Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**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,  2009**                                                                                                                                                                                               |
|   |       |                                                                                                                                                                                                                                                    |
|   |       | **OR**                                                                                                                                                                                                                                                  |
|   |       |                                                                                                                                                                                                                                                    |
| **o**  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                 |
|   |       |                                                                                                                                                                                                                                                    |
|   |       | **For the  transition period from                     to                   ** |

 

**Commissionfile number: 0-29939**

 

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**OMNIVISIONTECHNOLOGIES, INC.**

(Exact name ofregistrant as specified in its charter)

** **

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

 

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

(Address ofPrincipal Executive Offices) (Zip Code)

 

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

 

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

 

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

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes oNo x

 

At March 6, 2008, 50,041,378 shares of common stock of theregistrant were outstanding, exclusive of 12,541,000 shares of treasury stock.

 

 

 

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Table ofContents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **         | ** **                                                                                                                                 | **Page**   |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **         | ** **                                                                                                                                 | ** ** |
| ** **         | **PART I.  FINANCIAL INFORMATION**                                                                                                    | ** ** |
| ** **         | ** **                                                                                                                                 | ** ** |
| **Item 1.**        | Financial  Statements:                                                                                                                     | 3          |
|               |                                                                                                                                       |       |
|               | Condensed Consolidated Balance Sheets  (unaudited) – January 31, 2009 and April 30, 2008                          | 3          |
|               |                                                                                                                                       |       |
|               | Condensed  Consolidated Statements of Operations (unaudited) – Three and Nine  Months Ended  January 31, 2009 and 2008 | 4          |
|               |                                                                                                                                       |       |
|               | Condensed  Consolidated Statements of Cash Flows (unaudited) – Three and Nine  Months Ended  January 31, 2009 and 2008 | 5          |
|               |                                                                                                                                       |       |
|               | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                          | 6          |
|               |                                                                                                                                       |       |
| **Item 2.**        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                | 29         |
|               |                                                                                                                                       |       |
| **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                                                                                                                              | 52         |
|               |                                                                                                                                       |       |
| **Item 2.**        | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                               | 67         |
|               |                                                                                                                                       |       |
| **Item 6.**        | Exhibits                                                                                                                                   | 68         |
|               |                                                                                                                                       |       |
| Signatures         | 69                                                                                                                                         |
|               |                                                                                                                                       |
| Exhibit Index |                                                                                                                                       |

 

2

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Tableof Contents

 

**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.    FINANCIAL STATEMENTS**

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

** **
| ** **                                                                                                                                                                                                                             | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                             | ** ** | **2009**             | ** ** | **2008**           | ** ** |
| **ASSETS**                                                                                                                                                                                                                             |       |                 |       |               |       |
| Current assets:                                                                                                                                                                                                                        |       |                 |       |               |       |
| Cash and cash equivalents                                                                                                                                                                                                              |       | $                    | 225,013    |               | $          | 217,340 |   |
| Short-term investments                                                                                                                                                                                                                 |       | 38,701               |       | 51,993             |       |
| Accounts receivable, net of allowances for doubtful  accounts and sales returns                                                                                                                                                        |       | 46,464               |       | 105,338            |       |
| Inventories                                                                                                                                                                                                                            |       | 146,475              |       | 115,127            |       |
| Deferred income taxes                                                                                                                                                                                                                  |       | 2,803                |       | 2,823              |       |
| Prepaid expenses and other current assets                                                                                                                                                                                              |       | 8,957                |       | 7,430              |       |
| Total current assets                                                                                                                                                                                                                   |       | 468,413              |       | 500,051            |       |
| Property, plant and equipment, net                                                                                                                                                                                                     |       | 118,870              |       | 92,451             |       |
| Long-term investments                                                                                                                                                                                                                  |       | 87,882               |       | 85,419             |       |
| Goodwill                                                                                                                                                                                                                               |       | —               |       | 7,541              |       |
| Intangibles, net                                                                                                                                                                                                                       |       | 9,029                |       | 13,928             |       |
| Other long-term assets                                                                                                                                                                                                                 |       | 20,680               |       | 18,956             |       |
| Total assets                                                                                                                                                                                                                           |       | $                    | 704,874    |               | $          | 718,346 |   |
|                                                                                                                                                                                                                                   |       |                 |       |               |       |
| **LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                      |       |                 |       |               |       |
| Current liabilities:                                                                                                                                                                                                                   |       |                 |       |               |       |
| Accounts payable                                                                                                                                                                                                                       |       | $                    | 51,091     |               | $          | 57,760 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                         |       | 11,296               |       | 17,069             |       |
| Income taxes payable                                                                                                                                                                                                                   |       | 3,959                |       | 2,637              |       |
| Deferred revenues, less cost of revenues                                                                                                                                                                                               |       | 8,740                |       | 8,238              |       |
| Current portion of long-term debt                                                                                                                                                                                                      |       | 3,570                |       | 651                |       |
| Total current liabilities                                                                                                                                                                                                              |       | 78,656               |       | 86,355             |       |
| Long-term liabilities:                                                                                                                                                                                                                 |       |                 |       |               |       |
| Long-term income taxes payable                                                                                                                                                                                                         |       | 77,521               |       | 78,031             |       |
| Non-current portion of long-term debt                                                                                                                                                                                                  |       | 33,756               |       | 32,830             |       |
| Other long-term liabilities                                                                                                                                                                                                            |       | 8,435                |       | 6,955              |       |
| Total long-term liabilities                                                                                                                                                                                                            |       | 119,712              |       | 117,816            |       |
| Total liabilities                                                                                                                                                                                                                      |       | 198,368              |       | 204,171            |       |
|                                                                                                                                                                                                                                   |       |                 |       |               |       |
| Commitments and contingencies (Note 16)                                                                                                                                                                                                |       |                 |       |               |       |
|                                                                                                                                                                                                                                   |       |                 |       |               |       |
| Minority interest                                                                                                                                                                                                                      |       | 3,617                |       | 4,444              |       |
|                                                                                                                                                                                                                                   |       |                 |       |               |       |
| Stockholders’ equity:                                                                                                                                                                                                             |       |                 |       |               |       |
| Common stock, $0.001 par value; 100,000 shares  authorized; 62,579 shares issued and 50,038 outstanding at  January 31, 2009 and 62,010 shares issued and 51,046 outstanding at  April 30, 2008, respectively |       | 63                   |       | 62                 |       |
| Additional paid-in capital                                                                                                                                                                                                             |       | 397,214              |       | 373,024            |       |
| Accumulated other comprehensive income                                                                                                                                                                                                 |       | 714                  |       | 1,561              |       |
| Treasury stock, 12,541 and 10,964 at  January 31, 2009 and April 30, 2008, respectively                                                                                                                                      |       | (178,683             | )          | (165,768           | )          |
| Retained earnings                                                                                                                                                                                                                      |       | 283,581              |       | 300,852            |       |
| Total stockholders’ equity                                                                                                                                                                                                        |       | 502,889              |       | 509,731            |       |
| Total liabilities, minority interest and  stockholders’ equity                                                                                                                                                                    |       | $                    | 704,874    |               | $          | 718,346 |   |

 

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

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                                               | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                                 |       | $                                | 80,046     |                            | $          | 224,921 |   | $ | 418,260 |   | $ | 630,677 |   |
| Cost of revenues                                         |       | 62,142                           |       | 163,937                         |       | 315,546 |   | 470,461 |   |
| Gross profit                                             |       | 17,904                           |       | 60,984                          |       | 102,714 |   | 160,216 |   |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                      |       |                             |       |                            |       |   |   |   |   |
| Research, development and related                        |       | 20,812                           |       | 20,124                          |       | 64,311 |   | 57,728 |   |
| Selling, general and administrative                      |       | 13,949                           |       | 15,566                          |       | 48,221 |   | 46,518 |   |
| Goodwill impairment                                      |       | —                           |       | —                          |       | 7,541 |   | — |   |
| Total operating expenses                                 |       | 34,761                           |       | 35,690                          |       | 120,073 |   | 104,246 |   |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Income (loss) from operations                            |       | (16,857                          | )          | 25,294                          |       | (17,359 | ) | 55,970 |   |
| Interest income, net                                     |       | 424                              |       | 3,397                           |       | 2,178 |   | 10,083 |   |
| Other expense, net                                       |       | (2,914                           | )          | (1,040                          | )          | (3,719 | ) | (1,118 | ) |
| Income (loss) before income taxes and minority  interest |       | (19,347                          | )          | 27,651                          |       | (18,900 | ) | 64,935 |   |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Provision for (benefit from) income taxes                |       | (921                             | )          | 5,138                           |       | (1,002 | ) | 8,929 |   |
| Minority interest                                        |       | (235                             | )          | 50                              |       | (627 | ) | 56 |   |
| Net income (loss)                                        |       | $                                | (18,191    | )                               | $          | 22,463 |   | $ | (17,271 | ) | $ | 55,950 |   |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) per share:                             |       |                             |       |                            |       |   |   |   |   |
| Basic                                                    |       | $                                | (0.36      | )                               | $          | 0.41 |   | $ | (0.34 | ) | $ | 1.02 |   |
| Diluted                                                  |       | $                                | (0.36      | )                               | $          | 0.40 |   | $ | (0.34 | ) | $ | 1.01 |   |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| Shares used in computing net income (loss) per  share:   |       |                             |       |                            |       |   |   |   |   |
| Basic                                                    |       | 50,036                           |       | 55,386                          |       | 50,682 |   | 55,041 |   |
| Diluted                                                  |       | 50,036                           |       | 55,827                          |       | 50,682 |   | 55,583 |   |

 

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

 

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**OMNIVISIONTECHNOLOGIES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands, unaudited)**

** **
| ** **                                                                                    | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                    | ** ** | **January 31,**            | ** ** |
| ** **                                                                                    | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| Cash flows from operating activities:                                                         |       |                            |       |   |   |
| Net income (loss)                                                                             |       | $                               | (17,271    | ) | $ | 55,950 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities:     |       |                            |       |   |   |
| Depreciation and amortization                                                                 |       | 13,750                          |       | 9,841 |   |
| Change in fair value of interest rate swap                                                    |       | 2,875                           |       | 1,972 |   |
| Stock-based compensation                                                                      |       | 20,131                          |       | 21,628 |   |
| Tax effect from stock-based compensation                                                      |       | —                          |       | 2,000 |   |
| Minority interest in net income (loss) of  consolidated affiliates                            |       | (627                            | )          | 56 |   |
| Gain on equity investments, net                                                               |       | (2,393                          | )          | (6,693 | ) |
| Affiliate stock grants                                                                        |       | —                          |       | 56 |   |
| Write-down of inventories                                                                     |       | 17,507                          |       | 17,928 |   |
| Excess tax benefits from stock-based compensation                                             |       | —                          |       | (900 | ) |
| (Gain) loss on disposal of property, plant and  equipment                                     |       | 550                             |       | (22 | ) |
| Goodwill impairment                                                                           |       | 7,541                           |       | — |   |
| Changes in assets and liabilities:                                                            |       |                            |       |   |   |
| Accounts receivable, net                                                                      |       | 58,998                          |       | (25,911 | ) |
| Inventories                                                                                   |       | (47,226                         | )          | (20,708 | ) |
| Deferred income taxes                                                                         |       | (3,501                          | )          | (1,195 | ) |
| Prepaid expenses and other assets                                                             |       | (561                            | )          | 14,083 |   |
| Accounts payable                                                                              |       | (14,978                         | )          | 20,474 |   |
| Accrued expenses and other current liabilities                                                |       | (5,794                          | )          | (12,690 | ) |
| Income taxes payable                                                                          |       | 827                             |       | 8,996 |   |
| Deferred revenues, less cost of revenues                                                      |       | 517                             |       | 1,338 |   |
| Deferred tax liabilities                                                                      |       | (1,370                          | )          | (1,968 | ) |
| Net cash provided by operating activities                                                     |       | 28,975                          |       | 84,235 |   |
| Cash flows from investing activities:                                                         |       |                            |       |   |   |
| Purchases of short-term investments                                                           |       | (45,813                         | )          | (77,055 | ) |
| Proceeds from sales or maturities of short-term  investments                                  |       | 58,734                          |       | 104,926 |   |
| Purchases of property, plant and equipment, net of  sales                                     |       | (27,758                         | )          | (21,486 | ) |
| Purchases of long-term investments                                                            |       | (1,376                          | )          | (9,000 | ) |
| Net cash used in investing activities                                                         |       | (16,213                         | )          | (2,615 | ) |
| Cash flows from financing activities:                                                         |       |                            |       |   |   |
| Proceeds from long-term borrowings                                                            |       | 6,000                           |       | — |   |
| Repayment of long-term borrowings                                                             |       | (2,155                          | )          | (459 | ) |
| Cash contribution by minority shareholder                                                     |       | —                          |       | 49 |   |
| Affiliate cash dividend paid to minority shareholder                                          |       | (201                            | )          | (226 | ) |
| Proceeds from exercise of stock options and from  employee stock purchase plan                |       | 4,441                           |       | 14,213 |   |
| Excess tax benefits from stock-based compensation                                             |       | —                          |       | 900 |   |
| Payments for repurchases of common stock                                                      |       | (12,915                         | )          | (11,457 | ) |
| Net cash provided by (used in) financing activities                                           |       | (4,830                          | )          | 3,020 |   |
| Effect of exchange rate changes on cash and cash  equivalents                                 |       | (259                            | )          | (10 | ) |
| Net increase in cash and cash equivalents                                                     |       | 7,673                           |       | 84,630 |   |
| Cash and cash equivalents at beginning of period                                              |       | 217,340                         |       | 190,878 |   |
| Cash and cash equivalents at end of period                                                    |       | $                               | 225,013    |   | $ | 275,508 |   |
| Supplemental cash flow information:                                                           |       |                            |       |   |   |
| Taxes paid                                                                                    |       | $                               | 3,049      |   | $ | 3,131 |   |
| Interest paid                                                                                 |       | $                               | 1,288      |   | $ | 13 |   |
| Supplemental schedule of non-cash investing and  financing activities:                        |       |                            |       |   |   |
| Additions to property, plant and equipment included  in accounts payable and accrued expenses |       | $                               | 8,335      |   | $ | 8,238 |   |
| Affiliate shares issued to affiliate employees                                                |       | $                               | —     |   | $ | 295 |   |
| Capitalized interest                                                                          |       | $                               | 183        |   | $ | 146 |   |
| Impact of initial adoption of FIN 48 on  retained earnings                               |       | $                               | —     |   | $ | 4,307 |   |
| Deferred tax asset write-off                                                                  |       | $                               | 381        |   | $ | — |   |

 

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

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**For the Three and Nine Months Ended January 31,2009 and 2008**

**(unaudited)**

 

**Note 1 — Basis of Presentation**

 

## ***Overview***

 

The accompanyinginterim unaudited condensed consolidated financial statements as of January 31,2009 and April 30, 2008 and for the three and nine months ended January 31,2009 and 2008 have been prepared by OmniVision Technologies, Inc., and itssubsidiaries (“OmniVision” or the “Company”) in accordance with the rules andregulations of the U.S. Securities and Exchange Commission (“SEC”). The amountsas of April 30, 2008 come from the Company’s audited annual financialstatements. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted in accordance with such rules andregulations. In the opinion of management, the accompanying unaudited condensedconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring adjustments, necessary to state fairly the financial positionof the Company and its results of operations and cash flows as of and for theperiods presented. These condensed consolidated financial statements should beread in conjunction with the audited annual financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for thefiscal year ended April 30, 2008 (the “Form 10-K”).

 

The results ofoperations for the three and nine months ended January 31, 2009 are notnecessarily indicative of the results that may be expected for the fiscal yearending April 30, 2009 or any other future period.

 

## ***Use of Estimates***

 

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

 

**Note 2 — Summary of SignificantAccounting Policies**

 

## ***Principles ofConsolidation***

 

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

 

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

 

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

 

## ***Foreign CurrencyTranslation***

 

The functionalcurrency of the Company is the U.S. dollar. For subsidiaries or consolidatedaffiliates with a functional currency other than the U.S. dollar, the assetsand liabilities of the subsidiaries are translated into U.S. dollars atthe rates of exchange prevailing on the balance sheet date. Revenue and expenseitems are translated into U.S. dollars 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 with the U.S. dollar as the functionalcurrency, and with assets or liabilities denominated in currencies other thanthe U.S. dollar, non-monetary assets are remeasured into U.S. dollars using historicalrates of exchange. Monetary assets are remeasured into U.S. dollars usingexchange rates prevailing on the balance sheet date. For the three and ninemonths ended January 31, 2009, the Company recorded remeasurement lossesof $98,000 and $0.9 million, respectively, in “Other expense, net.” Forthe three and nine months ended January 31, 2008, the Company recordedremeasurement gains (losses) of $2,000 and ($4,000), respectively, in “Otherexpense, net.”

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2009 and 2008**

**(unaudited)**

## *** ***

## ***Cash and CashEquivalents***

 

The Companyconsiders all highly liquid investments purchased with a maturity at the dateof purchase of three months or less to be cash equivalents. Cash equivalentsconsist principally of government bonds, certificates of deposit and moneymarket funds. (See Note 10.)

 

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

 

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

 

## ***Inventories***

 

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

 

The Companyrecords a provision to reduce the carrying value of inventories to their netrealizable value when the Company believes that the net realizable value isless than cost. The Company also records a provision for the cost ofinventories when the number of units on hand exceeds the number of units thatthe Company forecasts will be sold over a certain period of time, generally 12months. Where necessary, these provisions take into account the inventoriesowned and not yet sold by certain of the Company’s distributors. The recordingof these provisions establishes a new and lower cost basis for eachspecifically identified inventory item, and the Company does not restore thecost basis to its original level regardless of any subsequent changes in factsor circumstances. Recoveries are only recognized upon the sale of previouslywritten-down inventories.

 

## ***Goodwill***

 

The Companyrecords goodwill when the consideration paid for an acquisition exceeds thefair value of net tangible and intangible assets acquired, including relatedtax effects. Goodwill is not amortized; instead goodwill is tested forimpairment on an annual basis, or more frequently if the Company believesindicators of impairment exist. The performance of the test involves a two-stepprocess. The first step requires comparing the fair value of the reporting unit(the Company has one reporting unit) to its net book value, including goodwill.The fair value of the reporting unit is determined by taking the marketcapitalization of the reporting unit as determined through quoted marketprices. A potential impairment exists if the fair value of the reporting unitis lower than its net book value. The second step of the process, which isperformed only if a potential impairment exists, involves determining thedifference between the fair value of the reporting unit’s net assets other thangoodwill and the fair value of the reporting unit. If this difference is lessthan the net book value of goodwill, an impairment exists and is recorded.During the three months ended October 31, 2008, the Company recorded animpairment charge of $7.5 million to write-off the carrying value ofgoodwill. (See Note 7.)

 

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

 

Comprehensiveincome (loss) is defined as the change in the equity of a company during aperiod from transactions and other events and circumstances excludingtransactions resulting from investments by owners and distributions to owners.Comprehensive loss for the three months ended January 31, 2009 was$18.4 million and included a net loss, unrealized gains fromavailable-for-sale securities and translation gains (losses) from foreignsubsidiaries. Comprehensive loss for the nine months ended January 31,2009 was $18.1 million and included a net loss, unrealized gains fromavailable-for-sale securities and translation gains (losses) from foreignsubsidiaries. Comprehensive income for the three months ended January 31,2008 was $22.6 million and included net income, 

 

7

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Table of Contents

 

**OMNIVISIONTECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2009 and 2008**

**(unaudited)**

 

unrealizedgains (losses) from available-for-sale securities and foreign currencytranslation gains (losses) from foreign subsidiaries. Comprehensive income forthe nine months ended January 31, 2008 was $52.1 million and includednet income, the impact of the initial adoption of Financial AccountingStandards Board (“FASB”) Interpretation No. (“FIN”) 48, “*Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109,”*(“FIN 48”)  on retained earnings, unrealized gains(losses) from available-for-sale securities and translation gains (losses) fromforeign subsidiaries.

 

## ***RevenueRecognition***

 

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

 

For shipment ofproducts sold to distributors under agreements allowing for returns or credits,title and the risk of ownership to the products transfer to the distributorupon shipment, and the distributor is obligated to pay for the products whetheror not the distributor has sold them at the time payment is due. Under theterms of the Company’s agreements with such distributors and subject to theCompany’s prior approval, distributors are entitled to reclaim from the Companyas price adjustments the difference, if any, between the prices at which theCompany sold the product to the distributors and the prices at which theproduct is subsequently sold by the distributor. In addition, distributors havelimited rights to return inventory that they determine is in excess of theirrequirements, and accordingly, in determining the appropriate level ofprovision for excess and obsolete inventory, the Company takes into account theinventories held by its distributors. For these reasons, prices and revenuesare not fixed or determinable until the distributor resells the products to theCompany’s end-user customers and the distributor notifies the Company inwriting of the details of such sales transactions. Accordingly, the Companyrecognizes revenue using the “sell-through” method. Under the “sell-through”method, the Company defers the revenue, adjustments to revenue and the relatedcosts of revenue until the final resale of such products to end customers. Theamounts billed to these distributors and adjustments to revenue and the cost ofinventory shipped to, but not yet sold by, the distributors are shown net onthe Condensed Consolidated Balance Sheets as “Deferred revenues, less cost ofrevenues.”

 

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

 

## ***Recent AccountingPronouncements***

 

In March 2008,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161,*“Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133”* (“SFASNo. 161”). This Statement requires enhanced disclosures for derivativeinstruments, including those used in hedging activities. It requiresqualitative disclosures about objectives and strategies for using derivatives,and quantitative disclosures about fair value amounts of gains and losses onderivative instruments. In September 2008, FASB issued Financial StaffPosition (“FSP”) SFAS No. 133-1 and FASB Interpretation No. (“FIN”) 45-4,*“Disclosures about Credit Derivatives and CertainGuarantees: An Amendment of FASB Statement No. 133 and FASB InterpretationNo. 45, and Clarification of the Effective Date of FASB Statement No. 161”*(“FSP SFAS No. 133-1 and FIN 45-4”). FSP SFAS No. 133-1 andFIN 45-4 clarifies that SFAS No. 161 is effective for any reportingperiod beginning after November 15, 2008. SFAS 

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2009 and 2008**

**(unaudited)**

 

No. 161is effective for the Company’s fourth quarter of fiscal 2009. The Companydoes not expect the adoption of SFAS No. 161 in its fourth quarter offiscal 2009 to have any material effect on its financial position, resultsof operations or cash flows.

 

FSP SFAS No. 133-1and FIN 45-4 also amends FASB Statement No. 133, *“Accountingfor Derivative Instruments and Hedging Activities,”* to requireenhanced disclosures about credit derivatives and guarantees, and amendsFIN 45, *“Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness to Others,”*to exclude derivative instruments accounted for at fair value under SFAS No. 133.The provisions of FSP SFAS No. 133-1 and FIN 45-4 that amended SFAS No. 133and FIN 45 are effective for reporting periods ending after November 15,2008. The Company’s adoption of FSP SFAS No. 133-1 and FIN 45-4 didnot have any material effect on its financial position, results of operationsor cash flows.

