##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-29939
 
 OMNIVISION TECHNOLOGIES, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction 
of incorporation or organization)
    
    77-0401990
(I.R.S. Employer
Identification Number)
 1341 Orleans Drive, Sunnyvale, California 94089-1136
(Address of Principal Executive Offices) (Zip Code)
 Registrants telephone number, including area code: (408) 542-3000
 
 þ o
  þ o o
 o þ




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##### 



OMNIVISION TECHNOLOGIES, INC.
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets (unaudited)  October 31, 2006 and April 30, 2006
    
    
    3Condensed Consolidated Statements of Income (unaudited)  Three and Six Months Ended October 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited)  Six Months Ended October 31, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 4.
    
    Controls and Procedures
    
    
    47PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    48Item 1A.
    
    Risk Factors
    
    
    49Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    63Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    64Item 6.
    
    Exhibits
    
    
    64Signatures
    
    
    65Exhibit Index
    
    
    66EXHIBIT 10.13EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 OMNIVISION TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amounts)
 (unaudited)
 October 31,
    
    
    April 30,2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    207,035
    
    
    $
    240,227Short-term investments
    
    
    142,941
    
    
    
    114,278Accounts receivable, net
    
    
    75,288
    
    
    
    65,916Inventories
    
    
    103,693
    
    
    
    54,973Refundable and deferred income taxes
    
    
    1,689
    
    
    
    1,708Prepaid expenses and other current assets
    
    
    10,779
    
    
    
    9,158Recoverable insurance proceeds
    
    
    13,000
    
    
    
    Total current assets
    
    
    554,425
    
    
    
    486,260Property, plant and equipment, net
    
    
    83,921
    
    
    
    38,010Long-term investments
    
    
    20,301
    
    
    
    18,673Goodwill
    
    
    7,541
    
    
    
    4,892Intangibles, net
    
    
    25,540
    
    
    
    26,245Other non-current assets
    
    
    4,023
    
    
    
    3,189Total assets
    
    $
    695,751
    
    
    $
    577,269LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    78,076
    
    
    $
    42,770Accrued expenses and other current liabilities
    
    
    23,179
    
    
    
    21,351Litigation settlement accrual
    
    
    13,820
    
    
    
    Accrued income taxes payable
    
    
    63,939
    
    
    
    52,406Deferred income
    
    
    6,849
    
    
    
    6,329Current portion of capital lease obligations
    
    
    141
    
    
    
    152Total current liabilities
    
    
    186,004
    
    
    
    123,008Long-term liabilities:Capital lease obligations, less current portion
    
    
    208
    
    
    
    308Deferred tax liabilities
    
    
    3,071
    
    
    
    4,033Total long-term liabilities
    
    
    3,279
    
    
    
    4,341Total liabilities
    
    
    189,283
    
    
    
    127,349Commitments and contingencies (Note 15)Minority interest
    
    
    35,227
    
    
    
    27,113Stockholders equity:Common stock, $0.001 par value; 100,000 shares authorized; 60,552
issued and 54,682 outstanding at October 31, 2006 and 59,744
shares issued and 53,874 outstanding at April 30, 2006,
respectively
    
    
    61
    
    
    
    60Additional paid-in capital
    
    
    311,890
    
    
    
    285,112Accumulated other comprehensive income
    
    
    1,451
    
    
    
    1,092Treasury stock, 5,870 shares at October 31, 2006 and April 30, 2006
    
    
    (79,568
    )
    
    
    (79,568
    )Retained earnings
    
    
    237,407
    
    
    
    216,111Total stockholders equity
    
    
    471,241
    
    
    
    422,807Total liabilities, minority interest and stockholders equity
    
    $
    695,751
    
    
    $
    577,269
  3




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OMNIVISION TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share amounts)

(unaudited)
 Three Months Ended
    
    
    Six Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    137,656
    
    
    $
    126,820
    
    
    $
    274,531
    
    
    $
    222,814Cost of revenues
    
    
    92,101
    
    
    
    80,997
    
    
    
    179,256
    
    
    
    145,062Gross profit
    
    
    45,555
    
    
    
    45,823
    
    
    
    95,275
    
    
    
    77,752Operating expenses:Research, development and related
    
    
    18,657
    
    
    
    9,935
    
    
    
    35,499
    
    
    
    18,412Selling, general and administrative
    
    
    15,774
    
    
    
    9,059
    
    
    
    28,225
    
    
    
    15,837Litigation settlement
    
    
    3,300
    
    
    
    
    
    
    
    3,300
    
    
    
    Total operating expenses
    
    
    37,731
    
    
    
    18,994
    
    
    
    67,024
    
    
    
    34,249Income from operations
    
    
    7,824
    
    
    
    26,829
    
    
    
    28,251
    
    
    
    43,503Interest income, net
    
    
    3,366
    
    
    
    2,094
    
    
    
    6,769
    
    
    
    4,053Other income, net
    
    
    669
    
    
    
    36
    
    
    
    1,646
    
    
    
    59Income before income taxes and minority interest
    
    
    11,859
    
    
    
    28,959
    
    
    
    36,666
    
    
    
    47,615Provision for income taxes
    
    
    3,907
    
    
    
    5,791
    
    
    
    10,531
    
    
    
    9,523Minority interest
    
    
    2,537
    
    
    
    571
    
    
    
    4,839
    
    
    
    1,113Net income
    
    $
    5,415
    
    
    $
    22,597
    
    
    $
    21,296
    
    
    $
    36,979Net income per share:Basic
    
    $
    0.10
    
    
    $
    0.42
    
    
    $
    0.39
    
    
    $
    0.67Diluted
    
    $
    0.10
    
    
    $
    0.41
    
    
    $
    0.38
    
    
    $
    0.65Shares used in computing net income per share:Basic
    
    
    54,620
    
    
    
    53,807
    
    
    
    54,511
    
    
    
    55,493Diluted
    
    
    55,624
    
    
    
    55,486
    
    
    
    55,689
    
    
    
    57,193
  4




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months EndedOctober 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    21,296
    
    
    $
    36,979Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    7,822
    
    
    
    4,712Stock-based compensation
    
    
    15,277
    
    
    
    2Affiliates stock grants
    
    
    179
    
    
    
    Tax benefits from stock option exercises
    
    
    
    
    
    
    955Minority interest in net income of consolidated affiliates
    
    
    4,839
    
    
    
    1,113Equity investments (gain) loss, net
    
    
    (1,628
    )
    
    
    125Loss on disposal of property, plant and equipment
    
    
    7
    
    
    
    Changes in assets and liabilities:Accounts receivable, net
    
    
    (9,384
    )
    
    
    (13,679
    )Inventories
    
    
    (48,819
    )
    
    
    (12,823
    )Refundable and deferred income taxes
    
    
    
    
    
    
    54Prepaid expenses and other current assets
    
    
    (17,653
    )
    
