**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended October 31,2008**

 

**OR**

 

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

** **

**For the transition periodfrom                          to                          **

 

**Commissionfile number: 0-29939**

 

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**OMNIVISION TECHNOLOGIES, INC.**

(Exact name ofregistrant as specified in its charter)

** **

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

 

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

(Address ofPrincipal Executive Offices) (Zip Code)

 

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

 

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  ̈

 

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

 

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

 

At December 1, 2008, 50,034,761 shares of common stock of theregistrant were outstanding, exclusive of 12,541,000 shares of treasury stock.

 

 

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **         | ** ** | ** **                                                                                                                               | ** ** | **Page**   |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **         | ** ** | ** **                                                                                                                               | ** ** | ** ** |
|               | ** ** | **PART I.  FINANCIAL INFORMATION**                                                                                                  | ** ** | ** ** |
| ** **         | ** ** | ** **                                                                                                                               | ** ** | ** ** |
| **Item  1.**       |       | Financial Statements:                                                                                                                    |       | 3          |
|               |       |                                                                                                                                     |       |       |
|               |       | Condensed  Consolidated Balance Sheets (unaudited) – October 31, 2008 and  April 30, 2008                       |       | 3          |
|               |       |                                                                                                                                     |       |       |
|               |       | Condensed  Consolidated Statements of Operations (unaudited) – Three and Six  Months Ended October 31, 2008 and 2007 |       | 4          |
|               |       |                                                                                                                                     |       |       |
|               |       | Condensed  Consolidated Statements of Cash Flows (unaudited) – Three and Six  Months Ended October 31, 2008 and 2007 |       | 5          |
|               |       |                                                                                                                                     |       |       |
|               |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                        |       | 6          |
|               |       |                                                                                                                                     |       |       |
| **Item 2.**        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                              |       | 27         |
|               |       |                                                                                                                                     |       |       |
| **Item 3.**        |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                              |       | 46         |
|               |       |                                                                                                                                     |       |       |
| **Item 4.**        |       | Controls and  Procedures                                                                                                                 |       | 47         |
|               |       |                                                                                                                                     |       |       |
|               |       | **PART II.  OTHER INFORMATION**                                                                                                     |       |       |
|               |       |                                                                                                                                     |       |       |
| **Item 1.**        |       | Legal Proceedings                                                                                                                        |       | 48         |
|               |       |                                                                                                                                     |       |       |
| **Item 1A.**       |       | Risk Factors                                                                                                                             |       | 49         |
|               |       |                                                                                                                                     |       |       |
| **Item 2.**        |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                             |       | 64         |
|               |       |                                                                                                                                     |       |       |
| **Item 4.**        |       | Submission  of Matters to a Vote of Security Holders                                                                                     |       | 64         |
|               |       |                                                                                                                                     |       |       |
| **Item  6.**       |       | Exhibits                                                                                                                                 |       | 65         |
|               |       |                                                                                                                                     |       |       |
| Signatures         |       | 66                                                                                                                                       |
|               |       |                                                                                                                                     |       |       |
| Exhibit Index |       |                                                                                                                                     |

 

2

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**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.    FINANCIAL STATEMENTS**

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

** **
| ** **                                                                                                                                                                                                                             | ** ** | **October 31,  2008** | ** ** | **April 30,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                             |       |                       |       |                     |       |
| Current assets:                                                                                                                                                                                                                        |       |                       |       |                     |       |
| Cash and cash equivalents                                                                                                                                                                                                              |       | $                          | 238,928    |                     | $          | 217,340 |   |
| Short-term investments                                                                                                                                                                                                                 |       | 43,771                     |       | 51,993                   |       |
| Accounts receivable, net of allowances for doubtful  accounts and sales returns                                                                                                                                                        |       | 100,441                    |       | 105,338                  |       |
| Inventories                                                                                                                                                                                                                            |       | 127,014                    |       | 115,127                  |       |
| Deferred income taxes                                                                                                                                                                                                                  |       | 3,100                      |       | 2,823                    |       |
| Prepaid expenses and other current assets                                                                                                                                                                                              |       | 10,243                     |       | 7,430                    |       |
| Total current assets                                                                                                                                                                                                                   |       | 523,497                    |       | 500,051                  |       |
| Property, plant and equipment, net                                                                                                                                                                                                     |       | 113,127                    |       | 92,451                   |       |
| Long-term investments                                                                                                                                                                                                                  |       | 87,903                     |       | 85,419                   |       |
| Goodwill                                                                                                                                                                                                                               |       | —                     |       | 7,541                    |       |
| Intangibles, net                                                                                                                                                                                                                       |       | 10,662                     |       | 13,928                   |       |
| Other long-term assets                                                                                                                                                                                                                 |       | 20,876                     |       | 18,956                   |       |
| Total assets                                                                                                                                                                                                                           |       | $                          | 756,065    |                     | $          | 718,346 |   |
|                                                                                                                                                                                                                                   |       |                       |       |                     |       |
| **LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                      |       |                       |       |                     |       |
| Current liabilities:                                                                                                                                                                                                                   |       |                       |       |                     |       |
| Accounts payable                                                                                                                                                                                                                       |       | $                          | 83,924     |                     | $          | 57,760 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                         |       | 17,963                     |       | 17,069                   |       |
| Income taxes payable                                                                                                                                                                                                                   |       | 1,454                      |       | 2,637                    |       |
| Deferred revenues, less cost of revenues                                                                                                                                                                                               |       | 12,682                     |       | 8,238                    |       |
| Current portion of long-term debt                                                                                                                                                                                                      |       | 3,640                      |       | 651                      |       |
| Total current liabilities                                                                                                                                                                                                              |       | 119,663                    |       | 86,355                   |       |
| Long-term liabilities:                                                                                                                                                                                                                 |       |                       |       |                     |       |
| Long-term income taxes payable                                                                                                                                                                                                         |       | 78,030                     |       | 78,031                   |       |
| Non-current portion of long-term debt                                                                                                                                                                                                  |       | 34,644                     |       | 32,830                   |       |
| Other long-term liabilities                                                                                                                                                                                                            |       | 6,151                      |       | 6,955                    |       |
| Total long-term liabilities                                                                                                                                                                                                            |       | 118,825                    |       | 117,816                  |       |
| Total liabilities                                                                                                                                                                                                                      |       | 238,488                    |       | 204,171                  |       |
|                                                                                                                                                                                                                                   |       |                       |       |                     |       |
| Commitments and contingencies (Note 16)                                                                                                                                                                                                |       |                       |       |                     |       |
|                                                                                                                                                                                                                                   |       |                       |       |                     |       |
| Minority interest                                                                                                                                                                                                                      |       | 3,852                      |       | 4,444                    |       |
|                                                                                                                                                                                                                                   |       |                       |       |                     |       |
| Stockholders’ equity:                                                                                                                                                                                                             |       |                       |       |                     |       |
| Common stock, $0.001 par value; 100,000 shares  authorized; 62,245 shares issued and 49,704 outstanding at  October 31, 2008 and 62,010 shares issued and 51,046 outstanding at  April 30, 2008, respectively |       | 62                         |       | 62                       |       |
| Additional paid-in capital                                                                                                                                                                                                             |       | 389,612                    |       | 373,024                  |       |
| Accumulated other comprehensive income                                                                                                                                                                                                 |       | 962                        |       | 1,561                    |       |
| Treasury stock, 12,541 and 10,964 at  October 31, 2008 and April 30, 2008, respectively                                                                                                                                      |       | (178,683                   | )          | (165,768                 | )          |
| Retained earnings                                                                                                                                                                                                                      |       | 301,772                    |       | 300,852                  |       |
| Total stockholders’ equity                                                                                                                                                                                                        |       | 513,725                    |       | 509,731                  |       |
| Total liabilities, minority interest and  stockholders’ equity                                                                                                                                                                    |       | $                          | 756,065    |                     | $          | 718,346 |   |

 

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

 

3

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**OMNIVISIONTECHNOLOGIES, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                                 |       | $                                                  | 163,935    |                                             | $          | 232,622 |   | $ | 338,214 |   | $ | 405,756 |   |
| Cost of revenues                                         |       | 123,018                                            |       | 173,998                                          |       | 253,404 |   | 306,524 |   |
| Gross profit                                             |       | 40,917                                             |       | 58,624                                           |       | 84,810 |   | 99,232 |   |
|                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Operating expenses:                                      |       |                                               |       |                                             |       |   |   |   |   |
| Research, development and related                        |       | 23,199                                             |       | 20,178                                           |       | 43,499 |   | 37,604 |   |
| Selling, general and administrative                      |       | 16,890                                             |       | 15,787                                           |       | 34,272 |   | 30,952 |   |
| Goodwill impairment                                      |       | 7,541                                              |       | —                                           |       | 7,541 |   | — |   |
| Total operating expenses                                 |       | 47,630                                             |       | 35,965                                           |       | 85,312 |   | 68,556 |   |
|                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Income (loss) from operations                            |       | (6,713                                             | )          | 22,659                                           |       | (502 | ) | 30,676 |   |
| Interest income, net                                     |       | 478                                                |       | 3,325                                            |       | 1,754 |   | 6,686 |   |
| Other expense, net                                       |       | (854                                               | )          | (338                                             | )          | (805 | ) | (78 | ) |
| Income (loss) before income taxes and minority  interest |       | (7,089                                             | )          | 25,646                                           |       | 447 |   | 37,284 |   |
|                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Provision for (benefit from) income taxes                |       | (1,494                                             | )          | 5,151                                            |       | (81 | ) | 3,791 |   |
| Minority interest                                        |       | (287                                               | )          | (15                                              | )          | (392 | ) | 6 |   |
| Net income (loss)                                        |       | $                                                  | (5,308     | )                                                | $          | 20,510 |   | $ | 920 |   | $ | 33,487 |   |
|                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Net income (loss) per share:                             |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                    |       | $                                                  | (0.10      | )                                                | $          | 0.37 |   | $ | 0.02 |   | $ | 0.61 |   |
| Diluted                                                  |       | $                                                  | (0.10      | )                                                | $          | 0.36 |   | $ | 0.02 |   | $ | 0.60 |   |
|                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Shares used in computing net income (loss) per  share:   |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                    |       | 50,754                                             |       | 54,985                                           |       | 51,006 |   | 54,868 |   |
| Diluted                                                  |       | 50,754                                             |       | 56,449                                           |       | 51,591 |   | 55,503 |   |

 

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

 

4

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**OMNIVISIONTECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands, unaudited)**

** **
| ** **                                                                                    | ** ** | **Six Months Ended  October 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                                         |       |                                             |       |   |   |
| Net income                                                                                    |       | $                                                | 920        |   | $ | 33,487 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:            |       |                                             |       |   |   |
| Depreciation and amortization                                                                 |       | 9,245                                            |       | 6,337 |   |
| Change in fair value of interest rate swap                                                    |       | 165                                              |       | 169 |   |
| Stock-based compensation                                                                      |       | 13,851                                           |       | 13,986 |   |
| Minority interest in net income (loss) of  consolidated affiliates                            |       | (392                                             | )          | 6 |   |
| Gain on equity investments, net                                                               |       | (1,198                                           | )          | (4,072 | ) |
| Affiliate stock grants                                                                        |       | —                                           |       | 56 |   |
| Write-down of inventories                                                                     |       | 11,641                                           |       | 12,422 |   |
| Loss on disposal of property, plant and equipment                                             |       | 505                                              |       | — |   |
| Goodwill impairment                                                                           |       | 7,541                                            |       | — |   |
| Changes in assets and liabilities:                                                            |       |                                             |       |   |   |
| Accounts receivable, net                                                                      |       | 4,872                                            |       | (22,046 | ) |
| Inventories                                                                                   |       | (21,887                                          | )          | (27,659 | ) |
| Deferred income taxes                                                                         |       | (2,582                                           | )          | (314 | ) |
| Prepaid expenses and other assets                                                             |       | (2,288                                           | )          | 1,700 |   |
| Accounts payable                                                                              |       | 21,253                                           |       | 22,922 |   |
| Accrued expenses and other current liabilities                                                |       | (1,768                                           | )          | 3,821 |   |
| Income taxes payable                                                                          |       | (1,194                                           | )          | 4,690 |   |
| Deferred revenues, less cost of revenues                                                      |       | 4,455                                            |       | (2,176 | ) |
| Deferred tax liabilities                                                                      |       | (994                                             | )          | (1,344 | ) |
| Net cash provided by operating activities                                                     |       | 42,145                                           |       | 41,985 |   |
| Cash flows from investing activities:                                                         |       |                                             |       |   |   |
| Purchases of short-term investments                                                           |       | (45,393                                          | )          | (65,241 | ) |
| Proceeds from sales or maturities of short-term  investments                                  |       | 53,186                                           |       | 63,961 |   |
| Purchases of property, plant and equipment, net of  sales                                     |       | (21,289                                          | )          | (16,566 | ) |
| Purchases of long-term investments                                                            |       | (1,376                                           | )          | (9,000 | ) |
| Net cash used in investing activities                                                         |       | (14,872                                          | )          | (26,846 | ) |
| Cash flows from financing activities:                                                         |       |                                             |       |   |   |
| Proceeds from long-term borrowings                                                            |       | 6,000                                            |       | — |   |
| Repayment of long-term borrowings                                                             |       | (1,196                                           | )          | (283 | ) |
| Cash contribution by minority shareholder                                                     |       | —                                           |       | 49 |   |
| Affiliate cash dividend paid to minority shareholder                                          |       | (201                                             | )          | (226 | ) |
| Proceeds from exercise of stock options and employee  stock purchase plan                     |       | 2,737                                            |       | 11,607 |   |
| Payments for repurchases of common stock                                                      |       | (12,915                                          | )          | (9,616 | ) |
| Net cash provided by (used in) financing activities                                           |       | (5,575                                           | )          | 1,531 |   |
| Effect of exchange rate changes on cash and cash  equivalents                                 |       | (110                                             | )          | 58 |   |
| Net increase in cash and cash equivalents                                                     |       | 21,588                                           |       | 16,728 |   |
| Cash and cash equivalents at beginning of period                                              |       | 217,340                                          |       | 190,878 |   |
| Cash and cash equivalents at end of period                                                    |       | $                                                | 238,928    |   | $ | 207,606 |   |
| Supplemental cash flow information:                                                           |       |                                             |       |   |   |
| Taxes paid                                                                                    |       | $                                                | 4,607      |   | $ | 2,031 |   |
| Interest paid                                                                                 |       | $                                                | 714        |   | $ | 9 |   |
| Supplemental schedule of non-cash investing and  financing activities:                        |       |                                             |       |   |   |
| Additions to property, plant and equipment included  in accounts payable and accrued expenses |       | $                                                | 5,820      |   | $ | 8,597 |   |
| Affiliate shares issued to affiliate employees                                                |       | $                                                | —     |   | $ | 295 |   |
| Capitalized interest                                                                          |       | $                                                | —     |   | $ | 140 |   |
| Impact of initial adoption of FIN 48 on  retained earnings                               |       | $                                                | —     |   | $ | 4,307 |   |

 

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

 

5

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

**Note 1 — Basis ofPresentation**

 

## ***Overview***

 

The accompanying interimunaudited condensed consolidated financial statements as of October 31,2008 and April 30, 2008 and for the three and six months ended October 31,2008 and 2007 have been prepared by OmniVision Technologies, Inc., and itssubsidiaries (“OmniVision” or the “Company”) in accordance with the rules andregulations of the U.S. Securities and Exchange Commission (“SEC”). The amountsas of April 30, 2008 come from the Company’s audited annual financialstatements. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted in accordance with such rules andregulations. In the opinion of management, the accompanying unaudited condensedconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring adjustments, necessary to state fairly the financial positionof the Company and its results of operations and cash flows as of and for theperiods presented. These condensed consolidated financial statements should beread in conjunction with the audited annual financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for thefiscal year ended April 30, 2008 (the “Form 10-K”).

 

The results of operationsfor the three and six months ended October 31, 2008 are not necessarilyindicative of the results that may be expected for the fiscal year ending April 30,2009 or any other future period.

 

## ***Use of Estimates***

## *** ***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America (“GAAP”) requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. The Company bases its estimates and judgments onits historical experience, knowledge of current conditions and beliefs of whatcould occur in the future considering available information. Actual resultscould differ from these estimates.

 

**Note 2 — Summaryof Significant Accounting Policies**

 

## ***Principles of Consolidation***

## *** ***

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

 

## ***Change-of-InterestBenefit/Impairment***

## *** ***

Where an unrelated thirdparty invests in one of the Company’s consolidated subsidiaries or affiliates,and the per share value of the investment exceeds the Company’s average pershare carrying value in the entity, the Company will record thechange-of-interest benefit as “Additional paid-in capital.” If the per sharevalue is less than the Company’s per share carrying value, the Company willassess whether the investment has been impaired.

 

## ***Foreign Currency Translation***

## *** ***

The functional currencyof the Company is the U.S. dollar. For subsidiaries or consolidated affiliateswith a functional currency other than the U.S. dollar, the assets andliabilities of the subsidiaries are translated into U.S. dollars at the ratesof exchange prevailing on the balance sheet date. Revenue and expense items aretranslated into U.S. dollars at the average rate of exchange for the period.Unrealized gains and losses from foreign currency translation are included in “Accumulatedother comprehensive income,” a component of stockholders’ equity. Forsubsidiaries with the U.S. dollar as the functional currency, and with assetsor liabilities denominated in currencies other than the U.S. dollar,non-monetary assets are remeasured into U.S. dollars using historical rates ofexchange. Monetary assets are remeasured into U.S. dollars using exchange ratesprevailing on the balance sheet date. Remeasurement gains and losses which areincluded in “Other expense, net,” have not been material in any of the periodspresented.

 

6

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

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

## *** ***

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

 

The Company maintains themajority of its cash and cash equivalent balances with major financialinstitutions in the United States. These balances are subject to aconcentration of credit risk and only a small proportion of these balances arecovered by Federal Deposit Insurance Corporation (“FDIC”) insurance.

 

The Company places itscash investments in instruments that meet high credit quality standards, asspecified in the Company’s investment policy guidelines, and reviews itsinvestments regularly to identify and evaluate investments for risk of possibleimpairment. Factors the Company considers in determining whether a loss istemporary include the length of time and extent to which fair value has beenless than the cost basis, the financial condition and near-term prospects ofthe investee, and the Company’s intent and ability to hold the investment for aperiod of time sufficient to allow for any anticipated recovery in marketvalue.

 

## ***Inventories***

## *** ***

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

 

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

 

## ***Goodwill***

## *** ***

The Company recordsgoodwill when the consideration paid for an acquisition exceeds the fair valueof net tangible and intangible assets acquired, including related tax effects.Goodwill is not amortized; instead goodwill is tested for impairment on anannual basis, or more frequently if the Company believes indicators ofimpairment exist. The performance of the test involves a two-step process. Thefirst step requires comparing the fair value of the reporting unit (the Companyhas one reporting unit) to its net book value, including goodwill. The fairvalue of the reporting unit is determined by taking the market capitalizationof the reporting unit as determined through quoted market prices. A potentialimpairment exists if the fair value of the reporting unit is lower than its netbook value. The second step of the process, which is performed only if apotential impairment exists, involves determining the difference between thefair value of the reporting unit’s net assets other than goodwill and the fairvalue of the reporting unit. If this difference is less than the net book valueof goodwill, an impairment exists and is recorded. For the three and six monthsended October 31, 2008, the Company recorded a goodwill impairment chargeof $7.5 million. The Company did not record a goodwill impairment chargein the three and six months ended October 31, 2007. (See Note 7.)

 

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

## *** ***

Comprehensive income(loss) is defined as the change in the equity of a company during a period fromtransactions and other events and circumstances excluding transactionsresulting from investments by owners and distributions to owners. Comprehensiveloss for the three months ended October 31, 2008 was $5.8 million andincluded net income, unrealized gains (losses) from available-for-salesecurities and translation gains (losses) from foreign subsidiaries.Comprehensive income for the six months ended October 31, 2008 was$321,000 and included net income, unrealized gains (losses) fromavailable-for-sale securities and translation gains (losses) from foreignsubsidiaries. Comprehensive income for the three months ended October 31,2007 was $20.7 million and included net income, unrealized gains (losses)from available-for-sale securities and translation gains (losses) from foreignsubsidiaries. Comprehensive income for the six months ended October 31,2007 was $29.5 million and included net 

 

7

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

income, the impact of theinitial adoption of Financial Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,”*(“FIN 48”)  on retainedearnings, unrealized gains (losses) from available-for-sale securities andtranslation gains (losses) from foreign subsidiaries.

 

## ***Revenue Recognition***

## *** ***

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

 

For shipment of productssold to distributors under agreements allowing for returns or credits, titleand the risk of ownership to the products transfer to the distributor uponshipment, and the distributor is obligated to pay for the products whether ornot the distributor has sold them at the time payment is due. Under the termsof the Company’s agreements with such distributors and subject to the Company’sprior approval, distributors are entitled to reclaim from the Company as priceadjustments the difference, if any, between the prices at which the Companysold the 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 ofallowances for excess and obsolete inventory, the Company takes into accountthe inventories held by its distributors. For these reasons, prices andrevenues are not fixed or determinable until the distributor resells theproducts to the Company’s end-user customers and the distributor notifies theCompany in writing of the details of such sales transactions. Accordingly, theCompany recognizes revenue using the “sell-through” method. Under the “sell-through”method, the Company defers the revenue, adjustments to revenue and the relatedcosts of revenue until the final resale of such products to end customers. Theamounts billed to these distributors and adjustments to revenue and the cost ofinventory shipped to, but not yet sold by, the distributors are shown net onthe Condensed Consolidated Balance Sheets as “Deferred revenues, less cost ofrevenues.”

 

In addition, the Companyrecognizes revenue from the performance of services to a limited number ofcustomers by its wholly-owned subsidiary, OmniVision CDM Optics, Inc. (“CDM”),formerly CDM Optics, Inc. The Company recognizes the CDM-associatedrevenue under either the completed-contract or the percentage-of-completionmethods. The percentage-of-completion method of accounting is used for costreimbursement-type contracts, where revenues recognized are that portion of thetotal contract price equal to the ratio of costs expended to date to theanticipated final total costs based on current estimates of the costs tocomplete the projects. CDM-associated revenue has not been material in any ofthe periods presented.

 

## ***Recent Accounting Pronouncements***

## *** ***

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *“Fair Value Measurements”*(“SFAS No. 157”) which became effective for the Company in itsfiscal 2009. This Statement defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about fair value measurements;however, it does not require any new fair value measurements. In February 2008,the FASB issued Financial Staff Position (“FSP”) SFAS No. 157-2, *“Effective Date of FASB Statement No. 157”*(“FSP SFAS No. 157-2”).FSP SFAS No. 157-2 delays the effective date of SFAS No. 157 for theCompany from its fiscal 2009 to 2010 for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis (at least annually).Effective May 1, 2008, the Company adopted SFAS No. 157, as itapplies to the Company’s financial assets and liabilities. The adoption of theprovision of SFAS No. 157 did not have any material effect on the Company’sfinancial condition, results of operations or cash flows. In October 2008,the FASB issued FSP SFAS No. 157-3, *“Determining the FairValue of a Financial Asset When the Market for That Asset Is Not Active”*(“FSP SFAS No. 157-3”). FSP SFAS No. 157-3 provides 

 

8

----

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

examples to illustratekey considerations in determining the fair value of a financial asset when themarket for that financial asset is not active. FSP SFAS No. 157-3 iseffective upon issuance. The adoption of the provision of FSP SFAS No. 157-3did not have any material effect on the Company’s financial condition, resultsof operations or cash flows. (See Note 10.)

 

In March 2008, theFASB issued SFAS No. 161, *“Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”*(“SFAS No. 161”). This Statement requires enhanced disclosures forderivative instruments, including those used in hedging activities. It requiresqualitative disclosures about objectives and strategies for using derivatives,and quantitative disclosures about fair value amounts of gains and losses onderivative instruments. The provisions of SFAS No. 161 are effective forfiscal years beginning on or after November 15, 2008. In September 2008,FASB issued FSP SFAS No. 133-1 and FASB Interpretation No. (“FIN”) 45-4,*“Disclosures about Credit Derivatives and CertainGuarantees: An Amendment of FASB Statement No. 133 and FASB InterpretationNo. FIN 45, and Clarification of the Effective Date of FASB StatementNo. 161”* (“FSP SFAS No. 133-1 and FIN 45-4”). FSPSFAS No. 133-1 and FIN 45-4 clarifies that the effective date of SFASNo. 161 is applicable to any reporting period beginning after November 15,2008. SFAS No. 161 is effective for the Company’s fourth quarter of fiscal2009. The Company is currently evaluating the impact SFAS No. 161 may haveon its financial position, results of operations and cash flows.

 

FSP SFAS No. 133-1and FIN 45-4 also amends FASB Statement No. 133, *“Accountingfor Derivative Instruments and Hedging Activities,”* to requireenhanced disclosures about credit derivatives and guarantees, and amendsFIN 45, *“Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers,”* to exclude derivative instruments accounted for at fairvalue under SFAS No. 133. The provisions of FSP SFAS No. 133-1 andFIN 45-4 that amended SFAS No. 133 and FIN 45 are effective forreporting periods ending after November 15, 2008.  The Company does not expect the adoption ofFSP SFAS No. 133-1 and FIN 45-1 in its fourth quarter of fiscal 2009to have any material effect on its financial condition, results of operationsor cash flows.