 

In November 2008,the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 08-06,*“Equity Method Investment Accounting Considerations”*(“EITF No. 08-06”). Under EITF No. 08-06, an equity method investorshall account for a share issuance by an investee as if the investor had sold aproportionate share of its investment, and any resulting gain or loss shall berecognized in earnings. EITF No. 08-06 is effective in fiscal yearsbeginning after December 15, 2008 and the Company is required to adopt itin the first quarter of its fiscal 2010. The Company is currentlyevaluating the impact EITF No. 08-06 may have on its financial position,results of operations and cash flows.

 

In December 2008,FASB issued FSP SFAS No. 140-4 and FIN 46(R)-8, *“Disclosuresby Public Entities (Enterprises) about Transfers of Financial Assets andInterests in Variable Interest Entities”* (“FSP SFAS No. 140-4and FIN 46(R)-8”). FSP SFAS No. 140-4 and FIN 46(R)-8 amendsFIN 46(R), *“Consolidation of Variable InterestEntities,”* or FIN 46(R), to require public enterprises,including sponsors that have a variable interest in a variable interest entity(“VIE”), to provide additional disclosures about their involvement with theVIE. FSP SFAS No. 140-4 and FIN 46(R)-8 is effective immediately. TheCompany’s adoption of FSP SFAS No. 140-4 and FIN 46(R)-8 did not have anymaterial effect on the Company’s financial position, results of operations orcash flows.

 

**Note 3 — Short-Term Investments**

 

Available-for-sale securities at January 31, 2009and April 30, 2008 were as follows (in thousands):

 
| ** **                                                          | ** ** | **As of January 31, 2009** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                          | ** ** | **Amortized**                                  | ** ** | **Gross  Unrealized** | ** ** | **Gross  Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Cost**                                       | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Certificates of deposit                                             |       | $                                              | 4,205      |   | $ | — |   | $ | — |   | $ | 4,205 |   |
| U.S. government debt securities with maturities less  than one year |       | 34,460                                         |       | 36 |   | — |   | 34,496 |   |
|                                                                |       | $                                              | 38,665     |   | $ | 36 |   | $ | — |   | $ | 38,701 |   |
| Contractual maturity dates, less than one year                      |       |                                           |       |   |   |   |   | $ | 38,701 |   |

 

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Table ofContents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2009 and 2008**

**(unaudited)**

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

 

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**Table of Contents**

** **

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2009 and 2008**

**(unaudited)**

** **

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

 
| ** **                                                   | ** **                       | **January 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------|----------------------------------|----------------------|------------|--------------------|------------|
| ** **                                                   | ** **                       | **2009**             | ** ** | **2008**           | ** ** |
| Cash and cash equivalents:                                   |                             |                 |       |               |       |
| Cash                                                         |                             | $                    | 101,133    |               | $          | 23,453 |   |
| Money market funds and certificates of deposit               |                             | 123,880              |       | 193,887            |       |
|                                                         |                             | $                    | 225,013    |               | $          | 217,340 |   |
|                                                         | ** **                       | ** **           | ** ** | ** **         | ** ** |
| Accounts receivable, net:                                    | ** **                       | ** **           | ** ** | ** **         | ** ** |
| Accounts receivable                                          |                             | $                    | 51,361     |               | $          | 109,452 |   |
| Less:                                                        | Allowance for doubtful  accounts |                 | (910       | )                  | (1,080     | ) |
|                                                         | Allowance for sales  returns     |                 | (3,987     | )                  | (3,034     | ) |
|                                                         |                             | $                    | 46,464     |               | $          | 105,338 |   |
|                                                         |                             |                 |       |               |       |
| Inventories:                                                 |                             |                 |       |               |       |
| Work in progress                                             |                             | $                    | 43,620     |               | $          | 52,614 |   |
| Finished goods                                               |                             | 102,855              |       | 62,513             |       |
|                                                         |                             | $                    | 146,475    |               | $          | 115,127 |   |
|                                                         |                             |                 |       |               |       |
| Prepaid expenses and other current assets:                   |                             |                 |       |               |       |
| Prepaid expenses                                             |                             | $                    | 6,562      |               | $          | 5,091 |   |
| Deposits and other                                           |                             | 2,343                |       | 1,604              |       |
| Interest receivable                                          |                             | 52                   |       | 735                |       |
|                                                         |                             | $                    | 8,957      |               | $          | 7,430 |   |
|                                                         |                             |                 |       |               |       |
| Property, plant and equipment, net:                          |                             |                 |       |               |       |
| Land (1)                                                     |                             | $                    | 13,000     |               | $          | 13,000 |   |
| Buildings and land use right (1)                             |                             | 39,234               |       | 26,135             |       |
| Buildings/leasehold improvements                             |                             | 17,110               |       | 5,745              |       |
| Machinery and equipment                                      |                             | 50,619               |       | 39,913             |       |
| Furniture and fixtures                                       |                             | 4,826                |       | 794                |       |
| Software                                                     |                             | 6,079                |       | 2,780              |       |
| Construction in progress                                     |                             | 16,603               |       | 25,977             |       |
|                                                         |                             | 147,471              |       | 114,344            |       |
| Less: Accumulated depreciation and amortization              |                             | (28,601              | )          | (21,893            | )          |
|                                                         |                             | $                    | 118,870    |               | $          | 92,451 |   |
|                                                         |                             |                 |       |               |       |
| Other long-term assets:                                      |                             |                 |       |               |       |
| Deferred income tax assets – non-current      |                             | $                    | 15,847     |               | $          | 13,058 |   |
| Prepaid wafer credits                                        |                             | 2,990                |       | 4,000              |       |
| Long-term employee loan receivable                           |                             | 1,000                |       | 1,000              |       |
| Other long-term assets                                       |                             | 843                  |       | 898                |       |
|                                                         |                             | $                    | 20,680     |               | $          | 18,956 |   |
|                                                         |                             |                 |       |               |       |
| Accrued expenses and other current liabilities:              |                             |                 |       |               |       |
| Employee compensation                                        |                             | $                    | 3,385      |               | $          | 6,726 |   |
| Third party commissions                                      |                             | 1,226                |       | 1,970              |       |
| Professional services                                        |                             | 2,228                |       | 2,523              |       |
| Noncancelable purchase commitments                           |                             | 409                  |       | 283                |       |
| Distributor pricing adjustments                              |                             | 2,680                |       | 3,416              |       |
| Deferred income tax liabilities – current     |                             | 13                   |       | 38                 |       |
| Other                                                        |                             | 1,355                |       | 2,113              |       |
|                                                         |                             | $                    | 11,296     |               | $          | 17,069 |   |
|                                                         |                             |                 |       |               |       |
| Other long-term liabilities:                                 |                             |                 |       |               |       |
| Deferred income tax liabilities – non-current |                             | $                    | 3,331      |               | $          | 4,726 |   |
| Interest rate swaps                                          |                             | 5,104                |       | 2,229              |       |
|                                                         |                             | $                    | 8,435      |               | $          | 6,955 |   |

 

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

 

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** **

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2009 and 2008**

**(unaudited)**

 

**Note 5 — Long-term Investments**

 

Long-terminvestments as of January 31, 2009 and April 30, 2008 consisted ofthe following (in thousands):

 
| ** ** | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|------------|------------|----------------------|------------|--------------------|------------|
| ** ** | ** ** | **2009**             | ** ** | **2008**           | ** ** |
| VisEra     |       | $                    | 69,914     |               | $          | 68,593 |   |
| WLCSP      |       | 10,744               |       | 10,293             |       |
| XinTec     |       | 4,661                |       | 4,661              |       |
| ImPac      |       | 2,563                |       | 1,872              |       |
| Total      |       | $                    | 87,882     |               | $          | 85,419 |   |

 

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

 

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

 

Under the terms ofthe Amended VisEra Agreement, the parties reaffirmed their respectivecommitments to VisEra, and expanded the scope of and made certain modificationsto the VisEra Agreement. The Company and TSMC have equal interests in VisEraCayman. In the quarter ended October 31, 2005, the Company and TSMC eachcontributed $7.5 million to VisEra and VisEra Cayman. As a result of thisadditional investment, the Company’s and TSMC’s interest each increased from25% to 43%, and consequently the Company re-evaluated its accounting for VisErain accordance with FIN 46(R).**Since the Companywas the source of virtually all of VisEra’s revenues, the Company had adecisive influence over VisEra’s profitability. The Company concluded that, asa result of its step acquisition of VisEra, and because substantially all ofthe activities of VisEra either involved or were conducted on behalf of theCompany, VisEra was a variable interest entity (“VIE”). Accordingly, theCompany considered itself to be the primary beneficiary of VisEra, and includedVisEra’s financial results in its consolidated financial statements through December 31,2006. In the quarter ended January 31, 2006, the Company increasedits interest in VisEra from 43% to 46% through purchases of $9.5 millionof unissued shares.

 

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

 

In May 2006,VisEra purchased certain equipment and intellectual property from Dai NipponPrinting Co., Ltd. (“Dai Nippon”) for approximately $3.1 million. DaiNippon also made an investment in VisEra Cayman of approximately$4.3 million. Because the per share value of the Dai Nippon investmentexceeded the Company’s average per share carrying value in VisEra Cayman, theCompany recorded a one-time change-of-interest benefit of $1.2 milliondirectly to “Additional paid-in capital,” a component of stockholders’ equity.In November 2006, the Company invested another $6.1 million inVisEra.

 

On January 1,2007, the Company assumed responsibility for logistics management servicespreviously provided to the Company by VisEra. As a consequence of the change,the Company concluded that, as of the date of the change, it would lose itsstatus as the primary beneficiary of the joint venture, VisEra would cease tobe VIE as defined under 

 

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** **

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2009 and 2008**

**(unaudited)**

 

FIN 46(R) and,as a result, the Company deconsolidated VisEra. Accordingly, beginning on January 1,2007, the Company has accounted for its investment in VisEra under the equitymethod. The deconsolidation of VisEra did not have a material effect on theCompany’s reported revenue or reported net income for the fiscal year ended April 30,2007. In April 2007, pursuant to a January 2007 amendment to the AmendedVisEra Agreement that provided for an increase in VisEra’s manufacturingcapacity, the Company and TSMC each made an additional investment of$27.0 million in VisEra. This additional investment was part of an ongoingcapacity expansion program at VisEra. The Company’s contribution to VisEra andVisEra Cayman thus totaled $51.6 million, effectively meeting its commitmentunder the terms of the January 2007 amendment to the Amended VisEraAgreement, in which the Company and TSMC have agreed to commit a total of$112.9 million to the joint venture. The Company has not made any subsequentcontributions into VisEra.

 

All other materialterms of the VisEra Agreement remain in effect. (See Notes 16 and 17.)

 

## ***China WLCSPLimited***

 

China WLCSPLimited (“WLCSP”) is in the business of designing, manufacturing, packaging andselling certain wafer level chip scale packaging related services, for whichthe Company is currently a customer. In May 2007, the Company acquired2,500,000 units of WLCSP’s equity interests from WLCSP at a per unit price of$2.00 for an aggregate purchase amount of $5.0 million. Concurrently, theCompany purchased from Infinity-CSVC Venture Capital Enterprise 2,000,000 unitsof WLCSP’s outstanding equity interests at a price per unit of $2.00 for anaggregate purchase amount of $4.0 million. Following the completion of thetwo transactions, the Company owns approximately 20.0% of WLCSP’s registeredcapital on a fully-diluted basis and has appointed a member to WLCSP’s board ofdirectors and a supervisor to monitor the actions of WLCSP’s board of directorsand officers.

 

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

 

The Company accounts for its investment in WLCSP underthe equity method. For the three and nine months ended January 31, 2009,the Company recorded equity income of $39,000 and $451,000, respectively, in “Otherexpense, net,” consisting of its portion of the net income recorded by WLCSPduring the periods, partially offset by equity method investment adjustments.For the three and nine months ended January 31, 2008, the Company recordedequity income of $0.8 million and $0.9 million, respectively, in “Otherexpense, net,” consisting of its portion of the net income recorded by WLCSPduring the periods, partially offset by an equity method investment adjustment.(See Note 17.)

 

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

 

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

 

In January 2007,TSMC purchased approximately 90,526,000 previously-unissued shares from XinTec.The purchased shares represented approximately a 43.0% ownership interest inXinTec. Other existing shareholders, including the Company and the Company’saffiliate, VisEra, did not purchase additional shares. As a result, the Company’sdirect ownership percentage in XinTec declined to approximately 4.4%. VisEra’sownership interest declined to 16.9%, and the Company’s beneficial ownershippercentage in XinTec declined to 12.4%. Consequently, 

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months Ended January 31,2009 and 2008**

**(unaudited)**

 

effectiveJanuary 1, 2007, in accordance with APB 18, the Company began toaccount for XinTec as a cost method investment. In addition, because the pershare value of the TSMC investment exceeded the Company’s average per sharecarrying value in XinTec, the Company recorded a one-time change-of-interestbenefit of $1.2 million directly to “Additional paid-in capital,” acomponent of stockholders’ equity.

 

## ***ImPac TechnologyCo., Ltd.***

 

In 2003, in orderto enhance its access to plastic and ceramic packaging services that were inshort supply, the Company purchased approximately 27% of the common stock ofImPac Technology Co., Ltd. (“ImPac”), a privately-held company based in Taiwanfor a total of $2.0 million in cash. In December 2003, the Companymade an additional cash contribution of approximately $0.8 million tomaintain its equity ownership percentage in ImPac. Unrelated third parties ownthe balance of ImPac’s equity. During fiscal 2004, the Company’s equityinterest declined to approximately 23% due to additional rounds of financingobtained by ImPac in which the Company did not participate. In July 2008,the Company purchased additional shares in ImPac for $1.4 million. Thisincreased the Company’s ownership in ImPac to 25.7%. The Company’s purchasesfrom ImPac are at arm’s length, and the Company accounts for this investmentusing the equity method. The Company recorded an equity loss of $150,000 and$0.7 million, respectively, in “Other expense, net,” as its portion ofImPac’s net loss for the three and nine months ended January 31, 2009. TheCompany recorded an equity loss of $38,000 and $244,000, respectively, in “Otherexpense, net,” as its portion of ImPac’s net loss for the three and nine monthsended January 31, 2008.

 

The followingtable presents the summary combined financial information of ImPac, VisEra andWLCSP, as derived from their financial statements for the three and nine monthsended January 31, 2009 and 2008 and prepared under GAAP (in thousands):

 
| ** **             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **             | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating data:        |       |                             |       |                            |       |   |   |   |   |
| Revenues               |       | $                                | 19,280     |                            | $          | 36,934 |   | $ | 77,274 |   | $ | 114,063 |   |
| Gross profit           |       | 4,139                            |       | 13,373                          |       | 17,225 |   | 32,856 |   |
| Income from operations |       | 1,261                            |       | 10,036                          |       | 7,635 |   | 22,071 |   |
| Net income             |       | $                                | 2,901      |                            | $          | 7,327 |   | $ | 5,480 |   | $ | 15,397 |   |

 

The amount ofconsolidated retained earnings that represent undistributed earnings of theinvestees accounted for by the equity method totaled $16.9 million and $14.8 million at January 31,2009 and April 30, 2008, respectively.

 

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

 

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

 

In April 2007,SOI became listed on the Taiwan GreTai Securities Market (“TGSM”). The TGSM isthe approximate equivalent in Taiwan of the Over-The-Counter market in theUnited States. In conjunction with the TGSM listing, various employees of SOIexercised their options and increased the number of shares outstanding. Fromtime to time, SOI also issues shares to its employees as a bonus, which dilutesthe Company’s ownership percentage. The Company’s ownership percentage in SOIwas 43.9% as of both January 31, 2009 and April 30, 2008.

 

During the ninemonths ended January 31, 2009, SOI paid a cash dividend ofapproximately $359,000, of which the Company received $158,000. (SeeNote 17.)

 

14

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** **

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

**Note 7 — Goodwill and IntangibleAssets**

 

During the second quarter of fiscal 2009, based on acombination of factors, including the significant decline in the Company’smarket capitalization and the global economic downturn, the Company concludedthat there were sufficient factual circumstances for interim impairmentanalyses under SFAS No. 142 and SFAS No. 144, *“Accountingfor the Impairment or Disposal of Long-Lived Assets,”* (“SFAS No. 144”).As a result, the Company performed interim impairment tests on goodwill andcertain other long-lived tangible and intangible assets as of October 31, 2008.

 

***Goodwill***

 

Under the two-step process as mandated by SFAS No. 142,goodwill is tested for impairment at the reporting unit level by comparing thereporting unit’s fair value to its net book value, including goodwill. Apotential impairment exists if the fair value of the reporting unit is lowerthan its net book value. The second step of the process, which is performedonly if a potential impairment exists, involves determining the differencebetween the fair value of the reporting unit’s net assets other than goodwill,and the fair value of the reporting unit. Because the Company has only onereporting unit under SFAS No. 142, the Company utilized an enterprise wideapproach to assess goodwill for impairment. The Company first concluded thatits market capitalization was significantly lower than its net book value as ofOctober 31, 2008, indicating potential goodwill impairment. The Companythen determined the fair value of the enterprise by using the present valuetechnique, based in part, upon an independent valuation. The present valuetechniques uses the Company’s estimate future discounted cash flows todetermine the enterprise fair value. The fair value of the enterprise wasreconciled to the Company’s overall market capitalization as of October 31,2008. By comparing the fair value to net assets other than goodwill, theCompany recorded a goodwill impairment charge of $7.5 million, which wasincluded in “Goodwill impairment” for the nine months ended January 31,2009.

 

The change to the carrying value of the Company’sgoodwill from May 1, 2008 through January 31, 2009 is reflectedbelow:

 
| ** **                        | ** ** | **Goodwill** | ** ** |
|-----------------------------------|------------|--------------|------------|
| Balance at  May 1, 2008      |       | $            | 7,541      |   |
| Goodwill impairment               |       | (7,541       | )          |
| Balance at  January 31, 2009 |       | $            | —     |   |

 

***Intangible Assets***

 

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

 

Intangible assets as of January 31, 2009 consistof the following (in thousands):

 
| ** **                 | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|----------------------------|------------|----------|------------|-------------------------------|------------|--------------------------|------------|
| Core technology            |       | $        | 17,800     |                          | $          | 13,350                   |       | $ | 4,450 |   |
| Patents and  licenses      |       | 13,487   |       | 9,258                         |       | 4,229                    |       |
| Trademarks and  tradenames |       | 1,400    |       | 1,050                         |       | 350                      |       |
| Customer  relationships    |       | 100      |       | 100                           |       | —                   |       |
| Intangible  assets, net    |       | $        | 32,787     |                          | $          | 23,758                   |       | $ | 9,029 |   |

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine Months EndedJanuary 31, 2009 and 2008**

**(unaudited)**

 

Intangible assets as of April 30, 2008 consist ofthe following (in thousands):

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

 

For the three and nine months ended January 31,2009, the Company amortized $1.6 million and $4.9 million,respectively, of its intangible assets. For the three and nine months ended January 31,2008, the Company amortized $1.6 million and $4.9 million,respectively, of its intangible assets. The total expected future annualamortization of these intangible assets is as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| 2009                                      |       | $          | 1,633      |   |
| 2010                                      |       | 6,386      |       |
| 2011                                      |       | 973        |       |
| 2012                                      |       | 37         |       |
| Total                                     |       | $          | 9,029      |   |

 

**Note 8 — BorrowingArrangements**

 

The following table shows the Company’s debt andcapital lease obligations (in thousands):

 
| ** **                             | ** ** | **January 31,  2009** | ** ** | **April 30,  2008** | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------------------|------------|
|                                   |       |                       |       |                     |       |
| Mortgage loan                          |       | $                          | 26,560     |                     | $          | 27,347 |   |
| Term loan                              |       | 10,750                     |       | 6,000                    |       |
| Capital lease  obligations             |       | 16                         |       | 134                      |       |
|                                   |       | 37,326                     |       | 33,481                   |       |
| Less: amount  due within one year |       | (3,570                     | )          | (651                     | )          |
| Non-current  portion of long-term debt |       | $                          | 33,756     |                     | $          | 32,830 |   |

 

At January 31, 2009, aggregate debt maturitieswere as follows (in thousands):

 
| **Years Ending April 30,** | ** ** | **Mortgage  and Term  Loan** | ** ** | **Capital  Lease** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|-----------|------------|
| 2009                                      |       | $                                 | 888        |               | $          | 16        |       | $ | 904 |   |
| 2010                                      |       | 3,554                             |       | —             |       | 3,554     |       |
| 2011                                      |       | 3,554                             |       | —             |       | 3,554     |       |
| 2012                                      |       | 3,554                             |       | —             |       | 3,554     |       |
| 2013                                      |       | 1,554                             |       | —             |       | 1,554     |       |
| Thereafter                                |       | 24,206                            |       | —             |       | 24,206    |       |
| Total                                     |       | $                                 | 37,310     |               | $          | 16        |       | $ | 37,326 |   |

 

## ***Mortgage Loan***

 

On March 16, 2007, the Company entered into aLoan and Security Agreement with a domestic bank for the purchase of a complexof four buildings located in Santa Clara, California (the “Santa Clara Property”).The Loan and Security Agreement provides for a mortgage loan in the principalamount of $27.9 million (the “Mortgage Loan”) and a secured line of creditwith an aggregate maximum principal amount of up to $12.0 million (the “TermLoan”). In

 

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

March 2008, theCompany borrowed $6.0 million under the Term Loan to finance improvementsto the Santa Clara Property. The Company drew down the remaining$6.0 million under the Term Loan in July 2008.

 

Borrowings under the Mortgage Loan accrue interest atthe London Interbank Borrowing Rate (“LIBOR”) rate plus 90 basis points.Borrowings under the Term Loan accrue interest at the LIBOR rate plus125 basis points. The Mortgage and Term Loans mature on March 31,2017 and July 31, 2012, respectively.

 

Interest rates under the Mortgage Loan were 1.3% and3.6% at January 31, 2009 and April 30, 2008, respectively. Interestrates under the Term Loan were 1.7% and 4.0% at January 31, 2009 and April 30,2008, respectively. The Company was in compliance with the financial covenantsof the Loan and Security Agreement as of January 31, 2009.

 

In conjunction with the Mortgage Loan, the Companyentered into an interest rate swap with the same bank to effectively convertthe variable interest rate described above to a fixed rate. The swap is for aperiod of ten years, and the notional amount of the swap approximates theprincipal outstanding under the Mortgage Loan. The Company is the fixed ratepayer under the swap and the rate is fixed at 5.3% per annum and the effectiverate on the Mortgage Loan is fixed at approximately 6.2%. In July 2008, inconnection with the Term Loan, the Company entered into a second interest rateswap with the bank to effectively convert the variable interest rate describedabove to a fixed rate. This second swap is for a period of four years. TheCompany is the fixed rate payer and the rate is fixed at 4.3% per annum and theeffective rate on the Term Loan is fixed at approximately 5.5%. The Companyremeasures both swaps at fair values at each balance sheet date and recordsthem as either assets or liabilities, depending on whether the fair valuerepresents net gains or net losses. As of January 31, 2009 and April 30,2008, the Company recorded $5.1 million and $2.2 million,respectively, in “Other long-term liabilities.” For the three and nine monthsended January 31, 2009, the Company recorded expense of $2.7 million and$2.9 million, respectively, in “Other expense, net.” For the three andnine months ended January 31, 2008, the Company recorded losses of$1.8 million and $2.0 million, respectively, in “Other expense, net.”

 

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

 

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 these lines ofcredit bear interest at the market interest rate prevailing at the time ofborrowing. There are no financial covenant requirements for these facilities.At January 31, 2009 and April 30, 2008, there were no borrowingsoutstanding under these facilities.