    
    (2,170
    )Accounts payable
    
    
    35,349
    
    
    
    20,717Accrued expenses and other current liabilities
    
    
    14,702
    
    
    
    (392
    )Accrued income taxes payable
    
    
    11,535
    
    
    
    9,179Deferred income
    
    
    520
    
    
    
    2,789Deferred tax liabilities
    
    
    (962
    )
    
    
    (955
    )Net cash provided by operating activities
    
    
    33,080
    
    
    
    46,606Cash flows from investing activities:Purchases of short-term investments
    
    
    (125,672
    )
    
    
    (122,054
    )Proceeds from sales or maturities of short-term investments
    
    
    96,800
    
    
    
    121,375Purchases of property, plant and equipment, net of sales
    
    
    (49,143
    )
    
    
    (984
    )Proceeds from consolidation of VisEra, net of cash payments
    
    
    
    
    
    
    13,792Purchases of long-term investments
    
    
    
    
    
    
    (11,847
    )Purchases of intangible assets
    
    
    (548
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (78,563
    )
    
    
    282Cash flows from financing activities:Proceeds from short-term borrowings of consolidated affiliate
    
    
    
    
    
    
    3,981Repayment of short-term borrowings of consolidated affiliate
    
    
    
    
    
    
    (3,038
    )Payment of capital lease obligations
    
    
    (74
    )
    
    
    Cash contribution by minority shareholder
    
    
    4,290
    
    
    
    Affiliate cash dividend paid to minority shareholder
    
    
    (245
    )
    
    
    Proceeds from exercise of stock options and employee stock purchase plan
    
    
    8,345
    
    
    
    2,267Payment for repurchases of common stock
    
    
    
    
    
    
    (79,568
    )Net cash provided by (used in) financing activities
    
    
    12,316
    
    
    
    (76,358
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (25
    )
    
    
    263Net decrease in cash and cash equivalents
    
    
    (33,192
    )
    
    
    (29,207
    )Cash and cash equivalents at beginning of period
    
    
    240,227
    
    
    
    170,457Cash and cash equivalents at end of period
    
    $
    207,035
    
    
    $
    141,250Supplemental cash flow information:Income taxes paid
    
    $
    1,764
    
    
    $
    228Interest paid
    
    $
    13
    
    
    $
    Supplemental schedule of non-cash investing and financing activities:Capital equipment financing obligations
    
    $
    554
    
    
    $
    Affiliate shares issued to affiliate employees
    
    $
    459
    
    
    $
    Change-of-interest benefit from minority shareholder cash contribution
    
    $
    1,229
    
    
    $
    Issuance of escrow shares to CDM selling stockholders
    
    $
    34
    
    
    $
    
  5




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OMNIVISION TECHNOLOGIES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Note 1  Basis of Presentation
 Overview
   Use of Estimates
  Reclassifications
  Cash and
    
    Short-termCash Equivalents
    
    InvestmentsAs Reported
    
    Revised
    
    As Reported
    
    RevisedOctober 31, 2005
    
    $
    172,365
    
    
    $
    141,250
    
    
    $
    93,711
    
    
    $
    124,826
  Cash Flows ActivityAs Reported
    
    As RevisedPurchases of short-term investments
    
    $
    (48,164
    )
    
    $
    (122,054
    )Proceeds from sales or maturities of short-term investments
    
    
    45,000
    
    
    
    121,375Net decrease in cash and cash equivalents
    
    
    (31,692
    )
    
    
    (29,207
    )Cash and cash equivalents at beginning of period
    
    
    204,057
    
    
    
    170,457Cash and cash equivalents at end of period
    
    $
    172,365
    
    
    $
    141,250
 6




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Note 2  Summary of Significant Accounting Policies
 Principles of Consolidation
  Revenue Recognition
    Foreign Currency Translation
   7




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OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Cash and Cash Equivalents
   Inventories
   Stock-Based Compensation
 Share-Based Payment, Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation Share-Based Payment
   Transition Election Related to Accounting for Tax Effects of Share-based
Payment Awards
 8




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OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
  Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.
 Comprehensive Income (Loss)
  Recent Accounting Pronouncements
 How Sales Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That is, Gross Versus Net Presentation)
 Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109.
 9




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OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Fair
Value Measurements
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 Note 3  Short-Term Investments
  As of October 31, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueCertificates of deposit
    
    $
    4,540
    
    
    $
    
    
    
    $
    
    
    
    $
    4,540Municipal bonds and notes
    
    
    118,451
    
    
    
    10
    
    
    
    (14
    )
    
    
    118,447Commercial paper and bond funds
    
    
    19,950
    
    
    
    4
    
    
    
    
    
    
    
    19,954$
    142,941
    
    
    $
    14
    
    
    $
    (14
    )
    
    $
    142,941Contractual maturity dates, less than one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    107,877Contractual maturity dates, one year to two years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,721Contractual maturity dates, two years to 35
years(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,343$
    142,941
 As of April 30, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    

FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueMunicipal bonds and notes
    
    $
    95,445
    
    
    
    
    
    
    
    (39
    )
    
    $
    95,406Commercial paper
    
    
    18,900
    
    
    
    
    
    
    
    (28
    )
    
    
    18,872$
    114,345
    
    
    $
    
    
    
    $
    (67
    )
    
    $
    114,278Contractual maturity dates, less than one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    36,648Contractual maturity dates, one year to 34 years(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,630$
    114,278
 
 (1)
    
    Represents auction rate securities, which have a maturity date of up to 30 years
with the interest rate being reset principally up to every 35 days and variable rate
demand notes, which have a final maturity date of up to 35 years but whose interest rate
is reset at varying intervals typically between one and seven days. 10




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OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Note 4  Balance Sheet Accounts (in thousands)
 October 31,
    
    
    April 30,2006
    
    
    2006Cash and cash equivalents:Cash
    
    $
    10,509
    
    
    $
    8,597Money market funds and certificates of deposit
    
    
    123,294
    
    
    
    197,030Commercial paper and government bonds
    
    
    73,232
    
    
    
    34,600$
    207,035
    
    
    $
    240,227Accounts receivable, net:Accounts receivable
    
    $
    82,146
    
    
    $
    73,412Less: Allowance for doubtful accounts
    
    
    (1,028
    )
    
    
    (1,067
    )Allowance for sales returns
    
    
    (5,830
    )
    
    
    (6,429
    )$
    75,288
    
    
    $
    65,916Inventories:Work in progress
    
    $
    68,772
    
    
    $
    34,310Finished goods
    
    
    34,921
    
    
    
    20,663$
    103,693
    
    
    $
    54,973Prepaid expenses and other current assets:Prepaid expenses
    
    $
    3,489
    
    
    $
    2,758Deposits and other
    
    
    5,518
    
    
    
    4,556Interest receivable
    
    
    1,772
    
    
    
