**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**(MarkOne)**

| x      |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------|--------|-----------------------------------------------------------------------------------------------|
|   |   | **For the fiscal year ended April 30, 2007**                                                  |
| o      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|   |   | **For the transition period from**                                                            | ** ** | **to** | ** ** | ** ** |

 

**Commission file number:0-29939**

**OMNIVISION TECHNOLOGIES, INC.**

(Exactname of registrant as specified in its charter)

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

 

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

(Address of principal executive offices) (Zip Code)

Registrant’stelephone number, including area code: **(408)542-3000**

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**Securitiesregistered pursuant to Section 12(b) of the Act:**

|            |                                                    | **Name of  each exchange** | ** **                   |
|------------|---------------------------------------------------------|----------------------------|------------------------------|
| ** ** | **Title  of each class**                                |                       | **on  which registered**     | ** ** |
| ** ** | Common Stock,  $0.001 par value                         |                       | The Nasdaq Stock  Market LLC | ** ** |
| ** ** | (Including  associated Preferred Stock Purchase Rights) |                       | (Nasdaq Global  Market)      | ** ** |

 

**Securities registered pursuant toSection 12(g) of the Act:**

None

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

Indicate by check mark whether the registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.Yes  x No  o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§ 229.405 of thischapter) is not contained herein, and will not be contained, to the best of theRegistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one):

Large acceleratedfiler  x        Acceleratedfiler  o        Non-acceleratedfiler  o

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Act). Yes  oNo  x

As of October 31, 2006, the last business day ofRegistrant’s most recently completed second fiscal quarter, there were54,682,162 shares of Registrant’s common stock outstanding, and the aggregatemarket value of such shares held by non-affiliates of registrant (based uponthe closing sale price of such shares on the Nasdaq National Market onOctober 31, 2006) was approximately $802,989,624. Shares of Registrant’scommon stock held by the Registrant’s executive officers and directors and byeach entity that owns five percent or more of Registrant’s outstanding commonstock have been excluded in that such persons may be deemed to be affiliates.This determination of affiliate status is not necessarily a conclusivedetermination for other purposes.

As of May 31, 2007, 55,082,878 shares of commonstock of the Registrant were outstanding, exclusive of 5,870,000 shares oftreasury stock.

**DOCUMENTSINCORPORATED BY REFERENCE**

The Registrant has incorporated by reference intoPart III of this Annual Report on Form 10-K portions of its ProxyStatement for the 2007 Annual Meeting of Stockholders.

 

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**OMNIVISIONTECHNOLOGIES, INC.**

**INDEX TO**

**ANNUALREPORT ON FORM 10-K**

**FORYEAR ENDED APRIL 30, 2007**
| **PART I**         |                                                                                                                | 3      |
|--------------------|---------------------------------------------------------------------------------------------------------------------|--------|
|               |                                                                                                                |   |
| Item 1.            | Business                                                                                                            | 3      |
| Item 1A.           | Risk Factors                                                                                                        | 15     |
| Item 1B.           | Unresolved Staff Comments                                                                                           | 29     |
| Item 2.            | Properties                                                                                                          | 29     |
| Item 3.            | Legal Proceedings                                                                                                   | 30     |
| Item 4.            | Submission  of Matters to a Vote of Security Holders                                                                | 31     |
|               |                                                                                                                |   |
| **PART II**        |                                                                                                                | 32     |
|               |                                                                                                                |   |
| Item 5.            | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 32     |
| Item 6.            | Selected  Financial Data                                                                                            | 34     |
| Item 7.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 35     |
| Item 7A.           | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 53     |
| Item 8.            | Consolidated  Financial Statements and Supplementary Data                                                           | 54     |
| Item 9.            | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 93     |
| Item 9A.           | Controls and Procedures                                                                                             | 93     |
| Item 9B.           | Other Information                                                                                                   | 94     |
|               |                                                                                                                |   |
| **PART III**       |                                                                                                                | 95     |
|               |                                                                                                                |   |
| Item 10.           | Directors,  Executive Officers and Corporate Governance                                                             | 95     |
| Item 11.           | Executive Compensation                                                                                              | 95     |
| Item 12.           | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 95     |
| Item 13.           | Certain  Relationships and Related Transactions and Director Independence                                           | 95     |
| Item 14.           | Principal  Accounting Fees and Services                                                                             | 95     |
|               |                                                                                                                |   |
| **PART IV**        |                                                                                                                | 96     |
|               |                                                                                                                |   |
| Item 15.           | Exhibits  and Financial Statement Schedules                                                                         | 96     |
|               |                                                                                                                |   |
| Signatures         |                                                                                                                | 99     |
|               |                                                                                                                |   |
| Exhibit  Index     |                                                                                                                |
| Exhibit  10.17     |                                                                                                                |
| Exhibit 10.18      |                                                                                                                |
| Exhibit 10.19      |                                                                                                                |
| Exhibit 10.20      |                                                                                                                |
| Exhibit  10.21     |                                                                                                                |
| Exhibit 10.22      |                                                                                                                |
| Exhibit 10.23 |                                                                                                                |
| Exhibit 10.24      |                                                                                                                |
| Exhibit 10.25 |                                                                                                                |
| Exhibit 21.1  |                                                                                                                |
| Exhibit 23.1  |                                                                                                                |
| Exhibit 31.1       |                                                                                                                |
| Exhibit 31.2       |                                                                                                                |
| Exhibit 32    |                                                                                                                |

 

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**PARTI**

**ITEM 1.   BUSINESS**

*Thefollowing information should be read in conjunction with our audited**consolidated financial statements and thenotes thereto included in Item 8 of**this Annual Report on Form 10-K. This Annual Report onForm 10-K contains forward-looking statements, within the meaning of**Section 27A of the Securities Act of 1933and Section 21E of the Securities**ExchangeAct of 1934, which involve risks and uncertainties. Forward-looking statementsgenerally include words such as “may,” “will,” “plans,” “seeks,” “expects,” “anticipates,”“outlook,” “intends,” “believes” 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 Annual Report onForm 10-K, including, but not limited to, statements regarding the extentof future sales through distributors, future trends and opportunities incertain markets, the development, introduction and capabilities of newproducts, the establishment of partnerships with other companies, increasedunit volume sales, the increase of competition in our industry, the continuedimportance of the camera cell phone market to our business, continued pricecompetition and the consequent reduction in the average selling prices of ourproducts, future gross margins and future expenses, our effective tax rate forfiscal 2008, our future investments, our working capital requirements infiscal 2008, and the sufficiency of our available cash, cash equivalentsand short-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 factorsinclude, but are not limited to, those set forth under the caption “Item 1A.Risk Factors,” beginning on page 15 of this Annual Report and elsewhere inthis Annual Report and in other documents we file with the**U.S. Securities and Exchange Commission**(“SEC”). All subsequentwritten and oral**forward-lookingstatements by or attributable to us or persons acting on our**behalf are expressly qualified in their entirety bysuch factors.*

*OmniVision and OmniPixel are registered trademarks ofOmniVision Technologies, Inc. CameraChip, OmniPixel2,**OmniPixel3, OmniQSP and TrueFocus are trademarks of OmniVision Technologies, Inc.Wavefront Coded is a registered trademark of CDM Optics, Inc., a wholly-ownedsubsidiary of OmniVision Technologies, Inc. Wavefront Coding is a trademark ofCDM Optics, Inc.*

**Corporate Information**

OmniVisionTechnologies, Inc., a Delaware corporation, was incorporated in May 1995 inCalifornia, and reincorporated in Delaware in March 2000. Our executive officesare located at 1341 Orleans Drive, Sunnyvale, California 94089-1136 and ourtelephone number is (408) 542-3000. Copies of our Annual Reports onForm 10-K, Quarterly Reports on Form 10-Q, Proxy Statement for ourannual stockholders’ meeting and Current Reports on Form 8-K, as well asany amendments to these reports, are available through our website as soonas reasonably practicable after we electronically file such material with, or furnishit to, the United States Securities and Exchange Commission, or the SEC. Information about our company is available onthe Internet at www.ovt.com. The information in, or that can be accessedthrough, our website is not part of this report.

**Overview**

We design, develop andmarket high performance, highly integrated and cost efficient semiconductorimage sensor devices. Our main products, image-sensing devices which we referto by the name CameraChipTM image sensors, are used to capture an image electronicallyand are used in a number of consumer and commercial mass-market applications.Our CameraChip image sensors are manufactured using the complementary metaloxide semiconductor, or CMOS, fabrication process. Our CameraChip image sensorsare predominantly single-chip CMOS solutions that integrate several distinctfunctions including image capture, image processing, color processing, signalconversion and output of a fully processed image or video stream. We believethat our highly integrated CameraChip image sensors enable camera devicemanufacturers to build high quality camera products that are smaller, lesscomplex, more reliable, more cost effective and more power efficient thancameras using traditional charge-coupled devices, or CCDs.

We sell our productsworldwide directly to original equipment manufacturers, or OEMs, which includebranded customers and contract manufacturers, and value added resellers, orVARs, and indirectly through distributors. In order to ensure that we addressall available markets for our image sensors, we divide our marketing effortsinto two separate departments. The Mainstream Products marketing departmentaddresses the camera cell 

3

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**ITEM 1.   BUSINESS****— (Continued)**

phone and digitalstill camera, or DSC, markets, and the Advanced Products marketing departmentaddresses the security and surveillance, toys and games, personal computer,automotive and medical markets.

We currently outsourcethe wafer fabrication and packaging of our image-sensor products to thirdparties.  We outsource the color filterand micro-lens phases of production to a joint venture. This approach allows usto focus our resources on the design, development, marketing and testing of ourproducts and significantly reduces our capital requirements.

We currently perform thefinal testing of the majority of our products ourselves at our facility inShanghai, China. We are currently upgrading and expanding our testingcapabilities with new automated testing equipment.

## ***TheCurrent Economic and Market Environment***

We operate in achallenging economic environment that has undergone significant changes intechnology and in patterns of global trade. We strive to remain a leader in thedevelopment and marketing of image sensing devices based on the CMOS fabricationprocess and have benefited from the growing market demand for and acceptance ofthis technology.

In the camera cell phonemarket in particular, future revenues depend to a large extent on design winswhere, on the basis of an exhaustive evaluation of available products, aparticular handset maker determines which image sensor to design into one ormore specific models. There is generally a time lag of between six and ninemonths between the time of a particular design win and the first shipments ofthe designated product. Design wins are also an important driver in the manyother markets that we address, and in some cases, such as automotiveapplications, the time lag between a particular design win and first revenuecan be longer than one year.

In most cases, thedecision to specify a particular product requires conforming otherspecifications of the product to the chosen image sensor and makes subsequentchanges both difficult and expensive. Accordingly, the ability to produce anddeliver reliable products on time and in large quantities is a key competitivedifferentiator. Since our inception, we have shipped more than 550 millionimage sensors, including approximately 250 million in fiscal 2007,which demonstrates the capabilities of our production system.

To increase and enhanceour production capabilities, last year we completed a project with TaiwanSemiconductor Manufacturing Co., Ltd., or TSMC, our principal wafer supplierand one of the largest wafer fabrication companies in the world, to increasefrom two to four the number of their fabrication facilities, at which ourproducts can be produced. VisEra, our joint venture with TSMC and ourinvestments in two 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. InJanuary 2007, we amended our joint venture agreement with TSMC to eachinvest an additional $27 million in VisEra to fund VisEra’s furtherexpansion. Separately, TSMC purchased approximately 90.5 million previously-unissuedshares from XinTec, Inc., or XinTec, a Taiwan-based provider of chip-scalepackaging services, to expand XinTec’s capacity. In February 2007, weentered into a foundry manufacturing agreement with Powerchip SemiconductorCorp., or PSC. We are also expanding our testing capacity in China, as well asour overall capability to design more custom products for our customers. Asnecessary, we will make further investments to ensure that we have sufficientcapacity to meet the demands of our customers as part of our ongoing efforts tolower production costs to offset, at least in part, the continuing pressure weexperience on prices.

Many of the productsusing our image sensors, such as camera cell phones, digital still cameras 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, Hong Kong and Taiwan, the pattern of demand forour image sensors has been increasingly influenced by the timing of theextended lunar or Chinese New Year holiday, a period in which the factorieswhich use our image sensors generally close.

We believe that themarket opportunity represented by cell phones remains very large. Thepercentage of cell phones which incorporate a camera continues to increase, andwe are now seeing cell phones equipped with a second camera designed for use invideo-conferencing. In fiscal 2007, we benefited from the growth in shipmentsof 

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**ITEM 1.   BUSINESS****— (Continued)**

image sensors,particularly for camera cell phones, where we saw increased demand for ourvideo graphics array, or VGA, 1.3-megapixel and 2.0-megapixel image sensors.

We also believethat, like the DSC market, camera cell phone demand will not only continue toshift toward higher resolutions, but also will increasingly fragment intomultiple resolution categories. In addition, there is increased demand forcustomization, and several different interface standards are coming tomaturity. All of these trends will require the development of an increasingvariety of products. In response to these trends we have introduced several1.3-megapixel products based on our OmniPixel® technology. In fiscal 2007,we began volume production and shipments of our first product based on thesecond generation of our OmniPixel technology which we call OmniPixel2TMtechnology. This is a 2.0-megapixel image sensor, the world’s first 2.0-megapixelsensor in a quarter-inch format. We also believe that VGA resolution sensorswill continue to account for a large portion of the volume shipments inhandsets in fiscal 2008. Consequently, we have continued to introduce newproducts at this resolution, most recently the OV7680, a 1/10 inch VGA sensorthat permits a camera module height of 3.17 mm. We also believe that consumerswill require image focusing capabilities as image sensor resolutions in cameracell phones continue to increase. To meet this requirement, we introduced ourfirst TrueFocusproduct in February 2007.