 

## ***Capital Lease 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 May 2009.Accordingly, the Company recorded a capital asset for $393,000 that is beingdepreciated over a five-year period in accordance with the Company’scapitalization policy. As of January 31, 2009, $16,000 was outstandingunder the capital lease and was classified as a short-term obligation. As of April 30,2008, $134,000 was outstanding under the capital lease and $133,000 wasclassified as a short-term obligation.

 

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

 

Basic net 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 sharesand potentially dilutive common shares outstanding during the period.Potentially dilutive common shares represent the effect of stock options,restricted stock units and employee stock purchase plan shares. For the threeand nine months ended January 31, 2009, the Company excluded all optionsand restricted stock units outstanding as the Company recorded a net loss of$18.2 million and $17.3 million, respectively.

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

The Company’s earnings per share were calculated underthe provisions of the SFAS No. 128, *“EarningsPer Share,”* (“SFAS No. 128”). SFAS No. 128 requires thatthe Company take into account the effect on consolidated earnings per share ofoptions, warrants and convertible securities issued by its subsidiaries. Theeffect on consolidated earnings per share depends on whether the securitiesissued by the subsidiary enable their holders to obtain common stock of thesubsidiary company or common stock of the parent company. Securities issued bya subsidiary that enable their holders to obtain the subsidiary’s common stockare included in computing the 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 of thesubsidiary’s securities. Through January 31, 2009, SOI issued options tovarious of its employees exercisable for 2,700,000 shares of its commonstock. In the calculation of its earnings per share for the three and ninemonths ended January 31, 2009 and 2008, the Company included the effect ofSOI’s options in its consolidated earnings per share.

 

The following table sets forth the computation ofbasic and diluted earnings (loss) per share for the periods indicated (inthousands, except per share data):

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                                                                      | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ***Basic:***                                                                    |       |                             |       |                            |       |   |   |   |   |
| Numerator:                                                                      |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                                              |       | $                                | (18,191    | )                               | $          | 22,463 |   | $ | (17,271 | ) | $ | 55,950 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Denominator:                                                                    |       |                             |       |                            |       |   |   |   |   |
| Weighted average  common shares for net income (loss) per share                 |       | 50,036                           |       | 55,386                          |       | 50,682 |   | 55,041 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Basic net income  (loss) per share                                              |       | $                                | (0.36      | )                               | $          | 0.41 |   | $ | (0.34 | ) | $ | 1.02 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| ***Diluted:***                                                                  |       |                             |       |                            |       |   |   |   |   |
| Numerator:                                                                      |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                                              |       | $                                | (18,191    | )                               | $          | 22,463 |   | $ | (17,271 | ) | $ | 55,950 |   |
| Dilutive effect of SOI consolidation                                            |       | —                           |       | (1                              | )          | — |   | — |   |
| Net income (loss) for diluted computation                                       |       | $                                | (18,191    | )                               | $          | 22,462 |   | $ | (17,271 | ) | $ | 55,950 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Denominator:                                                                    |       |                             |       |                            |       |   |   |   |   |
| Denominator for  basic net income (loss) per share                              |       | 50,036                           |       | 55,386                          |       | 50,682 |   | 55,041 |   |
| Weighted average  effect of dilutive securities:                                |       |                             |       |                            |       |   |   |   |   |
| Stock options,  restricted stock units, and employee stock purchase plan shares |       | —                           |       | 441                             |       | — |   | 542 |   |
| Weighted average  common shares for diluted net income (loss) per share         |       | 50,036                           |       | 55,827                          |       | 50,682 |   | 55,583 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Diluted net  income (loss) per share                                            |       | $                                | (0.36      | )                               | $          | 0.40 |   | $ | (0.34 | ) | $ | 1.01 |   |

 

**Note 10 — Fair Value Measurements**

 

Effective May 1, 2008, the Company adopted theprovisions of SFAS No. 157, as amended. The adoption of this standard waslimited to financial assets and liabilities and did not have a material effecton the Company’s financial condition or results of operations.

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

SFAS No. 157 specifies a hierarchy of valuationtechniques based upon whether the inputs to those valuation techniques reflectassumptions other market participants would use based upon market data obtainedfrom independent sources (observable inputs) or reflect the Company’s ownassumption of market participant valuation (unobservable inputs). The fairvalue hierarchy consists of the following three levels:

 

·                  *Level 1 — *Inputsare quoted prices in active markets for identical assets or liabilities.

 

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

 

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

 

The following table presents the Company’s financialassets and liabilities that are measured at fair value on a recurring basiswhich were comprised of the following types of instruments as of January 31,2009 (in thousands):

 
| ** **                                          | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Money market  funds                                 |       | $         | 117,363    |             | $          | 117,363          |       | $                | —     |   | $ | — |   |
| Certificates of  deposit                            |       | 10,722    |       | —           |       | 10,722           |       | —           |       |
| Debt securities  issued by U.S. government agencies |       | 34,496    |       | —           |       | 34,496           |       | —           |       |
| Total assets                                        |       | $         | 162,581    |             | $          | 117,363          |       | $                | 45,218     |   | $ | — |   |
| Interest rate  swaps                                |       | $         | (5,104     | )                | $          | —           |       | $                | (5,104     | ) | $ | — |   |
| Total  liabilities                                  |       | $         | (5,104     | )                | $          | —           |       | $                | (5,104     | ) | $ | — |   |

 

The following table presents the Company’s financialassets and liabilities that are measured at fair value on a recurring basiswhich were presented on the Company’s Condensed Consolidated Balance Sheets asof January 31, 2009 (in thousands):

 
| ** **              | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Cash equivalents        |       | $         | 123,880    |             | $          | 117,363          |       | $                | 6,517      |   | $ | — |   |
| Short-term  investments |       | 38,701    |       | —           |       | 38,701           |       | —           |       |
| Total assets            |       | $         | 162,581    |             | $          | 117,363          |       | $                | 45,218     |   | $ | — |   |
| Interest rate  swaps    |       | $         | (5,104     | )                | $          | —           |       | $                | (5,104     | ) | $ | — |   |
| Total  liabilities      |       | $         | (5,104     | )                | $          | —           |       | $                | (5,104     | ) | $ | — |   |

 

**Note 11 — Segmentand Geographic Information**

 

The Company identifies its business 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 illustrates the percentage of revenues from sales to OEMs and VARs and todistributors for the three and nine months ended January 31, 2009 and2008, respectively:

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **    | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| OEMs and VARs |       | 63.6                             | %          | 69.1                            | %          | 59.9 | % | 67.6 | % |
| Distributors  |       | 36.4                             |       | 30.9                            |       | 40.1 |   | 32.4 |   |
| Total         |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

Since the Company’s end-user customers market and selltheir products worldwide, its revenues by geographic location are notnecessarily indicative of the geographic distribution of end-user sales, butrather indicate where their components are sourced. The revenues by geographyin the following table are based on the country or region in which the Company’scustomers issue their purchase orders (in thousands):

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **    | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| China         |       | $                                | 58,417     |                            | $          | 192,684 |   | $ | 315,517 |   | $ | 545,191 |   |
| Malaysia      |       | 2,185                            |       | 15,449                          |       | 32,842 |   | 28,239 |   |
| United States |       | 12,991                           |       | 3,282                           |       | 30,262 |   | 7,170 |   |
| Taiwan        |       | 4,387                            |       | 11,542                          |       | 29,902 |   | 42,145 |   |
| All other     |       | 2,066                            |       | 1,964                           |       | 9,737 |   | 7,932 |   |
| Total         |       | $                                | 80,046     |                            | $          | 224,921 |   | $ | 418,260 |   | $ | 630,677 |   |

 

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

 
| ** **    | ** ** | **January 31,** | ** ** | **April 30,** | ** ** |
|---------------|------------|----------------------|------------|--------------------|------------|
| ** **    | ** ** | **2009**             | ** ** | **2008**           | ** ** |
| Taiwan        |       | $                    | 91,369     |               | $          | 83,829 |   |
| United States |       | 66,700               |       | 56,899             |       |
| China         |       | 52,018               |       | 41,550             |       |
| All other     |       | 498                  |       | 489                |       |
| Total         |       | $                    | 210,585    |               | $          | 182,767 |   |

 

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

 

## ***2007 Equity IncentivePlan***

 

In September 2007, on the recommendation of theCompany’s board of directors, the stockholders of the Company approved the2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Planreplaced the Company’s 2000 Stock Plan. The Company has reserved 6,000,000shares of common stock for issuance under the 2007 Plan. The2007 Plan provides for the grant of the following types of incentiveawards: (i) stock options; (ii) stock appreciation rights; (iii) restrictedstock; (iv) restricted stock units; (v) performance shares andperformance units; and (vi) other stock or cash awards. In general, stockoption and stock appreciation right awards under the 2007 Plan will begranted at a price not less than 100% of the fair market value of the Company’scommon stock on the date of grant. Through January 31, 2009, the Companyhad granted stock options for approximately 496,000 shares and548,000 restricted stock units to employees under the 2007 Plan. Ingeneral, the Company’s stock option awards have a maximum contractual term often years and vest over four years. Restricted stock units granted under the2007 Plan generally vest over three years. In July 2008, the Company alsogranted approximately 196,000 performance shares to certain employees. These196,000 shares represent the “target” number of shares of common stock thatwill be issued if certain performance goals are achieved. The actual number ofshares to be issued will be determined at the end of a one-year performanceperiod, and can range from 0% to 175% of the target number, depending on thedegree of achievement then of the performance goals. After determining thefinal share count, the awards will vest over two years.

 

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

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

The Company’s equityincentive and stock-based compensation plans as of January 31, 2009 aresummarized as follows (in thousands):

 
| ** **                     | ** ** | ** **     | ** ** | **Shares**         | ** ** | ** **      | ** ** | **Restricted**       | ** ** | **Performance**        | ** ** |
|--------------------------------|------------|----------------|------------|--------------------|------------|-----------------|------------|----------------------|------------|------------------------|------------|
| ** **                     | ** ** | **Shares**     | ** ** | **Available**      | ** ** | **Options**     | ** ** | **Stock Units** | ** ** | **Shares**             | ** ** |
| **Name of Plan**     | ** ** | **Authorized** | ** ** | **for Grant** | ** ** | **Outstanding** | ** ** | **Outstanding**      | ** ** | **Outstanding****(1)** | ** ** |
| 1995 Stock Plan           |       | —         |       | —             |       | 38              |       | —               |       | —                 |       |
| 2000 Stock Plan           |       | —         |       | —             |       | 12,951          |       | —               |       | —                 |       |
| 2000 Director Option Plan |       | —         |       | —             |       | 287             |       | —               |       | —                 |       |
| 2007 Plan                      |       | 6,000          |       | 3,944              |       | 615             |       | 525                  |       | 196                    |       |
| Total                          |       | 6,000          |       | 3,944              |       | 13,891          |       | 525                  |       | 196                    |       |

 

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(1)  Represents targeted issuance. The actual number of shares ofcommon stock that will be issued in connection with the performance shares willbe determined at the end of a one-year performance period.

## *** ***

21

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three and Nine Months EndedJanuary 31, 2009 and 2008**

**(unaudited)**

 

## ***Stock-BasedCompensation Award Activity***

 

The following table summarizes the equity awardactivities under the 2000 Stock Plan, the 2000 Director Option Planand the 2007 Plan, for the nine months ended January 31, 2009:

 
| ** **                                                                          | ** ** | ** **                        | ** ** | **Options Outstanding** | ** ** | **Restricted  Stock Units  Outstanding**               | ** ** | **Performance  Shares  Outstanding** | ** ** | **Restricted Stock  Units and  Performance  Shares** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------|------------|------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **Shares  Available  For  Grant** | ** ** | **Number  of Shares**   | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Number of  Shares**           | ** ** | **Number of  Shares**                                     | ** ** | **Weighted  Average  Grant Date  Fair Market  Value Per  Share** | ** ** |
| ** **                                                                          | ** ** | **(in  thousands)**               | ** ** | **(in  thousands)**          | ** ** | ** **                                             | ** ** | **(in  thousands)**                  | ** ** | **(in  thousands)**                                            | ** ** | ** ** | ** ** |
| Balance at May 1, 2008                                                         |       |                              |       | 13,807                       |       | $                                                      | 18.18      |                                 | —     |                                                           | —     |   | $ | — |   |
| Shares available for grant at May 1, 2008                                      |       | 5,846                             |       |                         |       |                                                   |       |                                 |       |                                                           |       |   |   |
| Stock options granted                                                               |       | (496                              | )          | 496                          |       | 11.95                                                  |       |                                 |       |                                                           |       |   |   |
| Stock options exercised                                                             |       | —                            |       | (61                          | )          | 5.15                                                   |       |                                 |       |                                                           |       |   |   |
| Stock options expired or forfeited                                                  |       | 35                                |       | (351                         | )          | 18.92                                                  |       |                                 |       |                                                           |       |   |   |
| Restricted stock units granted (1)                                                  |       | (1,096                            | )          |                         |       |                                                   |       | 548                                  |       |                                                           |       | 11.46 |   |
| Restricted stock units expired or forfeited (1)                                     |       | 46                                |       |                         |       |                                                   |       | (23                                  | )          |                                                           |       | 11.84 |   |
| Performance shares granted (1) (2)                                             |       | (391                              | )          |                         |       |                                                   |       |                                 |       | 196                                                            |       | 11.95 |   |
| Balance at January 31, 2009 — shares available  for grant                 |       | 3,944                             |       |                         |       |                                                   |       |                                 |       |                                                           |       |   |   |
| Balance at January 31, 2009 — options                                     |       |                              |       | 13,891                       |       | 18.00                                                  |       |                                 |       |                                                           |       |   |   |
| Balance at January 31, 2009 — restricted stock  units                     |       |                              |       |                         |       |                                                   |       | 525                                  |       |                                                           |       | 11.46 |   |
| Balance at January 31, 2009 — performance  shares                         |       |                              |       |                         |       |                                                   |       |                                 |       | 196                                                            |       | 11.95 |   |
| Exercisable at January 31, 2009                                                |       |                              |       | 10,274                       |       | 18.06                                                  |       |                                 |       |                                                           |       |   |   |
| Vested and expected to vest at January 31, 2009  — options                |       |                              |       | 13,526                       |       | $                                                      | 18.03      |                                 |       |                                                           |       |   |   |   |
| Vested and expected to vest at January 31, 2009  — restricted stock units |       |                              |       |                         |       |                                                   |       | 423                                  |       |                                                           |       | $ | 11.46 |   |
| Vested and expected to vest at January 31, 2009  — performance shares     |       |                              |       |                         |       |                                                   |       |                                 |       | 150                                                            |       | $ | 11.95 |   |

 

----

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

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

 

The totalintrinsic value of options exercised during the three and nine months ended January 31,2009 was $7,000 and $493,000, respectively. Total cash received from employeesas a result of employee stock option exercises during the three and nine monthsended January 31, 2009 was approximately $15,000 and $315,000,respectively.

 

As of January 31,2009, net of forfeitures, there was $28.6 million of unrecognizedcompensation expense related to unvested stock options, which the Company expectsto recognize over a weighted average period of 1.9 years. As of January 31,2009, net of forfeitures, there was $4.5 million of unrecognizedcompensation expense related to unvested restricted stock units, which theCompany expects to recognize over a weighted average period of 2.4 years.For the Company’s 2000 Employee Stock Purchase Plan (the “2000 PurchasePlan”), as of January 31, 2009, there was $2.8 million ofunrecognized compensation expense which the Company expects to recognize over aweighted average period of 0.9 years. As of April 30, 2008, net offorfeitures, there was $43.0 million of unrecognized compensation costrelated to unvested stock options, which the Company expects to recognize overa weighted average period of 2.3 years.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

Forthe 2000 Purchase Plan, as of April 30, 2008, there was$1.2 million of unrecognized compensation cost which the Company expectedto be recognized over a weighted average period of 0.9 years. The Company’scurrent policy is to issue new shares to settle the exercise of stock optionsand prospectively, the vesting of restricted stock units.

 

## ***ValuationAssumptions***

 

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

 

For restrictedstock unit awards, the per-share fair value is the closing market price of theCompany’s common stock as reported on the NASDAQ Global Market on the grantdate. For performance share awards, the per share fair value is also theclosing market price of the Company’s common stock as reported on NASDAQ.However, the related stock-based compensation is adjusted by the estimatedprobable outcome of the predetermined performance conditions. The compensationwill be adjusted for subsequent changes in the estimated and actual outcome.For stock option awards and rights issued under the 2000 Purchase Plan, theCompany measures the fair value using the Black-Scholes option pricing model.Black-Scholes was developed to estimate the fair value of freely tradable,fully transferable options without vesting restrictions. These assumptionsdiffer significantly from the characteristics of the Company’s stock-basedcompensation awards. Black-Scholes also requires the use of highly subjective, complexassumptions, including expected term and the price volatility of the Company’sstock.

 

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 $3.19 and$5.02 in the three and nine months ended January 31, 2009, respectively.The per share weighted average estimated grant date fair value for employeeoptions granted was $9.01 and $7.11 in the three and nine months ended January 31,2008, respectively. The following weighted average assumptions are included inthe estimated fair value calculations for stock options granted in the threeand nine months ended January 31, 2009 and 2008:

 
| ** **                          | ** ** | **Employee Stock Option Plans** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended**               | ** ** | **Nine Months Ended** | ** ** |
| ** **                          | ** ** | **January 31,**                           | ** ** | **January 31,** | ** ** |
| ** **                          | ** ** | **2009**                                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free interest rate             |       | 1.89                                           | %          | 3.08 | % | 2.96 | % | 4.77 | % |
| Expected term of options (in years) |       | 4.6                                            |       | 4.0 |   | 4.1 |   | 4.0 |   |
| Expected volatility                 |       | 67.0                                           | %          | 57.0 | % | 50.5 | % | 52.5 | % |
| Expected dividend yield             |       | 0                                              | %          | 0 | % | 0 | % | 0 | % |

 

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, 2009 was $2.66 and $4.21, 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, 2008 was $5.62 for both periods.

 

The following weighted average assumptions areincluded in the estimated grant date fair value calculations for rights topurchase stock under the 2000 Purchase Plan:

 
| ** **                          | ** ** | **Employee Stock Purchase Plan** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended**                | ** ** | **Nine Months Ended** | ** ** |
| ** **                          | ** ** | **January 31,**                            | ** ** | **January 31,** | ** ** |
| ** **                          | ** ** | **2009**                                        | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free interest rate             |       | 1.92                                            | %          | 4.74 | % | 3.33 | % | 4.89 | % |
| Expected term of options (in years) |       | 0.5                                             |       | 0.5 |   | 0.5 |   | 0.5 |   |
| Expected volatility                 |       | 52.7                                            | %          | 39.5 | % | 46.1 | % | 45.7 | % |
| Expected dividend yield             |       | 0                                               | %          | 0 | % | 0 | % | 0 | % |

 

23

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

The definitions of the terms used to determine theabove values are 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:*Upon the adoption of SFAS No. 123(R), the Company determined expectedvolatility based on an average between the historical volatility of the Company’scommon stock and the implied volatility based on the Company’s traded optionswith lives of six months or more. Averaging two data sources may provide abetter proxy to what market place participants would use to value the Company’soptions. Previously, the Company determined expected volatility based on thehistorical volatility of the Company’s common stock.

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

·                  *Estimated pre-vestingforfeitures:* When estimating pre-vesting forfeitures, the Companyconsiders forfeiture behavior based on actual historical information.

 

**Note 13 — Additional Paid-inCapital**

 

The following table shows the amounts recorded to “Additionalpaid-in capital” for the nine months ended January 31, 2009 (inthousands):

 
| ** **                        | ** ** | **Additional** | ** ** |
|-----------------------------------|------------|----------------|------------|
| ** **                        | ** ** | **Paid-in**    | ** ** |
| ** **                        | ** ** | **Capital**    | ** ** |
| Balance at May 1, 2008       |       | $              | 373,024    |   |
| Exercise of stock options         |       | 315            |       |
| Employee stock purchase plan      |       | 4,125          |       |
| Employee stock-based compensation |       | 20,131         |       |
| Deferred tax asset write-off      |       | (381           | )          |
| Balance at January 31, 2009  |       | $              | 397,214    |   |

 

**Note 14 — Treasury Stock**

 

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

 

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

 

**Note 15 — Income Taxes**

 

The Companyrecorded a benefit from income taxes of $0.9 million for the three monthsended January 31, 2009 and a provision for income taxes of$5.1 million for the three months ended January 31, 2008, resultingin effective tax rates of 4.8% and 18.6% for the respective periods. Asrequired by Financial Accounting Standard Board interpretation No.18 (“FIN 18”),*“Accounting for Income Taxes in Interim Periods, aninterpretation of Accounting Principal Board Opinion No. 28,”*the Company excluded from the current fiscal year’s overall estimation of theannual effective tax rate one jurisdiction with losses for which no benefit canbe realized. During the three months ended January 31, 2009, the

 

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** **

**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

Companyaccrued an additional $0.5 million of interest related to the Company’sunrecognized tax benefits determined in accordance with FIN 48.

 

The Companygenerated approximately $18.9 million in loss before income taxes andminority interest for the nine months ended January 31, 2009 and$64.9 million in income before income taxes and minority interest for thenine months ended January 31, 2008. The Company recorded a benefit fromincome taxes of approximately $1.0 million for the nine months ended January 31,2009 and a provision for income taxes of approximately $8.9 million forthe nine months ended January 31, 2008, resulting in effective tax ratesof 5.3% and 13.8% for the respective periods. During the nine months ended January 31,2009, the Company accrued an additional $1.6 million of interest relatedto the Company’s unrecognized tax benefits determined in accordance withFIN 48.

 

**Note 16 — Commitments andContingencies**

 

## ***Commitments***

 

The Companymaintains a wholly-owned subsidiary in Shanghai, China, OmniVision Technologies(Shanghai) Co. Ltd. (“OTC”) which provides assistance to the Company in variousproduct design projects and in marketing and sales support. On January 10,2007, OTC entered into a Land-Use-Right Purchase Agreement (the “PurchaseAgreement”) with the Construction and Transportation Commission of the PudongNew District, Shanghai. The Purchase Agreement has an effective date of December 31,2006. Under the terms of the Purchase Agreement, the Company agreed to pay anaggregate amount of approximately $0.6 million (the “Purchase Price”) inexchange for the right to use approximately 323,000 square feet of landlocated in Shanghai for a period of 50 years. In addition, the Company isobligated to invest a minimum of approximately $33.6 million to developthe land and construct facilities, which amount includes the Purchase Price. Asof January 31, 2009, the Company has already contributed $12.0* *millionof the $33.6 million total investment. Construction of the facilities onthe land has commenced and according to the Purchase Agreement, constructionmust be completed by June 30, 2009, subject to an additional one-yearextension under limited circumstances. The Company may use the land solely forthe purposes of industrial use and/or scientific research. The Company intendsto use OTC’s registered capital to partially fund its commitment to thisproject.

 

During the threemonths ended October 31, 2008, the Company formed Shanghai OmniVisionSemiconductor Technology, Co. Ltd, a new wholly-owned subsidiary in Shanghai,China, for the purpose of expanding its testing capabilities. During the threemonths ended January 31, 2009, the Company contributed $1.5 million,as required under the terms of its capital commitment. The Company is requiredto contribute the remaining $8.5 million of a $10.0 million commitment by October 2010.