    1,844$
    10,779
    
    
    $
    9,158Property, plant and equipment, net:Buildings and land use right
    
    $
    7,368
    
    
    $
    7,163Buildings/leasehold improvements
    
    
    3,235
    
    
    
    2,702Machinery and equipment
    
    
    46,095
    
    
    
    34,185Furniture and fixtures
    
    
    765
    
    
    
    713Software
    
    
    2,649
    
    
    
    2,280Construction in progress
    
    
    40,444
    
    
    
    3,248100,556
    
    
    
    50,291Less: Accumulated depreciation and amortization
    
    
    (16,635
    )
    
    
    (12,281
    )$
    83,921
    
    
    $
    38,010Accrued expenses and other current liabilities:Employee compensation
    
    $
    7,345
    
    
    $
    5,301Third party commissions
    
    
    1,501
    
    
    
    1,876Acquisition costs
    
    
    
    
    
    
    2,095Professional services
    
    
    1,862
    
    
    
    2,494Noncancelable purchase commitments
    
    
    2,169
    
    
    
    2,627Pricing adjustments
    
    
    6,935
    
    
    
    3,968Other
    
    
    3,367
    
    
    
    2,990$
    23,179
    
    
    $
    21,351
 11




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Note 5  Long-term Investments
  October 31,
    
    
    April 30,2006
    
    
    2006ImPac
    
    $
    2,477
    
    
    $
    2,130XinTec
    
    
    17,824
    
    
    
    16,543Total
    
    $
    20,301
    
    
    $
    18,673
 ImPac Technology Co., Ltd.
  XinTec, Inc.
    12




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OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Note 6  Consolidated Affiliates
 Silicon Optronics, Inc.
    VisEra Technologies Company, Ltd.
   13




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OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Consolidation of Variable Interest Entities
     Note 7  Intangible Assets and Goodwill
  AccumulatedCost
    
    
    Amortization
    
    
    Net Book ValueCore technology
    
    $
    17,800
    
    
    $
    5,340
    
    
    $
    12,460Patents and licenses
    
    
    13,460
    
    
    
    3,174
    
    
    
    10,286Other intangible assets
    
    
    2,073
    
    
    
    309
    
    
    
    1,764Trademarks and tradenames
    
    
    1,400
    
    
    
    420
    
    
    
    980Customer relationships
    
    
    100
    
    
    
    50
    
    
    
    50Intangible assets, net
    
    $
    34,833
    
    
    $
    9,293
    
    
    $
    25,540
 14




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
  AccumulatedCost
    
    
    Amortization
    
    
    Net Book ValueCore technology
    
    $
    17,800
    
    
    $
    3,560
    
    
    $
    14,240Patents and licenses
    
    
    11,260
    
    
    
    1,865
    
    
    
    9,395Other intangible assets
    
    
    1,525
    
    
    
    102
    
    
    
    1,423Trademarks and tradenames
    
    
    1,400
    
    
    
    280
    
    
    
    1,120Customer relationships
    
    
    100
    
    
    
    33
    
    
    
    67Intangible assets, net
    
    $
    32,085
    
    
    $
    5,840
    
    
    $
    26,245
  Years Ending April 30,2007
    
    $
    3,4902008
    
    
    6,9802009
    
    
    6,9472010
    
    
    6,8002011
    
    
    1,286Thereafter
    
    
    37Total
    
    $
    25,540
  GoodwillBalance at April 30, 2006
    
    $
    4,892Increase in goodwill associated with CDM acquisition in fiscal 2005(1)
    
    
    2,649Balance at October 31, 2006
    
    $
    7,541
 
 (1)
    
    In the three months ended October 31, 2006, the Company increased Goodwill
related to its acquisition of CDM by $2.6 million. The increase was partially related to a
put option that expired during the current quarter with respect to the remaining CDM
escrow shares. The escrow shares were puttable back to the Company at a premium and
145,000 shares were put to the Company for cash totaling $2.8 million. Additionally, the
value of the initial shares that were issued in April 2005 as part of the CDM acquisition
was also increased due to a put option that expired unexercised
subsequent to their
original issuance. Both amounts should have been recorded as part of the
initial acquisition of CDM. Note 8  Credit Facilities of Consolidated Affiliates
  Note 9  Capital Lease Obligations
  15




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
  Note 10  Net Income Per Share
   Earnings Per Share,
 16




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
  Three Months Ended
    
    
    Six Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic:Numerator:Net income
    
    $
    5,415
    
    
    $
    22,597
    
    
    $
    21,296
    
    
    $
    36,979Denominator:Weighted average common shares for net
income per share
    
    
    54,620
    
    
    
    53,807
    
    
    
    54,511
    
    
    
    55,493Basic net income per share
    
    $
    0.10
    
    
    $
    0.42
    
    
    $
    0.39
    
    
    $
    0.67Diluted:Numerator:Net income
    
    $
    5,415
    
    
    $
    22,597
    
    
    $
    21,296
    
    
    $
    36,979Dilutive effect of SOI consolidation
    
    
    (2
    )
    
    
    (9
    )
    
    
    (3
    )
    
    
    (20
    )Net income for diluted computation
    
    $
    5,413
    
    
    $
    22,588
    
    
    $
    21,293
    
    
    $
    36,959Denominator:Denominator for basic net income per share
    
    
    54,620
    
    
    
    53,807
    
    
    
    54,511
    
    
    
    55,493Weighted average effect of common stock
options
    
    
    1,004
    
    
    
    1,679
    
    
    
    1,178
    
    
    
    1,700Weighted average common shares for
diluted net income per share
    
    
    55,624
    
    
    
    55,486
    
    
    
    55,689
    
    
    
    57,193Diluted net income per share
    
    $
    0.10
    
    
    $
    0.41
    
    
    $
    0.38
    
    
    $
    0.65
 Note 11  Segment and Geographic Information
   Three Months Ended
    
    
    Six Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005OEMs and VARs
    
    
    62.7
    %
    
    
    69.2
    %
    
    
    65.4
    %
    
    
    71.2
    %Distributors
    
    
    37.3
    
    
    
    30.8
    
    
    
    34.6
    
    
    
    28.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 17




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
  Three Months Ended
    
    
    Six Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Hong Kong
    
    $
    51,984
    
    
    $
    57,300
    
    
    $
    102,066
    
    
    $
    101,592China
    
    
    38,903
    
    
    
    20,197
    
    
    
    64,895
    
    
    
    34,029Taiwan
    
    
    29,081
    
    
    
    25,011
    
    
    
    57,052
    
    
    
    43,690South Korea
    
    
    7,287
    
    
    
    11,476
    
    
    
    21,528
    
    
    
    17,188Japan
    
    
    4,855
    
    
    
    11,203
    
    
    
    17,943
    
    
    
    22,430United States
    
    
    1,259
    
    
    
    1,463
    
    
    
    3,752
    
    
    
    2,420All other
    
    
    4,287
    
    
    
    170
    
    
    
    7,295
    
    
    