The camera cellphone market also evidences a trend toward slim and thin form factors. InJanuary 2006, based on the new and improved OV7670 VGA sensor, weintroduced an ultra thin VGA camera module which measures 6 x 6 x 4.1 mm. Ourdesign meets the current trend of slim and thin form factors in camera phonesand other electronic devices. In addition to addressing the continuous demandfor smaller, thinner camera phones, the ultra thin module solution is alsoproving popular in PC notebook applications where the camera module needs to beno thicker than the LCD housing. In October 2006, we introduced our sixthgeneration 1.3-megapixel CameraChip sensor based on our OmniPixel2 technology.Featuring a 2.0 x 2.0 pixel and1/5-inch optical format, the OV9660 enables a 25% thinner camera module thanthe previous generation, meeting the requirements of ultra slim handsetdesigns. Additionally, the smaller module size is especially attractive tohandset makers because it allows a drop-in upgrade from VGA to1.3 megapixels, thereby extending the life of existing VGA camera phonedesigns.

Inthe emerging market for image sensors embedded in PC notebooks, we continue towin designs. We are supplying sensors to four of the top five notebook OEMs.Our shipments to notebook and standalone PC camera manufacturers continue togrow as services such as, AOL, Google, Skype and Yahoo are adding videocapability to their conferencing software. The OV9660 also providesultra-portable notebook manufacturers with the ability to upgrade to1.3-megapixel cameras without the need for a costly system redesign by avoidingthe size constraints which previously limited them to VGA resolution cameras.

As the markets for imagesensors have grown, we have experienced increasing competition frommanufacturers of CMOS and CCD image sensors. Our principal competitors in themarket for CMOS image sensors include MagnaChip, Micron, Samsung, STMicroelectronics and Toshiba. We expect to see continued price competition inthe image sensor market for camera cell phones and digital cameras as thosemarkets continue to grow. Although we believe that we currently competeeffectively in those markets, our competitive position could be impaired bycompanies that have greater financial, technical, marketing, manufacturing anddistribution resources, broader product lines, better access to large customerbases, greater name recognition, longer operating histories and moreestablished strategic and financial relationships than we do. Such companiesmay be able to adapt more quickly to new or emerging technologies and customerrequirements or devote greater resources to the promotion and sale of theirproducts. Many of these competitors ownand operate their own fabrication facilities, which in certain circumstancesmay give them the ability to price their products more aggressively than we canor may allow them to respond more rapidly to changing market opportunities thanwe can.

As a result of theincrease in competition and the growth of various consumer-product applicationsfor image sensors, we have experienced a shortening in the life cycle of someimage-sensor products. For example, although in the security and surveillancemarket we continue to sell image sensors introduced more than four years ago,in the camera cell phone market, product life cycles can be as short as six months.The shortening of product life cycles combined with our 12-14 week productioncycle makes it increasingly difficult to accurately forecast customer demandfor or to predict the ramp of our products. As a result, we face the risk ofbeing unable to fulfill customer orders if we underestimate market demand andthe risks of excess inventory and product obsolescence if we overestimatemarket demand for our products. As a result, it is possible that we couldsuffer from shortages for certain products and build inventories in excess ofdemand for other products. We carefully consider the risk that our inventoriesmay be excess to expected future demand and record appropriate reserves. If, assometimes happens, we 

5

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**ITEM 1.   BUSINESS****— (Continued)**

are subsequentlyable to sell these reserved products, the sales have little or no associatedcost and consequently they have a favorable impact on gross margins. Theshortening of product life cycles also increases the importance of having shortproduct development cycles and being accurate in the prediction of markettrends in the design of new products. The reduction in product life cyclesincreases the importance of our continued investment in research anddevelopment, which we consider to be critical to our future success.

In common with many othersemiconductor products and in response to competitive pressures, the averageselling prices, or ASPs, of image sensor products have declined steadily sincetheir introduction, and we expect ASPs to continue to decline in the future.Accordingly, in order to maintain our gross margins, we and our suppliers haveto work continuously to lower our manufacturing costs and increase ourproduction yields, and in order to maintain or grow our revenues, we have toincrease the number of units we sell by a large enough amount to offset theeffect of declining ASPs. In fiscal 2007, ASPs declined more rapidly than wewere able to reduce our manufacturing costs, and our gross marginsdeclined.  In addition, if we are unableto timely introduce new products that can take advantage of smaller processgeometries or new products that incorporate more advanced technology andinclude more advanced features that can be sold at higher average sellingprices, our gross margin will decline.

## ***Technology***

In August 2004, weannounced the introduction of our OmniPixel technology. In September 2005, weannounced the introduction of our OmniPixel2 architecture. The OmniPixel2  architecture, which is based on a 2.2μ x 2.2μpixel and uses a 0.13μ process geometry, is less than half the size of theOmniPixel architecture introduced in 2004, but with improved performance. Withthe OmniPixel2 architecture, we significantly improved sensor performance inthree key areas: the improved fill-factor and zero-gap micro-lens structureincreased the sensor’s capacity to capture light; the sensor’s improved quantumefficiency improved its dynamic range, that is its capacity to capture widelydiffering light levels in a single image; and the capacity to rapidly adjust tochanges in light levels.

In February 2007, weintroduced our first TrueFocusTM camera with Wavefront CodingTM technology forthe mobile handset market. Our patented Wavefront Coding technology is a methodof optically encoding light using a special lens to form an intermediate imageon the sensor, and decoding this intermediate image with digital processing tocreate a picture that is in focus across virtually the entire image. TrueFocusoffers true ‘point-and-shoot’ capability where the entire image is always infocus and always available for instant one-click capture in real time, with nowaiting for the lens to focus. TrueFocus is designed to provide our customerswith a product that effectively targets the mobile handset market by beingsmall, durable, easy to manufacture and cost-competitive.

In May 2007, weannounced the introduction of the latest generation of our OmniPixelarchitecture, our OmniPixel3TM architecture. The OmniPixel3 architecture isbased on a new 1.75 x 1.75 pixel anduses a 0.11 processgeometry which further reduces the size of a given sensor array without anyreduction in image quality.

Given the rapidlychanging nature of our technology, there can be no assurance that we will notencounter delays or other unexpected production or performance issues with futureproducts. During the early stages of production, production yields and grossmargins for products based on new technology are typically lower than those ofestablished products.

**ProductDesign**

## ***Mixed Analog/Digital Circuit and CMOS ImageSensor Design***

We have the in-houseexpertise to design complex analog and digital semiconductor circuits. Thisin-house expertise enables us to process video data in both analog and digitaldomains, which has allowed us to optimize each aspect of analog and digital chipdesign. Analog processing works directly with the original image signalswithout the loss of data that typically occurs in conversion to digitalprocessing. Analog circuits require considerably less space, which means we candesign smaller chips that have more functions but that still produce far lessnoise than is typically generated by the heat and cross talk found in digitalcircuits. Analog processing is the key for integrating all of the functions ona single chip, thereby taking advantage of the benefits of CMOS technology. Wehave also developed in-house expertise in the mixing of analog and digitalsignals in the same semiconductor design without suffering the common problemsof interference from noise caused by heat or crosstalk. Our in-house semiconductordesign engineers are skilled in the design of high speed, low power, mixedanalog/digital image sensors with advanced pixel cell structures. We useadvanced design techniques to develop high-speed, highly integrated 

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**ITEM 1.   BUSINESS****— (Continued)**

semiconductorswhich can be fabricated using standard CMOS processes. The result has been acombination of improved image quality coupled with a reduction in unwantedelectrical noise.

## ***Advanced Image Processing***

With our acquisition ofCDM Optics, Inc., or CDM, and its patented Wavefront Coding technology, wesignificantly expanded our proprietary technology. Wavefront Coding technologycombines optics and electronics to significantly increase the depth of field ofan image without changing the aperture of or reducing the amount of lightreaching the lens and can eliminate the need for a mechanical auto-focussystem. Wavefront Coding technology changes the phase of light as it traversesa specialized element in the lens and deliberately blurs all points in anyimage to an identical degree. Powerful algorithms then remove thesystem-dependent image blur to produce a sharp and clear image from theintermediate coded image.

**Products**

Our main products,image-sensing devices we refer to by the name CameraChip image sensors, areused to capture images electronically and are used in a number of consumer andcommercial mass-market applications. Our products have a variety of features,including:

**Product Features**
| CMOS CameraChip image  sensors |                                                      | Color or black and  white                                                                           |
|--------------------------------|-----------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                           |                                                      |                                                                                                |
| Resolutions                    |                                                      | CIF (352 x 288 pixels) to 5.17 megapixel (2560  x 2048 pixels)                                 |
|                           |                                                      |                                                                                                |
| Output signal                  |                                                      | Analog for television, digital for computers and  other digital devices                             |
|                           |                                                      |                                                                                                |
| Operating voltage              |                                                      | 5 volt, 3 volt, 2.7 volt or 1.8 volt                                                                |
|                           |                                                      |                                                                                                |
| Optical lens/array size        |                                                      | 1/18, 1/10, 1/9, 1/7, 1/6, 1/5, 1/4, 1/3 or 1/2 inch  formats                                       |
|                           |                                                      |                                                                                                |
| Interface chips                |                                                      | For connecting to computers and other devices                                                       |
|                           |                                                      |                                                                                                |
| Software drivers:              |                                                      |                                                                                                |
|                           | ·     Standard operating systems | Linux®, Mac OS®, Windows®                                                            |
|                           |                                                      |                                                                                                |
|                           | ·     Embedded systems           | Palm OS®, Symbian OSTM, Windows CETM, Windows  EmbeddedTM and Windows Mobile® |
|                                |                                                           |                                                                                                     |  |

 

We provide companionchips used to connect our CameraChip image sensors to various interfaces,including the universal serial bus, or USB, a connection which allows add-ondevices to be connected to personal computers and other industry standardinterfaces. In addition, we provide companion chips that perform compression instandardized still photo and digital video formats.

We also design anddevelop standard software drivers for Microsoft Windows, Linux and Mac OS, aswell as for embedded operating systems such as Windows Embedded, Windows CE,Windows Mobile, Symbian and Palm OS. These software drivers accept the imagedata being received from the USB, provide data decompression, if required, andmanage interface protocols with the camera. We have designed these drivers forspeed and flexibility and allow easy customization of the user interface. We donot record any revenue from this software, which we provide to our customers asan element of customer support.

## ***New Products***

In October 2005, weannounced the OV2640 sensor, our first product on the OmniPixel2 architectureand the world’s first 2.0-megapixel sensor on a 1⁄4 inch form factor. In additionto the features of the OmniPixel2 architecture, the OV2640 sensor alsoincorporates an advanced image signal processor called the OmniQSPTM systemwhich provides high-grade picture processing and features traditionally foundonly in digital still cameras. In July 2006, we announced that the OV2640sensor was in volume production.

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**ITEM 1.   BUSINESS****— (Continued)**

In October 2005, we alsoannounced the OV7950, an enhanced sensor designed specifically for theautomotive market. The OV7950 offers several improvements including a dualdynamic overlay function allowing for both a dynamic and a static visual aidlayer (text or graphics) within the image. This is especially useful forreference frames and guiding systems in backup and parking assist cameras forcars and trucks.

In April 2006, weannounced our second-generation, 5.17-megapixel camera chip. The OV5620 offersa small form-factor, 5.17-megapixel CMOS camera that we believe surpasses CCDsensors in performance. Furthermore, we believe the OV5620’s advancedhigh-definition, or HD, video modes with vivid colors make this CameraChipimage sensor especially attractive for next generation DSCs, and hybridcameras, which take both still and video pictures.

In September 2006,we introduced the OV7720, a high sensitivity digital VGA CameraChip sensordesigned specifically for security and surveillance applications. Unlike thesensors used in conventional analog security cameras, the new sensor produceshigh quality digital output and eliminates the need for A/D converters whilesimplifying post processing. The OV7720 is one of the first high performancesensors capable of running at 60 frames per second and delivers, webelieve, exceptional low-light sensitivity and performance without sacrificingthe speed required for advanced security applications. In September 2006,we also unveiled the new OV7949 advanced CMOS CameraChip sensor designedspecifically for commercial CCTV/video monitoring security systems. The highlyintegrated, single-chip OV7949 video camera chip sensor is based on ourproprietary OmniPixel architecture. The OV7949 combines a high level offunctionality with a brand new design that we specifically engineered tooperate extremely well in low-light conditions, a feature especially criticalto indoor and night security monitoring systems.

In October 2006, weannounced the availability of our new all digital OV7710 CameraChip advancedCMOS image sensor developed specifically for automotive applications. TheOV7710 is a highly integrated CMOS video camera that combines a high level offunctionality with all digital output. Digital output is a key requirement forautomotive machine-vision applications such as airbag deployment, lanedeparture warning, collision avoidance/pedestrian detection, windshield wipercontrol, and drowsiness detection. The OV7710 features a dual dynamic overlayfunction, which permits text or graphics within the image.

In February 2007, inaddition to the first TrueFocus camera described earlier, we announced thedetails of two other new products. The first was a 5.17-megapixel auto-focuscamera module for mobile handsets based around the OV5623 CameraChipsensor. The new module provides the basis for high resolution cameras to enterthe mainstream mobile handset market. Our introduction of the 5.17-megapixelcamera module with auto-focus capability, a function previously associated onlywith DSCs and expensive camera phones, brings high image quality and cameraperformance closer to the mainstream camera phone market. We expect that ournew 5.17-megapixel camera module will enable our handset customers to continueto move up the ‘megapixel curve’ in order to provide DSC-quality imaging onmass market camera phones.

The second new productwas the OV7680, a new 1/10 inch VGA CameraChip sensor designed for entry-levelcamera phones, for secondary cameras in 3G handsets, and for integratednotebook PC cameras. The new sensor incorporates a unique non-linear lens shifttechnology, which permits a reduction in the height of the camera module tojust 3.17mm.

In March 2007, weintroduced the OV10620, our first color High Dynamic Range, or HDR, CMOS imagesensor for mass market applications. The new OV10620 has the capacity tocapture widely differing light levels in a single image and to rapidly adjustto changes in light levels, much like the human eye under quickly changinglight conditions. The OV10620 rapidly switches to HDR mode to handle extremevariations of bright and dark conditions and automatically switches back tonon-HDR mode when condition return to normal. The new single-chip sensor alsohas a spectral light sensitivity of up to 1,000 nm, which is near infraredsensitivity.

