result either in excessinventories, which could adversely affect our gross margins and operatingresults, or lead to an inability to fill customer orders, which would result inlower sales and could harm our relationships with existing and potentialcustomers.

 

We must also managemultiple relationships with customers, business partners and other thirdparties, such as our foundries and process and assembly vendors. Moreover,future growth could significantly overburden our management and financialsystems and other resources. We may not make adequate allowances for the costsand risks associated with our expansion. In addition, our systems, proceduresor controls may not be adequate to support our operations, and we may not beable to expand 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 and tax payments could be higher thanwe anticipate and may harm our results of operations.***

 

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

 

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

 

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

 

During fiscal 2010 andthe three months ended July 31, 2010, approximately 48.5% and 31.6%,respectively, of our revenues came from sales through distributors. We expectthat revenues from sales through distributors 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 more complex supply chain;

·                         manage the level of inventory at eachdistributor;

·                         provide for credits, return rights andprice protection;

·                         estimate the impact of credits, returnrights, price protection and unsold inventory at distributors; and

·                         monitor the financial condition andcreditworthiness of our distributors.

 

Any failure to managethese challenges could cause us to inaccurately forecast sales and carry excessor insufficient inventory, thereby adversely affecting our operating resultsand cash flows.

 

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

 

We face difficulties inmanaging our third party foundries, color filter application service providers,packaging and other manufacturing service providers and our foreigndistributors, most of whom are located in Asia. In addition, our presence inAsia presents the challenge of managing foreign operations and maintaining goodrelations with our employees located there. Any political and economicinstability in Asia might have an adverse impact on foreign exchange rates andcould cause service disruptions for our vendors and distributors and adverselyaffect our customers.

 

Sales outside of theUnited States accounted for substantially all of our revenues forfiscal 2010 and the three months ended July 31, 2010. We anticipatethat sales outside of the United States will continue to account for asubstantial portion of our revenues in future periods. Dependence on sales toforeign customers involves certain risks, including:

 

·                         longer payment cycles;

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

·                         decreased visibility as to future demand;

·                         difficulties in accounts receivablecollections; and

·                         burdens of complying with a wide varietyof foreign laws and labor practices.

 

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

 

***Our business could be harmed if we lose the services of oneor more members of our senior management team, or if we are unable to attractand retain qualified personnel.***

 

The loss of the servicesof one or more of our executive officers or key employees, which has occurredfrom time to time, or the decision of one or more of these individuals to joina competitor, could adversely affect our business and harm our operatingresults and financial condition. Our success depends to a significant extent onthe continued service of our senior management and certain other key technicalpersonnel. None of our senior management is bound by an employment ornon-competition agreement. We do not maintain key man life insurance on any ofour employees.

 

Our success also dependson our ability to identify, attract and retain qualified sales, marketing,finance, management and technical personnel. We have experienced, and maycontinue to experience, difficulty in hiring and retaining candidates withappropriate qualifications. If we do not succeed in hiring and retaining candidateswith appropriate qualifications, our revenues, operations and productdevelopment efforts could be harmed.

 

***We substantially completed the implementation of the firstphase of a new enterprise resource planning system, a process which presents anumber of significant operational risks.***

 

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

 

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

 

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

 

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

 

Acts of war or terroristacts, wherever they occur around the world, may cause damage or disruption toour business, employees, facilities, suppliers, distributors or customers,which could significantly impact our revenue, costs, expenses and financialcondition. In addition, as a company with significant operations and majordistributors and customers located in Asia, we may be adversely impacted byheightened tensions and acts of war that occur in locations such as the KoreanPeninsula, Taiwan and China. The potential for future terrorist attacks, thenational and international responses to terrorist attacks or perceived threatsto national security, and other acts of war or hostility have created manyeconomic and political uncertainties that could adversely affect our businessand results of operations in ways that cannot presently be predicted. We areuninsured for losses and interruptions caused by terrorist acts and acts ofwar.

 

***Risks Related tothe Securities Markets and Ownership of Our Common Stock***

 

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

 

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

 

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

·                         providing for a classified board ofdirectors with staggered, three-year terms;

·                         requiring supermajority voting to amendsome provisions in our certificate of incorporation and bylaws;

·                         limiting the persons who may call specialmeetings of stockholders; and

·                         prohibiting stockholder actions bywritten consent.

 

Provisions of Delawarelaw also may discourage, delay or prevent another company from acquiring ormerging with us. Our board of directors adopted a preferred stock rightsagreement in August 2001. Pursuant to the rights agreement, our board ofdirectors declared a dividend of one right to purchase one one-thousandth shareof our Series A Participating Preferred Stock for each outstanding shareof our common stock. The dividend was paid on September 28, 2001 tostockholders of record as of the close of business on that date. Each rightentitles the registered holder to purchase from us one one-thousandth of ashare of Series A Preferred at an exercise price of $176.00, subject toadjustment. The exercise of the rights could have the effect of delaying,deferring or preventing a change of control of our company, including, without limitation,discouraging a proxy contest or making more difficult the acquisition of asubstantial block of our common stock. The rights agreement could also limitthe price that investors might be willing to pay in the future for our commonstock.

 

***Our stock has been and will likely continue to be subject tosubstantial price and volume fluctuations due to a number of factors, many ofwhich are beyond our control that may prevent our stockholders from selling ourcommon stock at a profit.***

 

The market price of ourcommon stock has fluctuated substantially, and there can be no assurance thatsuch volatility will not continue. Since the beginning of fiscal 2002 throughSeptember 3, 2010, the closing sales price of our common stock has rangedfrom a high of $33.90 per share to a low of $1.26 per share. Theclosing sales price of our common stock on September 3, 2010 was$22.06 per share. The securities markets have experienced significantprice and volume fluctuations in the past, and the market prices of the securitiesof semiconductor companies have been especially volatile. This marketvolatility, 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 

 

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performance. The market price of our common stock mayfluctuate significantly in response to a number of factors, including:

 

·                         actual or anticipated fluctuations in ouroperating results;

·                         changes in expectations as to our futurefinancial performance;

·                         changes in financial estimates ofsecurities analysts;

·                         release of lock-up or other transferrestrictions on our outstanding shares of common stock or sales of additionalshares of common stock;

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

·                         changes in market valuations of othertechnology companies; and

·                         announcements by us or our competitors ofsignificant technical innovations, design wins, contracts, standards oracquisitions.

 

Due to these factors, theprice of our stock may decline and investors may be unable to resell theirshares of our stock for a profit. In addition, the stock market experiencesextreme volatility that often is unrelated to the performance of particularcompanies. These market fluctuations may cause our stock price to declineregardless 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 therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| ** **                    | ** ** | **OMNIVISION  TECHNOLOGIES, INC**.            |
|-------------------------------|------------|----------------------------------------------------|
| * *                      | * *   | *(Registrant)*                                     |
|                          |       |                                               |
|                          |       |                                               |
| Dated: September 9, 2010 |       |                                               |
|                          |       |                                               |
|                          | By:        | **/s/  SHAW HONG**                                 |
| ** **                    | ** ** | **Shaw  Hong**                                     |
| * *                      | * *   | *Chief  Executive Officer, President and Director* |
| * *                      | * *   | *(Principal  Executive Officer)*                   |
|                          |       |                                               |
|                          |       |                                               |
| Dated: September 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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