    1,465Total
    
    $
    137,656
    
    
    $
    126,820
    
    
    $
    274,531
    
    
    $
    222,814
  October 31,
    
    
    April 30,2006
    
    
    2006Taiwan
    
    $
    86,126
    
    
    $
    40,637China
    
    
    16,962
    
    
    
    17,146United States
    
    
    1,538
    
    
    
    1,633All other
    
    
    504
    
    
    
    456Total
    
    $
    105,130
    
    
    $
    59,872
 Note 12  Employee Stock Purchase and Stock Option Plans
 2000 Employee Stock Purchase Plan
  1995 Stock Option Plan
  18




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
   2000 Stock Plan
   2000 Director Option Plan
  19




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Stock-Based Compensation Award Activity
  Options outstandingWeightedOptions
    
    
    
    
    
    
    AverageAvailable
    
    
    Number
    
    
    PriceFor Grant
    
    
    of Shares
    
    
    Per Share(in
    
    
    (inthousands)
    
    
    thousands)Balance at April 30, 2006
    
    
    3,041
    
    
    
    8,963
    
    
    $
    16.22Replenished
    
    
    3,135
    
    
    
    
    
    
    
    Granted
    
    
    (5,017
    )
    
    
    5,017
    
    
    
    21.56Exercised
    
    
    
    
    
    
    (709
    )
    
    
    9.87Expired or forfeited
    
    
    475
    
    
    
    (475
    )
    
    
    20.53Balance at October 31, 2006
    
    
    1,634
    
    
    
    12,796
    
    
    
    18.50Vested and expected to vest at October 31, 2006
    
    
    
    
    
    
    11,763
    
    
    $
    18.24
  Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    WeightedRemaining
    
    
    Average
    
    
    Aggregate
    
    
    Options
    
    
    Remaining
    
    
    Average
    
    
    AggregateRange of Exercise
    
    Options
    
    
    Contractual
    
    
    Exercise
    
    
    Intrinsic
    
    
    Vested and
    
    
    Contractual
    
    
    Exercise
    
    
    IntrinsicPrices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Value
    
    
    Exercisable
    
    
    Life
    
    
    Price
    
    
    Value(in
    
    
    (in
    
    
    
    
    
    
    
    
    
    
    (in(in thousands)
    
    
    (in years)
    
    
    
    
    
    
    thousands)
    
    
    thousands)
    
    
    (in years)
    
    
    
    
    
    
    thousands)$0.15$12.14
    
    
    1,871
    
    
    
    5.88
    
    
    $
    7.21
    
    
    
    
    
    
    
    1,546
    
    
    
    
    
    
    $
    6.26$12.15$16.40
    
    
    2,796
    
    
    
    7.38
    
    
    
    15.69
    
    
    
    
    
    
    
    2,022
    
    
    
    
    
    
    
    15.75$16.41$18.77
    
    
    2,966
    
    
    
    9.50
    
    
    
    17.14
    
    
    
    
    
    
    
    358
    
    
    
    
    
    
    
    17.69$18.78$25.40
    
    
    2,465
    
    
    
    7.92
    
    
    
    23.88
    
    
    
    
    
    
    
    1,075
    
    
    
    
    
    
    
    23.47$25.41$30.05
    
    
    2,698
    
    
    
    9.51
    
    
    
    25.84
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    27.72$0.15$30.05
    
    
    12,796
    
    
    
    8.20
    
    
    $
    18.50
    
    
    $
    19,262
    
    
    
    5,076
    
    
    
    6.92
    
    
    $
    14.81
    
    
    $
    17,067
    20




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Impact of the Adoption of SFAS No. 123(R)
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedOctober 31,
    
    
    October 31,2006
    
    
    2006Stock-based compensation expense by type of award:Employee stock options
    
    $
    8,423
    
    
    $
    14,453Employee stock purchase plan
    
    
    399
    
    
    
    824Total stock-based compensation
    
    
    8,822
    
    
    
    15,277Tax effect
    
    
    1,152
    
    
    
    1,944Net effect on net income
    
    $
    7,670
    
    
    $
    13,333
 Valuation Assumptions
   21




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
  Employee Stock Option PlansThree Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    4.81
    %
    
    
    4.00
    %
    
    
    4.94
    %
    
    
    3.72
    %Expected term of options (in years)
    
    
    4.0
    
    
    
    3.5
    
    
    
    4.0
    
    
    
    3.5Expected volatility
    
    
    62.3
    %
    
    
    80.9
    %
    
    
    64.8
    %
    
    
    84.1
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
   Employee Stock Purchase PlanThree Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    5.11
    %
    
    
    3.65
    %
    
    
    5.11
    %
    
    
    3.47
    %Expected term of options (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Expected volatility
    
    
    57.2
    %
    
    
    36.4
    %
    
    
    57.2
    %
    
    
    39.6
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  
    
    Expected term:The expected term represents the period that the Companys stock-based
awards are expected to be outstanding and is estimated based on historical experience.
    
    Risk-free interest rate:The risk-free interest rate assumption is based upon observed
interest rates appropriate for the expected term of the Companys stock-based awards.
    
    Expected volatility:The Company determines expected volatility based on an average
between the historical volatility of the Companys common stock and the implied volatility
based on the Companys traded options.
    
    Dividend yield:The dividend yield assumption reflects the Companys intention not to
issue a dividend under its dividend policy.
    
    Estimated pre-vesting forfeitures:When estimating pre-vesting forfeitures, the Company
considers forfeiture behavior based on actual historical information.
 22




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 Periods Prior to Adoption of SFAS No. 123(R)
 Accounting for Stock-Based Compensation  Transition and Disclosures.
 Three Months
    
    
    Six MonthsEnded
    
    
    EndedOctober 31,
    
    
    October 31,2005
    
    
    2005Net income, as reported
    
    $
    22,597
    
    
    $
    36,979Deduct: Total stock-based employee compensation
determined under fair value based method for all awards,
net of related tax effects
    
    
    5,808
    
    
    
    11,348As adjusted net income
    
    $
    16,789
    
    
    $
    25,631Net income per share  Basic:As reported
    
    $
    0.42
    
    
    $
    0.67As adjusted
    
    $
    0.31
    
    
    $
    0.46Net income per share  Diluted:As reported
    
    $
    0.41
    
    
    $
    0.65As adjusted
    
    $
    0.31
    
    
    $
    0.46Shares used in computing net income per share  Basic:As reported
    
    
    53,807
    
    
    
    55,493As adjusted
    
    
    53,807
    
    
    
    55,493Shares used in computing net income per share  Diluted:As reported
    
    
    55,486
    
    
    
    57,193As adjusted
    
    
    53,807
    
    
    
    55,493
 Note 13  Additional Paid-in Capital
  AdditionalPaid-inCapitalBalance at May 1, 2006
    