In June 2007, weintroduced the OV3640, the first fully integrated 3.2-megapixel CameraChipsensor in a 1⁄4-inch format. Based on the new 1.75-micron OmniPixel3TMarchitecture, the OV3640 is small enough to fit the standard 8 x 8 mm socketsused in 2.0-megapixel camera phones, making it an ideal drop-in upgrade forexisting handset designs. The highly integrated OV3640 features a high-speedtwo-lane mobile industry processor interface, or MIPI, to enable the fasttransfer of large blocks of data, which is critical to making effective use ofincreased camera resolutions. In addition, the new sensor incorporates advancedimage signal processing and onboard JPEG compression to allow existing basebandprocessors without MIPI to support a camera upgrade to 3.2 megapixels at 

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**ITEM 1.   BUSINESS****— (Continued)**

15 frames persecond in full resolution. In addition to MIPI, the OV3640 also incorporatesadvanced image stabilization functionality similar to that used in DSC andcamcorder products.

**Strategic Investments andAcquisitions**

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

In October 2003, weentered into a Shareholders’ Agreement, or the VisEra Agreement, with TSMCpursuant to which we agreed with TSMC to form VisEra Technologies Company,Ltd., or VisEra, a joint venture in Taiwan. VisEra’s mission is to provideback-end manufacturing services. In connection with the formation of VisEra,both TSMC and we entered into separate nonexclusive license agreements withVisEra pursuant to which each party licenses certain intellectual property toVisEra relating to manufacturing services. The VisEra Agreement also providedthat once VisEra had acquired the capability to deliver high qualitymanufacturing services, we would be committed to direct a substantial portionof our requirements in these areas to VisEra, subject to pricing and technologyrequirements. Both TSMC and we have also committed not to compete directly or indirectlywith VisEra in the provision of certain manufacturing services. Historically,we have relied upon TSMC to provide us with a substantial proportion of ourwafers. As a part of the VisEra Agreement, TSMC agreed to commit substantialwafer manufacturing capacity to us in exchange for our commitment to purchase asubstantial portion of our wafers from TSMC, subject to pricing and technologyrequirements.

InAugust 2005, we entered into an Amended and Restated Shareholders’Agreement with TSMC, or the Amended VisEra Agreement, under which the partiesreaffirmed their respective commitments to VisEra, expanded the scope of andmade minor modifications to the VisEra Agreement. Under the Amended VisEraAgreement, the parties agreed to raise the total capital committed to the jointventure from $50.0 million to $68.0 million. The $18.0 millionincrease was designated principally for the acquisition from unrelated existingshareholders of approximately 29.6% of the issued share capital of XinTec, ofwhich we directly owned approximately 7.8% at that time. In fiscal 2006,VisEra invested an additional $0.5 million and we invested an additional$130,000 in XinTec as our portion of an additional capital injection to enableXinTec to expand its production capacity. As a result of the increase in ourbeneficial interest in XinTec due to VisEra’s investment in XinTec duringfiscal 2006, we accounted for our investment in XinTec under the equitymethod. In January 2007, TSMC through the purchase of approximately90.5 million previously unissued shares, acquired a controlling interestin XinTec. As a result of TSMC’s investment, our ownership percentage in XinTecdeclined from 7.8% to 4.4% and VisEra’s ownership percentage declinedfrom 29.6% to 16.9%. Due to the reduction in our ownership percentage in XinTecand the deconsolidation of VisEra described below, effective January 1, 2007,we began to account for our interest in XinTec under the cost method.

As a result of theadditional investment that TSMC and we made in VisEra under the Amended VisEraAgreement, TSMC’s and our interest each increased from 25% to 43%, andconsequently we re-evaluated our accounting for VisEra in accordance withFinancial Accounting Standards Board, or FASB, Interpretation No. 46(revised December 2003), or FIN 46(R), *“Consolidation of VariableInterest Entities.”* We concluded that, as a result of our stepacquisition of VisEra and because substantially all of the activities of VisEraeither involve or are conducted on our behalf, VisEra was a variable interestentity. Since we were the source of virtually all of VisEra’s revenues, we hada decisive influence over VisEra’s profitability. Accordingly, we consideredourselves to be the primary beneficiary of the joint venture, and in the quarterwhich ended in October 2005, we began to include VisEra’s financial results inour consolidated financial statements. In the quarter ended January 2006,we increased our interest in VisEra from 43% to 46% through purchases ofunissued shares. In January 2006, pursuant to the Amended VisEraAgreement, VisEra purchased from TSMC the equipment used for applying colorfilers and micro-lenses to wafers, and VisEra is now providing the relatedprocessing services that we previously purchased from TSMC. In November 2006,we invested $6.1 million in VisEra as our portion of an additional cash orasset contribution to be made by TSMC and us under the then current AmendedVisEra Agreement.

EffectiveJanuary 1, 2007, by mutual agreement, we assumed responsibility forthe logistics management services previously provided to us by VisEra. As aconsequence, we concluded that we had lost our status as the primarybeneficiary of the joint venture and VisEra had ceased to be a variableinterest entity (“VIE”) as defined under FIN 46(R). As a result, wedeconsolidated VisEra as of the date of the change. As a consequence of thedeconsolidation, effective January 1, 2007, we account for our investmentin VisEra under the equity method. The deconsolidation of VisEra did not have amaterial effect on our reported revenue or reported net income forfiscal 2007. See Note 5 – “*Long-termInvestments”*to our consolidated financial statements.

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**ITEM 1.   BUSINESS****— (Continued)**

In January 2007, weand TSMC also signed an amendment to the Amended VisEra Agreement to providefor an increase in VisEra’s manufacturing capacity. Under the amendment, we andTSMC each made an additional $27.0 million investment in VisEra inApril 2007. This investment is part of an ongoing capacity expansion programat VisEra. All other material terms of the Amended VisEra Agreement remain ineffect.

## ***Joint Venture with PSC***

In May 2004, we enteredinto an agreement with PSC, to establish SOI as a joint venture. The purpose ofSOI is to conduct manufacturing, marketing and selling of certain of our legacyproducts. In connection with the establishment of SOI, we have agreed to enterinto manufacturing and other agreements as appropriate with PSC. InMarch 2005, we assumed control of the board of directors of SOI and wehave consolidated SOI since April 30, 2005. In July 2006, SOIdeclared a cash dividend of $482,000, of which we received $237,000 when thecash dividend was paid in August 2006. SOI also issued shares to itsemployees in July 2006, with an estimated fair value of $459,000 whichcaused our ownership percentage to decline from 49.0% to 46.6%. InApril 2007, SOI became listed on the 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, which caused ourownership percentage to decline to 45.4% as of April 30, 2007. SeeNote 18 – “*Related Party Transactions”*to our consolidated financial statements.

## ***Acquisition of CDM***

In April 2005, wecompleted the acquisition of CDM. CDM is located in Boulder, Colorado. CDM isthe exclusive licensee from an affiliate of the University of Colorado of apatented technology, known as Wavefront Coding technology that increases theperformance of an imaging system by substantially increasing the depth of fieldand/or correcting optical aberrations within the image. We expect that it willsignificantly reduce the size and complexity of the auto-focus function onfuture camera modules utilizing OmniVision sensors. Because the image is alwaysin focus, Wavefront Coding technology also eliminates the time-delay inherentin conventional auto or manually focused camera systems. The closing considerationfor the acquisition consisted of $10.0 million in cash and approximately515,000 shares of our common stock. Approximately 147,000 of these shares wereretained as security for certain indemnities given by the sellers.

In the quarter endedOctober 31, 2006, we increased “Goodwill” related to our acquisition ofCDM by $2.6 million. The increase was partially related to a put optionthat expired during the quarter with respect to the 147,000 CDM escrow shares.The escrow shares were puttable back to us at a premium and 145,000 shares wereput to us for cash totaling $2.8 million. Additionally, the value of theinitial shares that were issued in April 2005 as part of the CDMacquisition were also increased due to a put option that expired unexercisedsubsequent to the original issuance of the shares. Both amounts should havebeen recorded as part of the initial acquisition of CDM. We are also obligatedto pay an additional $10.0 million in cash upon the sale, prior to the endof April 2009, of a pre-determined number of revenue-producing productsincorporating CDM’s technology.

**Industry Background**

## ***Image Sensor Technologies***

Digital imaging enablesthe capture of still or moving images without the use of photographic, orchemical-based films. The two most common electronic image sensors, bothdeveloped in the late 1960s, are CCD and CMOS image sensors. Both sensors aresilicon-based semiconductor devices that convert light to an electric chargefor display or storage.

CMOS image sensors aretypically less expensive to produce and consume significantly less power thanCCDs, but the quality of early CMOS image sensors lagged behind that of CCDs.Owing to their historically superior image quality, CCDs became a standard fordigital imaging and have been used in a wide variety of applications rangingfrom video camcorders to numerous industrial and scientific applications. Untila few years ago, CMOS image sensors were primarily used for relativelylower-cost applications, such as PC video cameras, for which high image qualitywas not a priority.

In recent years, advancesin semiconductor manufacturing processes and design techniques have led toimprovements in CMOS image sensor performance and image quality, resulting insmaller circuits and better current 

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**ITEM 1.   BUSINESS****— (Continued)**

control, making itpossible to design CMOS image sensors that provide image quality comparable tothat of CCDs of comparable resolution. As a result, CMOS image sensors havebecome a compelling alternative to CCDs for a wide range of uses, particularlyin consumer photography and new camera market segments, such as camera-equippedcell phones, security and surveillance systems, toys and interactive video gameconsoles, laptop computers, and automotive applications, where high image quality,low power consumption, small size and low cost are important considerations.

## ***CMOS Sensors versus CCD Sensors***

One of the criticaldifferences between CCD and CMOS image sensors is the way in which eachprocesses an electrical charge, or a signal. Cameras employing CCDs require anadditional integrated circuit called an analog-to-digital converter, or ADC, toconvert a signal from analog to digital format. In contrast, image sensorsbased on the CMOS manufacturing process are able to integrate a number offunctions on one device, enabling all of the conversion circuitry to beincorporated in a single sensor chip. This high level of integration reducesthe overall number of components and system complexity, and reduces the spacerequired for them.

## ***Market Opportunity***

Demand for CMOS imagesensors for use in camera cell phones continued to account for a substantialportion of our revenue in fiscal 2007. Other applications and markets thatwe are currently serving or that are developing include embedded applicationsfor personal computers, security and surveillance, toys and interactive videogame consoles, and automotive and medical applications. As device manufacturersbecome increasingly aware of the numerous advantages associated with singlechip CMOS image sensor solutions, such as high image quality, accelerated timeto market, efficient design and manufacturability, smaller size, lower powerconsumption and reduced cost, we believe these markets offer significantadditional opportunities for mass-market applications for CMOS image sensors.

**Customers**

We sell directly to OEMsand VARs and indirectly through distributors. OEMs include branded cameradevice manufacturers and contract manufacturers. During fiscal 2007, weshipped approximately 250 million CameraChip image sensors, as compared toapproximately 150 million CameraChip image sensors in fiscal 2006.

In fiscal 2007, wederived approximately 60% of our revenues from OEMs and VARs and approximately40% of our revenues through distributors. The one OEM customer that accountedfor 10% or more of our revenues in fiscal 2007 was the Foxconn TechnologyGroup, or Foxconn, which accounted for approximately 14.0% of our revenues. Thetwo distributors that accounted for 10% or more of our revenues in fiscal 2007were World Peace Industrial Group, or World Peace, and SiDaElectronics (Hong Kong) Co., Limited, or SiDa Electronics, which accountedfor approximately 15.1% and 12.9% of our revenues, respectively. No other OEM,VAR or distributor accounted for 10% or more of our fiscal 2007 revenues.

**Sales and Marketing**

We sell our productsthrough a direct sales force and indirectly through distributors. As ofApril 30, 2007, our sales and marketing organization had a total of168 full-time employees. We also have ten independentdistributors, eight of which are located outside the United States. Salesoutside of the United States represented approximately 99% of our revenues infiscal 2005, fiscal 2006 and fiscal 2007. We expect that sales outsideof the United States will continue to account for a very large proportion ofour revenues and in certain markets, it is more cost-effective for us to sellto certain customers through distributors who often have more sales coveragethan we do and assume responsibility for logistics, collections, productreturns and customer support. In addition to our standard product marketing, wealso participate in tradeshows and other industry events to promote ourCameraChip solutions.

**Research and Development**

We have designed theinternal structure of our CMOS CameraChip image sensors in a modular fashion.The major functions, such as image capture, image sensor control logic, colorprocessing, analog output, digital output and programming control, arestand-alone circuits that we can rapidly modify for use in new productdevelopments. We design circuit improvements so that we can transfer themreadily to other CameraChip products to help reduce total development time andcost for new products. As of April 30, 2007, we had a total of 340 full-timeemployees 

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**ITEM 1.   BUSINESS****— (Continued)**

in research anddevelopment. Research, development and related expenses for fiscal 2005,2006 and 2007 were approximately, $25.5 million $40.6 million and$67.6 million, respectively.

**Intellectual Property**

Our success and futurerevenue growth will depend, in part, on our ability to protect our intellectualproperty. We rely on a combination of patents, copyrights, trademarks and tradesecrets, as well as nondisclosure agreements and other methods, to protectvarious aspects of our CameraChip image sensors. As of April 30, 2007, wehave been issued 74 United States patents which expire betweenOctober 2015 and August 2025. We have also received 79 foreignpatents which expire between October 2015 and December 2025. As ofApril 30, 2007, we have 75 additional United States patent applicationspending, of which two have been allowed, and we have filed 239 foreign patentapplications, of which 17 have been allowed.

From time to time, wehave been subject to legal proceedings and claims with respect to such mattersas patents and other actions arising out of the normal course of business. Itis possible that companies might pursue litigation with respect to any claimssuch companies purport to have against us. The results of any litigation areinherently uncertain. In the event of an adverse result in any litigation withrespect to intellectual property rights relevant to our products that couldarise in the future, we could be required to obtain licenses to the infringedtechnology, pay substantial damages under applicable law, including trebledamages if we are held to have willfully infringed, cease the manufacture, useand sale of infringing products or expend significant resources to developnon-infringing technology, even if we ultimately prevail. Litigation frequentlyinvolves substantial expenditures and can require significant managementattention.

