** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

** **

**FORM 10-Q**

** **
| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                    | ** ** | ** ** | ** ** |
| ** ** | **For the quarterly period ended January 31,  2007**                                     | ** ** | ** ** |
| ** ** | ** **                                                                                    | ** ** | ** ** | ** ** |
| **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**

** **

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** **

**OMNIVISION TECHNOLOGIES, INC.**

**(Exact name of registrant as specified in itscharter)**

** **

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

 

**1341 Orleans Drive,Sunnyvale, California 94089-1136**

**(Address of Principal Executive Offices) (ZipCode)**

 

**Registrant’s telephone number, including areacode: (408) 542-3000**

** **

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Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities and Exchange Act of 1934 during thepreceding 12 months (or for shorter period that the registrant was required tofile such reports); and (2) has been subject to such filing requirements forthe past 90 days. Yes xNo o

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  xAccelerated filer  o  Non-accelerated filer  o

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934). Yes o No x

At March 6,2007, 54,925,165  shares of common stockof the Registrant were outstanding, exclusive of 5,870,000 shares of treasurystock.

 

 

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**OMNIVISIONTECHNOLOGIES, INC.**

**INDEX**

 
|                    | ** ** | ** **                                                                                                                  | **Page**   |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **         |       | ** **                                                                                                                  | ** ** |
| ** **         |       | ** **                                                                                                                  | ** ** |
| ** **         |       | **PART I. FINANCIAL  INFORMATION**                                                                                          | ** ** |
| ** **         |       | ** **                                                                                                                  | ** ** |
| **Item 1.**        |       | Financial Statements:                                                                                                       |       |
|               |       |                                                                                                                        |       |
|               |       | Condensed  Consolidated Balance Sheets (unaudited) — January 31, 2007 and  April 30, 2006                    | 3          |
|               |       |                                                                                                                        |       |
|               |       | Condensed  Consolidated Statements of Income (unaudited) — Three and Nine Months Ended  January 31, 2007 and 2006 | 4          |
|               |       |                                                                                                                        |       |
|               |       | Condensed  Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended  January 31, 2007 and 2006       | 5          |
|               |       |                                                                                                                        |       |
|               |       | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                           | 6          |
|               |       |                                                                                                                        |       |
| **Item 2.**        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 | 28         |
|               |       |                                                                                                                        |       |
| **Item 3.**        |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                 | 48         |
| ** **         |       |                                                                                                                        |       |
| **Item 4.**        |       | Controls and  Procedures                                                                                                    | 49         |
|               |       |                                                                                                                        |       |
|               |       |                                                                                                                        |       |
|               |       | **PART II. OTHER INFORMATION**                                                                                              |       |
|               |       |                                                                                                                        |       |
| **Item 1.**        |       | Legal  Proceedings                                                                                                          | 50         |
| ** **         |       |                                                                                                                        |       |
| **Item  1A.**      |       | Risk  Factors                                                                                                               | 51         |
| ** **         |       |                                                                                                                        |       |
| **Item 5.**        |       | Other Information                                                                                                           | 65         |
| ** **         |       |                                                                                                                        |       |
| **Item  6.**       |       | Exhibits                                                                                                                    | 66         |
| ** **         |       |                                                                                                                        |       |
| Signatures         | 67         |
|               |       |
| Exhibit  Index     | 68         |
| Exhibit 10.15 |       |
| Exhibit 10.16 |       |
| Exhibit 31.1  |       |
| Exhibit 31.2  |       |
| Exhibit 32    |       |

 

2

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**PART I —FINANCIAL INFORMATION**

**ITEM 1.   FINANCIAL STATEMENTS**

**OMNIVISIONTECHNOLOGIES, INC.**

**CONDENSEDCONSOLIDATED BALANCESHEETS**

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

** **
| ** **                                                                                                                                                                                                       | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                       | ** ** | **2007**             | ** ** | **2006**           | ** ** |
| **ASSETS**                                                                                                                                                                                                       |       |                 |       |               |       |
| Current assets:                                                                                                                                                                                                  |       |                 |       |               |       |
| Cash and cash  equivalents                                                                                                                                                                                       |       | $                    | 209,463    |               | $          | 240,227 |   |
| Short-term  investments                                                                                                                                                                                          |       | 131,320              |       | 114,278            |       |
| Accounts  receivable, net                                                                                                                                                                                        |       | 73,167               |       | 65,916             |       |
| Inventories                                                                                                                                                                                                      |       | 105,537              |       | 54,973             |       |
| Refundable and  deferred income taxes                                                                                                                                                                            |       | 3,503                |       | 1,708              |       |
| Prepaid expenses  and other current assets                                                                                                                                                                       |       | 7,588                |       | 9,158              |       |
| Recoverable  insurance proceeds                                                                                                                                                                                  |       | 13,000               |       | —             |       |
| Total current  assets                                                                                                                                                                                            |       | 543,578              |       | 486,260            |       |
|                                                                                                                                                                                                             |       |                 |       |               |       |
| Property, plant and  equipment, net                                                                                                                                                                              |       | 21,841               |       | 38,010             |       |
| Long-term investments                                                                                                                                                                                            |       | 42,267               |       | 18,673             |       |
| Goodwill                                                                                                                                                                                                         |       | 7,541                |       | 4,892              |       |
| Intangibles, net                                                                                                                                                                                                 |       | 22,135               |       | 26,245             |       |
| Other non-current  assets                                                                                                                                                                                        |       | 10,065               |       | 3,189              |       |
| Total assets                                                                                                                                                                                                     |       | $                    | 647,427    |               | $          | 577,269 |   |
|                                                                                                                                                                                                             |       |                 |       |               |       |
| **LIABILITIES,  MINORITY INTEREST AND STOCKHOLDERS’ EQUITY**                                                                                                                                                |       |                 |       |               |       |
|                                                                                                                                                                                                             |       |                 |       |               |       |
| Current liabilities:                                                                                                                                                                                             |       |                 |       |               |       |
| Accounts payable                                                                                                                                                                                                 |       | $                    | 51,791     |               | $          | 42,770 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                  |       | 19,317               |       | 21,351             |       |
| Litigation  settlement accrual                                                                                                                                                                                   |       | 13,750               |       | —             |       |
| Accrued income  taxes payable                                                                                                                                                                                    |       | 57,941               |       | 52,406             |       |
| Deferred income                                                                                                                                                                                                  |       | 7,143                |       | 6,329              |       |
| Current portion  of capital lease obligations                                                                                                                                                                    |       | 144                  |       | 152                |       |
| Total current  liabilities                                                                                                                                                                                       |       | 150,086              |       | 123,008            |       |
|                                                                                                                                                                                                             |       |                 |       |               |       |
| Long-term liabilities:                                                                                                                                                                                           |       |                 |       |               |       |
| Capital lease  obligations, less current portion                                                                                                                                                                 |       | 171                  |       | 308                |       |
| Deferred tax  liabilities                                                                                                                                                                                        |       | 6,744                |       | 4,033              |       |
| Total long-term  liabilities                                                                                                                                                                                     |       | 6,915                |       | 4,341              |       |
| Total  liabilities                                                                                                                                                                                               |       | 157,001              |       | 127,349            |       |
|                                                                                                                                                                                                             |       |                 |       |               |       |
| Commitments and  contingencies (Note 15)                                                                                                                                                                         |       |                 |       |               |       |
|                                                                                                                                                                                                             |       |                 |       |               |       |
| Minority interest                                                                                                                                                                                                |       | 4,282                |       | 27,113             |       |
|                                                                                                                                                                                                             |       |                 |       |               |       |
| Stockholders’ equity:                                                                                                                                                                                       |       |                 |       |               |       |
| Common stock,  $0.001 par value; 100,000 shares authorized; 60,774 issued and 54,904  outstanding at January 31, 2007 and 59,744 shares issued and 53,874  outstanding at April 30, 2006, respectively |       | 61                   |       | 60                 |       |
| Additional  paid-in capital                                                                                                                                                                                      |       | 323,143              |       | 285,112            |       |
| Accumulated  other comprehensive income                                                                                                                                                                          |       | 971                  |       | 1,092              |       |
| Treasury stock,  5,870 at January 31, 2007 and April 30, 2006                                                                                                                                          |       | (79,568              | )          | (79,568            | )          |
| Retained earnings                                                                                                                                                                                                |       | 241,537              |       | 216,111            |       |
| Total  stockholders’ equity                                                                                                                                                                                 |       | 486,144              |       | 422,807            |       |
| Total liabilities,  minority interest and stockholders’ equity                                                                                                                                              |       | $                    | 647,427    |               | $          | 577,269 |   |

 

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

3

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**OMNIVISIONTECHNOLOGIES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTSOF INCOME**

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

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                                        | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                          |       | $                                | 134,381    |                            | $          | 137,283 |   | $ | 408,912 |   | $ | 360,097 |   |
| Cost of revenues                                  |       | 100,892                          |       | 81,922                          |       | 280,148 |   | 226,984 |   |
| Gross profit                                      |       | 33,489                           |       | 55,361                          |       | 128,764 |   | 133,113 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Operating  expenses:                              |       |                             |       |                            |       |   |   |   |   |
| Research, development and related                 |       | 16,521                           |       | 10,481                          |       | 52,020 |   | 28,893 |   |
| Selling, general and administrative               |       | 16,627                           |       | 9,238                           |       | 44,852 |   | 25,075 |   |
| Litigation settlement                             |       | —                           |       | —                          |       | 3,300 |   | — |   |
| Total operating expenses                          |       | 33,148                           |       | 19,719                          |       | 100,172 |   | 53,968 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Income from  operations                           |       | 341                              |       | 35,642                          |       | 28,592 |   | 79,145 |   |
| Interest income,  net                             |       | 4,195                            |       | 2,292                           |       | 10,964 |   | 6,345 |   |
| Other income  (expense), net                      |       | (756                             | )          | 1,197                           |       | 890 |   | 1,256 |   |
| Income before  income taxes and minority interest |       | 3,780                            |       | 39,131                          |       | 40,446 |   | 86,746 |   |
| Provision for  (benefit from) income taxes        |       | (1,338                           | )          | 7,826                           |       | 9,193 |   | 17,349 |   |
| Minority  interest                                |       | 988                              |       | 1,669                           |       | 5,827 |   | 2,782 |   |
| Net income                                        |       | $                                | 4,130      |                            | $          | 29,636 |   | $ | 25,426 |   | $ | 66,615 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Net income per  share:                            |       |                             |       |                            |       |   |   |   |   |
| Basic                                             |       | $                                | 0.08       |                            | $          | 0.56 |   | $ | 0.47 |   | $ | 1.22 |   |
| Diluted                                           |       | $                                | 0.07       |                            | $          | 0.53 |   | $ | 0.46 |   | $ | 1.18 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Shares used in  computing net income per share:   |       |                             |       |                            |       |   |   |   |   |
| Basic                                             |       | 54,872                           |       | 52,576                          |       | 54,631 |   | 54,515 |   |
| Diluted                                           |       | 55,885                           |       | 55,547                          |       | 55,509 |   | 56,643 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |

 

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

4

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**OMNIVISION TECHNOLOGIES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTSOF CASH FLOWS**

**(inthousands)****(unaudited)**
| ** **                                                                              | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                              | ** ** | **January 31,**            | ** ** |
| ** **                                                                              | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                                  |       |                            |       |   |   |
| Net income                                                                              |       | $                               | 25,426     |   | $ | 66,615 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:      |       |                            |       |   |   |
| Depreciation and amortization                                                           |       | 10,462                          |       | 7,487 |   |
| Stock-based compensation                                                                |       | 22,880                          |       | 2 |   |
| Affiliate’s stock grants                                                           |       | 179                             |       | — |   |
| Tax benefits from stock-based compensation                                              |       | 365                             |       | 2,623 |   |
| Excess tax benefits from stock-based compensation                                       |       | (365                            | )          | — |   |
| Minority interest in net income of consolidated  affiliates                             |       | 5,827                           |       | 2,783 |   |
| Equity investments gain, net                                                            |       | (3,172                          | )          | (1,070 | ) |
| Loss on disposal of property, plant and equipment                                       |       | 7                               |       | — |   |
| Changes in assets and liabilities, net of the impact  of VisEra’s deconsolidation: |       |                            |       |   |   |
| Accounts receivable, net                                                                |       | (7,572                          | )          | (16,596 | ) |
| Inventories                                                                             |       | (50,902                         | )          | (4,160 | ) |
| Refundable and deferred income taxes                                                    |       | (8,969                          | )          | 52 |   |
| Prepaid expenses and other current assets                                               |       | (14,739                         | )          | (5,007 | ) |
| Accounts payable                                                                        |       | 29,864                          |       | 14,446 |   |
| Accrued expenses and other current liabilities                                          |       | 13,818                          |       | 3,664 |   |
| Accrued income taxes payable                                                            |       | 12,298                          |       | 13,752 |   |
| Deferred income                                                                         |       | 814                             |       | 9,327 |   |
| Deferred tax liabilities                                                                |       | 2,735                           |       | (1,415 | ) |
| Net cash provided by operating activities                                               |       | 38,956                          |       | 92,503 |   |
| Cash flows from  investing activities:                                                  |       |                            |       |   |   |
| Purchases of short-term investments                                                     |       | (243,100                        | )          | (156,246 | ) |
| Proceeds from sales or maturities of short-term  investments                            |       | 214,741                         |       | 153,955 |   |
| Purchases of property, plant and equipment, net of  sales                               |       | (41,038                         | )          | (6,771 | ) |
| Proceeds from consolidation of VisEra, net of cash  payments                            |       | —                          |       | 13,792 |   |
| Deconsolidation of VisEra                                                               |       | (20,646                         | )          | — |   |
| Purchases of long-term investments                                                      |       | —                          |       | (11,847 | ) |
| Purchases of intangible assets                                                          |       | (548                            | )          | (4,000 | ) |
| Net cash used in investing activities                                                   |       | (90,591                         | )          | (11,117 | ) |
| Cash flows from  financing activities:                                                  |       |                            |       |   |   |
| Proceeds from short-term borrowings of consolidated  affiliate                          |       | —                          |       | 3,981 |   |
| Repayment of short-term borrowings of consolidated  affiliate                           |       | —                          |       | (3,981 | ) |
| Payment of capital lease obligations                                                    |       | (107                            | )          | — |   |
| Cash contribution by minority shareholder                                               |       | 10,359                          |       | 9,500 |   |
| Affiliate cash dividend paid to minority shareholder                                    |       | (245                            | )          | — |   |
| Proceeds from exercise of stock options and employee  stock purchase plan               |       | 10,445                          |       | 8,024 |   |
| Excess tax benefits from stock-based compensation                                       |       | 365                             |       | — |   |
| Payment for repurchases of common stock                                                 |       | —                          |       | (79,568 | ) |
| Net cash provided by (used in) financing activities                                     |       | 20,817                          |       | (62,044 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                           |       | 54                              |       | 662 |   |
| Net increase  (decrease) in cash and cash equivalents                                   |       | (30,764                         | )          | 20,004 |   |
| Cash and cash  equivalents at beginning of period                                       |       | 240,227                         |       | 170,457 |   |
| Cash and cash  equivalents at end of period                                             |       | $                               | 209,463    |   | $ | 190,461 |   |
| Supplemental  cash flow information:                                                    |       |                            |       |   |   |
| Income taxes paid                                                                       |       | $                               | 1,972      |   | $ | 244 |   |
| Interest paid                                                                           |       | $                               | 20         |   | $ | 17 |   |
| Supplemental  schedule of non-cash investing and financing activities:                  |       |                            |       |   |   |
| Capital equipment financing obligations                                                 |       | $                               | 1,354      |   | $ | — |   |
| Affiliate shares issued to affiliate employees                                          |       | $                               | 459        |   | $ | — |   |
| Change-of-interest benefit from minority shareholder  cash contribution                 |       | $                               | 2,413      |   | $ | — |   |
| Issuance of escrow shares to CDM selling  stockholders                                  |       | $                               | 34         |   | $ | — |   |
| Current  obligation for purchases of equipment                                          |       | $                               | —     |   | $ | 11,863 |   |

 

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

5

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**OMNIVISIONTECHNOLOGIES, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

** **

**Note 1 — Basisof Presentation**

## ***Overview***

The accompanying interim unaudited condensedconsolidated financial statements as of January 31, 2007 andApril 30, 2006 and for the three and nine months ended January 31,2007 and 2006 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, 2006 come from the Company’s annual audited 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 annual audited financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for thefiscal year ended April 30, 2006 (the “Form 10-K”).

The results of operations for the three and ninemonths ended January 31, 2007 are not necessarily indicative of theresults that may be expected for the fiscal year ending April 30, 2007 orany other future period.

## ***Useof Estimates***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. The Company bases itsestimates and judgments on its historical experience, knowledge of currentconditions and beliefs of what could occur in the future considering availableinformation. Actual results could differ from these estimates.

**Note 2 — Summaryof Significant Accounting Policies**

## ***Principlesof Consolidation***

The consolidated financial statements include theaccounts of the Company, its wholly-owned subsidiaries and its consolidatedaffiliates. All significant inter-company accounts and transactions have beeneliminated.

## ***Consolidationof Affiliates***

Financial Accounting Standards Board InterpretationNo. 46 (“FIN 46(R)”) requires that if an entity is the primarybeneficiary of a variable interest entity (“VIE”), the entity should includethe assets, liabilities and results of operations of the VIE in itsconsolidated financial statements. In the quarter endedJanuary 31, 2006, the Company consolidated VisEra TechnologiesCompany, Ltd (“VisEra”) and VisEra Holding Company (“VisEra Cayman”), as thecombined VisEra entity was deemed a VIE and the Company considered itself to bethe primary beneficiary of VisEra. During the quarter endedJanuary 31, 2007, the Company assumed responsibility for logisticsmanagement previously provided by VisEra, and as a result, concluded that ithad lost the status as the primary beneficiary in VisEra and VisEra ceased tobe a VIE. As a result, the Company deconsolidated VisEra and VisEra Cayman onJanuary 1, 2007, and accounted for the combined VisEra entity under theequity method. (See Notes 5 and 6.)

## ***RevenueRecognition***

For shipments to customers without agreements thatallow for returns or credits, principally original 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 ofproducts to the customer provided that the Company has received a signedpurchase order, the price is fixed or determinable, title and risk of loss hastransferred to the customer, collection of resulting receivables is consideredreasonably assured, product returns are reasonably estimable, there are nocustomer acceptance requirements and there are no remaining material

6

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**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

** **

obligations. At the time revenue is recognized, theCompany provides for future returns of potentially defective product based onhistorical experience. For cash consideration given to customers for which theCompany does not receive a separately identifiable benefit or cannot reasonablyestimate fair value, the Company records the amounts as reductions of revenue.

For shipments to distributors under agreementsallowing for returns or credits, the Company recognizes revenue using the “sell-through”method under which the Company defers revenue until the distributor resells theproduct to the Company’s end-user customer and the Company is notified inwriting by the distributor of such sale. The amount billed to thesedistributors less the cost of inventory shipped to but not yet sold by thedistributors is shown net on the consolidated balance sheets as deferredincome.

In addition, the Companyrecognizes revenue from the performance of services to a limited number ofcustomers by its wholly-owned subsidiary, CDM, and, through December 31,2006, by its then consolidated affiliate, VisEra. (See Note 6.)

The Company recognizesthe CDM-associated revenue under the completed-contract and thepercentage-of-completion methods. The percentage-of-completion method ofaccounting is used for cost reimbursement-type contracts, where revenuesrecognized are that portion of the total contract price equal to the ratio ofcosts expended to date to the anticipated final total costs based on currentestimates of the costs to complete the projects. CDM-associated revenue has notbeen material in any of the periods presented. For production services, theCompany recognizes revenue when the production services are complete and theproduct has been shipped to the customer.

## ***ForeignCurrency Translation***

In general, the functional currencies of the Company’swholly-owned subsidiaries are their respective local currencies. The functionalcurrency of the Company’s subsidiaries located in Hong Kong, OmniVisionTechnologies (Hong Kong) Company Limited and OmniVision Trading (Hong Kong)Company Ltd., and in the Cayman Islands, OmniVision International Holding, Ltd.and HuaWei Technology International, Ltd., is the U.S. dollar.

Effective January 1, 2007, the Company determinedthat, as a result of its plans to expand the scope of its future operations andto fund such expansion through the investment of U.S. dollars, its wholly-ownedsubsidiaries in Shanghai, China, Hua Wei Semiconductors (Shanghai) Co. Ltd. (“HWSC”)and Shanghai OmniVision IC Design Co., Ltd., (“SDC”) should change theirfunctional currency from Chinese Yuan Renminbi to the U.S. dollar.

Effective May 1, 2006, the functional currency ofone of the Company’s affiliates, VisEra, also became the U.S. dollar. Thechange was necessitated by a significant increase in U.S. dollar-basedtransactions after VisEra’s acquisition of certain color-filter manufacturingassets from TSMC. The functional currency of Silicon Optronics, Inc., (“SOI”),the only currently consolidated affiliate of the Company, remains the New Taiwandollar.

For subsidiaries with local currencies as thefunctional currencies, the assets and liabilities of the subsidiaries aretranslated at the rates of exchange prevailing on the balance sheet date.Revenue and expense items are translated at the average rate of exchange forthe period. Unrealized gains and losses from foreign currency translation areincluded in “Accumulated other comprehensive income,” a component ofstockholders’ equity. For subsidiaries or consolidated affiliates with U.S.dollar functional currencies, non-monetary assets are remeasured into U.S.dollars with historical rates of exchange. Remeasurement gains and losses areincluded in “Other income, net” and have not been material in any of theperiods presented.

## ***Cashand Cash Equivalents***

The Company considers all highly liquid investmentspurchased with a maturity at the date of purchase of three months or less to becash equivalents. Cash equivalents consist principally of commercial paper,government bonds, certificates of deposit and money market funds that arestated at cost, which approximates fair value.

7

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

** **

The Company’s cash and cash equivalent amount issubject to concentration of credit risk. The Company maintains some cash andcash equivalents balances with financial institutions that are in excess ofFDIC insurance limits.

## ***Inventories***

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

The Company records allowances to reduce the carryingvalue of inventories to their net realizable value when the Company believesthat the net realizable value is less than cost. The Company also recordsallowances for the cost of inventories when the number of units on hand exceedsthe number of units that the Company forecasts will be sold over a certainperiod of time, generally 12 months.

## ***Stock-BasedCompensation***

Effective May 1, 2006, the Company adopted theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(revised 2004), *“Share-Based Payment,”*(“SFAS No. 123(R)”) which requires all share-based payments toemployees, including grants of employee stock options and employee stockpurchases under the 2000 Employee Stock Purchase Plan (the “2000 Purchase Plan”),to be recognized in the financial statements based on their respective grantdate fair values. SFAS No. 123(R) supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25, *“Accountingfor Stock Issued to Employees”* (“APB 25”) and relatedinterpretations and eliminates the pro forma disclosures of SFAS No. 123, *“Accounting for Stock-Based Compensation”*(“SFAS No. 123”). In March 2005, the SEC issued SAB No. 107, *Share-Based Payment*(“SAB 107”),which provides guidance regarding the interaction of SFAS No. 123(R) andcertain SEC rules and regulations. The Company has applied the provisionsof SAB 107 in its adoption of SFAS No. 123(R).

The Company adopted SFAS No. 123(R) usingthe modified prospective method. The Company’s condensed consolidated financialstatements as of and for the three and nine months ended January 31, 2007reflect the impact of adopting SFAS No. 123(R). In accordance withthe modified prospective method, the consolidated financial statements forprior periods have not been restated to reflect, and do not include, the impactof SFAS No. 123(R). (See Note 12.)

Under SFAS No. 123(R), stock-based compensation ismeasured at the grant date, based on the fair value of the award using theBlack-Scholes option pricing model (“Black-Scholes”), and is recognized asexpense over the requisite service period of the award. The Company has chosento recognize stock-based compensation expense using the straight-lineattribution method. Black-Scholes requires the use of highly subjective,complex assumptions, including the expected term and the price volatility ofthe Company’s stock. SFAS No. 123(R) also requires forfeiture ratesto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from initial estimates. Stock-basedcompensation expense was recorded net of estimated forfeitures for the threeand nine months ended January 31, 2007 such that expense was recorded onlyfor those stock-based awards that are expected to vest. Previously underAPB 25 to the extent awards were forfeited prior to vesting, thecorresponding previously recognized expense was reversed in the period of forfeiture.

In November 2005, the Financial AccountingStandards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS123(R)-3, *“Transition Election Related to Accounting for TaxEffects of Share-based Payment Awards”*(“FSP 123(R)-3”). FSP123(R)-3 provides an alternative transition method of accounting for the taxeffects of adopting SFAS No. 123(R). This FSP grants one year from thelater of the date of the FSP or the adoption of SFAS No. 123(R) to theCompany for determination of the one-time election for purposes of transition.As of January 31, 2007, the Company had not yet chosen a transition methodto establish the beginning balance of the additional paid-in capital pool (“APICPool”) related to the tax effects of employee stock-based awards granted priorto the adoption of SFAS No. 123(R).

Prior to the adoption of SFAS No. 123(R),the Company accounted for stock-based employee compensation arrangements usingthe intrinsic value method in accordance with the provisions of APB 25,and complied with the

8

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

** **

disclosure provisions of SFAS No. 123. UnderAPB 25, compensation cost was recognized based on the difference on thedate of grant, if any, between the fair value of the Company’s stock and theamount an employee was required to pay to acquire the stock. In accordance withSFAS No. 123, the Company provided pro forma information to illustrate theeffect on net income and earnings per share as if the Company had applied thefair value recognition provisions of SFAS No. 123 to stock-based employeecompensation. In the pro forma presentation, the Company recognized stock-basedcompensation expense under the accelerated method, as specified in FASBInterpretation No. 28, *“Accounting forStock Appreciation Rights and Other Variable Stock Option or Award Plans.”*

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

Comprehensive income (loss) is defined as the changein the equity of a company during a period from transactions and other eventsand circumstances excluding transactions resulting from investments by ownersand distributions to owners. Comprehensive income for the three and nine monthsended January 31, 2007 was $3.7 million and $25.3 million,respectively, and included net income, unrealized gains (losses) fromavailable-for-sale securities and translation gains (losses) from foreignsubsidiaries. Comprehensive income for the three and nine months ended January 31,2006 was $31.0 million and $67.5 million, respectively.