 

**Note 3 — Short-TermInvestments**

 

Available-for-salesecurities at October 31, 2008 and April 30, 2008 were as follows (inthousands):

 
| ** **                                                          | ** ** | **As of October 31, 2008** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                          | ** ** | **Amortized  Cost**                            | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Certificates of deposit                                   |       | $                                              | 4,414      |   | $ | — |   | $ | — |   | $ | 4,414 | ** ** |
| U.S. government debt securities with maturities less  than one year |       | 34,231                                         |       | 90 |   | — |   | 34,321 |   |
| U.S. government debt securities with maturities over  one year      |       | 5,034                                          |       | 2 |   | — |   | 5,036 |   |
| Commercial paper and bond funds                                     |       | —                                         |       | — |   | — |   | — |   |
|                                                                |       | $                                              | 43,679     |   | $ | 92 |   | $ | — |   | $ | 43,771 |   |
| Contractual maturity dates, less than one year                      |       |                                           |       |   |   |   |   | $ | 38,735 |   |
| Contractual maturity dates, one year to two years                   |       |                                           |       |   |   |   |   | 5,036 |   |
|                                                                |       |                                           |       |   |   |   |   | $ | 43,771 |   |

 

9

----

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 
| ** **                                                          | ** ** | **As of April 30, 2008** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                          | ** ** | **Amortized  Cost**                          | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| Certificates of deposit                                             |       | $                                            | 9,455      |   | $ | 1 |   | $ | — |   | $ | 9,456 |   |
| U.S. government debt securities with maturities less  than one year |       | 24,037                                       |       | 69 |   | — |   | 24,106 |   |
| U.S. government debt securities with maturities over  one year      |       | 5,104                                        |       | — |   | — |   | 5,104 |   |
| Commercial paper and bond funds                                     |       | 13,298                                       |       | 29 |   | — |   | 13,327 |   |
|                                                                |       | $                                            | 51,894     |   | $ | 99 |   | $ | — |   | $ | 51,993 |   |
| Contractual maturity dates, less than one year                      |       |                                         |       |   |   |   |   | $ | 38,558 |   |
| Contractual maturity dates, one year to two years                   |       |                                         |       |   |   |   |   | 13,435 |   |
|                                                                |       |                                         |       |   |   |   |   | $ | 51,993 |   |

 

10

----

 

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

** **

**Note 4 — BalanceSheet Accounts (in thousands)**

 
| ** **                                                   | ** ** | **October 31,  2008** | ** ** | **April 30,  2008** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| Cash and cash equivalents:                                   |       |                       |       |                     |       |
| Cash                                                         |       | $                          | 142,118    |                     | $          | 23,453 |   |
| Money market funds and certificates of deposit               |       | 96,810                     |       | 193,887                  |       |
|                                                         |       | $                          | 238,928    |                     | $          | 217,340 |   |
| Accounts receivable, net:                                    | ** ** | ** **                 | ** ** | ** **               | ** ** |
| Accounts receivable                                          |       | $                          | 104,955    |                     | $          | 109,452 |   |
| Less: Allowance for doubtful accounts                        |       | (985                       | )          | (1,080                   | )          |
| Allowance for sales returns                                  |       | (3,529                     | )          | (3,034                   | )          |
|                                                         |       | $                          | 100,441    |                     | $          | 105,338 |   |
| Inventories:                                                 |       |                       |       |                     |       |
| Work in progress                                             |       | $                          | 60,498     |                     | $          | 52,614 |   |
| Finished goods                                               |       | 66,516                     |       | 62,513                   |       |
|                                                         |       | $                          | 127,014    |                     | $          | 115,127 |   |
| Prepaid expenses and other current assets:                   |       |                       |       |                     |       |
| Prepaid expenses                                             |       | $                          | 7,931      |                     | $          | 5,091 |   |
| Deposits and other                                           |       | 2,170                      |       | 1,604                    |       |
| Interest receivable                                          |       | 142                        |       | 735                      |       |
|                                                         |       | $                          | 10,243     |                     | $          | 7,430 |   |
| Property, plant and equipment, net:                          |       |                       |       |                     |       |
| Land (1)                                                     |       | $                          | 13,000     |                     | $          | 13,000 |   |
| Buildings and land use right (1)                             |       | 39,205                     |       | 26,135                   |       |
| Buildings/leasehold improvements                             |       | 17,108                     |       | 5,745                    |       |
| Machinery and equipment                                      |       | 47,361                     |       | 39,913                   |       |
| Furniture and fixtures                                       |       | 4,829                      |       | 794                      |       |
| Software                                                     |       | 6,075                      |       | 2,780                    |       |
| Construction in progress                                     |       | 11,045                     |       | 25,977                   |       |
|                                                         |       | 138,623                    |       | 114,344                  |       |
| Less: Accumulated depreciation and amortization              |       | (25,496                    | )          | (21,893                  | )          |
|                                                         |       | $                          | 113,127    |                     | $          | 92,451 |   |
| Other long-term assets:                                      |       |                       |       |                     |       |
| Deferred income tax assets – non-current      |       | $                          | 15,583     |                     | $          | 13,058 |   |
| Prepaid wafer credits                                        |       | 3,460                      |       | 4,000                    |       |
| Long-term employee loan receivable                           |       | 1,000                      |       | 1,000                    |       |
| Other long-term assets                                       |       | 833                        |       | 898                      |       |
|                                                         |       | $                          | 20,876     |                     | $          | 18,956 |   |
| Accrued expenses and other current liabilities:              |       |                       |       |                     |       |
| Employee compensation                                        |       | $                          | 6,510      |                     | $          | 6,726 |   |
| Third party commissions                                      |       | 1,933                      |       | 1,970                    |       |
| Professional services                                        |       | 2,513                      |       | 2,523                    |       |
| Noncancelable purchase commitments                           |       | 2,196                      |       | 283                      |       |
| Pricing adjustments                                          |       | 2,619                      |       | 3,416                    |       |
| Deferred income tax liabilities – current     |       | 75                         |       | 38                       |       |
| Other                                                        |       | 2,117                      |       | 2,113                    |       |
|                                                         |       | $                          | 17,963     |                     | $          | 17,069 |   |
| Other long-term liabilities:                                 |       |                       |       |                     |       |
| Deferred income tax liabilities – non-current |       | $                          | 3,757      |                     | $          | 4,726 |   |
| Other                                                        |       | 2,394                      |       | 2,229                    |       |
|                                                         |       | $                          | 6,151      |                     | $          | 6,955 |   |

 

----

(1)         Prior year balances have been reclassified to conform to currentyear presentations. These reclassifications had no impact on the previouslyreported asset balances, results of operations or cash flows.

 

11

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

**Note 5 — Long-termInvestments**

 

Long-terminvestments as of October 31, 2008 and April 30, 2008 consisted ofthe following (in thousands):

 
| ** ** | ** ** | **October 31,  2008** | ** ** | **April 30,  2008** | ** ** |
|------------|------------|----------------------------|------------|--------------------------|------------|
| VisEra     |       | $                          | 69,793     |                     | $          | 68,593 |   |
| WLCSP      |       | 10,705                     |       | 10,293                   |       |
| XinTec     |       | 4,692                      |       | 4,661                    |       |
| ImPac      |       | 2,713                      |       | 1,872                    |       |
| Total      |       | $                          | 87,903     |                     | $          | 85,419 |   |

 

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

 

In August 2005, theCompany entered into an Amended and Restated Shareholders’ Agreement (the “AmendedVisEra Agreement”) with Taiwan Semiconductor Manufacturing Company Limited (“TSMC”),VisEra Technologies Company, Ltd. (“VisEra”), and VisEra Holding Company (“VisEraCayman”). The Amended VisEra Agreement amended and restated the originalShareholders’ Agreement (the “VisEra Agreement”) that the parties entered intoon October 29, 2003, pursuant to which the Company and TSMC agreed to formVisEra, a joint venture in Taiwan, for the purposes of providing certainmanufacturing and automated final testing services related to complementarymetal oxide semiconductor, or CMOS, image sensors. In November 2003,pursuant to the terms of the VisEra Agreement, the Company contributed$1.5 million in cash to VisEra and granted a non-exclusive license tocertain of its manufacturing and automated final testing technologies andpatents. In order to provide greater financial and fiscal flexibility toVisEra, in connection with the Amended VisEra Agreement, the parties formedVisEra Cayman, a company incorporated in the Cayman Islands and VisEra became asubsidiary of VisEra Cayman.

 

Under the terms of theAmended VisEra Agreement, the parties reaffirmed their respective commitmentsto VisEra, and expanded the scope of and made certain modifications to theVisEra Agreement. The Company and TSMC have equal interests in VisEra Cayman.In the quarter ended October 31, 2005, the Company and TSMC eachcontributed $7.5 million to VisEra and VisEra Cayman. As a result of thisadditional investment, the Company’s and TSMC’s interest each increased from25% to 43%, and consequently the Company re-evaluated its accounting for VisErain accordance with FIN 46(R), *“Consolidation of VariableInterest Entities.”* Since the Company was the source of virtuallyall of VisEra’s revenues, the Company had a decisive influence over VisEra’sprofitability. The Company concluded that, as a result of its step acquisitionof VisEra, and because substantially all of the activities of VisEra eitherinvolved or were conducted on behalf of the Company, VisEra was a variableinterest entity (“VIE”). Accordingly, the Company considered itself to be theprimary beneficiary of VisEra, and included VisEra’s financial results in itsconsolidated financial statements through December 31, 2006. In thequarter ended January 31, 2006, the Company increased its interest inVisEra from 43% to 46% through purchases of $9.5 million of unissuedshares.

 

In January 2006, inaccordance with the Amended VisEra Agreement, VisEra purchased color filterprocessing equipment and related assets from TSMC for an aggregate priceequivalent to $16.9 million. In connection with the purchase, VisEraentered into a three-year lease agreement with TSMC. Under this agreement,VisEra leased from TSMC approximately 14,000 square feet of factory and officespace where the assets were located at an annual cost of approximately$2.4 million. VisEra vacated the facility in July 2008.

 

In May 2006, VisErapurchased certain equipment and intellectual property from Dai Nippon PrintingCo., Ltd. (“Dai Nippon”) for approximately $3.1 million. Dai Nippon alsomade an investment in VisEra Cayman of approximately $4.3 million. Becausethe per share value of the Dai Nippon investment exceeded the Company’s averageper share carrying value in VisEra Cayman, the Company recorded a one-timechange-of-interest benefit of $1.2 million directly to “Additional paid-incapital,” a component of stockholders’ equity. In November 2006, theCompany invested another $6.1 million in VisEra.

 

On January 1, 2007,the Company assumed responsibility for logistics management services previouslyprovided to the Company by VisEra. As a consequence of the change, the Companyconcluded that, as of the date of the change, it would lose its status as theprimary beneficiary of the joint venture, VisEra would cease to be VIE asdefined under 

 

12

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

Financial Interpretation No. 46(revised December 2003), *“Consolidation of VariableInterest Entities,”*(“FIN 46(R)”) and, as a result, the Companydeconsolidated VisEra. Accordingly, beginning on January 1, 2007, theCompany has accounted for its investment in VisEra under the equity method. Thedeconsolidation of VisEra did not have a material effect on the Company’sreported revenue or reported net income for the fiscal year ended April 30,2007. In April 2007, pursuant to a January 2007 amendment to theAmended VisEra Agreement that provided for an increase in VisEra’smanufacturing capacity, the Company and TSMC each made an additional investmentof $27.0 million in VisEra. This additional investment was part of anongoing capacity expansion program at VisEra. The Company’s contribution toVisEra and VisEra Cayman thus totaled $51.6 million, effectively meeting itscommitment under the terms of the January 2007 amendment to the AmendedVisEra Agreement, in which the Company and TSMC have agreed to commit a totalof $112.9 million to the joint venture. The Company has not made any subsequentcontributions into VisEra.

 

All other material termsof the original Shareholders’ Agreement remain in effect. (See Notes 16and 17.)

 

## ***China WLCSP Limited***

## *** ***

China WLCSP Limited (“WLCSP”)is in the business of designing, manufacturing, packaging and selling certainwafer level chip scale packaging related services, for which the Company iscurrently a customer. In May 2007, the Company acquired 2,500,000 units ofWLCSP’s equity interests from WLCSP at a per unit price of $2.00 for anaggregate purchase amount of $5.0 million. Concurrently, the Companypurchased from Infinity-CSVC Venture Capital Enterprise 2,000,000 units ofWLCSP’s outstanding equity interests at a price per unit of $2.00 for anaggregate purchase amount of $4.0 million. Following the completion of thetwo transactions, the Company owns approximately 20.0% of WLCSP’s registeredcapital on a fully-diluted basis and has appointed a member to WLCSP’s board ofdirectors and a supervisor to monitor the actions of WLCSP’s board of directorsand officers.

 

At the date of thetransaction, the Company’s $9.0 million investment in WLCSP exceeded itsshare of the book value of WLCSP’s assets by $5.7 million. Of this$5.7 million difference, $4.1 million represents equity methodgoodwill which, in accordance with SFAS No. 142, *“Goodwill and Other Intangible Assets,”***and APB Opinion No. 18, *“The Equity Method of Accounting for Investments in Common Stock”*(“APB 18”),the Company will not amortize. This amount is recorded as a portion of theCompany’s investment in WLCSP. The Company will amortize the remaining basisdifference of $1.6 million, which is attributable to intangible assets ofWLCSP, over various periods up to a maximum of five years.

 

The Companyaccounts for its investment in WLCSP under the equity method. For the three andsix months ended October 31, 2008, the Company recorded equity income of$405,000 and $412,000, respectively, in “Other expense, net,” consisting of itsportion of the net income recorded by WLCSP during the periods, partiallyoffset by equity method investment adjustments. For the three and six monthsended October 31, 2007, the Company recorded equity income of $0.5 millionand $169,000, respectively, in “Other expense, net,” consisting of its portionof the net income recorded by WLCSP during the periods, partially offset by anequity method investment adjustment. (See Note 17.)

 

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

 

Between October 2005and March 2006, pursuant to the terms of the Amended VisEra Agreement (asdefined above), VisEra Cayman completed the acquisition of approximately 29.6%of the issued and outstanding shares of XinTec, Inc. (“XinTec”), aTaiwan-based supplier of chip scale packaging services, in which the Companyalready held an approximate 7.8% interest. Since VisEra was a consolidatedentity at the time, the Company’s beneficial interest in XinTec increased tomore than 20%. Consequently, beginning in the three months ended October 31,2005 and through December 31, 2006, the Company accounted for itsinvestment in XinTec under the equity method.

 

In January 2007,TSMC purchased approximately 90,526,000 previously-unissued shares from XinTec.The purchased shares represented approximately a 43.0% ownership interest inXinTec. Other existing shareholders, including the Company and the Company’saffiliate, VisEra, did not purchase additional shares. As a result, the Company’sdirect ownership percentage in XinTec declined to approximately 4.4%. VisEra’sownership interest 

 

13

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

declined to 16.9%, andthe Company’s beneficial ownership percentage in XinTec declined to 12.4%.Consequently, effective January 1, 2007, in accordance withAPB 18, the Company began to account for XinTec as a cost methodinvestment. In addition, because the per share value of the TSMC investmentexceeded the Company’s average per share carrying value in XinTec, the Companyrecorded a one-time change-of-interest benefit of $1.2 million directly to“Additional paid-in capital,” a component of stockholders’ equity. (SeeNote 17.)

 

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

## *** ***

In 2003, in order toenhance its access to plastic and ceramic packaging services that were in shortsupply, the Company purchased approximately 27% of the common stock of ImPacTechnology Co., Ltd. (“ImPac”), a privately-held company based in Taiwan for atotal of $2.0 million in cash. In December 2003, the Company made anadditional cash contribution of approximately $0.8 million to maintain itsequity ownership percentage in ImPac. Unrelated third parties own the balanceof ImPac’s equity. During fiscal 2004, the Company’s equity interestdeclined to approximately 23% due to additional rounds of financing obtained byImPac in which the Company did not participate. In July 2008, the Companypurchased additional shares in ImPac for $1.4 million. This increased theCompany’s ownership in ImPac to 25.7%. The Company’s purchases from ImPac areat arm’s length, and the Company accounts for this investment using the equitymethod. The Company recorded an equity loss of $140,000 and $0.5 million,respectively, in “Other expense, net,” as its portion of ImPac’s net loss forthe three and six months ended October 31, 2008.  The Company recorded an equity loss of$97,000 and $206,000, respectively, in “Other expense, net,” as its portion ofImPac’s net loss for the three and six months ended October 31, 2007.

 

The following tablepresents the summary combined financial information of ImPac, VisEra and WLCSP,as derived from their financial statements for the three and six months ended October 31,2008 and 2007 and prepared under accounting principles generally accepted inthe United States of America (in thousands):

 
| ** **             | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **             | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating data:   | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues               |       | $                                                  | 31,658     |                                             | $          | 35,317 |   | $ | 57,994 |   | $ | 77,129 |   |
| Gross profit           |       | 6,986                                              |       | 12,202                                           |       | 13,086 |   | 19,483 |   |
| Income from operations |       | 3,590                                              |       | 7,700                                            |       | 6,374 |   | 12,035 |   |
| Net income             |       | $                                                  | 1,349      |                                             | $          | 6,415 |   | $ | 2,579 |   | $ | 8,070 |   |

 

The amount ofconsolidated retained earnings that represent undistributed earnings of theinvestees accounted for by the equity method totaled $15.4 million and $14.8 million at October 31,2008 and April 30, 2008, respectively.

 

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

 

In May 2004, theCompany entered into an agreement with Powerchip Semiconductor Corporation (“PSC”),a Taiwan based company that produces memory chips and provides semiconductorfoundry services, to establish a joint venture in Taiwan. The purpose of thejoint venture, Silicon Optronics, Inc. (“SOI”), is to conductmanufacturing, marketing and selling of certain of the Company’s legacyproducts. The Company contributed approximately $2.1 million to SOI inexchange for an ownership percentage of 49.0%. In March 2005, the Companyassumed control of the board of directors of SOI and the Company hasconsolidated SOI since April 30, 2005.

 

In April 2007, SOIbecame listed on the Taiwan GreTai Securities Market, (“TGSM”). The TGSM is theapproximate equivalent in Taiwan of the Over-The-Counter market in the UnitedStates. In conjunction with the TGSM listing, various employees of SOIexercised their options and increased the number of shares outstanding. Fromtime to time, SOI also issues shares to its employees as a bonus, which dilutesthe Company’s ownership percentage. The Company’s ownership percentage in SOIwas 43.9% as of both October 31, 2008 and April 30, 2008.

 

During the six monthsended October 31, 2008, SOI paid a cash dividend of approximately$359,000, of which the Company received $158,000. (See Note 17.)

 

14

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six Months Ended October 31,2008 and 2007**

**(unaudited)**

 

**Note 7 — Goodwilland Intangible Assets**

 

During the secondquarter of fiscal 2009, based on a combination of factors, including thesignificant decline in the Company’s market capitalization and the currentglobal economic downturn, the Company concluded that there were sufficientfactual circumstances for interim impairment analyses under SFAS No. 142and SFAS No. 144, *“Accounting for theImpairment or Disposal of Long-Lived Assets,”* (“SFAS No. 144”).  As a result, the Company performed interimimpairment tests on goodwill and certain other long-lived tangible andintangible assets as of October 31, 2008.

 

***Goodwill***

 

Under the two-stepprocess as mandated by SFAS No. 142, goodwill is tested for impairment atthe reporting unit level by comparing the reporting unit’s fair value to itsnet book value, including goodwill. A potential impairment exists if the fairvalue of the reporting unit is lower than its net book value. The second stepof the process, which is performed only if a potential impairment exists,involves determining the difference between the fair value of the reportingunit’s net assets other than goodwill, and the fair value of the reportingunit. Because the Company has only one reporting unit under SFAS No. 142,the Company utilized an enterprise wide approach to assess goodwill forimpairment. The Company first concluded that its market capitalization wassignificantly lower than its net book value as of October 31, 2008,indicating potential goodwill impairment. The Company then determined the fairvalue of the enterprise by using the present value technique, based in part,upon an independent valuation. The fair value of the enterprise was reconciledto the Company’s overall market capitalization as of October 31, 2008. Bycomparing the fair value to net assets other than goodwill, the Companyrecorded a goodwill impairment charge of $7.5 million, which was includedin “Goodwill impairment” for the three and six months ended October 31,2008.

 

The change to thecarrying value of the Company’s goodwill from May 1, 2008 through October 31,2008 is reflected below:

 
| ** **                       | ** ** | **Goodwill** | ** ** |
|----------------------------------|------------|--------------|------------|
| Balance at May 1, 2008      |       | $            | 7,541      |   |
| Goodwill impairment              |       | (7,541       | )          |
| Balance at October 31, 2008 |       | $            | —     |   |

 

***IntangibleAssets***

 

The Company alsotested its long-lived assets, including its intangible assets, for potentialimpairment. Under SFAS No. 144, potential impairment assessments arepreceded by recoverability tests where undiscounted expected future cash flowswould be compared to carrying amounts of asset groups. If the carrying amountis less than the undiscounted expected future cash flows, the Company will notrecognize any asset impairment loss. Based on the recoverability analysis, theCompany determined that the undiscounted expected future cash flows asgenerated by the Company’s primary asset group, which is its supply chainassets, exceeded the asset carrying values. Consequently, the Company did notrecord any impairment of its intangible assets or its other long-lived assets.Intangible assets as of October 31, 2008 consist of the following (inthousands):

 
| ** **                | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|---------------------------|------------|----------|------------|-------------------------------|------------|--------------------------|------------|
| Core technology           |       | $        | 17,800     |                          | $          | 12,460                   |       | $ | 5,340 |   |
| Patents and licenses      |       | 13,487   |       | 8,585                         |       | 4,902                    |       |
| Trademarks and tradenames |       | 1,400    |       | 980                           |       | 420                      |       |
| Customer relationships    |       | 100      |       | 100                           |       | —                   |       |
| Intangible assets, net    |       | $        | 32,787     |                          | $          | 22,125                   |       | $ | 10,662 |   |

 

15

----

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six Months Ended October 31,2008 and 2007**

**(unaudited)**

 

Intangibleassets as of April 30, 2008 consist of the following (in thousands):

 
| ** **                | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|---------------------------|------------|----------|------------|-------------------------------|------------|--------------------------|------------|
| Core technology           |       | $        | 17,800     |                          | $          | 10,680                   |       | $ | 7,120 |   |
| Patents and licenses      |       | 13,487   |       | 7,239                         |       | 6,248                    |       |
| Trademarks and tradenames |       | 1,400    |       | 840                           |       | 560                      |       |
| Customer relationships    |       | 100      |       | 100                           |       | —                   |       |
| Intangible assets, net    |       | $        | 32,787     |                          | $          | 18,859                   |       | $ | 13,928 |   |

 

For the three andsix months ended October 31, 2008, the Company amortized $1.6 millionand $3.3 million, respectively, of its intangible assets. For the threeand six months ended October 31, 2007, the Company amortized$1.6 million and $3.3 million, respectively, of its intangibleassets. The total expected future annual amortization of these intangibleassets is as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| 2009                                      |       | $          | 3,266      |   |
| 2010                                      |       | 6,386      |       |
| 2011                                      |       | 973        |       |
| 2012                                      |       | 37         |       |
| Total                                     |       | $          | 10,662     |   |

 

**Note 8 — BorrowingArrangements**

 

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

 
| ** **                             | ** ** | **October 31,  2008** | ** ** | **April 30,  2008** | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------------------|------------|
|                                   |       |                       |       |                     |       |
| Mortgage loan                          |       | $                          | 26,728     |                     | $          | 27,347 |   |
| Term loan                              |       | 11,500                     |       | 6,000                    |       |
| Capital lease obligations              |       | 56                         |       | 134                      |       |
|                                   |       | 38,284                     |       | 33,481                   |       |
| Less: amount  due within one year |       | (3,640                     | )          | (651                     | )          |
| Non-current portion of long-term debt  |       | $                          | 34,644     |                     | $          | 32,830 |   |

 

At October 31,2008, aggregate debt maturities were as follows: (in thousands):

 
| **Years Ending April 30,** | ** ** | **Mortgage  and Term  Loan** | ** ** | **Capital  Lease** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|-----------|------------|
| 2009                                      |       | $                                 | 1,807      |               | $          | 56        |       | $ | 1,863 |   |
| 2010                                      |       | 3,554                             |       | —             |       | 3,554     |       |
| 2011                                      |       | 3,554                             |       | —             |       | 3,554     |       |
| 2012                                      |       | 3,554                             |       | —             |       | 3,554     |       |
| 2013                                      |       | 1,554                             |       | —             |       | 1,554     |       |
| Thereafter                                |       | 24,205                            |       | —             |       | 24,205    |       |
| Total                                     |       | $                                 | 38,228     |               | $          | 56        |       | $ | 38,284 |   |

 

## ***MortgageLoan***

## *** ***

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

 

16

----

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six Months Ended October 31,2008 and 2007**

**(unaudited)**

 

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

 

Interest ratesunder the Mortgage Loan were 4.6% and 3.6% at October 31, 2008 and April 30,2008, respectively. Interest rates under the Term Loan were 5.0% and 4.0% at October 31,2008 and April 30, 2008, respectively. The Company was in compliance withthe financial covenants of the Loan and Security Agreement as of October 31,2008.