    $
    285,112Exercise of stock options
    
    
    6,993Employee stock purchase plan
    
    
    1,351Compensation related to stock options granted
    
    
    15,277Gain from minority investment
    
    
    1,229Goodwill adjustment for put rights issued to CDM selling stockholders
    
    
    1,894Shares issued for CDM Optics acquisition
    
    
    34Balance at October 31, 2006
    
    $
    311,890
 Note 14  Treasury Stock
  23




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
  Note 15  Commitments and Contingencies
 Commitments
    Litigation
  McKee v. OmniVision Technologies, Inc., et. al.,
Civil Action No. 01CV 10775 In re Initial Public Offering Securities Litigation, 21 MC 92
 24




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
 In re Initial Public Offering Securities Litigation
 In
re OmniVision Technologies, Inc.,
 Hackl v. Hong
 Note 16  Related Party Transactions
   25




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##### Table of Contents



OMNIVISION TECHNOLOGIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
For the Three and Six Months Ended October 31, 2006 and 2005
(unaudited)
   Note 17 Subsequent Event
   26




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 The following information should be read in conjunction with our unaudited condensed interim
financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form
10-Q. The following discussion contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
involve risks and uncertainties. Forward-looking statements generally include words such as may,
will, plans, seeks, expects, anticipates, outlook, intends, believes and words of
similar import as well as the negative of those terms. In addition, any statements that refer to
expectations, projections or other characterizations of future events or circumstances, including
any underlying assumptions, are forward-looking statements. All forward-looking statements included
in this Quarterly Report on Form 10-Q, including, but not limited to, statements regarding the
expansion of our testing capabilities and packaging capacity, manufacturing services to be provided
by VisEra, future trends and opportunities in certain markets, the development, introduction and
capabilities of new products, the establishment of partnerships with other companies, increased
unit volume sales, the increase of competition in our industry, the continued importance of the
camera cell phone market to our business, continued price competition and reduction of average
selling prices with respect to our products, the extent of certain future expenses, our effective
tax rate for fiscal 2007, our future investments, our working capital requirements in fiscal 2007,
and the sufficiency of our available cash, cash equivalents and short-term investments are based on
current expectations and are subject to important factors that could cause actual results to differ
materially from those projected in the forward-looking statements. Such important factors include,
but are not limited to, those set forth under the caption Item 1A. Risk Factors, beginning on
page 49 of this Quarterly Report and elsewhere in this Quarterly Report and in other documents we
file with the U.S. Securities and Exchange Commission. All subsequent written and oral
forward-looking statements by or attributable to us or persons acting on our behalf are expressly
qualified in their entirety by such factors.
 OmniVision and OmniPixel are registered trademarks of OmniVision Technologies, Inc.
CameraChip, OmniPixel2, OmniQSP, VarioPixel and VarioPixel2 are trademarks of OmniVision
Technologies, Inc. Wavefront Coded is a registered trademark of CDM Optics, Inc., a wholly-owned
subsidiary of OmniVision Technologies, Inc. Wavefront Coding is a trademark of CDM Optics, Inc.
 Overview
  Technology
  ®
 27




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)
  New Products
 1 4
     Joint Venture with TSMC
  28




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)
     Joint Venture with PSC
  29




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)
 Acquisition of CDM
   Capital Resources
   The Current Economic and Market Environment
   30




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)
         31




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)
       32




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)
   Sources of Revenues
      33




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)
 Critical Accounting Policies
 Share-Based Payment,
 Stock-Based Compensation Expense
   Results of Operations
  Three Months Ended
    
    Six Months EndedOctober 31,
    
    October 31,2006
    
    2005
    
    2006
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    66.9
    
    
    
    63.9
    
    
    
    65.3
    
    
    
    65.1Gross margin
    
    
    33.1
    
    
    
    36.1
    
    
    
    34.7
    
    
    
    34.9Operating expenses:Research, development and related
    
    
    13.5
    
    
    
    7.8
    
    
    
    12.9
    
    
    
    8.3Selling, general and administrative
    
    
    11.5
    
    
    
    7.1
    
    
    
    10.3
    
    
    
    7.1Litigation settlement
    
    
    2.4
    
    
    
    
    
    
    
    1.2
    
    
    
    Total operating expenses
    
    
    27.4
    
    
    
    14.9
    
    
    
    24.4
    
    
    
    15.4Income from operations
    
    
    5.7
    
    
    
    21.2
    
    
    
    10.3
    
    
    
    19.5Interest income, net
    
    
    2.4
    
    
    
    1.6
    
    
    
    2.5
    
    
    
    1.9Other income, net
    
    
    0.5
    
    
    
    
    
    
    
    0.6
    
    
    
    Income before income taxes and minority interest
    
    
    8.6
    
    
    
    22.8
    
    
    
    13.4
    
    
    
    21.4Provision for income taxes
    
    
    2.8
    
    
    
    4.6
    
    
    
    3.8
    
    
    
    4.3Minority interest
    
    
    1.9
    
    
    
    0.4
    
    
    
    1.8
    
    
    
    0.5Net income
    
    
    3.9
    %
    
    
    17.8
    %
    
    
    7.8
    %
    
    
    16.6
    %
 34




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
(Continued)
 Three Months Ended October 31, 2006 as Compared to Three Months Ended October 31, 2005
 Revenues
  Revenues from Sales to OEMs and VARs as Compared to Distributors
  Three Months EndedOctober 31,2006
    
    2005OEMs and VARs
    
    
    62.7
    %
    
    
    69.2
    %Distributors
    
    
    37.3
    
    
    
    30.8Total
    
    
    100.0
    %
    
    
    100.0
    %
 OEMs and VARs.
 Distributors.
 Revenues from Domestic Sales as Compared to Foreign Sales
  Three Months EndedOctober 31,2006
    
    2005Domestic sales
    
    
    0.9
    %
    
    
    1.2
    %Foreign sales
    
    
    99.1
    
    
    
    98.8Total
    
    
    100.0
    %
    
    
    100.0
    %
  35




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##### Table of Contents



ITEM 2.
    
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
 Gross Profit
   Research, Development and Related Expenses
   Selling, General and Administrative Expenses
   36




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##### Table of Contents



ITEM 2.
    
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
  Litigation Settlement
 Note 15  Commitments and Contingencies
 Interest Income, Net
  Other Income, Net
 Note
5  Long-term Investments
 Provision for Income Taxes
  37




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##### Table of Contents



ITEM 2.
    
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
 Minority Interest
  Six Months Ended October 31, 2006 as Compared to Six Months Ended October 31, 2005
 Revenues
  Revenues from Sales to OEMs and VARs as Compared to Distributors
  Six Months EndedOctober 31,2006
    
    
    2005OEMs and VARs
    
    
    65.4
    %
    
    
    71.2
    %Distributors
    
    
    34.6
    
    
    
    28.8Total
    
    
    100.0
    %
    
    
    100.0
    %
 OEMs and VARs.
 Distributors.
 Revenues from Domestic Sales as Compared to Foreign Sales
  Six Months EndedOctober 31,2006
    
    
    2005Domestic sales
    
    
    1.4
    %
    
    
    1.1
    %Foreign sales
    
    
    98.6
    
    
    
    98.9Total
    
    
    100.0
    %
    
    
    100.0
    %
 38




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##### Table of Contents



ITEM 2.
    