 

The Company hasvarious commitments arising from the Amended VisEra Agreement, and thesubsequent amendments to it. In particular, as of January 31, 2009, theCompany and TSMC have agreed to commit a total of $112.9 million to the joint venture, which commitments may be madein the form of cash or asset contributions. Through January 31,2009, the Company has contributed $51.6 millionto VisEra and VisEra Cayman and, as of January 31, 2009, the Company haseffectively met its commitment under the terms of this agreement. Additionalcontributions may be made by additional investors, additional contributions bythe Company and TSMC, or a combination thereof, provided that the Company andTSMC have and will maintain equal interests in VisEra and VisEra Cayman. To theextent, if any that the value of assets contributed in the future exceeds thevalue of the Company’s commitment, the Company will receive cash from VisEraCayman. (See Notes 5 and 17.)

 

## ***Litigation***

 

From time to time,the Company has been subject to legal proceedings and claims with respect tosuch matters as patents, product liabilities and other actions arising out ofthe normal course of business.

 

On November 29,2001, a complaint captioned *McKee v. OmniVisionTechnologies, Inc., et. al., Civil Action No. 01 CV 10775*,was filed in the United States District Court for the Southern District of NewYork against OmniVision, some of the Company’s directors and officers, andvarious underwriters for the Company’s initial public offering. Plaintiffsgenerally allege that the named defendants violated federal securities lawsbecause the prospectus related to

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

theCompany’s offering failed to disclose, and contained false and misleadingstatements regarding, certain commissions purported to have been received bythe underwriters, and other purported underwriter practices in connection withtheir allocation of shares in the Company’s offering. The complaint seeksunspecified damages on behalf of a purported class of purchasers of the Company’scommon stock between July 14, 2000 and December 6, 2000.Substantially similar actions have been filed concerning the initial publicofferings for more than 300 different issuers, and the cases have beencoordinated as *In re Initial Public Offering SecuritiesLitigation, 21 MC 92*. Claims against the Company’s directorsand officers have been dismissed without prejudice pursuant to a stipulation.On February 19, 2003, the Court issued an order dismissing all claimsagainst the Company except for a claim brought under Section 11 of theSecurities Act of 1933.

 

In June 2004,the issuer defendants and plaintiffs negotiated a stipulation of settlement forthe claims against the issuer defendants, including OmniVision, that wassubmitted to the Court for approval. In August 2005, the Courtpreliminarily approved the settlement. In December 2006, the appellatecourt overturned the certification of classes in the six test cases that wereselected by the underwriter defendants and plaintiffs in the coordinatedproceedings. The action involving OmniVision is not one of the six test cases.Because class certification was a condition of the settlement, it was unlikelythat the current settlement would receive final court approval. On June 25,2007, the Court entered an order terminating the proposed settlement based upona stipulation among the parties to the settlement. Plaintiffs filed amendedmaster allegations and amended complaints in the six test cases. On March 26,2008, the Court largely denied the test case defendants’ motion to dismiss theamended complaints. The parties have reached a global settlement of thelitigation and have so advised the Court. Under the settlement, whichremains subject to Court approval, the insurers would pay the fullamount of settlement share allocated to the Company, and the Companywould bear no financial liability. The Company, as well as the officerand director defendants who were previously dismissed from the action pursuantto tolling agreements, would receive complete dismissals from thecase. It is uncertain whether the settlement will receive final Courtapproval. If the settlement does not receive final Court approval,and litigation against the Company proceeds, the Company believes that it hasmeritorious defenses to plaintiffs’ claims and intends to defend the actionvigorously.

 

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

 

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

 

On March 6,2009, Panavision Imaging, LLC (“Panavision”) filed a complaint against theCompany alleging patent infringement in the District Court for the CentralDistrict of California. The case is entitled Panavision Imaging, LLC v.OmniVision Technologies, Inc., Canon U.S.A., Inc., Micron Technology, Inc.and Aptina Imaging Corporation, Case No. CV09-1577. In its complaint,Panavision asserts that the Company makes, has made, uses, sells and/or importsproducts that infringe U.S. Patent Nos. 6,818,877 (“Pre-charging a WideAnalog Bus for CMOS Image Sensors”), 6,663,029 (“Video Bus for High SpeedMulti-resolution Imagers and Method Thereof”) and 7,057,150 (“Solid StateImager with Reduced Number of Transistors per Pixel”). The complaint seeksunspecified monetary damages, fees and expenses and injunctive relief againstthe Company. The Company is in the initial stages of reviewing and investigatingthe complaint and expects to vigorously defend itself against Panavision’sallegations. At

 

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

thistime, the Company cannot estimate any possible loss or predict whether thismatter will result in any material expense to the Company.

 

**Note 17 — Related PartyTransactions**

 

In May 2006,the Company consummated a loan agreement with one of its employees. Under theterms of the agreement, which the board of directors approved infiscal 2004, the Company extended to the employee a three-year$1.0 million loan with an imputed interest rate of approximately fivepercent per annum which matures on May 12, 2009. The loan is secured by adeed of trust and may be extended, subject to mutual consent of the parties.The Company intends to extend the terms of the loan for one additional year.

 

During the threemonths ended January 31, 2007, the Company and ImPac agreed to initiatepayment of licensing fees for the use of certain software developed by ImPac atOmniVision Semiconductor (Shanghai) Co. Ltd., the Company’s wholly-ownedsubsidiary in China. During the three and nine months ended January 31,2009, the Company paid ImPac a nominal amount for software licensing fees.During the three and nine months ended January 31, 2008, the Company paidImPac approximately $29,000 and $119,000, respectively, in softwarelicensing fees. In addition, the Company paid ImPac approximately$1.9 million and $7.8 million for manufacturing services for thethree and nine months ended January 31, 2009, respectively. In addition,for the three and nine months ended January 31, 2008, the Company paidImPac approximately $3.8 million and $10.2 million,respectively, for manufacturing services. During fiscal 2008, the Companyloaned $1.3 million to ImPac for the purpose of expanding itsmanufacturing capacities for a term of one year, but can be extended uponmutual consent of the parties for one year. The loan is fully collateralized byassets held by ImPac. (See Note 5.) In August, 2008, the Company enteredinto an additional agreement with ImPac under which the Company agreed to placecertain manufacturing equipment with ImPac on a consignment basis for a periodof up to five years.

 

TheCompany consolidated VisEra’s operating results from August 1, 2005 to December 31,2006. Subsequently, the Company has accounted for its investment in VisEraunder the equity method. For the three and nine months ended January 31,2009, the Company paid $12.7 million and $49.1 million, respectively,to VisEra for color filter and other manufacturing services. For the three andnine months ended January 31, 2008, the Company paid$21.6 million and $78.3 million, respectively, to VisEra forcolor filter and other manufacturing services.

 

In May 2007,the Company purchased a 19.98% ownership in WLCSP for $9.0 million. Forthe three and nine months ended January 31, 2009, the Company paid zeroand $433,000, respectively, to WLCSP for chip scale packaging services.For the three and nine months ended January 31, 2008, the Company paid$6.2 million and $14.2 million to WLCSP for chip scale packagingservices.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

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

**For the Three and Nine MonthsEnded January 31, 2009 and 2008**

**(unaudited)**

 

The following table summarizes the transactions thatthe Company’s consolidated affiliate, SOI, and its affiliate, VisEra, engagedin with related parties in the ordinary course of business in the three andnine months ended January 31, 2009 and 2008 (in thousands):

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **January 31,**             | ** ** | **January 31,**            | ** ** |
| ** **                            | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ***SOI transactions with:***          | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ImPac:                                |       |                             |       |                            |       |   |   |   |   |
| Purchases of manufacturing services   |       | $                                | 33         |                            | $          | 290 |   | $ | 534 |   | $ | 1,390 |   |
| Balance payable at period end, net    |       | 18                               |       | 222                             |       | 18 |   | 222 |   |
| PSC:                                  |       |                             |       |                            |       |   |   |   |   |
| Purchases of wafers                   |       | 4                                |       | 762                             |       | 1,872 |   | 5,277 |   |
| Rent and other services               |       | 18                               |       | 14                              |       | 53 |   | 41 |   |
| Balance payable at period end, net    |       | 8                                |       | 413                             |       | 8 |   | 413 |   |
| VisEra:                               |       |                             |       |                            |       |   |   |   |   |
| Purchases of  manufacturing services  |       | 5                                |       | 5                               |       | 5 |   | 5 |   |
| Balance payable  at period end        |       | 5                                |       | 5                               |       | 5 |   | 5 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| ***VisEra transactions with:***       |       |                             |       |                            |       |   |   |   |   |
| TSMC:                                 |       |                             |       |                            |       |   |   |   |   |
| Sales to TSMC                         |       | 192                              |       | 579                             |       | 1,293 |   | 1,674 |   |
| Purchases of manufacturing services   |       | —                           |       | 287                             |       | — |   | 891 |   |
| Rent, utilities and other services    |       | —                           |       | 1,500                           |       | — |   | 5,275 |   |
| Balance receivable at period end, net |       | 138                              |       | —                          |       | 138 |   | — |   |
| Balance payable at period end, net    |       | —                           |       | 822                             |       | — |   | 822 |   |
| WLCSP:                                |       |                             |       |                            |       |   |   |   |   |
| Purchases of  manufacturing services  |       | —                           |       | —                          |       | — |   | 1,531 |   |
| SOI:                                  |       |                             |       |                            |       |   |   |   |   |
| Sales to SOI                          |       | 5                                |       | 5                               |       | 5 |   | 5 |   |
| Balance receivable  at period end     |       | $                                | 5          |                            | $          | 5 |   | $ | 5 |   | $ | 5 |   |

 

The Companypurchases a substantial portion of its wafers from TSMC. The Company alsopurchases a portion of its wafers from PSC.

 

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*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 of Section 27Aof the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934, which involve risks and uncertainties.Forward-looking statements generally include words such as “anticipates,” “believes,”“expects,” “intends,” “may,” “outlook,” “plans,” “seeks,” “will”  and words of similar import as well as thenegative of those terms. In addition, any statements that refer toexpectations, projections or other characterizations of future events orcircumstances, including any underlying assumptions, are forward-lookingstatements.**All forward**-looking statements included in this QuarterlyReport on Form 10-Q, including, but not limited to, statements regardingour projected results of operations for future reporting periods,  the extent of future sales through originalequipment manufacturers, or OEMs, and distributors, future growth trends andopportunities in certain markets, the development, introduction andcapabilities of new products, future sales of our products outside the UnitedStates, the increasing competition in our industry, the continued importance ofthe mobile phone market to our business, continued price competition and theconsequent reduction in the average selling prices of our products, futureexpenses we expect to incur, our future investments, our working capitalrequirements in fiscal 2009 and thereafter, the effect of a change inforeign currency rates, the effect of a fluctuation in the value of the U.S.dollar, and the sufficiency of our available cash, cash equivalents andshort-term investments are based on current expectations and are subject toimportant factors that could cause actual results to differ materially fromthose projected in the forward-looking statements.****Such important factors include,but are not limited to, those set forth under the caption “Item 1A. RiskFactors,” beginning on page 52 of this Quarterly Report and elsewhere inthis Quarterly Report and in other documents we file with theU.S. Securities and Exchange Commission, or SEC. All subsequent writtenand oral forward-looking statements by or attributable to us or persons actingon our behalf are expressly qualified in their entirety by such factors.*

 

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

 

**Overview**

 

We design, developand market high performance, highly integrated and cost efficient semiconductorimage-sensor devices. Our main products, image-sensing devices which we referto by the name CameraChipTM image sensors, capture an image electronically andare used in a number of consumer and commercial mass-market applications. OurCameraChip image sensors are manufactured using the complementary metal oxidesemiconductor, or CMOS, fabrication process and are predominantly single-chipsolutions that integrate several distinct functions including image capture,image processing, color processing, signal conversion and output of a fullyprocessed image or video stream. Recently, we have also integrated ourCameraChip image sensors with wafer-level optics, which we refer to as CameraCubeTMimaging devices. Our CameraCube imaging device is a small footprint, totalcamera solution that we believe will enable the further miniaturization ofcamera products. We believe that our highly integrated image sensors andimaging devices enable camera device manufacturers to build high quality cameraproducts that are smaller, less complex, more reliable, more cost effective andmore power efficient than cameras using traditional charge-coupled devices, orCCDs.

 

## ***Technology***

 

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

 

In May 2007,we announced the introduction of our OmniPixel3TM architecture. The OmniPixel3architecture represents a further refinement and pixel size reduction of ourOmniPixel2TM and OmniPixel® architectures, which we introduced in September 2005and August 2004, respectively.

 

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

 

In May 2008, we announced a new approach to CMOS image sensordesign we call OmniBSITM technology. OmniBSI technologyis based on an idea called back sideillumination, or BSI. Our first OmniBSI product, an 8-megapixel image sensor isbuilt using an advanced 1.4 μm pixel, and we believe we are the firstimage sensor company to announce a viable process for the mass production ofBSI sensors.

 

All traditionally designed CMOS image sensors capture light on thefront side of the chip, so the photo-sensitive portion has to share the surfaceof the image sensor with the metal wiring of the transistors in the pixel andthe metal wiring acts to limit the amount of image light that reaches thephoto-sensitive portion of the image sensor. With our new OmniBSI architecture,the image sensor receives light through the back side of the chip. As a result,there is no metal wiring to block the image light, and the entire backside ofthe image sensor can be photo-sensitive. Not only does this enable us toproduce a superior image, it also permits the front of the chip surface area tobe devoted entirely to processing, and permits an increase in the number ofmetal layers, both of which result in greater functionality.

 

In addition to increasing the amount of light the image sensor cancollect, our OmniBSI architecture significantly increases the quantumefficiency and reduces the cross talk of the sensor. Increasing the quantumefficiency increases the quality of the sensor’s color reproduction. Reducingcross-talk reduces electrical noise, which produces sharper images and bettercolor.

 

Capturinglight on the back side of the image sensor also allows us to reduce thedistance the light has to travel to the pixels, and thus provide a wider angleof light acceptance. Widening the angle of acceptance in turn makes it possibleto reduce the height of the camera module, and thus the height of the devicewhich incorporates the camera.

 

In February 2009,we announced the introduction of our CameraCube technology. This is athree-dimensional, reflowable, total camera solution that combines the fullfunctionality of CameraChip and wafer-level optics in one compact,small-footprint package. Our CameraCube devices can be soldered directly toprinted circuit boards, with no socket or insertion requirements. We believe ourCameraCube solution can streamline the mobile phone manufacturing process, thusresulting in lower cost and faster time-to-market for our customers.

 

Giventhe rapidly changing nature of our technology, there can be no assurance thatwe will not encounter delays or other unexpected production or performanceissues with future products. During the early stages of production, productionyields and gross margins for products based on new technology are typicallylower than those of established products.

 

## ***New Products***

 

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

 

Thesecond new product is the OV7725. The 1⁄4-inch OV7725 is built with a 6 μm x6 μm pixel to deliver the ultra-high light sensitivity required for thelow light conditions in which most consumers use their notebook computers. TheOV7725 is a highly integrated CameraChip image sensor that provides the fullfunctionality of a VGA camera and image processor on a single chip. A uniquefeature of the OV7725 is its high chief ray angle which allows for a reductionin module height, a critical element in building cameras that can fit in today’sthin notebook computers. A second highlight of the OV7725 is its ability tooperate at 60 FPS, in VGA mode, or 120 FPS in quarter VGA, or QVGA,for optimal performance in notebook and personal computer and gamingapplications.

 

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

 

Thesecond new product is the OV7690, a VGA CameraChip image sensor with a1/13-inch form factor. The OV7690’s new 1.75 μm OmniPixel3-HS architecturecombined with a unique, non-linear micro lens shift technology allows for asignificant reduction in distance between the image sensor and the lens, andthus enables us to significantly reduce the module height while maintaininghigh levels of image quality and camera performance. The result is anultra-thin camera module of just 4.5 mm x 4.5 mm and a height of only2.8 mm, a critical dimension both for slim mobile phones and for notebookcomputer applications where the camera module can be no thicker than the LCDhousing.

 

In May 2008,we introduced two new products. The first, the OV5630, is a 1/3-inch,5-megapixel CameraChip image sensor targeted at the mobile phone market. TheOV5630 is based on the OmniPixel3-HS architecture, enabling quality low-lightimage capture with low-light sensitivity of 960 mV/(Lux-sec). The OV5630 alsooutputs data in full 5-megapixel resolution at 15 FPS, and records 720p HDvideo at 60 FPS, or 1080p at 30 FPS. In QVGA resolution, the OV5630can output data at 120 FPS, ideal for slow motion preview. For the fasttransfer of image data, the OV5630 is outfitted with a two-lane, high-speedMIPI interface. This enables mobile phone makers to use the OV5630’s parallelinterface as input for a secondary camera, while alternately providing outputvia the MIPI interface.

 

In May 2008,we also introduced the OV5633, another 1/3-inch 5-megapixel CameraChip imagesensor. This image sensor has all of the same functionality as the OV5630, butemploys a different chief ray angle to suit the specific lens requirements of thedigital still camera, or DSC, market.

 

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

 

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

 

Thefirst OmniBSI device introduced, the OV8810, is a 1/3-inch, 8-megapixelCameraChip image sensor targeted at the mobile phone market. The device issmall enough to fit within an 8.5 x 8.5 x 7 mm camera module and outputs datain full 8-megapixel resolution at 10 FPS, and records 720p HD video at60 FPS, or 1080p at 30 FPS. In QVGA resolution, the OV8810 can outputdata at 120 FPS, ideal for slow motion preview. For fast transfer of imagedata, the OV8810 is outfitted with a parallel interface and a two-lane,high-speed MIPI interface. This enables mobile phone makers to use the OV8810’sparallel interface as input for a secondary camera, while alternately providingoutput via the MIPI interface.

 

Thesecond OmniBSI product, the OV5642, is a 1⁄4-inch, 5-megapixel fully integratedsystem-on-chip (SOC) image sensor with integrated TrueFocus ISP, our mostadvanced ISP technology. The TrueFocus ISP increases picture clarity andsharpness and offers extended depth of field, or EDoF, capabilities. EDoFenables customers to utilize fixed focus lenses which reduces overall cost oftheir camera modules.  The OV5642 canoutput video in full resolution at 15 FPS, supports 720p HD video at60 FPS and 1080p at 30 FPS. An integrated JPEG compression enginesimplifies 

 

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datatransfer for bandwidth limited interfaces. For fast transfer of image data, the OV5642 has a two-lane, high-speedMIPI interface.

 

In October 2008,we announced that the 1⁄4-inch, all digital OV7710 VGA CameraChip sensor is involume production and has shipped to multiple top-tier automotive customers.

 

In November 2008,we introduced two new devices based on our OmniPixel3-HS architecture. Thefirst device is the OV6930, a SquareGA (400 x 400 pixels) CameraChip imagesensor with a 1/10-inch form factor. It uses 3 μm OmniPixel3-HS pixels, whichenables it to achieve low-light performance of 3,300 mV/(Lux-sec). OV6930is positioned for the medical device market. The second device is the OV9710 inquad flat package, or QFP. It is a 1-megapixel image sensor designedspecifically for advanced automotive vision and sensing systems.

 

In January 2009,we introduced the OV7740, a 1/5-inch VGA CameraChip image sensor with4.2 μm pixels based on the OmniPixel3-HS architecture. It is capable ofoperating at 60 FPS in VGA resolution, and 120 FPS in QVGA resolution. OV7740is appropriate for leading-edge notebook PC and webcam designs. OV7740 is alsoan ideal solution for security, surveillance, automotive and games and toyapplications.

 

In February 2009,as part of our CameraCube technology announcement, we introduced two newCameraCube imaging devices. The first product is the OVM6680. It is has aSquareGA resolution. The second product is the OVM7680, and it has a VGAresolution.

 

## ***Joint Venture withTSMC***

 

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

 

In August 2005, we entered into an Amended andRestated Shareholders’ Agreement with TSMC, or the Amended VisEra Agreement,under which the parties reaffirmed their respective commitments to VisEra,expanded the scope of and made certain modifications to the VisEra Agreement.Under the Amended VisEra Agreement, the parties agreed to raise the totalcapital committed to the joint venture from $50.0 million to$68.0 million. The $18.0 million increase was designated principallyfor the acquisition from unrelated existing shareholders of approximately 29.6%of the issued share capital of XinTec, Inc., or XinTec, a Taiwan-basedprovider of chip scale packaging services, of which we directly ownedapproximately 7.8% at that time. In fiscal 2006, VisEra invested anadditional $0.5 million and we invested an additional $130,000 in XinTecas our portion of an additional capital injection to enable XinTec to expandits production capacity. As a result of the increase in our beneficial interestin XinTec due to VisEra’s investment in XinTec during fiscal 2006, weaccounted for our investment in XinTec under the equity method. In January 2007,TSMC, through the purchase of approximately 90,500,000 previously unissuedshares, acquired a controlling interest in XinTec. As a result of TSMC’sinvestment, our direct ownership percentage in XinTec declined from7.8% to 4.4% and VisEra’s ownership percentage declined from 29.6% to16.9%. Due to the reduction in our ownership percentage in XinTec and thedeconsolidation of VisEra described below, effective January 1, 2007, webegan to account for our interest in XinTec under the cost method.

 

As a result of the additional investment that TSMC andwe made in VisEra under the Amended VisEra Agreement, TSMC’s and our interesteach increased from 25.0% to 43.0%, and consequently we re-evaluated ouraccounting for VisEra in accordance with Financial Accounting Standards Board,or FASB, Interpretation No., or FIN, 46 (revised December 2003), *“Consolidation of Variable Interest Entities,”* orFIN 46(R). We concluded that, as a 

 

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result of our step acquisition of VisEra and becausesubstantially all of the activities of VisEra either involved or were conductedon our behalf, VisEra was a variable interest entity, or VIE. Since we were thesource of virtually all of VisEra’s revenues, we had a decisive influence overVisEra’s profitability. Accordingly, we considered ourselves to be the primarybeneficiary of the joint venture, and in the quarter which ended in October 2005,we began to include VisEra’s financial results in our consolidated financialstatements. In the quarter ended January 2006, we increased our interestin VisEra from 43.0% to 46.0% through purchases of unissued shares. In January 2006,pursuant to the Amended VisEra Agreement, VisEra purchased from TSMC theequipment used for applying color filters and micro-lenses to wafers, andVisEra is now providing the related processing services that we previouslypurchased from TSMC. In November 2006, we invested $6.1 million inVisEra as our portion of an additional cash or asset contribution to be made byTSMC and us under the then current Amended VisEra Agreement.

 

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

 

InJanuary 2007, we and TSMC also signed an amendment to the Amended VisEraAgreement to provide for an increase in VisEra’s manufacturing capacity. Underthe amendment, we and TSMC each made an additional $27.0 millioninvestment in VisEra in April 2007. In April 2008, VisErasubstantially completed the relocation and expansion of its capacity at a newlyconstructed manufacturing facility in Taiwan.

 

## ***Joint Venture withPowerchip Semiconductor Corporation***

 

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

 

In March 2005,we assumed control of the board of directors of SOI and we have consolidatedSOI since April 30, 2005. SOI also issued shares to its employees in July 2006,with an estimated fair value of $459,000 which caused our ownership percentageto decline from 49.0% to 46.6%. In April 2007, SOI became listed on theTaiwan GreTai Securities Market, or TGSM. The TGSM is the approximateequivalent in Taiwan of the Over-The-Counter market in the United States. Inconjunction with the TGSM listing, various employees of SOI exercised theiroptions and increased the number of shares outstanding. From time to time, SOIalso issues shares to its employees as a bonus which further dilutes ourownership percentage. As of January 31, 2009, we owned 43.9% of SOI. SeeNote 6 — “*ConsolidatedAffiliate — Silicon Optronics, Inc.”*andNote 17 — “*Related Party Transactions”*to our condensed consolidated financial statements.