 

In conjunctionwith the Mortgage Loan, the Company entered into an interest rate swap with thesame bank to effectively convert the variable interest rate described above toa fixed rate. The swap is for a period of ten years, and the notional amount ofthe swap approximates the principal outstanding under the Mortgage Loan. TheCompany is the fixed rate payer under the swap and the rate is fixed at 5.3%per annum and the effective rate on the Mortgage Loan is fixed at approximately6.2%. In July 2008, in connection with the Term Loan, the Company enteredinto a second interest rate swap with the bank to effectively convert thevariable interest rate described above to a fixed rate. This second swap is fora period of four years. The Company is the fixed rate payer and the rate isfixed at 4.3% per annum and the effective rate on the Term Loan is fixed atapproximately 5.5%. The Company remeasures both swaps at fair values at eachbalance sheet date and records them as either assets or liabilities, dependingon whether the fair value represents net gains or net losses. As of October 31,2008 and April 30, 2008, the Company recorded $2.4 million and$2.2 million, respectively, in “Other long-term liabilities.” For thethree and six months ended October 31, 2008, the Company recorded expenseof $0.6 million and $165,000, respectively, in “Other expense, net.” Forthe three and six months ended October 31, 2007, the Company recordedexpense of $0.8 million and $169,000, respectively, in “Other expense,net.”

 

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

## *** ***

SOI maintains fourunsecured lines of credit with three commercial banks, which provide a total ofapproximately $3.4 million in available credit. All borrowings under theselines of credit bear interest at the market interest rate prevailing at thetime of borrowing. There are no financial covenant requirements for thesefacilities. At October 31, 2008 and April 30, 2008, there were noborrowings outstanding under these facilities.

 

## ***Capital Lease Obligations***

## *** ***

In February 2006,the Company leased telecommunications equipment under a three-year capitallease at an imputed interest rate of 7.5% per annum. Terms of the agreementrequire the Company to make monthly payments of approximately $14,000 through May 2009.Accordingly, the Company recorded a capital asset for $393,000 that is beingdepreciated over a five-year period in accordance with the Company’scapitalization policy. As of October 31, 2008, $56,000 was outstandingunder the capital lease and was classified as a short-term obligation. As of April 30,2008, $134,000 was outstanding under the capital lease and $133,000 wasclassified as a short-term obligation.

 

**Note 9 — NetIncome (Loss) Per Share**

 

Basic net incomeper share is computed by dividing net income by the weighted average number ofcommon shares outstanding during the period.

 

Diluted net incomeper share 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, restricted stock units and employee stock purchase plan shares.For the three months ended October 31, 2008, the Company excluded alloptions and restricted stock units outstanding as the Company recorded a netloss of $5.3 million. For the six months ended October 31, 2008,12,261,000 shares of common stock subject to outstanding options were notincluded in the calculation of diluted net income per share because they wereantidilutive. For the three and six months ended October 31, 2007,4,711,000 and 5,382,000 shares, 

 

17

----

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Six Months Ended October 31,2008 and 2007**

**(unaudited)**

 

respectively,of common stock subject to outstanding options were not included in thecalculation of diluted net income per share because they were antidilutive. Allrestricted stock units outstanding as of October 31, 2008 were included inthe treasury stock method calculation.

 

The Company’searnings per share were calculated under the provisions of the SFAS No. 128,*“Earnings Per Share,”* (“SFAS No. 128”).SFAS No. 128 requires that the Company take into account the effect onconsolidated earnings per share of options, warrants and convertible securitiesissued by its subsidiaries. The effect on consolidated earnings per sharedepends on whether the securities issued by the subsidiary enable their holdersto obtain common stock of the subsidiary company or common stock of the parentcompany. Securities issued by a subsidiary that enable their holders to obtain thesubsidiary’s common stock are included in computing the subsidiary’s earningsper share data. The diluted per-share earnings of the subsidiary are includedin the Company’s consolidated earnings per share computations based on theconsolidated group’s holding of the subsidiary’s securities. Through October 31,2008, SOI issued options to various of its employees exercisable for2,700,000 shares of its common stock. In the calculation of its earningsper share for the three and six months ended October 31, 2008 and 2007,the Company included the effect of SOI’s options in its consolidated earningsper share.

 

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

 
| ** **                                                                      | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ***Basic:***                                                                    |       |                                               |       |                                             |       |   |   |   |   |
| Numerator:                                                                      |       |                                               |       |                                             |       |   |   |   |   |
| Net income (loss)                                                               |       | $                                                  | (5,308     | )                                                | $          | 20,510 |   | $ | 920 |   | $ | 33,487 |   |
|                                                                            |       |                                               |       |                                             |       |   |   |   |   |
| Denominator:                                                                    |       |                                               |       |                                             |       |   |   |   |   |
| Weighted average common shares for net income (loss)  per share                 |       | 50,754                                             |       | 54,985                                           |       | 51,006 |   | 54,868 |   |
|                                                                            |       |                                               |       |                                             |       |   |   |   |   |
| Basic net income (loss) per share                                               |       | $                                                  | (0.10      | )                                                | $          | 0.37 |   | $ | 0.02 |   | $ | 0.61 |   |
|                                                                            |       |                                               |       |                                             |       |   |   |   |   |
| ***Diluted:***                                                                  |       |                                               |       |                                             |       |   |   |   |   |
| Numerator:                                                                      |       |                                               |       |                                             |       |   |   |   |   |
| Net income (loss)                                                               |       | $                                                  | (5,308     | )                                                | $          | 20,510 |   | $ | 920 |   | $ | 33,487 |   |
|                                                                            |       |                                               |       |                                             |       |   |   |   |   |
| Denominator:                                                                    |       |                                               |       |                                             |       |   |   |   |   |
| Denominator for basic net income (loss) per share                               |       | 50,754                                             |       | 54,985                                           |       | 51,006 |   | 54,868 |   |
| Weighted average effect of dilutive securities:                                 |       |                                               |       |                                             |       |   |   |   |   |
| Stock options, restricted stock units, and employee  stock purchase plan shares |       | —                                             |       | 1,464                                            |       | 585 |   | 635 |   |
| Weighted average common shares for diluted net  income (loss) per share         |       | 50,754                                             |       | 56,449                                           |       | 51,591 |   | 55,503 |   |
|                                                                            |       |                                               |       |                                             |       |   |   |   |   |
| Diluted net income (loss) per share                                             |       | $                                                  | (0.10      | )                                                | $          | 0.36 |   | $ | 0.02 |   | $ | 0.60 |   |

 

**Note 10 — Fair Value Measurements**

 

Effective May 1,2008, the Company adopted the provisions of SFAS No. 157, as amended. Theadoption of this standard was limited to financial assets and liabilities anddid not have a material effect on the Company’s financial condition or resultsof operations.

 

18

----

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

SFAS No. 157specifies a hierarchy of valuation techniques based upon whether the inputs tothose valuation techniques reflect assumptions other market participants woulduse based upon market data obtained from independent sources (observableinputs) or reflect the Company’s own assumption of market participant valuation(unobservable inputs). The fair value hierarchy consists of the following threelevels:

 

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

 

·                  *Level 2* – Inputs are quoted prices forsimilar assets or liabilities in an active market, quoted prices for identicalor similar assets or liabilities in markets that are not active, inputs otherthan quoted prices that are observable and market-corroborated inputs which arederived principally from or corroborated by observable market data.

 

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

 

The followingtable presents the Company’s financial assets and liabilities that are measuredat fair value on a recurring basis which were comprised of the following typesof instruments as of October 31, 2008 (in thousands):

 
| ** **                                           | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|------------------------------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Money market funds                                   |       | $         | 39,545     |             | $          | 39,545           |       | $                | —     |   | $ | — |   |
| Bank time deposits                                   |       | 14,311    |       | —           |       | 14,311           |       | —           |       |
| Debit securities  issued by U.S. government agencies |       | 86,725    |       | —           |       | 86,725           |       | —           |       |
| Total assets                                         |       | $         | 140,581    |             | $          | 39,545           |       | $                | 101,036    |   | $ | — |   |
| Interest rate  swaps                                 |       | $         | (2,394     | )                | $          | —           |       | $                | (2,394     | ) | $ | — |   |
| Total  liabilities                                   |       | $         | (2,394     | )                | $          | —           |       | $                | (2,394     | ) | $ | — |   |

 

The followingtable presents the Company’s financial assets and liabilities that are measuredat fair value on a recurring basis which were presented on the Company’sCondensed Consolidated Balance Sheets as of October 31, 2008, (inthousands):

 
| ** **             | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Cash equivalents       |       | $         | 96,810     |             | $          | 39,545           |       | $                | 57,265     |   | $ | — |   |
| Short-term investments |       | 43,771    |       | —           |       | 43,771           |       | —           |       |
| Total assets           |       | $         | 140,581    |             | $          | 39,545           |       | $                | 101,036    |   | $ | — |   |
| Interest rate  swaps   |       | $         | (2,394     | )                | $          | —           |       | $                | (2,394     | ) | $ | — |   |
| Total  liabilities     |       | $         | (2,394     | )                | $          | —           |       | $                | (2,394     | ) | $ | — |   |

 

**Note 11 — Segmentand Geographic Information**

 

The Company identifiesits business segments based on business activities, management responsibilityand geographic location. For all periods presented, the Company operated in asingle reportable business segment.

 

The Company sells itsimage-sensor products either directly to OEMs and VARs or indirectly throughdistributors. The following table illustrates the percentage of revenues fromsales to OEMs and VARs and to distributors for the three and six months ended October 31,2008 and 2007, respectively:

 
| ** **    | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|---------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| OEMs and VARs |       | 60.0                                               | %          | 68.5                                             | %          | 59.1 | % | 66.8 | % |
| Distributors  |       | 40.0                                               |       | 31.5                                             |       | 40.9 |   | 33.2 |   |
| Total         |       | 100.0                                              | %          | 100.0                                            | %          | 100.0 | % | 100.0 | % |

 

19

----

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

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

 
| ** **    | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|---------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| China         |       | $                                                  | 129,074    |                                             | $          | 199,598 |   | $ | 257,100 |   | 352,507 |   |
| Malaysia      |       | 12,123                                             |       | 8,833                                            |       | 30,657 |   | 12,790 |   |
| Taiwan        |       | 11,177                                             |       | 19,507                                           |       | 25,515 |   | 30,603 |   |
| United States |       | 7,027                                              |       | 2,496                                            |       | 17,271 |   | 3,888 |   |
| All other     |       | 4,534                                              |       | 2,188                                            |       | 7,671 |   | 5,968 |   |
| Total         |       | $                                                  | 163,935    |                                             | $          | 232,622 |   | $ | 338,214 |   | $ | 405,756 |   |
|               |            |                                                    |            |                                                  |            |  |  |  |  |  |  |  |  |

 

The Company’s long-livedassets, including its equity method investments, are located in the followingcountries (in thousands):

 
| ** **    | ** ** | **October 31,  2008** | ** ** | **April 30,  2008** | ** ** |
|---------------|------------|----------------------------|------------|--------------------------|------------|
| Taiwan        |       | $                          | 91,759     |                     | $          | 83,829 |   |
| United States |       | 67,436                     |       | 56,899                   |       |
| China         |       | 45,720                     |       | 41,550                   |       |
| All other     |       | 408                        |       | 489                      |       |
| Total         |       | $                          | 205,323    |                     | $          | 182,767 |   |

 

 

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

 

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

 

In September 2007,on the recommendation of the Company’s board of directors, the stockholders ofthe Company approved the 2007 Equity Incentive Plan (the “2007 Plan”).The 2007 Plan replaced the Company’s 2000 Stock Plan. The Company hasreserved 6,000,000 shares of common stock for issuance under the2007 Plan. The 2007 Plan provides for the grant of the followingtypes of incentive awards: (i) stock options; (ii) stock appreciationrights; (iii) restricted stock; (iv) restricted stock units; (v) performanceshares and performance units; and (vi) other stock or cash awards. Ingeneral, stock option and stock appreciation right awards under the2007 Plan will be granted at a price not less than 100% of the fair marketvalue of the Company’s common stock on the date of grant. Through October 31,2008, the Company had granted stock options for approximately594,000 shares and 511,000 restricted stock units to employees under the2007 Plan. In general, the Company’s stock option awards have a maximumcontractual term of ten years and vest over four years. Restricted stock unitsgranted under the 2007 Plan generally vest over three years. In July 2008,the Company also granted approximately 196,000 performance shares to certainemployees. These 196,000 shares represent the “target” number of shares ofcommon stock that will be issued if certain performance goals are achieved. Theactual number of shares to be issued will be determined at the end of aone-year performance period, and can range from 0% to 175% of the targetnumber, depending on the degree of achievement then of the performance goals.After determining the final share count, the awards will vest over two years.

 

In November 2007,the Company’s board of directors approved the termination of the Company’s 2000Director Option Plan. The 2007 Plan will also cover all future grants ofequity-based compensation to directors.

 

20

----

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

The Company’s equityincentive and stock-based compensation plans as of October 31, 2008 aresummarized as follows (in thousands):

 
| **Name of Plan**     | ** ** | **Shares  Authorized** | ** ** | **Shares  Available  for Grant** | ** ** | **Options  Outstanding** | ** ** | **Restricted  Stock Units  Outstanding** | ** ** | **Performance  Shares  Outstanding****(1)** | ** ** |
|--------------------------------|------------|------------------------|------------|---------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| 1995 Stock Plan           |       | —                 |       | —                                |       | 38                       |       | —                                        |       | —                                      |       |
| 2000 Stock Plan           |       | —                 |       | —                                |       | 13,048                   |       | —                                        |       | —                                      |       |
| 2000 Director Option Plan |       | —                 |       | —                                |       | 287                      |       | —                                        |       | —                                      |       |
| 2007 Plan                      |       | 6,000                  |       | 4,036                                 |       | 566                      |       | 503                                           |       | 196                                         |       |
| Total                          |       | 6,000                  |       | 4,036                                 |       | 13,939                   |       | 503                                           |       | 196                                         |       |

 

----

(1)    Represents targeted issuance. Theactual number of shares of common stock that will be issued in connection withthe performance shares will be determined at the end of a one-year performanceperiod.

 

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

## *** ***

The following tablesummarizes the equity award activities under the 2000 Stock Plan, the2000 Director Option Plan and the 2007 Plan, for the six months endedOctober 31, 2008:

 
| ** **                                           | ** ** | ** **                        | ** ** | **Options Outstanding** | ** ** | **Restricted  Stock Units  Outstanding**          | ** ** | **Performance  Shares  Outstanding** | ** ** | **Restricted  Stock units  and  Performance  Shares** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Shares  Available  For  Grant** | ** ** | **Number  of Shares**   | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Number of  Shares**                | ** ** | **Number of  Shares**                                 | ** ** | **Weighted  Average  Grant Date  Fair Market  Value Per  Share** | ** ** |
| ** **                                           | ** ** | **(in  thousands)**               | ** ** | **(in  thousands)**          | ** ** | ** **                                             | ** ** | **(in  thousands)**                  | ** ** | **(in  thousands)**                                        | ** ** | ** ** | ** ** |
| Balance at May 1, 2008                          |       |                              |       | 13,807                       |       | $                                                      | 18.18      |                                 | —     |                                                       | —     |   | $ | — |   |
| Shares available for grant at May 1, 2008       |       | 5,846                             |       |                         |       |                                                   |       |                                 |       |                                                       |       |   |   |
| Stock options granted                                |       | (436                              | )          | 436                          |       | 12.79                                                  |       |                                 |       |                                                       |       |   |   |
| Stock options exercised                              |       | —                            |       | (58                          | )          | 5.19                                                   |       |                                 |       |                                                       |       |   |   |
| Stock options expired or forfeited                   |       | 24                                |       | (246                         | )          | 18.98                                                  |       |                                 |       |                                                       |       |   |   |
| Restricted stock units granted (1)                   |       | (1,022                            | )          |                         |       |                                                   |       | 511                                  |       |                                                       |       | 11.91 |   |
| Restricted stock units expired or forfeited (1)      |       | 15                                |       |                         |       |                                                   |       | (8                                   | )          |                                                       |       | 11.95 |   |
| Performance shares granted (1) (2)              |       | (391                              | )          |                         |       |                                                   |       |                                 |       | 196                                                        |       | 11.95 |   |
| Balance at October 31, 2008                     |       | 4,036                             |       | 13,939                       |       | 18.05                                                  |       | 503                                  |       | 196                                                        |       | 11.95 |   |
| Exercisable at October 31, 2008                 |       |                              |       | 9,679                        |       | 18.01                                                  |       |                                 |       |                                                       |       |   |   |
| Vested and expected to vest at October 31, 2008 |       |                              |       | 13,483                       |       | $                                                      | 18.08      |                                 | 392        |                                                       | 145        |   | $ | 11.95 |   |

 

----

(1)          Shares subject to awards granted for less thanfair market value on the date of grant count against the share reserve as twoshares for every one share subject to such an award. When a share is returnedto the plan, two shares will be credited back to the reserve.

 

(2)          Represents targeted issuance. Theactual number of shares of common stock that will be issued in connection withthe performance shares will be determined at the end of a one-year performanceperiod.

 

The total intrinsic valueof options exercised during the three and six months ended October 31,2008 was $78,000 and $486,000, respectively. Total cash received from employeesas a result of employee stock option exercises during the three and six monthsended October 31, 2008 was approximately $58,000 and $300,000,respectively.

 

21

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**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For theThree and Six Months Ended October 31, 2008 and 2007**

**(unaudited)**

 

As of October 31,2008, net of forfeitures, there was $33.7 million of unrecognizedcompensation expense related to unvested stock options, which the Companyexpects to recognize over a weighted average period of 2.1 years. As of October 31,2008, net of forfeitures, there was $4.7 million of unrecognizedcompensation expense related to unvested restricted stock units, which theCompany expects to recognize over a weighted average period of 2.7 years.For the Company’s 2000 Employee Stock Purchase Plan (the “2000 PurchasePlan”), as of October 31, 2008, there was $2.6 million ofunrecognized compensation expense which the Company expects to recognize over aweighted average period of 1.1 years. As of April 30, 2008, net offorfeitures, there was $43.0 million of unrecognized compensation costrelated to unvested stock options, which the Company expects to recognize overa weighted average period of 2.3 years. For the 2000 Purchase Plan,as of April 30, 2008, there was $1.2 million of unrecognizedcompensation cost which the Company expected to be recognized over a weightedaverage period of 0.9 years. The Company’s current policy is to issue newshares to settle the exercise of stock options and prospectively, the vestingof restricted stock units.

 

## ***Valuation Assumptions***

## *** ***

SFAS No. 123(R),“*Share-Based Payment,”*(“SFAS No. 123(R)”)requires companies to estimate the fair value of stock-based compensationawards on the grant date. The value of the portion of the award that isultimately expected to vest is recognized as expense over the requisite serviceperiod in the Company’s Condensed Consolidated Statements of Operations.

 

For restricted stock unitawards, the per-share fair value is the closing market price of the Company’scommon stock as reported on the NASDAQ Global Market on the grant date. Forperformance share awards, the per share fair value is also the closing marketprice of the Company’s common stock as reported on NASDAQ. However, the relatedstock-based compensation is adjusted by the estimated probable outcome of thepredetermined performance conditions. The compensation will be adjusted forsubsequent changes in the estimated and actual outcome. For stock option awardsand rights issued under the 2000 Purchase Plan, the Company measures the fairvalue using the Black-Scholes option pricing model. Black-Scholes was developedto estimate the fair value of freely tradable, fully transferable optionswithout vesting restrictions. These assumptions differ significantly from thecharacteristics of the Company’s stock-based compensation awards. Black-Scholesalso requires the use of highly subjective, complex assumptions, includingexpected term and the price volatility of the Company’s stock.

 

The fair value for theseoptions was estimated using the Black-Scholes option pricing model. The Companydid not grant any employee options in the three months ended October 31,2008. The per share weighted average estimated grant date fair value foremployee options granted was $5.27 in the six months ended October 31,2008, respectively. The per share weighted average estimated grant date fairvalue for employee options granted was $8.98 and $7.01 in the three and sixmonths ended October 31, 2007, respectively. The following weightedaverage assumptions are included in the estimated fair value calculations forstock options granted in the three and six months ended October 31, 2008and 2007:

 
| ** **                          | ** ** | **Employee Stock Option Plans**     | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
| ** **                          | ** ** | **2008**                                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free interest rate             |       | —                                             | %          | 4.20 | % | 3.11 | % | 4.78 | % |
| Expected term of options (in years) |       | —                                             |       | 4.0 |   | 4.0 |   | 4.0 |   |
| Expected volatility                 |       | —                                             | %          | 55.0 | % | 48.2 | % | 52.3 | % |
| Expected dividend yield             |       | —                                             | %          | 0 | % | 0 | % | 0 | % |

 

Using Black-Scholes, theper share weighted average estimated fair value of rights issued pursuant tothe Company’s 2000 Purchase Plan during the three and six months ended October 31,2008 was $5.97 and$5.77, respectively. Using Black-Scholes, the per share weighted averageestimated fair value of rights issued pursuant to the Company’s 2000 PurchasePlan during the three and six months ended October 31, 2007 was $5.57 and $5.61, respectively.

 

22

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**OmnivisionTechnologies, Inc.**

 

**Notes tocondensed consolidated financial statements — (Continued)**

**For the Three and Six MonthsEnded October 31, 2008 and 2007**

**(unaudited)**

 

The following weightedaverage assumptions are included in the estimated grant date fair valuecalculations for rights to purchase stock under the 2000 Purchase Plan:

 
| ** **                          | ** ** | **Employee Stock Purchase Plan** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended**                | ** ** | **Six Months Ended** | ** ** |
| ** **                          | ** ** | **October 31,**                            | ** ** | **October 31,** | ** ** |
| ** **                          | ** ** | **2008**                                        | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free interest rate             |       | 2.21                                            | %          | 5.07 | % | 3.90 | % | 5.0 | % |
| Expected term of options (in years) |       | 0.5                                             |       | 0.5 |   | 0.5 |   | 0.5 |   |
| Expected volatility                 |       | 49.2                                            | %          | 41.0 | % | 42.8 | % | 48.3 | % |
| Expected dividend yield             |       | 0                                               | %          | 0 | % | 0 | % | 0 | % |

 

The definitions of theterms used to determine the above values are as follows:

 

·                  *Expected term:* The expected term represents the period thatthe Company’s stock-based awards are expected to be outstanding and isestimated based on historical experience.

 

·                  *Risk-free interest rate:* The risk-free interest rateassumption is based upon observed interest rates appropriate for the expectedterm of the Company’s stock-based awards.

 

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

 

·                  *Dividend yield:* The dividend yield assumption reflects theCompany’s intention not to pay a cash dividend under its dividend policy.

 

·                  *Estimated pre-vesting forfeitures:* When estimatingpre-vesting forfeitures, the Company considers forfeiture behavior based onactual historical information.

 

**Note 13 — AdditionalPaid-in Capital**

 

The following table showsthe amounts recorded to “Additional paid-in capital” for the six months ended October 31,2008 (in thousands):

 
| ** **                        | ** ** | **Additional** | ** ** |
|-----------------------------------|------------|----------------|------------|
| ** **                        | ** ** | **Paid-in**    | ** ** |
| ** **                        | ** ** | **Capital**    | ** ** |
| Balance at May 1, 2008       |       | $              | 373,024    |   |
| Exercise of stock options         |       | 300            |       |
| Employee stock purchase plan      |       | 2,437          |       |
| Employee stock-based compensation |       | 13,851         |       |
| Balance at October 31, 2008  |       | $              | 389,612    |   |

 

**Note 14 — TreasuryStock**

 

In June 2005, theCompany’s board of directors authorized the repurchase in an open-marketprogram of up to an aggregate of $100 million of the Company’s commonstock. At the time that the program expired in June 2006, and at April 30,2007, the Company had cumulatively repurchased 5,870,000 shares of itscommon stock for an aggregate cost of approximately $79.6 million.

 

In February 2007,the Company’s board of directors approved an additional stock repurchaseprogram that provides for the repurchase of up to $100 million of itsoutstanding common stock in an open-market program. Subject to applicablesecurities laws, such repurchases will be at such times and in such amounts asit deems appropriate, based on factors such as market conditions, legalrequirements and other corporate considerations. As of October 31, 2008,the Company had cumulatively repurchased 6,671,000 shares of its commonstock under the open-market program for an aggregate cost of approximately$99.1 million.

 

23

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**OmnivisionTechnologies, Inc.**

 

**Notes tocondensed consolidated financial statements — (Continued)**

**For the Three and Six MonthsEnded October 31, 2008 and 2007**

**(unaudited)**

 

**Note 15 — IncomeTaxes**

 

The benefit from incometaxes recorded for the three months ended October 31, 2008 was calculatedbased on the actual effective tax rate for the six months ended October 31,2008. The Company recorded a benefit from income taxes of $1.5 million forthe three months ended October 31, 2008 and a provision for income taxesof $5.2 million for the three months ended October 31, 2007,resulting in effective tax rates of 21.1% and 20.1% for the respective periods.

 

During the three monthsended October 31, 2008, the Emergency Economic Stabilization Act of 2008reinstated the U.S. federal research and development (“R&D”) tax credit,retroactive to January 1, 2008. As a result, the Company’s benefit fromincome taxes for the three months ended October 31, 2008 reflected a $0.6million tax benefit related to fiscal 2008 R&D expenses. The Company’sbenefit from income taxes for the three months ended October 31, 2008 alsoreflected the unfavorable impact of the $7.5 million goodwill impairmentcharge discussed in Notes 7, partially offset by the favorable impact offoreign exchange gains related to the Company’s unrecognized tax benefits andthe benefit from the fiscal 2009 U.S. federal R&D tax credit.

 

During the three monthsended October 31, 2008, the Company accrued an additional $0.6 million ofinterest related to the Company’s unrecognized tax benefits determined inaccordance with FIN 48.