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
 Gross Profit
   Research, Development and Related Expenses
   Selling, General and Administrative Expenses
   Litigation Settlement
  39




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ITEM 2.
    
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
 Note 15  Commitments and Contingencies
 Interest Income, Net
  Other Income, Net
 Note 5  Long-term Investments
 Provision for Income Taxes
  Minority Interest
  Liquidity and Capital Resources
  Liquidity
  40




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ITEM 2.
    
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
   Cash Flows from Operating Activities
   41




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ITEM 2.
    
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
  Cash Flows From Investing Activities
   Cash and
    
    Short-termCash Equivalents
    
    InvestmentsAs Reported
    
    Revised
    
    As Reported
    
    RevisedOctober 31, 2005
    
    $
    172,365
    
    
    $
    141,250
    
    
    $
    93,711
    
    
    $
    124,826
  Cash Flow ActivityAs Reported
    
    As RevisedPurchases of short-term investments
    
    $
    (48,164
    )
    
    $
    (122,054
    )Proceeds from sales or maturities of short-term investments
    
    
    45,000
    
    
    
    121,375Net decrease in cash and cash equivalents
    
    
    (31,692
    )
    
    
    (29,207
    )Cash and cash equivalents at beginning of period
    
    
    204,057
    
    
    
    170,457Cash and cash equivalents at end of period
    
    $
    172,365
    
    
    $
    141,250
 Cash Flows From Financing Activities
  42




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
 Capital Resources
    Risk Factors.
 Contractual Obligations and Commercial Commitments
  Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1 - 3 Years
    
    
    3 - 5 Years
    
    
    5 YearsContractual Obligations:Operating leases
    
    $
    29,874
    
    
    $
    8,271
    
    
    $
    13,169
    
    
    $
    3,102
    
    
    $
    5,332Noncancelable orders
    
    
    75,720
    
    
    
    75,720
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    
    105,594
    
    
    
    83,991
    
    
    
    13,169
    
    
    
    3,102
    
    
    
    5,332Other Commercial Commitments:Investment in HWSC
    
    
    10,300
    1
    
    
    10,300
    
    
    
    
    
    
    
    
    
    
    
    Joint Venture with TSMC
    
    
    6,069
    2
    
    
    6,069
    
    
    
    
    
    
    
    
    
    
    
    Investment in Shanghai Design
Center
    
    
    4,900
    3
    
    
    4,900
    
    
    
    
    
    
    
    
    
    
    
    XinTec equipment consignment
    
    
    25,100
    4
    
    
    25,100Total commercial commitments
    
    
    46,369
    
    
    
    46,369
    
    
    
    
    
    
    
    
    
    
    
    Total contractual
obligations and commercial
commitments
    
    $
    151,963
    
    
    $
    130,360
    
    
    $
    13,169
    
    
    $
    3,102
    
    
    $
    5,332
 
 1
    
    Represents the remaining $10.3 million of registered capital for our subsidiary,
HWSC. We established this subsidiary as part of our efforts to increase capacity and reduce
costs for testing our image-sensor products. Under an agreement with the Chinese government,
the date by which the remaining $10.3 million of registered capital must be funded is now
January 17, 2007.2
    
    On August 12, 2005, our wholly-owned subsidiary, OmniVision International Holding
Ltd., entered into an Amended and Restated Shareholders Agreement, or the Amended VisEra
Agreement, with Taiwan 43




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
 Semiconductor Manufacturing Co., Ltd., or TSMC, VisEra Technologies
Company, Ltd., or VisEra, and VisEra Holding Company, or VisEra Cayman. In order to provide
greater financial and fiscal flexibility to VisEra, in connection with the Amended VisEra
Agreement, the parties formed VisEra Cayman, a company incorporated in the Cayman Islands,
and VisEra became a subsidiary of VisEra Cayman. The Amended VisEra Agreement amended and
restated the original Shareholders Agreement that the parties entered into on October 29,
2003, pursuant to which the Company and TSMC agreed to form VisEra, a joint venture in
Taiwan, for the purposes of providing manufacturing services and automated final testing
services related to CMOS image sensors. In November 2003, pursuant to the terms of the
original Shareholders Agreement, we contributed $1.5 million in cash to VisEra and granted a
non-exclusive license to certain of our manufacturing and automated final testing
technologies and patents. In September 2005, we contributed a
further $7.5 million to VisEra Cayman. In November 2005, pursuant to the Amended VisEra
Agreement, we contributed an additional $9.5 million in cash to VisEra Cayman. As a result of
our step acquisition, and in accordance with the provisions of FIN 46, we consolidated the
results of VisEra beginning in the fiscal quarter ended October 31, 2005. See Note 6 to our
condensed consolidated financial statements.Under the terms of the Amended VisEra Agreement, the parties reaffirmed their respective
commitments to VisEra, and expanded the scope of and made certain modifications to the original
Shareholders Agreement. In particular, the parties agreed to raise the total capital committed
to the joint venture from $50 million to $68 million, which commitments may be made in the form
of cash or asset contributions. The parties have equal interests in VisEra and VisEra Cayman.
To date we have contributed $18.5 million to VisEra and VisEra Cayman. A minimum of an
additional $6.5 million in cash or asset contributions will be made by each of the parties,
with the remaining $10.7 million to be made by additional investors, additional contributions
by the parties, or a combination thereof, provided that the parties have and will maintain
equal interests in VisEra Cayman. In November 2006, we contributed approximately $6.1 million
in another round of financing with certain other assets to be contributed to the joint venture
at an undetermined date, including technology, plant and equipment currently owned by us or to
be purchased with funds for existing commercial commitments. To the extent, if any, that the
value of the assets contributed exceeds the value of our commitment, we will receive cash from
VisEra Cayman. See Note 16 to our condensed consolidated financial statements.Pursuant to the terms of the Amended VisEra Agreement, VisEra Cayman used approximately $12.3
million of the $18.0 million increase in the total capital commitment for the acquisition of
approximately 29.6% of the issued shares of XinTec, of which we own separately and directly
approximately 7.8%. See Notes 5, 15 and 16 in our condensed consolidated financial statements.All other material terms of the original Shareholders Agreement remain in effect.3
    
    We intend to increase our investment in the Shanghai Design Center by $4.9
million before March 7, 2009. The investment will provide additional design capacity. See
Note 15 to our condensed consolidated financial statements.4
    