## ***RecentAccounting Pronouncements***

In June 2006, the FASB issued FASB interpretationNo. 48 (FIN No. 48) *“Accounting forUncertainty in Income Taxes—an Interpretation of FASB Statement No. 109.”*FIN No. 48 requires that the Company recognize in the consolidatedfinancial statements the impact of a tax position that, based on the technicalmerits of the position, is more likely than not to be sustained uponexamination. The evaluation of a tax position in accordance with thisinterpretation is a two-step process. In the first step, recognition, theCompany determines whether it is more-likely-than-not that a tax position willbe sustained upon examination, including resolution of any related appeals orlitigation processes, based on the technical merits of the position. The secondstep addresses measurement of a tax position that meets themore-likely-than-not criterion. The tax position is measured at the largestamount of benefit that has a greater than 50 percent likelihood of beingrealized upon ultimate settlement. Tax positions that previously failed to meetthe more-likely-than-not recognition threshold will be recognized in the firstsubsequent financial reporting period in which that threshold is met.Previously recognized tax positions that no longer meet themore-likely-than-not recognition threshold will be de-recognized in the firstsubsequent financial reporting period in which that threshold is no longer met.FIN No. 48 is effective for fiscal years beginning after December 15,2006. The differences between the amounts recognized in the consolidatedfinancial statements prior to the adoption of FIN No. 48 and the amountsreported after adoption will be accounted for as a cumulative-effect adjustmentrecorded to the beginning balance of retained earnings. On January 17,2007, the FASB decided unanimously not to delay the effective date ofFIN No. 48. The FASB did, however, agree to pursue providingadditional guidance regarding the definition of ultimate settlement and how theability of the taxing authority to reopen a matter impacts recognition andmeasurement under FIN No. 48. Any such guidance would likely be in theform of a FASB Staff Position that would be available for public comment. TheCompany is currently evaluating the impact FIN No. 48 will have on itsfinancial position, results of operations or cash flows.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “*FairValue Measurements’’*(“SFAS No. 157”), which defines fairvalue, establishes guidelines for measuring fair value and expands therequisite disclosures for fair value measurements. SFAS No. 157 doesnot require any new fair value measurements but rather establishes a commondefinition of fair value to be used throughout generally accepted accountingprinciples. SFAS No. 157 is effective in fiscal years beginning afterNovember 15, 2007 and is required to be adopted by the Company in thefirst quarter of fiscal 2009. The Company’s adoption of the provisions ofSFAS No. 157 is not expected to have a material effect on itsfinancial condition, results of operations or cash flows.

In February 2007,the FASB issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities,”* (“SFAS No. 159”)which permits entities to choose to measure many financial instruments andcertain other items at fair value that are not currently required to bemeasured at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings

9

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

** **

caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.SFAS No. 159 also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choosedifferent measurement attributes for similar types of assets and liabilities.SFAS No. 159 does not affect any existing accounting literature thatrequires certain assets and liabilities to be carried at fair value. TheCompany is currently evaluating the impact SFAS No. 159 may have onits financial position, results of operations or cash flows.

**Note 3 — Short-Term Investments**

Available-for-sale securities at January 31, 2007and April 30, 2006 were as follows (in thousands):

 

|                                                                | ** ** | **As of January 31, 2007** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair  Value** | ** ** |
| ** **                                                     |       |                            |       |   |   |   |   |   |   |
| Certificates of  deposit                                       |       | $                               | 3,369      |   | $ | — |   | $ | — |   | $ | 3,369 |   |
| U.S. government  debt securities with maturities over one year |       | 10,045                          |       | — |   | (23 | ) | 10,022 |   |
| Municipal bonds  and notes                                     |       | 76,680                          |       | — |   | (28 | ) | 76,652 |   |
| Commercial paper  and bond funds                               |       | 41,305                          |       | — |   | (28 | ) | 41,277 |   |
|                                                           |       | $                               | 131,399    |   | $ | — |   | $ | (79 | ) | $ | 131,320 |   |
| Contractual  maturity dates, less than one year                |       |                            |       |   |   |   |   | $ | 44,207 |   |
| Contractual  maturity dates, one year to two years             |       |                            |       |   |   |   |   | 35,513 |   |
| Contractual  maturity dates, two years to 39 years(1)          |       |                            |       |   |   |   |   | 51,600 |   |
|                                                           |       |                            |       |   |   |   |   | $ | 131,320 |   |

 

|                                                          | ** ** | **As of April 30, 2006** | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|
| ** **                                               | ** ** | **Amortized  Cost**      | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Fair  Value** | ** ** |
| Municipal bonds  and notes                               |       | $                        | 95,445     |   | — |   | (39 | ) | $ | 95,406 |   |
| Commercial paper                                         |       | 18,900                   |       | — |   | (28 | ) | 18,872 |   |
|                                                     |       | $                        | 114,345    |   | $ | — |   | $ | (67 | ) | $ | 114,278 |   |
| Contractual  maturity dates, less than one year          |       |                     |       |   |   |   |   | $ | 36,648 |   |
| Contractual  maturity dates, one year to 34 years(1) (2) |       |                     |       |   |   |   |   | 77,630 |   |
|                                                     |       |                     |       |   |   |   |   | $ | 114,278 |   |
|                                                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |

----

(1)               Represents auctionrate securities, which have a maturity date of up to 39 years with the interestrate being reset principally up to every 35 days.

(2)               Represents variablerate demand notes, which have a final maturity date of up to 34 years but whoseinterest rate is reset at varying intervals typically between one andseven days.

10

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

 

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

** **
| ** **                                       | ** ** | **January 31,  2007** | ** ** | **April 30,  2006** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| Cash and cash  equivalents:                      |       |                       |       |                     |       |
| Cash                                             |       | $                          | 14,568     |                     | $          | 8,597 |   |
| Money market  funds and certificates of deposit  |       | 110,297                    |       | 197,030                  |       |
| Commercial paper  and government bonds           |       | 84,598                     |       | 34,600                   |       |
|                                             |       | $                          | 209,463    |                     | $          | 240,227 |   |
|                                             |       |                       |       |                     |       |
| Accounts receivable,  net:                       |       |                       |       |                     |       |
| Accounts receivable                              |       | $                          | 80,217     |                     | $          | 73,412 |   |
| Less:Allowance  for doubtful accounts            |       | (1,077                     | )          | (1,067                   | )          |
| Allowance for  sales returns                     |       | (5,973                     | )          | (6,429                   | )          |
|                                             |       | $                          | 73,167     |                     | $          | 65,916 |   |
|                                             |       |                       |       |                     |       |
| Inventories:                                     |       |                       |       |                     |       |
| Work in progress                                 |       | $                          | 56,913     |                     | $          | 34,310 |   |
| Finished goods                                   |       | 48,624                     |       | 20,663                   |       |
|                                             |       | $                          | 105,537    |                     | $          | 54,973 |   |
|                                             |       |                       |       |                     |       |
| Prepaid expenses and  other current assets:      |       |                       |       |                     |       |
| Prepaid expenses                                 |       | $                          | 3,161      |                     | $          | 2,758 |   |
| Deposits and  other                              |       | 3,801                      |       | 4,556                    |       |
| Interest  receivable                             |       | 626                        |       | 1,844                    |       |
|                                             |       | $                          | 7,588      |                     | $          | 9,158 |   |
|                                             |       |                       |       |                     |       |
| Property, plant and  equipment, net:             |       |                       |       |                     |       |
| Buildings and  land use right                    |       | $                          | 7,434      |                     | $          | 7,163 |   |
| Buildings/leasehold  improvements                |       | 3,840                      |       | 2,702                    |       |
| Machinery and  equipment                         |       | 18,800                     |       | 34,185                   |       |
| Furniture and  fixtures                          |       | 697                        |       | 713                      |       |
| Software                                         |       | 2,441                      |       | 2,280                    |       |
| Construction in  progress                        |       | 2,083                      |       | 3,248                    |       |
|                                             |       | 35,295                     |       | 50,291                   |       |
| Less:  Accumulated depreciation and amortization |       | (13,454                    | )          | (12,281                  | )          |
|                                             |       | $                          | 21,841     |                     | $          | 38,010 |   |
|                                             |       |                       |       |                     |       |
| Accrued expenses and  other current liabilities: |       |                       |       |                     |       |
| Employee  compensation                           |       | $                          | 3,669      |                     | $          | 5,301 |   |
| Third party  commissions                         |       | 1,423                      |       | 1,876                    |       |
| Acquisition costs                                |       | —                     |       | 2,095                    |       |
| Professional  services                           |       | 2,570                      |       | 2,494                    |       |
| Noncancelable  purchase commitments              |       | 1,662                      |       | 2,627                    |       |
| Pricing  adjustments                             |       | 5,930                      |       | 3,968                    |       |
| Other                                            |       | 4,063                      |       | 2,990                    |       |
|                                             |       | $                          | 19,317     |                     | $          | 21,351 |   |

 

11

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**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

 

**Note 5 — Long-termInvestments**

Long-term investments asof January 31, 2007 and April 30, 2006 consisted of the following (inthousands):

|        | ** ** | **January 31,  2007** | ** ** | **April 30,  2006** | ** ** |
|--------|------------|----------------------------|------------|--------------------------|------------|
| ImPac  |       | $                          | 2,509      |                     | $          | 2,130 |   |
| XinTec |       | 4,661                      |       | 16,543                   |       |
| VisEra |       | 35,097                     |       | —                   |       |
| Total  |       | $                          | 42,267     |                     | $          | 18,673 |   |

##  

## ***ImPacTechnology Co., Ltd.***

In June 2003, in order to enhance its access toplastic and ceramic packaging services that were in short supply, the Companypurchased approximately 27% of the common stock of ImPac Technology Co., Ltd. (“ImPac”),a privately-held company based in Taiwan for a total of $2.0 million incash. In December 2003, the Company made an additional cash contributionof approximately $0.8 million to maintain its equity ownership percentagein ImPac. Unrelated third parties own the balance of ImPac’s equity. Duringfiscal 2004, the Company’s equity interest declined to approximately 23%due to additional rounds of financing obtained by ImPac in which the Companydid not participate. The Company’s purchases from ImPac are at arm’s length andthe Company accounts for this investment using the equity method. The Companyrecorded equity income of $32,000 and $379,000, respectively, in “Other income,net”, as its portion of the net income in the three and nine months endedJanuary 31, 2007 recorded by ImPac. The Company recorded equity income of$111,000 and $162,000, respectively, in “Other income, net”, as its portion ofthe net income in the three and nine months ended January 31, 2006recorded by ImPac. (See Note 16.)

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

Between October 2005 and March 2006,pursuant to the terms of the Amended VisEra Agreement (as defined below),VisEra Cayman completed the acquisition of approximately 29.6% of the issuedand outstanding shares of XinTec, Inc. (“XinTec”), a Taiwan-based supplier ofchip-scale packaging services, in which the Company already held an approximate7.8% interest. Since VisEra was a consolidated entity at the time, the Company’sbeneficial interest in XinTec increased to more than 20%.  Consequently, the Company began to accountfor its investment in XinTec under the equity method.

In January 2007, Taiwan SemiconductorManufacturing Company Limited (“TSMC”) purchased approximately90.5 million previously-unissued shares from XinTec. The purchased sharesrepresented approximately a 43.0% ownership interest in XinTec. As a result ofthe purchase, TSMC’s beneficial ownership percentage in XinTec increased toapproximately 51.2%. 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. Otherexisting shareholders, including the Company and the Company’s affiliate,VisEra, did not purchase additional shares. Consequently, the Company’s directownership percentage in XinTec declined to approximately 4.4%. VisEra’sownership interest declined to 16.9%, and the Company’s beneficial ownershippercentage in XinTec declined to 12.6%. In accordance with APB OpinionNo. 18, *“The Equity Method of Accounting ForInvestments in Common Stocks,”* (“APB 18”), the Company began toaccount for XinTec as a cost method investment effectiveJanuary 1, 2007.

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. For the three and nine monthsended January 31, 2007, the Company recorded equity income of $412,000 and$1.7 million, respectively, in “Other income, net.” For the three and ninemonths ended January 31, 2006, the Company recorded equity income of$1.1 million and $0.9 million, respectively, in “Other income, net.”Prior to October 2005, the Company recorded its investment in XinTec under thecost method. The Company’s purchases of services from XinTec are at arm’slength.

12

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

 

In August 2006, the Company entered into anEquipment Procurement Agreement (the “Equipment Agreement”) with XinTec. Underthe Equipment Agreement, XinTec agreed to provide chip-scale packaging servicesto the Company, and the Company agreed to procure, through XinTec, up to$50.0 million of certain equipment to be located at XinTec’s facilitiesfor the sole purpose of providing such chip-scale packaging services to theCompany. In January 2007, OmniVision and XinTec mutually determined that,as a result of the recent acquisition by TSMC of a controlling interest inXinTec, it was in each company’s best interest to terminate the EquipmentAgreement, and for XinTec to own and operate the capital equipment which, as ofJanuary 1, 2007, was in place and operational in the same manner asit operates its existing equipment. Pursuant to the agreement between theCompany and XinTec to terminate the Equipment Agreement, XinTec refunded to theCompany approximately $32.0 million, representing all funds previouslyremitted by the Company to XinTec for the purpose of the equipment purchasecontemplated by the Equipment Agreement, plus interest accrued thereon. Thedeposits made to XinTec pursuant to the original Equipment Agreement, and therefund upon the termination of the agreement, are presented in the “Cash flowsfrom investing activities” section of the Condensed Consolidated Statements ofCash Flows for the nine months ended January 31, 2007.

**Note 6 — ConsolidatedAffiliates**

## ***SiliconOptronics, Inc.***

In May 2004, the Company entered into an agreementwith Powerchip Semiconductor Corporation (“PSC”) to establish a joint venturein Taiwan. The purpose of the joint venture, which is called 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 approximately 49%. In March 2005,the Company assumed control of the board of directors of SOI and the Companyhas consolidated SOI since April 30, 2005.

In July 2006, SOI declared a cash dividend of$482,000, of which the Company received $237,000 when the cash dividend waspaid in August 2006. SOI also issued shares to its employees with anestimated fair value of $459,000. As a result of the issuance of shares by SOIto its employees, the Company’s ownership percentage declined from 49% to approximately47%.

In August 2006, SOI filed its application to become apublic company with the Taiwan Securities and Futures Bureau (“TSFB”). InSeptember, the TSFB accepted the application. SOI also plans to apply for alisting on the Taiwan Emerging Market (“TEM”) in 2007. In Taiwan, obtainingacceptance to become a public company and being listed on the TEM are mandatorysteps prior to an initial public offering (“IPO”). The timing of thecommencement of SOI’s IPO application will depend on its business outlook. Thedue diligence process will follow and is anticipated to take at least sixmonths after SOI files its application for a listing on the Taiwan GreTaiSecurities Market (“TGSM”), which is the approximate equivalent in Taiwan ofthe Over-The-Counter market in the United States. SOI will complete the IPO process byapplying for listing on the TGSM.

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

In August 2005, the Company entered into anAmended and Restated Shareholders’ Agreement (the “Amended VisEra Agreement”)with TSMC, VisEra, and VisEra Cayman. The Amended VisEra Agreement amended andrestated the original Shareholders’ Agreement (the “VisEra Agreement”) that theparties entered into on October 29, 2003, pursuant to which the Companyand TSMC agreed to form VisEra, a joint venture in Taiwan, for the purposes ofproviding manufacturing services and automated final testing services relatedto complementary metal oxide semiconductor, or CMOS, image sensors. InNovember 2003, pursuant to the terms of the original Shareholders’Agreement, the Company contributed $1.5 million in cash to VisEra andgranted a non-exclusive license to certain of its manufacturing and automatedfinal testing technologies and patents. In order to provide greater financialand fiscal flexibility to VisEra, in connection with the Amended VisEraAgreement, the parties formed VisEra Cayman, a company incorporated in theCayman Islands and VisEra became a subsidiary of VisEra Cayman.

13

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

 

Under the terms of the Amended VisEra Agreement, theparties reaffirmed their respective commitments to VisEra, and expanded thescope of and made certain modifications to the original Shareholders’Agreement. In particular, the parties agreed to raise the total capitalcommitted to the joint venture from $50.0 million to $68.0 million,which commitments may be met or discharged in the form of cash or assetcontributions. The Company and TSMC have equal interests in VisEra Cayman.Through January 31, 2007, the Company has contributed $24.6 millionto VisEra and VisEra Cayman. At a future date yet to be determined, the Companyexpects to contribute certain of its assets to the joint venture, includingtechnology and plant and equipment currently owned by it or to be purchasedwith funds for existing commercial commitments. To the extent, if any, that thevalue of the assets contributed by the Company exceeds the balance of theCompany’s commitment, the Company will receive cash from VisEra Cayman.

As a result of the additional investment that theCompany and TSMC made in VisEra during the quarter ended October 31, 2005,the Company’s and TSMC’s interest each increased from 25% to 43%, andconsequently the Company re-evaluated its accounting for VisEra in accordancewith FIN 46. The Company concluded that, as a result of its stepacquisition of VisEra, and because substantially all of the activities ofVisEra either involved or were conducted on behalf of the Company, VisEra was avariable interest entity. Since the Company was the source of virtually all ofVisEra’s revenues, the Company had a decisive influence over VisEra’sprofitability. In the quarter ended January 2006, the Company increasedits interest in VisEra from 43% to 46% through purchases of unissued shares.Accordingly, the Company considered itself to be the primary beneficiary ofVisEra, and included VisEra’s financial results in its consolidated financialstatements through December 31, 2006.

In January 2006, in accordance with the Amended VisEraAgreement, VisEra purchased color filter processing equipment and relatedassets from TSMC for an aggregate price equivalent to $16.9 million. Inconnection with the purchase, VisEra entered into a three-year lease agreementwith TSMC. Under this agreement, VisEra leases from TSMC approximately 14,000square feet of factory and office space where the assets are located at anannual cost of approximately $2.4 million.

In May 2006, VisEra Cayman purchased certain equipmentand intellectual property from Dai Nippon Printing Co., Ltd., or Dai Nippon,for approximately $3.1 million. Dai Nippon also made an investment inVisEra Cayman of approximately $4.3 million, representing an approximate3.6% interest in the common stock of VisEra Cayman. Because the per share valueof the Dai Nippon investment exceeded the Company’s average per share carryingvalue in VisEra Cayman, the Company recorded a one-time change-of-interestbenefit of $1.2 million directly to “Additional paid-in capital,” acomponent of stockholders’ equity.

On January 1, 2007, pursuant to the terms of amutual determination between the Company and VisEra, the Company assumedresponsibility for logistical management previously provided by VisEra. As aconsequence, the Company concluded that it would lose its status as the primarybeneficiary in the joint venture and VisEra would cease to be VIE as definedunder FIN 46R. This change became effective on January 1, 2007 and,as a result, the Company was required to deconsolidate VisEra as of the date ofthe change. The Company’s investment in VisEra was accounted for under theequity method beginning on January 1, 2007. The deconsolidation of VisEra didnot have a material effect on the Company’s reported revenue or reported netincome for the three and nine months ended January 31, 2007.

In January 2007, the Company and TSMC signed anamendment to the Amended VisEra Agreement to provide for an increase in VisEra’smanufacturing capacity. The amendment requires the Company and TSMC to eachmake an additional investment of up to $27.0 million. This additionalinvestment is part of an ongoing capacity expansion program at VisEra.

All other material terms of the original Shareholders’Agreement remain in effect. (See Note 15.)

14

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

 

The following table presents the summary combinedfinancial information of VisEra and VisEra Cayman, as derived from the VisEraand VisEra Cayman financial statements as of January 31, 2007 andApril 30, 2006 (in thousands):

 

|                            | ** ** | **January 31  2007** | ** ** | **April 30,  2006** | ** ** |
|----------------------------|------------|---------------------------|------------|--------------------------|------------|
| ***Balance  sheet data:*** |       |                      |       |                     |       |
| Current assets             |       | $                         | 41,929     |                     | $          | 31,108 |   |
| Long-term assets           |       | 76,101                    |       | 35,749                   |       |
| Current liabilities        |       | 39,392                    |       | 20,601                   |       |
| Long-term  liabilities     |       | 5,028                     |       | 3,586                    |       |
|                            |            |                           |            |                          |            |  |  |

 

**Note 7 — Intangible Assets andGoodwill**

Intangible assets as of January 31, 2007 consistof the following (in thousands):

|                            | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|----------------------------|------------|----------|------------|-------------------------------|------------|---------------------|------------|
| Core technology            |       | $        | 17,800     |                          | $          | 6,230               |       | $ | 11,570 |   |
| Patents and  licenses      |       | 13,460   |       | 3,847                         |       | 9,613               |       |
| Trademarks and  tradenames |       | 1,400    |       | 490                           |       | 910                 |       |
| Customer  relationships    |       | 100      |       | 58                            |       | 42                  |       |
| Intangible  assets, net    |       | $        | 32,760     |                          | $          | 10,625              |       | $ | 22,135 |   |

 

Intangible assets as ofApril 30, 2006 consist of the following (in thousands):

|                            | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|----------------------------|------------|----------|------------|-------------------------------|------------|--------------------------|------------|
| Core technology            |       | $        | 17,800     |                          | $          | 3,560                    |       | $ | 14,240 |   |
| Patents and  licenses      |       | 11,260   |       | 1,865                         |       | 9,395                    |       |
| Other intangible  assets   |       | 1,525    |       | 102                           |       | 1,423                    |       |
| Trademarks and  tradenames |       | 1,400    |       | 280                           |       | 1,120                    |       |
| Customer  relationships    |       | 100      |       | 33                            |       | 67                       |       |
| Intangible  assets, net    |       | $        | 32,085     |                          | $          | 5,840                    |       | $ | 26,245 |   |

 

During the three and nine months endedJanuary 31, 2007, the Company recorded $1.7 million and$5.2 million, respectively, in total amortization expense of intangibleassets. During the three and nine months ended January 31, 2006, theCompany recorded $1.6 million and $4.4 million, respectively, intotal amortization expense of intangible assets. The total expected futureamortization of these intangible assets is as follows (in thousands):

| Years Ending April 30, | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| 2007                                  |       | $          | 1,641      |   |
| 2008                                  |       | 6,565      |       |
| 2009                                  |       | 6,532      |       |
| 2010                                  |       | 6,386      |       |
| 2011                                  |       | 973        |       |
| Thereafter                            |       | 38         |       |
| Total                                 |       | $          | 22,135     |   |

 

15

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

 

The following table shows the activity recorded to “Goodwill”for the nine months ended January 31, 2007 (in thousands):

|                                                                               | ** ** | **Goodwill** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|
| Balance at  April 30, 2006                                               |       | $            | 4,892      |   |
| Increase in  goodwill associated with CDM acquisition in fiscal 2005 (1) |       | 2,649        |       |
| Balance at  January 31, 2007                                             |       | $            | 7,541      |   |

----

(1)               In the three monthsended October 31, 2006, the Company increased “Goodwill” related to itsacquisition of CDM by $2.6 million. The increase was due in part to a putoption related to shares held in escrow that expired during the same quarter.The escrow shares were puttable back to the Company at a premium and 145,000shares were put to the Company for cash totaling $2.8 million.Additionally, the value of the initial shares that were issued inApril 2005 as part of the CDM acquisition was also increased due to a putoption that expired unexercised subsequent to their original issuance. Bothamounts should have been recorded as part of the initial acquisition cost ofCDM.

**Note 8 — CreditFacilities of Consolidated Affiliate**

SOI maintains four unsecured lines of credit withthree commercial banks, which provide a total of approximately$3.4 million in available credit. All borrowings under the four lines ofcredit maintained by SOI bear interest at the market interest rate prevailingat the time of borrowing. There are no financial covenant requirementsassociated with these facilities and at January 31, 2007, and April 30,2006, there were no borrowings.

**Note 9 — CapitalLease Obligations**

In February 2006, the Company leasedtelecommunications equipment under a three-year capital lease at an imputedinterest rate of 7.5% per annum. Terms of the agreement require the Company tomake monthly payments of approximately $14,000 through February 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 January 31, 2007 and April 30, 2006,$315,000 and $460,000, respectively, were outstanding under the capital lease.As of January 31, 2007 and April 30, 2006, $171,000 and $308,000,respectively, was classified as a long-term obligation.

**Note 10 — NetIncome Per Share**

Basic net income per share is computed by dividing netincome by the weighted average number of common shares outstanding during theperiod.

Diluted net income per share is computed according tothe treasury stock method using the weighted average number of common andpotentially dilutive common shares outstanding during the period. Potentiallydilutive common shares represent the effect of stock options. For the three andnine months ended January 31, 2007, 10,723,000 and 5,538,000 shares,respectively, of common stock subject to outstanding options were not includedin the calculation of diluted net income per share because they wereantidilutive (i.e., the per share exercise price for such options exceeded theaverage trading price of the Company’s common stock as reported on The NasdaqStock Market for the periods presented). For the three and nine months endedJanuary 31, 2006, 2,251,000 and 5,305,000 shares, respectively, of commonstock subject to outstanding options were not included in the calculation ofdiluted net income per share because they were antidilutive.

The Company’s earnings per share were calculated underthe provisions of SFAS No. 128, *“EarningsPer Share,”* or SFAS No. 128. SFAS No. 128requires that the Company take into account the effect on consolidated earningsper share of options, warrants and convertible securities issued by itssubsidiaries. The effect on consolidated earnings per share depends on whetherthe securities issued by the subsidiary enable their holders to obtain commonstock of the subsidiary company or common stock of the parent company.Securities issued by a subsidiary that enable their holders to obtain thesubsidiary’s common stock are included in computing the

16

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

 

subsidiary’s earnings per share data. The dilutedper-share earnings of the subsidiary are included in the Company’s consolidatedearnings per share computations based on the consolidated group’s holding ofthe subsidiary’s securities. In February 2005, SOI issued to its employeesoptions exercisable for 1,400,000 shares of its own common stock. InJune 2006, SOI issued to its employees options exercisable for anadditional 700,000 shares of its own stock. In the calculation of its earningsper share for the three and nine months ended January 31, 2007 and 2006,the Company included the effect of SOI’s options in its consolidated earningsper share.