 

**Note 16 — Commitmentsand Contingencies**

 

## ***Commitments***

## *** ***

The Company maintains awholly-owned subsidiary in Shanghai, China, OmniVision Technologies (Shanghai)Co. Ltd. (“OTC”) which provides assistance to the Company in various productdesign projects and in marketing and sales support. On January 10, 2007,OTC entered into a Land-Use-Right Purchase Agreement (the “Purchase Agreement”)with the Construction and Transportation Commission of the Pudong New District,Shanghai. The Purchase Agreement has an effective date of December 31,2006. Under the terms of the Purchase Agreement, the Company agreed to pay anaggregate amount of approximately $0.6 million (the “Purchase Price”) inexchange for the right to use approximately 323,000 square feet of landlocated in Shanghai for a period of 50 years. In addition, the Company isobligated to invest a minimum of approximately $33.7 million to developthe land and construct facilities, which amount includes the Purchase Price. Asof October 31, 2008, the Company has already contributed $12.0* *millionof the $33.7 million total investment. Construction of the facilities onthe land has commenced and according to the Purchase Agreement, constructionmust be completed by June 30, 2009, subject to an additional one-yearextension under limited circumstances. The Company may use the land solely forthe purposes of industrial use and/or scientific research. The Company intendsto use OTC’s registered capital to partially fund its commitment to thisproject.

 

During the three monthsended October 31, 2008, the Company formed Shanghai OmniVisionSemiconductor Technology, Co. Ltd, a new subsidiary in Shanghai, China, for thepurpose of expanding its testing capabilities. The Company is required tocontribute $1.5 million by January 2009. The Company is required tocontribute the remaining $8.5 million of a $10.0 million commitment by October 2010.

 

The Company has variouscommitments arising from the Amended VisEra Agreement, and the subsequentamendments to it. In particular, as of October 31, 2008, the Company andTSMC have agreed to commit a total of $112.9 millionto the joint venture, which commitments may be made in the form of cash orasset contributions. Through October 31, 2008, the Company hascontributed $51.6 millionto VisEra and VisEra Cayman and, as of October 31, 2008, the Company haseffectively met its commitment under the terms of this agreement. Additionalcontributions may be made by additional investors, additional contributions bythe Company and TSMC, or a combination thereof, provided that the Company andTSMC have and will maintain equal interests in VisEra and VisEra Cayman. To theextent, if any that the value of assets contributed in the future exceeds thevalue of the Company’s commitment, the Company will receive cash from VisEraCayman. (See Notes 5 and 17.)

 

24

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**OmnivisionTechnologies, Inc.**

 

**Notes tocondensed consolidated financial statements — (Continued)**

**For the Three and Six MonthsEnded October 31, 2008 and 2007**

**(unaudited)**

 

## ***Litigation***

## *** ***

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

 

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

 

In June 2004, theissuer defendants and plaintiffs negotiated a stipulation of settlement for theclaims against the issuer defendants, including OmniVision, that was submittedto the Court for approval. In August 2005, the Court preliminarilyapproved the settlement. In December 2006, the appellate court overturnedthe certification of classes in the six test cases that were selected by theunderwriter defendants and plaintiffs in the coordinated proceedings. Theaction involving OmniVision is not one of the six test cases. Because classcertification was a condition of the settlement, it is unlikely that thecurrent settlement will receive final court approval. On June 25, 2007,the Court entered an order terminating the proposed settlement based upon astipulation among the parties to the settlement. Plaintiffs have filed amendedmaster allegations and amended complaints in the six test cases. On March 26,2008, the Court largely denied the test case defendants’ motion to dismiss theamended complaints. It is uncertain whether there will be any revised or futuresettlement. If the litigation proceeds, the Company believes that it hasmeritorious defenses to plaintiffs’ claims and intends to defend the actionvigorously.

 

On October 12, 2007,a purported OmniVision stockholder filed a complaint against certain of the Company’sunderwriters for its initial public offering. The complaint, *Vanessa Simmonds v. Bank of America Corporation, et al.*,Case No. C07-1668, filed in District Court for the Western District ofWashington, makes similar allegations to those made in *In reInitial Public Offering Securities Litigation* and seeks the recoveryof short-swing trading profits under Section 16(b) of the SecuritiesExchange Act of 1934. The Company is named as a nominal defendant. No recoveryis sought from the Company.

 

On February 21,2008, the Company filed a lawsuit against Qualcomm Incorporated in the UnitedStates District Court for the Northern District of California (the “NorthernDistrict Action”) alleging claims of trademark infringement arising fromQualcomm’s use of, and attempt to register, the mark OMNIVISION for a computerhardware system and related services. The Company seeks an injunction andunspecified damages. The Company had previously filed opposition proceedingsbefore the Trademark Trial and Appeal Board of the United States Patent andTrademark office against Qualcomm’s applications to register the OMNIVISIONmark, and the Company successfully moved to suspend those proceedings basedupon the new parallel federal litigation. Qualcomm has filed its Answer denyingthe allegations of infringement. Trial is currently set for November 30,2009.

 

**Note 17 — RelatedParty Transactions**

 

In May 2006, theCompany consummated a loan agreement with one of its employees. Under the termsof the agreement, which the board of directors approved in fiscal 2004,the Company extended to the employee a three-year $1.0 million loan withan imputed interest rate of approximately five percent per annum which matureson May 12, 2009. The loan is secured by a deed of trust and may be extended,subject to mutual consent of the parties.

 

25

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**OmnivisionTechnologies, Inc.**

 

**Notes tocondensed consolidated financial statements — (Continued)**

**For the Three and Six MonthsEnded October 31, 2008 and 2007**

**(unaudited)**

 

During the three monthsended January 31, 2007, the Company and ImPac agreed to initiate paymentof licensing fees for the use of certain software developed by ImPac atOmniVision Semiconductor (Shanghai) Co. Ltd., the Company’s wholly-ownedsubsidiary in China. During the three and six months ended October 31,2008, the Company paid ImPac a nominal amount for software licensing fees.During the three and six months ended October 31, 2007, the Company paidImPac approximately $45,000 and $90,000, respectively, in softwarelicensing fees.  In addition, the Companypaid ImPac approximately $3.2 million and $5.9 million formanufacturing services for the three and six months ended October 31,2008, respectively. In addition, for the three and six months ended October 31,2007, the Company paid ImPac approximately $3.7 million and $6.4million, respectively, for manufacturing services. During fiscal 2008, theCompany loaned $1.3 million to ImPac for the purpose of expanding itsmanufacturing capacities for a term of one year, but can be extended uponmutual consent of the parties for one year. The loan is fully collateralized byassets held by ImPac. (See Note 5.) In August, 2008, the Company enteredinto an additional agreement with ImPac under which the Company agreed to placecertain manufacturing equipment with ImPac on a consignment basis for a periodof up to five years.

 

The Company consolidatedVisEra’s operating results from August 1, 2005 to December 31, 2006.Subsequently, the Company has accounted for its investment in VisEra under theequity method. For the three and six months ended October 31, 2008, theCompany paid $19.3 million and $36.4 million, respectively, to VisErafor color filter and other manufacturing services. For the three and six monthsended October 31, 2007, the Company paid $22.4 million and$56.7 million, respectively, to VisEra for color filter and othermanufacturing services.

 

In May 2007, theCompany purchased a 19.98% ownership in WLCSP for $9.0 million. For thethree and six months ended October 31, 2008, the Company paid zero and$433,000, respectively, to WLCSP for chip scale packaging services. Forthe three and six months ended October 31, 2007, the Company paid$5.7 million and $8.0 million, respectively, to WLCSP for chipscale packaging services.

 

The following tablesummarizes the transactions that the Company’s consolidated affiliate, SOI, andits affiliate, VisEra, engaged in with related parties in the ordinary courseof business in the three and six months ended October 31, 2008 and 2007(in thousands):

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                            | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ***SOI transactions with:***          | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ImPac:                                |       |                             |       |                           |       |   |   |   |   |
| Purchases of manufacturing services   |       | $                                | 204        |                           | $          | 537 |   | $ | 501 |   | $ | 1,100 |   |
| Balance payable at period end, net    |       | 123                              |       | 562                            |       | 123 |   | 562 |   |
| PSC:                                  |       |                             |       |                           |       |   |   |   |   |
| Purchases of wafers                   |       | 833                              |       | 2,975                          |       | 1,869 |   | 4,515 |   |
| Rent and other services               |       | 19                               |       | 27                             |       | 35 |   | 27 |   |
| Balance payable at period end, net    |       | 152                              |       | 1,066                          |       | 152 |   | 1,066 |   |
|                                  |       |                             |       |                           |       |   |   |   |   |
| ***VisEra transactions with:***       |       |                             |       |                           |       |   |   |   |   |
| TSMC:                                 |       |                             |       |                           |       |   |   |   |   |
| Sales to TSMC                         |       | 444                              |       | 480                            |       | 1,102 |   | 1,095 |   |
| Purchases of manufacturing services   |       | —                           |       | 361                            |       | — |   | 604 |   |
| Rent, utilities and other services    |       | —                           |       | 1,916                          |       | — |   | 3,775 |   |
| Balance receivable at period end, net |       | 245                              |       | —                         |       | 245 |   | — |   |
| Balance payable at period end, net    |       | —                           |       | 1,209                          |       | — |   | 1,209 |   |
|                                       |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

The Company purchases asubstantial portion of its wafers from TSMC. The Company also purchases aportion of its wafers from PSC.

 

26

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

 

*The following information shouldbe read in conjunction with our unaudited condensed interim financialstatements and the notes thereto included in Item 1 of this QuarterlyReport on Form 10-Q. The following discussion contains forward-lookingstatements, within the meaning of Section 27A of the Securities Actof 1933 and Section 21E of the Securities Exchange Act of 1934,which involve risks and uncertainties. Forward-looking statements generallyinclude words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “outlook,”“plans,” “seeks,” “will”  and words ofsimilar import as well as the negative of those terms. In addition, anystatements that refer to expectations, projections or other characterizationsof future events or circumstances, including any underlying assumptions, areforward-looking statements. Allforward-looking statements included in this Quarterly Report on Form 10-Q,including, but not limited to, statements regarding our projected results ofoperations for future reporting periods, the extent of future sales throughdistributors, future growth trends and opportunities in certain markets, thedevelopment, introduction and capabilities of new products, future sales of ourproducts outside the United States, the increasing competition in our industry,the continued importance of the mobile phone market to our business, continuedprice competition and the consequent reduction in the average selling prices ofour products, future expenses we expect to incur, our future investments, ourworking capital requirements in fiscal 2009 and thereafter, the effect ofa change in foreign currency rates, and the sufficiency of our available cash,cash equivalents and short-term investments are based on current expectationsand are subject to important factors that could cause actual results to differmaterially from those projected in the forward-looking statements. Such important factors include, butare not limited to, those set forth under the caption “Item 1A. RiskFactors,” beginning on page 49 of this Quarterly Report and elsewhere inthis Quarterly 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 and OmniPixel are registered trademarks ofOmniVision Technologies, Inc. CameraChip, OmniBSI, OmniPixel2,**OmniPixel3, OmniPixel3-HS, OmniQSP, OmniVision, SquareGA**and TrueFocus aretrademarks of OmniVision Technologies, Inc. Wavefront Coded is aregistered trademark of**OmniVision CDM Optics, Inc.,a wholly-owned subsidiary of OmniVision Technologies, Inc. WavefrontCoding is a trademark of OmniVision CDM Optics, Inc.*

 

**Overview**

 

We design, develop andmarket high performance, highly integrated and cost efficient semiconductorimage-sensor devices. Our main products, image-sensing devices which we referto by the name CameraChipTM image sensors, capture an image electronically andare used in a number of consumer and commercial mass-market applications. OurCameraChip image sensors are manufactured using the complementary metal oxidesemiconductor, or CMOS, fabrication process and are predominantly single-chipsolutions that integrate several distinct functions including image capture,image processing, color processing, signal conversion and output of a fullyprocessed image or video stream. We believe that our highly integrated imagesensors enable camera device manufacturers to build high quality cameraproducts that are smaller, less complex, more reliable, more cost effective andmore power efficient than cameras using traditional charge-coupled devices, orCCDs.

 

## ***Technology***

## *** ***

In August 2004, weannounced the introduction of our OmniPixel® technology. In September 2005,we announced the introduction of our OmniPixel2TM architecture. The OmniPixel2architecture, which is based on a 2.2 μm x 2.2 μm pixel and uses a0.13 μm process geometry, is less than half the size of the OmniPixelarchitecture introduced in 2004, but with improved performance.

 

In February 2007, weintroduced our first TrueFocusTM camera with Wavefront CodingTM technology forthe mobile phone market. Our patented Wavefront Coding technology is a methodof optically encoding light using a special lens to form an intermediate imageon the image sensor, and decoding this intermediate image with digitalprocessing to create a picture that is in focus across virtually the entireimage. TrueFocus technology is designed to provide ‘point-and-shoot’ capabilityto our customers with a product that effectively targets the mobile phonemarket by being small, durable, easy to manufacture and cost-competitive.

 

In May 2007, weannounced the introduction of our OmniPixel3TM architecture. The OmniPixel3architecture is based on a 1.75 μm x 1.75 μm pixel and a 0.11 μmprocess geometry which further reduced the size of a given image-sensor arraywithout any reduction in image quality.

 

27

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

 

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

 

In May 2008,we announced a new approach to CMOS image sensor design we call OmniBSITMtechnology. OmniBSI technology is based on an idea called back side illumination, or BSI. Ourfirst OmniBSI product, an 8-megapixel image sensor is built using an advanced1.4 μm pixel, and we believe we are the first image sensor company toannounce a viable process for the mass production of BSI sensors.

 

All traditionallydesigned CMOS image sensors capture light on the front side of the chip, so thephoto-sensitive portion has to share the surface of the image sensor with themetal wiring of the transistors in the pixel and the metal wiring acts to limitthe amount of image light that reaches the photo-sensitive portion of the imagesensor. With our new OmniBSI architecture, the image sensor receives lightthrough the back side of the chip. As a result, there is no metal wiring toblock the image light, and the entire backside of the image sensor can bephoto-sensitive. Not only does this enable us to produce a superior image, italso permits the front of the chip surface area to be devoted entirely toprocessing, and permits an increase in the number of metal layers, both ofwhich result in greater functionality.

 

In addition toincreasing the amount of light the image sensor can collect, our OmniBSIarchitecture significantly increases the quantum efficiency and reduces thecross talk of the sensor. Increasing the quantum efficiency increases thequality of the sensor’s color reproduction. Reducing cross talk reduceselectrical noise, which produces sharper images and better color.

 

Capturing light onthe back side of the image sensor also allows us to reduce the distance thelight has to travel to the pixels, and thus provide a wider angle of lightacceptance. Widening the angle of acceptance in turn makes it possible toreduce the height of the camera module, and thus the height of the device whichincorporates the camera.

 

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

 

## ***New Products***

## *** ***

In January 2008, weintroduced two new products. The first, the OV9710, is our first truehigh-definition, or HD, video CameraChip image sensor for mobile phone andnotebook computer markets. The OV9710 is a 1-megapixel CMOS image sensor builtwith our proprietary OmniPixel3 architecture and a 3 μm x 3 μm pixelfor optimal low-light sensitivity and high-quality HD video performance at30 frames per second, or FPS. We designed the OV9710 specifically to meetall mobile phone (1280 x 720 pixels) and notebook and personal computer (1280 x800 pixels) market requirements in terms of performance, quality, reliabilityand power consumption.

 

The second new product isthe OV7725. The 1⁄4-inch OV7725 is built with a 6 μm x 6 μm pixel to deliverthe ultra-high light sensitivity required for the low light conditions in whichmost consumers use their notebook computers. The OV7725 is a highly integratedCameraChip image sensor that provides the full functionality of a VGA cameraand image processor on a single chip. A unique feature of the OV7725 is itshigh chief ray angle which allows for a reduction in module height, a criticalelement in building cameras that can fit in today’s thin notebook computers. Asecond highlight of the OV7725 is its ability to operate at 60 FPS, in VGAmode, or 120 FPS in quarter VGA, or QVGA, for optimal performance innotebook and personal computer and gaming applications.

 

In February 2008, weintroduced two additional new products. The first, the OV3642, is a 1⁄4-inch,3-megapixel CameraChip image sensor with extended depth of field technologyembedded on-chip. The fully integrated OV3642 is built with our newOmniPixel3-HS technology and offers best-in-class low light performance.Additionally, the OV3642 incorporates our most advanced ISP technologyresulting in increased picture clarity and sharpness.

 

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The second new product isthe OV7690, a VGA CameraChip image sensor with a 1/13-inch form factor. TheOV7690’s new 1.75 μm OmniPixel3-HS architecture combined with a unique,non-linear micro lens shift technology allows for a significant reduction indistance between the image sensor and the lens, and thus enables us tosignificantly reduce the module height while maintaining high levels of image qualityand camera performance. The result is an ultra-thin camera module of just4.5 mm x 4.5 mm and a height of only 2.8 mm, a criticaldimension both for slim mobile phones and for notebook computer applicationswhere the camera module can be no thicker than the LCD housing.

 

In May 2008, weintroduced two new products. The first, the OV5630, is a 1/3-inch, 5-megapixelCameraChip image sensor targeted at the mobile phone market. The OV5630 isbased on the OmniPixel3-HS architecture, enabling quality low-light imagecapture with low-light sensitivity of 960 mV/(Lux-sec). The OV5630 also outputsdata in full 5-megapixel resolution at 15 FPS, and records 720p HD videoat 60 FPS, or 1080p at 30 FPS. In QVGA resolution, the OV5630 canoutput data at 120 FPS, ideal for slow motion preview. For the fast transfer ofimage data, the OV5630 is outfitted with a two-lane, high-speed MIPI interface.This enables mobile phone makers to use the OV5630’s parallel interface asinput for a secondary camera, while alternately providing output via the MIPIinterface.

 

In May 2008, we alsointroduced the OV5633, another 1/3-inch 5-megapixel CameraChip image sensor.This image sensor has all of the same functionality as the OV5630, but employsa different chief ray angle to suit the specific lens requirements of the DSCmarket.

 

In June 2008, weintroduced the OV3647, a 1⁄4-inch 3-megapixel image sensor that supports themobile display digital interface, or MDDI. The OV3647 is also equipped with astandard parallel interface which has the unique ability to act as an input fora secondary camera, so it can share the MDDI interface while also functioningas an MDDI hub. Sharing the MDDI reduces the number of interconnects to theBaseband processor, which increases reliability, reduces power consumption andenables rapid two-way data transfer. Sharing the MDDI also eliminates highfrequency electro-magnetic interference, or EMI, issues, which often haveadverse effects on system performance. The OV3647 is small enough to enable 7 x7 x 5 mm camera modules with a very short optical track, and thus is versatileenough to work well both with fixed focus and auto-focus modules. The OV3647’sembedded, one-time programmable memory is designed for part recognition andsimplification of module designs using different lenses. In addition totargeting the mobile phone market, the OV3647 is well-suited to applications inthe digital still camera, or DSC, notebook and personal computer and toysectors.

 

In September 2008,we introduced two devices based on our 1.4 micron OmniBSI architecture. TheOmniBSI technology delivers best-in-class low light sensitivity, greaterquantum efficiency and significantly reduced cross-talk, which allows ourcustomers to introduce cameras that deliver sharper images across broaderlighting conditions, with more vibrant, true-to-life colors. Additionally theOmniBSI architecture’s wide angle of light acceptance is designed forultra-thin camera modules for the next-generation mobile phones and otherproduct applications.

 

The first OmniBSI deviceintroduced, the OV8810, is a 1/3-inch, 8-megapixel CameraChip image sensortargeted at the mobile phone market. The device is small enough to fit withinan 8.5 x 8.5 x 7 mm camera module and outputs data in full 8-megapixel resolutionat 10 fps, and records 720p HD video at 60 fps, or 1080p at30 fps. In QVGA resolution, the OV8810 can output data at 120 fps, idealfor slow motion preview. For fast transfer of image data, the OV8810 isoutfitted with a parallel interface and a two-lane, high-speed MIPI interface.This enables mobile phone makers to use the OV8810’s parallel interface asinput for a secondary camera, while alternately providing output via the MIPIinterface.

 

The second OmniBSIproduct, the OV5642, is a 1⁄4-inch, 5-megapixel fully integrated system-on-chip(SOC) image sensor with integrated TrueFocus ISP, our most advanced ISPtechnology. The TrueFocus ISP increases picture clarity and sharpness andoffers extended depth of field, or EDoF, capabilities.  EDoF enables customers to utilize fixed focuslenses which reduces overall cost of their camera modules.  The OV5642 can output video in fullresolution at 15 fps, supports 720p HD video at 60 fps and 1080p at 30 fps.  An integrated JPEG compression enginesimplifies data transfer for bandwidth limited interfaces.  For fast transfer of image data, the OV5642has a two-lane, high-speed MIPI interface.

 

In October 2008, weannounced that the 1⁄4”, all digital OV7710 VGA CameraChip sensor is in volumeproduction and has shipped to multiple top-tier automotive customers.

 

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## ***Joint Venture with TSMC***

 

In October 2003, weentered into a Shareholders’ Agreement, or the VisEra Agreement, with TaiwanSemiconductor Manufacturing Company Limited, or TSMC, pursuant to which weagreed with TSMC to form VisEra Technologies Company, Ltd., or VisEra, a jointventure in Taiwan. VisEra’s mission is to provide back-end manufacturingservices. In connection with the formation of VisEra, both TSMC and we enteredinto separate nonexclusive license agreements with VisEra pursuant to whicheach party licenses certain intellectual property to VisEra relating tomanufacturing services. The VisEra Agreement also provided that once VisEra hadacquired the capability to deliver high quality manufacturing services, wewould be committed to direct a substantial portion of our requirements in theseareas to VisEra, subject to pricing and technology requirements. Both TSMC andwe have also committed not to compete directly or indirectly with VisEra in theprovision of certain manufacturing services. Historically, we have relied onTSMC to provide us with a substantial proportion of our wafers. As a part ofthe VisEra Agreement, TSMC agreed to commit substantial wafer manufacturingcapacity to us in exchange for our commitment to purchase a substantial portionof our wafers from TSMC, subject to pricing and technology requirements.

 

In August 2005, weentered into an Amended and Restated Shareholders’ Agreement with TSMC, or theAmended VisEra Agreement, under which the parties reaffirmed their respectivecommitments to VisEra, expanded the scope of and made certain modifications tothe VisEra Agreement. Under the Amended VisEra Agreement, the parties agreed toraise the total capital committed to the joint venture from $50.0 millionto $68.0 million. The $18.0 million increase was designatedprincipally for the acquisition from unrelated existing shareholders ofapproximately 29.6% of the issued share capital of XinTec, Inc., orXinTec, a Taiwan-based provider of chip scale packaging services, of which wedirectly owned approximately 7.8% at that time. In fiscal 2006, VisErainvested an additional $0.5 million and we invested an additional $130,000in XinTec as our portion of an additional capital injection to enable XinTec toexpand its production capacity. As a result of the increase in our beneficialinterest in XinTec due to VisEra’s investment in XinTec duringfiscal 2006, we accounted for our investment in XinTec under the equitymethod. In January 2007, TSMC, through the purchase of approximately90,500,000 previously unissued shares, acquired a controlling interest inXinTec. As a result of TSMC’s investment, our direct ownership percentage inXinTec declined from 7.8% to 4.4% and VisEra’s ownership percentagedeclined from 29.6% to 16.9%. Due to the reduction in our ownership percentagein XinTec and the deconsolidation of VisEra described below, effective January 1,2007, we began to account for our interest in XinTec under the cost method.

 

As a result of theadditional investment that TSMC and we made in VisEra under the Amended VisEraAgreement, TSMC’s and our interest each increased from 25.0% to 43.0%, andconsequently we re-evaluated our accounting for VisEra in accordance withFinancial Accounting Standards Board, or FASB, Interpretation No. 46(revised December 2003), or FIN 46(R), *“Consolidationof Variable Interest Entities.”* We concluded that, as a result ofour step acquisition of VisEra and because substantially all of the activitiesof VisEra either involved or were conducted on our behalf, VisEra was avariable interest entity, or VIE. Since we were the source of virtually all ofVisEra’s revenues, we had a decisive influence over VisEra’s profitability.Accordingly, we considered ourselves to be the primary beneficiary of the jointventure, and in the quarter which ended in October 2005, we began toinclude VisEra’s financial results in our consolidated financial statements. Inthe quarter ended January 2006, we increased our interest in VisEra from43.0% to 46.0% through purchases of unissued shares. In January 2006,pursuant to the Amended VisEra Agreement, VisEra purchased from TSMC theequipment used for applying color filters and micro-lenses to wafers, andVisEra is now providing the related processing services that we previouslypurchased from TSMC. In November 2006, we invested $6.1 million inVisEra as our portion of an additional cash or asset contribution to be made byTSMC and us under the then current Amended VisEra Agreement.

 

Effective January 1, 2007,by mutual agreement, we assumed responsibility for the logistics managementservices previously provided to us by VisEra. As a consequence, we concludedthat we were no longer the primary beneficiary of the joint venture and thatVisEra had ceased to be a VIE, as defined under FIN 46(R). As a result, wedeconsolidated VisEra as of the date of the change. As a consequence of thedeconsolidation, effective January 1, 2007, we account for our investmentin VisEra under the equity method. The deconsolidation of VisEra did not have amaterial effect on our reported revenue or reported net income forfiscal 2007 or 2008. See Note 5 – “*Long-termInvestments”*to our consolidated financial statements.

 

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In January 2007, weand TSMC also signed an amendment to the Amended VisEra Agreement to providefor an increase in VisEra’s manufacturing capacity. Under the amendment, we andTSMC each made an additional $27.0 million investment in VisEra in April 2007.In April 2008, VisEra substantially completed the relocation and expansionof its capacity at a newly constructed manufacturing facility in Taiwan.