    On August 31, 2006, we entered into an Equipment Procurement Agreement (the Equipment
Agreement) with XinTec. Under the terms of the Equipment Agreement, XinTec has agreed to
provide wafer level packaging services to us on the terms and conditions of a
manufacturing agreement to be negotiated between the parties. We have agreed to procure, through XinTec, up to $50 million
of certain equipment to be located at XinTecs facilities for the sole purpose of providing
such wafer level packaging services to us. See Note 5 to our condensed
consolidated financial statements. Off-Balance Sheet Arrangements
  44




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Continued)
 Recent Accounting Pronouncements
 How Sales Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That is, Gross Versus Net Presentation)
 Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No.
109.
 Fair Value Measurements
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 45




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Exchange Risk
      Market Interest Rate Risk
  46




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ITEM 4. CONTROLS AND PROCEDURES
 (a) Evaluation of Disclosure Controls and Procedures.
  (b) Changes in Internal Controls.
  47




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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  McKee v. OmniVision Technologies, Inc., et. al.,
Civil Action No. 01CV 10775 In re Initial Public Offering
Securities Litigation, 21 MC 92 In re
Initial Public Offering Securities Litigation
 In re OmniVision
Technologies, Inc.,
 Hackl v. Hong
 48




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ITEM 1A. RISK FACTORS
 This Quarterly Report on Form 10-Q , including Managements Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking statements. These
forward-looking statements are subject to substantial risks and uncertainties that could cause our
future business, financial condition or results of operations to differ materially from our
historical results or currently anticipated results, including those set forth below.
 The following description of these risk factors includes any material changes to and
supersedes the description of the risk factors associated with our business previously disclosed in
Item 1A of our 2006 Annual Report on Form 10-K filed with the SEC on July 14, 2006. As a result of
the following risk factors, as well as of other variables affecting our operating results, past
financial performance may not be a reliable indicator of future performance, and historical trends
should not be used to anticipate results or trends in future periods.
 Risks Related to Our Business
 We face intense competition in our markets from more established CMOS and CCD image sensor
manufacturers, and if we are unable to compete successfully we may not be able to maintain or
grow our business.
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Declines in our average selling prices may result in declines in our revenues and gross margins.
  Sales of our image-sensor products for camera cell phones account for a large portion of our
revenues, and any decline in sales to the camera cell phone market or failure of this market to
continue to grow as expected could adversely affect our results of operations.
  Our future success depends on the timely development, introduction, marketing and selling of new
CMOS image sensors, which we might not be able to achieve.
  50




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
    
    accurate prediction of market requirements and evolving standards, including
pixel resolution, output interface standards, power requirements, optical lens size,
input standards and operating systems for personal computers and other platforms;
    
    development of advanced technologies and capabilities;
    
    definition, timely completion and introduction of new CMOS image sensors that
satisfy customer requirements;
    
    development of products that maintain a technological advantage over the
products of our competitors, including our advantages with respect to the functionality
and pixel capability of our image-sensor products and our proprietary testing processes;
and
    
    market acceptance of the new products.
  Failure to obtain design wins could cause our market share and revenues to decline and could
impair our ability to grow our business.
  We depend on a limited number of third party wafer foundries, which reduces our ability to
control our manufacturing process.
   
    
    reduced control over delivery schedules, quality assurance, manufacturing
yields and production costs;
    
    lack of guaranteed production capacity or product supply;
    
    unavailability of, or delayed access to, next generation or key process technologies; and
    
    financial difficulties or disruptions in the operations of third party
foundries due to causes beyond our control.
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We rely on a joint venture company for color filter application and on third party service
providers for packaging services, which reduces our control over delivery schedules, product
quality and cost, and could adversely affect our ability to deliver products to customers.
   Fluctuations in our quarterly operating results make it difficult to predict our future
performance and may result in volatility in the market price of our common stock.
  
    
    the volume and mix of our product sales;
    
    competitive pricing pressures;
    
    our ability to accurately forecast demand for our products;
    
    our ability to achieve acceptable wafer manufacturing or back-end processing yields;
    
    our gain or loss of a large customer;
    
    our ability to manage our product transitions;
    
    the availability of production capacity at the suppliers that manufacture our
products or components of our products;
    
    the growth of the market for products and applications using CMOS image sensors;
    
    the timing and size of orders from our customers;
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
    
    the volume of our product returns;
    
    the seasonal nature of customer demand for our products;
    
    the deferral of customer orders in anticipation of new products, product designs or enhancements;
    
    the announcement and introduction of products and technologies by our competitors; and
    
    the level of our operating expenses.
   Problems with wafer manufacturing and/or back-end processing yields could result in higher
product costs and could impair our ability to meet customer demand for our products.
  If we do not forecast customer demand correctly, our business could be impaired and our stock
price may decline.
  53




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We depend on the increased acceptance of mass-market image sensor applications to grow our
business and increase our revenues.
   Our lengthy manufacturing, packaging and assembly cycle, in addition to our customers design
cycle, may result in uncertainty and delays in generating revenues.
  54




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Our ability to deliver products that meet customer demand is dependent upon our ability to meet
new and changing requirements for color filter application and sensor packaging.
  The high level of complexity and integration of our products increases the risk of latent
defects, which could damage customer relationships and increase our costs.
  Historically, our revenues have been dependent upon a few key customers, the loss of one or more
of which could significantly reduce our revenues.
  Changes in accounting rules for stock-based compensation adversely affect our reported operating
results, and may adversely affect our stock price and our competitiveness in the employee
marketplace.
 Share-Based Payment.
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We may be required to record a significant charge to earnings if our goodwill or amortizable
intangible assets become impaired.
  We maintain a backlog of customer orders that is subject to cancellation or delay in delivery
schedules, and any cancellation or delay may result in lower than anticipated revenues.
  If we are unable to maintain processes and procedures to sustain effective internal control over
our financial reporting, our ability to provide reliable and timely financial reports could be
harmed and this could have a material adverse effect on our stock price.
    Corporate governance regulations have recently increased our compliance costs and could further
increase our expenses if changes occur within our business.
  There are risks associated with our operations in China.
  56




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##### Table of Contents




    
    difficulties in staffing and managing foreign operations, particularly in
attracting and retaining personnel qualified to design, sell and support CMOS image
sensors;
    
    difficulties in coordinating our operations in China with those in California;
    
    diversion of management attention;
    
    difficulties in maintaining uniform standards, 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 could impair our ability to conduct our business in
China; and
    
    inadequacy of the local infrastructure to support our needs.
 We may experience integration or other problems with potential future acquisitions, which could
have an adverse effect on our business or results of operations. New acquisitions could dilute
the interests of existing stockholders, and the announcement of new acquisitions could result in
a decline in the price of our common stock.
  