The following table sets forth the computation ofbasic and diluted earnings per share attributable to common stockholders forthe periods indicated (in thousands, except per share data):

 

|                                                                  | ** **   | **Three Months Ended  January 31,** | ** **   | **Nine Months Ended  January 31,** | ** **   |
|------------------------------------------------------------------|--------------|----------------------------------------------------|--------------|---------------------------------------------------|--------------|
| ** **                                                       | ** **   | **2007**                                           | ** **   | **2006**                                          | ** **   | **2007** | ** ** | **2006** | ** ** |
| ***Basic:***                                                     | *** *** | *** ***                                       | *** *** | *** ***                                      | *** *** | *** *** | *** *** | *** *** | *** *** |
| Numerator:                                                       |         |                                               |         |                                              |         |   |   |   |   |
| Net income                                                       |         | $                                                  | 4,130        |                                              | $            | 29,636 |   | $ | 25,426 |   | $ | 66,615 |   |
|                                                             |         |                                               |         |                                              |         |   |   |   |   |
| Denominator:                                                     |         |                                               |         |                                              |         |   |   |   |   |
| Weighted average common shares for net income per  share         |         | 54,872                                             |         | 52,576                                            |         | 54,631 |   | 54,515 |   |
|                                                             |         |                                               |         |                                              |         |   |   |   |   |
| Basic net income per share                                       |         | $                                                  | 0.08         |                                              | $            | 0.56 |   | $ | 0.47 |   | $ | 1.22 |   |
|                                                             |         |                                               |         |                                              |         |   |   |   |   |
| ***Diluted:***                                                   |         |                                               |         |                                              |         |   |   |   |   |
| Numerator:                                                       |         |                                               |         |                                              |         |   |   |   |   |
| Net income                                                       |         | $                                                  | 4,130        |                                              | $            | 29,636 |   | $ | 25,426 |   | $ | 66,615 |   |
| Dilutive effect of SOI consolidation                             |         | (1                                                 | )            | (27                                               | )            | (3 | ) | (46 | ) |
| Net income for diluted computation                               |         | $                                                  | 4,129        |                                              | $            | 29,609 |   | $ | 25,423 |   | $ | 66,569 |   |
|                                                             |         |                                               |         |                                              |         |   |   |   |   |
| Denominator:                                                     |         |                                               |         |                                              |         |   |   |   |   |
| Denominator for basic net income per share                       |         | 54,872                                             |         | 52,576                                            |         | 54,631 |   | 54,515 |   |
| Weighted average effect of common stock options                  |         | 1,013                                              |         | 2,971                                             |         | 878 |   | 2,128 |   |
| Weighted average common shares for diluted net  income per share |         | 55,885                                             |         | 55,547                                            |         | 55,509 |   | 56,643 |   |
|                                                             |         |                                               |         |                                              |         |   |   |   |   |
| Diluted net  income per share                                    |         | $                                                  | 0.07         |                                              | $            | 0.53 |   | $ | 0.46 |   | $ | 1.18 |   |

 

**Note 11 — Segmentand Geographic Information**

The Company identifies its operating segments based onbusiness activities, management responsibility and geographic location. For allperiods presented, the Company operated in a single reportable businesssegment.

The Company sells its image-sensor products eitherdirectly to OEMs and VARs or indirectly through distributors. The followingtable shows the percentage of revenues from sales to OEMs and VARs and throughdistributors for the three and nine months ended January 31, 2007 and2006:

 

|               | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|---------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                           | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| OEMs and VARs |       | 51.1                                               | %          | 76.2                                              | %          | 60.7 | % | 73.1 | % |
| Distributors  |       | 48.9                                               |       | 23.8                                              |       | 39.3 |   | 26.9 |   |
| Total         |       | 100.0                                              | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |

 

17

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

 

Since the Company’s end-user customers market and selltheir products worldwide, the Company’s revenues by geographic location are notnecessarily indicative of the geographic distribution of end-user sales, butrather indicate where the products and/or their components are manufactured orsourced. The revenues by geography in the following table are based on thecountry or region in which the Company’s customers issue purchase orders (inthousands):

 

|               | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|---------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                           | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| China(1)      |       | $                                                  | 104,351    |                                              | $          | 84,072 |   | $ | 271,312 |   | $ | 219,692 |   |
| Taiwan        |       | 9,923                                              |       | 18,716                                            |       | 66,975 |   | 62,406 |   |
| South Korea   |       | 6,688                                              |       | 8,540                                             |       | 28,217 |   | 25,728 |   |
| Japan         |       | 9,281                                              |       | 23,060                                            |       | 27,224 |   | 45,490 |   |
| United States |       | 309                                                |       | 2,164                                             |       | 4,061 |   | 4,584 |   |
| All other     |       | 3,829                                              |       | 731                                               |       | 11,123 |   | 2,197 |   |
| Total         |       | $                                                  | 134,381    |                                              | $          | 137,283 |   | $ | 408,912 |   | $ | 360,097 |   |

----

(1)               Prior year datareclassified to combine the results for Hong Kong and China.

The Company’s long-lived assets are located in thefollowing countries (in thousands):

|               | ** ** | **January 31,  2007** | ** ** | **April 30,  2006** | ** ** |
|---------------|------------|----------------------------|------------|--------------------------|------------|
| Taiwan        |       | $                          | 42,927     |                     | $          | 40,637 |   |
| China         |       | 18,270                     |       | 17,146                   |       |
| United States |       | 3,187                      |       | 1,633                    |       |
| All other     |       | 524                        |       | 456                      |       |
| Total         |       | $                          | 64,908     |                     | $          | 59,872 |   |

 

**Note 12 — EmployeeStock Purchase and Stock Option Plans**

## ***2000Employee Stock Purchase Plan***

The 2000 Employee Stock Purchase Plan (the “2000 PurchasePlan”) was adopted by the board of directors in February 2000 and wasapproved by the shareholders in March 2000. The 2000 Purchase Planbecame effective upon the closing of the Company’s initial public offering.Under the 2000 Purchase Plan, 3,000,000 shares of common stock wereinitially reserved for issuance together with an annual increase in the numberof shares reserved thereunder beginning on the first day of the fiscal yearcommencing May 1, 2001 in an amount equal to the lesser of:2,000,000 shares, or four percent of the Company’s outstanding commonstock on the last day of the prior fiscal year, or an amount determined by theCompany’s board of directors. The offering periods under this plan are theperiods of approximately 24 months commencing on the first trading day onor after June 1 and December 1 of each year and terminating on thelast trading day in the periods ending twenty-four months later. Depending onthe fair market value of the common stock, the offer periods can be consecutiveor overlapping. The purchase period under the 2000 Purchase Plan begins onthe first trading day on or after June 1 and December 1 of each yearand ends six months later. The purchase price of the common stock under thisplan is 85% of the lesser of the fair market value per share on the firsttrading day of the offering period or on the last trading day of the purchaseperiod. Employees may end their participation in an offering period at anytime, and their participation ends automatically on termination of employmentwith the Company. The 2000 Purchase Plan will terminate inFebruary 2010, unless the board of directors determines to terminate itsooner. As of January 31, 2007, 1,869,000 shares had been purchasedunder the 2000 Purchase Plan.

## ***1995Stock Option Plan***

In May 1995, the Company adopted the1995 Stock Option Plan under which 7,200,000 shares of common stockwere reserved for issuance to eligible employees, directors and consultantsupon exercise of the stock options and stock purchase rights. Incentive stockoptions were granted at a price not less than 100% of the fair market value

18

----

**OMNIVISIONTECHNOLOGIES, INC.**

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

**For the Three and Nine Months EndedJanuary 31, 2007 and 2006**

**(unaudited)**

 

of the Company’s common stock and at a price of notless than 110% of the fair market value for grants to any person who owned morethan 10% of the voting power of all classes of stock on the date of grant.Nonstatutory stock options were granted at a price not less than 85% of thefair market value of the common stock and at a price not less than 110% of thefair market value for grants to a person who owned more than 10% of the votingpower of all classes of stock on the date of the grant. Options granted underthe 1995 Stock Option Plan generally vest over five years and areexercisable immediately or for up to ten years (five years for grants to anyperson who owned more than 10% of the voting power of all classes of stock onthe date of the grant).

In February 2000, the Company terminated the1995 Stock Option Plan as to future grants. However, options outstandingunder the 1995 Stock Option Plan continue to be governed by the terms ofthe 1995 Stock Option Plan.

## ***2000Stock Plan***

In February 2000, the Company adopted the2000 Stock Plan under which 6,000,000 shares of common stock wereinitially reserved for issuance together with an annual increase in the numberof shares reserved thereunder beginning on the first day of the Company’sfiscal year, commencing May 1, 2002, in an amount equal to the lesser of:3,000,000 shares, or 6% of outstanding shares of common stock on the lastday of the prior fiscal year, or an amount determined by the Company’s board ofdirectors. The 2000 Stock Plan provides for grants of incentive stock optionsto its employees including officers and employees, directors and nonstatutorystock options to its consultants including nonemployee directors. Incentivestock options are granted at a price not less than 100% of the fair marketvalue of the Company’s common stock and at a price not less than 110% of thefair market value for grants to any person who owns more than 10% of the votingpower of all classes of stock on the date of grant. Nonstatutory stock optionsare granted at a price not less than 85% of the fair market value of the commonstock and at a price not less than 110% of the fair market value for grants toa person who owns more than 10% of the voting power of all classes of stock onthe date of the grant. Options granted under the 2000 Stock Plan have beenat fair market value on the date of the grant and generally vest over fouryears and are exercisable up to ten years (five years for grants to any personwho owned more than 10% of the voting power of all classes of stock on the dateof the grant).

Under the 2000 Stock Plan, options to purchaseapproximately 181,000 and 5,198,000 shares of common stock were granted toemployees during the three and nine months ended January 31, 2007,respectively. During the three and nine months ended January 31, 2006,options to purchase approximately 236,000 and 1,432,000 shares of common stockwere granted to employees, respectively. As of January 31, 2007, optionsto purchase approximately 12,390,000 shares of common stock wereoutstanding.

## ***2000Director Option Plan***

The 2000 Director Option Plan was adopted by theboard of directors in February 2000 and approved by the shareholders inMarch 2000. Under this plan 500,000 shares of common stock wereinitially reserved for issuance together with an annual increase in the numberof shares reserved thereunder beginning on the first day of the Company’sfiscal year commencing May 1, 2002 equal to the lesser of150,000 shares, or 0.25% of the outstanding shares of the common stock onthe last day of the prior fiscal year, or an amount determined by the board ofdirectors. The 2000 Director Option Plan provides for an initial grant tothe nonemployee director to purchase 40,000 shares of common stock.Subsequent to the initial grants, each nonemployee director is granted anoption to purchase 20,000 shares of common stock at the next meeting ofthe board of directors following the annual meeting of stockholders, if on thedate of the annual meeting the director has served on the board of directorsfor not less than six months. The contractual term of options granted under the2000 Director Option Plan is ten years, but the options expire threemonths following the termination of the optionee’s status as a director ortwelve months if the termination is due to death or disability. The initial40,000 share grants are exercisable at a rate of one-fourth of the shares onthe first anniversary of the grant date and at a rate of 1/16th of the sharesper quarter thereafter. The subsequent 20,000 share grants are exercisableat the rate of 1/16th of the shares per quarter. The exercise price of all ofthese options is 100% of the fair market value of the common stock on the dateof grant.

19

----

**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For theThree and Nine Months Ended January 31, 2007 and 2006**

**(unaudited)**

***Stock-BasedCompensation Award Activity***

The following table summarizes stock-based compensationaward activity under the 2000 Stock Plan and the 2000 Director OptionPlan, and the related weighted average exercise price, for the nine monthsended January 31, 2007:

|                                                      | ** ** | ** **                             | ** ** | **Options outstanding** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **Options  Available  For Grant** | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Price Per  Share** | ** ** |
| ** **                                           | ** ** | **(in  thousands)**                    | ** ** | **(in  thousands)**          | ** ** | ** ** | ** ** |
| Balance at April 30,  2006                           |       | 3,041                                  |       | 8,963                        |       | $ | 16.22 |   |
| Replenished                                          |       | 3,135                                  |       | —                       |       | — |   |
| Granted                                              |       | (5,258                                 | )          | 5,258                        |       | 21.36 |   |
| Exercised                                            |       | —                                 |       | (822                         | )          | 9.27 |   |
| Expired or  forfeited                                |       | 608                                    |       | (608                         | )          | 20.54 |   |
| Balance at  January 31, 2007                    |       | 1,526                                  |       | 12,791                       |       | 18.57 |   |
| Vested and expected to vest at January 31, 2007 |       |                                   |       | 11,901                       |       | $ | 18.36 |   |

 

As of January 31, 2007 and April 30, 2006,options to purchase 5,549,000 and 4,768,000 shares, respectively, were vested. Informationregarding the options outstanding as of January 31, 2007 is summarizedbelow:
| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                        | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Options  Outstanding**     | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Options  Vested and  Exercisable** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| ** **                              | ** ** | **(in  thousands)**          | ** ** | **(in years)**                                 | ** ** | ** ** | ** ** | **(in  thousands)** | ** ** | **(in  thousands)** | ** ** | **(in years)** | ** ** | ** ** | ** ** | **(in  thousands)** | ** ** |
| $­0.15—$14.58                 |       | 2,195                        |       | 6.17                                                |       | $ | 8.65 |   |   |   | 1,707 |   |   |   | $ | 7.45 |   |   |   |
| $14.59—$16.40                      |       | 2,350                        |       | 6.93                                                |       | 16.01 |   |   |   | 1,967 |   |   |   | 15.98 |   |   |   |
| $16.41—$18.00                      |       | 2,708                        |       | 9.49                                                |       | 16.89 |   |   |   | 396 |   |   |   | 16.95 |   |   |   |
| $18.01—$25.40                      |       | 2,876                        |       | 7.73                                                |       | 23.12 |   |   |   | 1,397 |   |   |   | 22.84 |   |   |   |
| $­25.41—$30.05                |       | 2,662                        |       | 9.26                                                |       | 25.83 |   |   |   | 82 |   |   |   | 27.72 |   |   |   |
| $­0.15—$30.05                 |       | 12,791                       |       | 8.01                                                |       | $ | 18.57 |   | $ | 7,610 |   | 5,549 |   | 6.83 |   | $ | 15.32 |   | $ | 7,599 |   |
|                                         |            |                              |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value (the aggregate difference betweenthe closing stock price of the Company’s common stock on January 31, 2007of $11.54 and the exercise price of in-the-money options) that would have beenreceived by the option holders had all option holders exercised their optionsas of that date. The total number of shares of common stock underlyingin-the-money options exercisable as of January 31, 2007 was 1,156,000.

The total intrinsic value of options exercised duringthe three and nine months ended January 31, 2007 was $0.7 million and $1.9 million, respectively. Total cashreceived from employees as a result of employee stock option exercises duringthe nine months ended January 31, 2007 was approximately $7.6 million.

As of January 31, 2007, net of forfeitures, therewas $50.9 millionof unrecognized compensation cost related to unvested stock options, which isexpected to be recognized over a weighted average period of 1.3 years. Forthe 2000 Purchase Plan, as of January 31, 2007, there was$1.7 million of unrecognized compensation cost which is expected to berecognized over a weighted average period of 1.2 years. The Company’scurrent practice is to issue new shares to settle share option exercises.

20

----

**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For theThree and Nine Months Ended January 31, 2007 and 2006**

**(unaudited)**

## ***Impact of theAdoption of SFAS No. 123(R)***

The Company adopted SFASNo. 123(R) beginning May 1, 2006 and used the modifiedprospective transition method. In accordance with the modified prospectivetransition method, the Company’s consolidated financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS No. 123(R). Effective with the adoption of SFAS No. 123(R),stock-based compensation expense is recognized in the Company’s ConsolidatedStatements of Operations and includes (i) compensation expense forstock-based compensation awards granted prior to, but not yet vested as ofMay 1, 2006, based on the grant-date fair value estimated in accordance withthe pro forma provisions of SFAS No. 123 and (ii) compensationexpense for the stock-based compensation awards granted or modified subsequentto May 1, 2006, based on the grant-date fair value estimated in accordancewith the provisions of SFAS No. 123(R). The impact of SFAS No. 123(R)on the Company’s consolidated financial statements by award type for the threeand nine months ended January 31, 2007 was as follows (in thousands):

|                                                     | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **January 31,  2007**   | ** ** | **January 31,  2007**  | ** ** |
| Stock-based  compensation expense by type of award: |       |                         |       |                        |       |
| Employee stock  options                             |       | $                            | 7,548      |                        | $          | 22,001 |   |
| Employee stock  purchase plan                       |       | 55                           |       | 879                         |       |
| Total stock-based  compensation                     |       | 7,603                        |       | 22,880                      |       |
| Tax effect                                          |       | 1,127                        |       | 3,071                       |       |
| Net effect on net income                            |       | $                            | 6,476      |                        | $          | 19,809 |   |

 

## ***ValuationAssumptions***

SFAS No. 123(R) requires companies toestimate the fair value of stock-based compensation awards on the grant dateusing an option pricing model. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service period inthe Company’s Condensed Consolidated Statements of Income. The Company measuresthe fair value of stock-based compensation awards using Black-Scholesconsistent with the provisions of SFAS No. 123(R), SEC SABNo. 107 and the Company’s prior period pro forma disclosures of netearnings, including stock-based compensation (determined under a fair valuemethod as prescribed by SFAS No. 123). Black-Scholes was developed toestimate the fair value of freely tradable, fully transferable options withoutvesting 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 these options was estimated usingthe Black-Scholes option pricing model. The per share weighted averageestimated grant date fair value for employee options granted was $8.32 and$11.44 during the three and nine months ended January 31, 2007,respectively. The per share weighted average estimated grant date fair valuefor employee options granted was $9.65 and $7.76 during the three and ninemonths ended January 31, 2006, respectively.

21

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For theThree and Nine Months Ended January 31, 2007 and 2006**

**(unaudited)**

The following weighted average assumptions areincluded in the estimated fair value calculations for stock options granted inthe three and nine months ended January 31, 2007 and 2006:

 

|                                      | ** ** | **Employee Stock Option Plans** | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended**               | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **January 31,**                           | ** ** | **January 31,** | ** ** |
| ** **                           | ** ** | **2007**                                       | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free interest rate              |       | 4.53                                           | %          | 4.40 | % | 4.92 | % | 3.85 | % |
| Expected term of  options (in years) |       | 4.2                                            |       | 3.5 |   | 4.1 |   | 3.5 |   |
| Expected volatility                  |       | 55.0                                           | %          | 75.0 | % | 64.3 | % | 82.3 | % |
| Expected dividend yield              |       | 0                                              | %          | 0 | % | 0 | % | 0 | % |

 

Using Black-Scholes, the per share weighted averageestimated fair value of rights issued pursuant to the Company’s 2000 PurchasePlan during the three and nine months ended January 31, 2007 was $6.54 and $7.41, respectively. UsingBlack-Scholes, the per share weighted average estimated fair value of rightsissued pursuant to the Company’s 2000 Purchase Plan during the three and ninemonths ended January 31, 2006 was $3.28 and $3.26, respectively.

The following weighted average assumptions are includedin the estimated grant date fair value calculations for rights to purchasestock under the 2000 Purchase Plan:

|                                      | ** ** | **Employee Stock Purchase Plan** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended**                | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **January 31,**                            | ** ** | **January 31,** | ** ** |
| ** **                           | ** ** | **2007**                                        | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free interest rate              |       | 4.95                                            | %          | 4.34 | % | 5.03 | % | 3.82 | % |
| Expected term of  options (in years) |       | 0.5                                             |       | 0.5 |   | 0.5 |   | 0.5 |   |
| Expected volatility                  |       | 46.8                                            | %          | 51.8 | % | 52.0 | % | 44.5 | % |
| Expected dividend yield              |       | 0                                               | %          | 0 | % | 0 | % | 0 | % |

 

The methodologies for determining the above valueswere as follows:

·                  *Expected term:*The expected term represents the period that the Company’s stock-based awardsare 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 ratesappropriate for the expected term of the Company’s stock-based awards.

·                  *Expected volatility:*The Company determines 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.

·                  *Dividend yield:*The dividend yield assumption reflects the Company’s intention not to issue adividend under its dividend policy.

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

22

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For theThree and Nine Months Ended January 31, 2007 and 2006**

**(unaudited)**

## ***Periods Prior toAdoption of SFAS No. 123(R)***

Prior to the adoption ofSFAS No. 123(R), the Company applied APB 25 and relatedinterpretations and provided the required pro forma disclosures ofSFAS No. 123, as amended by SFAS No. 148, *“Accounting for Stock-Based Compensation — Transitionand Disclosures.”* The pro forma information in the following tableillustrates the effect on net income and net income per share for the three andnine months ended January 31, 2006 as if the Company had applied the fairvalue recognition provisions of SFAS No. 123 (in thousands, exceptper share amounts):

|                                                                                                                                      | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                           | ** ** | **January 31,  2006**   | ** ** | **January 31,  2006**  | ** ** |
| Net income, as reported                                                                                                              |       | $                            | 29,636     |                        | $          | 66,615 |   |
| Deduct:Total  stock-based employee compensation determined under fair value based method  for all awards, net of related tax effects |       | 5,440                        |       | 16,788                      |       |
|                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| As adjusted net income                                                                                                               |       | $                            | 24,196     |                        | $          | 49,827 |   |
|                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Net income per share —  Basic:                                                                                                  |       |                         |       |                        |       |
| As reported                                                                                                                          |       | $                            | 0.56       |                        | $          | 1.22 |   |
| As adjusted                                                                                                                          |       | $                            | 0.46       |                        | $          | 0.91 |   |
|                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Net income per share —  Diluted:                                                                                                |       |                         |       |                        |       |
| As reported                                                                                                                          |       | $                            | 0.53       |                        | $          | 1.18 |   |
| As adjusted                                                                                                                          |       | $                            | 0.46       |                        | $          | 0.91 |   |
|                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Shares used in  computing net income per share — Basic:                                                                         |       |                         |       |                        |       |
| As reported                                                                                                                          |       | 52,576                       |       | 54,515                      |       |
| As adjusted                                                                                                                          |       | 52,576                       |       | 54,515                      |       |
|                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Shares used in  computing net income per share — Diluted:                                                                       |       |                         |       |                        |       |
| As reported                                                                                                                          |       | 55,547                       |       | 56,643                      |       |
| As adjusted                                                                                                                          |       | 53,060                       |       | 54,515                      |       |

 

**Note 13 — AdditionalPaid-in Capital**

The following table shows the activity recorded to “Additionalpaid-in capital” for the nine months ended January 31, 2007 (inthousands):

|                                                                        | ** ** | **Additional** | ** ** |
|------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                             | ** ** | **Paid-in**    | ** ** |
| ** **                                                             | ** ** | **Capital**    | ** ** |
| Balance at May 1,  2006                                           |       | $              | 285,112    |   |
| Exercise of  stock options                                             |       | 7,615          |       |
| Employee stock  purchase plan                                          |       | 2,830          |       |
| Compensation  related to stock options granted                         |       | 22,880         |       |
| Tax benefits  from stock-based compensation                            |       | 365            |       |
| Gain from  minority investment                                         |       | 2,413          |       |
| Goodwill  adjustment for put rights issued to CDM selling stockholders |       | 1,894          |       |
| Shares issued  for CDM Optics acquisition                              |       | 34             |       |
| Balance at January 31, 2007                                       |       | $              | 323,143    |   |

 

23

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For theThree and Nine Months Ended January 31, 2007 and 2006**

**(unaudited)**

**Note 14 — TreasuryStock**

On June 21, 2005, the Company’s board ofdirectors authorized the repurchase in an open-market program of up to anaggregate of $100 million of the Company’s common stock. Repurchases underthe open-market program were authorized for a twelve-month period that ended onJune 21, 2006. As of January 31, 2007 and April 30, 2006, the Companyhad cumulatively repurchased 5,870,000 shares of its common stock underthe open-market program for an aggregate cost of approximately $79.6 million.(See Note 17.)

**Note 15 — Commitmentsand Contingencies**

## ***Commitments***

In December 2000, the Company formed asubsidiary, HWSC, to conduct testing operations and other processes associatedwith the manufacturing of its products in China. The registered capital of HWSCis $30.0 million of which the Company has funded a total of$24.0 million. The Company is currently applying to the Chinese governmentfor an extension of the time by which it is obligated to fund the remainingregistered capital of HWSC. The $24.0 million invested throughJanuary 31, 2007 was used primarily for payment to building contractorsfor the construction of facilities and the purchase of equipment.

The Company also maintains a subsidiary in Shanghai,SDC, which provides assistance to the Company in various product designprojects. On January 10, 2007, SDC entered into a Land-Use-Right PurchaseAgreement (the “Purchase Agreement”) with the Construction and TransportationCommission of the Pudong New District, Shanghai. The Purchase Agreement has aneffective date of December 31, 2006. Under the terms of the PurchaseAgreement, the Company agreed to pay an aggregate amount of approximately$0.6 million (the “Purchase Price”) in exchange for the right to useapproximately 322,537 square feet of land located in Shanghai for a period of50 years. In addition, the Company is obligated to invest a minimum ofapproximately $30 million to develop the land and construct facilities,which amount includes the Purchase Price. As of January 31, 2007, theCompany has already contributed $7.5 million of the $30 million totalinvestment. Construction of the facilities on the land must commence and becompleted during the time period beginning on June 30, 2007 and ending onJune 30, 2009, subject to an additional one-year extension under limitedcircumstances. The Company may use the land solely for the purposes ofindustrial use and/or scientific research. The Company intends to use SDC’sregistered capital to partially fund its commitment to this project.

The Company has various commitments arising from theVisEra Agreement, and the subsequent amendments to it. In particular, theparties agreed to raise the total capital committed to the joint venture to$112.9 million, which commitments may be made in the form of cash or assetcontributions, including in January 2007, when the Company amended its jointventure agreement with TSMC to each invest an additional $27 million in VisEra.Through January 31, 2007, the Company has contributed $24.6 million to VisEraand VisEra Cayman. Additional contributions may be made by additionalinvestors, additional contributions by the Company and TSMC, or a combinationthereof, provided that the Company and TSMC have and will maintain equalinterests in VisEra and VisEra Cayman. To the extent, if any, that the value ofthe assets contributed exceeds the value of the Company’s commitment, theCompany will receive cash from VisEra Cayman. (See Notes 6 and 17.)

## ***Litigation***

From time to time, the Company has been subject tolegal proceedings and claims with respect to such matters as patents, productliabilities and other actions arising in the normal course of business.