 

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

## *** ***

In May 2004, weentered into an agreement with Powerchip Semiconductor Corporation, or PSC, toestablish the joint venture called Silicon Optronics, Inc., or SOI. Thepurpose of SOI is to conduct manufacturing, marketing and selling of certain ofour legacy products.

 

In March 2005, weassumed control of the board of directors of SOI and we have consolidated SOIsince April 30, 2005. SOI also issued shares to its employees in July 2006,with an estimated fair value of $459,000 which caused our ownership percentageto decline from 49.0% to 46.6%. In April 2007, SOI became listed on theTaiwan GreTai Securities Market, or TGSM. The TGSM is the approximateequivalent in Taiwan of the Over-The-Counter market in the United States. Inconjunction with the TGSM listing, various employees of SOI exercised theiroptions and increased the number of shares outstanding. From time to time, SOIalso issues shares to its employees as a bonus which further dilutes ourownership percentage. As of October 31, 2008, we owned 43.9% of SOI. SeeNote 6 – “*ConsolidatedAffiliate – Silicon Optronics, Inc.”*andNote 17 – “*Related Party Transactions”*to our condensed consolidated financial statements.

 

## ***Acquisition of CDM***

## *** ***

In April 2005, wecompleted the acquisition of OmniVision CDM Optics, Inc., or CDM, formerlyCDM Optics, Inc. CDM is the exclusive licensee from an affiliate of theUniversity of Colorado of a patented technology, known as Wavefront Codingtechnology that increases the performance of an imaging system by substantiallyincreasing the depth of field and/or correcting optical aberrations within theimage. We expect that it will significantly reduce the size and complexity ofthe auto-focus function on future camera modules utilizing our image sensors.Because the image is always in focus, Wavefront Coding technology alsoeliminates the time-delay inherent in conventional auto or manually focusedcamera systems. The closing consideration for the acquisition consisted of$10.0 million in cash and approximately 515,000 shares of our commonstock. In addition, we are obligated to pay $10.0 million in cash upon thesale, prior to the end of April 2009, of a pre-determined number ofrevenue-producing products incorporating CDM’s technology.

 

In the three months endedOctober 31, 2006, we adjusted “Goodwill” related to our acquisition of CDMby $2.6 million. The adjustment was related, in part, to a put option thatexpired during the quarter with respect to the 147,000 shares held inescrow, 145,000 of which were put to us for cash totaling $2.8 million.The other part of the increase related to the value of the initial shares thatwe issued as part of the CDM acquisition. These shares were also subject to aput option, an option that expired unexercised subsequent to their originalissuance. Both amounts should have been recorded as part of the initialacquisition of CDM.

 

During the second quarterof fiscal 2009, we performed our “Goodwill” impairment analysis inaccordance with Statement of Financial Accounting Standards, or SFAS,SFAS No. 142, *“Goodwill and OtherIntangible Assets,”*or SFAS No. 142, and SFAS No. 144,*“Accounting for the Impairment or Disposal ofLong-Lived Assets*,*”* or SFAS No. 144.The reduction of our market capitalization and the current economic downturnprompted our management to perform such analysis. From the analysis, werecorded a full impairment of $7.5 million of the “Goodwill” related to ouracquisition of CDM.

 

## ***Capital Resources***

## *** ***

As of October 31,2008, we held approximately $238.9 millionin cash and cash equivalents and approximately $43.8 million in short-term investments. To mitigate marketrisk related to short-term investments, we have an investment policy designedto preserve the value of capital and to generate interest income from theseinvestments without material exposure to market fluctuations. Market risk isthe potential loss due to the change in value of a financial instrument as aresult of changes in interest rates or bond prices, and changes in marketliquidity and in the pricing of risk. Our policy is to invest in financialinstruments with short maturities, limiting interest rate exposure, and tomeasure performance against comparable benchmarks. We maintain our portfolio ofcash equivalents and short-term investments in a variety of securities,including both government and corporate obligations with ratings of “A” orbetter and money market funds. We do not believe that the value of our cash andshort-term investments will be significantly affected by recent instability inthe global financial markets.

 

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In June 2005, ourboard of directors authorized us to use up to $100 million of ouravailable cash under an open-market program to repurchase our common stock. Atthe expiration of the program in June 2006, we had cumulativelyrepurchased 5,870,000 shares of our common stock for an aggregate cost ofapproximately $79.6 million.

 

In February 2007,our board of directors approved an additional stock repurchase program thatprovides for the repurchase of up to $100 million of our outstandingcommon stock. Subject to applicable securities laws, such repurchases will beat times and in amounts as we deem appropriate, based on factors such as marketconditions, legal requirements and other corporate considerations. As of October 31,2008, we had cumulatively repurchased 6,671,000 shares of our common stockunder this open-market program for an aggregate cost of approximately$99.1 million. See Note 14 –* “Treasury Stock”*to ourcondensed consolidated financial statements.

 

## ***Current Economic Environment***

## *** ***

We operate in achallenging economic environment that has undergone significant changes intechnology and in patterns of global trade. We remain a leader in thedevelopment and marketing of image sensing devices based on the CMOSfabrication process and have benefited from the growing market demand for andacceptance of this technology.

 

Recently, generaldomestic and global economic conditions have been negatively impacted byseveral factors, including, among others, the subprime-mortgage crisis in thehousing market, going concern threats to investment banks and other financialinstitutions, reduced corporate spending, and decreased consumer confidence.These economic conditions have resulted in our facing one of the mostchallenging periods in our history. The image sensor market has been negativelyimpacted by the current global economic environment. In particular, we believethe current economic conditions have reduced spending by consumers andbusinesses in markets into which we sell our products. End customer demand hasdecreased significantly throughout the industry, affecting all consumerelectronic products, security products and products for the automotiveindustry.  Consequently, the overalldemand for image sensors has also decreased. This decrease in demand is havinga significant impact on our business. Our revenues for the three-month periodended October 31, 2008 were lower than similar historical periods. Inaddition, the current global economic environment has negatively impacted ourbusiness outlook and we expect that our revenues in the three-month periodending January 31, 2009, will be significantly lower than our reportedrevenues for the three-month period ended October 31, 2008.

 

These conditions couldalso have a number of additional effects on our business, including insolvencyof key suppliers resulting in product delays, inability of customers to obtaincredit to finance purchases of our products, customer insolvencies, andincreased difficulty in us accurately forecasting product demand and planningfuture business activities. It is uncertain how long the current economicconditions will last or how quickly any subsequent economic recovery willoccur. If the economy or markets into which we sell our products continue toslow or any subsequent economic recovery is slow to occur, our business,financial condition and results of operations could be further materially andadversely affected.

 

## ***Market Environment***

## *** ***

We sell our productsworldwide directly to original equipment manufacturers, or OEMs, which includebranded customers and contract manufacturers, and value added resellers, orVARs, and indirectly through distributors. In order to ensure that we addressall available markets for our image sensors, we organize our marketing effortsinto end-use market groups, each of which concentrates on a particular productor, in some cases, customer within a product group. Thus we have marketingteams that address the mobile phone market, the notebook and personal computermarket, the DSC, market, the security and surveillance market, the toys andgames market, and the automotive and medical markets.

 

In the mobile phonemarket in particular, future revenues depend to a large extent on design winswhere, on the basis of an exhaustive evaluation of available products, aparticular mobile phone maker determines which image sensor to design into oneor more specific models. The time lag between design win and volume shipmentsvaries from as little as three months to as much as twelve months, which couldcause an unexpected delay in generating revenues, especially during periods ofproduct transitions. Design wins are also an important driver in the many othermarkets that we address, and in some cases, such as automotive or medicalapplications, the time lag between a particular design win and first revenuecan be longer than one year.

 

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The overwhelming majorityof sales of our products depend on decisions by the engineering designers formanufacturers of products that incorporate image sensors to specify one of ourproducts rather than one made by a competitor. In most cases, the decision tospecify a particular image sensor requires conforming other specifications ofthe product to the chosen image sensor and makes subsequent changes bothdifficult and expensive. Accordingly, the ability to timely produce and deliverreliable products in large quantities is a key competitive differentiator.Since our inception, we have shipped more than one billion CameraChip imagesensors, including approximately 215 million in the six months ended October 31,2008. We believe that these quantities demonstrate the capabilities of ourproduction system, including our sources of offshore fabrication.

 

We currently outsourcethe wafer fabrication and packaging of our image-sensor products to thirdparties. We outsource the color filter and micro-lens phases of production toan investee joint venture company. This approach allows us to focus ourresources on the design, development, marketing and testing of our products andsignificantly reduces our capital requirements.

 

To increase and enhanceour production capabilities, we work closely with TSMC, our principal wafersupplier and one of the largest wafer fabrication companies in the world, toincrease, as necessary, the number of its fabrication facilities, at which ourproducts can be produced. VisEra, our joint venture with TSMC, and ourinvestments in three key back-end packaging suppliers are part of a broadstrategy to ensure that we have sufficient back-end capacity for the processingof our image sensors in the various formats required by our customers. In January 2007,we and TSMC each invested an additional $27.0 million in VisEra for itsmanufacturing capacity expansion. In April 2008, VisEra substantiallycompleted the relocation and expansion of its capacity at a newly constructedmanufacturing facility in Taiwan. Separately, TSMC purchased90,526,000 shares from XinTec to enable XinTec to expand its capacity. In February 2007,we also entered into a foundry manufacturing agreement with PSC.

 

We currently perform thefinal testing of the majority of our products at our own facility in China. Weare currently expanding our testing capacity, as well as our overall capabilityto design more custom products for our customers. As necessary, we will makefurther investments to ensure that we have sufficient production capacity tomeet the demands of our customers.

 

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

 

Many of the productsusing our image sensors, such as mobile phones, notebook and personalcomputers, DSCs and cameras for toys and games, are consumer electronics goods.These mass-market camera devices generally have seasonal cycles whichhistorically have caused the sales of our customers to fluctuatequarter-to-quarter. Historically, demand from OEMs and distributors that servesuch consumer product markets has been stronger in the second and thirdquarters of our fiscal year and weaker in the first and fourth quarters of ourfiscal year. However, because of the current economic downturn, we expect tosee declines in all of these markets in the third quarter of fiscal 2009. Inaddition,****since a very large number of themanufacturers who use our products are located in China, Hong Kong and Taiwan,the pattern of demand for our image sensors has been increasingly influenced bythe timing of the extended lunar or Chinese New Year holiday, a period in whichthe factories which use our image sensors generally close. We believe that themarket opportunity represented by mobile phones remains very large, althoughthe opportunities presented will be deferred until the current global economicconditions improve.

 

We also believe that,like the DSC market, mobile phone and notebook and personal computer demandwill not only continue to shift toward higher resolutions, but also willincreasingly fragment into multiple resolution categories. In addition, thereis increased demand for customization, and several different interfacestandards are coming to maturity. All of these trends will require thedevelopment of an increasing variety of products.

 

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As the markets for imagesensors have grown, we have experienced competition from manufacturers of CMOSand CCD image sensors. Our principal competitors in the market for CMOS imagesensors include Hynix, Kodak, Micron, Samsung, Sharp, Sony, ST Microelectronicsand Toshiba. We expect to see continued price competition in the image-sensormarket for mobile phones, notebook and personal computers and digital camerasas those markets continue to grow. Although we believe that we currentlycompete effectively in those markets, our competitive position could beimpaired by companies that have greater financial, technical, marketing, manufacturingand distribution resources, broader product lines, better access to largecustomer bases, greater name recognition, longer operating histories and moreestablished strategic and financial relationships than we do. Such companiesmay be able to adapt more quickly to new or emerging technologies and customerrequirements or devote greater resources to the promotion and sale of theirproducts. Many of these competitors ownand operate their own fabrication facilities, which in certain circumstancesmay give them the ability to price their products more aggressively than we canor may allow them to respond more rapidly than we can to changing marketopportunities.

 

In addition, from time totime, other companies enter the CMOS image sensor market by using obsolete andavailable manufacturing equipment. While these efforts have rarely had anylong-term success, the new entrants do sometimes manage to gain market share inthe short term by pricing their products significantly below current market levelswhich puts additional downward pressure on the prices we can obtain for ourproducts.

 

In common with many othersemiconductor products and as a response to competitive pressures, the averageselling prices, or ASPs, of image-sensor products have declined steadily sincetheir introduction, and we expect ASPs to continue to decline in the future.Accordingly, in order to maintain our gross margins, we and our suppliers haveto work continuously to lower our manufacturing costs and increase ourproduction yields, and in order to maintain or grow our revenues, we have toincrease the number of units we sell by a large enough amount to offset theeffect of declining ASPs. In addition, if we are unable to timely introduce newproducts that can take advantage of smaller process geometries or new productsthat incorporate more advanced technology and include more advanced featuresthat can be sold at higher ASPs, our gross margin will decline.

 

As part of our ongoingefforts to achieve both higher resolutions and smaller chip sizes, we initiatedmass production volumes of our OmniPixel3 sensors with 0.11 μm processtechnologies in January 2008. Given the rapidly changing nature of ourtechnology, there can be no assurance that we will not encounter delays orother unexpected yield issues with future products. During the early stages ofproduction, production yields and gross margins for new products are typicallylower than those of established products. We can encounter unexpectedmanufacturing issues, such as unexpected back-end yield problems. In addition,in preparation for new product introductions, we gradually decrease productionof established products. Due to our 12-14 week production cycle, it isextremely difficult to predict precisely how many units of established productswe will need. It is also difficult to accurately predict the speed of the rampof new products. Given the current economic downturn, the visibility of ourbusiness outlook is extremely limited and forecasting is even more difficultthan under normal market conditions. As a result, it is possible that we couldsuffer from shortages for certain products and build inventories in excess ofdemand for other products. We carefully consider the risk that our inventoriesmay be excess to expected future demand and record appropriate reserves. If, assometimes happens, we are subsequently able to sell these reserved products,the sales have little or no associated cost and consequently they have afavorable impact on gross margins.

 

## ***Sources of Revenues***

## *** ***

We generate almost allour revenue by selling our products directly to OEMs and VARs and indirectlythrough distributors. For accounting purposes, we treat sales to OEMs and VARsas one source of revenue, and sales to distributors as another and our revenuerecognition policies for the two groups are different. In general, we sell toour customers on FOB shipping point or FCA terms.

 

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

 

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

 

In order to determinewhether collection is probable, we assess a number of factors, including ourpast transaction history with the customer and the creditworthiness of thecustomer. If we determine that collection is not reasonably assured, we deferthe recognition of revenue until collection becomes reasonably assured or uponreceipt of payment.

 

In addition, we recognizerevenue from the performance of services to a limited number of our customersby our wholly-owned subsidiary, CDM. We recognize the CDM-associated revenueunder either the completed-contract or the percentage-of-completion methods.The percentage-of-completion method of accounting is used for costreimbursement-type contracts, where revenues recognized are that portion of thetotal contract price equal to the ratio of costs expended to date to theanticipated final total costs based on current estimates of the costs tocomplete the projects. CDM-associated revenue has not been material in any ofthe periods presented.

 

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

 

For a discussionof our critical accounting policies, please refer to the discussion in ourAnnual Report on Form 10-K for the fiscal year ended April 30, 2008.Other than for policies that are related to the issuance of performance sharesunder SFAS No. 123(R), there have been no material changes in any of ourcritical accounting policies since April 30, 2008.

 

*Stock-BasedCompensation Expense for Performance Shares*

 

In September 2007,our stockholders approved the 2007 Equity Incentive Plan, or the2007 Plan. See Note 12 — “*EmployeeStock Purchase, Equity Incentive and Stock Option Plans”* to ourcondensed consolidated financial statements. In July 2008, as allowed bythe 2007 Plan, we granted performance share awards to certain employees. Thenumber of shares that an employee actually earns under the awards is based onOmniVision’s achievement of certain corporate performance goals at the end of aone-year performance period. The number of earned performance shares that anemployee is eligible to receive may be reduced depending on such employee’sindividual performance. As required by SFAS No. 123(R), when we record thestock-based compensation expense for such awards that carry performancecontingencies, we have to estimate the probable outcome at the end of theperformance period. Furthermore, we have to adjust the cumulative compensationexpense recorded when probable outcome for the performance-based shares issubsequently updated for changes in facts and circumstances.

 

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

 

**Resultsof Operations**

 

The following table setsforth the results of our operations as a percentage of revenues. Our historicaloperating results are not necessarily indicative of the results we can expectfor any future period.

 
| ** **                                               | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                      | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                                 |       | 100.0                                         | %          | 100.0                                            | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                         |       | 75.0                                          |       | 74.8                                             |       | 74.9 |   | 75.5 |   |
| Gross margin                                             |       | 25.0                                          |       | 25.2                                             |       | 25.1 |   | 24.5 |   |
| Operating  expenses:                                     |       |                                          |       |                                             |       |   |   |   |   |
| Research,  development and related                       |       | 14.2                                          |       | 8.7                                              |       | 12.9 |   | 9.3 |   |
| Selling, general  and administrative                     |       | 10.3                                          |       | 6.8                                              |       | 10.1 |   | 7.6 |   |
| Goodwill  impairment                                     |       | 4.6                                           |       | —                                           |       | 2.2 |   | — |   |
| Total operating  expenses                                |       | 29.1                                          |       | 15.5                                             |       | 25.2 |   | 16.9 |   |
| Income (loss)  from operations                           |       | (4.1                                          | )          | 9.7                                              |       | (0.1 | ) | 7.6 |   |
| Interest income,  net                                    |       | 0.3                                           |       | 1.4                                              |       | 0.5 |   | 1.6 |   |
| Other expense,  net                                      |       | (0.5                                          | )          | (0.1                                             | )          | (0.2 | ) | — |   |
| Income (loss)  before income taxes and minority interest |       | (4.3                                          | )          | 11.0                                             |       | 0.2 |   | 9.2 |   |
| Provision for  (benefit from) income taxes               |       | (0.9                                          | )          | 2.2                                              |       | — |   | 0.9 |   |
| Minority  interest                                       |       | (0.2                                          | )          | —                                           |       | (0.1 | ) | — |   |
| Net income  (loss)                                       |       | (3.2                                          | )%         | 8.8                                              | %          | 0.3 | % | 8.3 | % |

 

*ThreeMonths Ended October 31, 2008 as Compared to Three Months Ended October 31,2007*

 

### **Revenues**

### ** **

We derive substantiallyall of our revenues from the sale of our image-sensor products for use in awide variety of consumer and commercial mass-market applications includingmobile phones, notebooks and personal computers, security and surveillancecameras, DSCs, interactive video and toy cameras, and automotive and medicalproducts. Revenues for the three months ended October 31, 2008 decreasedby 29.5% to approximately $163.9 million from $232.6 million for thethree months ended October 31, 2007. The decrease in revenues was due to adecline in unit sales of our image-sensor products, primarily for mobilephones, and notebooks and personal computers, combined with a decline in ourASPs, partially offset by favorable changes in product mix. Due to the globaleconomic downturn, we expect our revenues for the three months ending January 31,2009 to be significantly lower than the revenues for the three months ended October 31,2008. Visibility beyond January 31, 2009 is extremely limited.

 

## ***Revenuesfrom Sales to OEMs and VARs as Compared to Distributors***

## *** ***

We sell our image-sensorproducts either directly to OEMs and VARs or indirectly through distributors.The percentage of revenues from sales to OEMs and VARs was lower in the threemonths ended October 31, 2008 than in the prior-year period. Weexpect that the percentage of revenues from sales through OEMs and VARs willvary from year to year in response to changes in the make-up of our customerlist, but that it will continue to represent a majority of our revenues. Thegross margin that we earn on sales to OEMs and VARs or through distributors isnot significantly different. The following table shows the percentage ofrevenues from sales to OEMs and VARs and distributors in the three months endedOctober 31, 2008 and 2007:

 
| ** **    | ** ** | **Three Months Ended  October 31,** | ** ** |
|---------------|------------|----------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| OEMs and VARs |       | 60.0                                               | %          | 68.5 | % |
| Distributors  |       | 40.0                                               |       | 31.5 |   |
| Total         |       | 100.0                                              | %          | 100.0 | % |

 

*OEMs and VARs.*  Inthe three months ended October 31, 2008, two OEM customers accounted forapproximately 11.3% and 10.2% of our revenues. In the three months ended October 31,2007, two OEM customers accounted for approximately 15.9% and 10.4% of ourrevenues. For the three months ended October 31, 2008 and 2007, no other OEMor VAR customer accounted for 10% or more of our revenues.

 

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

 

*Distributors.*  Inthe three months ended October 31, 2008, one distributor customeraccounted for approximately 26.2% of our revenues. In the three months ended October 31,2007, one distributor customer accounted for approximately 19.4% of ourrevenues. For the three months ended October 31, 2008 and 2007, no otherdistributor customer accounted for 10% or more of our revenues.

 

## ***Revenuesfrom Domestic Sales as Compared to Foreign Sales***

## *** ***

The *following*table shows the percentage of our revenues derived from sales of ourimage-sensor products to domestic customers as compared to foreign customersfor the three months ended October 31, 2008 and 2007:

 
| ** **     | ** ** | **Three Months Ended  October ****31,** | ** ** |
|----------------|------------|--------------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Domestic sales |       | 4.3                                                    | %          | 1.1 | % |
| Foreign sales  |       | 95.7                                                   |       | 98.9 |   |
| Total          |       | 100.0                                                  | %          | 100.0 | % |

 

We derive the majority ofour foreign sales from customers in Asia and, to a lesser extent, in Europe.Over time, our sales to Asia-Pacific customers have increased primarily as aresult of the continuing trend of outsourcing the production of consumer electronicsproducts to Asia-Pacific manufacturers and facilities and to the increasingmarkets in Asia for consumer products. Because of the preponderance ofAsia-Pacific manufacturers and the fact that virtually all productsincorporating our image-sensor products are sold globally, we believe that thegeographic distribution of our sales does not accurately reflect the geographicdistribution of sales into end-user markets of products which incorporate ourimage sensors.

 

### **GrossProfit**

### ** **

Our gross margin in the threemonths ended October 31, 2008 declined to 25.0% from 25.2% for the threemonths ended October 31, 2007. The principal contributor to the year-over-year decrease in gross margin is thedecline in our ASPs and the write-downof inventories which totaled approximately $9.2 million during the threemonths ended October 31, 2008, as compared to $7.7 million in thesimilar prior year period, partially offset by reductions in ourproduction costs. During the threemonths ended October 31, 2008,the ASPs of our products were lower than they were in the year-earlier period.The decline in ASPs was due, in part, to a general price decline due tocompetition and, in part, also to an increase in the proportion of salesrepresented by bare die, often referred to as chip-on-board, or COB, products,rather than packaged products. We recorded approximately $0.7 million in stock-basedcompensation expense to cost of revenues during the three-month period ended October 31,2008, in accordance with SFAS No. 123(R), as compared toapproximately $1.0 million in the prior fiscal year. Revenue fromsales of previously written-down products in the three months ended October 31,2008 was $1.1 million, as compared to $1.5 million during the sameperiod in the prior fiscal year.

 

**Research,Development and Related Expenses**

 

Research, development andrelated expenses consist primarily of compensation and personnel-relatedexpenses, non-recurring engineering costs related principally to the costs ofthe masks we buy when we release new product designs to the manufacturingfoundry, costs for purchased materials, designs, tooling, depreciation ofcomputers and workstations, and amortization of acquired intangibleintellectual property and computer aided design software. Because the number ofnew designs we release to the foundry can fluctuate from period to period,research, development and related expenses may fluctuate significantly.Research, development and related expenses for the three months ended October 31,2008 increased to approximately $23.2 million from approximately$20.2 million for the three months ended October 31, 2007. As apercentage of revenues, research, development and related expenses for thethree months ended October 31, 2008 and 2007 represented 14.2% and 8.7%,respectively.

 

The increase in research,development and related expenses of approximately $3.0 million, or15.0%, for the three months ended October 31, 2008 from the similarperiod in the prior year resulted primarily from a $1.4 million increasein salary and payroll-related expenses associated with salary increases and thehiring of additional personnel, a 

 

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

 

$0.8 million increasein non-recurring engineering expenses related to new product development, a$0.7 million increase in depreciation and amortization expenses ofacquired intangible assets and a $253,000 increase in patent-relatedexpenses, partially offset by a $227,000 decrease in stock-basedcompensation expense recognized in accordance with SFAS No. 123(R).We anticipate that our research, development and related expenses may decreaseas we implement certain cost reduction measures. This may be partially offsetby expenses incurred as we develop and introduce new products, including thoseemploying our OmniBSI technologies and as we develop other new technologiesrelated to image sensors.

 

**Selling, General andAdministrative Expenses**

 

Selling, general andadministrative expenses consist primarily of compensation and personnel relatedexpenses, commissions paid to distributors and manufacturers’ representativesand insurance and legal expenses. Selling, general and administrative expensesfor the three months ended October 31, 2008 increased to approximately$16.9 million from $15.8 million the three months ended October 31,2007. As a percentage of revenues, selling, general and administrative expensesfor the three months ended October 31, 2008 and 2007 represented 10.3% and6.8%, respectively.