 

## ***Acquisition of CDM***

 

In April 2005,we completed the acquisition of OmniVision CDM Optics, Inc., or CDM,formerly CDM Optics, Inc. CDM is the exclusive licensee from an affiliateof the University of Colorado of a patented technology, known as WavefrontCoding technology that increases the performance of an imaging system bysubstantially increasing the depth of field and/or correcting opticalaberrations within the image. We expect that it will significantly reduce thesize and complexity of the auto-focus function on future camera modules utilizingour image sensors. Because the image is always in focus, Wavefront Codingtechnology also eliminates the time-delay inherent in conventional auto ormanually focused camera systems. The closing consideration for the acquisitionconsisted of $10.0 million in cash and approximately 515,000 sharesof our common stock. In addition, we are obligated to pay $10.0 million incash, if and when we sell a pre-determined number of products incorporating CDM’stechnology, prior to April 30, 2009.

 

In the three monthsended October 31, 2006, we adjusted “Goodwill” related to our acquisitionof CDM by $2.6 million. The adjustment was related, in part, to a putoption that expired during the quarter with respect to the 147,000 sharesheld in escrow, 145,000 of which were put to us for cash totaling$2.8 million. The other part of the increase related to the value of theinitial shares that we issued as part of the CDM acquisition. These shares werealso 

 

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subjectto a put option, an option that expired unexercised subsequent to theiroriginal issuance. Both amounts should have been recorded as part of theinitial acquisition of CDM.

 

During the secondquarter of fiscal 2009, we performed our “Goodwill” impairment analysis inaccordance with Statement of Financial Accounting Standards, or SFAS, No. 142,*“Goodwill and Other Intangible Assets,”*orSFAS No. 142, and SFAS No. 144, *“Accountingfor the Impairment or Disposal of Long-Lived Assets*,*”* or SFAS No. 144. The reduction of our marketcapitalization and the global economic downturn prompted our management toperform such analysis. From the analysis, we recorded a full impairment of $7.5million of the “Goodwill” related to our acquisition of CDM.

 

## ***Capital Resources***

 

As of January 31,2009, we held approximately $225.0 millionin cash and cash equivalents and approximately $38.7 million in short-term investments. To mitigate marketrisk related to short-term investments, we have an investment policy designedto preserve the value of capital and to generate interest income from theseinvestments without material exposure to market fluctuations. Market risk isthe potential loss due to the change in value of a financial instrument as aresult of changes in interest rates or bond prices, and changes in marketliquidity and in the pricing of risk. Our policy is to invest in financialinstruments with short maturities, limiting interest rate exposure, and tomeasure performance against comparable benchmarks. We maintain our portfolio ofcash equivalents and short-term investments in a variety of securities,including both government and corporate obligations with ratings of “A” orbetter and money market funds. We do not believe that the value of our cash andshort-term investments will be significantly affected by recent instability inthe global financial markets.

 

In June 2005,our board of directors authorized us to use up to $100.0 million of ouravailable cash under an open-market program to repurchase our common stock. Atthe expiration of the program in June 2006, we had cumulativelyrepurchased 5,870,000 shares of our common stock for an aggregate cost ofapproximately $79.6 million.

 

In February 2007,our board of directors approved an additional stock repurchase program thatprovides for the repurchase of up to $100.0 million of our outstandingcommon stock. Subject to applicable securities laws, such repurchases will beat times and in amounts as we deem appropriate, based on factors such as marketconditions, legal requirements and other corporate considerations. As of January 31,2009, we had cumulatively repurchased 6,671,000 shares of our common stockunder this open-market program for an aggregate cost of approximately$99.1 million. See Note 14 *— “Treasury Stock”*to ourcondensed consolidated financial statements.

 

## ***Current EconomicEnvironment***

 

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

 

Recently, generaldomestic and global economic conditions have been negatively impacted byseveral factors, including, among others, the subprime-mortgage crisis in thehousing market, going concern threats to investment banks and other financialinstitutions, reduced corporate spending, and decreased consumer confidence.These economic conditions have resulted in our facing one of the most challengingperiods in our history. The image sensor market has been negatively impacted bythe current global economic environment. In particular, we believe the currenteconomic conditions have reduced spending by consumers and businesses inmarkets into which we sell our products in response to tighter credit, negativefinancial news and the continued uncertainty of the global economy. Endcustomer demand has decreased significantly throughout the industry, affectingall consumer electronic products, security products and products for theautomotive industry.  Consequently, theoverall demand for image sensors has also decreased. This decrease in demand ishaving a significant impact on our revenues, results of operations and overallbusiness. Our revenues for the three-month period ended January 31, 2009were lower than similar historical periods. In addition, the current globaleconomic environment has negatively impacted our business outlook and we expectthat our revenues in the three-month period ending April 30, 2009, will belower than our reported revenues for the three-month period ended January 31,2009.

 

These conditionscould also have a number of additional effects on our business, includinginsolvency of key suppliers or manufacturers, resulting in product delays,inability of customers to obtain credit to finance purchases of our 

 

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products,customer insolvencies, increased pricing pressures, restructuring expenses andassociated diversion of management’s attention, excess inventory and increaseddifficulty in accurately forecasting product demand and planning futurebusiness activities. It is uncertain how long the current economic conditionswill last or how quickly any subsequent economic recovery will occur. If theeconomy or markets into which we sell our products continue to slow or anysubsequent economic recovery is slow to occur, our business, financialcondition and results of operations could be further materially and adverselyaffected.

 

## ***Market Environment***

 

We sell ourproducts worldwide directly to original equipment manufacturers, or OEMs, whichinclude branded customers and contract manufacturers, and value addedresellers, or VARs, and indirectly through distributors. In order to ensurethat we address all available markets for our image sensors, we organize ourmarketing efforts into end-use market groups, each of which concentrates on aparticular product or, in some cases, customer within a product group. Thus wehave marketing teams that address the mobile phone market, the notebook andpersonal computer market, the DSC market, the security and surveillance market,the toys and games market, and the automotive and medical markets.

 

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

 

The overwhelmingmajority of sales of our products depend on decisions by the engineeringdesigners for manufacturers of products that incorporate image sensors tospecify one of our products rather than one made by a competitor. In mostcases, the decision to specify a particular image sensor requires conformingother specifications of the product to the chosen image sensor and makessubsequent changes both difficult and expensive. Accordingly, the ability totimely produce and deliver reliable products in large quantities is a keycompetitive differentiator. Since our inception, we have shipped more than onebillion CameraChip image sensors, including approximately 270 million forthe nine months ended January 31, 2009. We believe that these quantitiesdemonstrate the continuing capabilities of our production system, including oursources of offshore fabrication.

 

We currentlyoutsource the wafer fabrication and packaging of our image-sensor products tothird parties. We outsource the color filter and micro-lens phases ofproduction to an investee joint venture company. With our new CameraCubeproducts, we also collaborated with the industry’s leading wafer-level lenssuppliers, and outsourced the assembly process to third parties. This approachallows us to focus our resources on the design, development, marketing andtesting of our products and significantly reduces our capital requirements.

 

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

 

We currentlyperform the final testing of the majority of our products at our own facilityin China. As necessary, we will make further investments to expand our testingand production capacity as well as our overall capability to design additionalcustom products for our customers.

 

Since our end-usercustomers market and sell their products worldwide, our revenues by geographiclocation are not necessarily indicative of the geographic distribution ofend-user sales, but rather indicate where the products and/or 

 

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theircomponents are manufactured or sourced. The revenues we report by geography arebased on the country or region in which our customers issue their purchaseorders to us.

 

Many of theproducts using our image sensors, such as mobile phones, notebook and personalcomputers, DSCs and cameras for toys and games, are consumer electronics goods.These mass-market camera devices generally have seasonal cycles whichhistorically have caused the sales of our customers to fluctuatequarter-to-quarter. Historically, demand from OEMs and distributors that servesuch consumer product markets has been stronger in the second and thirdquarters of our fiscal year and weaker in the first and fourth quarters of ourfiscal year. However, because of the current economic downturn, we expect tosee weaker than normal conditions in all of these markets in the fourth quarterof fiscal 2009. In addition,****since a verylarge number of the manufacturers who use our products are located in China,Hong Kong and Taiwan, the pattern of demand for our image sensors has beenincreasingly influenced by the timing of the extended lunar or Chinese New Yearholiday, a period in which the factories which use our image sensors generallyclose. We believe that the market opportunity represented by mobile phonesremains very large, although the opportunities presented will be deferred untilthe current global economic conditions improve.

 

We also believethat, like the DSC market, mobile phone and notebook and personal computerdemand will not only continue to shift toward higher resolutions, but also willincreasingly fragment into multiple market segments with differing productattributes. For example, we see the further expansion of the smartphone segmentwithin the mobile phone market and the recent introduction of the netbookproduct segment within the notebook computer market. In addition, there isincreased demand for customization, and several different interface standardsare coming to maturity. All of these trends will require the development of anincreasing variety of products.

 

As the markets forimage sensors have grown, we have experienced competition from manufacturers ofCMOS and CCD image sensors. Our principal competitors in the market for CMOSimage sensors include Micron, Samsung, Sharp, Sony, ST Microelectronics andToshiba. We expect to see continued price competition in the image-sensormarket for mobile phones, notebook and personal computers and digital camerasas those markets continue to grow. Although we believe that we currentlycompete effectively in those markets, our competitive position could beimpaired by companies that have greater financial, technical, marketing,manufacturing and distribution resources, broader product lines, better accessto large customer bases, greater name recognition, longer operating historiesand more established strategic and financial relationships than we do. Suchcompanies may be able to adapt more quickly to new or emerging technologies andcustomer requirements or devote greater resources to the promotion and sale oftheir products. 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, fromtime to time, other companies enter the CMOS image sensor market by usingobsolete and available manufacturing equipment. While these efforts have rarelyhad any long-term success, the new entrants do sometimes manage to gain marketshare in the short term by pricing their products significantly below currentmarket levels which puts additional downward pressure on the prices we canobtain for our products.

 

In common withmany other semiconductor products and as a response to competitive pressures,the average selling prices, or ASPs, of image-sensor products have declinedsteadily since their introduction, and we expect ASPs to continue to decline inthe future. We recently introduced our new CameraCube products. Depending onthe adoption rate and unit volume, we believe these products may partiallymitigate the rate of ASP decline. In order to maintain our gross margins, weand our suppliers must work continuously to lower our manufacturing costs andincrease our production yields, and in order to maintain or grow our revenues,we need to increase the number of units we sell by a large enough amount tooffset the effect of declining ASPs. In addition, if we are unable to timelyintroduce new products that can take advantage of smaller process geometries ornew products that incorporate more advanced technology and include moreadvanced features that can be sold at higher ASPs, our gross margin willdecline.

 

As part of ourongoing efforts to achieve both higher resolutions and smaller chip sizes, weinitiated mass production volumes of our OmniPixel3 sensors with 0.11 μmprocess technologies in January 2008. More recently, in September 2008,we introduced two devices based on our 1.4 micron OmniBSI architecture. Giventhe rapidly changing nature of our technology, there can be no assurance thatwe will not encounter delays or other unexpected yield issues with futureproducts. During the early stages of production, production yields and grossmargins for new products are typically lower than those of establishedproducts. We can encounter unexpected manufacturing issues, such as 

 

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unexpectedback-end yield problems. In addition, in preparation for new product introductions,we gradually decrease production of established products. Due to our12-14 week production cycle, it is extremely difficult to predictprecisely how many units of established products we will need. It is alsodifficult to accurately predict the speed of the ramp of new products. Giventhe current economic downturn, the visibility of our business outlook isextremely limited and forecasting is even more difficult than under normalmarket conditions. As a result, it is possible that we could suffer fromshortages for certain products and build inventories in excess of demand forother products. We carefully consider the risk that our inventories may beexcess to expected future demand and record appropriate reserves. If, assometimes happens, we are subsequently able to sell these reserved products,the sales have little or no associated cost and consequently they have afavorable impact on gross margins.

 

## ***Sources ofRevenues***

 

We generate almostall our revenue by selling our products directly to OEMs and VARs andindirectly through distributors. For accounting purposes, we treat sales toOEMs and VARs as one source of revenue, and sales to distributors as anotherand 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 tocustomers without agreements that allow for returns or credits, principallyOEMs and VARs, we recognize revenue using the “sell-in” method. Under thismethod, we recognize revenue when title passes to the customer provided that wehave received a signed purchase order, the price is fixed or determinable,title and risk of loss has transferred to the customer, collection of resultingreceivables is considered reasonably assured, product returns are reasonablyestimable, there are no customer acceptance requirements and there are noremaining material obligations. We provide for future returns of potentiallydefective products based on historical experience at the time we recognizerevenue. For cash consideration given to customers for which we do not receivea separately identifiable benefit or cannot reasonably estimate fair value, werecord the amounts as reductions of revenue.

 

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

 

In order todetermine whether collection is probable, we assess a number of factors,including our past transaction history with the customer and thecreditworthiness of the customer. If we determine that collection is notreasonably assured, we defer the recognition of revenue until collectionbecomes reasonably assured or upon receipt of payment.

 

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

 

## ***CriticalAccounting Policies and Estimates***

 

For a discussionof our critical accounting policies, please refer to the discussion in ourAnnual Report on Form 10-K for the fiscal year ended April 30, 2008.Other than for policies that are related to the issuance of 

 

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performanceshares under SFAS No. 123(R), there have been no material changes in anyof our critical accounting policies since April 30, 2008.

 

*Stock-BasedCompensation Expense for Performance Shares*

 

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

 

**Resultsof 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,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** ** | **2009**                                           | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                                 |       | 100.0                                              | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                         |       | 77.6                                               |       | 72.9                                              |       | 75.4 |   | 74.6 |   |
| Gross margin                                             |       | 22.4                                               |       | 27.1                                              |       | 24.6 |   | 25.4 |   |
| Operating expenses:                                      |       |                                               |       |                                              |       |   |   |   |   |
| Research, development and related                        |       | 26.0                                               |       | 9.0                                               |       | 15.4 |   | 9.1 |   |
| Selling, general and administrative                      |       | 17.4                                               |       | 6.9                                               |       | 11.5 |   | 7.4 |   |
| Goodwill impairment                                      |       | —                                             |       | —                                            |       | 1.8 |   | — |   |
| Total operating expenses                                 |       | 43.4                                               |       | 15.9                                              |       | 28.7 |   | 16.5 |   |
| Income (loss) from  operations                           |       | (21.0                                              | )          | 11.2                                              |       | (4.1 | ) | 8.9 |   |
| Interest income, net                                     |       | 0.5                                                |       | 1.5                                               |       | 0.5 |   | 1.6 |   |
| Other expense, net                                       |       | (3.7                                               | )          | (0.4                                              | )          | (0.9 | ) | (0.2 | ) |
| Income (loss) before income taxes and minority  interest |       | (24.2                                              | )          | 12.3                                              |       | (4.5 | ) | 10.3 |   |
| Provision for (benefit  from) income taxes               |       | (1.2                                               | )          | 2.3                                               |       | (0.2 | ) | 1.4 |   |
| Minority interest                                        |       | (0.3                                               | )          | —                                            |       | (0.2 | ) | — |   |
| Net income (loss)                                        |       | (22.7                                              | )%         | 10.0                                              | %          | (4.1 | )% | 8.9 | % |

 

*Three Months Ended January 31,2009 as Compared to Three Months Ended January 31, 2008*

 

### **Revenues**

 

We derivesubstantially all of our revenues from the sale of our image-sensor productsfor use in a wide variety of consumer and commercial mass-market applicationsincluding mobile phones, notebooks and personal computers, security andsurveillance cameras, DSCs, interactive video and toy cameras, and automotiveand medical products. Revenues for the three months ended January 31, 2009decreased by 64.4% to approximately $80.0 million from $224.9 millionfor the three months ended January 31, 2008. The decrease in revenues wasdue to a decline in unit sales of our image-sensor products across all productcategories, combined with a decline in our ASPs, partially offset by a morefavorable product mix. Due to the global economic downturn, we expect ourrevenues for the three months ending April 30, 2009 to be lower than therevenues for the three months ended January 31, 2009. Visibility beyond April 30,2009 continues to be limited.

 

## ***Revenues fromSales to 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 OEMs and VARs was lower in the three months ended January 31, 2009than in

 

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the prior-year period. We expect that the percentageof revenues from sales through OEMs and VARs will vary from year to year inresponse to changes in the make-up of our customer list, but that it willcontinue to represent a majority of our revenues. The gross margin that we earnon sales to OEMs and VARs or through distributors is not significantlydifferent. The following table shows the percentage of revenues from sales toOEMs and VARs and distributors in the three months ended January 31, 2009and 2008:

 
| ** **    | ** ** | **Three Months Ended  January 31,** | ** ** |
|---------------|------------|----------------------------------------------------|------------|
| ** **    | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| OEMs and VARs |       | 63.6                                               | %          | 69.1 | % |
| Distributors  |       | 36.4                                               |       | 30.9 |   |
| Total         |       | 100.0                                              | %          | 100.0 | % |

 

*OEMs andVARs.*   In the three months ended January 31,2009, two OEM customers accounted for approximately 15.7% and 15.0% of ourrevenues. In the three months ended January 31, 2008, one OEMcustomer accounted for approximately 13.1% of our revenues. For the threemonths ended January 31, 2009 and 2008, no other OEM or VAR customeraccounted for 10% or more of our revenues.

 

*Distributors.*   Inthe three months ended January 31, 2009, two distributor customersaccounted for approximately 15.4% and 14.4% of our revenues. In the threemonths ended January 31, 2008, one distributor customer accounted forapproximately 19.8% of our revenues. For the three months ended January 31,2009 and 2008, no other distributor customer accounted for 10% or more of ourrevenues.

 

## ***Revenues fromDomestic Sales as Compared to Foreign Sales***

 

The followingtable shows the percentage of our revenues derived from sales of ourimage-sensor products to domestic customers as compared to foreign customersfor the three months ended January 31, 2009 and 2008:

 
| ** **     | ** ** | **Three Months Ended  January 31,** | ** ** |
|----------------|------------|----------------------------------------------------|------------|
| ** **     | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| Domestic sales |       | 16.2                                               | %          | 1.5 | % |
| Foreign sales  |       | 83.8                                               |       | 98.5 |   |
| Total          |       | 100.0                                              | %          | 100.0 | % |

 

We derive themajority of our foreign sales from customers in Asia and, to a lesser extent,in Europe. Historically, our sales to Asia-Pacific customers have accounted fora significant portion of our revenues as a result of the continuing trend ofoutsourcing the production of consumer electronics products to Asia-Pacificmanufacturers and facilities. Recently, we have experienced an increase indomestic sales as a percentage of total revenues. However, due to the fact thatvirtually all products incorporating our image-sensor products are soldglobally, we believe that the geographic distribution of our sales does notaccurately reflect the geographic distribution of sales into end-user marketsof products which incorporate our image sensors.

 

### **Gross Profit**

 

Our gross marginin the three months ended January 31, 2009 declined to 22.4% from 27.1%for the three months ended January 31, 2008. The principal contributors to the year-over-year decrease in gross margin were thedecline in our ASPs and the write-downof inventories which totaled approximately $5.9 million during the threemonths ended January 31, 2009,as compared to $5.5 million in the similar prior year period. Thewrite-down of inventories in the three months ended January 31, 2009represented a proportionately greater percentage of revenues than in theprior year period as a consequence of a significant decline in revenue levels. These contributors to the reduction in grossprofit were partially offset by a more favorable product mix and reductionsin our production costs. During thethree months ended January 31, 2009, the ASPs of our products were lower than they were in theyear-earlier period. The decline in ASPs was due, in part, to a general pricedecline due to competition and, in part, also to an increase in theproportion of sales represented by bare die, often referred to aschip-on-board, or COB, products, rather than packaged products. We recordedapproximately $0.8 millionin stock-based compensation expense to cost of revenues during the three-monthperiod ended January 31, 2009, in accordance with SFAS No. 123(R),as compared to approximately $0.9 million in the 

 

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priorfiscal year. Revenue from sales of previously written-down products in thethree months ended January 31, 2009 was $0.6 million, as compared to$1.9 million during the same period in the prior fiscal year.

 

**Research, Development and RelatedExpenses**

 

Research,development and related expenses consist primarily of compensation andpersonnel-related expenses, non-recurring engineering costs related principallyto the costs of the masks we buy when we release new product designs to themanufacturing foundry, costs for purchased materials, designs, tooling,depreciation of computers and workstations, and amortization of acquired intangibleintellectual property and computer aided design software. Because the number ofnew designs we release to the foundry can fluctuate from period to period,research, development and related expenses may fluctuate significantly.Research, development and related expenses for the three months ended January 31,2009 increased to approximately $20.8 million from approximately$20.1 million for the three months ended January 31, 2008. As apercentage of revenues, research, development and related expenses for thethree months ended January 31, 2009 and 2008 represented 26.0% and 9.0%,respectively.

 

The increase inresearch, development and related expenses of approximately $0.7 million,or 3.4%, for the three months ended January 31, 2009 from the similarperiod in the prior year resulted primarily from a $0.6 million increasein salary and payroll-related expenses associated with salary increases and thehiring of additional personnel, a $440,000 increase in software expenses,a $242,000 increase in office and facilities expenses, a $196,000 increasein non-recurring engineering expenses related to new product development and a$103,000 increase in depreciation and amortization expenses of acquiredintangible assets, partially offset by a $0.6 million decrease instock-based compensation expense recognized in accordance with SFAS No. 123(R).We anticipate that our research, development and related expenses may decreaseslightly as we continue to implement additional cost reduction measures. Thismay be partially offset by expenses we anticipate incurring as we develop andintroduce new products, including those employing our CameraCube and OmniBSItechnologies and as we develop other new technologies related to image sensors.

 

**Selling, General and Administrative Expenses**

 

Selling, generaland administrative expenses consist primarily of compensation and personnelrelated expenses, commissions paid to distributors and manufacturers’representatives and insurance and legal expenses. Selling, general and administrativeexpenses for the three months ended January 31, 2009 decreased toapproximately $13.9 million from $15.6 million for the three monthsended January 31, 2008. As a percentage of revenues, selling, general andadministrative expenses for the three months ended January 31, 2009 and2008 represented 17.4% and 6.9%, respectively.

 

The decrease inselling, general and administrative expenses of approximately$1.7 million, or 10.4%, for the three months ended January 31, 2009from the similar period in the prior year resulted primarily from a$1.8 million decrease in commissions paid primarily to distributorsand sales representatives and a $0.6 million decrease in stock-basedcompensation expense recognized in accordance with SFAS No. 123(R),partially offset by a $0.5 million increase in depreciation expense and a$205,000 increase in provisions for bad debts. We anticipate that ourselling, general and administrative expenses may decrease slightly as wecontinue to implement additional cost reduction measures. The amount of anypotential future charges for cost reduction measures may depend upon thenature, timing and extent of those measures.