On November 29, 2001, a complaint captioned *McKee v. OmniVision Technologies, Inc., et. al.,Civil Action No. 01CV 10775*, was filed in the United StatesDistrict Court for the Southern District of New York against OmniVision, someof the Company’s directors and officers, and various underwriters for theCompany’s initial public offering. Plaintiffs generally allege that the nameddefendants violated federal securities laws because the prospectus related tothe Company’s offering failed to disclose, and contained false and misleadingstatements regarding, certain commissions purported to have been received bythe underwriters, and other purported 

24

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For theThree and Nine Months Ended January 31, 2007 and 2006**

**(unaudited)**

underwriter practices in connection with theirallocation of shares in the Company’s offering. The complaint seeks unspecifieddamages on behalf of a purported class of purchasers of the Company’s commonstock between July 14, 2000 and December 6, 2000. Substantiallysimilar actions have been filed concerning the initial public offerings formore than 300 different issuers, and the cases have been coordinated as *In re Initial Public Offering Securities Litigation,21 MC 92*. Claims against the Company’s directors and officers havebeen dismissed without prejudice pursuant to a stipulation. OnFebruary 19, 2003, the Court issued an order dismissing all claims againstthe Company except for a claim brought under Section 11 of the SecuritiesAct of 1933. A stipulation of settlement for the release of claims against theissuer defendants, including the Company, has been submitted to the Court. OnFebruary 15, 2005, the Court preliminarily approved the settlementcontingent on specified modifications. On August 31, 2005, the Court issuedan order confirming preliminary approval of the settlement. On April 24,2006, the Court held a fairness hearing in connection with the motion for finalapproval of the settlement. The Court has not yet issued aruling on the motion for final approval. The settlement remains subject tofinal Court approval and a number of other conditions. On December 5, 2006 theCourt of Appeals for the Second Circuit reversed the Court’s order certifying aclass in several “test cases” that had been selected by the underwriter defendantsand plaintiffs in the coordinated proceeding *Inre Initial Public Offering Securities Litigation*. The Company is notone of the test cases, and it is unclear what impact this will have on theCompany’s case. If the settlement does not occur and litigation against theCompany continues, the Company believes that it has meritorious defenses andintends to defend the case vigorously. The Company further believes that thesettlement will not have any material adverse affect on its financial condition,results of operations or cash flows.

On June 10, 2004, the first of several putativeclass actions was filed against the Company and certain of its present andformer directors and officers in federal court in the Northern District ofCalifornia on behalf of investors who purchased the Company’s common stock atvarious times from February 2003 through June 9, 2004. Those actionswere consolidated under the caption *In reOmniVision Technologies, Inc.,*No. C-04-2297-SC, and aconsolidated complaint was filed. The consolidated complaint asserts claims onbehalf of purchasers of the Company’s common stock between June 11, 2003and June 9, 2004, and seeks unspecified damages. The consolidatedcomplaint generally alleges that defendants violated Sections 10(b) and20(a) of the Securities Exchange Act of 1934 by allegedly engaging in improperaccounting practices that purportedly led to the Company’s financialrestatement. On July 29, 2005, the court denied the Company’s motion todismiss the complaint and discovery commenced thereafter. The parties engagedin settlement discussions and in November 2006, the parties reached anagreement in principle to settle this litigation. Much of the settlement wouldbe funded by insurance carriers that issued Directors and Officers LiabilityInsurance Policies to the Company. The Company accrued $3.3 million duringthe quarter ended October 31, 2006, as the Company’s share of thesettlement, including unreimbursed defense costs, net of $13.0 million inrecoverable insurance proceeds. The parties are currently drafting a writtensettlement agreement and other customary documentation. As a result of thepending settlement, the parties have agreed to stay discovery and otherproceedings. Notice of the settlement must be provided to the purportedshareholder class, and the Court must grant final approval of the settlement.The Company believes that ultimate settlement is probable at the currentlyestimated amount. There is no assurance that the Court will grant suchapproval, or that the settlement will become final. If the settlement does notoccur and litigation against the Company continues, the Company believes thatit has meritorious defenses and intends to defend the case vigorously. If thelitigation continues, the Company cannot estimate whether the result of thelitigation would have a material adverse effect on its financial condition,results of operations or cash flows.

On October 20, 2005, a purported shareholderderivative complaint, captioned *Hackl v. Hong*,No. 1:05-CV-050985, was filed in Santa Clara County Superior Court for theState of California. This derivative action contains allegations that arevirtually identical to the prior state court derivative actions that werevoluntarily dismissed, and which were based on the allegations contained in thesecurities class actions. The current complaint generally seeks unspecifieddamages and equitable relief based on causes of action against various of theCompany’s present and former directors and officers for purported breach offiduciary duty, abuse of control, gross mismanagement, waste of corporateassets, unjust enrichment and violations of California Corporations Code. TheCompany is named solely as a nominal defendant against whom no monetaryrecovery is sought. Pursuant to a January 20, 2006 Court Order, plaintifffurnished a bond for reasonable expenses in order to proceed with hisderivative action. On May 15, 2006, the Court sustained the Company’sdemurrer to the complaint with leave to amend on the grounds that 

25

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For theThree and Nine Months Ended January 31, 2007 and 2006**

**(unaudited)**

plaintiff failed to make a pre-litigation demand onthe Company’s board of directors and fails to sufficiently plead that demand isfutile. On October 4, 2006, the Court sustained the Company’s demurrer tothe amended complaint as well and again granted plaintiff leave to amend. TheCompany and individual defendants have filed demurrers to the second amendedcomplaint, which are scheduled to be heard in April 2007.

**Note 16 — RelatedParty Transactions**

In May 2006, the Company consummated a loanagreement with one of its employees. Under the terms of the agreement, whichwas approved in fiscal 2004, the Company extended to the employee athree-year $1.0 million loan with an imputed interest rate ofapproximately five percent per annum which matures on May 12, 2009. Theloan is secured by a deed of trust.

In the second quarter of fiscal 2006, the Companyentered into an agreement with ImPac (see Note 5) under which ImPac agreedto provide certain management and support services to HWSC. The Companycompensates ImPac for the services provided in accordance with the Company’spolicy regarding related party transactions. The Company’s board of directorsapproved the agreement, which may be cancelled by either party at any time.During the three months ended January 31, 2007, the Company and ImPacagreed to phase out ImPac’s management and support services over the nextseveral months beginning on January 1, 2007. During the three and ninemonths ended January 31, 2007, the Company paid ImPac approximately$181,000 and $0.6 million, respectively, as compensation for managementand support services. During the three and nine months ended January 31,2006, the Company paid ImPac approximately $183,000 and $299,000, respectively,as compensation for management and support services. In addition, fromAugust 2005 to present, Tsuey-Jiuan Chen, the president of ImPac, has alsoacted as president of HWSC. From August 2001 to April 2003,Tsuey-Jiuan Chen served on the Company’s board of directors.

In January 2006, in accordance with the Amended VisEraAgreement (see Note 6), VisEra, the Company’s joint venture with TSMC,purchased from TSMC color filter processing equipment and related assets for anaggregate price equivalent to $16.9 million. In connection with the purchase,VisEra entered into a three-year lease agreement with TSMC. Under thisagreement, VisEra leases from TSMC approximately 14,000 square feet of factoryand office space where the assets are located. Under a related servicescontract, TSMC agreed to provide VisEra with certain manufacturing supportservices, such as mail delivery and receipt and reception services, at priceswhich approximate cost.

**Note17** — **SubsequentEvents**

On February 27, 2007 the Company entered into aFoundry Manufacturing Agreement (the “Manufacturing Agreement”) with PSC. Underthe terms of the Manufacturing Agreement, the Company and PSC agreed to jointlydevelop certain process technology to enable the fabrication of the Company’sCMOS image sensors at PSC. Upon completion of the process development andsubject to PSC’s fulfillment of certain terms and conditions, the Company hasagreed to purchase a certain quantity of the jointly-developed wafers from PSCin accordance with the purchasing specifications approved by the parties. Underthe terms of the Manufacturing Agreement, the Company has made a refundable,interest-bearing deposit of $4 million to PSC and this deposit will beapplied as credit towards future wafer purchases. The Company and PSC willshare in the ownership of the intellectual property created in connection withthe process development. However, PSC will not have the right to use theprocess technology or the Company’s intellectual property for its own use orfor any third party without the Company’s prior written consent.

On February 13, 2007, the Company’s board ofdirectors approved a proposal to purchase a complex of four buildings in SantaClara County, California, totaling approximately 207,000 square feet for anaggregate purchase price of approximately $37.2 million. The Companyexpects to spend approximately $10 million to complete the interior build-outof the buildings and plans to occupy two of the four buildings in mid-2008 uponcompletion of the work. Provided that financing is available on acceptableterms, the Company expects to finance a portion of the total project with amortgage.

26

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For theThree and Nine Months Ended January 31, 2007 and 2006**

**(unaudited)**

On February 27, 2007, the Company’s board ofdirectors approved a stock repurchase program that, subject to applicablesecurities laws, provides for the repurchase of up to $100 million of itsoutstanding common stock in an open-market program. Such purchases will be attimes and in amounts as the Company deems appropriate, based on factors such asmarket conditions, legal requirements and other corporate considerations.

 

27

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*Thefollowing information should be read in conjunction with our unauditedcondensed interim financial statements and the notes thereto included inItem 1 of this Quarterly Report on Form 10-Q. The followingdiscussion contains forward-looking statements, within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities 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 wordsof similar 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. All forward-looking statements included in thisQuarterly Report on Form 10-Q, including, but not limited to, statementsregarding the extent of future sales through distributors, future trends andopportunities in certain markets, the development, introduction andcapabilities of new products, the establishment of partnerships with othercompanies, increased unit volume sales, the increase of competition in ourindustry, the continued importance of the camera cell phone market to ourbusiness, continued price competition and reduction of average selling priceswith respect to our products, the extent of certain future expenses, oureffective tax rate for fiscal 2007, our future investments, our workingcapital requirements in fiscal 2007, and the sufficiency of our availablecash, 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. Suchimportant factors include, but are not limited to, those set forth under thecaption “Item 1A. Risk Factors,” beginning on page 51 of thisQuarterly Report and elsewhere in this Quarterly Report and in other documentswe file with the**U.S. Securitiesand Exchange Commission**(“SEC”). All subsequent written and oral**forward-looking statements by or attributableto us or persons acting on our**behalfare expressly qualified in their entirety by such factors.*

*OmniVision and OmniPixel are registered trademarks ofOmniVision Technologies, Inc. CameraChip, OmniPixel2, OmniQSP and TrueFocus are trademarks of OmniVisionTechnologies, Inc. Wavefront Coding is a trademark of CDM Optics, Inc., awholly-owned subsidiary of OmniVision Technologies, Inc.*

**Overview**

We design, develop and market high performance, highlyintegrated and cost efficient semiconductor image sensor devices. Our mainproducts, image-sensing devices which we refer to by the name CameraChipTM imagesensors, are used to capture an image electronically and are used in a numberof consumer and commercial mass-market applications. Our CameraChip imagesensors are manufactured using the complementary metal oxide semiconductor, orCMOS, fabrication process. Our CameraChip image sensors are predominantlysingle-chip CMOS solutions that integrate several distinct functions includingimage capture, image processing, color processing, signal conversion and outputof a fully processed image or video stream. We believe that our highlyintegrated CameraChip image sensors enable camera device manufacturers to buildhigh quality camera products that are smaller, less complex, more reliable,lower cost and more power efficient than cameras using traditional charge-coupleddevices, or CCDs.

## ***Technology***

In August 2004, we announced the introduction ofour advanced OmniPixel® technology. OmniPixel technology represented a globalredesign that featured new pixel architecture, new circuit design, new embeddedalgorithms, new materials and new process technology. OmniPixel technology alsoincludes support for features such as auto-focus, zooming, panning andmechanical shutter control.

In September 2005, we announced the introduction ofour advanced OmniPixel2TM architecture. This architecture, which is based on a2.2μ x 2.2μ pixel and uses a 0.13μ process geometry, is less than half the sizeof the OmniPixel architecture introduced in 2004, but with improvedperformance. With the OmniPixel2 architecture, we have significantly improvedsensor performance in three key areas. The improved fill-factor and zero-gapmicro-lens structure increase the sensor’s ability to capture light, and itsimproved quantum efficiency improves its dynamic range, its ability to capturewidely differing light levels in a single image and to rapidly adjust tochanges in light levels.

In February 2007, we introduced our firstTrueFocusTM camera with Wavefront CodingTM technology for the mobile handsetmarket. Our patented Wavefront Coding technology is a method of opticallyencoding light using a special lens to form an intermediate image on thesensor, and decoding this intermediate image with digital 

28

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

processing to create a picture that is in focus acrossvirtually the entire image. TrueFocus offers true ‘point-and-shoot’ capabilitywhere the entire image is always in focus and always available for instantone-click capture in real time, with no waiting for the lens to focus.TrueFocus is designed to provide our customers with a product that effectivelytargets the mobile handset market by being small, durable, easy to manufactureand cost-competitive.

## ***New Products***

In October 2005, we announced the OV2640 sensor, ourfirst product on the OmniPixel2 architecture and the world’s first 2-megapixelsensor on a 1⁄4 inch form factor. In addition to the features of the OmniPixel2architecture, the OV2640 sensor also incorporates an advanced image signalprocessor called the OmniQSPTM system which provides high-grade pictureprocessing and features traditionally found only in digital still cameras. InJuly 2006, we announced that the OV2640 sensor was in volume production.

In October 2005, we also announced the OV7950, anenhanced sensor designed specifically for the automotive market. The OV7950offers several improvements including a dual dynamic overlay function allowingfor both a dynamic and a static visual aid layer (text or graphics) within the image.This is especially useful for reference frames and guiding systems in backupand parking assist cameras for cars and trucks.

In April 2006, we announced oursecond-generation, 5-megapixel camera chip. The OV5620 offers a smallform-factor, 5-megapixel CMOS camera that we believe surpasses CCD sensors inperformance. Furthermore, we believe the OV5620’s advanced high-definition, orHD, video modes with vivid colors make this CameraChip image sensor especiallyattractive for next generation digital still cameras, or DSCs, and hybridcameras, which take both still and video pictures.

In September 2006, we introduced the OV7720, ahigh sensitivity digital VGA CameraChip sensor designed specifically forsecurity and surveillance applications. Unlike the sensors used in conventionalanalog security cameras, the new sensor produces high quality digital outputand eliminates the need for A/D converters while simplifying post processing.The OV7720 is one of the first high performance sensors capable of running at60 frames per second and delivers, we believe, exceptional low-lightsensitivity and performance without sacrificing the speed required for advancedsecurity applications. In September 2006, we also unveiled the new OV7949advanced CMOS CameraChip sensor designed specifically for commercial CCTV/videomonitoring security systems. The highly integrated, single-chip OV7949 videocamera chip sensor is based on our proprietary OmniPixel architecture. TheOV7949 combines a high level of functionality with a brand new design that wespecifically engineered to operate extremely well in low-light conditions, afeature especially critical to indoor and night security monitoring systems.

In October 2006, we announced the availability ofour new all digital OV7710 CameraChip advanced CMOS image sensor developedspecifically for automotive applications. The OV7710 is a highly integratedCMOS video camera that combines a high level of functionality with all digitaloutput. Digital output is a key requirement for automotive machine-visionapplications such as airbag deployment, lane departure warning, collisionavoidance/pedestrian detection, windshield wiper control, and drowsinessdetection. The OV7710 features a dual dynamic overlay function, which permitstext or graphics within the image.

In February 2007, in addition to the firstTrueFocus camera described above, we announced the details of two other newproducts. The first was a 5-megapixel auto-focus camera module for mobilehandsets based around the OV5623 CameraChip sensor. The new module provides thebasis for high resolution cameras to enter the mainstream mobile handsetmarket. Our introduction of the 5-megapixel camera module with auto-focuscapability, a function previously associated only with DSCs and expensivecamera phones, brings high image quality and camera performance closer to themainstream camera phone market. We expect that our new 5-megapixel cameramodule will enable our handset customers to continue to move up the ‘megapixelcurve’ in order to provide DSC-quality imaging on mass market camera phones.

The second new product was the OV7680, a new 1/10 inchVGA CameraChip sensor designed for entry-level camera phones, for secondarycameras in 3G handsets, and for integrated notebook PC cameras. The new sensorincorporates a unique non-linear lens shift technology, which permits areduction in the height of the camera module to just 3.17mm.

29

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

## ***Joint Venture withTSMC***

In October 2003, we entered into a Shareholders’Agreement, or the VisEra Agreement, with Taiwan Semiconductor ManufacturingCo., Ltd., or TSMC, pursuant to which we agreed with TSMC to form VisEraTechnologies Company, Ltd., or VisEra, a joint venture in Taiwan. VisEra’smission is to provide manufacturing services and automated final testingservices. 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 and automated final testing services. The VisEraAgreement also provided that once VisEra had acquired the capability to deliverhigh quality manufacturing services and automated final testing 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 and automated final testingservices. Historically, we have relied upon TSMC to provide us with asubstantial proportion of our wafers. As a part of the VisEra Agreement, TSMCagreed to commit substantial wafer manufacturing capacity to us in exchange forour commitment to purchase a substantial portion of our wafers from TSMC,subject to pricing and technology requirements.

In 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 minor 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., or XinTec, aTaiwan-based provider of chip-scale packaging services of which we directlyowned approximately 7.8%. In fiscal 2006, VisEra invested an additional$0.5 million and we invested an additional $130,000 in XinTec as ourportion of an additional capital injection to enable XinTec to expand itsproduction capacity. As a result of the increase in our beneficial interest inXinTec due to VisEra’s investment in XinTec during fiscal 2006, weaccounted for our investment in XinTec under the equity method. InJanuary 2007, TSMC purchased approximately 90.5 million previouslyunissued shares from XinTec. As a result of TSMC’s additional investment, ourownership percentage in XinTec declined from 7.8% to 4.4% and VisEra’sownership percentage declined from 29.6% to 16.9%. Due to the reduction in ourownership percentage in XinTec and the deconsolidation of VisEra describedbelow, effective January 1, 2007, we began to account for our interest inXinTec under the cost method.

As a result of the additional investment that TSMC andwe made in VisEra during the quarter ended October 31, 2005, TSMC’s andour interest each increased from 25% to 43%, and consequently we re-evaluatedour accounting for VisEra in accordance with FIN 46. We concluded that, asa result of our step acquisition of VisEra and because substantially all of theactivities of VisEra either involve or are conducted on our behalf, VisEra wasa variable interest entity. Since we were the source of virtually all of VisEra’srevenues, we had a decisive influence over VisEra’s profitability. Accordingly,we considered ourselves to be the primary beneficiary of the joint venture, andwe began to include VisEra’s financial results in our consolidated financialstatements. In the quarter ended January 2006, we increased our interestin VisEra from 43% to 46% through purchases of unissued shares. InJanuary 2006, pursuant to the Amended VisEra Agreement, VisEra purchasedfrom TSMC the equipment used for applying color filers and micro-lenses towafers, and VisEra is now providing the related processing services that wepreviously purchased from TSMC. In November 2006, we provided a further$6.1 million as our portion of an additional cash or asset contribution tobe made by TSMC and us under the then current Amended VisEra Agreement.

In July 2006, we agreed with VisEra that we wouldassume direct responsibility for the logistics management services that VisEraprovided to us at that time. In January 2007, pursuant to the terms of themutual agreement between VisEra and us, we assumed responsibility forlogistical management previously provided by VisEra. As a consequence, weconcluded that we would lose our status as the primary beneficiary in the jointventure and VisEra would cease to be a variable interest entity (“VIE”) asdefined under FIN 46R. This change became effective on January 1, 2007and, as a result, we were required to deconsolidate VisEra as of the date ofthe change. As a consequence of the deconsolidation, effective January 1,2007, we account for our investment in VisEra under the equity method. Thedeconsolidation of VisEra did not have a material effect on our reportedrevenue or reported net 

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

income for the three and nine months endedJanuary 31, 2007. See Note 6 — “*ConsolidatedAffiliates”*to our condensed consolidated financial statements.

In January 2007, we and TSMC signed an amendmentto the Amended VisEra Agreement to provide for an increase in VisEra’smanufacturing capacity. The amendment requires us and TSMC to each make anadditional $27.0 million investment in VisEra. This investment is part ofan ongoing capacity expansion program at VisEra. All other material terms ofthe original Shareholders’ Agreement remain in effect.

## ***Joint Venture withPSC***

In May 2004, we entered into an agreement withPowerchip Semiconductor Corporation, or PSC, to establish Silicon Optronics,Inc., or SOI, our joint venture with Powerchip Semiconductor Corporation inTaiwan. The purpose of SOI is to conduct manufacturing, marketing and sellingof certain of our legacy products. In connection with the establishment of SOI,we have agreed to enter into manufacturing and other agreements as appropriatewith PSC. In March 2005, we assumed control of the board of directors ofSOI and we have consolidated SOI since April 30, 2005. In July 2006,SOI declared a cash dividend of $482,000, of which $245,000 was payable tominority shareholders. SOI also issued shares to its employees with anestimated fair value of $459,000. The cash dividend was paid inAugust 2006. As a result of the issuance of shares by SOI to itsemployees, our ownership percentage declined from 49% to approximately 47%.

## ***Acquisition of CDM***

In April 2005, we completed the acquisition ofprivately-held CDM Optics, Inc., or CDM. CDM is located in Boulder, Colorado.CDM is the exclusive licensee from an affiliate of the University of Colorado ofa patented technology, known as Wavefront Coding technology that increases theperformance of an imaging system by substantially increasing the depth of fieldand/or correcting optical aberrations within the image. We expect that it willsignificantly reduce the size and complexity of the auto-focus function onfuture camera modules utilizing OmniVision sensors. Because the image is alwaysin focus, Wavefront Coding technology also eliminates the time-delay inherentin conventional auto or manually focused camera systems. The closingconsideration for the acquisition consisted of $10.0 million in cash andapproximately 515,000 shares of our common stock. We are further obligated topay an additional $10.0 million in cash upon the sale of a pre-determined numberof revenue-producing products incorporating CDM’s technology. CDM and the costsassociated with the acquisition are included in our consolidated balance sheetsat January 31, 2007 and April 30, 2006.

In the quarter ended October 31, 2006, we increased“Goodwill” related to our acquisition of CDM by $2.6 million. The increasewas partially related to a put option that expired during the quarter withrespect to the remaining CDM escrow shares. The escrow shares were puttableback to us at a premium and 145,000 shares were put to us for cash totaling$2.8 million. Additionally, the value of the initial shares that wereissued in April 2005 as part of the CDM acquisition were also increaseddue to a put option that expired unexercised subsequent to the originalissuance of the shares. Both amounts should have been recorded as part of theinitial acquisition of CDM.

## ***Capital Resources***

As of January 31, 2007, we had approximately$209.5 million in cash and cash equivalents and approximately$131.3 million in short-term investments. To mitigate market risk relatedto short-term investments, we have an investment policy designed to preservethe value of capital and to generate interest income from these investmentswithout material exposure to market fluctuations. Market risk is the potentialloss due to the change in value of a financial instrument as a result ofchanges in interest rates or bond prices. 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 or betterand money market funds.

In June 2005, our board of directors approved aproposal to use up to $100 million of our available cash to repurchase ourcommon stock in an open-market program during a twelve-month period that endedon June 21, 2006. Under the program, we repurchased a total of approximately5,870,000 shares at a weighted average price of $13.56 per commonshare for a total of $79.6 million.

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

In February 2007, our board of directors approvedan additional stock repurchase program that provides for the repurchase of upto $100 million of our outstanding common stock in an open-market program.Subject to applicable securities laws, such repurchases will be at times and inamounts as we deem appropriate, based on factors such as market conditions,legal requirements and other corporate considerations. See Note 14*  — “TreasuryStock”*and Note 17* — “Subsequent Events”*toour condensed consolidated financial statements.

## ***The Current Economicand Market Environment***

We operate in a challenging economic environment thathas undergone significant changes in technology and in patterns of globaltrade. We strive to remain a leader in the development and marketing of imagesensing devices based on the CMOS fabrication process and have benefited fromthe growing market demand for and acceptance of CMOS image sensors. The shiftin global fabrication to Asia has introduced a range of cost pressures ondomestic manufacturers. In response to these pressures, and in order to becloser to our primary customer base and our sources of offshore fabrication, werelocated a substantial portion of our testing operations to China duringfiscal 2004 and completed this relocation in early fiscal 2005.

We sell our products worldwide directly to originalequipment manufacturers, or OEMs, which include branded customers and contractmanufacturers, and value added resellers, or VARs, and indirectly throughdistributors. In order to ensure that we address all available markets for ourimage sensors, we divide our marketing efforts into two separate departments,each headed by a Vice President. The Mainstream Products marketing departmentaddresses the camera cell phone and DSC markets, and the Advanced Productsmarketing department addresses the security and surveillance, toys and games,personal computers, automotive and medical markets.

In the camera cell phone market in particular, futurerevenues depend to a large extent on design wins where, on the basis of anexhaustive evaluation of available products, a particular hand-set makerdetermines which image sensor to design into one or more specific models. Thereis generally a time lag of between six and nine months between the time of aparticular design win and the first shipments of the designated product. Designwins are also an important driver in the many other markets that we address,and in some cases, such as automotive applications, the time lag between aparticular design win and first revenue can be longer than one year.

The overwhelming majority of sales of our productsdepend on decisions by engineering designers and manufacturers of products thatincorporate image sensors to specify one of our products rather than one madeby a competitor. In most cases, the decision to specify a particular productrequires conforming other specifications of the product to the chosen imagesensor and makes subsequent changes both difficult and expensive. Accordingly,the ability to produce and deliver on time reliable products in largequantities is a key competitive differentiator. Since our inception, we haveshipped more than 465 million image sensors, including approximately186 million in the nine months ended January 31, 2007, whichdemonstrates the capabilities of our production system, including our sourcesof offshore fabrication.

To increase and enhance our production capabilities,last year we completed a project with TSMC, our principal wafer supplier andone of the largest wafer fabrication companies in the world, to increase fromtwo to four the number of their fabrication facilities, at which our productscan be produced. VisEra, our joint venture with TSMC and our investments in twokey back-end packaging suppliers are part of a broad strategy to ensure that wehave sufficient back-end capacity for the processing of our image sensors inthe various formats required by our customers. We are currently expanding ourcapacity with VisEra. In January 2007, we amended our joint ventureagreement with TSMC to each invest an additional $27 million in VisEra.Separately, TSMC invested $42 million in XinTec to expand XinTec’scapacity. In February 2007, we entered into a foundry manufacturingagreement with PSC. We are also expanding our testing capacity in China, aswell as our overall capability to design more custom products for ourcustomers. As necessary, we will make further investments to ensure that wehave sufficient production capacity to meet the demands of our customers aspart of our ongoing efforts to lower production costs to offset, at least inpart, the continuing pressure we experience on prices.

Since our end-user customers market and sell theirproducts worldwide, our revenues by geographic location are not necessarilyindicative of the geographic distribution of end-user sales, but ratherindicate where the products and/or their components are manufactured orsourced. The revenues by geography are based on the country or region in whichour customers issue purchase orders to us.

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

Many of the products using our image sensors, such ascamera cell phones, digital still cameras 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 distributors that serve such consumerproduct markets has been stronger in the second and third quarters of ourfiscal year and weaker in the first and fourth quarters of our fiscal year. Inaddition, since a very large number of the manufacturers who use our productsare located in China, Hong Kong and Taiwan, the pattern of demand for our imagesensors has been increasingly influenced by the timing of the extended lunar orChinese New Year holiday, a period in which the factories which use our imagesensors close.