**Manufacturing**

## ***Wafer Fabrication***

Our semiconductorproducts are fabricated using standard CMOS processes, which permit us toengage independent wafer foundries to manufacture our semiconductors. Weoutsource our wafer manufacturing for CameraChip image sensors to TSMC and PSC.Our CameraChip image sensors are currently fabricated using a standard processat 0.11μ, 0.13μ, 0.18μ, 0.25μ, 0.50μ and 0.60μ. In addition, TSMC andSemiconductor Manufacturing International Corporation, or SMIC, fabricate ourcompanion DSP and interface chips.

## ***Color Filter Application***

A majority of our fiscal2007 CameraChip image sensor sales were color CameraChip image sensors, which,in addition to a micro-lens, require a color filter to be applied to the waferbefore packaging. The color filter application uses a series of masks to placered, green and blue dyes on the individual pixels in an industry-standard Bayerpattern. In the final step, a micro lens is applied to each pixel. We outsourcethese manufacturing steps to VisEra.

## ***Wafer Probe Testing***

Wafers that aredesignated for chip-on-board, or COB, packaging are tested using a processcalled wafer probe testing. We outsource wafer probe testing to King YuanElectronics Co., Ltd., or KYEC, Winstek Semiconductor Corp., or Winstek, andVisEra.

## ***Packaging***

In the case of chip-scalepackaged or CSP products, after wafer fabrication, color filter application ifrequired, and micro-lens application, the wafers are packaged and then dicedinto chips. With the exception of CSP products, the wafers are diced first andthen packaged. Our products are designed to use standard packaging that iswidely used for optical sensor chips. These packages have a glass lid to allowlight to pass through to the image sensor array. For our higher-priced productlines, we rely on Advanced Semiconductor Engineering, or ASE, ChipbondTechnology Corporation and ImPacTechnology Co., Ltd., or ImPac, an investee company, for substantiallyall of our ceramic chip packaging. We rely on ImPac for our plastic chippackaging and on XinTec, another investee company, for the large majority ofour CSP products, which are generally designed for the smallest form factorapplications.

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**ITEM 1.   BUSINESS****— (Continued)**

## ***FinalTesting***

High volume final producttesting is a critical element of the production of CameraChip image sensors andis a substantial barrier to entry for potential competitors. Production finaltesting instruments designed for conventional CMOS devices are not sufficientfor testing image sensors, because an optical image must be captured andchecked in addition to checking the standard logic and electrical functions.

We are currently in theprocess of installing new high-throughput automated final test equipment builtto our specifications at our testing facility in Shanghai, China. The newtesters have automated handling capability, a lighting and lens system, achangeable image source and automated output sorting by functionality. Thesystem is programmable so that testing criteria and methodology can be changedeasily to accommodate new products or special testing requirements.

## ***Product Quality Assurance***

We focus on productquality through all stages of the design and manufacturing process. We submitall our designs to in-depth circuit simulation before we commit them tosilicon. Before we commit a new product to production, we fabricate testwafers, package test chips and test the final product. We keep initialproduction runs to a minimum until sufficient products have completed theentire manufacturing and testing process and are delivered to and approved bycustomers. We commit to full production runs after final customer approval.

We qualify each of oursubcontractors through a series of industry standard environmental productstress tests, as well as through an audit and an analysis of the subcontractor’squality system and manufacturing capability. We also participate in quality andreliability monitoring through each stage of the production cycle by reviewingelectrical parametric data from our foundries and other subcontractors.

**Competition**

We operate in an industrycharacterized by intense competition, rapid technological changes, evolvingindustry standards, declining average selling prices and rapid productobsolescence. Our competition both comes from CMOS and CCD image sensormanufacturers:

·        CMOS Image SensorManufacturers. Image sensor manufacturers using CMOS technology include anumber of well established companies such as Kodak, MagnaChip, Micron,Matsushita, Samsung, Sony, STMicroelectronics and Toshiba. In addition, wecompete with a large number of smaller CMOS manufacturers including Foveon,PixArt, Pixelplus and Pixim.

·        CCDImage Sensor Manufacturers. Image sensor manufacturers using CCD technologyinclude a number of well-established companies, particularly verticallyintegrated camcorder and high-resolution digital still camera manufacturers.Our main competition from CCD manufacturers comes from Fuji, Kodak, Matsushita,NEC, Sanyo, Sharp, Sony, Texas Instruments and Toshiba.

Our competitors includemany large domestic and international companies that have greater presence inkey markets, greater access to advanced wafer foundry capacity, substantiallygreater financial, technical, marketing, manufacturing, distribution and otherresources, better access to large customer bases, greater name recognition,longer operating histories and more established strategic and financialrelationships than we do. As a result, they may be able to adapt more quicklyto new or emerging technologies and customer requirements or devote greaterresources to the promotion and sale of their products.

We believe that theprincipal factors affecting our competition in our markets includerelationships with key OEMs that incorporate image sensors into mass-marketapplications, relationships with key distributors, relationships withsemiconductor foundries and other participants in the semiconductormanufacturing chain, time to market, quality, total system design cost, productperformance, customer support and supplier reputation. We believe that wecompete effectively with respect to these factors.

**Backlog**

Sales are generally madepursuant to standard purchase orders. Our backlog includes only acceptedcustomer orders with assigned shipment dates within the upcoming 12 months. Asof April 30, 2006 and 2007, our backlog was approximately $134.5 million and$149.6 million, respectively. The increase in our backlog reflects thefact that with product in relatively short supply as compared to a year ago,customers need to place purchase orders farther in 

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**ITEM 1.   BUSINESS****— (Continued)**

advance ofshipments than they did in the prior period. Our current backlog is subject tochanges in delivery schedules, and may not necessarily be an indication offuture revenue.

**Employees**

As of April 30, 2007we had a total of 2,064 full-time employees, 336 located in the U.S.and 1,728 located in China, Finland, Germany, Hong Kong, Japan, Singapore,South Korea, Taiwan and the United Kingdom, with approximately 1,600 of theseemployees located in China. Most of the increase from the prior year occurredin China and Taiwan to staff our expanded test, logistics and researchactivities. Our future success will depend, in part, on our ability to continueto attract, retain and motivate highly qualified technical and management personnel.None of our employees is represented by a collective bargaining agreement, andwe have never experienced any work stoppage. We believe that our employeerelations are good.

**Financial Information AboutGeographic Areas**

For information aboutrevenue and long-lived assets by geographic region/country, seeNote 16 — “*Segment and GeographicInformation”* in Part II, Item 8 of this Form 10-K and *“Management’s Discussion and Analysis of Financial Condition andResults of Operations”* in Part II, Item 7 of thisForm 10-K.

**Executive Officers and Directors ofthe Registrant**

The followingpersons are our executive officers as of the date of this report:
| Name                  | ** ** | **Age**    | ** ** | **Position**                                    | ** ** |
|-----------------------|------------|------------|------------|-------------------------------------------------|------------|
| ** **            | ** ** | ** ** | ** ** | ** **                                      |
| Shaw Hong             |       | 69         |       | Chief Executive Officer, President and Director |
| Xinping He            |       | 44         |       | Chief Operating Officer and Director            |
| Peter V. Leigh        |       | 62         |       | Chief Financial Officer                         |
| Y. Vicky Chou         |       | 44         |       | Vice President of Legal and General Counsel     |
| Dr. John T.  Yue |       | 60         |       | Vice President of Quality and Reliability       |
| Anson Chan            |       | 38         |       | Vice President of Finance                       |

 

*ShawHong*, one of our cofounders, has served as one of ourdirectors and as our Chief Executive Officer and President since May 1995. Mr.Hong holds a B.S. degree in electrical engineering from Jiao Tong University inChina and an M.S. degree in electrical engineering from Oregon StateUniversity.

*XinpingHe*has served as our Chief Operating Officer sinceAugust 2006. From February 2003 to August 2006, Mr. Heserved as our Senior Vice President of Engineering. Mr. He joined our companyin June 1995 and served as a senior design engineer until his promotion todesign manager in July 1998. From August 2001 untilFebruary 2003, Mr. He served as our Vice President of CoreTechnology. In November 2006, our board of directors appointed Mr. Heas a member of the board of directors as a Class II director. Mr. Heholds a B.S. degree and an M.S. degree in electrical engineering fromTsinghua University in Beijing.

*PeterV. Leigh* has served as our Chief Financial Officer sinceSeptember 2004. From September 2004 to February 2007, Mr. Leigh also served as ourVice President of Finance. From December 2002 to September 2004, Mr.Leigh was self-employed as a consultant to a technology company. From November1995 to December 2002, Mr. Leigh served as Chief Financial Officer of MetronTechnology, Inc., a global provider of materials and services to thesemiconductor industry. From 1992 to 1995, Mr. Leigh was Chief FinancialOfficer of Liposome Technology, a bio-pharmaceutical company. From 1982 to 1992,Mr. Leigh served as Corporate Controller of Bio-Rad Laboratories, amulti-national manufacturer of research chemistry products, clinicaldiagnostics and analytical instruments. Mr. Leigh holds an M.B.A. degree fromthe Harvard Business School and a B.A. degree in economics from OxfordUniversity.

*Y.Vicky Chou*has served as our Vice President of Legal andGeneral Counsel since June 2003. From February 2003 to June 2003, Ms. Chouserved as our Corporate Counsel. From August 1999 to January 2003, Ms. Chou wasan attorney at Heller Ehrman White & McAuliffe LLP. From June 1997 to July1999, Ms. Chou was an attorney/corporate specialist at Coudert Brothers LLP.Ms. Chou received a B.S. degree in anthropology from Temple University, anM.B.A. degree from St. Joseph’s University and a J.D. degree from Santa ClaraUniversity.

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**ITEM 1.   BUSINESS****— (Continued)**

*Dr.John T. Yue* has served as our Vice President of Quality andReliability since February 2005. From September 1999 toFebruary 2005, Dr. Yue was employed by Taiwan Semiconductor ManufacturingCompany (TSMC) where he served as Vice President of Quality and Reliabilityfrom September 1999 to June 2002 and as Vice President of Technologywith the company’s North America operations from July 2002 toFebruary 2005. Prior to joining TSMC, Dr. Yue was employed for 17 years byAdvanced Micro Devices (AMD) where he held various positions, includingDirector of Reliability and Quality in the Corporate Quality Division and wasan AMD fellow. Prior to AMD, Dr. Yue held management positions at NationalSemiconductor and Texas Instruments. He holds a Ph.D. and an M.S. degree inphysics from Stanford University, a B.S. degree in physics from theMassachusetts Institute of Technology, and an M.B.A. degree from Southern MethodistUniversity.

*AnsonChan* has served as our Vice President of Finance sinceFebruary 2007. From July 2006 to February 2007, Mr. Chan servedas our Vice President of Business Strategy. From September 1997 toJuly 2006, Mr. Chan served in various positions withPricewaterhouseCoopers, LLP, an independent public accounting firm, mostrecently as a Senior Manager. Mr. Chan holds a B.S. degree in economicsand a B.S. degree in engineering from the University of Pennsylvania and anM.B.A. degree in business strategy and operations management from theUniversity of Chicago.

**ITEM 1A.   RISKFACTORS**

*ThisAnnual Report on Form 10-K, including Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, contains forward-lookingstatements. These forward-looking statements are subject to substantial risksand uncertainties that could cause our future business, financial condition orresults of operations to differ materially from our historical results orcurrently anticipated results, including those set forth below.*

***Risks Related toOur Business***

## ***We face intense competition in our marketsfrom more established CMOS and CCD image sensor manufacturers, and if we areunable to compete successfully we may not be able to maintain or grow our business.***

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

Ourimage-sensor products face competition from other companies that sell CMOSimage sensors and from companies that sell CCD image sensors. Many of ourcompetitors have longer operating histories, greater presence in key markets,greater name recognition, larger customer bases, more established strategic andfinancial relationships and significantly greater financial, sales andmarketing, distribution, technical and other resources than we do. Many of themalso have their own manufacturing facilities which may give them a competitiveadvantage. As a result, they may be able to adapt more quickly to new oremerging technologies and customer requirements or devote greater resources tothe promotion and sale of their products. Our competitors include establishedCMOS image sensor manufacturers such as Kodak, MagnaChip, Micron,Matsushita, Samsung, Sony, STMicroelectronics and Toshiba as well as CCD image sensor manufacturerssuch as Fuji, Kodak, Matsushita,NEC, Sanyo, Sharp, Sony, Texas Instruments and Toshiba. Many of these competitors own and operate their ownfabrication facilities, which in certain circumstances may give them theability to price their products more aggressively than we can or may allow themto respond more rapidly than we can to changing market opportunities. Inaddition, we compete with a large number of smaller CMOS manufacturersincluding Foveon, PixArt andPixelplus and Pixim. Competitionwith these and other companies has required, and in the future may require, usto reduce our prices. For instance, we have seen increased competition in themarkets for VGA image sensor products with resulting pressures on productpricing. Downward pressure on pricing could result both in decreased revenuesand lower gross margins, which would adversely affect our profitability.

Our competitors mayacquire or enter into strategic or commercial agreements or arrangements withfoundries or providers of color filter processing, assembly or packagingservices. These strategic arrangements between our competitors and third partyservice providers could involve preferential or exclusive arrangements for ourcompetitors. Such strategic alliances could impair our ability to securesufficient capacity from foundries and service

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**ITEM 1A.   RISK FACTORS****— (Continued)**

providers to meetour demand for wafer manufacturing, color filter processing, assembly orpackaging services, adversely affecting our ability to meet customer demand forour products. In addition, competitors may enter into exclusive relationshipswith distributors, which could reduce available distribution channels for ourproducts and impair our ability to sell our products and grow our business.Further, some of our customers could also become developers of image sensors,and this could potentially adversely affect our results of operations, businessand prospects.

## ***Declines in our average selling prices mayresult in declines in our revenues and may further reduce our gross margins.***

Wehave experienced and expect to continue to experience pressure to reduce theselling prices of our products, and our average selling prices have declined asa result. Competition in our product markets is intense and as this competitioncontinues to intensify, we anticipate that these pricing pressures willincrease. We expect that the average selling prices for many of our productswill continue to decline over time. Unless we can increase unit salessufficiently to offset these declines in our average selling prices, ourrevenues will decline. Our low average selling prices have adversely affectedour gross margins, and unless we can reduce manufacturing costs to compensate,additional reductions in our average selling prices will continue to adverselyaffect our gross margins and could materially and adversely affect ouroperating results and impair our financial condition. We have increased andintend to continue to increase our research, development and related expensesto continue the development of new image sensor products in fiscal years 2008and 2009 that can be sold at higher selling prices and/or manufactured at lowercost. However, if we are unable to timely introduce new products thatincorporate more advanced technology and include more advanced features thatcan be sold at higher average selling prices, or if we are unable tosuccessfully develop more cost-effective technologies, our financial resultscould be adversely affected.