 

**Interest Income, Net**

 

We invest ourcash, cash equivalents and short-term investments in interest-bearing accountsconsisting primarily of money market funds, commercial paper, certificates ofdeposit, high-grade corporate securities and government bonds. Interest income,net, declined to approximately $424,000 for the three months ended January 31,2009 from $3.4 million in the similar prior year period. The$3.0 million decline in interest income, net, resulted from a$2.4 million reduction in interest income for the three months ended January 31,2009 as compared to the corresponding period in the prior year. The decline wasthe result of lower interest rates on interest-bearing accounts than in thesame period in the prior year. In addition, interest expense associated withlong-term borrowings increased by $0.6 million. The increase in interestexpense resulted primarily from the recognition of interest charges as expensesin the three months ended January 31, 2009 as compared to the prior yearperiod during which period such charges were capitalized.

 

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**Other Expense, Net**

 

Other expense,net, for the three months ended January 31, 2009 totaled$2.9 million. Other expense, net, for the three months ended January 31,2009 included a $2.7 million loss on the interest rate swap agreements relatedto the mortgage on our complex of four buildings located in Santa Clara, California,or Santa Clara Property, a $150,000 loss that represented our portion of thenet loss recorded by ImPac Technology Co., Ltd., or ImPac, which we account forunder the equity method of accounting and a $98,000 exchange loss, partiallyoffset by a $39,000 gain, representing our portion of the net income recordedby China WLCSP Limited, or WLCSP, which we account for under the equity methodof accounting. Other expense, net, for the three months ended January 31,2008 totaled $1.0 million. The amount for the three months ended January 31,2008 included a $1.8 million loss on the interest rate swap agreements relatedto the mortgage on our Santa Clara Property and a $38,000 loss that representedour portion of the net loss recorded by ImPac which we account for under theequity method of accounting. These losses were partially offset by a$0.8 million gain consisting of our portion of the net income recorded byWLCSP which we also account for under the equity method of accounting.

 

**Provision for Income Taxes**

 

We generatedapproximately $19.3 million in loss before income taxes and minorityinterest for the three months ended January 31, 2009 and$27.7 million in income before income taxes and minority interest for thethree months ended January 31, 2008. We recorded a benefit from incometaxes of approximately $0.9 million for the three months ended January 31,2009 and a provision for income taxes of approximately $5.1 million forthe three months ended January 31, 2008, resulting in effective tax ratesof 4.8% and 18.6% for the respective periods. As required by FIN 18, *“Accounting for Income Taxes in Interim Periods, an interpretation ofAccounting Principal Board Opinion No. 28,”*or FIN 18, weexcluded from the current fiscal year’s overall estimation of the annualeffective tax rate one jurisdiction with losses for which no benefit can berealized.

 

**Minority Interest**

 

Minority interestfor the three months ended January 31, 2009 and 2008 was $(235,000) and$50,000, respectively, which represents the 56.1% and 56.0%, respectively,interest that we did not own in the net income (loss) of SOI.

 

*Nine Months Ended January 31,2009 as Compared to Nine Months Ended January 31, 2008*

 

### **Revenues**

 

Revenues for thenine months ended January 31, 2009 decreased by 33.7% to approximately$418.3 million from $630.7 million for the nine months ended January 31,2008. The decrease in revenues was due to a decrease in unit sales of ourimage-sensor products across all product categories and a decline in our ASPs.

 

## ***Revenues fromSales to OEMs and VARs as Compared to Distributors***

 

We sell ourimage-sensor products either directly to OEMs and VARs or indirectly throughdistributors. The following table shows the percentage of revenues from salesto OEMs and VARs and distributors in the nine months ended January 31,2009 and 2008:

 
| ** **    | ** ** | **Nine Months Ended  January 31,** | ** ** |
|---------------|------------|---------------------------------------------------|------------|
| ** **    | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| OEMs and VARs |       | 59.9                                              | %          | 67.6 | % |
| Distributors  |       | 40.1                                              |       | 32.4 |   |
| Total         |       | 100.0                                             | %          | 100.0 | % |

 

*OEMs andVARs.*   In the nine months ended January 31,2009, two OEM customers accounted for approximately 11.1% and 10.3% of ourrevenues. In the nine months ended January 31, 2008, one OEM customeraccounted for approximately 15.5% of our revenues. For the nine months ended January 31,2009 and 2008, no other OEM or VAR customer accounted for 10% or more of ourrevenues.

 

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*Distributors.*   Inthe nine months ended January 31, 2009, one distributor customer accountedfor approximately 22.5% of our revenues. In the nine months ended January 31,2008, one distributor customer accounted for approximately 20.5% of ourrevenues. For the nine months ended January 31, 2009 and 2008, no otherdistributor customer accounted for 10% or more of our revenues.

 

## ***Revenues fromDomestic Sales 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 31,2009 and 2008:

 
| ** **     | ** ** | **Nine Months Ended  January 31,** | ** ** |
|----------------|------------|---------------------------------------------------|------------|
| ** **     | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| Domestic sales |       | 7.2                                               | %          | 1.1 | % |
| Foreign sales  |       | 92.8                                              |       | 98.9 |   |
| Total          |       | 100.0                                             | %          | 100.0 | % |

 

### **Gross Profit**

 

Our gross marginin the nine months ended January 31, 2009 was 24.6%, a decrease from 25.4%for the nine months ended January 31, 2008. The principal contributor to the year-over-year decrease in gross margin was thedecline in our ASPs. This contributorto the reduction in gross profit was partially offset by a more favorableproduct mix and reductions in our production costs. During the nine months ended January 31,2009, the ASPs of our products werelower than they were in the year-earlier period. The decline in ASPs was due,in part, to a general price decline due to competition and, in part, also to anincrease in the proportion of sales represented by bare die, often referred toas chip-on-board, or COB, products, rather than packaged products. In the ninemonths ended January 31, 2009, in accordance with SFAS No. 123(R),we recorded approximately $2.4 millionin stock-based compensation expense to cost of revenues, as compared to $2.9 million in the nine monthsended January 31, 2008.

 

Revenue from salesof previously written-down products in the nine months ended January 31,2009 was $4.2 million,as compared to $5.3 million during the same period in the prior fiscalyear. In the nine months ended January 31, 2009, we recorded a provisionfor excess and obsolete inventory totaling $17.5 million to cost ofrevenues as compared to $17.9 million during the same period in the priorfiscal year.

 

**Research, Development and RelatedExpenses**

 

Research,development and related expenses for the nine months ended January 31,2009 increased to approximately $64.3 million from approximately$57.7 million for the nine months ended January 31, 2008. As apercentage of revenues, research, development and related expenses for the ninemonths ended January 31, 2009 and 2008 represented 15.4% and 9.1%,respectively.

 

The increase inresearch, development and related expenses of approximately $6.6 million,or 11.4%, for the nine months ended January 31, 2009 from the similarperiod in the prior year resulted primarily from a $2.7 million increasein salary and payroll-related expenses associated with salary increases and thehiring of additional personnel, a $1.6 million increase in non-recurringengineering expenses related to new product development, a $1.1 millionincrease in depreciation and amortization expenses of acquired intangibleassets, a $0.5 million increase in patent-related expenses and a$0.6 million increase in office and facility expenses, partially offset bya $227,000 decrease in stock-based compensation expense recognized inaccordance with SFAS No. 123(R).

** **

**Selling, General and Administrative Expenses**

 

Selling, generaland administrative expenses for the nine months ended January 31, 2009increased to approximately $48.2 million from $46.5 million for thenine months ended January 31, 2008. As a percentage of revenues, selling,general and administrative expenses for the nine months ended January 31,2009 and 2008 represented 11.5% and 7.4%, respectively.

 

The increase inselling, general and administrative expenses of approximately$1.7 million, or 3.7%, for the nine months ended January 31, 2009from the similar period in the prior year resulted primarily from a$1.5 million increase 

 

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insalary and payroll-related expenses associated with salary increases and thehiring of additional personnel, a $1.0 million increase in depreciationexpenses, a $0.7 million increase in fees for outside services, a $445,000increase in office and facility expenses, a $416,000 increase in propertytaxes, a $339,000 increase in marketing expenses and a $225,000 increase insoftware expenses, partially offset by a $1.5 million decrease incommissions paid primarily to distributors and sales representatives, a$1.1 million decrease in legal and accounting expenses and a$0.8 million decrease in stock-based compensation expense recognized inaccordance with SFAS No. 123(R).

 

**Goodwill Impairment**

 

During the secondquarter of fiscal 2009, based on a combination of factors, including thesignificant decline in our market capitalization and the global economicdownturn, we concluded that there were sufficient factual circumstances forinterim impairment analyses under SFAS No. 142 and SFAS No. 144. Bycomparing the fair value to net assets other than goodwill, we recorded anon-cash goodwill impairment charge of $7.5 million, or 1.8% of revenues,which we included in “Goodwill impairment” for the nine months ended January 31,2009. There was no similar goodwill impairment charge in the same period of theprior year.

 

**Interest Income, Net**

 

Interest income,net, for the nine months ended January 31, 2009 decreased to approximately$2.2 million from $10.1 million for the nine months ended January 31,2008. The $7.9 million decline in interest income, net, resulted from a$6.6 million reduction in interest income for the nine months ended January 31,2009 as compared to the corresponding period in the prior year was the resultof lower interest rates on interest-bearing accounts and a $1.3 millionincrease in interest expense associated with long-term borrowings. The increasein interest expense resulted primarily from the recognition of interest chargesas expenses in the nine months ended January 31, 2009 as compared to theprior year period during which period such charges were capitalized.

 

**Other Expense, Net**

 

Other expense,net, for the nine months ended January 31, 2009 totaled $3.7 million.Other expense, net, for the nine months ended January 31, 2009 included a$0.9 million exchange loss, a $0.7 million loss that represented ourportion of the net loss recorded by ImPac and a $2.9 million loss oninterest rate swap agreements related to the mortgage on the Santa ClaraProperty, partially offset by a gain of $451,000, representing our portion ofthe net income recorded by WLCSP. Other expense, net, for the nine months endedJanuary 31, 2008 totaled $1.1 million. The amount included a non-cash$2.0 million charge arising from the revaluation of the interest rate swaprelated to the mortgage on our Santa Clara property and a $244,000 loss for thenine months ended January 31, 2008 as our portion of the net loss recordedby ImPac which we account for under the equity method of accounting. Theselosses were partially offset by a $0.9 million gain consisting of ourportion of the net income recorded by WLCSP, which we also account for underthe equity method of accounting.

 

**Provision for Income Taxes**

 

We generated approximately $18.9 million in loss before incometaxes and minority interest for the nine months ended January 31, 2009 and$64.9 million in income before income taxes and minority interest for thenine months ended January 31, 2008. We recorded a benefit from incometaxes of approximately $1.0 million for the nine months ended January 31,2009 and a provision for income taxes of approximately $8.9 million forthe nine months ended January 31, 2008, resulting in effective tax ratesof 5.3% and 13.8% for the respective periods.

 

Quarterly income taxes reflect an estimate of the effective tax ratefor the fiscal year and include, when applicable, the impact of discrete taxitems. As required by FIN 18, we excluded from the current fiscal year’soverall estimation of the annual effective tax rate one jurisdiction withlosses for which no benefit can be realized.

 

During the ninemonths ended January 31, 2009, the Emergency Economic Stabilization Act of2008 reinstated the U.S. federal research and development tax credit,retroactive to January 1, 2008. As a result, our benefit for income taxesfor the nine months ended January 31, 2009 reflected a $0.6 million taxbenefit related to fiscal 2008 research and development expenses. Ourbenefit from income taxes for the nine months ended January 31, 2009 alsoreflected the unfavorable impact of the $7.5 million goodwill impairmentcharge, partially offset by the favorable impact of foreign exchange gainsrelated to our unrecognized tax benefits. Our provision for income taxes forthe nine months ended 

 

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

 

January 31,2008 reflected the benefit from the reduction of accrual for penalties relatedto our unrecognized tax benefits by $4.5 million as a result of a changein tax law in a foreign jurisdiction.

 

**Minority Interest**

 

Minority interestfor the nine months ended January 31, 2009 was $(627,000), whichrepresents the approximately 56.1% interest that we do not own in the net lossof SOI which we included in our consolidated operating results. Minorityinterest for the nine months ended January 31, 2008 was $56,000, whichrepresents the approximately 56.0%, interest that we did not own in the netincome of SOI which we included in our consolidated operating results.

 

**Liquidityand Capital Resources**

 

Our principalsources of liquidity at January 31, 2009 consisted of cash, cashequivalents and short-term investments totaling $263.7 million.

 

## ***Liquidity***

 

Our workingcapital declined to $389.8 million as of January 31, 2009 as comparedto $413.7 million as of April 30, 2008. Our working capital decreasedas a result of: a $58.9 million decrease in accounts receivable, net,resulting from a decrease in product shipments late in the nine months ended January 31,2009; a $13.3 million decrease in short-term investments; a$3.0 million increase in the current portion of long-term debt and a$1.3 million increase in income taxes payable. These decreases in workingcapital were partially offset by: a $31.3 million increase in inventories;a $7.7 million increase in cash and cash equivalents primarily due to cashprovided by operating activities; a $6.7 million decrease in accountspayable resulting from the timing of disbursement cycles; a $5.8 milliondecrease in accrued expenses and other current liabilities; and a$1.5 million increase in prepaid expenses and other current assets.

 

In March 2007,we purchased a complex of four buildings in Santa Clara, California, or theSanta Clara Property. In connection with the purchase, we entered into a Loanand Security Agreement with a domestic bank on March 16, 2007. The Loanand Security Agreement provides for a term mortgage loan in the principalamount of $27.9 million, or the Mortgage Loan, and a secured line ofcredit with an aggregate maximum principal amount of up to $12.0 million,or the Term Loan. In March 2008, we borrowed $6.0 million under theTerm Loan to finance improvements to our Santa Clara Property. We drew down theremaining $6.0 million under the Term Loan in July 2008.

 

SOI maintains fourunsecured lines of credit with three commercial banks, which provide a total ofapproximately $3.4 million in available credit. All borrowings under theselines of credit bear interest at the market interest rate prevailing at thetime of borrowing. There are no financial covenant requirements for thesefacilities. At January 31, 2009 and April 30, 2008, there were noborrowings outstanding under these facilities.

 

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

 

For the ninemonths ended January 31, 2009, net cash provided by operating activitiestotaled approximately $29.0 million as compared to $84.2 million forthe corresponding period in the prior year. The principal components of thecurrent year amount were: a net loss of approximately $17.3 million forthe nine months ended January 31, 2009; adjustments for non-cash chargesof $20.1 million in stock-based compensation, $17.5 million inwrite-down of inventories, $13.8 million in depreciation and amortization,$7.5 million in goodwill impairment charges, $2.9 million from losson interest rate swaps and $2.4 million of gains in equity investments; a$59.0 million decrease in accounts receivable, net, and a$0.8 million increase in income taxes payable. These increases werepartially offset by: a $47.2 million increase in inventories; a$15.0 million decrease in accounts payable; a $5.8 million decreasein accrued expenses and other current liabilities; a $3.5 million increasein deferred income taxes and a $1.4 million decrease in deferred taxliabilities. The $59.0 million decrease in accounts receivable, net,reflects the lower level of revenues during the nine months ended January 31,2009, with the days of sales outstanding declining to 53 days as of January 31,2009 from 56 days as of April 30, 2008. The $47.2 million increase ininventories resulted in a decrease in annualized inventory turns to 1.7 asof January 31, 2009 from 4.3 as of April 30, 2008.

 

For the ninemonths ended January 31, 2008, net cash provided by operating activitiestotaled approximately $84.2 million. The principal components of theamount for the nine months ended January 31, 2008 were: net income ofapproximately $56.0 million for the nine months ended January 31,2008, adjusted for non-cash charges of $21.6 million in stock-basedcompensation, $17.9 million in write-down of inventories,$9.8 million in depreciation and 

 

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

 

amortizationand $6.7 million of gains in equity investments; a $20.5 millionincrease in accounts payable; a $14.1 million decrease in prepaid expensesand other current assets; a $9.0 million increase in income taxes payableand a $1.3 million increase in deferred income. These increases werepartially offset by: a $25.9 million increase in accounts receivable, net;a $20.7 million increase in inventories; a $12.7 million decrease inaccrued expenses and other current liabilities; and a $2.0 milliondecrease in deferred tax liabilities. The $25.9 million increase inaccounts receivable, net, reflects the higher level of revenues during the ninemonths ended January 31, 2008, partially offset by an improvement in daysof sales outstanding as of January 31, 2008 to 37 days from49 days as of April 30, 2007. The $20.7 million increase ininventories was a reflection of increased sales in fiscal 2008. The inventorybalances increased concurrently with an improvement in annualized inventoryturns to 5.4 as of January 31, 2008 from 3.1 as of April 30,2007. The $14.1 million decrease in prepaid expenses and other currentassets was principally due to the final settlement of the class actionlitigation and the consequent removal of the associated recoverable insuranceproceeds from the balance sheet and the reclassification of a deposit paid forland from other current assets to property, plant and equipment upon transferof title.

 

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

 

For the ninemonths ended January 31, 2009, our cash used in investing activitiestotaled $16.2 million as compared to approximately $2.6 million usedin investing activities for the corresponding period in the prior year, dueprimarily to: $27.8 million in purchases of property, plant and equipmentand $1.4 million in a long-term investment in ImPac, partially offset by$12.9 million in net sales of short-term investments. For the nine monthsended January 31, 2008, our cash used in investing activities totaled$2.6 million due primarily to: $21.5 million in purchases ofproperty, plant and equipment and $9.0 million in a long-term investmentin WLCSP, partially offset by $27.9 million in net sales of short-terminvestments.

 

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

 

For the ninemonths ended January 31, 2009, net cash used in financing activitiestotaled approximately $4.8 million as compared to net cash provided byfinancing activities of $3.0 million during the corresponding period inthe prior year. This change was due primarily to $12.9 million in repurchasesof our common stock, partially offset by $4.4 million in proceeds from theexercise of stock options and employee purchases through our employee stockpurchase plan and $3.8 million in proceeds from net long-term borrowings.For the nine months ended January 31, 2008, net cash provided by financingactivities totaled approximately $3.0 million due primarily to$14.2 million in proceeds from the exercise of stock options and employeepurchases through our employee stock purchase plan partially offset by$11.5 million in repurchases of shares of our common stock under theopen-market program in the nine months ended January 31, 2008.

 

## ***CapitalCommitments and Resources***

 

Over the next twoyears, we expect to invest a total of approximately $33.6 million in ourwholly-owned subsidiary in Shanghai, OmniVision Technologies (Shanghai) Co.Ltd., or OTC, of which we have already contributed $12.0 million. Thefunding requirement arises from our execution of a Land-Use-Right PurchaseAgreement with the Construction and Transportation Commission of the Pudong NewDistrict, Shanghai with a concomitant commitment to spend approximately$33.6 million to develop the land. See Note 16* — “Commitmentsand Contingencies”*to our condensed consolidated financial statements.We expect to fund our capital commitments to OTC from our available workingcapital.

 

In February 2007,our board of directors approved an additional stock repurchase program thatprovides for the repurchase of up to $100.0 million of our outstandingcommon stock in an open-market program. Subject to applicable securities laws,such repurchases will be at such times and in such amounts as we deemappropriate, based on factors such as market conditions, legal requirements andother corporate considerations. As of January 31, 2009, we hadcumulatively repurchased 6,671,000 shares of our common stock under theopen-market program for an aggregate cost of approximately $99.1 million.See Note 14 *— “TreasuryStock”*to our condensed consolidated financial statements.

 

In addition, weare obligated to pay $10.0 million in cash, if and when we sell apre-determined number of products incorporating CDM’s technology, prior to April 30, 2009.CDM and the costs associated with the acquisition are included in our condensedconsolidated balance sheets at January 31, 2009 and April 30, 2008.

 

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

 

Wecurrently expect our available cash, cash equivalents and short-terminvestments, together with cash that we anticipate generating from operatingactivities, will be sufficient to satisfy our capital requirements overapproximately the next twelve months. Other than normal working capitalrequirements, we expect our capital requirements totaling approximately$40.0 million over approximately the next twelve months will consistprimarily of funding capital investments in our wholly-owned subsidiaries,OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, OTC and ShanghaiOmniVision Semiconductor Technology, Co. Ltd, or OST. We formed OST during thethree months ended October 31, 2008, for the purpose of expanding ourtesting capabilities in Shanghai, China.

 

Our ability togenerate cash from operations is subject to substantial risks described belowunder the caption Part II Item 1A. *“RiskFactors.”*We encourage you to review these risks carefully.

 

**Contractual Obligations and Commercial Commitments**

 

The following table summarizes our contractualobligations and commercial commitments as of January 31, 2009 and theeffect such obligations and commitments are expected to have on our liquidityand cash flows in future periods (in thousands):

 
| ** **                                               | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                               | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **More than  5 Years** | ** ** |
| Contractual Obligations:                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating leases                                         |       | $                                         | 13,433     |   | $ | 5,626 |   | $ | 5,770 |   | $ | 2,037 |   | $ | — |   |
| Capital leases                                           |       | 16                                        |       | 16 |   | — |   | — |   | — |   |
| Mortgage obligation                                      |       | 37,310                                    | (1)        | 3,554 |   | 7,107 |   | 2,857 |   | 23,792 |   |
| Noncancelable orders                                     |       | 12,278                                    |       | 12,278 |   | — |   | — |   | — |   |
| Total contractual obligations                            |       | 63,037                                    |       | 21,474 |   | 12,877 |   | 4,894 |   | 23,792 |   |
|                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Other Commercial Commitments:                            |       |                                      |       |   |   |   |   |   |   |   |   |
| OST                                                      |       | 8,500                                     | (2)        | — |   | 8,500 |   | — |   | — |   |
| OTC                                                      |       | 21,635                                    | (3)        | 16,590 |   | 5,045 |   | — |   | — |   |
| Total commercial commitments                             |       | 30,135                                    |       | 16,590 |   | 13,545 |   | — |   | — |   |
| Total contractual obligations and commercial commitments |       | $                                         | 93,172     |   | $ | 38,064 |   | $ | 26,422 |   | $ | 4,894 |   | $ | 23,792 |   |

 

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

 

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

 

(3)          Overthe next two years, we expect to invest a total of approximately$33.6 million in our subsidiary, OTC, of which we have already invested$12.0 million. OTC will use the funds to develop land and constructfacilities for its use. See Note 16 — “*Commitmentsand Contingencies”* to our condensed consolidated financialstatements.

 

As of January 31,2009, the long-term income taxes payable under FIN 48 was$77.5 million. We are unable to make a reasonably reliable estimate of thetiming of payments in individual years beyond twelve months due touncertainties in the timing of tax audit, if any, or their outcomes.Accordingly, we have excluded this obligation from the schedule summarizing oursignificant obligations to make future payments under contractual obligationsas of January 31, 2009 presented above.

 

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

 

### **Off-BalanceSheet Arrangements**

 

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

 

### **RecentAccounting Pronouncements**

 

In March 2008,the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 161,*“Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133,”* orSFAS No. 161. This Statement requires enhanced disclosures for derivativeinstruments, including those used in hedging activities. It requiresqualitative disclosures about objectives and strategies for using derivatives,and quantitative disclosures about fair value amounts of gains and losses onderivative instruments. In September 2008, FASB issued Financial StaffPosition, or FSP, SFAS No. 133-1 and FASB Interpretation No., orFIN, 45-4, *“Disclosures about Credit Derivatives andCertain Guarantees: An Amendment of FASB Statement No. 133 and FASBInterpretation No. 45, and Clarification of the Effective Date of FASBStatement No. 161,”* or FSP SFAS No. 133-1 andFIN 45-4. FSP SFAS No. 133-1 and FIN 45-4 clarifies that SFAS No. 161is effective for any reporting period beginning after November 15, 2008.SFAS No. 161 is effective for our fourth quarter of fiscal 2009. Wedo not expect the adoption of SFAS No. 161 to have any material effect onour financial position, results of operations or cash flows.