We believe that the market opportunity represented bycamera cell phones remains very large. We benefited from growth in shipments ofimage sensors, particularly for camera cell phones, on a year-to-date basis,driven by increased demand for our VGA, 1.3-megapixel and 2-megapixel imagesensors.

We also believe that, like the digital still cameramarket, camera cell phone demand will not only continue to shift toward higherresolutions, but also will increasingly fragment into multiple resolutioncategories. In addition, there is increased demand for customization, andseveral different interface standards are coming to maturity. All of thesetrends will require the development of multiple products. In response to thesetrends we introduced several 1.3-megapixel products based on our OmniPixeltechnology. More recently, we have begun volume production and shipments of thefirst product based on the second generation of our OmniPixel technology whichwe call OmniPixel2 technology. This is a 2-megapixel image sensor, the world’sfirst 2-megapixel sensor in a quarter-inch format. We also believe that VGAresolution sensors will continue to account for a large portion of the volumeshipments in handsets during the remainder of fiscal 2007. Consequently,we have continued to introduce new products at this resolution, most recentlythe OV7680, a 1/10 inch VGA sensor that permits a camera module height of 3.17mm. We also believe that consumers will require image focusing capabilities aspicture resolution continues to increase. As such, we introduced our first TrueFocusproduct in February 2007.

The digital still camera market also demonstrates acontinuing trend toward higher resolution products, with a growing acceptanceof CMOS image sensors. We have continued to address this trend through thedevelopment and introduction of higher resolution products. In April 2006, weintroduced our OV5620 sensor, a second generation small-scale, CMOS imagesensor based on our OmniPixel2 technology. The new sensor offers advancedimaging features both for digital still cameras and hybrid cameras which takeboth still and video pictures.

The digital sensor market also demonstrates a trendtoward slim and thin form factors. In January 2006, based on the new andimproved OV7670 VGA sensor, we introduced an ultra thin VGA camera module whichmeasures 6 x 6 x 4.1 mm. Our design meets the current trend of slim and thinform factors in camera phones and other electronic devices. In addition toaddressing the continuous demand for smaller, thinner camera phones, we believethat the ultra thin module solution may also prove popular in personalcomputer, or PC, notebook applications where the camera module needs to be nothicker than the LCD housing. In October 2006, we introduced our sixthgeneration 1.3-megapixel CameraChip sensor based on our OmniPixel2 technology.Featuring a 2-micron pixel and 1/5-inch optical format, the OV9660 enables a 25percent thinner camera module than the previous generation, meeting therequirements of ultra slim handset designs. Additionally, the smaller module sizeis especially attractive to handset makers because it allows a drop-in upgradefrom VGA to 1.3 megapixels, thereby extending the life of existing VGA cameraphone designs.

In the emerging notebookmarket for embedded image sensors, we continue to win designs. We are supplyingsensors to four of the top five notebook OEMs. Our shipments to notebook andstandalone PC camera manufacturers continue to grow as services such as Skype,Google, AOL and Yahoo are adding video capability to their conferencing software.The OV9660 also provides ultra-portable notebook manufacturers with theability to upgrade to 1.3-megapixel cameras without the need for a costlysystem redesign by avoiding the size constraints which previously limited themto VGA resolution cameras.

We addressed the trend in game consoles towardinteractive applications when, in December 2005, we announced that ourOV7930 VGA CMOS CameraChip image sensor is featured in a video and musicentertainment system from one of the world’s largest toy makers. The new toyrecords users with a motion camera, so they can see themselves on television asthey sing along to their favorite songs. This toy, which includes a camera,wireless microphone and special effects lenses, is the first of its kind in theentertainment toy market. Our OV7930 CameraChip image sensor introduces a costefficient, true single-chip design with high video quality.

As the markets for image sensors have grown, we haveexperienced competition from manufacturers of CMOS and CCD image sensors. Ourprincipal competitors in the market for CMOS image sensors include MagnaChip,Micron, Samsung, ST Microelectronics and Toshiba. We expect to see continuedprice competition in the image sensor market for camera cell phones and digitalcameras as those markets continue to grow. Although we believe that wecurrently compete effectively in those markets, our competitive position couldbe impaired by companies that have greater financial, technical, marketing,manufacturing and distribution resources, broader product lines, 

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

better access to large customer bases, greater namerecognition, longer operating histories and more established strategic andfinancial relationships than we do. Such companies may be able to adapt morequickly to new or emerging technologies and customer requirements or devotegreater resources to the promotion and sale of their products. Many of these competitors own and operatetheir own fabrication facilities, which in certain circumstances may give themthe ability to price their products more aggressively than we can or may allowthem to respond more rapidly than we can to changing market opportunities.

As a result of the increase in competition and thegrowth of various consumer-product applications for image sensors, we haveexperienced a shortening in the life cycle of some image-sensor products. Forexample, although in the security and surveillance market we continue to sellimage sensors introduced more than four years ago, in the camera cell phonemarket, product life cycles can be as short as six months. With the shorteningof product life cycles, it will be increasingly difficult to accuratelyforecast customer demand for our products. As a result, we face the risk ofbeing unable to fulfill customer orders if we underestimate market demand andthe risks of excess inventory and product obsolescence if we overestimatemarket demand for our products. The shortening of product life cycles alsoincreases the importance of having short product development cycles and beingaccurate in the prediction of market trends in the design of new products. Thereduction in product life cycles increases the importance of our continuedinvestment in research and development, which we consider to be critical to ourfuture success.

In common with many other semiconductor products andas a response to competitive pressures, the average selling prices, or ASPs, ofimage sensor products have declined steadily since their introduction, and weexpect ASPs to continue to decline in the future. Accordingly, in order tomaintain our gross margins, we and our suppliers have to work continuously tolower our manufacturing costs and increase our production yields, and in orderto maintain or grow our revenues, we have to increase the number of units wesell by a large enough amount to offset the effect of declining ASPs. Inaddition, if we are unable to timely introduce new products that incorporate moreadvanced technology and include more advanced features that can be sold athigher average selling prices, our gross margin will decline.

We have migrated the production of our new sensors tothe 0.13μ line width process, and initiated mass production volumes at the endof calendar 2005. Given the rapidly changing nature of our technology,there can be no assurance that we will not encounter delays or other unexpectedyield issues with future products. During the early stages of production, productionyields and gross margins for new products are typically lower than those ofestablished products. We can encounter unexpected manufacturing issues, such asthe unexpected back-end problems that resulted in low yields on two of ourproducts, the first of which arose in the fourth quarter of fiscal 2005 and inthe first quarter of fiscal 2006. In addition, in preparation for newproduct introductions, we gradually decrease production of establishedproducts. Due to our 12-14 week production cycle, it is extremely difficult topredict precisely how many units of established products we will need. It isalso difficult to accurately predict the speed of the ramp of new products. Asa result, it is possible that we could suffer from shortages for certainproducts and build inventories in excess of demand for other products. Wecarefully consider the risk that our inventories may be excess to expectedfuture demand and record appropriate reserves. If, as sometimes happens, we aresubsequently able to sell these reserved products, the sales have little or noassociated cost and consequently they have a favorable impact on gross margins.

## ***Sources of Revenues***

We generate almost all our revenue by selling ourproducts directly to OEMs and VARs and indirectly through distributors. Wetreat sales to OEMs and VARs as one source of revenue, and distributors asanother. Our revenue recognition policies for the two groups are different. Ingeneral, we sell to our customers on FOB shipping point or FCA terms.

For shipments to customers without agreements thatallow for returns or credits, principally OEMs and VARs, we recognize revenueusing the “sell-in” method. Under this method, we recognize revenue when titlepasses to the customer provided that we have received a signed purchase order,the price is fixed or determinable, title and risk of loss has transferred tothe customer, collection of resulting receivables is considered reasonablyassured, product returns are reasonably estimable, there are no customeracceptance requirements and there are no remaining material obligations. Weprovide for future returns based on historical experience at the time werecognize revenue. For cash consideration given to customers for which we donot receive a separately identifiable benefit or cannot reasonably estimatefair value, we record the amounts as reductions of revenue.

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

For shipments to distributors under agreementsallowing for returns or credits, we recognize revenue using the “sell-through”method under which we defer revenue until the distributor resells the productto its customer and notifies us in writing of such sale. Deferred income onshipments to distributors represents the amount billed less the cost ofinventory shipped to but not yet sold by distributors. Accounting for revenueon the “sell-through” method requires that we obtain sales and inventoryinformation from our distributors. As part of our internal control process, weobserve our distributors’ physical counts of their inventories of our productson a regular basis.

In order to determine whether collection is probable,we assess a number of factors, including our past transaction history with thecustomer and the creditworthiness of the customer. If we determine thatcollection is not reasonably assured, we defer the recognition of revenue untilcollection becomes reasonably assured or upon receipt of payment.

In addition, we recognize revenue from the provision ofservices to a limited number of our customers by our wholly-owned subsidiary,CDM, and, until December 31, 2006 when we ceased to account for it as aconsolidated entity, by VisEra. We recognize the CDM-associated revenue underthe completed-contract and the percentage-of-completion methods. Thepercentage-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. For production services, we recognize revenue when theproduction services are complete and the product has been shipped to thecustomer. Until December 31, 2006 when we deconsolidated VisEra, werecognized VisEra’s revenue from third party customers when the productionservices provided by VisEra were complete and the product was shipped to thecustomer.

## ***Critical AccountingPolicies***

For a discussion of our critical accounting policies,please refer to the discussion in our Annual Report on Form 10-K for thefiscal year ended April 30, 2006. Other than for policies that are relatedto the adoption of Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004), *“Share-BasedPayment,”* or SFAS No. 123(R), there have been no materialchanges in any of our critical accounting policies since April 30, 2006.

*Stock-Based Compensation Expense*

Effective May 1, 2006, we adopted the provisionsof SFAS No. 123(R). SFAS No. 123(R) that requires all share-basedpayments to employees, including grants of employee stock options and employeestock purchases under our employee stock purchase plan, to be recognized in ourfinancial statements based on their respective grant date fair values. Wecurrently use the Black-Scholes option pricing model to estimate the fair valueof our share-based payment awards. The Black-Scholes option pricing modelrequires the use of highly subjective and complex assumptions, including ourstock price, expected volatility, expected term, risk-free interest rate andexpected dividend yield. For expected volatility, we use an average between thehistorical volatility of our common stock, and the implied volatility of tradedoptions on our common stock. The expected term of the awards is based onhistorical data regarding our employees’ option exercise behaviors. Therisk-free interest rate assumption is based on observed interest ratesappropriate for the terms of our awards. The dividend yield assumption is basedon our history and expectation of dividend payouts. The fair value of ourrestricted stock units is based on the fair market value of our common stock onthe date of grant. In addition to the requirement for fair value estimates,SFAS No. 123(R) also requires the recording of expense that is net of an anticipatedforfeiture rate. Only expenses associated with awards that are ultimatelyexpected to vest are included in our financial statements. Our forfeiture rateis determined based on our historical option cancellation experience.

We evaluate the Black-Scholes assumptions that we useto value our awards on a quarterly basis. With respect to the forfeiture rate,we will revise the rate, if necessary, in subsequent periods if actualforfeitures differ from our estimates. Otherwise, we will revise the forfeiturerate on an annual basis. If factors change and we employ different assumptions,stock-based compensation expense related to future stock-based payments maydiffer significantly from estimates recorded in prior periods.

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

**Results of Operations**

The following table sets forth the results of ouroperations as a percentage of revenues. Our historical operating results arenot necessarily indicative of the results we can expect for any future period.
| ** **                                        | ** ** | **Three Months Ended  January 31** | ** ** | **Nine Months Ended  January 31** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                          | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                          |       | 100.0                                             | %          | 100.0                                            | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                  |       | 75.1                                              |       | 59.7                                             |       | 68.5 |   | 63.0 |   |
| Gross margin                                      |       | 24.9                                              |       | 40.3                                             |       | 31.5 |   | 37.0 |   |
| Operating  expenses:                              |       |                                              |       |                                             |       |   |   |   |   |
| Research, development and related                 |       | 12.3                                              |       | 7.6                                              |       | 12.7 |   | 8.0 |   |
| Selling, general and administrative               |       | 12.4                                              |       | 6.7                                              |       | 11.0 |   | 7.0 |   |
| Litigation settlement                             |       | —                                            |       | —                                           |       | 0.8 |   | — |   |
| Total operating expenses                          |       | 24.7                                              |       | 14.3                                             |       | 24.5 |   | 15.0 |   |
| Income from operations                            |       | 0.2                                               |       | 26.0                                             |       | 7.0 |   | 22.0 |   |
| Interest income,  net                             |       | 3.1                                               |       | 1.7                                              |       | 2.7 |   | 1.8 |   |
| Other income  (expense), net                      |       | (0.5                                              | )          | 0.8                                              |       | 0.2 |   | 0.3 |   |
| Income before  income taxes and minority interest |       | 2.8                                               |       | 28.5                                             |       | 9.9 |   | 24.1 |   |
| Provision for  (benefit from) income taxes        |       | (1.0                                              | )          | 5.7                                              |       | 2.3 |   | 4.8 |   |
| Minority  interest                                |       | 0.7                                               |       | 1.2                                              |       | 1.4 |   | 0.8 |   |
| Net income                                        |       | 3.1                                               | %          | 21.6                                             | %          | 6.2 | % | 18.5 | % |

 

*Three Months Ended January 31, 2007 as Compared to Three MonthsEnded January 31, 2006*

**Revenues**

We derive substantially all of our revenues from thesale of our image-sensor products for use in a wide variety of consumer andcommercial mass-market applications including camera cell phones, security andsurveillance cameras, digital still cameras, embedded applications for personalcomputers, interactive video and toy cameras and automotive products. Revenuesfor the three months ended January 31, 2007 decreased by 2.1% toapproximately $134.4 million from $137.3 million for the three monthsended January 31, 2006. The decreased revenues were due to a decline inaverage selling prices, partially offset by an increase in unit sales of ourimage-sensor products, primarily for cell phones. Revenue from SOI, whoseoperating results were consolidated for the first time in the first quarter offiscal 2006, represented approximately 2.2% and 3.8% of our revenue forthe three months ended January 31, 2007 and 2006, respectively.

## ***Revenues from Salesto OEMs and VARs as Compared to Distributors***

We sell our image-sensor products either directly toOEMs and VARs or indirectly through distributors. The percentage of revenuesfrom sales to distributors was significantly higher in the three months endedJanuary 31, 2007 as compared to recent quarters. We expect that revenuesfrom sales through distributors will continue to represent a higher proportionof our total revenues than they have in prior quarters. The following tableshows the percentage of revenues from sales to OEMs and VARs and distributorsin the three months ended January 31, 2007 and 2006:

|               | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **January 31,**             | ** ** |
| ** **    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| OEMs and VARs |       | 51.1                             | %          | 76.2 | % |
| Distributors  |       | 48.9                             |       | 23.8 |   |
| Total         |       | 100.0                            | %          | 100.0 | % |

 

*OEMs and VARs.*   Inthe three months ended January 31, 2006, two OEM customers accounted forapproximately 16.8% and 16.0% of our revenues, respectively. For the threemonths ended January 31, 2007 and 2006, no other OEM or VAR customeraccounted for 10% or more of our revenues.

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**ITEM 2.**                MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

*Distributors.*   Inthe three months ended January 31, 2007, two distributor customersaccounted for approximately 18.4% and 15.9% of our revenues, respectively. Inthe three months ended January 31, 2006, one distributor customeraccounted for approximately 10.2% of our revenues. No other distributorcustomer accounted for 10% or more of our revenues during either of theseperiods.

## ***Revenues fromDomestic 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 three monthsended January 31, 2007 and 2006:

|                | ** ** | **Three Months Ended** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **January 31,**             | ** ** |
| ** **     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Domestic sales |       | 0.2                              | %          | 1.6 | % |
| Foreign sales  |       | 99.8                             |       | 98.4 |   |
| Total          |       | 100.0                            | %          | 100.0 | % |

 

We derive the majority of our foreign sales fromcustomers in Asia and, to a lesser extent, in Europe. Over time, our sales toAsia-Pacific customers have increased primarily as a result of the continuingtrend of outsourcing the production of consumer electronics products toAsia-Pacific manufacturers and facilities and to the increasing markets in Asiafor consumer products. Because of the preponderance of Asia-Pacificmanufacturers and the fact that virtually all products incorporating ourimage-sensor products are sold globally, we believe that the geographicdistribution of our sales does not accurately reflect the geographicdistribution of sales into end-user markets of products which incorporate ourimage sensors.

**Gross Profit**

Our gross margin in the three months endedJanuary 31, 2007 was 24.9%, down from the 40.3% we reported for the threemonths ended January 31, 2006. The principal contributor to the year-over-year decline in gross marginwas continued pricing pressures during the three months ended January 31,2007. In addition, during the three months ended January 31, 2007, we soldhigher cost inventory which was built in previous quarters. In the threemonths ended January 31, 2007, in accordance withSFAS No. 123(R), we recorded approximately $1.0 million in stockcompensation expense to cost of revenues, or 0.7% of revenues. We adoptedSFAS No. 123(R) effective May 1, 2006 and there was no similarexpense in the prior year quarter. Our gross margin in the three months endedJanuary 31, 2006 was reduced by approximately four hundred basis pointsfrom the sales of the products with which we had back-end yield issues thatarose in the fourth quarter of fiscal 2005 and the first and secondquarters of fiscal 2006.

Revenue from sales of previously reserved products inthe three months ended January 31, 2007 was $3.8 million, as comparedto $2.2 million during the same period in the prior fiscal year. In thethree months ended January 31, 2007, we recorded an allowance for excessand obsolete inventory totaling $3.4 million to cost of revenues ascompared to $5.2 million during the same period in the prior fiscal year.

**Research,Development and Related Expenses**

Research, development and related expenses consistprimarily of compensation and personnel-related expenses, non-recurringengineering costs and costs for purchased materials, designs, tooling,depreciation of computers and workstations, and amortization of acquiredintangible intellectual property and computer aided design software. Becausethe number of new designs can fluctuate from period to period, research,development and related expenses may fluctuate significantly. Research,development and related expenses for the three months ended January 31,2007 increased to approximately $16.5 million from approximately$10.5 million for the three months ended January 31, 2006. As apercentage of revenues, research and development expenses for the three monthsended January 31, 2007 and 2006 represented 12.3% and 7.6%, respectively.

 

37

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

The increase in research, development and relatedexpenses of approximately $6.0 million, or 57.6%, for the threemonths ended January 31, 2007 from the similar period in the prior yearresulted primarily from the recognition of $3.0 million in stock-basedcompensation expense recognized in accordance with SFAS No. 123(R), a$2.0 million increase in salary and payroll-related expenses associatedwith the hiring of additional personnel, a $411,000 increase in softwareexpenses, a $280,000 increase in amortization expenses of acquired intangibleassets, a $247,000 increase in office and facility expenses, and a$145,000 increase in non-recurring engineering expenses related to new productdevelopment. We anticipate that our research, development and related expenseswill continue to increase as we develop and introduce new products employingour OmniPixel2 and Wavefront Coding technologies and explore other newtechnologies related to image sensors.

**Selling,General and AdministrativeExpenses**

Selling, general and administrative expenses consistprimarily of compensation and personnel related expenses, commissions paid todistributors and manufacturers’ representatives and insurance and legalexpenses. Selling, general and administrative expenses for the three monthsended January 31, 2007 increased to approximately $16.6 million from$9.2 million for the three months ended January 31, 2006. As apercentage of revenues, selling, general and administrative expenses for thethree months ended January 31, 2007 and 2006 represented 12.4% and 6.7%,respectively.

The increase in selling, general and administrativeexpenses of approximately $7.4 million, or 80.0%, for the three monthsended January 31, 2007 from the similar period in the prior year resultedprimarily from the recognition of $3.6 million in stock-based compensationexpense recognized with the adoption of SFAS No. 123(R), a $1.5 millionincrease in salary and payroll-related expenses associated with the hiring ofadditional personnel, a $1.2 million increase in commissions paid primarily to distributorsas a result of increased revenues, $325,000 increase in marketing expensesprimarily related to tradeshows, and a $260,000 increase in facility expenses.We anticipate that our selling, general and administrative expenses willincrease in the future due to the continued expansion of our organization andthe continuing upgrade of our computer systems, including our enterpriseresource planning, or ERP, and other management information systems.

**Interest Income, Net**

We invest our cash, cash equivalents and short-terminvestments in interest-bearing accounts consisting primarily of money marketfunds, commercial paper, certificates of deposit, high-grade corporatesecurities and government bonds with maturities from the date of purchase up to35 years. Interest income increased for the three months ended January 31,2007 from the corresponding period in the prior year to approximately$4.2 million from $2.3 million. Increased interest income for thethree months ended January 31, 2007 as compared to the correspondingperiod in the prior year was the result both of higher balances in interest-bearingaccounts resulting primarily from cash from operations, and of higher interestrates.

**OtherIncome****(Expense), Net**

Other income (expense), net, for the three monthsended January 31, 2007 was expense of $0.8 million as compared toincome of $1.2 million in the prior year. The current year amount included$412,000, which represents our portion of the income recorded by XinTec in themonths of November and December 2006, the final months for which weaccounted for XinTec under the equity method of accounting prior to ourreversion to the cost method beginning on January 1, 2007. In addition,Other income (expense), net, for the three months ended January 31, 2007included $32,000 as our portion of the income recorded by ImPac Technology Co.,Ltd., or ImPac, which we account for under the equity method of accounting. Offsettingthese items during the three months ended January 31, 2007 was a $1.3 millioncontra-income item, which reflected residual income attributable to the 54.6%interest in VisEra that we do not own. Prior to the deconsolidation, incomeattributable to equity interest that we do not own was recorded to minorityinterest expense. The income was earned through our sale of inventory purchasedfrom VisEra prior to January 1, 2007, the effective date of the deconsolidation.(See Note 6* — “Consolidated Affiliates”*of the Notes to our condensed consolidated financial statements.) Other income(expense), net, for the three months ended January 31, 2006 was income of$1.3 million and included our portion of the net income recorded by ImPacand XinTec, both of which we accounted for under the equity method ofaccounting.

**Provision for Income Taxes**

We recorded approximately $3.8 million and$39.1 million in income before income taxes and minority interest for thethree months ended January 31, 2007 and 2006, respectively, and recordedan income tax benefit of approximately $1.3 million and a provision for incometaxes of approximately $7.8 million for the three months

38

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

ended January 31,2007 and 2006, respectively. For the three months ended January 31, 2007and 2006, our effective tax rates were (35.4)% and 20.0%, respectively.Quarterly income taxes are calculated using an estimate of the effective taxrate for the fiscal year. The tax provision for the quarter reflects theestimated annual effective tax rate and includes, when applicable, the impactof changes from the prior estimated rate and discrete tax items. The currentquarter rate is lower than the rate reflected in the provision for the quarterended October 31, 2006 because we now expect our annual effective tax ratefor the current fiscal year to be lower than we previously estimated primarilydue to the retroactive extension of the United States, or U.S., Research andDevelopment, or R&D, tax credit, and the current quarter reflects theconsequent adjustment. The current quarter tax rate is further reduced by theincome tax benefit from discrete tax items, in particular the release of taxreserves that were no longer required as a result of the expiration of astatute of limitations. In both years, however, our effective tax rates areless than the combined federal and state statutory rate of approximately 40%principally because we earn a portion of our income in jurisdictions where taxrates are lower than the combined federal and state statutory rate. We expectthat our consolidated effective tax rate during the remainder offiscal 2007 will continue to be less than the combined federal and statestatutory rates. The extent to which our effective tax rate in fiscal 2007is less than the combined federal and state statutory rates is principallycontingent upon the proportion and geographic mix of our total pre-tax incomethat is generated in jurisdictions outside the United States.

**Minority Interest**

Minority interest for the three months endedJanuary 31, 2007 and 2006 was $1.0 million and $1.7 million,respectively. For the three months ended January 31, 2007 and 2006,approximately $73,000 and $0.7 million, respectively, represents the 53%interest that we do not own in the net income of SOI, which we included in ourconsolidated operating results for the first time beginning in the three monthsended July 31, 2005. For the three months ended January 31, 2007 and2006, approximately $0.9 million and $1.0 million represents the 54.6%interest that we do not own in the net income of VisEra, which we included inour consolidated operating results for the first time beginning in the threemonths ended October 31, 2005. For the three months ended January 31,2007, we recorded only two months of minority interest expense in VisEra, as wedeconsolidated the entity effective January 1, 2007.

*Nine Months Ended January 31, 2007 as Compared to Nine MonthsEnded January 31, 2006*

### **Revenues**

Revenues for the nine months ended January 31,2007 increased by 13.6% to approximately $408.9 million from$360.1 million for the nine months ended January 31, 2006. Theincreased revenues were due to an increase in unit sales of our image-sensorproducts, primarily for cell phones, partially offset by a decrease in averageselling prices. Revenue from SOI, whose operating results were consolidated forthe first time in the first quarter of fiscal 2006, representedapproximately 3% and 5% of our revenue for the nine months endedJanuary 31, 2007 and 2006, respectively.

## ***Revenues from Salesto OEMs and VARs as Compared to Distributors***

The following table shows the percentage of revenues fromsales to OEMs and VARs and distributors in the nine months endedJanuary 31, 2007 and 2006:

|               | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|---------------------------------|------------|
| ** **    | ** ** | **January 31,**            | ** ** |
| ** **    | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| OEMs and VARs |       | 60.7                            | %          | 73.1 | % |
| Distributors  |       | 39.3                            |       | 26.9 |   |
| Total         |       | 100.0                           | %          | 100.0 | % |

 

*OEMs and VARs.*   Inthe nine months ended January 31, 2007, one OEM customer accounted forapproximately 13.6% of our revenues. In the nine months ended January 31, 2006,two OEM customers accounted for approximately 16.2% and 12.6% of our revenues,respectively. For the nine months ended January 31, 2007 and 2006, noother OEM or VAR customer accounted for 10% or more of our revenues.

39

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

*Distributors.*   Inthe nine months ended January 31, 2007, two distributor customersaccounted for approximately 14.6% and 12.4% of our revenues. In the nine monthsended January 31, 2006, one distributor customer accounted for 13.5% of ourrevenues. No other distributor accounted for 10% or more of our revenues duringeither of these periods. We expect that revenues from sales throughdistributors will continue to represent a higher  proportion of our total revenues than theyhave in prior quarters.