 

The increase in selling,general and administrative expenses of approximately $1.1 million, or7.0%, for the three months ended October 31, 2008 from the similar periodin the prior year resulted primarily from a $468,000 increase in depreciationexpenses, a $392,000 increase in fees for outside services, a $321,000 increasein salary and payroll-related expenses associated with salary increases and thehiring of additional personnel, a $224,000 increase in office and facilityexpenses and a $221,000 increase in marketing expenses, partially offset by a$448,000 decrease in stock-based compensation expense recognized in accordancewith SFAS No. 123(R), a $383,000 decrease in legal and accountingexpenses, a $211,000 decrease in provisions for bad debts and a$107,000 decrease in commissions paid primarily to distributors and salesrepresentatives. We anticipate that our selling, general and administrativeexpenses will likely decrease as we implement certain cost reduction measures.

 

**Goodwill Impairment**

 

During the second quarterof fiscal 2009, based on a combination of factors, including the significantdecline in our market capitalization and the current global economic downturn,we concluded that there were sufficient factual circumstances for interimimpairment analyses under SFAS No. 142 and SFAS No. 144.  As a result, we performed interim impairmenttests on goodwill and certain other long-lived tangible and intangible assetsas of October 31, 2008. We then determined the fair value of theenterprise by using the present value technique, based in part, upon anindependent valuation. The fair value of the enterprise was reconciled to ouroverall market capitalization as of October 31, 2008. By comparing thefair value to net assets other than goodwill, we recorded a non-cash goodwillimpairment charge of $7.5 million, or 4.6% of revenues, which we includedin “Goodwill impairment” for the three months ended October 31, 2008.There was no similar goodwill impairment charge in the same period of the prioryear.

 

**Interest Income, Net**

 

We invest our cash, cashequivalents and short-term investments in interest-bearing accounts consistingprimarily of money market funds, commercial paper, certificates of deposit,high-grade corporate securities and government bonds. Interest income, net,declined to approximately $478,000 for the three months ended October 31,2008 from $3.3 million in the similar prior year period. The reduction ininterest income for the three months ended October 31, 2008 as compared tothe corresponding period in the prior year was the result of lower interestrates on interest-bearing accounts and a $0.7 million increase in interestexpense associated with long-term borrowings.

 

**Other Expense, Net**

 

Other expense, net, forthe three months ended October 31, 2008 totaled $0.9 million. Otherexpense, net, for the three months ended October 31, 2008, included a$0.6 million loss on the interest rate swap agreements related to themortgage on our complex of four buildings located in Santa Clara, California,or Santa Clara Property, a $0.7 million exchange loss, and a $140,000 lossthat represented our portion of the net loss recorded by ImPac Technology Co.,Ltd., or ImPac, which we account for under the equity method of accounting,partially offset by our $405,000 portion of the net income recorded by ChinaWLCSP Limited, or WLCSP, which we account for under the equity method ofaccounting. Other expense, net, for the three months ended October 31,2007 totaled $338,000. The amount for the three months ended October 31,2007 included a $0.8 million loss on the interest rate swap agreement anda $97,000 loss for the three months ended October 31, 2007 as our portionof the net loss recorded by ImPac. These losses were partially offset by a$0.5 million gain consisting of our portion of the net income recorded byWLCSP.

 

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

 

**Provision for Income Taxes**

 

We calculated the benefitfrom income taxes that we recorded for the three months ended October 31,2008 based on the actual effective tax rate for the six months ended October 31,2008.

 

We generatedapproximately $7.1 million in loss before income taxes and minorityinterest for the three months ended October 31, 2008 and$25.6 million in income before income taxes and minority interest for thethree months ended October 31, 2007. We recorded a benefit from incometaxes of approximately $1.5 million for the three months ended October 31,2008 and a provision for income taxes of approximately $5.2 million forthe three months ended October 31, 2007, resulting in effective tax ratesof 21.1% and 20.1% for the respective periods.

 

During the three monthsended October 31, 2008, the Emergency Economic Stabilization Act of 2008reinstated the U.S. federal research and development, or R&D, tax credit,retroactive to January 1, 2008. As a result, our benefit from income taxesfor the three months ended October 31, 2008 reflected a $0.6 million taxbenefit related to fiscal 2008 R&D expenses. Our benefit from income taxesfor the three months ended October 31, 2008 also reflected the unfavorableimpact of the $7.5 million goodwill impairment charge, partially offset bythe favorable impact of foreign exchange gains related to our unrecognized taxbenefits and the benefit from the fiscal 2009 U.S. federal R&D taxcredit.

 

**Minority Interest**

 

Minority interest for thethree months ended October 31, 2008 and 2007 was $(287,000) and $(15,000),respectively, which represents the 56.1% and 56.0%, respectively, interest thatwe did not own in the net loss of SOI.

 

*SixMonths Ended October 31, 2008 as Compared to Six Months Ended October 31,2007*

 

Revenues for the sixmonths ended October 31, 2008 decreased by 16.6% to approximately$338.2 million from $405.8 million for the six months ended October 31,2007. The decrease in revenues was due to a decrease in unit sales of ourimage-sensor products, primarily for mobile phones, and notebooks and personalcomputers and a decline in our ASPs.

 

## ***Revenuesfrom Sales to OEMs and VARs as Compared to Distributors***

## *** ***

We sell our image-sensorproducts either directly to OEMs and VARs or indirectly through distributors.The following table shows the percentage of revenues from sales to OEMs andVARs and distributors in the six months ended October 31, 2008 and 2007:

 
| ** **    | ** ** | **Six Months Ended  October 31,** | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| OEMs and VARs |       | 59.1                                             | %          | 66.8 | % |
| Distributors  |       | 40.9                                             |       | 33.2 |   |
| Total         |       | 100.0                                            | %          | 100.0 | % |

 

*OEMs and VARs.*  Inthe six months ended October 31, 2008, two OEM customers accounted forapproximately 10.7% and 10.0% of our revenues. In the six months ended October 31,2007, one OEM customer accounted for approximately 16.8% of our revenues. Forthe six months ended October 31, 2008 and 2007, no other OEM or VARcustomer accounted for 10% or more of our revenues.

 

*Distributors.*  Inthe six months ended October 31, 2008, one distributor customer accountedfor approximately 24.1% of our revenues. In the six months ended October 31,2007, one distributor customer accounted for approximately 20.9% of ourrevenues. For the six months ended October 31, 2008 and 2007, no otherdistributor customer accounted for 10% or more of our revenues.

 

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

 

## ***Revenuesfrom Domestic Sales as Compared to Foreign Sales***

## *** ***

The following table showsthe percentage of our revenues derived from sales of our image-sensor productsto domestic customers as compared to foreign customers for the six months endedOctober 31, 2008 and 2007:

 
| ** **     | ** ** | **Six Months Ended  October 31,** | ** ** |
|----------------|------------|--------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Domestic sales |       | 5.1                                              | %          | 1.0 | % |
| Foreign sales  |       | 94.9                                             |       | 99.0 |   |
| Total          |       | 100.0                                            | %          | 100.0 | % |

 

We derive the majority ofour foreign sales from customers in Asia and, to a lesser extent, in Europe.Over time, our sales to Asia-Pacific customers have increased primarily as aresult of the continuing trend of outsourcing the production of consumerelectronics products to Asia-Pacific manufacturers and facilities and to theincreasing markets in Asia for consumer products. Because of the preponderanceof Asia-Pacific manufacturers and the fact that virtually all productsincorporating our image-sensor products are sold globally, we believe that thegeographic distribution of our sales does not accurately reflect the geographicdistribution of sales into end-user markets of products which incorporate ourimage sensors.

 

### **GrossProfit**

### ** **

Our gross margin in thesix months ended October 31, 2008 was 25.1%, an increase from 24.5% forthe six months ended October 31, 2007. The principal contributor to the year-over-year increase in gross margin wasreductions in our production costs. Inthe six months ended October 31, 2008, in accordance with SFAS No. 123(R),we recorded approximately $1.6 million in stock-based compensation expenseto cost of revenues, as compared to $1.9 million in the six months ended October 31,2007.

 

Revenue from sales ofpreviously written-down products in the six months ended October 31, 2008was $3.6 million, as compared to $3.4 million during the same periodin the prior fiscal year. In the six months ended October 31, 2008, werecorded an allowance for excess and obsolete inventory totaling$11.6 million to cost of revenues as compared to $12.4 million duringthe same period in the prior fiscal year.

 

**Research,Development and Related Expenses**

 

Research, development andrelated expenses for the six months ended October 31, 2008 increased toapproximately $43.5 million from approximately $37.6 million for thesix months ended October 31, 2007. As a percentage of revenues, research, developmentand related expenses for the six months ended October 31, 2008 and 2007represented 12.9% and 9.3%, respectively.

 

The increase in research,development and related expenses of approximately $5.9 million, or15.7%, for the six months ended October 31, 2008 from the similarperiod in the prior year resulted primarily from a $2.1 million increasein salary and payroll-related expenses associated with salary increases and thehiring of additional personnel, a $1.4 million increase in non-recurring engineeringexpenses related to new product development, a $1.0 million increase indepreciation and amortization expenses of acquired intangible assets, a$0.5 million increase in patent-related expenses, a $406,000 increase inoffice and facility expenses and a $404,000 increase in stock-basedcompensation expense recognized in accordance with SFAS No. 123(R).

 

**Selling, General andAdministrative Expenses**

 

Selling, general andadministrative expenses for the six months ended October 31, 2008increased to approximately $34.3 million from $31.0 million for thesix months ended October 31, 2007. As a percentage of revenues, selling,general and administrative expenses for the six months ended October 31,2008 and 2007 represented 10.1% and 7.6%, respectively.

 

The increase in selling,general and administrative expenses of approximately $3.3 million, or10.7%, for the six months ended October 31, 2008 from the similar periodin the prior year resulted primarily from a $1.4 million increase insalary and payroll-related expenses associated with salary increases and thehiring of additional personnel, a 

 

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

 

$0.9 millionincrease in fees for outside services, a $0.5 million increase indepreciation expenses, a $481,000 increase in office and facility expenses, a$393,000 increase in commissions paid primarily to distributors and salesrepresentatives and a $212,000 increase in marketing expenses, partially offsetby a $0.8 million decrease in legal and accounting expenses, a$410,000 decrease in provisions for bad debts and a $207,000 decrease instock-based compensation expense recognized in accordance with SFAS No. 123(R).

 

**Goodwill Impairment**

 

During the second quarterof fiscal 2009, based on a combination of factors, including the significantdecline in our market capitalization and the current global economic downturn,we concluded that there were sufficient factual circumstances for interimimpairment analyses under SFAS No. 142 and SFAS No. 144. By comparingthe fair value to net assets other than goodwill, we recorded a non-cashgoodwill impairment charge of $7.5 million, or 2.2% of revenues, which we includedin “Goodwill impairment” for the six months ended October 31, 2008. Therewas no similar goodwill impairment charge in the same period of the prior year.

 

**Interest Income, Net**

 

Interest income for thesix months ended October 31, 2008 decreased to approximately$1.8 million from $6.7 million for the six months ended October 31,2007. The reduction in interest income for the six months ended October 31,2008 as compared to the corresponding period in the prior year was the resultof lower interest rates on interest-bearing accounts and a $0.7 millionincrease in interest expense associated with long-term borrowings.

 

**Other Expense, Net**

 

Other expense, net, forthe six months ended October 31, 2008 totaled $805,000. Other expense,net, for the six months ended October 31, 2008 included a$0.8 million exchange loss, a $0.5 million loss that represented ourportion of the net loss recorded by ImPac and a $165,000 loss on interest rateswap agreements related to the mortgage on the Santa Clara Property, partiallyoffset by our $412,000 portion of the net income recorded by WLCSP. Otherexpense, net, for the six months ended October 31, 2007 totaled $78,000.The amount for the six months ended October 31, 2007 included a $169,000loss on the interest rate swap agreement and a $206,000 loss as our portion ofthe net loss recorded by ImPac. These losses were partially offset by a$169,000 gain consisting of our portion of the net income recorded by WLCSP.

 

**Provision for Income Taxes**

 

We calculated the benefitfrom income taxes that we recorded for the six months ended October 31,2008 based on the actual effective tax rate for the six months ended October 31,2008.

 

We generatedapproximately $0.4 million and $37.3 million in income before incometaxes and minority interest for the six months ended October 31, 2008 and2007, respectively. We recorded a benefit from income taxes of approximately$0.1 million for the six months ended October 31, 2008 and a provision forincome taxes of approximately $3.8 million for the six months ended October 31,2007, resulting in effective tax rates of (18.1)% and 10.2% for the respectiveperiods.

 

During the six monthsended October 31, 2008, the Emergency Economic Stabilization Act of 2008reinstated the U.S. federal R&D tax credit, retroactive to January 1,2008. As a result, our benefit for income taxes for the six months ended October 31,2008 reflected a $0.6 million tax benefit related to fiscal 2008 R&Dexpenses.  Our benefit from income taxesfor the six months ended October 31, 2008 also reflected the unfavorableimpact of the $7.5 million goodwill impairment charge, partially offset bythe favorable impact of foreign exchange gains related to our unrecognized taxbenefits and the benefit from the fiscal 2009 U.S. federal R&D taxcredit. Our provision for income taxes for the six months ended October 31,2007 reflected the benefit from the reduction of accrual for penalties relatedto our unrecognized tax benefits by $4.5 million as a result of a change in taxlaw in a foreign jurisdiction.

 

**Minority Interest**

 

Minority interest for thesix months ended October 31, 2008 was $(392,000), which represents theapproximately 56.1% interest that we do not own in the net loss of SOI which weincluded in our consolidated operating results. Minority interest for the sixmonths ended October 31, 2007 was $6,000, which represents theapproximately 56.0%, interest that we did not own in the net income of SOIwhich we included in our consolidated operating results.

 

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

 

**Liquidity and Capital Resources**

 

Our principal sources ofliquidity at October 31, 2008 consisted of cash, cash equivalents andshort-term investments totaling $282.7 million.

 

## ***Liquidity***

## *** ***

Our working capitaldeclined to $403.8 million as of October 31, 2008 as compared to at$413.7 million as of April 30, 2008. Our working capital decreased asa result of: a $26.2 million increase in accounts payable resulting fromthe timing of inventory purchases; a $8.2 million decrease in short-terminvestments; a $4.9 million decrease in accounts receivable, net,resulting from a decrease in product shipments late in the six months ended October 31,2008; a $4.4 million increase in deferred revenues, less cost of revenuesand $3.0 million increase in the current portion of long-term debt. Thesedecreases in working capital were partially offset by: a $21.6 millionincrease in cash and cash equivalents primarily due to cash provided byoperating activities; an $11.9 million increase in inventories; a$2.8 million increase in prepaid expenses and other current assets; and a$1.2 million decrease in income taxes payable.

 

In March 2007, wepurchased a complex of four buildings in Santa Clara, California, or the SantaClara Property. In connection with the purchase, we entered into a Loan andSecurity Agreement with a domestic bank on March 16, 2007. The Loan andSecurity Agreement provides for a term mortgage loan in the principal amount of$27.9 million, or the Mortgage Loan, and a secured line of credit with anaggregate maximum principal amount of up to $12.0 million, or the TermLoan. In March 2008, we borrowed $6.0 million under the Term Loan tofinance improvements to our Santa Clara Property. We drew down the remaining$6.0 million under the Term Loan in July 2008.

 

SOI maintains fourunsecured lines of credit with three commercial banks, which provide a total ofapproximately $3.4 million in available credit. All borrowings under theselines of credit bear interest at the market interest rate prevailing at thetime of borrowing. There are no financial covenant requirements for thesefacilities. At October 31, 2008 and April 30, 2008, there were noborrowings outstanding under these facilities.

 

## ***CashFlows from Operating Activities***

## *** ***

For the six months ended October 31,2008, net cash provided by operating activities totaled approximately $42.1 millionas compared to $42.0 million for the corresponding period in the prioryear. The principal components of the current year amount were: net income ofapproximately $0.9 million for the six months ended October 31, 2008;adjustments for non-cash charges of $13.9 million in stock-based compensation,$11.6 million in write-down of inventories; $9.2 million indepreciation and amortization; $7.5 million in goodwill impairmentcharges; $1.2 million of gains in equity investments and a$21.3 million increase in accounts payable; a $4.9 million decreasein accounts receivable, net; a $4.5 million increase in deferred income.These increases were partially offset by: a $21.9 million increase ininventories; a $2.6 million increase in refundable and deferred income taxes; a$2.3 million increase in prepaid expenses and other assets; a$1.8 million decrease in accrued expenses and other current liabilities; a$1.2 million decrease in income taxes payable and a $1.0 million decrease indeferred tax liabilities. The $4.9 million decrease in accounts receivable,net, reflects the lower level of revenues during the six months ended October 31,2008, with the days of sales outstanding remaining unchanged at 56 days as of October 31,2008 and as of April 30, 2008. The $21.9 million increase ininventories resulted in a decrease in annualized inventory turns to 3.9 asof October 31, 2008 from 4.3 as of April 30, 2008.

 

For the six months ended October 31,2007, net cash provided by operating activities totaled approximately$42.0 million. The principal components of the current year amount were:net income of approximately $33.5 million for the six months ended October 31,2007, adjusted for non-cash charges of $14.0 million in stock-basedcompensation, $12.4 million in write-down of inventories,$6.3 million in depreciation and amortization, and $4.1 million ofgains in equity investments; a $22.9 million increase in accounts payable;a $4.7 million increase in income taxes payable; a $3.8 millionincrease in accrued expenses and other current liabilities and a$1.7 million decrease in prepaid expenses and other assets. Theseincreases were partially offset by: a $27.7 million increase ininventories; a $22.0 million increase in accounts receivable, net; a$2.2 million decrease in deferred income and a $1.3 million decreasein deferred tax liabilities. The $22.0 million increase in accountsreceivable, net, reflects the 

 

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

 

higher level of revenuesduring the six months ended October 31, 2007, partially offset by adecrease in days of sales outstanding as of October 31, 2007 to35 days from 49 days as of April 30, 2007. The$27.7 million increase in inventories was in anticipation of increasedsales in the third quarter of fiscal 2008. The inventory balances increasedconcurrently with an increase in annualized inventory turns to 5.2 as of October 31,2007 from 3.1 as of April 30, 2007. The $1.7 million decrease inprepaid expenses and other current assets was principally due to thereclassification of a deposit paid for land from other current assets toproperty, plant and equipment upon transfer of title.

 

## ***CashFlows From Investing Activities***

## *** ***

For the six months ended October 31,2008, our cash used in investing activities totaled $14.9 million ascompared to approximately $26.8 million used in investing activities forthe corresponding period in the prior year, due primarily to:$21.3 million in purchases of property, plant and equipment and$1.4 million in a long-term investment in ImPac, partially offset by$7.8 million in net sales of short-term investments. For the six monthsended October 31, 2007, our cash used in investing activities totaledapproximately $26.8 million, and was due to: $16.6 million inpurchases of property, plant and equipment; $9.0 million in a long-terminvestment in WLCSP and $1.3 million in net purchases of short-terminvestments.

 

## ***CashFlows From Financing Activities***

## *** ***

For the six months ended October 31,2008, net cash used in financing activities totaled approximately$5.6 million as compared to net cash provided by financing activities of$1.5 million during the corresponding period in the prior year. Thischange was primarily due to $12.9 million in repurchases of our common stock,partially offset by $4.8 million in proceeds from net long-term borrowingsand $2.7 million in proceeds from the exercise of stock options andemployee purchases through our employee stock purchase plan. For the six monthsended October 31, 2007, net cash provided by financing activities totaledapproximately $1.5 million. This change was primarily due to$11.6 million in proceeds from the exercise of stock options and employeepurchases through our employee stock purchase plan partially offset by$9.6 million in repurchases of shares of our common stock under theopen-market program in the six months ended October 31, 2007.

 

## ***CapitalCommitments and Resources***

## *** ***

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

 

In February 2007,our board of directors approved an additional stock repurchase program thatprovides for the repurchase of up to $100 million of our outstandingcommon stock in an open-market program. Subject to applicable securities laws,such repurchases will be at such times and in such amounts as we deemappropriate, based on factors such as market conditions, legal requirements andother corporate considerations. As of October 31, 2008, we hadcumulatively repurchased 6,671,000 shares of our common stock under theopen-market program for an aggregate cost of approximately $99.1 million.See Note 14 *— “TreasuryStock”*to our condensed consolidated financial statements.

 

We are obligated to payan additional $10.0 million in cash upon the sale, prior to the end of April 2009,of a pre-determined number of revenue-producing products incorporating CDM’stechnology. CDM and the costs associated with the acquisition are included inour condensed consolidated balance sheets at October 31, 2008 and April 30,2008.

 

We currently expect ouravailable cash, cash equivalents and short-term investments, together with cashthat we anticipate generating from operating activities, will be sufficient tosatisfy our capital requirements over approximately the next twelve months.Other than normal working capital requirements, we expect our capitalrequirements totaling approximately $40 million over approximately thenext twelve months will consist primarily of funding capital investments atOmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, OTC and ShanghaiOmniVision Semiconductor Technology, Co. Ltd, or OST. We formed OST during thethree months ended October 31, 2008, for the purpose of expanding ourtesting capabilities in Shanghai, China.

 

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

 

Our ability to generatecash from operations is subject to substantial risks described below under thecaption Part II Item 1A. *“Risk Factors.”*We encourage you to review these risks carefully.

 

**Contractual Obligations andCommercial Commitments**

 

The following tablesummarizes our contractual obligations and commercial commitments as of October 31,2008 and the effect such obligations and commitments are expected to have onour liquidity and cash flows in future periods (in thousands):

 
| ** **                                                | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **Total**                                 | ** ** | **Less than****1 Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **More than****5 Years** | ** ** |
| Contractual  Obligations:                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating leases                                          |       | $                                         | 15,031     |   | $ | 5,713 |   | $ | 6,779 |   | $ | 2,518 |   | $ | 21 |   |
| Capital leases                                            |       | 56                                        |       | 56 |   | — |   | — |   | — |   |
| Mortgage  obligation                                      |       | 38,228                                    | (1)        | 3,584 |   | 7,107 |   | 3,607 |   | 23,930 |   |
| Noncancelable  orders                                     |       | 41,389                                    |       | 41,389 |   | — |   | — |   | — |   |
| Total  contractual obligations                            |       | 94,704                                    |       | 50,742 |   | 13,886 |   | 6,125 |   | 23,951 |   |
|                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Other Commercial  Commitments:                            |       |                                      |       |   |   |   |   |   |   |   |   |
| OTC                                                       |       | 21,696                                    | (2)        | 15,187 |   | 6,509 |   | — |   | — |   |
| OST                                                       |       | 10,000                                    | (3)        | 1,500 |   | 8,500 |   | — |   | — |   |
| Total commercial  commitments                             |       | 31,696                                    |       | 16,687 |   | 15,009 |   | — |   | — |   |
| Total contractual  obligations and commercial commitments |       | $                                         | 126,400    |   | $ | 67,429 |   | $ | 28,895 |   | $ | 6,125 |   | $ | 23,951 |   |

 

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(1)          In March 2007, weentered into the Mortgage Loan with a domestic bank in the amount of $27.9 million. In March 2008,we borrowed $6.0 million under the Term Loan for building improvement ofthe Santa Clara Property. We drew down the remaining $6.0 million underthe Term Loan in July 2008. See Note 8 –“*BorrowingArrangements”* to our condensed consolidated financial statements.

 

(2)          Over the next twoyears, we expect to invest a total of approximately $33.7 million in oursubsidiary, OTC, of which we have already invested $12.0 million. OTC willuse the funds to develop land and construct facilities for its use. SeeNote 16 – “*Commitments and Contingencies”*to our condensed consolidated financial statements.

 

(3)          During the threemonths ended October 31, 2008, we formed Shanghai OmniVision SemiconductorTechnology, Co. Ltd, a new subsidiary in Shanghai, China, for the purpose ofexpanding our testing capabilities. We are required to contribute$1.5 million by January 2009. We are required to contribute theremaining $8.5 million of a $10.0 million commitment by October 2010.See Note 16 – “*Commitments andContingencies”* to our condensed consolidated financial statements.

 

As of October 31,2008, the long-term income taxes payable under FIN 48 was$78.0 million. We are unable to make a reasonably reliable estimate of thetiming of payments in individual years beyond twelve months due touncertainties in the timing of tax audit, if any, or their outcomes.Accordingly, we have excluded this obligation from the schedule summarizing oursignificant obligations to make future payments under contractual obligationsas of October 31, 2008 presented above.

 

### **Off-Balance SheetArrangements**

### ** **

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

 

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

 

### **Recent AccountingPronouncements**

### ** **

In September 2006,the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, *“Fair Value Measurements,”* or SFAS No. 157, whichbecame effective for us in its fiscal 2009. This Statement defines fairvalue, establishes a framework for measuring fair value and expands disclosuresabout fair value measurements; however, it does not require any new fair valuemeasurements. In February 2008, the FASB issued FSP SFAS No. 157-2, *“Effective Date of FASB Statement No. 157,”*or FSP SFASNo. 157-2. FSP SFAS No. 157-2 delays the effective date of SFAS No. 157for us from our fiscal 2009 to 2010 for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis (at least annually).Effective May 1, 2008, we adopted SFAS No. 157, as it applies to ourfinancial assets and liabilities. The adoption of the provision of SFAS No. 157did not have any material effect on our financial condition, results ofoperations or cash flows. In October 2008, the FASB issued FSP SFAS No. 157-3,*“Determining the Fair Value of a Financial AssetWhen the Market for That Asset Is Not Active”* (“FSP SFAS No. 157-3”).FSP SFAS No. 157-3 provides examples to illustrate key considerations indetermining the fair value of a financial asset when the market for thatfinancial asset is not active. FSP SFAS No. 157-3 is effective uponissuance. The adoption of the provision of FSP SFAS No. 157-3 did not haveany material effect on our financial condition, results of operations or cashflows. (See Note 10.)