## ***Sales of our image-sensor products for cameracell phones account for a large portion of our revenues, and any decline insales to the camera cell phone market or failure of this market to continue togrow as expected could adversely affect our results of operations.***

Sales to the camera cellphone market account for a large portion of our revenues. Although we can onlyestimate the percentages of our products that are used in the camera cell phonemarket due to the significant number of our image-sensor products that are soldto module makers or through distributors and VARs, we believe that the cameracell phone market accounted for approximately 70% and 80% of our revenues infiscal 2006 and fiscal 2007, respectively. We expect that revenuesfrom sales of our image-sensor products to the camera cell phone market willcontinue to account for a significant portion of our revenues during fiscal2008 and beyond. Any factors adversely affecting the demand for our imagesensors in this market could cause our business to suffer and adversely affectour operating results. The digital image sensor market for camera cell phonesis extremely competitive, and we expect to face increased competition in thismarket in the future. In addition, we believe the market for camera cell phonesis also relatively concentrated and the top five producers account for more than80% of the annual sales of these products. If we do not continue to achievedesign wins with key camera cell phone manufacturers, our market share orrevenues could decrease. The camera cell phone image sensor market is alsosubject to rapid technological change. In order to compete successfully in thismarket, we will have to correctly forecast customer demand for technologicalimprovements and be able to deliver such products on a timely basis atcompetitive prices. If we fail to do this, our results of operations, businessand prospects would be materially and adversely affected. In the past, we haveexperienced problems accurately forecasting customer demand in other markets.If our sales to the camera cell phone market do not increase and/or the camera cellphone market does not grow as expected, our results of operations, business andprospects would be materially adversely affected.

## ***Our future success depends on the timelydevelopment, introduction, marketing and selling of new CMOS image sensors,which we might not be able to achieve.***

Our failure tosuccessfully develop new products that achieve market acceptance in a timelyfashion would adversely affect our ability to grow our business and ouroperating results. The development, introduction and market acceptance of newproducts is critical to our ability to sustain and grow our business. Anyfailure to successfully develop, introduce, market and sell new products couldmaterially adversely affect our business and operating results. The developmentof new products is highly complex, and we have in the past experienced delaysin completing the development and introduction of new products. From time totime, we have also encountered unexpected manufacturing problems as we increasethe production of new products. For example, in the fourth quarter of fiscal2005, and again in the first quarter of fiscal 2006, the back-end yields on twoof our advanced products were significantly below where we planned, and ourgross margins were adversely impacted. As our 

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**ITEM 1A.   RISK FACTORS****— (Continued)**

products integratenew and more advanced functions, they become more complex and increasinglydifficult to design and debug. Successful product development and introductiondepends on a number of factors, including:

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

·                         development of advancedtechnologies and capabilities;

·                         definition, timely completionand introduction of new CMOS image sensors that satisfy customer requirements;

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

·                         market acceptance of the newproducts.

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

## ***Design wins are a key determinant of futurerevenues, and failure to obtain design wins has in the past, and could in thefuture, adversely affect our revenues and impair our ability to grow ourbusiness.***

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

## ***We depend on a limited number of third partywafer foundries, which reduces our ability to control our manufacturingprocess.***

Unlikesome of our larger competitors, we do not own or operate a semiconductor fabricationfacility. Instead, we rely on TSMC, PSC and other subcontract foundries toproduce all of our wafers. Historically, we have relied on TSMC to provide uswith a substantial majority of our wafers. As a part of our joint ventureagreement with TSMC, TSMC has 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.

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

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

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

·                         lack of guaranteed productioncapacity or product supply;

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

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**ITEM 1A.   RISK FACTORS****— (Continued)**

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

IfTSMC, PSC, or any of our other foundries were unable to continue manufacturingour wafers in the required volumes, at acceptable quality, yields and costs, orin a timely manner, we would have to identify and qualify substitute foundries,which would be time consuming and difficult, and could increase our costs orresult in unforeseen manufacturing problems. In addition, if competition forfoundry capacity increases we may be required to pay increased amounts formanufacturing services. We are also exposed to additional risks if we transferour production of semiconductors from one foundry to another, as such transfercould interrupt our manufacturing process. Further, some of our foundries mayalso be developers of image sensor products and if one or more of our otherfoundries were to decide not to fabricate our companion DSP chips forcompetitive or other reasons, we would have to identify and qualify othersources for these products.

## ***We rely on a joint venture company for colorfilter application and on third party service providers for packaging services,which reduces our control over delivery schedules, product quality and cost,and could adversely affect our ability to deliver products to customers.***

Werely on VisEra, our joint venture with TSMC, for the color filter processing ofour completed wafers. In addition, we rely on ASE and ImPac for substantiallyall of our ceramic chip packages. We also rely on ImPac, our equity investee,for our plastic chip packages. We rely on XinTec, another investee company, andChina Wafer Level CSP, Ltd. for chip scale packages, which are generally usedin our products designed for the smallest form factor applications. We currentlyhave plans to expand color filter processing capacity at VisEra and with theseservice providers. If for any reason one or more of these service providersbecomes unable or unwilling to continue to provide color filter processing orpackaging services of acceptable quality, at acceptable costs and in a timelymanner, our ability to deliver our products to our customers could be severelyimpaired. We would have to identify and qualify substitute service providers,which could be time consuming and difficult and could result in unforeseenoperational problems. Substitute service providers might not be available or,if available, might be unwilling or unable to offer services on acceptableterms.

Inaddition, if competition for color filter processing or packaging capacityincreases, we may be required to pay or invest significant amounts to secureaccess to these services, which could adversely impact our operating results.The number of companies that provide these services is limited and some of themhave limited operating histories and financial resources. In the event ourcurrent providers refuse or are unable to continue to provide these services tous, we may be unable to procure services from alternate service providers.Furthermore, if customer demand for our products increases, we may be unable tosecure sufficient additional capacity from our current service providers oncommercially reasonable terms, if at all. Moreover, our reliance on a limitednumber of third party service providers to provide color filter processingservices subjects us to reduced control over delivery schedules, qualityassurance and costs. This lack of control may cause unforeseen productshortages or may increase our costs of manufacturing, assembling or testing ofour products, which would adversely affect our operating results.

## ***Fluctuations in our quarterly operatingresults have caused volatility in the market price of our common stock and makeit difficult to predict our future operating results.***

Ourquarterly operating results have varied significantly from quarter-to-quarterin the past and are likely to vary significantly in the future based on anumber 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:

·                         the volume and mix of ourproduct sales;

·                         competitive pricing pressures;

·                         our ability to accuratelyforecast demand for our products;

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

·                         our gain or loss of a largecustomer;

·                         our ability to manage ourproduct transitions;

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**ITEM 1A.   RISK FACTORS****— (Continued)**

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

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

·                         the timing and size of ordersfrom our customers;

·                         the volume of our productreturns;

·                         the seasonal nature ofcustomer demand for our products;

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

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

·                         the level of our operatingexpenses; and

·                         the increased volatility ofour effective tax rate as a consequence of our adoption of FASB InterpretationNo. 48, or FIN 48, *“Accounting forUncertainty in Income Taxes—an Interpretation of FASB Statement No. 109.”*

Ourintroduction of new products and our product mix have affected and may continueto affect our quarterly operating results. Changes in our product mix couldadversely affect our operating results, because some products provide highermargins than others. We typically experience lower yields when manufacturing newproducts through the initial production phase, and consequently our grossmargins on new products have historically been lower than our gross margins onour more established products. We also anticipate that the rate of orders fromour customers may vary significantly from quarter to quarter. Our operatingexpenses are relatively fixed, and our inventory levels are based on ourexpectations of future revenues. Consequently, if we do not achieve therevenues we expect in any quarter, expenses and inventory levels could bedisproportionately high, and our operating results for that quarter, andpotentially future quarters, may be harmed.

Allof these factors are difficult to forecast and could result in fluctuations inour quarterly operating results. Our operating results in a given quarter couldbe substantially less than anticipated, and, if we fail to meet market analysts’expectations, a substantial decline in our stock price could result.Fluctuations in our quarterly operating results could adversely affect theprice of our common stock in a manner unrelated to our long-term operatingperformance.

## ***Our business is subject to seasonalfluctuations which may in turn cause fluctuations in our results of operationsfrom period to period.***

Manyof the products using our image sensors, such as camera cell phones, digitalstill cameras 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.

Inaddition, since a very large number of the manufacturers who use our productsare located in China, Hong Kong and Taiwan, the pattern of demand for our imagesensors has been increasingly influenced by the timing of the extended lunar orChinese New Year holiday, a period in which the factories which use our imagesensors generally close. For example, we believe that the decline in revenuesthat we experienced in the fourth quarter of fiscal 2007 is partly attributableto the fact that Chinese New Year occurred this year in mid-February, andmanufacturing did not resume in full until sometime in March.

## ***Problems with wafer manufacturing and/orback-end processing yields could result in higher product costs and couldimpair our ability to meet customer demand for our products.***

Ifthe foundries manufacturing the wafers used in our products cannot achieve theyields we expect, we will incur higher per unit costs and reduced productavailability. Foundries that supply our wafers have experienced problems in thepast achieving acceptable wafer manufacturing yields. Wafer yields are afunction both of our design technology and the particular foundry’smanufacturing process technology. Certain risks are inherent in theintroduction of such new products and technology. Low yields may result fromdesign errors or manufacturing failures in new or existing products. During theearly stages of production, production yields for new products are typicallylower than those of established products. Unlike many other semiconductorproducts, optical products can 

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**ITEM 1A.   RISK FACTORS****— (Continued)**

be effectively tested only when they are complete. Accordingly, weperform final testing of our products only after they are assembled. As aresult, yield problems may not be identified until our products are well intothe production process. The risks associated with low yields could be increasedbecause we rely on third party offshore foundries for our wafers, which canincrease the effort and time required to identify, communicate and resolvemanufacturing yield problems. In addition to wafer manufacturing yields, ourproducts are subject to yield loss in subsequent manufacturing steps, oftenreferred to as back-end processing, such as the application of color filtersand micro-lenses, dicing (cutting the wafer into individual devices, or die)and packaging. Any of these potential problems with wafer manufacturing and/orback-end processing yields could result in a reduction in our gross marginsand/or our ability to timely deliver products to customers, which couldadversely affect our customer relations and make it more difficult to sustainand grow our business. For example, low back-end yields on two of our productsadversely impacted our gross margins for the fiscal quarters endedApril 30, 2005, July 31, 2005 and October 31, 2005.

## ***If we do not forecast customer demandcorrectly, our business could be impaired and our stock price may decline.***

Our sales are generallymade 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 sales forecastingprocedures. If we overestimate customer demand, we may manufacture productsthat we may be unable to sell, or we may have to sell to other customers atlower prices. This could materially and adversely affect our results ofoperations and financial condition. In addition, our customers may cancel ordefer orders at any time by mutual written consent. We have experiencedproblems with accurately forecasting customer demand in the past. For examplethere was a shift in the mix of product demand, in particular a shift in demand towards VGA productslate in the second quarter of fiscal 2007, and as a result our inventoriesat the end of the second and third quarters were higher than we intended themto be. We are required to accurately predict customer demand because we mustoften make commitments to have products manufactured before we receive firmpurchase orders from our customers. Conversely, if we underestimate customerdemand, we may be unable to manufacture sufficient products quickly enough to meetactual demand, causing us to lose customers and impairing our ability to growour business. In preparation for new product introductions, we gradually rampdown production of established products. With our 12-14 week production cycle,it is extremely difficult to predict precisely how many units of establishedproducts we will need. It is also difficult to accurately predict the speed ofthe ramp of our new products and the impact on inventory levels presented bythe shorter life cycles of end-user products. The shorter product life cycle isa result of an increase in competition and the growth of variousconsumer-product applications for image sensors. For example, although in thesecurity and surveillance market we continue to sell image-sensor productsintroduced more than four years ago, in the camera cell phone market, theproduct life cycle of image sensors can be as little as six months. 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 the increased acceptance ofmass-market image sensor applications to grow our business and increase ourrevenues.***

Ourbusiness strategy depends in large part on the continued growth of variousmarkets into which we sell our image-sensor products, including the markets forcamera cell phones, digital still and video cameras, commercial and securityand surveillance applications, personal computers and lap-tops, toys and games,including interactive video games, and automotive applications. Our ability tosustain and grow our business also depends on the continued development of newmarkets for our products such as medical imaging devices. If these current andnew markets do not grow and develop as anticipated, we may be unable to sustainor grow the sales of our products.

Inaddition, the market price of our common stock may be adversely affected ifcertain of these new markets do not emerge or develop as expected. Securitiesanalysts may already factor revenue from such new markets into their futureestimates of our financial performance and should such markets not develop asexpected by such securities analysts the trading price of our common stockcould be adversely affected.

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**ITEM 1A.   RISK FACTORS****— (Continued)**

## ***Our lengthy manufacturing, packaging andassembly cycle, in addition to our customers’ design cycle, may result inuncertainty and delays in generating revenues.***

Theproduction of our image sensors requires a lengthy manufacturing, packaging andassembly process, typically lasting approximately 12-14 weeks. Additional timemay pass before a customer commences volume shipments of products thatincorporate our image sensors. Even when a manufacturer decides to design ourimage sensors into its products, the manufacturer may never ship final productsincorporating our image sensors. Given this lengthy cycle, we experience adelay between the time we incur expenditures for research and development andsales and marketing efforts and the time we generate revenue, if any, fromthese expenditures. This delay makes it more difficult to forecast customerdemand, which adds uncertainty to the manufacturing planning process and couldadversely affect our operating results. In addition, the product life cycle forcertain of our image-sensor products designed for use in certain applicationscan be relatively short. If we fail to appropriately manage the manufacturing,packaging and assembly process, our products may become obsolete before theycan be incorporated into our customers’ products and we may never realize areturn on investment for the expenditures we incur in developing and producingthese products.