 

FSP SFAS No. 133-1and FIN 45-4 also amends FASB Statement No. 133, *“Accountingfor Derivative Instruments and Hedging Activities,”* to requireenhanced disclosures about credit derivatives and guarantees, and amendsFIN 45, *“Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness toOthers,”* to exclude derivative instruments accounted for at fairvalue under SFAS No. 133. The provisions of FSP SFAS No. 133-1 andFIN 45-4 that amended SFAS No. 133 and FIN 45 are effective forreporting periods ending after November 15, 2008. Our adoption of FSP SFASNo. 133-1 and FIN 45-4 did not have any material effect on ourfinancial position, results of operations or cash flows.

 

In November 2008,the Emerging Issues Task Force, or EITF, reached a consensus on EITF Issue No. 08-06,*“Equity Method Investment AccountingConsiderations,”* or EITF No. 08-06. Under EITF No. 08-06,an equity method investor shall account for a share issuance by an investee asif the investor had sold a proportionate share of its investment, and anyresulting gain or loss shall be recognized in earnings. EITF No. 08-06 iseffective in fiscal years beginning after December 15, 2008 and we arerequired to adopt it in the first quarter of our fiscal 2010. We arecurrently evaluating the impact EITF No. 08-06 may have on our financialposition, results of operations and cash flows.

 

In December 2008,FASB issued FSP SFAS No. 140-4 and FIN 46(R)-8, *“Disclosuresby Public Entities (Enterprises) about Transfers of Financial Assets andInterests in Variable Interest Entities,”* or FSP SFAS No. 140-4and FIN 46(R)-8. FSP SFAS No. 140-4 and FIN 46(R)-8 amendsFIN 46(R), *“Consolidation of Variable InterestEntities,”* or FIN 46(R), to require public enterprises,including sponsors that have a variable interest in a variable interest entity,or VIE, to provide additional disclosures about their involvement with the VIE.FSP SFAS No. 140-4 and FIN 46(R)-8 is effective immediately. Ouradoption of FSP SFAS No. 140-4 and FIN 46(R)-8 did not have anymaterial effect on our financial position, results of operations or cash flows.

 

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**ITEM 3.   QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

## ***Foreign CurrencyExchange Risk***

 

We sell ourproducts globally, in particular to branded customers, contract manufacturers,VARs and distributors in China, Japan, Korea and Taiwan.

 

The great majorityof our transactions with our customers and vendors are denominated in U.S.dollars. The expenses we incur in currencies other than U.S. dollars affectgross profit, selling, general and administrative expenses, research,development and related expenses and income taxes, and are primarily incurredin China, where the Chinese Yuan, or CNY, is the local currency and in Taiwan,where the New Taiwan dollar is the local currency.

 

Asof January 31, 2009, the functional currency of our wholly-ownedsubsidiaries located in Hong Kong, OmniVision Technologies (Hong Kong) CompanyLimited, OmniVision Trading (Hong Kong) Company Ltd., and OmniVision Holding(Hong Kong) Co., Ltd.; in the Cayman Islands, OmniVision International Holding,Ltd. and OmniVision Technology International Ltd. (formerly HuaWei TechnologyInternational, Ltd.); in China, OSC and OTC and OST, and in Taiwan, TaiwanOmniVision Technologies Co., Ltd., Taiwan OmniVision International TechnologiesCo., Ltd., and Taiwan OmniVision Investment Holding Co., Ltd., is the U.S.dollar. Our other wholly-owned subsidiaries have their respective localcurrencies as their functional currencies. The functional currency of ourconsolidated affiliate, SOI, is the New Taiwan dollar. Transaction gains andlosses resulting from transactions denominated in currencies other than therespective functional currencies are included in “Other expense, net” for theperiods presented. The amounts of transaction gains and losses for the ninemonths ended January 31, 2009 and 2008 were not material.

 

Given that theexpenses that we incur in currencies other than U.S. dollars have not been asignificant percentage of our revenues, we do not believe that our foreigncurrency exchange rate fluctuation risk is significant. Consequently, we do notbelieve that a ten percent change in foreign currency exchange rates would havea significant effect on our future net income or cash flows.

 

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

 

## ***Market Interest RateRisk***

 

Our cashequivalents and short-term investments are exposed to financial market risk dueto fluctuation in interest rates, which may affect our interest income and,from time to time, the fair market value of our investments. We manage ourexposure to financial market risk by performing ongoing evaluations of ourinvestment portfolio. We presently invest in money market funds, certificatesof deposit issued by banks, commercial paper, certificates of deposit,high-grade corporate securities and government bonds maturing approximately 18months or less from the date of purchase. In the past, we also invested inauction rate securities and in variable rate demand notes, which have a finalmaturity date of up to 39 years but whose interest rate is reset at varyingintervals typically between seven and 35 days. As of January 31,2009, we did not hold any auction rate securities or variable rate demandnotes.

 

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

 

Duringfiscal 2007, we financed the purchase of the Santa Clara Property with a$27.9 million mortgage loan. The mortgage loan is a variable rate loanwhich bears interest at LIBOR plus 90 basis points and changes in the interestrate affect our interest payments. However, concurrent with the mortgage loan,we also entered into an interest rate swap with a notional amount thatapproximates the principal outstanding under the mortgage loan. We are thefixed rate payer under the swap with a fixed rate of 5.27%. In both March andJuly 2008, we drew down $6.0 million under a term loan. 

 

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Concurrentwith the term loan, we also entered into an interest rate swap with a notionalamount that approximates the principal outstanding under the term loan. We arethe fixed rate payer under the swap with a fixed rate of 4.26%. In July 2008,in connection with the Term Loan we entered into a second interest rate swapwith the bank to effectively convert the variable interest rate described aboveto a fixed rate. This second swap is for a period of four years. We are thefixed rate payer and the rate is fixed at 4.3% per annum and the effective rateon the Term Loan is fixed at approximately 5.5%. Consequently, although we arerequired to mark the value of the swaps to market at each balance sheet dateand record the associated non-cash cost or benefit as part of Other income(expense), net, a hypothetical ten percent change in LIBOR would not have amaterial effect on our annual interest expense.

 

**ITEM4.   CONTROLS AND PROCEDURES**

 

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

 

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

 

**(b)  Changesin Internal Controls.**

 

There have been nochanges in our internal control over financial reporting during the three monthperiod ended January 31, 2009, as covered by this Quarterly Report on Form 10-Q,that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PART II — OTHERINFORMATION**

 

**ITEM 1.   LEGALPROCEEDINGS**

 

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

 

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

 

In June 2004,the issuer defendants and plaintiffs negotiated a stipulation of settlement forthe claims against the issuer defendants, including us that was submitted tothe Court for approval. In August 2005, the Court preliminarily approvedthe settlement. In December 2006, the appellate court overturned thecertification of classes in the six test cases that were selected by theunderwriter defendants and plaintiffs in the coordinated proceedings. Theaction involving OmniVision is not one of the six test cases. Because classcertification was a condition of the settlement, it was unlikely that the currentsettlement would receive final court approval. On June 25, 2007, the Courtentered an order terminating the proposed settlement based upon a stipulationamong the parties to the settlement. Plaintiffs filed amended masterallegations and amended complaints and moved for class certification in the sixtest cases, which the defendants in those cases have opposed. On March 26,2008, the Court largely denied the test case defendants’ motion to dismiss theamended complaints. The parties have reached a global settlement of thelitigation and have so advised the Court. Under the settlement, whichremains subject to Court approval, the insurers would pay the fullamount of settlement share allocated to us, and we would bear no financialliability. Our company, as well as our company’s officer and directordefendants who were previously dismissed from the action pursuant to tollingagreements, would receive complete dismissals from the case. It isuncertain whether the settlement will receive final Court approval. Ifthe settlement does not receive final Court approval, and litigationagainst us proceeds, we believe that we have meritorious defenses to plaintiffs’claims and intend to defend the action vigorously.

 

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

 

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

 

On March 6,2009, Panavision Imaging, LLC, or Panavision, filed a complaint against usalleging patent infringement in the District Court for the Central District ofCalifornia. The case is entitled Panavision Imaging, LLC v. OmniVisionTechnologies, Inc., Canon U.S.A., Inc., Micron Technology, Inc.and Aptina Imaging Corporation, Case No. CV09-1577. In its complaint,Panavision asserts that we make, have made, use, sell and/or import productsthat infringe U.S. Patent Nos. 6,818,877 (“Pre-charging a Wide AnalogBus for CMOS Image Sensors”), 6,663,029 (“Video 

 

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Busfor High Speed Multi-resolution Imagers and Method Thereof”) and 7,057,150 (“SolidState Imager with Reduced Number of Transistors per Pixel”). The complaintseeks unspecified monetary damages, fees and expenses and injunctive reliefagainst us. We are in the initial stages of reviewing and investigating thecomplaint and expect to vigorously defend ourselves against Panavision’sallegations. At this time, we cannot estimate any possible loss or predictwhether this matter will result in any material expense to us.

 

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** **

**ITEM 1A.   RISKFACTORS**

 

*ThisQuarterly Report on Form 10-Q, including Management’s Discussion andAnalysis of Financial Condition and Results of Operations, containsforward-looking statements. These forward-looking statements are subject tosubstantial risks and uncertainties that could cause our future business, financialcondition or results of operations to differ materially from our historicalresults or currently anticipated 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 2008 Annual Report on Form 10-Kfiled with the SEC on June 30, 2008. As a result of the following riskfactors, as well as of other variables affecting our operating results, pastfinancial performance may not be a reliable indicator of future performance,and historical trends should not be used to anticipate results or trends infuture periods.*

 

***Risks Related toOur Business***

 

## ***Recent domesticand worldwide economic conditions have adversely affected and may furtheradversely affect our business, results of operations, and financial condition.***

 

Recently, generaldomestic and global economic conditions have been negatively impacted byseveral factors, including, among others, the subprime-mortgage crisis in thehousing market, going concern threats to investment banks and other financialinstitutions, reduced corporate spending, and decreased consumer confidence.These economic conditions have resulted in our facing one of the mostchallenging periods in our history. The image sensor market has been negativelyimpacted by the current global economic environment. In particular, we believethe current economic conditions have reduced spending by consumers and businessesin markets into which we sell our products in response to tighter credit,negative financial news and the continued uncertainty of the global economy.End customer demand has decreased significantly throughout the industry,affecting all consumer electronic products, security products and products forthe automotive industry. Consequently, the overall demand for image sensors hasalso decreased. This decrease in demand is having a significant impact on ourrevenues, results of operations and overall business. Our revenues for thethree-month period ended January 31, 2009 were lower than similarhistorical periods. In addition, the current global economic environment hasnegatively impacted our business outlook and we expect that our revenues in thethree-month period ending April 30, 2009, will be lower than our reportedrevenues for the three-month period ended January 31, 2009.

 

These conditionscould also have a number of additional effects on our business, includinginsolvency of key suppliers or manufacturers resulting in product delays,inability of customers to obtain credit to finance purchases of our products,customer insolvencies, increased pricing pressures, restructuring expenses andassociated diversion of management’s attention, excess inventory and increaseddifficulty in accurately forecasting product demand and planning futurebusiness activities. It is uncertain how long the current economic conditionswill last or how quickly any subsequent economic recovery will occur. If theeconomy or markets into which we sell our products continue to slow or anysubsequent economic recovery is slow to occur, our business, financialcondition and results of operations could be further materially and adverselyaffected.

## *** ***

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

 

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

 

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

 

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such as Micron, Samsung, Sharp, Sony,STMicroelectronics and Toshiba as wellas CCD image sensor manufacturers such as Fuji, Kodak, NEC, Panasonic, Sanyo, Sharp, Sony and Toshiba. Many of thesecompetitors own and operate their own fabrication facilities, which in certaincircumstances may give them the ability to price their products moreaggressively than we can 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 Foveon, PixArt, Pixelplus, Pixim, SETi and SiliconFile. Competition with these and other companieshas required, and in the future may require, us to reduce our prices. Forinstance, we have seen increased competition in the markets for VGA imagesensor products with resulting pressures on product pricing. Downward pressureon pricing could result both in decreased revenues and lower gross margins,which would adversely affect our profitability. From time to time, othercompanies enter the CMOS image sensor market by using obsolete and availablemanufacturing equipment. These new entrants gain market share in the short termby pricing their products significantly below current market levels, which putsadditional downward pressure on the prices we can obtain for our products.

 

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

 

## ***Reductions in our average selling prices may lower ourrevenues and, as a result, may reduce our gross margins.***

 

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

 

## ***Sales of ourimage-sensor products for mobile phones account for a large portion of ourrevenues, and any decline in sales to the mobile phone market or failure of thismarket to continue to grow as expected could adversely affect our results ofoperations.***

 

Sales to themobile phone market account for a large portion of our revenues. Although wecan only estimate the percentages of our products that are used in the mobilephone market due to the significant number of our image-sensor products thatare sold to module makers or through distributors and VARs, we believe that themobile phone market accounted for approximately 70% of our revenues infiscal 2008 and approximately 65% in the nine months ended January 31,2009, respectively. We expect that revenues from sales of our image-sensorproducts to the mobile phone market will continue to account for a significantportion of our revenues during fiscal 2009 and beyond. Any factorsadversely affecting the demand for our image sensors in this market could causeour business to suffer and adversely affect our operating results. The digitalimage sensor market for mobile phones is extremely competitive, and we expectto face increased competition in this market in the future. In addition, webelieve the market for mobile phones is also relatively concentrated and thetop five producers account for more than 80% of the annual sales of theseproducts. If we do not continue to achieve design wins with key mobile phonemanufacturers, our market share or revenues could decrease. The mobile phoneimage-sensor market is also subject to rapid technological change. In order tocompete successfully in this market, we will have to correctly forecastcustomer demand for technological improvements and be 

 

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ableto deliver such products on a timely basis at competitive prices. If we fail todo this, our results of operations, business and prospects would be materiallyand adversely affected. In the past, we have experienced problems accuratelyforecasting customer demand in other markets. In addition, current domestic andglobal economic conditions could negatively affect the mobile phone market ifconsumers and/or businesses defer purchases in this market in response totighter credit, negative financial news, and/or decreased corporate or consumerspending. If our sales to the mobile phone market do not increase and/or themobile phone market does not grow as expected, our results of operations,business and prospects would be materially adversely affected.

 

## ***Our future successdepends on the timely development, introduction, marketing and selling of newproducts, 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. As our products integrate new and more advancedtechnologies and functions, they become more complex and increasingly difficultto design, debug and produce. Successful product development and introductiondepends on a number of factors, including:

 

·                  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;

 

·                  development ofadvanced technologies and capabilities, including our new CameraCube andOmniBSI technology;

 

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

 

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

 

·                  marketacceptance of the new products.

 

Accomplishing all of these steps is difficult, time consuming andexpensive. We may be unable to develop new products or product enhancements intime to capture market opportunities or achieve significant or sustainableacceptance in new and existing markets. In addition, our products could becomeobsolete sooner than anticipated because of a rapid change in one or more ofthe technologies related to our products or the reduced life cycles of consumerproducts.

 

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

 

Our past success has been, and our future success is, dependent uponmanufacturers designing our image-sensor products into their products. Toachieve design wins, which are decisions by manufacturers to design ourproducts into their systems, we must define and deliver cost effective andinnovative image-sensor solutions on a timely basis that satisfy themanufacturers’ requirements. Our ability to achieve design wins is subject tonumerous risks including competitive pressures as well as technological risks.If we do not achieve a design win with a prospective customer, it may bedifficult to sell our image-sensor products to such prospective customer in thefuture because once a manufacturer has designed a supplier’s products into itssystems, the manufacturer may be reluctant to change its source of components dueto the significant costs, time, effort and risk associated with qualifying anew supplier and modifying its design platforms. Accordingly, if we fail toachieve design wins with key device manufacturers that embed image sensors intheir products, our market share or revenues could decrease. Furthermore, tothe extent that our competitors secure design wins, our ability to expand ourbusiness in the future will be impaired.

 

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## ***We depend on alimited number of third party wafer foundries, which reduces our ability tocontrol our manufacturing process.***

 

Unlike some of our larger competitors, we do not own or operate asemiconductor fabrication facility. Instead, we rely on TSMC, PSC and othersubcontract foundries to produce all of our wafers. Historically, we haverelied on TSMC to provide us with a substantial majority of our wafers. As apart of our joint venture agreement with TSMC, TSMC has agreed to commitsubstantial wafer manufacturing capacity to us in exchange for our commitmentto purchase a substantial portion of our wafers from TSMC, subject to pricingand technology requirements.

 

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

 

Under the terms of these supply agreements, we secure manufacturingcapacity in any particular period on a purchase order basis. The foundries haveno obligation to supply products to us for any specific period, in any specificquantity or at any specific price, except as set forth in a particular purchaseorder. In general, our reliance on third party foundries involves a number ofsignificant risks, including:

 

·                  reduced controlover delivery schedules, quality assurance, manufacturing yields and productioncosts;

 

·                  lack ofguaranteed production capacity or product supply;

 

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

 

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

 

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

 

## ***We rely on a jointventure company for color filter application and on third party serviceproviders for packaging and other back-end services, which reduces our controlover delivery schedules, product quality and cost, and could adversely affectour ability to deliver products to customers.***

 

We rely on VisEra, our joint venture with TSMC, for the color filterprocessing of our completed wafers. In addition, we rely on AdvancedSemiconductor Engineering, Inc. and on ImPac, our equity investee, forsubstantially all of our ceramic chip packages. We rely on XinTec and WLCSP,two investee companies, for chip scale packages, which are generally used inour products designed for the smallest form factor applications. We rely onseveral specialized service providers, one of which is ImPac, to perform thenecessary wafer probe tests and prepare good die for use in a form calledchip-on-board, a process called reconstructing wafers. The current globaleconomic conditions could adversely affect these service providers’ ability tocontinue to fulfill our packaging, color filter processing and relatedrequirements. If for any reason one or more of these service providers were tobecome unable or unwilling to continue to provide services of acceptablequality, at acceptable costs or in a timely manner, our ability to deliver ourproducts to our customers could be severely impaired. We would have to identifyand qualify substitute service providers, which could be time consuming anddifficult and could result in unforeseen operational problems. Substituteservice providers might not be available or, if available, might be unwillingor unable to offer services on acceptable terms.

 

In addition, if competition for color filter processing, packaging,capacity or other back-end services increases, we may be required to pay orinvest significant amounts to secure access to these services, which couldadversely impact our operating results. The number of companies that providethese services is limited and some of them have limited operating histories andfinancial resources. In the event our current providers refuse or are unable tocontinue to provide 

 

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these services to us, we may be unable to procureservices from alternate service providers. Furthermore, if customer demand forour products increases, we may be unable to secure sufficient additionalcapacity from our current service providers on commercially reasonable terms,if at all. These factors may cause unforeseen product shortages or may increaseour costs of manufacturing, assembling or testing of our products, which wouldadversely affect our operating results.

 

## ***Fluctuations inour quarterly operating results have caused volatility in the market price ofour common stock and also make it difficult to predict our future operatingresults.***

 

Our quarterly operating results have varied significantly from quarter toquarter in the past and are likely to vary significantly in the future based ona number of factors, many of which are beyond our control. These factors andother industry risks, many of which are more fully discussed in our other riskfactors, include, but are not limited to:

 

·                  adverse changesin domestic or global economic conditions, including the current economiccrisis;

 

·                  the volume andmix of our product sales;

 

·                  competitivepricing pressures;

 

·                  our ability toaccurately forecast demand for our products;

 

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

 

·                  our gain or lossof a large customer;

 

·                  our ability tomanage our product transitions;

 

·                  the availabilityof production capacity at the suppliers that manufacture our products orprocess our products;

 

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

 

·                  the timing andsize of orders from our customers;

 

·                  the volume ofour product returns;

 

·                  the seasonalnature of customer demand for our products;

 

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

 

·                  the announcementand introduction of products and technologies by our competitors;

 

·                  the fair valueof our interest rate swaps;

 

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

 

·                  the level of ouroperating expenses; and

 

·                  fluctuations inour effective tax rate from quarter to quarter.

 

Our introduction of new products and our product mix have affected andmay continue to affect our quarterly operating results. Changes in our productmix could adversely affect our operating results, because some products providehigher margins than others. We typically experience lower yields whenmanufacturing new products through the initial production phase, andconsequently our gross margins on new products have historically been lowerthan our gross margins on our more established products. We also anticipatethat the rate of orders from our customers may vary significantly from quarterto quarter. Our operating expenses are relatively fixed in the short-term, andour inventory levels are based on our expectations of future revenues.Consequently, if we do not achieve the revenues we expect in any quarter,expenses and inventory levels could be disproportionately high, adverselyimpacting our operating results for that quarter, and potentially in futurequarters.

 

All of these factors are difficult to forecast and could result influctuations in our quarterly operating results. Our operating results in agiven quarter could be substantially less than anticipated, and, if we fail tomeet market analysts’ expectations, a substantial decline in our stock pricecould result. Fluctuations in our quarterly operating results could adverselyaffect the price of our common stock in a manner unrelated to our long-termoperating performance.

 

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## ***Our use ofderivative financial instruments to reduce interest rate risk may result inadded volatility in our quarterly operating results***

 

We do not hold or issue derivative financial instruments for tradingpurposes. However, we do utilize derivative financial instruments to reduceinterest rate risk. We have a variable rate mortgage loan that totaled$37.3 million as of January 31, 2009. To manage the related interestrate risk, we entered into interest rate swap agreements, effectivelyconverting our mortgage loan into a fixed rate loan. Under generally acceptedaccounting principles, the fair values of the swap contracts, which will eitherbe amounts receivable from or payable to counterparties, are reflected aseither assets or liabilities on our consolidated balance sheets. Also, we haveto record their fair value changes in our consolidated statements ofoperations, in “Other expense, net.” The associated impact on our quarterlyoperating results is directly related to changes in prevailing interest rates.If interest rates increase, we would have a non-cash gain on the swap, and viceversa. Consequently, these swap contracts will introduce volatility to ouroperating results.

 

We are also exposed to credit loss in the event of non-performance by thecounterparties to the interest rate swap agreements. However, we do notanticipate non-performance by the counterparties.

 

## ***Our business issubject to seasonal fluctuations which may in turn cause fluctuations in ourresults of operations from period to period.***

 

Many of the products using our image sensors, such as mobile phones, notebooksand personal computers, DSCs andcameras for toys and games, are consumer electronics goods. These mass-marketcamera devices generally have seasonal cycles which historically have causedthe sales of our customers to fluctuate quarter-to-quarter. Historically,demand from OEMs and distributors that serve such consumer product markets hasbeen stronger in the second and third quarters of our fiscal year and weaker inthe first and fourth quarters of our fiscal year.