    
    difficulty in realizing the potential technological benefits of the
transaction;
    
    difficulty in integrating the technology, operations or work force of the
acquired business with our existing business;
    
    unanticipated expenses related to technology integration;
    
    disruption of our ongoing business;
    
    difficulty in realizing the potential financial or strategic benefits of the transaction;
    
    difficulty in maintaining uniform standards, controls, procedures and policies;
    
    possible impairment of relationships with employees, customers, suppliers and
strategic partners as a result of integration of new businesses and management personnel;
    
    reductions in our future operating results from amortization
of intangible assets
    
    impairment of resulting goodwill; and
    
    potential unknown or unexpected liabilities associated with acquired businesses.
  We may never achieve all of the anticipated benefits from our joint venture with TSMC.
  57




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We may not achieve all of the anticipated benefits of our alliances with, and strategic
investments in, third parties.
    Changes in our relationships with our joint ventures and/or companies in which we hold less than
a majority interest could change the way we account for such interests in the future.
  58




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We may be unable to adequately protect our intellectual property, and therefore we may lose some
of our competitive advantage.
  Litigation regarding intellectual property could divert management attention, be costly to defend
and prevent us from using or selling the challenged technology.
  
    
    ceasing the sale or use of products or services that incorporate the
infringed intellectual property;
    
    obtaining from the holder of the infringed intellectual property a license to
sell or use the relevant technology, which license may not be available on acceptable
terms, if at all; or
    
    redesigning those products or services that incorporate the disputed
intellectual property, which could result in substantial unanticipated development
expenses and delay and prevent us from selling the products until the redesign is
completed, if at all.
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We have been named as a defendant in certain litigation that could have a material adverse impact
on our operating results and financial condition.
 Legal Proceedings Legal Proceedings,
 If we do not effectively manage our growth, our ability to increase our revenues and improve our
earnings could be adversely affected.
  
    
    significantly improve our operational, financial and accounting systems;
    
    train and manage our existing employee base;
    
    attract and retain qualified personnel with relevant experience; and
    
    effectively manage accounts receivable and inventory.
   Our future tax rates could be higher than we anticipate if the proportion of future operating
income generated outside the U.S. by our foreign subsidiaries is less than we expect.
   60




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Our sales through distributors increase the complexity of our business and may reduce our
ability to forecast revenues.
  
    
    manage a more complex supply chain;
    
    manage the level of inventory at each distributor;
    
    provide for credits, return rights and price protection;
    
    estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and
    
    monitor the financial condition and creditworthiness of our distributors.
  We face foreign business, political and economic risks, because a majority of our products and
those of our customers are manufactured and sold outside of the United States.
   
    
    longer payment cycles;
    
    the adverse effects of tariffs, duties, price controls or other restrictions that impair trade;
    
    decreased visibility as to future demand;
    
    difficulties in accounts receivable collections; and
    
    burdens of complying with a wide variety of foreign laws and labor practices.
  Our business could be harmed if we lose the services of one or more members of our senior
management team, or if we are unable to attract and retain qualified personnel.
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##### Table of Contents



We need to continue to upgrade our enterprise resource planning and other management information
systems.
  Our operations may be impaired as a result of disasters, business interruptions or similar
events.
  Acts of war and terrorist acts may seriously harm our business and revenue, costs and expenses
and financial condition.
  Risks Related to the Securities Markets and Ownership of Our Common Stock
 Provisions in our charter documents and Delaware law, as well as our stockholders rights plan,
could prevent or delay a change in control of our company and may reduce the market price of our
common stock.
  
    
    adjusting the price, rights, preferences, privileges and restrictions of
preferred stock without stockholder approval;
    
    providing for a classified board of directors with staggered, three year
terms;
    
    requiring supermajority voting to amend some provisions in our certificate of
incorporation and bylaws;
    
    limiting the persons who may call special meetings of stockholders; and
    
    prohibiting stockholder actions by written consent.
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Our stock has been and will likely continue to be subject to substantial price and volume
fluctuations due to a number of factors, many of which are beyond our control, that may prevent
our stockholders from selling our common stock at a profit.
  
    
    actual or anticipated fluctuations in our operating results;
    
    changes in expectations as to our future financial performance;
    
    changes in financial estimates of securities analysts;
    
    release of lock-up or other transfer restrictions on our outstanding shares
of common stock or sales of additional shares of common stock;
    
    sales or the perception in the market of possible sales of shares of our
common stock by our directors, officers, employees or principal stockholders;
    
    changes in market valuations of other technology companies; and
    
    announcements by us or our competitors of significant technical innovations,
design wins, contracts, standards or acquisitions.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  63




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Total Number of
    
    
    Approximate DollarShares
    
    
    Value of SharesTotal Number
    
    
    
    
    
    
    Purchased as
    
    
    that May Yet Beof Shares
    
    
    Average Price
    
    
    Part of a Publicly
    
    
    Purchased UnderPeriod
    
    Purchased(1)
    
    
    Paid per Share
    
    
    Announced Plan
    
    
    the PlanAugust 1, 2006 - August 31, 2006.
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    September 1, 2006 - September 30, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    October 1, 2006 - October 31, 2006
    
    
    145,021
    
    
    $
    19.42
    
    
    
    
    
    
    $
    Total
    
    
    145,021
    
    
    $
    19.42
    
    
    
    
 
 (1)
    
    As described above, in October 2006 certain stockholders exercised put rights with
respect to previously escrowed shares. The put rights associated with
all of the remaining escrowed shares expired unexercised on November 9, 2006. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    To elect two Class III directors to serve until the expiration of their
three-year term or until their successors are duly elected and qualified.
 VoteFor
    
    WithheldJoseph Jeng.
    
    
    47,438,184
    
    
    
    3,234,798Dwight Steffensen
    
    
    47,444,513
    
    
    
    3,228,469
  2.
    
    To ratify the appointment of PricewaterhouseCoopers LLP as our independent
registered public accounting firm for the fiscal year ending April 30, 2007.
 For
    
    Against
    
    Abstained
    
    No Vote50,169,259
    
    
    362,047
    
    
    
    141,676
    
    
    
    
 
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description10.13*
    
    Equipment Procurement Agreement dated as of August 31,
2006, by and between OmniVision Trading (Hong Kong) Co.
Ltd. and XinTec Inc.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.
 
 *
    
    Portions of this agreement have been omitted pursuant to a request for
confidential treatment and the omitted portions have been filed separately with the
Securities and Exchange Commission. 64




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##### Table of Contents



SIGNATURES
  OmniVision Technologies, Inc.(Registrant)Dated: December 11, 2006By:
    
    /s/Shaw HongShaw HongChief Executive Officer, President and Director(Principal Executive Officer)Dated: December 11, 2006By:
    
    /s/Peter V. LeighPeter V. LeighVice President of Finance and Chief FinancialOfficer (Principal Financialand Accounting Officer)
 65




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description10.13*
    
    Equipment Procurement Agreement dated as of August 31,
2006, by and between OmniVision Trading (Hong Kong) Co.
Ltd. and XinTec Inc.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.
 
 *
    
    Portions of this agreement have been omitted pursuant to a request for
confidential treatment and the omitted portions have been filed separately with the
Securities and Exchange Commission.