## ***Our ability to deliver products that meetcustomer demand is dependent upon our ability to meet new and changingrequirements for color filter application and sensor packaging.***

Weexpect that as we develop new products to meet technological advances and newand changing industry and customer demands, our color filter application andceramic, plastic and chip-scale packaging requirements will also evolve. Ourability to continue to profitably deliver products that meet customer demand isdependent upon our ability to obtain third party services that meet these newrequirements on a cost-effective basis. We have historically relied exclusivelyon third parties, and more recently, on one of our joint ventures, to providethese services. There can be no assurances that any of these parties will beable to develop enhancements to the services they provide to us to meet thesenew and changing industry and customer requirements. Furthermore, even if theseservice providers are able to develop their services to meet new and evolvingrequirements, these services may not be available at a cost that enables us tosustain our profitability.

## ***The high level of complexity and integrationof our products increases the risk of latent defects, which could damagecustomer relationships and increase our costs.***

Becausewe integrate many functions on a single chip, our products are complex and arebased upon evolving technology. The integration of additional functions intothe complex operations of our products could result in a greater risk thatcustomers or end users could discover latent defects or subtle faults aftervolumes of product have already been shipped. Although we test our products, wehave in the past and may in the future encounter defects or errors. Forexample, in the third quarter of fiscal 2005, we made a provision of$2.7 million related to the possible replacement of products that did notmeet a particular customer’s standards. Delivery of products with defects orreliability, quality or compatibility problems may damage our reputation andability to retain existing customers and attract new customers. In addition,product defects and errors could result in additional development costs,diversion of technical resources, delayed product shipments, increased productreturns, product warranty costs for recall and replacement and productliability claims against us which may not be fully covered by insurance.

## ***Historically, our revenues have beendependent upon a few key customers, the loss of one or more of which couldsignificantly reduce our revenues.***

Historically, arelatively small number of OEMs, VARs and distributors have accounted for asignificant portion of our revenues. Any material delay, cancellation orreduction of purchase orders from one or more of our major customers ordistributors could result in our failure to achieve anticipated revenue for aparticular period. In addition, if we are unable to retain one or more of ourlargest OEM, distributor or VAR customers, or if we are unable to maintain ourcurrent level of revenues from one or more of these significant customers, ourbusiness and results of operation would be impaired and our stock price coulddecrease, potentially significantly. In fiscal 2007, one OEM customeraccounted for approximately 14.0% of our revenues. In fiscal 2007, twodistributors accounted for approximately 15.1% and 12.9% of our revenues Inaddition, approximately 50% of our revenues have historically come from our topfive customers. Our business, financial condition, results of operations andcash flows will continue to depend significantly on our ability to retain ourcurrent key customers and attract new customers, as well as on the financialcondition and success of our OEMs, VARs and distributors.

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**ITEM 1A.   RISK FACTORS****— (Continued)**

## ***Changes in accounting rules for stock-basedcompensation have adversely affected our reported operating results, and mayadversely affect our stock price and our competitiveness in the employeemarketplace.***

Since our founding, wehave used employee stock options and other stock-based compensation to attract,motivate and retain our employees. In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards, or SFAS,No. 123(R), *“Share-Based Payment,”* or SFAS No. 123(R). We adoptedSFAS No. 123(R) on May 1, 2006 and accordingly, we began to measurecompensation costs for all stock-based compensation at fair value and recognizethese costs as expenses in our Consolidated Statements of Income. Therecognition of these expenses in our Consolidated Statements of Income has hada negative effect on our earnings per share, which could negatively impact ourfuture stock price. In addition, if we reduce or alter our use of stock-basedcompensation to minimize these expenses, our ability to attract, motivate andretain qualified employees may be impaired, which could put us at a competitivedisadvantage in the employee marketplace.

## ***We may be required to record a significantcharge to earnings if our goodwill, amortizable intangible assets or long-terminvestments become impaired.***

Under generally acceptedaccounting principles, we are required to review our amortizable intangibleassets for impairment when events or changes in circumstances indicate thecarrying value may not be recoverable. We are required to test goodwill forimpairment at least annually. Factors that may be considered a change incircumstances indicating that the carrying value of our amortizable intangibleassets may not be recoverable include a decline in stock price and marketcapitalization, and slower growth rates in our industry. We may be required torecord a significant charge to earnings in our financial statements during theperiod in which we determine that our goodwill, amortizable intangible assetsor long-term investments have been impaired. Any such charge would adverselyimpact our results of operations. As of April 30, 2007, our net goodwilland amortizable intangible assets totaled approximately $28.0 million andour long term investments totaled approximately $67.3 million.

## ***We maintain a backlog of customer orders thatis subject to cancellation or delay in delivery schedules, and any cancellationor delay may result in lower than anticipated revenues.***

Our sales are generallymade pursuant to standard purchase orders. We include in our backlog only thosecustomer orders for which we have accepted purchase orders and assigned shipmentdates within the upcoming 12 months. Orders constituting our currentbacklog are subject to cancellation or changes in delivery schedules, andbacklog may not necessarily be an indication of future revenue. Anycancellation or delay in orders which constitute our current or future backlogmay result in lower than expected revenues.

## ***If we are unable to maintain processes andprocedures to sustain effective internal control over our financial reporting,our ability to provide reliable and timely financial reports could be harmedand this could have a material adverse effect on our stock price.***

We are required to complywith the rules promulgated under Section 404 of the Sarbanes-Oxley Act of2002. Section 404 requires that we prepare an annual management reportassessing the effectiveness of our internal control over financial reporting,and requires a report by our independent registered public accounting firmaddressing this assessment and the effectiveness of our internal control overfinancial reporting.

We have in the pastdiscovered, 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 business expands,ongoing compliance with the provisions of Section 404 of the Sarbanes-OxleyAct of 2002 and maintenance ofeffective internal control over financial reporting will require that we hireadditional qualified finance and accounting personnel. Because other businessesface similar challenges, there is significant competition for such personnel,and there can be no assurance that we will be able to attract and/or retainsuitably qualified employees.

## ***Corporate governance regulations haverecently increased our compliance costs and could further increase our expensesif changes occur within our business.***

Changes in laws andregulations affecting public companies, including the provisions of theSarbanes-Oxley Act, have imposed new requirements on us and on our officers,directors, attorneys and independent registered 

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**ITEM 1A.   RISK FACTORS****— (Continued)**

public accountingfirm. In order to comply with these new rules, we added internal resources andhave utilized additional outside legal, accounting and advisory services, whichincreased our operating expenses in fiscal 2005 and fiscal 2006 as compared toprior fiscal years. We expect to incur ongoing operating expenses as wemaintain compliance with Section 404. In addition, if we undergosignificant modifications to our structure through personnel or system changes,acquisitions, or otherwise, it may be increasingly difficult to maintaincompliance with the existing and evolving corporate governance regulations.

## ***There are risks associated with ouroperations in China.***

In December 2000, weestablished Hua Wei Semiconductor (Shanghai) Co. Ltd., or HWSC, as part of ourefforts to streamline our manufacturing process and reduce the costs andworking capital associated with the testing of our image-sensor products, andrelocated our automated image testing equipment from the United States toChina. In addition, we also expect to expand testing capabilities withadditional automated testing equipment, which will also be located in China.However, there are significant administrative, legal and governmental risks tooperating in China that could result in increased operating expenses or thatcould prevent us from achieving our objectives in operations. The risks fromoperating in China that could increase our operating expenses and adverselyaffect our operating results, financial condition and ability to deliver ourproducts and grow our business include, without limitation:

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

·                         difficulties in coordinatingour operations in China with those in California;

·                         diversion of managementattention;

·                         difficulties in maintaininguniform standards, controls, procedures and policies across our globaloperations, including inventory management and financial consolidation;

·                         political and economicinstability, which could have an adverse impact on foreign exchange rates inAsia and could impair our ability to conduct our business in China; and

·                         inadequacy of the localinfrastructure to support our needs.

## ***We may experience integration or otherproblems with potential future acquisitions, which could have an adverse effecton our business or results of operations. New acquisitions could dilute theinterests of existing stockholders, and the******announcement of new acquisitionscould result in a decline in the price of our common 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 in realizing thepotential technological benefits of the transaction;

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

·                         unanticipated expenses relatedto technology integration;

·                         disruption of our ongoingbusiness;

·                         difficulty in realizing thepotential financial or strategic benefits of the transaction;

·                         difficulty in maintaininguniform standards, controls, procedures and policies;

·                         possible impairment ofrelationships with employees, customers, suppliers and strategic partners as aresult of integration of new businesses and management personnel;

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

·                         impairment of resultinggoodwill; and

·                         potential unknown orunexpected liabilities associated with acquired businesses.

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**ITEM 1A.   RISK FACTORS****— (Continued)**

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

## ***We may never achieve all of the anticipatedbenefits from our joint venture with TSMC.***

In October 2003, weentered into an agreement with TSMC to form VisEra, a joint venture in Taiwan,for the purposes of providing manufacturing services. In August 2005, weamended and restated our agreement with TSMC in part to enable VisEra toacquire 29.6% of XinTec, a supplier of chip-scale packaging services in whichwe originally invested in April 2003 and in which we directly hold an approximatefour percent interest. In January 2007, we entered into a further amendment tothe agreement with TSMC to expand the scope of VisEra’s activities and provideadditional funding 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 by TSMC. We expect that VisEra will be able toprovide 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 willreceive the expected benefits from the joint venture. For example, VisEra maynot be able to provide manufacturing services that have competitive technologyor prices, which could adversely affect our product offerings and our abilityto meet customer requirements for our products. In addition, the existence ofVisEra may also make it more difficult for us to secure dependable servicesfrom competing merchant vendors who provide similar manufacturing services.

## ***We may not achieve all of the anticipatedbenefits of our alliances with, and strategic investments in, third parties.***

We expect to develop ourbusiness partly through forming alliances or joint ventures with and makingstrategic investments in other companies, some of which may be companies at arelatively early stage of development. For example, in April 2003, we madean investment in XinTec, a chip scale packaging service company, and inJune 2003 we made an investment in ImPac, a plastic packaging servicecompany. In December 2005, VisEra, our joint venture with TSMC, completedthe acquisition of a further 29.6% of the issued and outstanding shares ofXinTec. In January 2007, TSMC acquired directly a 43.0% interest in XinTec,thus reducing our beneficial ownership in XinTec to 12.4%.

In May 2004, we enteredinto an agreement with PSC under which we established SOI, a joint venture as acompany incorporated under the laws of Taiwan., The purpose of the jointventure is to conduct the business of manufacturing, marketing and selling ofcertain of our legacy products. In March 2005, we assumed control of theboard of directors of SOI and we have consolidated SOI since April 30,2005.

Our investments in thesecompanies may negatively impact our operating results, because, under certaincircumstances, we are required to recognize our portion of any loss recorded byeach of these companies or to consolidate them into our operating results. Weexpect to continue to utilize partnerships, strategic alliances andinvestments, particularly those that enhance our manufacturing capacity andthose that provide manufacturing services and testing capability. Theseinvestments and partnering arrangements are crucial to our ability to grow ourbusiness and meet the increasing demands of our customers. However, we cannotensure that we will achieve the benefits expected as a result of thesealliances. For example, we may not be able to obtain acceptable quality and/orwafer manufacturing 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 our relationships with our jointventures and/or companies in which we hold less than a majority interest couldchange the way we account for such interests in the future.***

As part of our strategy,we have formed joint ventures with two of our foundry partners, and we hold aminority interest in two companies from which we purchase certain manufacturingservices. Under the applicable provisions of generally accepted accountingprinciples in the United States of America, we currently consolidate one 

24

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**ITEM 1A.   RISK FACTORS****— (Continued)**

of these jointventures into our consolidated financial statements and results of operations,and record the equity interests that we do not own as minority interests. Forthe investments that we account for under the equity method, we record as partof other income or expense our share of the increase or decrease in the equityof the companies in which we have invested. It is possible that, in the future,our relationships and/or our interests in or with these joint ventures or otherinvestees could change. Such changes have in the past, and could in the futureresult in deconsolidation or consolidation of such entities, as the case maybe, which could result in changes in our reported results.

## ***We may be unable to adequately protect ourintellectual property, and therefore we may lose some of our competitiveadvantage.***

We rely on a combinationof patent, copyright, trademark and trade secret laws as well as nondisclosureagreements and other methods to protect our proprietary technologies. We havebeen issued patents and have a number of pending United States and foreignpatent applications. However, we cannot provide assurance that any patent willbe issued as a result of any applications or, if issued, that any claimsallowed will be sufficiently broad to protect our technology. It is possiblethat existing or future patents may be challenged, invalidated or circumvented.For example, in August 2002 we initiated a patent infringement action inTaiwan, Republic of China against IC Media Corporation of San Jose, Californiafor infringement of a Taiwanese patent that had been issued to us. In responseto our patent infringement action, in October 2002, IC MediaCorporation initiated a cancellation proceeding in the Taiwan IntellectualProperty Office with respect to our patent. In July 2003, the TaiwanIntellectual 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.

## ***Litigation regarding intellectual propertycould divert management attention, be costly to defend and prevent us fromusing or selling the challenged technology.***

In recent years, therehas been significant litigation in the United States involving intellectualproperty rights, including in the semiconductor industry. We have in the pastbeen, and may in the future be, subject to legal proceedings and claims withrespect to our intellectual property, including such matters as trade secrets,patents, product liabilities and other actions arising out of the normal courseof business. These claims may increase as our intellectual property portfoliobecomes larger or more valuable. Intellectual property claims against us, andany resulting lawsuit, may cause us to incur significant expenses, subject usto liability for damages and invalidate our proprietary rights. Infiscal 2002, we paid $3.5 million to settle an intellectual propertylitigation matter. 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 sale or use ofproducts or services that incorporate the infringed intellectual property;

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

·                         redesigning those products orservices that incorporate the disputed intellectual property, which couldresult in substantial unanticipated development expenses and delay and preventus from selling the products until the redesign is completed, if at all.