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

The following table shows the percentage of ourrevenues derived from sales of our image-sensor products to domestic customersas compared to foreign customers for the nine months ended January 31,2007 and 2006:

|                | ** ** | **Nine Months Ended** | ** ** |
|----------------|------------|---------------------------------|------------|
| ** **     | ** ** | **January 31,**            | ** ** |
| ** **     | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| Domestic sales |       | 1.0                             | %          | 1.3 | % |
| Foreign sales  |       | 99.0                            |       | 98.7 |   |
| Total          |       | 100.0                           | %          | 100.0 | % |

 

### **Gross Profit**

Our gross margin in the nine months endedJanuary 31, 2007 was 31.5% as compared to the 37.0% we reported for thenine months ended January 31, 2006. The principal cause of theyear-over-year decrease in our gross margin was a less favorable product mix, in particular the larger share of VGA sensorsin our unit and dollar volume and a decline in our average sellingprices, which were partially offset by reductions in our production costs. Inaddition, we recorded approximately $2.9 million in stock compensationexpense to cost of revenues in the nine months ended January 31, 2007 inaccordance with SFAS No. 123(R). We adopted SFAS No. 123(R)effective May 1, 2006 and there was no similar expense in the first ninemonths of the prior year. Our gross margin in the nine months endedJanuary 31, 2006 was reduced by approximately five hundred basis pointsdue to the back-end yield issues that arose in the fourth quarter offiscal 2005 and the first and second quarters of fiscal 2006.

Revenue from sales of previously reserved products inthe nine months ended January 31, 2007 was $10.8 million, as comparedto $9.0 million during the same period in the prior fiscal year. In addition, during the nine months endedJanuary 31, 2007, we recognized credits of $3.8 million in compensation from suppliers whoseproduct quality in previous periods did not meet our standards. In thenine months ended January 31, 2007, we recorded an allowance for excessand obsolete inventory totaling $5.8 million to cost of sales as comparedto $8.5 million during the same period in the prior fiscal year.

**Research,Development and Related Expenses**

Research, development and related expenses for thenine months ended January 31, 2007 increased to approximately$52.0 million from approximately $28.9 million for the nine monthsended January 31, 2006. As a percentage of revenues, research anddevelopment expenses for the nine months ended January 31, 2007 and 2006represented 12.7% and 8.0%, respectively.

The increase in research, development and relatedexpenses of approximately $23.1 million, or 80.0%, for the ninemonths ended January 31, 2007 from the similar period in the prior yearresulted primarily from the recognition of $9.7 million in stock-basedcompensation expense recognized with the adoption of SFAS No. 123(R),a $7.1 million increase in salary and payroll-related expenses associatedwith the hiring of additional personnel, a $1.9 million increase innon-recurring engineering expenses related to new product development, a$0.9 million increase in amortization expenses of acquired intangibleassets, a $1.7 million increase in software expenses and a$0.8 million increase in office and outside service expenses. The increasein non-recurring engineering expenses is primarily due to an increase in thenumber of new designs we released to our foundry partners.

**Selling,General and AdministrativeExpenses**

Selling, general and administrative expenses consistprimarily of compensation and personnel related expenses, commissions paid todistributors and manufacturers’ representatives and insurance and legalexpenses. Selling, general and administrative expenses for the nine monthsended January 31, 2007 increased to approximately 

40

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

$44.9 million from$25.1 million for the nine months ended January 31, 2006. As apercentage of revenues, selling, general and administrative expenses for thenine months ended January 31, 2007 and 2006 represented 11.0% and 7.0%,respectively.

The increase in selling, general and administrativeexpenses of approximately $19.8 million, or 78.9%, for the ninemonths ended January 31, 2007 from the similar period in the prior yearresulted primarily from the recognition of $10.3 million in stock-basedcompensation expense recognized with the adoption of SFAS No. 123(R),a $4.7 million increase in salary and payroll-related expenses, a$2.1 million increase in commissions paid to distributors andmanufacturers’ representatives associated with increased revenues, a$1.4 million increase in outside service expenses and a $0.9 millionincrease in facility expenses, partially offset by a $1.2 millionreduction in legal expenses.

**Litigation Settlement**

We have accrued $3.3 million in litigationsettlement expenses for the nine months ended January 31, 2007, to reflectour share of a tentative settlement of a securities class action lawsuitpending in the United States District Court for the Northern District ofCalifornia. The parties to the litigation have reached an agreement inprinciple to settle the litigation and are drafting a written settlementagreement and other customary documentation. Notice of the settlement must beprovided to the purported shareholder class and the Court must provide approvethe settlement for it to become final. Litigation settlement expenses for thenine months ended January 31, 2007 represented 0.8% of revenue. See**Note 15* — “Commitments and Contingencies”*of the Notes to our condensed consolidated financial statements.

**Interest Income, Net**

Our cash, cash equivalents and short-term investmentsare invested in interest-bearing accounts consisting primarily of money marketfunds, commercial paper, certificates of deposit, high-grade corporatesecurities and government bonds with maturities from the date of purchaseranging from less than 12 months to 35 years. Interest income increased for thenine months ended January 31, 2007 from the corresponding period in theprior year to approximately $11.0 million from $6.3 million.Increased interest income for the nine months ended January 31, 2007 ascompared to the corresponding period in the prior year as a result both ofhigher balances in interest-bearing accounts resulting primarily from cash fromoperations, and by higher interest rates.

**OtherIncome****(Expense), Net**

Other income (expense), net, for the nine months endedJanuary 31, 2007 was income of $0.9 million as compared to$1.3 million in the prior year and consisted of approximately$1.7 million representing our portion of the income recorded by XinTec and$379,000 representing our portion of the income recorded by ImPac TechnologyCo., Ltd., or ImPac. Offsetting these items during the nine months endedJanuary 31, 2007 was a $1.3 million contra-income item, which reflectedresidual income attributable to the 54.6% interest in VisEra that we do notown. Prior to the deconsolidation, income attributable to equity interest thatwe do not own was recorded to minority interest expense. The income was earnedthrough our sale of inventory purchased from VisEra prior to January 1, 2007, theeffective date of the deconsolidation. In the nine months ended January 31,2007 and 2006, we accounted for ImPac under the equity method of accounting. Inthe eight months ended December 31, 2006, we accounted for XinTec underthe equity method prior to our reversion to the cost method beginning onJanuary 1, 2007. Our portion of the income recorded under the equitymethod of accounting is included in Other income (expense), net. (See Note 6* — “ConsolidatedAffiliates”* of the Notes to our condensed consolidatedfinancial statements.) Other income (expense), net, for the nine months endedJanuary 31, 2006 was income of $1.3 million and included our portion ofthe net income recorded by ImPac and XinTec.

**Provision for Income Taxes**

We recorded approximately $40.4 million and$86.7 million in income before income taxes and minority interest for thenine months ended January 31, 2007 and 2006, respectively, and recordedprovisions for income taxes of approximately $9.2 million and $17.3 million,respectively. For the nine months ended January 31, 2007 and 2006, oureffective tax rates were 22.7% and 20%, respectively. These rates are less thanthe combined federal and state statutory rate of approximately 40% principallybecause we earn a portion of our profits in jurisdictions where tax rates arelower than the combined federal and state statutory rate. The higher effectivetax rate for fiscal 2007 as compared to fiscal 2006 is principallydue to the unfavorable impact of the adoption of SFAS No. 123(R) and thechange in the geographical mix of income, partially offset by an increase intax exempt interest income and an increase in R&D tax credit.

41

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

**Minority Interest**

Minority interest for the nine months endedJanuary 31, 2007 and 2006 was $5.8 million and $2.8 million,respectively. For the nine months ended January 31, 2007 and 2006,approximately $342,000 and $1.6 million, respectively, represents the 53%interest that we do not own in the net income of SOI, which we included in ourconsolidated operating results for the first time beginning in the three monthsended July 31, 2005. For the nine months ended January 31, 2007 and 2006,respectively, approximately $5.5 million and $1.2 million representsthe 54.6% interest that we do not own in the net income of VisEra, which weincluded in our consolidated operating results for the first time beginning inthe three months ended October 31, 2005. For the nine months endedJanuary 31, 2007, we recorded only eight months of minority interest inVisEra, as we deconsolidated the entity effective January 1, 2007.

**Liquidity and Capital Resources**

Our principal sources of liquidity at January 31,2007 consisted of cash, cash equivalents and short-term investments of$340.8 million.

## ***Liquidity***

Our working capital increased by approximately$30.2 million to $393.5 million as of January 31, 2007 from$363.3 million as of April 30, 2006. The increase was primarilyattributable to: a $50.6 million increase in inventories which was theresult of a change in the mix of product demand late in the second quarter whichprecluded wafer productionschedule adjustments; a $17.0 million increase in short-terminvestments; a $13.0 million increase in recoverable insurance proceeds; a$7.3 million increase in accounts receivable, net, consistent with theincrease in revenues from prior year levels. These increases in working capitalwere partially offset by: a $30.8 million decrease in cash and cashequivalents; a $13.8 million increase in a litigation settlement accrual;a $9.0 million increase in accounts payable primarily resulting fromincreased inventory purchases and a $5.5 million increase in accruedincome taxes payable.

SOI maintains four unsecured lines of credit withthree commercial banks, which provide a total of approximately$3.4 million in available credit. All borrowings under the four lines ofcredit maintained by SOI bear interest at the market interest rate prevailingat the time of borrowing. There are no financial covenant requirements forthese facilities and at January 31, 2007, there were no borrowingsoutstanding under these facilities.

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

For the nine months ended January 31, 2007, netcash provided by operating activities totaled approximately $39.0 millionas compared to $92.5 million for the corresponding period in the prioryear. The principal components of the current year amount were: net income ofapproximately $25.4 million for the nine months ended January 31,2007, adjusted for non-cash charges of $22.9 million in stock-basedcompensation, $10.5 million in depreciation and amortization,$5.8 million in the minority interest in the net income of consolidatedaffiliates and $3.2 million of gains in equity investments; a$29.9 million increase in accounts payable; a $13.8 million increasein accrued expenses and other current liabilities; an $12.3 millionincrease in accrued income taxes payable and a $2.7 million increase indeferred tax liabilities. These increases were partially offset by: a$50.9 million increase in inventories; a $14.7 million increase inprepaid expenses and other current assets; a $7.6 million increase inaccounts receivable, net and a $9.0 million increase in refundable anddeferred income taxes. The $14.7 million increase in prepaid expenses andother current assets principally reflect $13.0 million in recoverableinsurance proceeds associated with the settlement of security class-actionlitigation. The $13.8 million increase in accrued expenses and othercurrent liabilities resulted from a litigation settlement accrual associatedwith the settlement of security class-action litigation. The $7.6 millionincrease in accounts receivable, net, reflects the higher level of revenuesduring the nine months ended January 31, 2007, and the increase in days ofsales outstanding as of January 31, 2007 to 50 days from 45 daysas of April 30, 2006. The $50.9 million increase in inventories wasprincipally the result of a change in the mix of product demand late in thesecond quarter which precluded wafer production schedule adjustments. The increase ininventory balances resulted in a decline in annualized inventory turns to 3.8as of January 31, 2007 from 6.1 as of April 30, 2006. Our accrued incometaxes payable increased as a consequence of additional provisions for the threeand nine months ended January 31, 2007.

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

For the nine months ended January 31, 2006, netcash provided by operating activities totaled approximately $92.5 millionprimarily due to: net income of approximately $66.6 million for the ninemonths ended January 31, 2006; a $14.4 million increase in accountspayable; a $13.8 million increase in accrued income taxes payable; a$9.3 million increase in deferred income and a $3.7 million increasein accrued expenses and other current liabilities. These increases werepartially offset by: a $16.6 million increase in accounts receivable, net;a $5.0 million increase in prepaid expenses and other current assets and a$4.2 million increase in inventories. The $16.6 million increase inaccounts receivable, net, reflects the higher level of revenues during the ninemonths ended January 31, 2006, offset by a slight decrease in days of salesoutstanding as of January 31, 2006 to 51 days from 52 days as ofApril 30, 2005. The $4.2 million increase in inventories was drivenby our 12 to 14 week production cycle and reflects our increased salesactivity. Inventory turns increased to 5.2 as of January 31, 2006 from 4.5as of April 30, 2005. Our accrued income taxes payable increased as aconsequence of our income before taxes, partially offset by a reduction in oureffective tax rate for the nine months ended January 31, 2006.

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

For the nine months ended January 31, 2007, our cashused in investing activities increased to $90.6 million as compared tocash used in investing activities of approximately $11.1 million for thecorresponding prior year period, due to: $41.0 million in purchases ofproperty, plant and equipment; $28.4 million in net purchases ofshort-term investments; $20.6 million resulting from the deconsolidationof VisEra and $0.5 million in purchase of intangible property. For thenine months ended January 31, 2006, our cash used in investing activitieswas approximately $11.1 million due to: $11.8 million in purchases oflong-term investments; $6.8 million in purchases of property, plant andequipment; $4.0 million in purchase of intangible property and$2.3 million in net purchases of short-term investments. These useswere partially offset by $13.8 million in proceeds from the consolidationof VisEra, net of cash payments.

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

For the nine months ended January 31, 2007, netcash provided by financing activities totaled approximately $20.8 millionas compared to net cash used in financing activities of $62.0 million forthe corresponding period in the prior year. This change was primarily due tothe absence of any repurchases of shares of our common stock under theopen-market program in the nine months ended January 31, 2007. Cashprovided by financing activities for the nine months ended January 31,2007 primarily resulted from $10.5 million in proceeds from the exerciseof stock options and employee purchases through our employee stock purchaseplan and a $10.4 million cash contribution by two of our minority interestshareholders. For the nine months ended January 31, 2006, net cash used infinancing activities totaled approximately $62.0 million. This change wasprimarily due to the $79.6 million we spent for the repurchase of sharesof our common stock in the nine months ended January 31, 2006. Cash usedin financing activities was partially offset by; a $9.5 million cashcontribution by one of our minority interest shareholders and $8.0 millionin proceeds from the exercise of stock options and employee purchases throughour employee stock purchase plan.

## ***Capital Commitmentsand Resources***

In December 2000, we formed a subsidiary, Hua WeiSemiconductor (Shanghai) Co. Ltd. (“HWSC”), to conduct testing operations andother processes associated with the manufacturing of our products in China. Atotal of $24.0 million of the $30.0 million of HWSC’s registeredcapital, as required by Chinese law, had been funded as of January 31,2007 from our available working capital. We are currently applying to theChinese government for an extension of the time by which we are obligated tofund the remaining $6.0 million of registered capital of HWSC.

Over the next two years, we expect to invest a totalof $30.0 million in our subsidiary, the Shanghai Design Center, or SDC, ofwhich we have already contributed $7.5 million. The funding isnecessitated by our execution of a land-lease agreement with the Constructionand Transportation Commission of the Pudong New District, Shanghai with acommitment to spend approximately $30.0 million to develop the land. See *“Note 15 — Commitments and Contingencies”*to our condensedconsolidated financial statements. We expect to fund our capital commitments toHWSC, SDC and to our joint venture with TSMC from our available workingcapital.

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

On February 27, 2007, our board of directorsapproved an additional stock repurchase program that provides for therepurchase of up to $100 million of our outstanding common stock in anopen-market program. Subject to applicable securities laws, such repurchaseswill be at times and in amounts as we deem appropriate, based on factors suchas market conditions, legal requirements and other corporate considerations.See Note 14 * —” Treasury Stock”* and  *Note 17  — ”SubsequentEvents”*to our condensed consolidated financial statements.

We are obligated to pay an additional$10.0 million in cash upon the sale of a pre-determined number ofrevenue-producing products incorporating CDM’s technology. CDM and the costsassociated with the acquisition are included in our consolidated balance sheetsat January 31, 2007 and April 30, 2006.

On February 13, 2007, our board of directorsapproved a proposal to purchase a complex of four buildings in Santa ClaraCounty, California, totaling approximately 207,000 square feet for an aggregatepurchase price of approximately $37.2 million. We expect to spend approximately$10 million to complete the interior build-out of the buildings andplan to occupy two of the four buildings in mid-2008 upon completion of thework. Provided that financing is available on acceptable terms, we expect tofinance a portion of the total project with a mortgage.

We currently expect our available cash, cashequivalents and short-term investments, together with cash that we anticipateto be generated from operating activities and funds that we expect to borrowfor the purchase of the buildings in Santa Clara, to be sufficient to satisfyour capital requirements over approximately the next twelve months. Other thannormal working capital requirements, we expect our capital requirementstotaling approximately $100 million over approximately the next twelvemonths will consist primarily of funding VisEra’s expansion of its color-filterprocessing and testing capacity, funding capital investment at HWSC, funding aportion of the acquisition and build-out costs associated with the purchase ofa complex of four buildings in Santa Clara, and funding a portion of thedevelopment costs of the land we have leased in Shanghai.

Our ability to generate cash from operations issubject to substantial risks described below under the caption Part II Item 1A.*“Risk Factors.”*We encourage youto review these risks carefully.

**Contractual Obligations and Commercial Commitments**

The following summarizes our contractual obligationsand commercial commitments as of January 31, 2007 and the effect suchobligations and commitments are expected to have on our liquidity and cashflows in future periods (in thousands):
| ** **                                                | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                                                | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **5 Years** | ** ** |
| **Contractual  Obligations:**                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating leases                                          |       | $                                         | 27,671     |   | $ | 7,947 |   | $ | 11,527 |   | $ | 3,103 |   | $ | 5,094 |   |
| Noncancelable orders                                      |       | 52,130                                    |       | 52,130 |   | — |   | — |   | — |   |
| Total contractual obligations                             |       | 79,801                                    |       | 60,077 |   | 11,527 |   | 3,103 |   | 5,094 |   |
|                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| **Other  Commercial Commitments:**                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Investment in HWSC                                        |       | 6,000                                     |  1    | 6,000 |   | — |   | — |   | — |   |
| Joint Venture with TSMC                                   |       | 27,000                                    |  2    | 27,000 |   | — |   | — |   | — |   |
| Investment in Shanghai Design Center                      |       | 22,060                                    |  3    | — |   | 22,060 |   | — |   | — |   |
| Total commercial commitments                              |       | 55,060                                    |       | 33,000 |   | 22,060 |   | — |   | — | ­ |
| Total  contractual obligations and commercial commitments |       | $                                         | 134,861    |   | $ | 93,077 |   | $ | 33,587 |   | $ | 3,103 |   | $ | 5,094 |   |

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1                     Representsthe remaining $6.0 million of registered capital for our subsidiary, HWSC.We established this subsidiary as part of our efforts to increase capacity andreduce costs for testing our image-sensor products. We are currently applyingto the Chinese government for an extension of the time by which we areobligated to fund the remaining $6.0 million of registered capital ofHWSC.

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

2                     EffectiveJanuary 1, 2007, our wholly owned subsidiary,  OmniVision International Holding Ltd.,entered into a First Amendment to the August 2005 Amended and RestatedShareholders’ Agreement, or the Amended VisEra Agreement, with TaiwanSemiconductor Manufacturing Co., Ltd., or TSMC, VisEra Technologies Company,Ltd., or VisEra, and VisEra Holding Company, or VisEra Cayman. The FirstAmendment added chip probing to VisEra’s list of activities, increased theamount of capital that each of OmniVision International Holding Ltd. and TSMC agreedto invest an additional $27 million in VisEra, and made other minor andconforming changes.

The Amended VisEra Agreement amended and restated theoriginal Shareholders’ Agreement that the parties entered into onOctober 29, 2003, pursuant to which the Company and TSMC agreed to formVisEra, a joint venture in Taiwan, for the purposes of providing manufacturingservices and automated final testing services related to CMOS image sensors. InNovember 2003, pursuant to the terms of the original Shareholders’Agreement, we contributed $1.5 million in cash to VisEra and granted anon-exclusive license to certain of our manufacturing and automated finaltesting technologies and patents. In September 2005, we contributed afurther $7.5 million to VisEra Cayman. In November 2005, pursuant to theAmended VisEra Agreement, we contributed an additional $9.5 million incash to VisEra Cayman. As a result of our step acquisition, and in accordancewith the provisions of FIN 46, we consolidated the results of VisEra beginningin the fiscal quarter ended October 31, 2005. In July 2006, we agreedwith VisEra that we would assume direct responsibility for the logisticsmanagement services that VisEra provided to us at that time. This change becameeffective on January 1, 2007 and, as a result, we were required todeconsolidate VisEra as of the date of the change.  Beginning on January 1, 2007, we areaccounting for our investment in VisEra under the equity method. Thedeconsolidation of VisEra had no material effect on our reported revenue orreported net income for the three and nine months ended January 31, 2007.See Note 6 — *”Consolidated Affiliates”*toour condensed consolidated financial statements.

Under the terms of the Amended VisEra Agreement, theparties reaffirmed their respective commitments to VisEra, and expanded thescope of and made certain modifications to the original Shareholders’Agreement. In particular, the parties agreed to raise the total capital committedto the joint venture to $112.9 million, which commitments may be made inthe form of cash or asset contributions. The parties have equal interests inVisEra and VisEra Cayman. Through January 31, 2007, we have contributed$24.6 million to VisEra and VisEra Cayman. To the extent, if any, that thevalue of the assets contributed exceeds the value of our commitment, we willreceive cash from VisEra Cayman. See Note 15 — ”*Commitments and Contingencies”* to our condensed consolidatedfinancial statements.

In order to provide greater financial and fiscal flexibilityto VisEra, in connection with the Amended VisEra Agreement, the parties alsoformed VisEra Cayman, a company incorporated in the Cayman Islands, and VisErabecame a subsidiary of VisEra Cayman. Pursuant to the terms of the Amended VisEra Agreement, VisEra Caymanused approximately $12.3 million of the $18.0 million increase in thetotal capital commitment for the acquisition of approximately 29.6% of theissued shares of XinTec, of which we own 

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

separately and directly approximately 7.8%. In January2007, as a result of the acquisition by TSMC of an approximate 43.0% in XinTec,VisEra Cayman’s interest in XinTec was reduced to 16.9%, and our directinterest was reduced to 4.4%. See Notes 5, 15 and 16 to our condensedconsolidated financial statements.

All other materialterms of the original Shareholders’ Agreement remain in effect.

3                     Overthe next two years, we expect to invest a total of approximately$30.0 million in our subsidiary, SDC, of which we have already invested$7.5 million. The investment will develop land and construct facilities. SeeNote 15 — ”*Commitments andContingencies”* to our condensed consolidated financial statements.

### **Off-Balance Sheet Arrangements**

We did not have any off-balance sheet arrangementsduring the period covered by this Quarterly Report on Form 10-Q.

### **Recent Accounting Pronouncements**

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB interpretation No. 48 (FIN No. 48) *“Accounting for Uncertainty in Income Taxes—anInterpretation of FASB Statement No. 109.”* FIN No. 48requires that we recognize in our consolidated financial statements the impactof a tax position that is more likely than not to be sustained upon examinationbased on the technical merits of the position. The evaluation of a tax positionin accordance with this interpretation is a two-step process. In the firststep, recognition, we determine whether it is more-likely-than-not that a taxposition will be sustained upon examination, including resolution of anyrelated appeals or litigation processes, based on the technical merits of theposition. The second step addresses measurement of a tax position that meetsthe more-likely-than-not criterion. The tax position is measured at the largestamount of benefit that has a greater than 50 percent likelihood of beingrealized upon ultimate settlement. Tax positions that previously failed to meetthe more-likely-than-not recognition threshold should be recognized in thefirst subsequent financial reporting period in which that threshold is met.Previously recognized tax positions that no longer meet themore-likely-than-not recognition threshold should be de-recognized in the firstsubsequent financial reporting period in which that threshold is no longer met.FIN No. 48 is effective for fiscal years beginning after December 15,2006. The differences between the amounts recognized in the consolidatedfinancial statements prior to the adoption of FIN No. 48 and the amountsreported after adoption will be accounted for as a cumulative-effect adjustmentrecorded to the beginning balance of retained earnings. In January 2007,the FASB decided unanimously not to delay the effective date ofFIN No. 48. The FASB did, however, agree to pursue providingadditional guidance regarding the definition of ultimate settlement and how theability of the taxing authority to reopen a matter impacts recognition andmeasurement under FIN No. 48. Any such guidance would likely be in theform of a FASB Staff Position that would be available for public comment. Weare currently evaluating the impact FIN No. 48 will have on our financialposition, results of operations or cash flows.

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting StandardsNo. 157, “*Fair Value Measurements’’*(“SFASNo. 157”), which defines fair value, establishes guidelines for measuringfair value and expands the requisite disclosures for fair value measurements.SFAS No. 157 does not require any new fair value measurements but ratherestablishes a common definition of fair value to be used throughout generallyaccepted accounting principles. SFAS No. 157 is effective in fiscal yearsbeginning after November 15, 2007 and is required to be adopted by us inthe first quarter of fiscal 2009. Our adoption of the provisions ofSFAS No. 157 is not expected to have a material effect on ourfinancial condition, results of operations or cash flows.

In February 2007, the FASB issuedSFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities,”* (“SFAS No. 159”)which permits entities to choose to measure many financial instruments andcertain other items at fair value that are not currently required to bemeasured at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. SFAS No. 159also establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. SFAS No. 159does not affect any existing accounting literature that requires certain assetsand liabilities to be carried at fair value. SFAS No. 159 does notestablish requirements for recognizing and measuring dividend income, 

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)

interest income, orinterest expense. This Statement does not eliminate disclosure requirementsincluded in other accounting standards.**TheCompany is currently evaluating the impact SFAS No. 159 will have onits financial position, results of operations or cash flows.

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

## ***Foreign CurrencyExchange Risk***

We sell our products globally, in particular tobranded customers, contract manufacturers, VARs and distributors in China, HongKong, Japan, Korea and Taiwan.

The great majority of our transactions with ourcustomers and vendors are denominated in U.S. dollars. We do incur certainexpenses in currencies other than U.S. dollars including certain costsaffecting gross profit, selling, general and administrative and research,development and related expenses. We incur these expenses primarily incurred inChina, where the Chinese Yuan Renminbi (“CNY”) is the local currency and inTaiwan, where the New Taiwan dollar is the local currency. Historically, theChinese government benchmarked the CNY exchange ratio against the U.S. dollar,thereby mitigating the associated foreign currency exchange rate fluctuationrisk. However, in July 2005, the Chinese central bank announced that, in thefuture, it would benchmark the CNY against a basket of currencies, and has nowallowed the CNY to appreciate by approximately three percent 6.5% against theU.S. dollar.

In general, the functional currencies of ourwholly-owned subsidiaries are their respective local currencies. The functionalcurrency of our subsidiaries located in Hong Kong, OmniVision Technologies(Hong Kong) Company Limited and OmniVision Trading (Hong Kong) Company Ltd.,and in the Cayman Islands, OmniVision International Holding, Ltd., and HuaWeiTechnology International, Ltd., is the U.S. dollar.

Effective January 1, 2007, we determined that, asa result of our plans to expand the scope of our future operations and to fundsuch expansion through the investment of U.S. dollars, our wholly-ownedsubsidiaries in Shanghai, China, Hua Wei Semiconductors (Shanghai) Co. Ltd. (“HWSC”)and Shanghai OmniVision IC Design Co., Ltd., should change their functionalcurrency from Chinese Yuan Renminbi to the U.S. dollar.