 

In March 2008, theFASB issued SFAS No. 161, *“Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,”*or SFAS No. 161. This Statement requires enhanced disclosuresfor derivative instruments, including those used in hedging activities. Itrequires qualitative disclosures about objectives and strategies for usingderivatives, and quantitative disclosures about fair value amounts of gains andlosses on derivative instruments. The provisions of SFAS No. 161 areeffective for fiscal years beginning on or after November 15, 2008. In September 2008,FASB issued FSP SFAS No. 133-1 and FASB Interpretation No. (“FIN”) 45-4,*“Disclosures about Credit Derivatives and CertainGuarantees: An Amendment of FASB Statement No. 133 and FASB InterpretationNo. FIN 45, and Clarification of the Effective Date of FASB StatementNo. 161”* (“FSP SFAS No. 133-1 and FIN 45-4”). FSPSFAS No. 133-1 and FIN 45-4 clarifies that the effective date of SFASNo. 161 is applicable to any reporting period beginning after November 15,2008. SFAS No. 161 is effective for our fourth quarter of fiscal 2009. Weare currently evaluating the impact SFAS No. 161 may have on our financialposition, results of operations and cash flows.

 

FSP SFAS No. 133-1and FIN 45-4 also amends FASB Statement No. 133, *“Accountingfor Derivative Instruments and Hedging Activities,”* to requireenhanced disclosures about credit derivatives and guarantees, and amendsFIN 45, *“Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers,”* to exclude derivative instruments accounted for at fairvalue under SFAS No. 133. The provisions of FSP SFAS No. 133-1 andFIN 45-4 that amended SFAS No. 133 and FIN 45 are effective forreporting periods ending after November 15, 2008.  We do not expect the adoption of FSP SFAS No. 133-1and FIN 45-1 in our fourth quarter of fiscal 2009 to have any materialeffect on our financial condition, results of operations or cash flows.

 

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**ITEM 3.****                             QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

## ***ForeignCurrency Exchange Risk***

## *** ***

We sell our productsglobally, in particular to branded customers, contract manufacturers, VARs anddistributors in China, Japan, Korea and Taiwan.

 

The great majority of ourtransactions with our customers and vendors are denominated in U.S. dollars.The expenses we incur in currencies other than U.S. dollars affect grossprofit, selling, general and administrative expenses, research, development andrelated expenses and income taxes, and are primarily incurred in China, wherethe Chinese Yuan, or CNY, is the local currency and in Taiwan, where the NewTaiwan dollar is the local currency.

 

As of October 31,2008, the functional currency of our wholly-owned subsidiaries located in HongKong, OmniVision Technologies (Hong Kong) Company Limited, OmniVision Trading(Hong Kong) Company Ltd., and OmniVision Holding (Hong Kong) Co., Ltd.; in theCayman Islands, OmniVision International Holding, Ltd. and OmniVisionTechnology International Ltd. (formerly HuaWei Technology International, Ltd.);in China, OSC and OTC and OST, and in Taiwan, Taiwan OmniVision TechnologiesCo., Ltd., Taiwan OmniVision International Technologies Co., Ltd., and TaiwanOmniVision Investment Holding Co., Ltd., is the U.S. dollar. Our other wholly-ownedsubsidiaries have their respective local currencies as their functionalcurrencies. The functional currency of our consolidated affiliate, SOI, is theNew Taiwan dollar. Transaction gains and losses resulting from transactionsdenominated in currencies other than the respective functional currencies areincluded in “Other expense, net” for the periods presented. The amounts oftransaction gains and losses for the six months ended October 31, 2008 and2007 were not material.

 

Given that the expenses thatwe incur in currencies other than U.S. dollars have not been a significantpercentage of our revenues, we do not believe that our foreign currencyexchange rate fluctuation risk is significant. Consequently, we do not believethat a 10% change in foreign currency exchange rates would have a significanteffect on our future net income or cash flows.

 

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

 

## ***MarketInterest Rate Risk***

## *** ***

Our cash equivalents andshort-term investments are exposed to financial market risk due to fluctuationin interest rates, which may affect our interest income and, from time to time,the fair market value of our investments. We manage our exposure to financialmarket risk by performing ongoing evaluations of our investment portfolio. Wepresently invest in money market funds, certificates of deposit issued bybanks, commercial paper, certificates of deposit, high-grade corporatesecurities and government bonds maturing approximately 18 months or less fromthe date of purchase. In the past, we also invested in auction rate securitiesand in variable rate demand notes, which have a final maturity date of up tothirty-nine years but whose interest rate is reset at varying intervalstypically between seven and 35 days. As of October 31, 2008, we didnot hold any auction rate securities or variable rate demand notes.

 

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

 

During fiscal 2007,we financed the purchase of a four-building complex in Santa Clara, Californiawith a $27.9 million mortgage loan. The mortgage loan is a variable rateloan which bears interest at LIBOR plus 90 basis points and changes in theinterest rate affect our interest payments. However, concurrent with themortgage loan, we also entered into an interest rate swap with a notionalamount that approximates the principal outstanding under the mortgage loan. Weare the fixed rate payer under the swap with a fixed rate of 5.27%. In both March andJuly 2008, we 

 

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drew down$6.0 million under a term loan. Concurrent with the term loan, we alsoentered into an interest rate swap with a notional amount that approximates theprincipal outstanding under the term loan. We are the fixed rate payer underthe swap with a fixed rate of 4.26%. In July 2008, in connection with theTerm Loan we entered into a second interest rate swap with the bank toeffectively convert the variable interest rate described above to a fixed rate.This second swap is for a period of four years. We are the fixed rate payer andthe rate is fixed at 4.3% per annum and the effective rate on the Term Loan isfixed at approximately 5.5%. Consequently, although we are required to mark thevalue of the swaps to market at each balance sheet date and record theassociated non-cash cost or benefit as part of Other income (expense), net, ahypothetical 10% change in LIBOR would not have a material effect on our annualinterest expense.

 

**ITEM 4.****                             CONTROLSAND PROCEDURES**

 

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

 

Under the supervision andwith the participation of our chief executive officer and our chief financialofficer, our management conducted an evaluation of the effectiveness of ourdisclosure controls and procedures, as defined in the Securities Exchange Actof 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q.Based on this evaluation, our chief executive officer and chief financialofficer have concluded that, at the level of reasonable assurance, ourdisclosure controls and procedures are effective to ensure that the informationwe are required to disclose in reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in SEC rules and forms and that such information isaccumulated and communicated to our management including our principalexecutive and principal financial officers, as appropriate, to allow timelydecisions regarding required disclosure.

 

**(b)  Changesin Internal Controls.**

 

There have been nochanges in our internal control over financial reporting during the three monthperiod ended October 31, 2008, as covered by this Quarterly Report on Form 10-Q,that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PART II — OTHERINFORMATION**

 

**ITEM 1.   LEGALPROCEEDINGS**

 

From time to time, wehave been subject to legal proceedings and claims with respect to such mattersas patents, product liabilities and other actions arising out of the normalcourse of business.

 

On November 29,2001, a complaint captioned *McKee v. OmniVisionTechnologies, Inc., et. al., Civil Action No. 01 CV 10775*,was filed in the United States District Court for the Southern District of NewYork against us, some of our directors and officers, and various underwritersfor our initial public offering. Plaintiffs generally allege that the nameddefendants violated federal securities laws because the prospectus related toour offering failed to disclose, and contained false and misleading statementsregarding, certain commissions purported to have been received by theunderwriters, and other purported underwriter practices in connection withtheir allocation of shares in our offering. The complaint seeks unspecifieddamages on behalf of a purported class of purchasers of our common stockbetween July 14, 2000 and December 6, 2000. Substantially similaractions have been filed concerning the initial public offerings for more than300 different issuers, and the cases have been coordinated as *In re Initial Public Offering Securities Litigation, 21 MC 92*.Claims against our directors and officers have been dismissed without prejudicepursuant to a stipulation. On February 19, 2003, the Court issued an orderdismissing all claims against us except for a claim brought under Section 11of the Securities Act of 1933.

 

In June 2004, theissuer defendants and plaintiffs negotiated a stipulation of settlement for theclaims against the issuer defendants, including us that was submitted to theCourt for approval. In August 2005, the Court preliminarily approved thesettlement. In December 2006, the appellate court overturned thecertification of classes in the six test cases that were selected by theunderwriter defendants and plaintiffs in the coordinated proceedings. Theaction involving OmniVision is not one of the six test cases. Because classcertification was a condition of the settlement, it is unlikely that thecurrent settlement will receive final court approval. On June 25, 2007,the Court entered an order terminating the proposed settlement based upon astipulation among the parties to the settlement. Plaintiffs have filed amendedmaster allegations and amended complaints and moved for class certification inthe six test cases, which the defendants in those cases have opposed. On March 26,2008, the Court largely denied the test case defendants’ motion to dismiss theamended complaints. It is uncertain whether there will be any revised or futuresettlement. If the litigation proceeds, we believe that we have meritoriousdefenses to plaintiffs’ claims and intend to defend the action vigorously.

 

On October 12, 2007,a purported OmniVision stockholder filed a complaint against certain of ourunderwriters for its initial public offering. The complaint, *Vanessa Simmonds v. Bank of America Corporation, et al.*,Case No. C07-1668, filed in District Court for the Western District ofWashington, makes similar allegations to those made in *In reInitial Public Offering Securities Litigation* and seeks the recoveryof short-swing trading profits under Section 16(b) of the SecuritiesExchange Act of 1934. The complaint names us as a nominal defendant. Norecovery is sought from us.

 

On February 21,2008, we filed a lawsuit against Qualcomm Incorporated in the United StatesDistrict Court for the Northern District of California, or the NorthernDistrict Action, alleging claims of trademark infringement arising fromQualcomm’s use of, and attempt to register, the mark OMNIVISION for a computerhardware system and related services. We seek an injunction and unspecifieddamages. We had previously filed opposition proceedings before the TrademarkTrial and Appeal Board of the United States Patent and Trademark office againstQualcomm’s applications to register the OMNIVISION mark, and we successfullymoved to suspend those proceedings based upon the new parallel federallitigation. Qualcomm has filed its Answer denying the allegations ofinfringement. Trial is currently set for November 30, 2009.

 

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**ITEM 1A.   RISKFACTORS**

 

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

 

*Thefollowing description of these risk factors includes any material changes toand supersedes the description of the risk factors associated with our businesspreviously disclosed in Item 1A of our 2008 Annual Report on Form 10-Kfiled with the SEC on June 30, 2008. As a result of the following riskfactors, as well as of other variables affecting our operating results, pastfinancial performance may not be a reliable indicator of future performance,and historical trends should not be used to anticipate results or trends infuture periods.*

 

***Risks Related toOur Business***

 

## ***Recentdomestic and worldwide economic conditions have adversely affected and mayfurther adversely affect our business, results of operations, and financialcondition.***

## *** ***

Recently, generaldomestic and global economic conditions have been negatively impacted byseveral factors, including, among others, the subprime-mortgage crisis in thehousing market, going concern threats to investment banks and other financialinstitutions, reduced corporate spending, and decreased consumer confidence.These economic conditions have resulted in our facing one of the mostchallenging periods in our history. The image sensor market has been negativelyimpacted by the current global economic environment. In particular, we believethe current economic conditions have reduced spending by consumers andbusinesses in markets into which we sell our products. End customer demand hasdecreased significantly throughout the industry, affecting all consumerelectronic products, security products and products for the automotiveindustry. Consequently, the overall demand for image sensors has alsodecreased. This decrease in demand is having a significant impact on ourbusiness. Our revenues for the three-month period ended October 31, 2008were lower than similar historical periods. In addition, the current globaleconomic environment has negatively impacted our business outlook and we expectthat our revenues in the three-month period ending January 31, 2009, willbe significantly lower than our reported revenues for the three-month periodended October 31, 2008.

 

These conditions couldalso have a number of additional effects on our business, including insolvencyof key suppliers resulting in product delays, inability of customers to obtaincredit to finance purchases of our products, customer insolvencies, andincreased difficulty in us accurately forecasting product demand and planningfuture business activities. It is uncertain how long the current economicconditions will last or how quickly any subsequent economic recovery willoccur. If the economy or markets into which we sell our products continue to slowor any subsequent economic recovery is slow to occur, our business, financialcondition and results of operations could be further materially and adverselyaffected.

 

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

## *** ***

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

 

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

 

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andoperate their own fabrication facilities, which in certain circumstances may givethem the ability to price their products more aggressively than we can or mayallow them to respond more rapidly than we can to changing marketopportunities. In addition, we compete with a large number of smaller CMOSmanufacturers including Foveon, MagnaChip, PixArt, Pixelplus, Pixim, SETi and SiliconFile. Competition with these and other companieshas required, and in the future may require, us to reduce our prices. Forinstance, we have seen increased competition in the markets for VGA imagesensor products with resulting pressures on product pricing. Downward pressureon pricing could result both in decreased revenues and lower gross margins,which would adversely affect our profitability. From time to time, othercompanies enter the CMOS image sensor market by using obsolete and availablemanufacturing equipment. These new entrants gain market share in the short termby pricing their products significantly below current market levels, which putsadditional downward pressure on the prices we can obtain for our products.

 

Our competitors mayacquire or enter into strategic or commercial agreements or arrangements withfoundries or providers of color filter processing, assembly or packagingservices. These strategic arrangements between our competitors and third partyservice providers could involve preferential or exclusive arrangements for ourcompetitors. Such strategic alliances could impair our ability to securesufficient capacity from foundries and service providers to meet our demand forwafer manufacturing, color filter processing, assembly or packaging services,adversely affecting our ability to meet customer demand for our products. Inaddition, competitors may enter into exclusive relationships with distributors,which could reduce available distribution channels for our products and impairour ability to sell our products and grow our business. Further, some of ourcustomers could also become developers of image sensors, and this couldpotentially adversely affect our results of operations, business and prospects.

 

## ***Reductionsin our average selling prices may lower our revenues and, as a result, mayreduce our gross margins.***

## *** ***

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

 

## ***Salesof our image-sensor products for mobile phones account for a large portion ofour revenues, and any decline in sales to the mobile phone market or failure ofthis market to continue to grow as expected could adversely affect our resultsof operations.***

## *** ***

Sales to the mobile phonemarket account for a large portion of our revenues. Although we can onlyestimate the percentages of our products that are used in the mobile phonemarket due to the significant number of our image-sensor products that are soldto module makers or through distributors and VARs, we believe that the mobilephone market accounted for approximately 70% of our revenues in fiscal 2008and 64% in the six months ended October 31, 2008, respectively. We expectthat revenues from sales of our image-sensor products to the mobile phonemarket will continue to account for a significant portion of our revenuesduring fiscal 2009 and beyond. Any factors adversely affecting the demandfor our image sensors in this market could cause our business to suffer andadversely affect our operating results. The digital image sensor market formobile phones is extremely competitive, and we expect to face increasedcompetition in this market in the future. In addition, we believe the marketfor mobile phones is also relatively concentrated and the top five producersaccount for more than 80% of the annual sales of these products. If we do notcontinue to achieve design wins with key mobile phone manufacturers, our marketshare or revenues could decrease. The mobile phone image-sensor market is alsosubject to rapid technological change. In order to compete successfully in thismarket, we will have to correctly forecast customer demand for technologicalimprovements and be able to deliver such products on a timely basis atcompetitive prices. If we fail to do this, our results of operations, businessand prospects would be materially and adversely affected. In the past, we haveexperienced problems accurately forecasting customer demand in other markets.In addition, current domestic and global economic conditions could negatively 

 

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affect the mobile phonemarket if consumers and/or businesses defer purchases in this market inresponse to tighter credit, negative financial news, and/or decreased corporateor consumer spending. If our sales to the mobile phone market do not increaseand/or the mobile phone market does not grow as expected, our results ofoperations, business and prospects would be materially adversely affected.

 

## ***Ourfuture success depends on the timely development, introduction, marketing andselling of new CMOS image sensors, which we might not be able to achieve.***

## *** ***

Our failure tosuccessfully develop new products that achieve market acceptance in a timelyfashion would adversely affect our ability to grow our business and ouroperating results. The development, introduction and market acceptance of newproducts is critical to our ability to sustain and grow our business. Anyfailure to successfully develop, introduce, market and sell new products couldmaterially adversely affect our business and operating results. The developmentof new products is highly complex, and we have in the past experienced delaysin completing the development and introduction of new products. From time to time,we have also encountered unexpected manufacturing problems as we increase theproduction of new products. As our products integrate new and more advancedtechnologies and functions, they become more complex and increasingly difficultto design, debug and produce. Successful product development and introductiondepends on a number of factors, including:

 

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

 

·                  development of advanced technologiesand capabilities, including our new OmniBSI technology;

 

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

 

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

 

·                  market acceptance of the newproducts.

 

Accomplishingall of these steps is difficult, time consuming and expensive. We may be unableto develop new products or product enhancements in time to capture marketopportunities or achieve significant or sustainable acceptance in new andexisting markets. In addition, our products could become obsolete sooner thananticipated because of a rapid change in one or more of the technologiesrelated to our products or the reduced life cycles of consumer products.

 

## ***Designwins are a key determinant of future revenues, and failure to obtain designwins adversely affects our revenues and impairs our ability to grow ourbusiness.***

## *** ***

Ourpast success has been, and our future success is, dependent upon manufacturersdesigning our image-sensor products into their products. To achieve designwins, which are decisions by manufacturers to design our products into theirsystems, we must define and deliver cost effective and innovative image-sensorsolutions on a timely basis that satisfy the manufacturers’ requirements. Ourability to achieve design wins is subject to numerous risks includingcompetitive pressures as well as technological risks. If we do not achieve adesign win with a prospective customer, it may be difficult to sell ourimage-sensor products to such prospective customer in the future because once amanufacturer has designed a supplier’s products into its systems, themanufacturer may be reluctant to change its source of components due to thesignificant costs, time, effort and risk associated with qualifying a newsupplier and modifying its design platforms. Accordingly, if we fail to achievedesign wins with key device manufacturers that embed image sensors in their products,our market share or revenues could decrease. Furthermore, to the extent thatour competitors secure design wins, our ability to expand our business in thefuture will be impaired.

 

## ***Wedepend on a limited number of third party wafer foundries, which reduces ourability to control our manufacturing process.***

## *** ***

Unlikesome of our larger competitors, we do not own or operate a semiconductorfabrication facility. Instead, we rely on TSMC, PSC and other subcontractfoundries to produce all of our wafers. Historically, we have relied on TSMC toprovide us with a substantial majority of our wafers. As a part of our jointventure agreement with TSMC, TSMC has agreed to commit substantial wafermanufacturing capacity to us in exchange for our commitment to purchase asubstantial portion of our wafers from TSMC, subject to pricing and technologyrequirements.

 

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Inaddition, we have entered into a foundry manufacturing agreement with PSCpursuant to which we and PSC have agreed to jointly develop certainpixel-related process technology and for PSC to process certain of our CMOSimage sensors at PSC’s facilities in accordance with the scheduled developmentapproved by both parties.

 

Underthe terms of these supply agreements, we secure manufacturing capacity in anyparticular period on a purchase order basis. The foundries have no obligationto supply products to us for any specific period, in any specific quantity orat any specific price, except as set forth in a particular purchase order. Ingeneral, our reliance on third party foundries involves a number of significantrisks, including:

 

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

 

·                  lack of guaranteed productioncapacity or product supply;

 

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

 

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

 

IfTSMC, PSC, or any of our other foundries were unable to continue manufacturingour wafers in the required quantities, at acceptable quality, yields and costs,or in a timely manner, we would have to identify and qualify substitutefoundries, which would be time consuming and difficult, and could increase ourcosts or result in unforeseen manufacturing problems. In addition, ifcompetition for foundry capacity increases we may be required to pay increasedamounts for manufacturing services. We are also exposed to additional risks ifwe transfer our production of semiconductors from one foundry to another, assuch transfer could interrupt our manufacturing process. Further, some of ourfoundries may also develop their own of image-sensor products and if one or moreof our other foundries were to decide not to fabricate our companion DSP chipsfor competitive or other reasons, we would have to identify and qualify othersources for these products.

 

## ***Werely on a joint venture company for color filter application and on third partyservice providers for packaging and other back-end services, which reduces ourcontrol over delivery schedules, product quality and cost, and could adverselyaffect our ability to deliver products to customers.***

## *** ***

Werely on VisEra, our joint venture with TSMC, for the color filter processing ofour completed wafers. In addition, we rely on Advanced SemiconductorEngineering, Inc. and on ImPac, our equity investee, for substantially allof our ceramic chip packages. We rely on XinTec and WLCSP, two investeecompanies, for chip scale packages, which are generally used in our productsdesigned for the smallest form factor applications. We rely on severalspecialized service providers, one of which is ImPac, to perform the necessarywafer probe tests and prepare good die for use in a form called chip-on-board,a process called reconstructing wafers. If for any reason one or more of theseservice providers were to become unable or unwilling to continue to provideservices of acceptable quality, at acceptable costs or in a timely manner, ourability to deliver our products to our customers could be severely impaired. Wewould have to identify and qualify substitute service providers, which could betime consuming and difficult and could result in unforeseen operationalproblems. Substitute service providers might not be available or, if available,might be unwilling or unable to offer services on acceptable terms.

 

Inaddition, if competition for color filter processing, packaging, capacity orother back-end services increases, we may be required to pay or investsignificant amounts to secure access to these services, which could adverselyimpact our operating results. The number of companies that provide theseservices is limited and some of them have limited operating histories andfinancial resources. In the event our current providers refuse or are unable tocontinue to provide these services to us, we may be unable to procure servicesfrom alternate service providers. Furthermore, if customer demand for ourproducts increases, we may be unable to secure sufficient additional capacityfrom our current service providers on commercially reasonable terms, if at all.These factors may cause unforeseen product shortages or may increase our costsof manufacturing, assembling or testing of our products, which would adverselyaffect our operating results.

 

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***Fluctuationsin our quarterly operating results have caused volatility in the market priceof our common stock and also make it difficult to predict our future operatingresults.***

*** ***

Our quarterly operating results have variedsignificantly from quarter to quarter in the past and are likely to varysignificantly in the future based on a number of factors, many of which arebeyond our control. These factors and other industry risks, many of which aremore fully discussed in our other risk factors, include, but are not limitedto:

 

·                  the volume and mix of our productsales;

 

·                  competitive pricing pressures;

 

·                  our ability to accurately forecastdemand for our products;

 

·                  our ability to achieve acceptablewafer manufacturing or back-end processing yields;

 

·                  our gain or loss of a large customer;

 

·                  our ability to manage our producttransitions;

 

·                  the availability of productioncapacity at the suppliers that manufacture our products or process ourproducts;

 

·                  the growth of the market for productsand applications using CMOS image sensors;

 

·                  the timing and size of orders fromour customers;

 

·                  the volume of our product returns;

 

·                  the seasonal nature of customerdemand for our products;

 

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

 

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

 

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

 

·                  the level of our operating expenses;and

 

·                  fluctuations in our effective taxrate from quarter to quarter.

 

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

 

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

 

***Ourbusiness is subject to seasonal fluctuations which may in turn causefluctuations in our results of operations from period to period.***

*** ***

Many of the products using our image sensors, suchas mobile phones, notebooks and personal computers, DSCs and cameras for toys and games, areconsumer electronics goods. These mass-market camera devices generally haveseasonal cycles which historically have caused the sales of our customers tofluctuate quarter-to-quarter. Historically, demand from OEMs and distributorsthat serve such consumer product markets has been stronger in the second andthird quarters of our fiscal year and weaker in the first and fourth quartersof our fiscal year.

 

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In addition, since a very large number of themanufacturers who use our products are located in China and Taiwan, the patternof demand for our image sensors has been increasingly influenced by the timingof the extended lunar or Chinese New Year holiday, a period in which the factorieswhich use our image sensors generally close. For example, we believe that thedecline in revenues that we experienced in the fourth quarters of fiscal 2007and 2008 is partly attributable to the fact that in 2007 and 2008 Chinese NewYear occurred in mid-February, and manufacturing did not resume in full forseveral weeks.

 

***Problemswith wafer manufacturing and/or back-end processing yields could result inhigher product costs and could impair our ability to meet customer demand forour products.***

*** ***

If the foundries manufacturing the wafers used inour products cannot achieve the yields we expect, we will incur higher unitcosts and reduced product availability. Foundries that supply our wafers haveexperienced problems in the past achieving acceptable wafer manufacturingyields. Wafer yields are a function both of our design technology and theparticular foundry’s manufacturing process technology. Certain risks areinherent in the introduction of new products and technology. Low yields mayresult from design errors or manufacturing failures in new or existingproducts. During the early stages of production, production yields for newproducts are typically lower than those of established products. Unlike manyother semiconductor products, optical products can be effectively tested onlywhen they are complete. Accordingly, we perform final testing of our productsonly after they are assembled. As a result, yield problems may not beidentified until our products are well into the production process. The risks associatedwith low yields could be increased because we rely on third party offshorefoundries for our wafers, which can increase the effort and time required toidentify, communicate and resolve manufacturing yield problems. In addition towafer manufacturing yields, our products are subject to yield loss insubsequent manufacturing steps, often referred to as back-end processing, suchas the application of color filters and micro-lenses, dicing (cutting the waferinto individual devices, or die) and packaging. Any of these potential problemswith wafer manufacturing and/or back-end processing yields could result in areduction in our gross margins and/or our ability to timely deliver products tocustomers, which could adversely affect our customer relations and make it moredifficult to sustain and grow our business.