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

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**ITEM 1A.   RISK FACTORS****— (Continued)**

## ***We have been named as a defendant in certainlitigation that could have a material adverse impact on our operating resultsand financial condition.***

We are currently adefendant in ongoing litigation matters as described in Part I,Item 3 — “*Legal Proceedings”*of this Annual Report. We have reached an agreement in principle to settle theshareholder class action lawsuit pending in the United States District Courtfor the Northern District of California. We accrued $3.3 million inlitigation settlement expenses during the quarter ended October 31, 2006to reflect our share of the settlement, including unreimbursed defense costs,net of $13.0 million in recoverable insurance proceeds. The parties haveexecuted a Stipulation of Settlement that was filed with the Court in May 2007.Notice of the settlement must be provided to the purported shareholder classand the Court must grant final approval of the settlement. There is noassurance that the settlement will become final. If there is no finalsettlement of the matters described in Part I, Item 3 — “*Legal Proceedings,”*and we fail to prevail in such matters, such failure could have amaterial adverse effect on our consolidated financial position, results ofoperations, or cash flows in the future. In addition, the results of litigationare uncertain, and the litigation process may utilize a portion of our cashresources and divert management’s attention from the day-to-day operations ofour company, all of which could harm our business.

## ***If we do not effectively manage our growth,our ability to increase our revenues and improve our earnings could beadversely affected.***

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

·                         significantly improve ouroperational, financial and accounting systems;

·                         train and manage our existingemployee base;

·                         attract and retain qualifiedpersonnel with relevant experience; and

·                         effectively manage accountsreceivable and inventory.

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

We must also managemultiple relationships with customers, business partners and other thirdparties, such as our foundries and process and assembly vendors. Moreover, ourgrowth may significantly overburden our management and financial systems andother resources. We may not make adequate allowances for the costs and risksassociated with our expansion. In addition, our systems, procedures or controlsmay not be adequate to support ouroperations, and we may not be able to expand quickly enough to capitalize onpotential market opportunities. Our future operating results will alsodepend, in part, on our ability to expand sales and marketing, research anddevelopment, accounting, finance and administrative support.

## ***Our future tax rates could be higher than weanticipate if the proportion of future operating income generated outside theU.S. by our foreign subsidiaries is less than we expect, or the mix differsfrom that which we expect.***

A number of factors willaffect our future tax rate, and certain of these factors could increase oureffective tax rate in future periods, which could adversely impact ouroperating results. For example, the complex rules for accounting for the taxeffects of stock-based compensation under SFAS No. 123(R) resulted in anincrease in our effective tax rate in the fiscal year ended April 30,2007. Similarly, we anticipate that there will be greater volatility in ourfuture effective tax rates due to the adoption of FIN 48 in the fiscalyear which began on May 1, 2007. In addition, our future effective taxrates could be negatively affected by changes in tax laws or the interpretationof tax laws, by unanticipated decreases in the amount of revenue or earnings incountries with low statutory tax rates, or by changes in the valuation of ourdeferred tax assets and liabilities.

In common with allmultinational companies, we are subject to tax in multiple jurisdictions. Thetax authorities in any given jurisdiction may seek to increase the taxes beingcollected by, for example, asserting that the transfer prices we charge betweenrelated entities are either too high or too low depending on which side of thetransaction they are looking at. Although we believe we have provided sufficienttaxes for all prior periods, adjustments could be proposed that would, in somecases, result in liabilities in excess of such provisions.

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**ITEM 1A.   RISK FACTORS****— (Continued)**

## ***Our sales through distributors increase thecomplexity of our business and may reduce our ability to forecast revenues.***

During fiscal 2006and 2007, approximately 31.1% and 40.0%, respectively, of our revenues camefrom sales through distributors. We expect that revenues from sales throughdistributors will continue to represent higher proportion of our total revenuesthan they have in the past. Selling through distributors reduces our ability toaccurately forecast sales and increases the complexity of our business,requiring us to, among other matters:

·                         manage a more complex supplychain;

·                         manage the level of inventoryat each distributor;

·                         provide for credits, returnrights and price protection;

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

·                         monitor the financialcondition and creditworthiness of our distributors.

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

## ***We face foreign business, political andeconomic risks, because a majority of our products and those of our customersare manufactured and sold outside of the United States.***

We face difficulties inmanaging our third party foundries, color filter application service providers,ceramic and plastic packaging service providers and our foreign distributors,most of whom are located in Asia. Any political and economic instability inAsia might have an adverse impact on foreign exchange rates and could causeservice disruptions for our vendors and distributors and adversely affect ourcustomers.

Sales outside of theUnited States accounted for substantially all of our revenues forfiscal 2006 and 2007. We anticipate that sales outside of the UnitedStates will continue to account for nearly all of our revenues in futureperiods. Dependence on sales to foreign customers involves certain risks,including:

·                         longer payment cycles;

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

·                         decreased visibility as tofuture demand;

·                         difficulties in accountsreceivable collections; and

·                         burdens of complying with awide variety of foreign laws and labor practices.

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

## ***Our business could be harmed if we lose theservices of one or more members of our senior management team, or if we areunable to attract and retain qualified personnel.***

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

Our success also dependson our ability to identify, attract and retain qualified sales, marketing,finance, management and technical personnel, particularly analog or mixedsignal design engineers. We have experienced, and may continue to experience,difficulty in hiring and retaining candidates with appropriate qualifications.If we 

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**ITEM 1A.   RISK FACTORS****— (Continued)**

do not succeed inhiring and retaining candidates with appropriate qualifications, our revenuesand product development efforts could be harmed.

## ***We are in the process of upgrading ourenterprise resource planning and other management information systems.***

As our businessgrows and becomes more complex, we have to expand and upgrade our enterpriseresource planning system and other management information systems which arecritical to the operational, accounting and financial functions of our company.We have evaluated alternative solutions, both short-term and long-term, to meetthe operating, administrative and financial reporting requirements of ourbusiness and have decided to implement a system based on a suite of applicationsoftware developed by Oracle Corporation. Implementation of such a system requires significant managementattention and resources over an extended period of time and any significantdesign errors in or delay in the implementation of the system could materiallyadversely affect our operating results and impact our ability to manage ourbusiness.

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

Disasters and businessinterruptions such as earthquakes, water, fire, electrical failure, accidentsand epidemics affecting our operating activities, major facilities, andemployees’ and customers’ health could materially and adversely affect ouroperating results and financial condition. In particular, our Asian operationsand most of our third party service providers involved in the manufacturing ofour products are located within relative close proximity. Therefore, anydisaster that strikes within close proximity of that geographic area could beextremely disruptive to our business and could materially and adversely affectour operating results and financial condition. We do not currently have adisaster recovery plan.

## ***Acts of war and terrorist acts may seriouslyharm our business and revenue, costs and expenses and financial condition.***

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

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

## ***Provisions in our charter documents andDelaware law, as well as our stockholders’ rights plan, could prevent or delaya change in control of our company and may reduce the market price of ourcommon stock.***

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

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

·                         providing for a classifiedboard of directors with staggered, three year terms;

·                         requiring supermajority votingto amend some provisions in our certificate of incorporation and bylaws;

·                         limiting the persons who maycall special meetings of stockholders; and

·                         prohibiting stockholderactions by written consent.

Provisions of Delawarelaw also may discourage, delay or prevent another company from acquiring ormerging with us. Our board of directors adopted a preferred stock rightsagreement in August 2001. Pursuant to the rights agreement, our board ofdirectors declared a dividend of one right to purchase one one-thousandth shareof our Series A Participating Preferred Stock for each outstanding shareof our common stock. The dividend was paid on September 28, 2001 tostockholders of record as of the close of business on that date. Each rightentitles the registered holder to purchase from us one one-thousandth of ashare of Series A Preferred at an exercise price of 

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**ITEM 1A.   RISK FACTORS****— (Continued)**

$176.00, subjectto adjustment. 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 investors mightbe willing to pay in the future for our common stock.

## ***Our stock has been and will likely continueto be subject to substantial price and volume fluctuations due to a number offactors, many of which are beyond our control, that may prevent our stockholdersfrom selling our common stock at a profit.***

The market price of ourcommon stock has fluctuated substantially, and there can be no assurance thatsuch volatility will not continue. Since the beginning of fiscal 2002 throughApril 30, 2007, the closing sales price of our common stock has rangedfrom a high of $33.90 per share to a low of $1.26 per share. Theclosing sales price of our common stock on June 22, 2007 was$17.38 per share. The securities markets have experienced significantprice and volume fluctuations in the past, and the market prices of thesecurities of semiconductor companies have been especially volatile. Thismarket volatility, as well as general economic, market or political conditions,could reduce the market price of our common stock in spite of our operatingperformance. The market price of our common stock may fluctuate significantlyin response to a number of factors, including:

·                         actual or anticipatedfluctuations in our operating results;

·                         changes in expectations as toour future financial performance;

·                         changes in financial estimatesof securities analysts;

·                         release of lock-up or othertransfer restrictions on our outstanding shares of common stock or sales ofadditional shares of common stock;

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

·                         changes in market valuationsof other technology companies; and

·                         announcements by us or ourcompetitors of significant technical innovations, design wins, contracts,standards or acquisitions.

Due to these factors, theprice of our stock may decline and investors may be unable to resell theirshares of our stock for a profit. In addition, the stock market experiencesextreme volatility that often is unrelated to the performance of particularcompanies. These market fluctuations may cause our stock price to declineregardless of our performance.

**ITEM 1B.   UNRESOLVEDSTAFF COMMENTS**

None.

**ITEM 2.   PROPERTIES**

Our principal offices arelocated in a leased 43,960 square foot facility in Sunnyvale, California. Ourlease on the Sunnyvale facility expires on May 31, 2009 with the right toextend the lease for an additional five years. In December 2005, we leasedan additional 48,896 square feet of office space in an adjacent facility inSunnyvale, California. Our lease on the second Sunnyvale facility expires onJune 30, 2009 with the right to extend the lease for an additional fiveyears. In March 2007, we purchased a complex of four buildings in SantaClara County, California, totaling approximately 207,000 square feet for anaggregate purchase price of approximately $37.5 million. We expect tospend approximately $10.0 million to complete the interior build-outof the buildings and currently expect to occupy two of the four buildings inmid-2008 upon completion of the work.

In January 2007, weentered into a Land-Use-Right Purchase Agreement, or the Purchase Agreement,with the Construction and Transportation Commission of the Pudong New District,Shanghai through our wholly-owned subsidiary, Shanghai OmniVision IC Design Co.Ltd., or SDC. The Purchase Agreement has an effective date of December 31,2006. Under the terms of the Purchase Agreement, we agreed to pay an aggregateamount of approximately $0.6 million (the “Purchase Price”) in exchangefor the right to use approximately 323,000 square feet of land located inShanghai for a period of 50 years. In addition, we are obligated to investa minimum of approximately $30.0 million to develop the land and constructfacilities, which amount includes the Purchase Price. Construction of thefacilities on the land must commence and be completed during the time periodbeginning on 

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**ITEM 2.   PROPERTIES****— (Continued)**

June 30, 2007and ending on June 30, 2009, subject to an additional one-year extensionunder limited circumstances. We may use the land solely for the purposes ofindustrial use and/or scientific research.

In December 2001, ourChinese subsidiary, HWSC, entered into an agreement to lease 447,400 squarefeet of land in Shanghai, China on which we have built a facility that iscurrently used for product design and testing and may possibly be used forother activities in the future. This lease agreement expires in December 2051. Webelieve that our existing or readily available facilities are suitable andadequate for our present purposes.

**ITEM 3.   LEGALPROCEEDINGS**

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

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

The issuer defendants andplaintiffs negotiated a stipulation of settlement for the claims against theissuer defendants, including us, that was submitted to the Court for approval.In August 2005, the Court preliminarily approved the settlement. InDecember 2006, the appellate court overturned the certification of classesin the six test cases that were selected by the underwriter defendants andplaintiffs in the coordinated proceedings. Because class certification is acondition of the settlement, it is unlikely that the current settlement willreceive final court approval. In that event, any revised or future settlementwould be uncertain. If the litigation proceeds, we believe that we havemeritorious defenses to plaintiffs’ claims and intend to defend the actionvigorously.

On June 10, 2004,the first of several putative class actions was filed against us and certain ofour present and former directors and officers in federal court in the NorthernDistrict of California on behalf of investors who purchased our common stock atvarious times from February 2003 through June 9, 2004. Those actionswere consolidated under the caption *In reOmniVision Technologies, Inc.,*No. C-04-2297-SC, and aconsolidated complaint was filed. The consolidated complaint asserts claims onbehalf of purchasers of our common stock between June 11, 2003 andJune 9, 2004, and seeks unspecified damages. The consolidated complaintgenerally alleges that defendants violated Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934 by allegedly engaging in improperaccounting practices that purportedly led to our financial restatement. On July 29,2005, the court denied our motion to dismiss the complaint. The parties engagedin settlement discussions and in November 2006, the parties reached anagreement in principle to settle this litigation. The total amount of theproposed settlement is approximately $13.8 million, of which approximately$0.8 million would be contributed by us and the remainder would be fundedby insurance carriers that issued Directors and Officers Liability InsurancePolicies to us. We accrued $3.3 million during fiscal 2007, as ourshare of the settlement, including unreimbursed defense costs, net of the$13.0 million in recoverable insurance proceeds. The parties have executeda Stipulation of Settlement that was filed with the Court on May 15, 2007.On May 25, 2007, the Court issued an Order preliminarily approving thesettlement and providing for notice of the settlement to be provided to thepurported shareholder class. The Order also scheduled a hearing onSeptember 7, 2007 to determine whether the proposed settlement is fair,reasonable and adequate to the purported class and should receive finalapproval by the Court. As a result of the pending settlement, the parties haveagreed to stay discovery and other proceedings. We believe that ultimatesettlement is probable at the currently estimated amount. There is no assurancethat the Court will grant such approval, or that the settlement will becomefinal. If the settlement does not occur and litigation against us continues, webelieve that we have meritorious defenses and intend to defend the casevigorously. If the litigation continues, we cannot estimate whether the resultof the litigation would have a material adverse effect on our financialcondition, results of operations or cash flows.