Effective May 1, 2006 the functional currency ofone of our affiliates, VisEra, also became the U.S. dollar. The change wasnecessitated by a significant increase in U.S. dollar-based transactions afterVisEra’s acquisition of certain color-filter manufacturing assets from TSMC.The functional currency of Silicon Optronics, Inc., (“SOI”), our only currentlyconsolidated affiliate, remains the New Taiwan dollar.

Transaction gains and losses resulting fromtransactions denominated in currencies other than the respective functionalcurrencies are included in “Other income (expense), net” for the periodspresented. The amounts of transaction gains and losses for the three monthsended January 31, 2007 and 2006 were not material.

Given that the only expenses that we incur incurrencies other than U.S. dollars are certain costs which historically havenot been a significant percentage of our revenues, we do not believe that ourforeign currency exchange rate fluctuation risk is significant. Consequently,we do not believe that a 10% change in foreign currency exchange rates wouldhave a significant effect on our future net income or cash flows.

We have not hedged exposures denominated in foreigncurrencies or used any other derivative financial instruments as we do notbelieve that we currently have any significant direct foreign currency exchangerate risk. Although we transact our business in U.S. dollars, futurefluctuations in the value of the U.S. dollar may affect the competitiveness ofour products and results of operations.

## ***Market Interest RateRisk***

Our cash equivalents and short-term investments areexposed to financial market risk due to fluctuations in interest rates, whichmay affect our interest income and, in the future, the fair market value of ourinvestments. With two exceptions, described below, we manage our exposure tofinancial market risk by performing ongoing evaluations of our investmentportfolio. We presently invest in money market funds, certificates of depositissued by banks, commercial paper, certificates of deposit, high-gradecorporate securities and government bonds maturing approximately 18 months orless from the date of purchase. The two exceptions are auction rate securities,which have a maturity date of up to thirty years where interest rates arere-negotiated every 35 days and variable rate demand notes which have amaturity of up to 35 years where the interest rate is reset every seven days.Due to the short maturities of our investments, the carrying values generallyapproximate the fair market value. In addition, we 

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do not use ourinvestments for trading or other speculative purposes. Due to the shortduration of our investment portfolio, we do not expect that an immediate 10%change in interest rates would have a material effect on the fair market valueof our portfolio and we would not expect our operating results or cash flows tobe affected to any significant degree by the effect of a sudden change inmarket interest rates.

**ITEM 4.   CONTROLSAND PROCEDURES**

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

Under the supervision and with the participation ofour chief executive officer and our chief financial officer, our managementconducted an evaluation of the effectiveness of our disclosure controls andprocedures, as defined in the Securities Exchange Act of 1934, as of the end ofthe period covered by this Quarterly Report on Form 10-Q. Based on thisevaluation, our chief executive officer and chief financial officer haveconcluded that, at the level of reasonable assurance, our disclosure controlsand procedures are effective to ensure that the information we are required todisclose in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission 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)  Changes in Internal Controls.**

There have been no changes in our internal controlover financial reporting during the period covered by this Quarterly Report onForm 10-Q that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II — OTHERINFORMATION**

**ITEM 1.   LEGALPROCEEDINGS**

From time to time, we have been subject to legalproceedings and claims with respect to such matters as patents, productliabilities and other actions arising in the normal course of business.

On November 29, 2001, a complaint captioned *McKee v. OmniVision Technologies, Inc., et. al.,Civil Action No. 01CV 10775*, was filed in the United StatesDistrict Court for the Southern District of New York against OmniVision, someof our directors and officers, and various underwriters for our initial publicoffering. Plaintiffs generally allege that the named defendants violatedfederal securities laws because the prospectus related to our offering failedto disclose, and contained false and misleading statements regarding, certaincommissions purported to have been received by the underwriters, and otherpurported underwriter practices in connection with their allocation of sharesin our offering. The complaint seeks unspecified damages on behalf of apurported class of purchasers of our common stock between July 14, 2000and December 6, 2000. Substantially similar actions have been filedconcerning the initial public offerings for more than 300 different issuers,and the cases have been coordinated as *In reInitial Public Offering Securities Litigation, 21 MC 92*. Claimsagainst our directors and officers have been dismissed without prejudicepursuant to a stipulation. On February 19, 2003, the Court issued an orderdismissing all claims against us except for a claim brought underSection 11 of the Securities Act of 1933. A stipulation of settlement forthe release of claims against the issuer defendants, including us, has beensubmitted to the Court. On February 15, 2005, the Court preliminarilyapproved the settlement contingent on specified modifications. OnAugust 31, 2005, the Court issued an order confirming preliminary approvalof the settlement. On April 24, 2006, the Court held a fairness hearing inconnection with the motion for final approval of the settlement. TheCourt has not yet issued a ruling on the motion for final approval.The settlement remains subject to final Court approval and a number of otherconditions. On December 5, 2006 the Court of Appeals for the Second Circuitreversed the Court’s order certifying a class in several “test cases” that hadbeen selected by the underwriter defendants and plaintiffs in the coordinatedproceeding *In re Initial Public OfferingSecurities Litigation*. We are not one of the test cases, and it isunclear what impact this will have on our case. If the settlement does notoccur and litigation against us continues, we believe that we have meritoriousdefenses and intend to defend the case vigorously. We further believe that thesettlement will not have any material adverse affect on our financialcondition, results of operations or cash flows.

On June 10, 2004, the first of several putativeclass actions was filed against us and certain of our present and formerdirectors and officers in federal court in the Northern District of Californiaon behalf of investors who purchased our common stock at various times fromFebruary 2003 through June 9, 2004. Those actions were consolidatedunder the caption *In re OmniVisionTechnologies, Inc.,*No. C-04-2297-SC, and a consolidatedcomplaint was filed. The consolidated complaint asserts claims on behalf ofpurchasers of our common stock between June 11, 2003 and June 9,2004, and seeks unspecified damages. The consolidated complaint generallyalleges that defendants violated Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934 by allegedly engaging in improperaccounting practices that purportedly led to our financial restatement. OnJuly 29, 2005, the court denied our motion to dismiss the complaint. Theparties engaged in settlement discussions and in November 2006, theparties reached an agreement in principle to settle this litigation. Much ofthe settlement would be funded by insurance carriers that issued Directors andOfficers Liability Insurance Policies to us. We accrued $3.3 million forthe quarter ended October 31, 2006, as our share of the settlement,including unreimbursed defense costs, net of $13.0 million in recoverableinsurance proceeds. The parties are currently drafting a written settlement agreementand other customary documentation. As a result of the pending settlement, theparties have agreed to stay discovery and other proceedings. Notice of thesettlement must be provided to the purported shareholder class, and the Courtmust grant final approval of the settlement. We believe that ultimatesettlement is probable at the currently estimated amount. There is no assurancethat the Court will grant such approval, or that the settlement will becomefinal. If the settlement does not occur and litigation against us continues, webelieve that we have meritorious defenses and intend to defend the casevigorously. If the litigation continues, we cannot estimate whether the resultof the litigation would have a material adverse effect on our financialcondition, results of operations or cash flows.

On October 20, 2005, a purported shareholderderivative complaint, captioned *Hackl v. Hong*,No. 1:05-CV-050985, was filed in Santa Clara County Superior Court for theState of California. This derivative action contains allegations that arevirtually identical to the prior state court derivative actions that werevoluntarily dismissed, and which were based on the allegations contained in thesecurities class actions. The current complaint generally seeks unspecified damagesand equitable relief based on causes of action against various of our presentand former

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directors and officers for purported breach offiduciary duty, abuse of control, gross mismanagement, waste of corporateassets, unjust enrichment and violations of California Corporations Code. Weare named solely as a nominal defendant against whom no monetary recovery issought. Pursuant to a January 20, 2006 Court Order, plaintiff furnished a bondfor reasonable expenses in order to proceed with his derivative action. On May15, 2006, the Court sustained our demurrer to the complaint with leave to amendon the grounds that the plaintiff failed to make a pre-litigation demand on ourboard of directors and fails to sufficiently plead that demand is futile. On October 4,2006, the Court sustained our demurrer to the amended complaint as well andagain granted plaintiff leave to amend. Individual defendants and we have fileddemurrers to the second amended complaint, which are scheduled to be heard in April2007.

**ITEM1A.  RISK FACTORS**

*This Quarterly Report onForm 10-Q, including Management’s Discussion and Analysis of FinancialCondition and Results of Operations, contains forward-looking statements. Theseforward-looking statements are subject to substantial risks and uncertaintiesthat could cause our future business, financial condition or results ofoperations to differ materially from our historical results or currentlyanticipated results, including those set forth below.*

*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 2006 Annual Report onForm 10-K filed with the SEC on July 14, 2006. As a result of thefollowing risk factors, as well as of other variables affecting our operatingresults, past financial performance may not be a reliable indicator of futureperformance, and historical trends should not be used to anticipate results ortrends in future periods.*

***Risks Related to Our Business***

## ***Weface intense competition in our markets from more established CMOS and CCDimage sensor manufacturers, and if we are unable to compete successfully we maynot be able to maintain or grow our business.***

The image sensor market is intensely competitive, andwe expect competition in this industry to continue to increase. Thiscompetition has resulted in rapid technological change, evolving standards,reductions in product selling prices and rapid product obsolescence. If we areunable to successfully meet these competitive challenges, we may be unable tomaintain and grow our business. Any inability on our part to competesuccessfully would also adversely affect our results of operations and impairour financial condition.

Our image-sensor productsface competition from other companies that sell CMOS image sensors and fromcompanies that sell CCD image sensors. Many of our competitors have longeroperating histories, greater presence in key markets, greater name recognition,larger customer bases, more established strategic and financial relationshipsand significantly greater financial, sales and marketing, distribution,technical and other resources than we do. Many of them also have their ownmanufacturing facilities which may give them a competitive advantage. As aresult, they may be able to adapt more quickly to new or emerging technologiesand customer requirements or devote greater resources to the promotion and saleof their products. Our competitors include established CMOS image sensormanufacturers such as Cypress, Kodak, MagnaChip, Micron, Samsung, Sharp, Sony,STMicroelectronics and Toshiba as well as CCD image sensor manufacturers suchas Fuji, Matsushita, NEC, Sanyo, Sharp, Sony and Toshiba. Many of thesecompetitors own and operate their own fabrication facilities, which in certaincircumstances may give them the ability to price their products moreaggressively than we can or may allow them to respond more rapidly than we canto changing market opportunities. In addition, we compete with a large numberof smaller CMOS manufacturers including PixArt and Pixelplus. Competition withthese and other companies has required, and in the future may require, us toreduce our prices. For instance, we have seen increased competition in themarkets for VGA image sensor products with resulting pressures on productpricing. Downward pressure on pricing could result both in decreased revenuesand lower gross margins, which would adversely affect our profitability.

Our competitors may acquire or enter into strategic orcommercial agreements or arrangements with foundries or providers of colorfilter processing, assembly or packaging services. These strategic arrangementsbetween our competitors and third party service providers could involvepreferential or exclusive arrangements for our competitors. Such strategicalliances could impair our ability to secure sufficient capacity from foundriesand service providers to meet our demand for wafer manufacturing, color filterprocessing, assembly or packaging services,

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adversely affecting our ability to meet customerdemand for our products. In addition, competitors may enter into exclusiverelationships with distributors, which could reduce available distributionchannels for our products and impair our ability to sell our products and growour business. Further, some of our customers could also become developers ofimage sensors, and this could potentially adversely affect our results ofoperations, business and prospects.

## ***Declinesin our average selling prices may result in declines in our revenues and havereduced our gross margins.***

We have experienced andexpect to continue to experience pressure to reduce the selling prices of ourproducts, and our average selling prices have declined as a result. Competitionin our product markets is intense and as this competition continues tointensify, we anticipate that these pricing pressures will increase. We expectthat the average selling prices for many of our products will continue todecline over time. Unless we can increase unit sales sufficiently to offsetthese declines in our average selling prices, our revenues will decline. Ourlow average selling prices have adversely affected our gross margins, andunless we can reduce manufacturing costs to compensate, additional reductionsin our average selling prices will continue to adversely affect our grossmargins and could materially and adversely affect our operating results andimpair our financial condition. We have increased and intend to continue toincrease our research, development and related expenses to continue thedevelopment of new image sensor products in fiscal years 2007 and 2008 that canbe sold at higher selling prices and/or manufactured at lower cost. However, ifwe are 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 camera cell phones account for a large portionof our revenues, and any decline in sales to the camera cell phone market orfailure of this market to continue to grow as expected could adversely affectour results of operations.***

Sales to the camera cell phone market account for alarge portion of our revenues. Although we can only estimate the percentages ofour products that are used in the camera cell phone market due to the significantnumber of our image-sensor products that are sold to module makers or throughdistributors and VARs, we believe that the camera cell phone market accountedfor approximately 70% of our revenues in fiscal 2006 and 80% in the ninemonths ended January 31, 2007. We expect that revenues from sales of ourimage-sensor products to the camera cell phone market will continue to accountfor a significant portion of our revenues during fiscal 2007 and beyond. Anyfactors adversely affecting the demand for our image sensors in this marketcould cause our business to suffer and adversely affect our operating results.The digital image sensor market for camera cell phones is extremelycompetitive, and we expect to face increased competition in this market in thefuture. In addition, we believe the market for camera cell phones is alsorelatively concentrated and the top six producers account for more than 75% ofthe annual sales of these products. If we do not continue to achieve designwins with key camera cell phone manufacturers, our market share or revenuescould decrease. The camera cell phone image sensor market is also subject torapid technological change. In order to compete successfully in this market, wewill have to correctly forecast customer demand for technological improvementsand be able to deliver such products on a timely basis at competitive prices.If we fail to do this, our results of operations, business and prospects wouldbe materially and adversely affected. In the past, we have experienced problemsaccurately forecasting customer demand in other markets. If our sales to thecamera cell phone market do not increase and/or the camera cell phone marketdoes not grow as expected, our results of operations, business and prospectswould 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 totime, we have also encountered unexpected manufacturing problems as we increasethe production of new products. For example, in the fourth quarter of fiscal2005, and again in the first quarter of fiscal 2006, the back-end yields on twoof our advanced products were significantly below where we planned, and ourgross margins were adversely impacted. As our

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products integrate new and more advanced functions,they become more complex and increasingly difficult to design and debug.Successful product development and introduction depends on a number of factors,including:

·                  accurateprediction of market requirements and evolving standards, including pixelresolution, output interface standards, power requirements, optical lens size,input standards and operating systems for personal computers and otherplatforms;

·                  developmentof advanced technologies and capabilities;

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

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

·                  marketacceptance of the new products.

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

## ***Designwins are a key determinant of future revenues, and failure to obtain designwins has in the past, and could in the future, adversely affect our revenuesand impair our ability to grow our business.***

Our past success has been,and our future success is, dependent upon manufacturers designing ourimage-sensor products into their products. To achieve design wins, which aredecisions by manufacturers to design our products into their systems, we mustdefine and deliver on a timely basis cost effective and innovative image-sensorsolutions that satisfy the manufacturers’ requirements. Our ability to achievedesign wins is subject to numerous risks including competitive pressures aswell as technological risks. If we do not achieve a design win with a prospectivecustomer, it may be difficult to sell our image-sensor products to suchprospective customer in the future because once a manufacturer has designed asupplier’s products into its systems, the manufacturer may be reluctant tochange its source of components due to the significant costs, time, effort andrisk associated with qualifying a new supplier. Accordingly, if we fail toachieve design wins with key device manufacturers that embed image sensors intheir products, our market share or revenues could decrease. Furthermore, tothe extent that our competitors secure design wins, our ability to expand ourbusiness in the future will be impaired.

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

Unlike some of our largercompetitors, we do not own or operate a semiconductor fabrication facility.Instead, we rely on TSMC, PSC and other subcontract foundries to produce all ofour wafers. Historically, we have relied on TSMC to provide us with asubstantial majority of our wafers. As a part of our joint venture agreementwith TSMC, TSMC has agreed to commit substantial wafer manufacturing capacityto us in exchange for our commitment to purchase a substantial portion of ourwafers from TSMC, subject to pricing and technology requirements.

In addition, we recentlyentered into a foundry manufacturing agreement with PSC pursuant to which weand PSC have agreed to jointly develop certain pixel-related process technologyand for PSC to process certain of our CMOS image sensors at PSC’s facilities inaccordance with the scheduled development approved by both parties.

Under the terms of thesesupply agreements, we secure manufacturing capacity in any particular period ona purchase order basis. The foundries have no obligation to supply products tous for any specific period, in any specific quantity or at any specific price,except as set forth in a particular purchase order. In general, our reliance onthird party foundries involves a number of significant risks, including:

·                  reducedcontrol over delivery schedules, quality assurance, manufacturing yields andproduction costs;

·                  lackof guaranteed production capacity or product supply;

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

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·                  financialdifficulties or disruptions in the operations of third party foundries due tocauses beyond our control.

If TSMC, PSC, or any of ourother foundries were unable to continue manufacturing our wafers in the requiredvolumes, at acceptable quality, yields and costs, or in a timely manner, wewould have to identify and qualify substitute foundries, which would be timeconsuming and difficult, and could increase our costs or result in unforeseenmanufacturing problems. In addition, if competition for foundry capacityincreases we may be required to pay increased amounts for manufacturingservices. We are also exposed to additional risks if we transfer our productionof semiconductors from one foundry to another, as such transfer could interruptour manufacturing process. Further, some of our foundries may also bedevelopers of image sensor products and if one or more of our other foundrieswere to decide not to fabricate our companion DSP chips for competitive or otherreasons, we would have to identify and qualify other sources for theseproducts.

## ***Werely on a joint venture company for color filter application and on third partyservice providers for packaging services, which reduces our control overdelivery schedules, product quality and cost, and could adversely affect ourability to deliver products to customers.***

We rely on VisEra, our jointventure with TSMC, for the color filter processing of our completed wafers. Inaddition, we rely on Advanced Semiconductor Engineering Inc., or ASE, and ImPacfor substantially all of our ceramic chip packages. We also rely on ImPac, ourequity investee, for our plastic chip packages. We rely on XinTec, anotherinvestee company, and China Wafer Level CSP, Ltd. for chip scale packages,which are generally used in our products designed for the smallest form factorapplications. We currently have plans to expand color filter processingcapacity at VisEra with these service providers. If for any reason one or moreof these service providers becomes unable or unwilling to continue to providecolor filter processing or packaging services of acceptable quality, atacceptable costs and in a timely manner, our ability to deliver our products toour customers could be severely impaired. We would have to identify and qualifysubstitute service providers, which could be time consuming and difficult andcould result in unforeseen operational problems. Substitute service providersmight not be available or, if available, might be unwilling or unable to offerservices on acceptable terms.

In addition, if competitionfor color filter processing or packaging capacity increases, we may be requiredto pay or invest significant amounts to secure access to these services, whichcould adversely impact our operating results. The number of companies thatprovide these services is limited and some of them have limited operatinghistories and financial resources. In the event our current providers refuse orare unable to continue to provide these services to us, we may be unable toprocure services from alternate service providers. Furthermore, if customerdemand for our products increases, we may be unable to secure sufficientadditional capacity from our current service providers on commerciallyreasonable terms, if at all. Moreover, our reliance on a limited number ofthird party service providers to provide color filter processing servicessubjects us to reduced control over delivery schedules, quality assurance andcosts. This lack of control may cause unforeseen product shortages or mayincrease our costs of manufacturing, assembling or testing of our products,which would adversely affect our operating results.

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

Our quarterly operatingresults have varied significantly from quarter-to-quarter in the past and arelikely to vary significantly in the future based on a number of factors, manyof which are beyond our control. These factors and other industry risks, manyof which are more fully discussed in our other risk factors, include:

·                  thevolume and mix of our product sales;

·                  competitivepricing pressures;

·                  ourability to accurately forecast demand for our products;

·                  ourability to achieve acceptable wafer manufacturing or back-end processingyields;

·                  ourgain or loss of a large customer;

·                  ourability to manage our product transitions;

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

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·                  thegrowth of the market for products and applications using CMOS image sensors;

·                  thetiming and size of orders from our customers;

·                  thevolume of our product returns;

·                  theseasonal nature of customer demand for our products;

·                  thedeferral of customer orders in anticipation of new products, product designs orenhancements;

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

·                  thelevel of our operating expenses.

Our introduction of newproducts and our product mix have affected and may continue to affect ourquarterly operating results. Changes in our product mix could adversely affectour operating results, because some products provide higher margins than others.We typically experience lower yields when manufacturing new products throughthe initial production phase, and consequently our gross margins on newproducts have historically been lower than our gross margins on our moreestablished products. We also anticipate that the rate of orders from ourcustomers may vary significantly from quarter to quarter. Our operatingexpenses are relatively fixed, 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, and our operating results for that quarter, andpotentially future quarters, may be harmed.

All of these factors aredifficult to forecast and could result in fluctuations in our quarterlyoperating results. Our operating results in a given quarter could besubstantially less than anticipated, and, if we fail to meet market analysts’expectations, a substantial decline in our stock price could result. Fluctuationsin our quarterly operating results could adversely affect the price of ourcommon stock in a manner unrelated to our long-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 theproducts using our image sensors, such as camera cell phones, digital stillcameras and cameras for toys and games, are consumer electronics goods. Thesemass-market camera devices generally have seasonal cycles which historicallyhave caused the sales of our customers to fluctuate quarter-to-quarter.  Historically, demand from OEMs anddistributors that serve such consumer product markets has been stronger in the secondand third quarters of our fiscal year and weaker in the first and fourthquarters of our fiscal year.

In addition,****since a very large number of the manufacturers who use ourproducts are located in China, Hong Kong and Taiwan, the pattern of demand forour image sensors has been increasingly influenced by the timing of theextended lunar or Chinese New Year holiday, a period in which the factorieswhich use our image sensors close.  Forexample, we believe that the decline in revenues that we expect in the fourthquarter of fiscal 2007 is partly attributable to the fact that Chinese New Yearoccurred this year in mid-February, and manufacturing did not resume in fulluntil some time in March.

## ***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 foundriesmanufacturing the wafers used in our products cannot achieve the yields weexpect, we will incur higher per unit costs and reduced product availability.Foundries that supply our wafers have experienced problems in the pastachieving acceptable wafer manufacturing yields. Wafer yields are a functionboth of our design technology and the particular foundry’s manufacturingprocess technology. Certain risks are inherent in the introduction of such newproducts and technology. Low yields may result from design errors ormanufacturing failures in new or existing products. During the early stages ofproduction, production yields for new products are typically lower than thoseof established products. Unlike many other semiconductor products, opticalproducts can be effectively tested only when they are complete. Accordingly, weperform final testing of our products only after they are assembled. As aresult, yield problems may not be identified until our products are well intothe production process. The risks associated with low yields could be increasedbecause we rely on third party offshore foundries for our wafers, which canincrease the effort and time required to identify, communicate and resolvemanufacturing yield problems. In addition to wafer manufacturing yields, ourproducts are subject to yield loss in subsequent

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manufacturing steps, often referred to as back-endprocessing, such as the application of color filters and micro-lenses, dicing(cutting the wafer into individual devices, or die) and packaging. Any of thesepotential problems with wafer manufacturing and/or back-end processing yieldscould result in a reduction in our gross margins and/or our ability to timelydeliver products to customers, which could adversely affect our customerrelations and make it more difficult to sustain and grow our business. Forexample, low back-end yields on two of our products adversely impacted ourgross margins for the fiscal quarters ended April 30, 2005, July 31,2005 and October 31, 2005.

## ***Ifwe do not forecast customer demand correctly, our business could be impairedand our stock price may decline.***

Our sales are generally made on the basis of purchaseorders rather than long-term purchase commitments; however, we manufactureproducts and build inventory based on our estimates of customer demand.Accordingly, we must rely on multiple assumptions to forecast customer demand.We are continually working to improve our sales forecasting procedures. If weoverestimate customer demand, we may manufacture products that we may be unableto sell, or we may have to sell to other customers at lower prices. This couldmaterially and adversely affect our results of operations and financialcondition. In addition, our customers may cancel or defer orders at any time.We have experienced problems with accurately forecasting customer demand in thepast. For example there was a shift in the mix of product demand, in particulara shift in demand towardsVGA products late in the second quarter of fiscal 2007, and as aresult our inventories at the end of the second and third quarters were higherthan we intended them to be. We are required to accurately predict customerdemand because we must often make commitments to have products manufacturedbefore we receive 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 camera cellphone market, the product life cycle of image sensors can be as little as sixmonths. Under these circumstances, it is possible that we could suffer fromshortages for certain products and, if we underestimate market demand, we facethe risk of being unable to fulfill customer orders. We also face the risk ofexcess inventory and product obsolescence if we overestimate market demand forour products and build inventories in excess of demand. Our ability toaccurately forecast sales is also a critical factor in our ability to meetanalyst expectations for our quarterly and annual operating results. Anyfailure to meet these expectations would likely lead to a substantial declinein our stock price.

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

Our business strategydepends in large part on the continued growth of various markets into which wesell our image-sensor products, including the markets for camera cell phones,digital still and video cameras, commercial and security and surveillanceapplications, personal computers and lap-tops, toys and games, includinginteractive video games, and automotive applications. Our ability to sustainand grow our business also depends on the continued development of new marketsfor our products such as medical imaging devices. If these current and newmarkets do not grow and develop as anticipated, we may be unable to sustain orgrow the sales of our products.

In addition, the marketprice of our common stock may be adversely affected if certain of these newmarkets do not emerge or develop as expected. Securities analysts may alreadyfactor revenue from such new markets into their future estimates of our financialperformance and should such markets not develop as expected by such securitiesanalysts the trading price 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 imagesensors requires a lengthy manufacturing, packaging and assembly process,typically lasting approximately 12-14 weeks. Additional time may pass before acustomer commences volume shipments of products that incorporate our imagesensors. Even when a manufacturer decides to design our image sensors into itsproducts, the manufacturer may never ship final products incorporating ourimage sensors. Given

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this lengthy cycle, we experience a delay between thetime we incur expenditures for research and development and sales and marketingefforts and the time we generate revenue, if any, from these expenditures. Thisdelay makes it more difficult to forecast customer demand, which addsuncertainty to the manufacturing planning process and could adversely affectour operating results. In addition, the product life cycle for certain of ourimage-sensor products designed for use in certain applications can berelatively short. If we fail to appropriately manage the manufacturing,packaging and assembly process, our products may become obsolete before theycan be incorporated into our customers’ products and we may never realize areturn on investment for the expenditures we incur in developing and producingthese products.