 

***If wedo not forecast customer demand correctly, our business could be impaired andour stock price may decline.***

*** ***

Oursales are generally made on the basis of purchase orders rather than long-termpurchase commitments; however, we manufacture products and build inventorybased on our estimates of customer demand. Accordingly, we must rely onmultiple assumptions to forecast customer demand. We are continually working toimprove our sales forecasting procedures. If we overestimate customer demand,we may manufacture products that we may be unable to sell, or we may have tosell at lower prices. This could materially and adversely affect our results ofoperations and financial condition. In addition, our customers may cancel ordefer orders at any time by mutual written consent. We have experiencedproblems with accurately forecasting customer demand in the past. For example,there was a shift in the mix of product demand, in particular a shift in demand towards VGA productslate in the second quarter of fiscal 2007, and as a result our inventoriesat the end of the second and third quarters of fiscal 2007 were higherthan we intended them to be. We need to accurately predict customer demandbecause we must often make commitments to have products manufactured before wereceive firm purchase orders from our customers. Conversely, if weunderestimate customer demand, we may be unable to manufacture sufficientproducts quickly enough to meet actual demand, causing us to lose customers andimpairing our ability to grow our business. In preparation for new productintroductions, we gradually ramp down production of established products. Withour 12-14 week production cycle, it is extremely difficult to predict preciselyhow many units of established products we will need. It is also difficult toaccurately predict the speed of the ramp of our new products and the impact oninventory levels presented by the shorter life cycles of end-user products. Theshorter product life cycle is a result of an increase in competition and thegrowth of various consumer-product applications for image sensors. For example,although in the security and surveillance market we continue to sellimage-sensor products introduced more than four years ago, in the mobile phonemarket, the product life cycle of image sensors can be as little as six months.Under these circumstances, it is possible that we could suffer from shortagesfor certain products and, if we underestimate market demand, we face the riskof being unable to fulfill customer orders. We also face the risk of excessinventory and product obsolescence if we overestimate market demand for ourproducts and build inventories in excess of demand. Our ability to accurately forecastsales is also a critical factor in our ability to meet analyst expectations forour quarterly and annual operating results. Any failure to meet theseexpectations would likely lead to a substantial decline in our stock price.

 

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***Wedepend on the increased acceptance of mass-market image-sensor applications togrow our business and increase our revenues.***

*** ***

Our business strategy depends in large part on thecontinued growth of various markets into which we sell our image-sensorproducts, including the markets for mobile phones, notebook and personalcomputers, digital still and videocameras, commercial and security and surveillance applications, toys and games,including interactive video games, automotive and medical applications. Ifthese markets do not grow and develop as we anticipate, we may be unable tosustain or grow the sales of our products. Each of these markets has alreadybeen adversely impacted by current global economic conditions where consumersand businesses have deferred purchases of products in these markets as a resultof tighter credit, negative financial news, and decreased corporate or consumerspending. Such conditions havenegatively affected our business.

 

In addition, the market price of our common stockmay be adversely affected if certain of these new markets do not emerge ordevelop as expected. Securities analysts may already factor revenue from suchnew markets into their future estimates of our financial performance and shouldsuch markets not develop as expected by such securities analysts the tradingprice of our common stock could be adversely affected.

 

***Ourlengthy manufacturing, packaging and assembly cycle, in addition to ourcustomers’ design cycle, may result in uncertainty and delays in generatingrevenues.***

*** ***

The production of our image sensors requires alengthy manufacturing, packaging and assembly process, typically lastingapproximately 12-14 weeks. Additional time may pass before a customer commencestaking volume shipments of products that incorporate our image sensors. Evenwhen a manufacturer decides to design our image sensors into its products, themanufacturer may never ship final products incorporating our image sensors.Given this lengthy cycle, we experience a delay between the time we incurexpenditures for research and development and sales and marketing efforts andthe time we generate revenue, if any, from these expenditures. This delay makesit more difficult to forecast customer demand, which adds uncertainty to themanufacturing planning process and could adversely affect our operatingresults. In addition, the product life cycle for certain of our image-sensorproducts designed for use in certain applications can be relatively short. Ifwe fail to appropriately manage the manufacturing, packaging and assemblyprocess, our products may become obsolete before they can be incorporated intoour customers’ products and we may never realize a return on investment for theexpenditures we incur in developing and producing these products.

 

***Ourability to deliver products that meet customer demand is dependent upon ourability to meet new and changing requirements for color filter application andimage-sensor packaging.***

*** ***

We expect that as we develop new products to meettechnological advances and new and changing industry and customer demands, ourcolor filter application and ceramic, plastic and chip scale packagingrequirements will also evolve. Our ability to continue to profitably deliverproducts that meet customer demand is dependent upon our ability to obtainthird party services that meet these new requirements on a cost-effectivebasis. There can be no assurances that any of these parties will be able todevelop enhancements to the services they provide to us to meet these new andchanging industry and customer requirements. Furthermore, even if these serviceproviders are able to develop their services to meet new and evolvingrequirements, these services may not be available at a cost that enables us tosustain our profitability.

 

***Thehigh level of complexity and integration of our products increases the risk oflatent defects, which could damage customer relationships and increase ourcosts.***

*** ***

Our products are based upon evolving technology, andbecause we integrate many functions on a single chip, are highly complex. Theintegration of additional functions into already complex products could resultin a greater risk that customers or end users could discover latent defects orsubtle faults after we have already shipped significant quantities of aproduct. Although we test our products, we have in the past and may in thefuture encounter defects or errors. For example, in the third quarter offiscal 2005, we recorded a provision of $2.7 million related to thepossible replacement of products that did not meet a particular customer’sstandards. Delivery of products with defects or reliability, quality orcompatibility problems may damage our reputation and ability to retain existingcustomers and attract new customers. In addition, product defects and errorscould result in additional development costs, diversion of technical resources,delayed product shipments, increased product returns, product warranty costsfor recall and replacement and product liability claims against us which maynot be fully covered by insurance.

 

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***Wedepend for the majority of our revenues on a few key customers and, the loss ofone or more of our key customers could significantly reduce our revenues.***

*** ***

Arelatively small number of OEMs, VARs and distributors account for asignificant portion of our revenues. Any material delay, cancellation orreduction of purchase orders from one or more of our major customers ordistributors could result in our failure to achieve anticipated revenue for aparticular period. In addition, if we are unable to retain one or more of ourlargest OEM, distributor or VAR customers, or if we are unable to maintain ourcurrent level of revenues from one or more of these significant customers, ourbusiness and results of operation would be impaired and our stock price coulddecrease, potentially significantly. In the six months ended October 31,2008, two OEM customers accounted for approximately 11.3% and 10.2% of ourrevenues, and one distributor customer accounted for approximately 26.2% of ourrevenues. In the six months ended October 31, 2007, two OEM customersaccounted for approximately 15.9% and 10.4%, respectively, of our revenues, andone distributor customer accounted for approximately 19.4% of our revenues. Inaddition, in fiscal 2008, approximately 55.0% of our revenues came fromsales to our top five customers. Our business, financial condition, results ofoperations and cash flows will continue to depend significantly on our abilityto retain our current key customers and to attract new customers, as well as onthe financial condition and success of our OEMs, VARs and distributors.

 

***Wemay be required to record a significant charge to earnings if our amortizableintangible assets or long-term investments become impaired.***

*** ***

Undergenerally accepted accounting principles, we are required to review ouramortizable 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 amortizable intangible assets may not be recoverable include a declinein stock price and market capitalization, and slower growth rates in ourindustry.

 

We maybe required to record a significant charge to earnings in our financialstatements during the period in which we determine that our amortizableintangible assets or long-term investments have been impaired. Any such chargewould adversely impact our results of operations. As of October 31, 2008,our amortizable intangible assets totaled approximately $10.7 million andour long term investments totaled approximately $87.9 million.

 

***Wemaintain a backlog of customer orders that is subject to cancellation or delayin delivery schedules, and any cancellation or delay may result in lower thananticipated revenues.***

*** ***

Oursales are generally made pursuant to standard purchase orders. We include inour backlog only those customer orders for which we have accepted purchaseorders and assigned shipment dates within the upcoming 12 months. Ordersconstituting our current backlog are subject to cancellation or changes indelivery schedules, and backlog may not necessarily be an indication of futurerevenue. Any cancellation or delay in orders which constitute our current orfuture backlog may result in lower than expected revenues.

 

***If weare unable to maintain processes and procedures to sustain effective internalcontrol over our financial reporting, our ability to provide reliable andtimely financial reports could be harmed and this could have a material adverseeffect on our stock price.***

*** ***

We arerequired to comply with the rules promulgated under Section 404 ofthe Sarbanes-Oxley Act of 2002. Section 404 requires that we prepare anannual management report assessing the effectiveness of our internal controlover financial reporting, and requires a report by our independent registeredpublic accounting firm addressing the effectiveness of our internal controlover financial reporting.

 

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

 

As ourbusiness expands, ongoing compliance with the provisions of Section 404 ofthe Sarbanes-Oxley Act of 2002 andmaintenance of effective internal control over financial reporting will requirethat we hire additional qualified finance and accounting personnel. Becauseother businesses face similar challenges, there is significant competition forsuch personnel, and there can be no assurance that we will be able to attractand/or retain suitably qualified employees.

 

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***Corporategovernance regulations have increased our compliance costs and could furtherincrease our expenses if changes occur within our business.***

*** ***

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

 

***Wehold a significant amount of marketable securities which are subject to generalmarket risks over which we have no control.***

*** ***

As of October 31,2008, we held cash and cash equivalents totaling $238.9 million, andshort-term investments totaling $43.8 million. These assets are managed onour behalf by unrelated third parties in accordance with a cash managementpolicy that has been approved by our board of directors and restricts ourinvestments to a maximum maturity of 18 months and to investment-gradeinstruments. As of October 31, 2008, we did not hold any illiquidinvestments and we have not realized any losses. However, recent uncertaintiesin global capital markets associated with a repricing of risk have causeddisruptions in the orderly function of markets where ordinarily there isvirtually unlimited liquidity. If we were to make a future investment incertain illiquid securities that are dependent on the orderly functioning ofthe capital markets, and if we were required to liquidate this type ofsecurities at short notice, such liquidation could result in losses ofprincipal.

 

***Thereare risks associated with our operations in China.***

*** ***

In December 2000,we established OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, formerlyHua Wei Semiconductor (Shanghai) Co. Ltd., as part of our efforts to streamlineour manufacturing process and reduce the costs and working capital associatedwith the testing of our image-sensor products, and relocated our automatedimage testing equipment from the United States to China. We are currentlyexpanding our testing capabilities with additional automated testing equipment,which will also be located in China. Through our wholly-owned subsidiary,OmniVision Technologies (Shanghai) Co. Ltd., or OTC, we are also developingland and constructing research facilities in Shanghai. There are certainadministrative, legal and governmental risks to operating in China that couldresult in increased operating expenses or could hamper us in the development ofour operations in China. More recently we invested in a company in China thatis providing a portion of our CSP packaging requirements. The risks fromoperating in China that could increase our operating expenses and adverselyaffect our operating results, financial condition and ability to deliver ourproducts and grow our business include, without limitation:

 

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

 

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

 

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

 

·                  difficulties in enforcing contractsin China;

 

·                  difficulties in protectingintellectual property;

 

·                  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,which could have an adverse impact on foreign exchange rates in Asia and couldimpair our ability to conduct our business in China; and

 

·                  inadequacy of the localinfrastructure to support our operations.

 

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***Wemay experience integration or other problems with potential futureacquisitions, which could have an adverse effect on our business or results ofoperations. 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 mayin the future make acquisitions of, or investments in, businesses that offerproducts, services and technologies that we believe would complement ourproducts, including CMOS image-sensor manufacturers. We may also makeacquisitions of or investments in, businesses that we believe could expand ourdistribution channels. Even if we were to announce an acquisition, we may notbe able to complete it. In addition, any future acquisition or substantialinvestment could present numerous risks, including:

 

·                  difficulty in realizing the potentialtechnological benefits of the transaction;

 

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

 

·                  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 relationshipswith employees, 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.

 

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

 

***Wemay not achieve continued benefits from our joint venture with TSMC.***

*** ***

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

 

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

 

***Wemay not achieve all of the anticipated benefits of our alliances with, andstrategic investments in, third parties.***

*** ***

Weexpect to develop our business partly through forming alliances or jointventures with and making strategic investments in other companies, some of whichmay be companies at a relatively early stage of development. For example, in April 2003,we made an investment in XinTec, a company that provides chip scale packagingservices, and in June 2003 we made an investment in ImPac, a packagingservice company. In December 2005, VisEra, our joint venture with TSMC,completed the acquisition of a further 29.6% of the issued and outstandingshares of XinTec. In January 2007, TSMC acquired directly a 43.0% interestin XinTec, thus reducing our beneficial ownership in XinTec to 12.4%. In May 2007,we acquired approximately 20.0% of the registered capital of WLCSP, a companythat also provides chip scale packaging services.

 

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

 

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

 

***Changesin our relationships with our joint ventures and/or companies in which we holdless than a majority interest could change the way we account for suchinterests in the future.***

*** ***

Aspart of our strategy, we have formed joint ventures with two of our foundrypartners, and we hold a minority interest in three companies from which wepurchase certain manufacturing services. Under the applicable provisions ofgenerally accepted accounting principles in the United States of America, wecurrently consolidate one of these joint ventures into our consolidatedfinancial statements and results of operations, and record the equity intereststhat we do not own as minority interests. For the investments that we accountfor under the equity method, we record as part of other income or expense ourshare of the increase or decrease in the equity of the companies in which wehave invested. It is possible that, in the future, our relationships and/or ourinterests in or with these joint ventures or other investees could change. Suchchanges have in the past, and could in the future result in deconsolidation orconsolidation of such entities, as the case may be, which could result inchanges in our reported results.

 

***Wemay be unable to adequately protect our intellectual property, and therefore wemay lose some of our competitive advantage.***

*** ***

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

 

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***Litigationregarding intellectual property could divert management attention, be costly todefend and prevent us from using or selling the challenged technology.***

*** ***

Inrecent years, there has been significant litigation in the United Statesinvolving intellectual property rights, including in the semiconductorindustry. We have in the past been, and may in the future be, subject to legalproceedings and claims with respect to our intellectual property, includingsuch matters as trade secrets, patents, product liabilities and other actionsarising out of the normal course of business. These claims may increase as ourintellectual property portfolio becomes larger or more valuable. Intellectualproperty claims against us, and any resulting lawsuit, may cause us to incursignificant expenses, subject us to liability for damages and invalidate ourproprietary rights. Any potential intellectual property litigation against us wouldlikely be time-consuming and expensive to resolve and would divert management’stime and attention and could also force us to take actions such as:

 

·                  ceasing the sale or use of productsor services 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 orservices that incorporate the disputed intellectual property, which couldresult in substantial unanticipated development expenses and delay and preventus from selling the products until the redesign is completed, if at all.

 

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

 

***If wedo not effectively manage our growth, our ability to increase our revenues andimprove our earnings could be adversely affected.***

*** ***

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

 

·                  continuously improve our operational,financial and accounting systems;

 

·                  train and manage our existingemployee base;

 

·                  attract and retain qualifiedpersonnel with relevant experience; and

 

·                  effectively manage accountsreceivable and inventory.

 

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

 

Wemust also manage multiple relationships with customers, business partners andother third parties, such as our foundries and process and assembly vendors.Moreover, future growth could significantly overburden our management andfinancial systems and other resources. We may not make adequate allowances forthe costs and risks associated with our expansion. In addition, our systems,procedures or controls may not be adequate to support our operations, and we may not be able to expand quickly enough tocapitalize on potential market opportunities. Our future operatingresults will also depend, in part, on our ability to expand sales andmarketing, research and development, accounting, finance and administrativesupport.

 

***Ourfuture tax rates could be higher than we anticipate and may harm our results ofoperations***

*** ***

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

 

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Anumber of other factors will also affect our future tax rate, and certain ofthese factors could increase our effective tax rate in future periods, whichcould adversely impact our operating results. These factors include changes innon-deductible share-based compensation, changes in tax laws or theinterpretation of tax laws, changes in the proportion and geographic mix of ourrevenue or income, changes in the valuation of our deferred tax assets andliabilities, changes in available tax credits and the repatriation of non-U.S.earnings for which we have not previously provided for U.S. taxes.

 

***Oursales through distributors increase the complexity of our business and mayreduce our ability to forecast revenues.***

*** ***

Duringfiscal 2007 and 2008, approximately 40.0% and 33.2%, respectively, of ourrevenues came from sales through distributors. We expect that revenues fromsales through distributors will continue to represent a significant proportionof our total revenues. Selling through distributors reduces our ability toaccurately forecast sales and increases the complexity of our business,requiring us to, among other matters:

 

·                  manage a more complex supply chain;

 

·                  manage the level of inventory at eachdistributor;

 

·                  provide for credits, return rightsand price protection;

 

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

 

·                  monitor the financial condition andcreditworthiness of our distributors.

 

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

 

***Weface foreign business, political and economic risks, because a majority of ourproducts and those of our customers are manufactured and sold outside of theUnited States.***

*** ***

Weface difficulties in managing our third party foundries, color filter applicationservice providers, packaging and other manufacturing service providers and ourforeign distributors, most of whom are located in Asia. Any political andeconomic instability in Asia might have an adverse impact on foreign exchangerates and could cause service disruptions for our vendors and distributors andadversely affect our customers.

 

Salesoutside of the United States accounted for substantially all of our revenuesfor fiscal 2008 and the six months ended October 31, 2008. Weanticipate that sales outside of the United States will continue to account fora substantial portion of our revenues in future periods. Dependence on sales toforeign customers involves certain risks, including:

 

·                  longer payment cycles;

 

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

 

·                  decreased visibility as to futuredemand;

 

·                  difficulties in accounts receivablecollections; and

 

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

 

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

 

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***Ourbusiness could be harmed if we lose the services of one or more members of oursenior management team, or if we are unable to attract and retain qualifiedpersonnel.***

*** ***

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

 

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

 

***Werecently substantially completed the implementation of the first phase of a newenterprise resource planning system, a process which presents a number ofsignificant operational risks.***

*** ***

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

 

***Ouroperations may be impaired as a result of disasters, business interruptions orsimilar events.***

*** ***

Disastersand business interruptions such as earthquakes, water, fire, electricalfailure, accidents and epidemics affecting our operating activities, majorfacilities, and employees’ and customers’ health could materially and adverselyaffect our operating results and financial condition. In particular, our Asianoperations and most of our third party service providers involved in the manufacturingof our products are located within relative close proximity. Therefore, anydisaster that strikes within or close to that geographic area, such as therecent earthquake and flooding that occurred in China, could be extremelydisruptive to our business and could materially and adversely affect ouroperating results and financial condition. We have recently developed and arecurrently implementing a disaster recovery plan.

 

***Actsof war and terrorist acts may seriously harm our business and revenue, costsand expenses and financial condition.***

*** ***

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

 

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

 

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

*** ***

Provisionsof our certificate of incorporation and bylaws may discourage, delay or preventa merger or acquisition that a stockholder may consider favorable. Theseprovisions include:

 

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

 

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

 

·                  requiring supermajority voting toamend some provisions in our certificate of incorporation and bylaws;

 

·                  limiting the persons who may callspecial meetings of stockholders; and

 

·                  prohibiting stockholder actions bywritten consent.

 

Provisionsof Delaware law also may discourage, delay or prevent another company fromacquiring or merging with us. Our board of directors adopted a preferred stockrights agreement in August 2001. Pursuant to the rights agreement, ourboard of directors declared a dividend of one right to purchase oneone-thousandth share of our Series A Participating Preferred Stock foreach outstanding share of our common stock. The dividend was paid on September 28,2001 to stockholders of record as of the close of business on that date. Eachright entitles the registered holder to purchase from us one one-thousandth ofa share of Series A Preferred at an exercise price of $176.00, subject toadjustment. The exercise of the rights could have the effect of delaying,deferring or preventing a change of control of our company, including, withoutlimitation, discouraging a proxycontest or making more difficult the acquisition of a substantial block of ourcommon stock. The rights agreement could also limit the price that investorsmight be willing to pay in the future for our common stock.

 

***Our stock has been and willlikely continue to be subject to substantial price and volume fluctuations dueto a number of factors, many of which are beyond our control that may preventour stockholders from selling our common stock at a profit.***

*** ***

Themarket price of our common stock has fluctuated substantially, and there can beno assurance that such volatility will not continue. Since the beginning offiscal 2002 through October 31, 2008, the closing sales price of ourcommon stock has ranged from a high of $33.90 per share to a low of$1.26 per share. The closing sales price of our common stock on December 1,2008 was $5.52 per share. The securities markets have experiencedsignificant price and volume fluctuations in the past, and the market prices ofthe securities of semiconductor companies have been especially volatile. Thismarket volatility, as well as general economic, market or political conditions,could reduce the market price of our common stock in spite of our operatingperformance. The market price of our common stock may fluctuate significantlyin response to a number of factors, including:

 

·                  actual or anticipated fluctuations inour operating results;

 

·                  changes in expectations as to ourfuture financial 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 marketof possible 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 ourcompetitors of significant technical innovations, design wins, contracts,standards or acquisitions.

 

Due tothese factors, the price of our stock may decline and investors may be unableto resell their shares of our stock for a profit. In addition, the stock marketexperiences extreme volatility that often is unrelated to the performance of particularcompanies. These market fluctuations may cause our stock price to declineregardless of our performance.

 

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

 

The following table sets forth, for the periodsindicated, our purchases of our common stock in the second quarter offiscal 2009 (in thousands, except per share data):

 
| **Period**                                            | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid per  Share** | ** ** | **Total Number of  Shares  Purchased as  Part of a Publicly  Announced Plan** | ** ** | **Approximate  Dollar Value of  Shares that May  Yet Be Purchased  Under the Plan(1)** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|
| August 1, 2008 – August 31, 2008       |       | —                                           |       | $                                            | —     |                                                                                                             | —     |                                                                                                                           | $          | 13,800 |   |
| September 1, 2008 – September 30, 2008 |       | —                                           |       | —                                       |       | —                                                                                                           |       | $                                                                                                                              | 13,800     |   |
| October 1, 2008 – October 31, 2008     |       | 1,578                                            |       | 8.19                                         |       | 1,578                                                                                                            |       | $                                                                                                                              | 885        |   |
| Total                                                 |       | 1,578                                            |       | $                                            | 8.19       |                                                                                                             | 1,578      |                                                                                                                           |       |   |

 

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(1) OnFebruary 27, 2007, our board of directors approved a stock repurchaseprogram that provides for the repurchase of up to $100 million of ouroutstanding common stock. Subject to applicable securities laws, suchrepurchases will be at times and in amounts as we deem appropriate, based onfactors such as market conditions, legal requirements and other corporateconsiderations. See the section entitled *“Liquidityand Capital Resources”* in Item 2 of this Quarterly Report on Form 10-Qfor further information on this program.

 

**ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

Ourannual meeting of stockholders was held at our corporate headquarters at 4275Burton Drive, Santa Clara, California on September 25, 2008 at 10:00 a.m.local time. The results of the matters voted upon were as follows:

 

1.               Toelect two Class II directors to serve until the expiration of theirthree-year term or until their successor is duly elected and qualified.

 

| ** **         | ** ** | **Vote**   | ** ** |
|--------------------|------------|------------|------------|
| ** **         | ** ** | **For**    | ** ** | **Withheld** | ** ** |
| Andrew Wang        |       | 38,556,813 |       | 4,779,811 |   |
| Xinping (James) He |       | 41,503,596 |       | 1,833,028 |   |

 

Theterm of office of directors Shaw Hong, Joseph Jeng and Dwight Steffensencontinued after the annual meeting.

 

2.               Toratify the appointment of PricewaterhouseCoopers LLP as our independentregistered public accounting firm for the fiscal year ending April 30,2009.

 

| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** | **No Vote** | ** ** |
|------------|------------|-------------|------------|---------------|------------|------------------|------------|
| 42,932,318 |       | 372,416     |       | 31,890        |       | —           |       |

 

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**ITEM 6.   EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18.1             |       | First Amendment to Loan  and Security Agreement dated March 16, 2007, by and between the  Registrant and Citibank, N.A., dated October 31, 2008.                              |
| 31.1                |       | Certification of Chief  Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                   |
| 31.2                |       | Certification of Chief  Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                   |
| 32                  |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley  Act of 2002. |

 

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**SIGNATURES**

 

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

 
|                           | ** ** | ** **                                        |
|--------------------------------|------------|---------------------------------------------------|
|                           | ** ** | **OMNIVISION  TECHNOLOGIES, INC**.                |
|                           | * *   | *(Registrant)*                                    |
|                           |       |                                              |
|                           |       |                                              |
| Dated:  December 10, 2008 |       |                                              |
|                           |       |                                              |
|                           | By:        | **/s/ SHAW HONG**                                 |
|                           | ** ** | **Shaw Hong**                                     |
|                           | * *   | *Chief Executive Officer, President and Director* |
|                           | * *   | *(Principal  Executive Officer)*                  |
|                           |       |                                              |
|                           |       |                                              |
| Dated:  December 10, 2008 |       |                                              |
| ** **                     | ** ** | ** **                                        |
|                           | By:        | **/s/ ANSON CHAN**                                |
|                           | ** ** | **Anson Chan**                                    |
|                           | * *   | *Chief Financial Officer*                         |
| ** **                     | * *   | *(Principal  Financial and Accounting Officer)*   |

 

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**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18.1             |       | First Amendment to Loan  and Security Agreement dated March 16, 2007, by and between the  Registrant and Citibank, N.A., dated October 31, 2008.                              |
| 31.1                |       | Certification of Chief  Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                   |
| 31.2                |       | Certification of Chief  Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                   |
| 32                  |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley  Act of 2002. |

 

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