 

In addition, since a very large number of the manufacturers who use ourproducts are located in China 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 generally close. For example, we believe that the decline in revenuesthat we experienced in the fourth quarters of fiscal 2007 and 2008 is partlyattributable to the fact that in 2007 and 2008 Chinese New Year occurred inmid-February, and manufacturing did not resume in full for several weeks.

 

## ***Problems withwafer manufacturing and/or back-end processing yields could result in higherproduct costs and could impair our ability to meet customer demand for ourproducts.***

 

If the foundries manufacturing the wafers used in our products cannotachieve the yields we expect, we will incur higher unit costs and reducedproduct availability. Foundries that supply our wafers have experiencedproblems in the past achieving acceptable wafer manufacturing yields. Waferyields are a function both of our design technology and the particular foundry’smanufacturing process technology. Certain risks are inherent in theintroduction of new products and technology. Low yields may result from designerrors or manufacturing failures in new or existing products. During the earlystages of production, production yields for new products are typically lowerthan those of established products. Unlike many other semiconductor products,optical products can be effectively tested only when they are complete.Accordingly, we perform final testing of our products only after they areassembled. As a result, yield problems may not be identified until our productsare well into the production process. The risks associated with low yieldscould be increased because we rely on third party offshore foundries for ourwafers, which can increase the effort and time required to identify,communicate and resolve manufacturing yield problems. In addition to wafermanufacturing yields, our products are subject to yield loss in subsequentmanufacturing steps, often referred to as back-end processing, such as theapplication of color filters and micro-lenses, dicing (cutting the wafer intoindividual devices, or die) and packaging. Any of these potential problems withwafer manufacturing and/or back-end processing yields could result in areduction in our gross margins and/or our ability to timely deliver products tocustomers, which could adversely affect our customer relations and make it moredifficult to sustain and grow our business.

 

## ***If we do notforecast customer demand correctly, our business could be impaired and ourstock price may decline.***

 

Our sales aregenerally made on the basis of purchase orders rather than long-term purchasecommitments; however, we manufacture products and build inventory based on ourestimates of customer demand. Accordingly, we must rely on multiple assumptionsto forecast customer demand. We are continually working to improve our salesforecasting procedures. The current domestic and global economic conditionshave made it extremely challenging to 

 

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accuratelypredict customer demand because recent demand has significantly decreased andhistorical models for predicting customer demand may no longer be reliable. Ifwe overestimate customer demand, we may manufacture products that we may beunable to sell, or we may have to sell at lower prices. This could materiallyand adversely affect our results of operations and financial condition. Inaddition, our customers may cancel or defer orders at any time by mutualwritten consent. We have experienced problems with accurately forecastingcustomer demand in the past. For example, there was a significant decline inproduct demand in the third quarter of fiscal 2009, and as a result ourinventories at the end of the third quarter of fiscal 2009 were higherthan we intended them to be. We need to accurately predict customer demandbecause we must often make commitments to have products manufactured before wereceive firm purchase orders from our customers. Conversely, if weunderestimate customer demand, we may be unable to manufacture sufficientproducts quickly enough to meet actual demand, causing us to lose customers andimpairing our ability to grow our business. In preparation for new productintroductions, we gradually ramp down production of established products. Withour 12-14 week production cycle, it is extremely difficult to predict preciselyhow many units of established products we will need. It is also difficult toaccurately predict the speed of the ramp of our new products and the impact oninventory levels presented by the shorter life cycles of end-user products. Theshorter product life cycle is a result of an increase in competition and thegrowth of various consumer-product applications for image sensors. Under thesecircumstances, it is possible that we could suffer from shortages for certainproducts and, if we underestimate market demand, we face the risk of beingunable to fulfill customer orders. We also face the risk of excess inventoryand product obsolescence if we overestimate market demand for our products andbuild inventories in excess of demand. Our ability to accurately forecast salesis also a critical factor in our ability to meet analyst expectations for ourquarterly and annual operating results. Any failure to meet these expectationswould likely lead to a substantial decline in our stock price.

 

## ***We depend on theincreased acceptance of mass-market image-sensor applications to grow ourbusiness and increase our revenues.***

 

Our business strategy depends in large part on the continued growth ofvarious markets into which we sell our image-sensor products, including themarkets for mobile phones, notebook and personal computers, digital still and video cameras, commercialand security and surveillance applications, toys and games, includinginteractive video games, automotive and medical applications. If these marketsdo not grow and develop as we anticipate, we may be unable to sustain or growthe sales of our products. Each of these markets has already been adverselyimpacted by current global economic conditions where consumers andbusinesses have deferred purchases of products in these markets as a result oftighter credit, negative financial news, and decreased corporate or consumerspending. Such conditions havenegatively affected our business.

 

In addition, the market price of our common stock may be adverselyaffected if certain of these new markets do not emerge or develop as expected.Securities analysts may already factor revenue from such new markets into theirfuture estimates of our financial performance and should such markets notdevelop as expected by such securities analysts the trading price of our commonstock could be adversely affected.

 

## ***Our lengthymanufacturing, packaging and assembly cycle, in addition to our customers’design cycle, may result in uncertainty and delays in generating revenues.***

 

The production of our image sensors requires a lengthy manufacturing,packaging and assembly process, typically lasting approximately 12-14 weeks.Additional time may pass before a customer commences taking volume shipments ofproducts that incorporate our image sensors. Even when a manufacturer decidesto design our image sensors into its products, the manufacturer may never shipfinal products incorporating our image sensors. Given this lengthy cycle, weexperience a delay between the time we incur expenditures for research anddevelopment and sales and marketing efforts and the time we generate revenue,if any, from these expenditures. This delay makes it more difficult to forecastcustomer demand, which adds uncertainty to the manufacturing planning processand could adversely affect our operating results. In addition, the product lifecycle for certain of our image-sensor products designed for use in certainapplications can be relatively short. If we fail to appropriately manage themanufacturing, packaging and assembly process, our products may become obsoletebefore they can be incorporated into our customers’ products and we may neverrealize a return on investment for the expenditures we incur in developing andproducing these products.

 

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## ***Our ability todeliver products that meet customer demand is dependent upon our ability tomeet new and changing requirements for color filter application and image-sensorpackaging.***

 

We expect that as we develop new products to meet technological advancesand new and changing industry and customer demands, our color filterapplication and ceramic, plastic and chip scale packaging requirements willalso evolve. Our ability to continue to profitably deliver products that meetcustomer demand is dependent upon our ability to obtain third party servicesthat meet these new requirements on a cost-effective basis. There can be noassurances that any of these parties will be able to develop enhancements tothe services they provide to us to meet these new and changing industry andcustomer requirements. Furthermore, even if these service providers are able todevelop their services to meet new and evolving requirements, these servicesmay not be available at a cost that enables us to sustain our profitability.

 

## ***The high level ofcomplexity and integration of our products increases the risk of latentdefects, which could damage customer relationships and increase our costs.***

 

Our products are based upon evolving technology, and because we integratemany functions on a single chip, are highly complex. The integration ofadditional functions into already complex products could result in a greaterrisk that customers or end users could discover latent defects or subtle faultsafter we have already shipped significant quantities of a product. Although wetest our products, we have in the past and may in the future encounter defectsor errors. For example, in the third quarter of fiscal 2005, we recorded aprovision of $2.7 million related to the possible replacement of productsthat did not meet a particular customer’s standards. Delivery of products withdefects or reliability, quality or compatibility problems may damage our reputationand ability to retain existing customers and attract new customers. Inaddition, product defects and errors could result in additional developmentcosts, diversion of technical resources, delayed product shipments, increasedproduct returns, product warranty costs for recall and replacement and productliability claims against us which may not be fully covered by insurance.

 

## ***We depend for themajority of our revenues on a few key customers and, the loss of one or more ofour key customers could significantly reduce our revenues.***

 

A relatively smallnumber of OEMs, VARs and distributors account for a significant portion of ourrevenues. Any material delay, cancellation or reduction of purchase orders fromone or more of our major customers or distributors could result in our failureto achieve anticipated revenue for a particular period. Such a delay,cancellation or reduction could be caused by, among other things, suchcustomers or distributors being materially and adversely affected by thecurrent domestic and global economic conditions. In addition, if we are unableto retain one or more of our largest OEM, distributor or VAR customers, or ifwe are unable to maintain our current level of revenues from one or more ofthese significant customers, our business and results of operation would beimpaired and our stock price could decrease, potentially significantly. In thenine months ended January 31, 2009, two OEM customers accounted forapproximately 11.1% and 10.3% of our revenues, and one distributor customeraccounted for approximately 22.5% of our revenues. In the nine months ended January 31,2008, one OEM customer accounted for approximately 15.5% of our revenues, andone distributor customer accounted for approximately 20.5% of our revenues. Inaddition, in fiscal 2008, approximately 55.0% of our revenues came fromsales to our top five customers. Our business, financial condition, results ofoperations and cash flows will continue to depend significantly on our abilityto retain our current key customers and to attract new customers, as well as onthe financial condition and success of our OEMs, VARs and distributors.

 

## ***We may be requiredto record a significant charge to earnings if our amortizable intangible assetsor long-term investments become impaired.***

 

Under generallyaccepted accounting principles, we are required to review our amortizableintangible assets for impairment when events or changes in circumstancesindicate the carrying value may not be recoverable. Factors that may beconsidered a change in circumstances indicating that the carrying value of ouramortizable intangible assets may not be recoverable include a decline in stockprice and market capitalization, and slower growth rates in our industry.

 

We may be requiredto record a significant charge to earnings in our financial statements duringthe period in which we determine that our amortizable intangible assets orlong-term investments have been impaired. Any such charge would adverselyimpact our results of operations. As of January 31, 2009, our amortizableintangible assets totaled approximately $9.0 million and our long-terminvestments totaled approximately $87.9 million.

 

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## ***We maintain abacklog of customer orders that is subject to cancellation or delay in deliveryschedules, and any cancellation or delay may result in lower than anticipatedrevenues.***

 

Our sales aregenerally made pursuant to standard purchase orders. We include in our backlogonly those customer orders for which we have accepted purchase orders andassigned shipment dates within the upcoming 12 months. Orders constitutingour current backlog are subject to cancellation or changes in deliveryschedules, and backlog may not necessarily be an indication of future revenue.Any cancellation or delay in orders which constitute our current or futurebacklog may result in lower than expected revenues.

 

## ***If we are unableto maintain processes and procedures to sustain effective internal control overour financial reporting, our ability to provide reliable and timely financialreports could be harmed and this could have a material adverse effect on ourstock price.***

 

We are required tocomply with the rules promulgated under Section 404 of theSarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Section 404 requiresthat we prepare an annual management report assessing the effectiveness of ourinternal control over financial reporting, and requires a report by ourindependent registered public accounting firm addressing the effectiveness ofour internal control over financial reporting.

 

We have in thepast discovered, and may in the future discover, areas of our internal control thatneed improvement. For example, we restated our financial statements for thefirst, second and third quarters of fiscal 2004. If these or similar types ofissues were to arise with respect to our internal controls in future periods,they could impair our ability to produce accurate and timely financial reports.

 

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

 

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

 

We are subject tocorporate governance laws and regulations affecting public companies, includingthe provisions of the Sarbanes-Oxley Act, that impose certain requirements onus and on our officers, directors, attorneys and independent registered publicaccounting firm. In order to comply with these rules, we added internalresources and have utilized additional outside legal, accounting and advisoryservices, which increased our operating expenses. We expect to incur ongoingoperating expenses as we maintain compliance with Section 404. Inaddition, if we undergo significant modifications to our structure throughpersonnel or system changes, acquisitions, or otherwise, it may be increasinglydifficult to maintain compliance with the existing and evolving corporategovernance regulations.

 

## ***We hold asignificant amount of marketable securities which are subject to general marketrisks over which we have no control.***

 

As of January 31,2009, we held cash and cash equivalents totaling $225.0 million, andshort-term investments totaling $38.7 million. These assets are managed onour behalf by unrelated third parties in accordance with a cash managementpolicy that has been approved by our board of directors and restricts ourinvestments to a maximum maturity of 18 months and to investment-gradeinstruments. As of January 31, 2009, we did not hold any illiquidinvestments and we have not realized any losses. However, recent uncertaintiesin global capital markets associated with a repricing of risk have causeddisruptions in the orderly function of markets where ordinarily there isvirtually unlimited liquidity. If we were to make a future investment incertain illiquid securities that are dependent on the orderly functioning ofthe capital markets, and if we were required to liquidate this type ofsecurities at short notice, such liquidation could result in losses ofprincipal.

 

## ***There are risksassociated with our operations in China.***

 

In December 2000,we established OSC as part of our efforts to streamline our manufacturingprocess and reduce the costs and working capital associated with the testing ofour image-sensor products, and relocated our automated image testing equipmentfrom the United States to China. We are currently expanding our testingcapabilities with additional automated testing equipment, which will also belocated in China. Through our wholly-owned subsidiary, 

 

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OTC,we are also developing land and constructing research facilities in Shanghai. Thereare certain administrative, legal and governmental risks to operating in Chinathat could result in increased operating expenses or could hamper us in thedevelopment of our operations in China. More recently we invested in a companyin China that is providing a portion of our CSP packaging requirements. Therisks from operating in China that could increase our operating expenses andadversely affect our operating results, financial condition and ability todeliver our products and grow our business include, without limitation:

 

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

 

·                  increases in thevalue of the Chinese Yuan, or CNY;

 

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

 

·                  difficulties inenforcing contracts in China;

 

·                  difficulties inprotecting intellectual property;

 

·                  diversion ofmanagement attention;

 

·                  imposition ofburdensome governmental regulations;

 

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

 

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

 

·                  inadequacy ofthe local infrastructure to support our operations.

## *** ***

## ***We may experienceintegration or other problems with potential future acquisitions, which couldhave an adverse effect on our business or results of operations. Newacquisitions could dilute the interests of existing stockholders, and theannouncement of new acquisitions could result in a decline in the price of ourcommon stock.***

 

We may in thefuture make acquisitions of, or investments in, businesses that offer products,services and technologies that we believe would complement our products,including CMOS image-sensor manufacturers. We may also make acquisitions of orinvestments in, businesses that we believe could expand our distributionchannels. Even if we were to announce an acquisition, we may not be able tocomplete it. In addition, any future acquisition or substantial investmentcould present numerous risks, including:

 

·                  difficulty inrealizing the potential technological benefits of the transaction;

 

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

 

·                  unanticipatedexpenses related to technology integration;

 

·                  disruption of ourongoing business;

 

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

 

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

 

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

 

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

 

·                  impairment ofresulting goodwill; and

 

·                  potential unknownor unexpected liabilities associated with acquired businesses.

 

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

 

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

 

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

 

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

 

## ***We may not achieveall of the anticipated benefits of our alliances with, and strategicinvestments in, third parties.***

 

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

 

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

 

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

 

## ***Changes in ourrelationships with our joint ventures and/or companies in which we hold lessthan a majority interest could change the way we account for such interests inthe future.***

 

As part of ourstrategy, we have formed joint ventures with two of our foundry partners, andwe hold a minority interest in three companies from which we purchase certainmanufacturing services. Under the applicable provisions of generally acceptedaccounting principles in the United States of America, we currently consolidateone of these joint ventures into our consolidated financial statements andresults of operations, and record the equity interests that we do not own asminority interests. For the investments that we account for under the equitymethod, we record as part of other income or expense our share of the increaseor decrease in the equity of the companies in which we have invested. 

 

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It ispossible that, in the future, our relationships and/or our interests in or withthese joint ventures or other 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.

 

## ***We may be unableto adequately protect our intellectual property, and therefore we may lose someof our competitive advantage.***

 

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

 

## ***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 litigation in the United States involvingintellectual property rights, including in the semiconductor industry. We havein the past been, currently are and may in the future be, subject to legalproceedings and claims with respect to our intellectual property, includingsuch matters as trade secrets, patents, product liabilities and other actionsarising out of the normal course of business. These claims may increase as ourintellectual property portfolio becomes larger or more valuable. Intellectualproperty claims against us, and any resulting lawsuit, may cause us to incursignificant expenses, subject us to liability for damages and invalidate ourproprietary rights. Any potential intellectual property litigation against uswould likely be time-consuming and expensive to resolve and would divertmanagement’s time and attention and could also force us to take actions suchas:

 

·                  ceasing the saleor use of products or services that incorporate the infringed intellectualproperty;

 

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

 

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

 

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

 

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## ***If we do noteffectively manage our growth, our ability to increase our revenues and improveour earnings could be adversely affected.***

 

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

 

·                  continuouslyimprove our operational, financial and accounting systems;

 

·                  train and manageour existing employee base;

 

·                  attract andretain qualified personnel with relevant experience; and

 

·                  effectivelymanage accounts receivable and inventory.

 

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

 

We must alsomanage multiple relationships with customers, business partners and other thirdparties, such as our foundries and process and assembly vendors. Moreover,future growth could significantly overburden our management and financialsystems and other resources. We may not make adequate allowances for the costsand risks associated with our expansion. In addition, our systems, proceduresor controls may not be adequate to support our operations, and we may not be able to expand quickly enough tocapitalize on potential market opportunities. Our future operatingresults will also depend, in part, on our ability to expand sales andmarketing, research and development, accounting, finance and administrativesupport.

 

## ***Our future taxrates could be higher than we anticipate and may harm our results of operations***

 

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

 

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

 

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

 

Duringfiscal 2008 and the nine months ended January 31, 2009, approximately33.2% and 40.1%, respectively, of our revenues came from sales throughdistributors. We expect that revenues from sales through distributors willcontinue to represent a significant proportion of our total revenues. Sellingthrough distributors reduces our ability to accurately forecast sales andincreases the complexity of our business, requiring us to, among other matters:

 

·                  manage a morecomplex supply chain;

 

·                  manage the levelof inventory at each distributor;

 

·                  provide forcredits, return rights and price protection;

 

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

 

·                  monitor thefinancial condition and creditworthiness of our distributors.

 

Any failure tomanage these challenges could cause us to inaccurately forecast sales and carryexcess or insufficient inventory, thereby adversely affecting our operatingresults.

 

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## ***We face foreignbusiness, political and economic risks, because a majority of our products andthose of our customers are manufactured and sold outside of the United States.***

 

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

 

Sales outside ofthe United States accounted for substantially all of our revenues forfiscal 2008 and the nine months ended January 31, 2009. We anticipatethat sales outside of the United States will continue to account for asubstantial portion of our revenues in future periods. Dependence on sales toforeign customers involves certain risks, including:

 

·                  longer paymentcycles;

 

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

 

·                  decreasedvisibility as to future demand;

 

·                  difficulties inaccounts receivable collections; and

 

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

 

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

 

## ***Our business couldbe harmed if we lose the services of one or more members of our seniormanagement team, or if we are unable to attract and retain qualified personnel.***

 

The loss of theservices of one or more of our executive officers or key employees, which hasoccurred from time to time, or the decision of one or more of these individualsto join a competitor, could adversely affect our business and harm ouroperating results and financial condition. Our success depends to a significantextent on the continued service of our senior management and certain other keytechnical personnel. None of our senior management is bound by an employment ornon-competition agreement. We do not maintain key man life insurance on any ofour employees.

 

Our success alsodepends on our ability to identify, attract and retain qualified sales,marketing, finance, management and technical personnel. We have experienced,and may continue to experience, difficulty in hiring and retaining candidateswith appropriate qualifications. If we do not succeed in hiring and retainingcandidates with appropriate qualifications, our revenues, operations andproduct development efforts could be harmed.

 

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

 

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

 

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

 

Disasters andbusiness interruptions such as earthquakes, water, fire, electrical failure,accidents and epidemics affecting our operating activities, major facilities,and employees’ and customers’ health could materially and adversely affect ouroperating results and financial condition. In particular, our Asian operationsand most of our third party service providers involved in the manufacturing ofour products are located within relative close proximity. Therefore, anydisaster that strikes within or close to that geographic area, such as the recentearthquake and flooding that occurred in China, could be extremely disruptiveto our business and could materially and adversely affect our operating resultsand financial condition. We have recently developed and are currentlyimplementing a disaster recovery plan.

 

## ***Acts of war andterrorist acts may seriously harm our business and revenue, costs and expensesand financial condition.***

 

Acts of war orterrorist acts, wherever they occur around the world, may cause damage ordisruption to our business, employees, facilities, suppliers, distributors orcustomers, which could significantly impact our revenue, costs, expenses andfinancial condition. In addition, as a company with significant operations andmajor distributors and customers located in Asia, we may be adversely impactedby heightened tensions and acts of war that occur in locations such as theKorean Peninsula, Taiwan and China. The potential for future terrorist attacks,the national and international responses to terrorist attacks or perceivedthreats to national security, and other acts of war or hostility have createdmany economic and political uncertainties that could adversely affect ourbusiness and results of operations in ways that cannot presently be predicted.We are uninsured for losses and interruptions caused by terrorist acts and actsof war.

 

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

 

## ***Provisions in ourcharter documents and Delaware law, as well as our stockholders’ rights plan,could prevent or delay a change in control of our company and may reduce themarket price of our common stock.***

 

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

 

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

 

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

 

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

 

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

 

·                  prohibitingstockholder actions by written consent.

 

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

 

## ***Our stock has beenand will likely continue to be subject to substantial price and volumefluctuations due to a number of factors, many of which are beyond our controlthat may prevent our stockholders from selling our common stock at a profit.***

 

The market priceof our common stock has fluctuated substantially, and there can be no assurancethat such volatility will not continue. Since the beginning of fiscal 2002through January 31, 2009, the closing sales price of our common stock hasranged from a high of $33.90 per share to a low of $1.26 per share.The closing sales price of our common stock on March 6, 2009 was$6.65 per share. The securities markets have experienced significant priceand 

 

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volumefluctuations in the past, and the market prices of the securities ofsemiconductor companies have been especially volatile. This market volatility,as well as general economic, market or political conditions, including thecurrent global economic situation, 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:

 

·                  actual oranticipated fluctuations in our operating results;

 

·                  changes inexpectations as to our future financial performance;

 

·                  changes infinancial estimates of securities analysts;

 

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

 

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

 

·                  changes inmarket valuations of other technology companies; and

 

·                  announcements byus or our competitors of significant technical innovations, design wins,contracts, standards or acquisitions.

 

Due to thesefactors, the price of our stock may decline and investors may be unable toresell their shares of our stock for a profit. In addition, the stock marketexperiences extreme volatility that often is unrelated to the performance ofparticular companies. These market fluctuations may cause our stock price todecline regardless of our performance.

 

**ITEM 2.   UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

We didnot repurchase any shares of our common stock in the third quarter offiscal 2009.

 

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**ITEM 6.   EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                        |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                       | **OMNIVISION TECHNOLOGIES, INC**.                                                |
|----------------------------|----------------------------------------------------------------------------------|
|                       | *(Registrant)*                                                                   |
|                       |                                                                             |
|                       |                                                                             |
| Dated: March 12, 2009 |                                                                             |
|                       |                                                                             |
|                       | By:                                                                              | **/s/ SHAW HONG      ** |
|                       | **Shaw Hong**                                                                    |
|                       | *Chief Executive Officer, President and Director  (Principal Executive Officer)* |
|                       |                                                                             |
|                       |                                                                             |
| Dated: March 12, 2009 |                                                                             |
| ** **                 | ** **                                                                       |
| ** **                 | By:                                                                              | **/s/ ANSON CHAN      ** |
| ** **                 | **Anson Chan**                                                                   |
|                       | *Chief Financial Officer  (Principal Financial and Accounting Officer)*          |

 

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## ***Table ofContents***

 

**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                        |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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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