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

We expect that as we developnew products to meet technological advances and new and changing industry andcustomer demands, our color filter application and ceramic, plastic andchip-scale packaging requirements will also evolve. Our ability to continue toprofitably deliver products that meet customer demand is dependent upon ourability to obtain third party services that meet these new requirements on acost-effective basis. We have historically relied exclusively on third parties,and more recently, on one of our joint ventures, to provide these services.There can be no assurances that any of these parties will be able to developenhancements to the services they provide to us to meet these new and changingindustry and customer requirements. Furthermore, even if these service providersare able to develop their services to meet new and evolving requirements, theseservices may not be available at a cost that enables us to sustain ourprofitability.

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

Because we integrate manyfunctions on a single chip, our products are complex and are based uponevolving technology. The integration of additional functions into the complexoperations of our products could result in a greater risk that customers or endusers could discover latent defects or subtle faults after volumes of producthave already been shipped. Although we test our products, we have in the pastand may in the future encounter defects or errors. For example, in the thirdquarter of fiscal 2005, we made 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.

## ***Historically,our revenues have been dependent upon a few key customers, the loss of one ormore of which could significantly reduce our revenues.***

Historically, a relatively small number of OEMs, VARsand distributors have accounted for a significant portion of our revenues. Anymaterial delay, cancellation or reduction of purchase orders from one or moreof our major customers or distributors could result in our failure to achieveanticipated revenue for a particular period. In addition, if we are unable toretain one or more of our largest OEM, distributor or VAR customers, or if weare unable to maintain our current level of revenues from one or more of thesesignificant customers, our business and results of operation would be impairedand our stock price could decrease, potentially significantly. In the nine monthsended January 31, 2007, one OEM customer accounted for approximately 13.6%of our revenues, and two distributor customers accounted for approximately14.6% and 12.4% of our revenues. In the nine months ended January 31, 2006, twoOEM customers accounted for approximately 16.2% and 12.6% of our revenues,respectively, and one distributor customer accounted for 13.5% of our revenues.In addition, approximately 50% of our revenues have historically come from ourtop five customers. Our business, financial condition, results of operationsand cash flows will continue to depend significantly on our ability to retainour current key customers and attract new customers, as well as on thefinancial condition and success of our OEMs, VARs and distributors.

## ***Changesin accounting rules for stock-based compensation have adversely affected ourreported operating results, and may adversely affect our stock price and ourcompetitiveness in the employee marketplace.***

Since our founding, we have used employee stockoptions and other stock-based compensation to attract, motivate and retain ouremployees. In December 2004, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 123(R), *“Share-Based Payment.”* We adopted SFAS No.123(R) on May 1, 2006

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and accordingly, we began to measure compensationcosts for all stock-based compensation at fair value and recognized these costsas expenses in our condensed consolidated statements of income. The recognitionof these expenses in our statements of income has had a negative effect on ourearnings per share, which could negatively impact our future stock price. Inaddition, if we reduce or alter our use of stock-based compensation to minimizethe recognition of these expenses, our ability to attract, motivate and retainemployees may be impaired, which could put us at a competitive disadvantage inthe employee marketplace.

## ***Wemay be required to record a significant charge to earnings if our goodwill oramortizable intangible assets become impaired.***

Under generally accepted accounting principles, we arerequired to review our amortizable intangible assets for impairment when eventsor changes in circumstances indicate the carrying value may not be recoverable.We are required to test goodwill for impairment at least annually. 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 may be required to record a significant charge to earnings in ourfinancial statements during the period in which we determine that our goodwillor amortizable intangible assets have been impaired. Any such charge wouldadversely impact our results of operations. As of January 31, 2007, ournet goodwill and amortizable intangible assets totaled approximately$29.7 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.***

Our sales are generally made pursuant to standardpurchase orders. We include in our backlog only those customer orders for whichwe have accepted purchase orders and assigned shipment dates within theupcoming 12 months. Orders constituting our current backlog are subject tocancellation or changes in delivery schedules, and backlog may not necessarilybe an indication of future revenue. Any cancellation or delay in orders whichconstitute our current or future backlog may result in lower than expectedrevenues.

## ***Ifwe are unable to maintain processes and procedures to sustain effectiveinternal control over our financial reporting, our ability to provide reliableand timely financial reports could be harmed and this could have a materialadverse effect on our stock price.***

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

We have in the past discovered, and may in the futurediscover, areas of our internal control that need improvement. For example, werestated our financial statements for the first, second and third quarters offiscal 2004. If these or similar types of issues were to arise with respect toour internal controls in future periods, they could impair our ability toproduce accurate and timely financial reports.

As our business expands, ongoing compliance with theprovisions of Section 404 of the Sarbanes-Oxley Act of 2002 and maintenance of effectiveinternal control over financial reporting will require that we hire additionalqualified finance and accounting personnel. Because other businesses facesimilar challenges, there is significant competition for such personnel, andthere can be no assurance that we will be able to attract and/or retainsuitably qualified employees.

## ***Corporategovernance regulations have recently increased our compliance costs and couldfurther increase our expenses if changes occur within our business.***

Changes in laws and regulations affecting publiccompanies, including the provisions of the Sarbanes-Oxley Act, have imposed newrequirements on us and on our officers, directors, attorneys and independentregistered public accounting firm. In order to comply with these new rules, weadded internal resources and have utilized additional outside legal, accountingand advisory services, which increased our operating expenses in fiscal 2005and fiscal 2006 as compared to prior fiscal years. We expect to incur ongoingoperating expenses as we maintain compliance with Section 404. Inaddition, if we undergo significant modifications to our structure throughpersonnel

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or system changes, acquisitions, or otherwise, it maybe increasingly difficult to maintain compliance with the existing and evolvingcorporate governance regulations.

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

In December 2000, we established Hua WeiSemiconductor (Shanghai) Co. Ltd., or HWSC, as part of our efforts tostreamline our manufacturing process and reduce the costs and working capitalassociated with the testing of our image-sensor products, and relocated ourautomated image testing equipment from the United States to China. In addition,we also expect to expand testing capabilities with additional automated testingequipment, which will also be located in China. However, there are significantadministrative, legal and governmental risks to operating in China that couldresult in increased operating expenses or that could prevent us from achievingour objectives in operations. The risks from operating in China that couldincrease our operating expenses and adversely affect our operating results,financial condition and ability to deliver our products and grow our businessinclude, without limitation:

·                  difficultiesin staffing and managing foreign operations, particularly in attracting andretaining personnel qualified to design, sell and support CMOS image sensors;

·                  difficultiesin coordinating our operations in China with those in California;

·                  diversionof management attention;

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

·                  politicaland economic instability, which could have an adverse impact on foreignexchange rates in Asia and could impair our ability to conduct our business inChina; and

·                  inadequacyof the local infrastructure to support our needs.

## ***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 may in the future make acquisitions of, orinvestments in, businesses that offer products, services and technologies thatwe believe would complement our products, including CMOS image sensormanufacturers. We may also make acquisitions of, or investments in, businessesthat we believe could expand our distribution channels. Even if we were toannounce an acquisition, we may not be able to complete it. In addition, anyfuture acquisition or substantial investment could present numerous risks,including:

·                  difficultyin realizing the potential technological benefits of the transaction;

·                  difficultyin integrating the technology, operations or work force of the acquiredbusiness with our existing business;

·                  unanticipatedexpenses related to technology integration;

·                  disruptionof our ongoing business;

·                  difficultyin realizing the potential financial or strategic benefits of the transaction;

·                  difficultyin maintaining uniform standards, controls, procedures and policies;

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

·                  reductionsin our future operating results from amortization of intangible assets

·                  impairmentof resulting goodwill; and

·                  potentialunknown or unexpected liabilities associated with acquired businesses.

We expect that any future acquisitions could includeconsideration to be paid in cash, shares of our common stock or a combinationof cash and our common stock. If and when consideration for a transaction ispaid in common stock, it will result in dilution to our existing stockholders.

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## ***Wemay never achieve all of the anticipated benefits from our joint venture withTSMC.***

In October 2003, we entered into an agreementwith TSMC to form VisEra, a joint venture in Taiwan, for the purposes ofproviding manufacturing services and automated final testing services. InAugust 2005, we amended and restated our agreement with TSMC in part to enableVisEra to acquire approximately 30% of XinTec, a supplier of chip-scalepackaging services in which we originally invested in April 2003 and in which wedirectly hold an approximate four percent interest. In January 2007, we enteredinto a further amendment to the agreement with TSMC to expand the scope ofVisEra’s activities and provide additional funding for the expansion of VisEra.

In January 2006, VisEra acquired certain colorfilter processing equipment from TSMC and assumed direct responsibility forproviding the color filter processing services that had previously beenprovided by TSMC. We expect that VisEra will be able to provide us with acommitted supply of high quality manufacturing services at competitive pricesand automated final testing services. However, there are significant legal,governmental and relationship risks to developing VisEra, and we cannot ensurethat we will receive the expected benefits from the joint venture. For example,VisEra may not be able to provide manufacturing services or automated testingservices that have competitive technology or prices, which could adverselyaffect our product offerings and our ability to meet customer requirements forour products. In addition, the existence of VisEra may also make it moredifficult for us to secure dependable services from competing merchant vendorswho provide similar manufacturing services.

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

We expect to develop our business partly throughforming alliances or joint ventures with and making strategic investments inother companies, some of which may be companies at a relatively early stage ofdevelopment. For example, in April 2003, we made an investment in XinTec,a chip scale packaging service company, and in June 2003 we made aninvestment in ImPac, a plastic packaging service company. In December 2005,VisEra, our joint venture with TSMC, completed the acquisition of a furtherapproximately 30% of the issued and outstanding shares of XinTec.  In January 2007, TSMC acquired directly a43.0% interest in XinTec, thus reducing our beneficial ownership in XinTec to12.6%.

In May 2004, we entered into an agreement with PSCunder which we established SOI, a joint venture as a company incorporated underthe laws of Taiwan, and we contributed $2.1 million in exchange for anownership percentage of approximately 49%. The purpose of the joint venture isto conduct the business of manufacturing, marketing and selling certain of ourlegacy products. On April 30, 2005, after we appointed a majority of theboard of directors, we began to consolidate SOI. In July 2006, SOI declareda cash dividend of $482,000, of which $245,000 was payable to minorityshareholders. SOI also issued shares to its employees with an estimated fairvalue of $459,000. The cash dividend was paid in August 2006. As a resultof the issuance of shares by SOI to its employees, our ownership percentagedeclined from 49% to approximately 47%.

Our investments in these companies may negativelyimpact our operating results, because, under certain circumstances, we arerequired to recognize our portion of any loss recorded by each of thesecompanies or to consolidate them into our operating results. We expect tocontinue to utilize partnerships, strategic alliances and investments,particularly those that enhance our manufacturing capacity and those thatprovide manufacturing services and testing capability. These investments andpartnering arrangements are crucial to our ability to grow our business andmeet the increasing demands of our customers. However, we cannot ensure that wewill achieve the benefits expected as a result of these alliances. For example,we may not be able to obtain acceptable quality and/or wafer manufacturingyields from these companies, which could result in higher operating costs andcould impair our ability to meet customer demand for our products. In addition,certain of these investments or partnering relationships may place restrictionson the scope of our business, the geographic areas in which we can sell ourproducts and the types of products that we can manufacture and sell. For example,our agreement with TSMC provides that we may not engage in business that willdirectly compete with the business of VisEra. This type of non-competitionprovision may impact our ability to grow our business and to meet the demandsof our customers.

## ***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.***

As part of our strategy, we have formed joint ventureswith two of our foundry partners, and we hold a minority interest in twocompanies from which we purchase certain manufacturing services. Under theapplicable provisions of generally accepted accounting principles in the UnitedStates of America, we currently consolidate the

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financial statements and results of operations of oneof these joint ventures into our consolidated financial statements and resultsof operations, and record the equity interests that we do not own as minorityinterests. For the investments that we account for under the equity method, werecord as part of other income or expense our share of the increase or decreasein the equity of the companies in which we have invested. It is possible that,in the future, our relationships and/or our interests in or with these jointventures or equity method investees could change. Such changes have in thepast, and could in the future result in deconsolidation or consolidation ofsuch entities, as the case may be, which could result in changes in ourreported results.

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

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

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

In recent years, there has been significant litigationin the United States involving intellectual property rights, including in thesemiconductor industry. We have in the past been, and may in the future be,subject to legal proceedings and claims with respect to our intellectualproperty, including such matters as trade secrets, patents, product liabilitiesand other actions arising out of the normal course of business. These claimsmay increase as our intellectual property portfolio becomes larger or morevaluable. Intellectual property claims against us, and any resulting lawsuit,may cause us to incur significant expenses, subject us to liability for damagesand invalidate our proprietary rights. In fiscal 2002, we paid$3.5 million to settle an intellectual property litigation matter. Anypotential intellectual property litigation against us would likely betime-consuming and expensive to resolve and would divert management’s time andattention and could also force us to take actions such as:

·                  ceasingthe sale or use of products or services that incorporate the infringedintellectual property;

·                  obtainingfrom the holder of the infringed intellectual property a license to sell or usethe relevant technology, which license may not be available on acceptableterms, if at all; or

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

If we are subject to a successful claim ofinfringement and we fail to develop non-infringing intellectual property orlicense the infringed intellectual property on acceptable terms and on a timelybasis, we may be unable to sell some or all of our products, and our operatingresults could be adversely affected. We may in the future initiate claims orlitigation against third parties for infringement of our intellectual propertyrights or to determine the scope and validity of our proprietary rights or theproprietary rights of competitors. These claims could also result insignificant expense and the diversion of technical and management attention.

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## ***Wehave been named as a defendant in certain litigation that could have a materialadverse impact on our operating results and financial condition.***

We are currently a defendant in ongoing litigationmatters as described in Part II, Item 1 — *”Legal Proceedings”* of this QuarterlyReport. We have reached an agreement in principle to settle the shareholder classaction lawsuit pending in the United States District Court for the NorthernDistrict of California. We accrued $3.3 million in litigation settlementexpenses for the quarter ended October 31, 2006 to reflect our share ofthe settlement, including unreimbursed defense costs. The parties are draftinga written settlement agreement and other customary documentation. Notice of thesettlement must be provided to the purported shareholder class and the Courtmust grant final approval of the settlement. There is no assurance that thesettlement will become final. If there is no final settlement of the mattersdescribed in Part II, Item 1 — *Legal Proceedings,”*andwe fail to prevail in such matters, such failure could have a material adverseeffect on our consolidated financial position, results of operations, or cashflows in the future. In addition, the results of litigation are uncertain, andthe litigation process may utilize a portion of our cash resources and divertmanagement’s attention from the day-to-day operations of our company, all ofwhich could harm our business.

## ***Ifwe do not effectively manage our growth, our ability to increase our revenuesand improve our earnings could be adversely affected.***

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

·                  significantlyimprove our operational, financial and accounting systems;

·                  trainand manage our existing employee base;

·                  attractand retain qualified personnel with relevant experience; and

·                  effectivelymanage accounts receivable and inventory.

For example, our failure to effectively manage ourinventory levels could result either in excess inventories, which couldadversely affect our gross margins and operating results, or lead to aninability to fill customer orders, which would result in lower sales and couldharm our relationships with existing and potential customers.

We must also manage multiple relationships withcustomers, business partners and other third parties, such as our foundries andprocess and assembly vendors. Moreover, our growth may significantly overburdenour management and financial systems and other resources. We may not makeadequate allowances for the costs and risks associated with our expansion. Inaddition, our systems, procedures or controls may not be adequate to support our operations, and we may not be able toexpand quickly enough to capitalize on potential market opportunities.Our future operating results will also depend, in part, on our ability toexpand sales and marketing, research and development, accounting, finance andadministrative support.

## ***Ourfuture tax rates could be higher than we anticipate if the proportion of futureoperating income generated outside the U.S. by our foreign subsidiaries is lessthan we expect, or the mix differs from that which we expect.***

A number of factors will affect our future tax rate,and certain of these factors could increase our effective tax rate in futureperiods, which could adversely impact our operating results. For example, thecomplex rules for accounting for the tax effects of stock-based compensationunder SFAS No. 123(R) have resulted in an increase in our effective tax rate inthe current fiscal year. In addition, our future effective tax rates could benegatively affected by changes in tax laws or the interpretation of tax laws,by unanticipated decreases in the amount of revenue or earnings in countrieswith low statutory tax rates, or by changes in the valuation of our deferredtax assets and liabilities.

In common with all multinational companies, we aresubject to tax in multiple jurisdictions. The tax authorities in any givenjurisdiction may seek to increase the taxes being collected by, for example,asserting that the transfer prices we charge between related entities areeither too high or too low depending on which side of the transaction they arelooking at. Although we believe we have provided sufficient taxes for all priorperiods, adjustments could be proposed that would, in some cases, result inliabilities in excess of such provisions.

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

During fiscal 2006, approximately 31.1% of ourrevenues came from sales through distributors. For the nine months endedJanuary 31, 2007, approximately 39.3% of our revenues came from salesthrough distributors. We expect that revenues from sales through distributorswill continue to represent higher proportion of our total revenues than theyhave in the past. Selling through distributors reduces our ability toaccurately forecast sales and increases the complexity of our business,requiring us to, among other matters:

·                  managea more complex supply chain;

·                  managethe level of inventory at each distributor;

·                  providefor credits, return rights and price protection;

·                  estimatethe impact of credits, return rights, price protection and unsold inventory atdistributors; and

·                  monitorthe financial condition and creditworthiness of our distributors.

Any failure to manage these challenges could cause usto inaccurately forecast sales and carry excess or insufficient inventory,thereby adversely affecting our 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.***

We face difficulties in managing our third partyfoundries, color filter application service providers, ceramic and plasticpackaging service providers and our foreign distributors, most of whom arelocated in Asia. Any political and economic instability in Asia might have anadverse impact on foreign exchange rates and could cause service disruptionsfor our vendors and distributors and adversely affect our customers.

Sales outside of the United States accounted forsubstantially all of our revenues for fiscal 2006 and the first ninemonths of fiscal 2007. We anticipate that sales outside of the United Stateswill continue to account for nearly all of our revenues in future periods.Dependence on sales to foreign customers involves certain risks, including:

·                  longerpayment cycles;

·                  theadverse effects of tariffs, duties, price controls or other restrictions thatimpair trade;

·                  decreasedvisibility as to future demand;

·                  difficultiesin accounts receivable collections; and

·                  burdensof complying with a wide variety of foreign laws and labor practices.

Sales of our products have to date been denominatedprincipally in U.S. dollars. Over the last several years, the U.S. dollar hasweakened against most other currencies. Future increases in the value of theU.S. dollar, if any, would increase the price of our products in the currencyof the countries in which our customers are located. This may result in ourcustomers seeking lower-priced suppliers, which could adversely impact ouroperating results. A larger portion of our international revenues may bedenominated in foreign currencies in the future, which would subject us toincreased risks associated with fluctuations in foreign exchange rates.

## ***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.***

The loss of the services of one or more of ourexecutive officers or key employees, which has occurred from time to time, orthe decision of one or more of these individuals to join a competitor, couldadversely affect our business and harm our operating results and financialcondition. Our success depends to a significant extent on the continued serviceof our senior management and certain other key technical personnel. None of oursenior management is bound by an employment or non-competition agreement. We donot maintain key man life insurance on any of our employees.

Our success also depends on our ability to identify,attract and retain qualified sales, marketing, finance, management andtechnical personnel, particularly analog or mixed signal design engineers. Wehave experienced, and may continue to experience, difficulty in hiring andretaining candidates with appropriate qualifications. If we

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do not succeed in hiring and retaining candidates withappropriate qualifications, our revenues and product development efforts couldbe harmed.

## ***Weneed to continue to upgrade our enterprise resource planning and othermanagement information systems.***

As our business grows and becomes more complex, wehave to expand and upgrade our ERP system and other management informationsystems which are critical to the operational, accounting and financialfunctions of our company. We continue to evaluate alternative solutions, bothshort term and long-term, to meet the operating, administrative and financialreporting requirements of our business. Failure to properly or adequatelyaddress these issues could result in the diversion of management’s attentionand resources and could materially adversely affect our operating results andimpact our ability to manage our business. At some point, we may outgrow ourexisting ERP system and need to transition our systems to a new platform. Sucha transition would be time consuming and costly, and would require managementresources in excess of those we currently have.

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

Disasters and business interruptions such asearthquakes, water, fire, electrical failure, accidents and epidemics affectingour operating activities, major facilities, and employees’ and customers’health could materially and adversely affect our operating results andfinancial condition. In particular, our Asian operations and most of our thirdparty manufacturers and service providers involved in the manufacturing of ourproducts are located within relative close proximity. Therefore, any disasterthat strikes within close proximity of that geographic area could be extremelydisruptive to our business and could materially and adversely affect ouroperating results and financial condition. We do not currently have a disasterrecovery plan.

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

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

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

## ***Provisionsin our charter documents and Delaware law, as well as our stockholders’ rightsplan, could prevent or delay a change in control of our company and may reducethe market price of our common stock.***

Provisions of our certificate of incorporation andbylaws may discourage, delay or prevent a merger or acquisition that astockholder may consider favorable. These provisions include:

·                  adjustingthe price, rights, preferences, privileges and restrictions of preferred stockwithout stockholder approval;

·                  providingfor a classified board of directors with staggered, three year terms;

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

·                  limitingthe persons who may call special meetings of stockholders; and

·                  prohibitingstockholder actions by written consent.

Provisions of Delaware law also may discourage, delayor prevent another company from acquiring or merging with us. Our board ofdirectors adopted a preferred stock rights agreement in August 2001.Pursuant to the rights agreement, our board of directors declared a dividend ofone right to purchase one one-thousandth share of our Series AParticipating Preferred Stock for each outstanding share of our common stock.The dividend was paid on

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September 28, 2001 to stockholders of record asof the close of business on that date. Each right entitles the registeredholder to purchase from us one one-thousandth of a share of Series APreferred at an exercise price of $176.00, subject to adjustment. The exerciseof the rights could have the effect of delaying, deferring or preventing achange of control of our company, including, without limitation, discouraging a proxy contest or makingmore difficult the acquisition of a substantial block of our common stock. Therights agreement could also limit the price that investors might be willing topay in the future for our common stock.

## ***Ourstock has been and will likely continue to be subject to substantial price andvolume fluctuations due to a number of factors, many of which are beyond ourcontrol, that may prevent our stockholders from selling our common stock at aprofit.***

The market price of our common stock has fluctuatedsubstantially, and there can be no assurance that such volatility will notcontinue. Since the beginning of fiscal 2002 through January 31, 2007, theclosing sales price of our common stock has ranged from a high of$33.90 per share to a low of $1.26 per share. The closing sales priceof our common stock on March 6, 2007 was $11.68 per share. The securitiesmarkets have experienced significant price and volume fluctuations in the past,and the market prices of the securities of semiconductor companies have beenespecially volatile. This market volatility, as well as general economic,market or political conditions, could reduce the market price of our commonstock in spite of our operating performance. The market price of our commonstock may fluctuate significantly in response to a number of factors,including:

·                  actualor anticipated fluctuations in our operating results;

·                  changesin expectations as to our future financial performance;

·                  changesin financial estimates of securities analysts;

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

·                  salesor the perception in the market of possible sales of shares of our common stockby our directors, officers, employees or principal stockholders;

·                  changesin market valuations of other technology companies; and

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

Due to these factors, the price of our stock maydecline and investors may be unable to resell their shares of our stock for aprofit. In addition, the stock market experiences extreme volatility that oftenis unrelated to the performance of particular companies. These marketfluctuations may cause our stock price to decline regardless of ourperformance.

**ITEM 5.   OTHERINFORMATION**

On January 1, 2007, through our wholly-ownedsubsidiary OmniVision International Holding Ltd., we entered into the FirstAmendment (the “First Amendment”) to the Amended VisEra Agreement with TSMC,VisEra, and VisEra Cayman. Under the terms of the First Amendment, we andTSMC each agreed to make an additional investment of $27.0 million inVisEra Cayman at a time mutually agreed to by us and TSMC. The additionalinvestment may be made in cash or in kind. The First Amendment alsoincluded certain other minor revisions to the Amended VisEra Agreement.

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**ITEM 6.   EXHIBITS**

 
| Exhibit  Number | ** ** | **Description** |
|-----------------|------------|-----------------|
|            | 10.14      |            |   | Termination Agreement, dated January 23, 2007,  by and between XinTec, Inc. and OmniVision Trading (Hong Kong) Co. Ltd.  (incorporated by reference to Exhibit 10.14 filed with the Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on January 29, 2007). |
|            | 10.15      |            |   | Land-Use-Right Purchase Agreement by and between the  Registrant and the Construction and Transportation Commission of the Pudong  New District, Shanghai, dated December 31, 2006. |
|            | 10.16      |            |   | First Amendment to the Amended and Restated  Shareholders’ Agreement by and between the Registrant and Taiwan  Semiconductor Manufacturing Co., Ltd. dated December 31, 2006. |
|            | 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**

Pursuant to the requirements of the Securities andExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                       | **OMNIVISION TECHNOLOGIES, INC.** |
|-----------------------|-----------------------------------|
|                  | *(Registrant)*                    |
|                  |                              |   |
|                  |                              |   |
|                  |                              |   |
| Dated: March 9,  2007 |                              |   |
|                  | By:                               | **/s/  SHAW HONG** |
|                  | ** **                        | **/s/  Shaw Hong** |
|                  | * *                          | *Chief  Executive Officer, President and Director* |
|                  | * *                          | *(Principal  Executive Officer)* |
|                  |                              |   |
|                  |                              |   |
|                  |                              |   |
| Dated: March 9,  2007 |                              |   |
|                  | By:                               | **/s/  PETER V. LEIGH** |
|                  | ** **                        | **Peter  V. Leigh** |
|                  | * *                          | *Chief  Financial Officer* |
|                  | * *                          | *(Principal  Financial* |
|                  | * *                          | *and  Accounting Officer)* |

 

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**Exhibit Index**

 
| Exhibit  Number | ** ** | **Description** |
|-----------------|------------|-----------------|
|            | 10.14      |            |   | Termination Agreement, dated January 23, 2007,  by and between XinTec, Inc. and OmniVision Trading (Hong Kong) Co. Ltd.  (incorporated by reference to Exhibit 10.14 filed with the Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on January 29, 2007). |
|            | 10.15      |            |   | Land-Use-Right Purchase Agreement by and between the  Registrant and the Construction and Transportation Commission of the Pudong New  District, Shanghai, dated December 31, 2006. |
|            | 10.16      |            |   | First Amendment to the Amended and Restated  Shareholders’ Agreement by and between the Registrant and Taiwan  Semiconductor Manufacturing Co., Ltd. dated December 31, 2006. |
|            | 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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