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**ITEM 3.   LEGALPROCEEDINGS****— (Continued)**

On October 20, 2005,a purported shareholder derivative complaint, captioned Hackl v. Hong,No. 1:05-CV-050985, was filed in Santa Clara County Superior Court for theState of California. This derivative action contains allegations that werevirtually identical to the prior state court derivative actions that werevoluntarily dismissed, and which were based on the allegations contained in thesecurities class actions. The complaint generally sought unspecified damagesand equitable relief based on causes of action against various of our presentand former directors and officers for purported breach of fiduciary duty, abuseof control, gross mismanagement, waste of corporate assets, unjust enrichmentand violations of California Corporations Code. We were named solely as anominal defendant against whom no monetary recovery was sought. Pursuant to aJanuary 20, 2006 Court Order, plaintiff furnished a bond for reasonableexpenses in order to proceed with his derivative action. On May 15, 2006,the Court sustained our demurrer to the complaint with leave to amend on thegrounds that the plaintiff failed to make a pre-litigation demand on our boardof directors and fails to sufficiently plead that demand is futile. OnOctober 4, 2006, the Court sustained our demurrer to the amended complaintas well and again granted plaintiff leave to amend. On May 10, 2007, theCourt sustained our demurrer contending that plaintiff’s amended complaintfailed to allege adequately why no pre-litigation demand had been made on theOmniVision Board of Directors, but granted plaintiff leave to further amend thecomplaint. Simultaneously, the parties advised the Court that they had reacheda settlement in principle. The parties executed a Stipulation of Settlementthat was filed with the Court on June 18, 2007. On June 26, 2007, theCourt entered an order approving the settlement, pursuant to which we agreed topay a settlement fee in the amount of $200,000.

**ITEM 4.   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

No stockholder votes tookplace during the fourth quarter of fiscal 2007.

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**PARTII**
| **ITEM 5.** | ** ** | **MARKET FOR REGISTRANT’S COMMON  EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------|

 

**Price Range of Common Stock**

Our common stock has beenquoted on the Nasdaq National Market under the symbol “OVTI” since our initialpublic offering in July 2000. Prior to that time, there was no public marketfor our common stock. The following table sets forth for the periods indicatedthe high and low sale prices per share of our common stock as reported on theNasdaq National Market.
|                | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fiscal 2007:   |       |     |       |    |       |
| First quarter  |       | $        | 34.49      |    | $          | 17.21 |   |
| Second quarter |       | 19.20    |       | 13.85   |       |
| Third quarter  |       | 18.90    |       | 11.00   |       |
| Fourth quarter |       | 14.93    |       | 11.29   |       |
| Fiscal 2006:   |       |     |       |    |       |
| First quarter  |       | $        | 16.29      |    | $          | 13.36 |   |
| Second quarter |       | 14.95    |       | 11.81   |       |
| Third quarter  |       | 25.23    |       | 12.81   |       |
| Fourth quarter |       | 31.02    |       | 23.99   |       |

 

On June 22, 2007,the reported last sale price of our common stock on the Nasdaq National Marketwas $17.38 per share. As of June 22, 2007, there were approximately 74holders of record of our common stock. This number does not includestockholders whose shares are held in trust by other entities. The actualnumber of stockholders is greater than this number of holders of record. Weestimate that the number of beneficial stockholders of the shares of our commonstock as of June 22, 2007 was approximately 20,000.

**Dividend Policy**

We have never declared orpaid cash dividends on our capital stock. Other than for the repurchase of ourcommon stock as described below, we currently expect to retain our futureearnings, if any, for use in the operation and expansion of our business and donot anticipate paying any cash dividends in the next 12 months.

**Repurchase of Our Common Stock**

On June 21, 2005,our board of directors authorized the repurchase in an open-market program ofup to an aggregate of $100 million of our common stock. Repurchases underthe open-market program were authorized for a twelve-month period endedJune 21, 2006. At the expiration of the program on June 21, 2006, wehad cumulatively repurchased 5,870,000 shares of our common stock for anaggregate cost of approximately $79.6 million.

On February 27,2007, our board of directors approved an additional stock repurchase programthat provides for the repurchase of up to $100 million of our outstandingcommon stock. Subject to applicable securities laws, such repurchases will beat times and in amounts as we deem appropriate, based on factors such as marketconditions, legal requirements and other corporate considerations. We did notmake any purchases of our common stock in the three months ended April 30,2007. See the section entitled *“Capital Resources”*in Item 7 of this Annual Report on Form 10-K for further informationon this program.

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** **
| **ITEM 5.** | ** ** | **MARKET FOR REGISTRANT’S COMMON  EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  — (Continued)** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|

 

**Performance Graph**

Notwithstanding anystatement to the contrary in any of our previous or future filings with theSEC, the following information relating to the price performance of our commonstock shall not be deemed “filed” with the SEC or “Soliciting Material” underthe Securities Exchange Act of 1934, as amended, or subject to Regulation 14Aor 14C, or to liabilities of Section 18 of the Exchange Act except to theextent we specifically request that such information be treated as solicitingmaterial or to the extent we specifically incorporate this information byreference.

The following is a linegraph comparing the cumulative total return to stockholders of our common stockat April 30, 2007 since April 30, 2002, to the cumulative totalreturn over such period of (i) The Nasdaq Stock Market United States Indexand (ii) the S&P Semiconductors Index.
|                                | ** ** | **     4/02     ** | ** ** | **     4/03     ** | ** ** | **     4/04     ** | ** ** | **     4/05     ** | ** ** | **     4/06     ** | ** ** | **     4/07     ** | ** ** |   |
|--------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------|
|                           | ** ** |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |
| OmniVision  Technologies, Inc. |       | 100.00                                                               |       | 204.46                                                               |       | 376.77                                                               |       | 235.35                                                               |       | 489.06                                                               |       | 227.61                                                               |       |
| NASDAQ Composite               |       | 100.00                                                               |       | 84.83                                                                |       | 114.47                                                               |       | 114.98                                                               |       | 142.84                                                               |       | 156.41                                                               |       |
| S&P Semiconductors         |       | 100.00                                                               |       | 64.61                                                                |       | 89.33                                                                |       | 81.30                                                                |       | 92.28                                                                |       | 91.01                                                                |       |

 

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*****      Assumes that $100.00 wasinvested on April 30, 2002 in our common stock and in the Nasdaq StockMarket (U.S.) Index and the S&P Semiconductor Index, and that all dividendswere reinvested. No dividends have been declared on our common stock. Stockholderreturns over the indicated period should not be considered indicative of futurestockholder returns.

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**ITEM 6.   SELECTEDFINANCIAL DATA**
| ** **                                        | ** ** | **Year Ended April 30,**                            | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2007(2)**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statements of  Income data:**      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues                                          |       | $                                                                  | 528,143    |   | $ | 491,926 |   | $ | 388,062 |   | $ | 318,123 |   | $ | 108,998 |   |
| Cost of revenues                                  |       | 372,776                                                            |       | 310,250 |   | 231,508 |   | 194,106 |   | 66,904 |   |
| Gross profit                                      |       | 155,367                                                            |       | 181,676 |   | 156,554 |   | 124,017 |   | 42,094 |   |
| Operating expenses:                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research, development and related                 |       | 67,570                                                             |       | 40,572 |   | 25,494 |   | 15,568 |   | 11,700 |   |
| Selling, general and administrative               |       | 58,674                                                             |       | 35,320 |   | 29,012 |   | 22,387 |   | 11,032 |   |
| Litigation settlement, net of recovery of $13,000 |       | 3,300                                                              |       | — |   | — |   | — |   | — |   |
| Total operating expenses                          |       | 129,544                                                            |       | 75,892 |   | 54,506 |   | 37,955 |   | 22,732 |   |
| Income from  operations                           |       | 25,823                                                             |       | 105,784 |   | 102,048 |   | 86,062 |   | 19,362 |   |
| Interest income,  net                             |       | 14,580                                                             |       | 8,949 |   | 4,218 |   | 1,696 |   | 802 |   |
| Other income  (expense), net                      |       | (1,285                                                             | )          | 933 |   | (173 | ) | 1,250 |   | — |   |
| Income before income taxes and minority interest  |       | 39,118                                                             |       | 115,666 |   | 106,093 |   | 89,008 |   | 20,164 |   |
| Provision for  income taxes                       |       | 9,392                                                              |       | 23,133 |   | 29,706 |   | 30,263 |   | 4,840 |   |
| Minority  interest                                |       | 5,753                                                              |       | 3,385 |   | — |   | — |   | — |   |
| Net income                                        |       | $                                                                  | 23,973     |   | $ | 89,148 |   | $ | 76,387 |   | $ | 58,745 |   | $ | 15,324 |   |
| Net income per share:                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic (1)                                         |       | $                                                                  | 0.44       |   | $ | 1.64 |   | $ | 1.35 |   | $ | 1.11 |   | $ | 0.34 |   |
| Diluted (1)                                       |       | $                                                                  | 0.43       |   | $ | 1.56 |   | $ | 1.24 |   | $ | 0.98 |   | $ | 0.31 |   |
| Shares used in  computing net income per share:   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic (1)                                         |       | 54,706                                                             |       | 54,268 |   | 56,688 |   | 52,856 |   | 45,357 |   |
| Diluted (1)                                       |       | 55,234                                                             |       | 56,958 |   | 61,566 |   | 59,688 |   | 50,200 |   |

 

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(1)   Amounts have been retroactively restated for a 2-for-1 stock split,which was effective on February 17, 2004.

(2)   On May 1, 2006, we adopted the provisionsof SFAS No. 123(R) for recording stock-based compensation.
| ** **                               | ** ** | **April 30,**      | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **2007**                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| **Consolidated Balance Sheet  data:**    |       |                    |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents               |       | $                       | 190,878    |   | $ | 240,227 |   | $ | 170,457 |   | $ | 114,653 |   | $ | 39,288 |   |
| Restricted cash                          |       | —                  |       | — |   | — |   | 1,072 |   | — |   |
| Working capital                          |       | 357,027                 |       | 363,252 |   | 342,755 |   | 271,919 |   | 80,864 |   |
| Total assets                             |       | 688,059                 |       | 577,269 |   | 479,833 |   | 345,836 |   | 117,953 |   |
| Total current  liabilities               |       | 158,685                 |       | 123,008 |   | 78,073 |   | 45,823 |   | 21,410 |   |
| Non-current  portion of long-term debt   |       | 27,576                  |       | 308 |   | — |   | — |   | — |   |
| Retained  earnings (accumulated deficit) |       | 240,084                 |       | 216,111 |   | 126,963 |   | 50,576 |   | (8,169 | ) |
| Total stockholders’  equity         |       | 490,456                 |       | 422,807 |   | 390,098 |   | 300,013 |   | 96,543 |   |
|                                          |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| **ITEM 7.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

*Thefollowing information should be read in conjunction with our audited**consolidated financial statements and thenotes thereto included in Item 8 of**this Annual Report on Form 10-K.*

**Overview**

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

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

We operate in achallenging economic environment that has undergone significant changes intechnology and in patterns of global trade. We strive to 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.

We sell our productsworldwide directly to original equipment manufacturers, or OEMs, which includebranded customers and contract manufacturers, and value added resellers, orVARs, and indirectly through distributors. In order to ensure that we addressall available markets for our image sensors, we divide our marketing effortsinto two separate departments. The Mainstream Products marketing departmentaddresses the camera cell phone and digital still camera, or DSC, markets, andthe Advanced Products marketing department addresses the security andsurveillance, toys and games, personal computers, automotive and medicalmarkets.

In the camera cell phonemarket in particular, future revenues depend to a large extent on design winswhere, on the basis of an exhaustive evaluation of available products, aparticular hand-set maker determines which image sensor to design into one ormore specific models. There is generally a time lag of between six and ninemonths between the time of a particular design win and the first shipments ofthe designated product. Design wins are also an important driver in the manyother markets that we address, and in some cases, such as automotiveapplications, 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 engineering designersand manufacturers of products that incorporate image sensors to specify one ofour products rather than one made by a competitor. In most cases, the decisionto specify a particular product requires conforming other specifications of theproduct to the chosen image sensor and makes subsequent changes both difficultand expensive. Accordingly, the ability to produce and deliver on time reliableproducts in large quantities is a key competitive differentiator. Since ourinception, we have shipped more than 550 million image sensors, includingapproximately 250 million in fiscal 2007, which demonstrates thecapabilities of our production system, including our sources of offshorefabrication.

We currently outsourcethe wafer fabrication and packaging of our image-sensor products to thirdparties.  We outsource the color filterand micro-lens phases of production to a joint venture. This approach allows usto focus our resources on the design, development, marketing and testing of ourproducts and significantly reduces our capital requirements.

To increase and enhanceour production capabilities, last year we completed a project with TSMC, ourprincipal wafer supplier and one of the largest wafer fabrication companies inthe world, to increase from two to four the number of their fabricationfacilities, at which our products can be produced. VisEra, our joint venturewith TSMC and our investments in two key back-end packaging suppliers are partof a broad strategy to ensure that we have sufficient back-end capacity for theprocessing of our image sensors in the various formats required by ourcustomers. We are currently expanding our capacity with VisEra. In January 2007,we amended our joint venture 

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agreement withTSMC to each invest an additional $27 million in VisEra. Separately, TSMC purchased90.5 million shares from XinTec to expand XinTec’s capacity. InFebruary 2007, we entered into a foundry manufacturing agreement withPowerchip Semiconductor Corporation, or PSC. We currently perform the finaltesting of the majority of our products ourselves. We are also expanding ourtesting capacity in China, as well as our overall capability to design morecustom products for our customers. As necessary, we will make furtherinvestments to ensure that we have sufficient production capacity to meet thedemands of our customers as part of our ongoing efforts to lower productioncosts to offset, at least in part, the continuing pressure we experience onprices.

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

Many of the productsusing our image sensors, such as camera cell phones, digital still cameras 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, Hong Kong and Taiwan, the pattern of demand forour image sensors has been increasingly influenced by the timing of theextended lunar or Chinese New Year holiday, a period in which the factorieswhich use our image sensors generally close.

We believe that themarket opportunity represented by camera cell phones remains very large. Webenefited from growth in shipments of image sensors, particularly for cameracell phones in fiscal 2007, driven by increased demand for our VGA,1.3-megapixel and 2.0-megapixel image sensors.

We also believe that,like the digital still camera market, camera cell phone demand will not onlycontinue to shift toward higher resolutions, but also will increasinglyfragment into multiple resolution categories. In addition, there is increaseddemand for customization, and several different interface standards are comingto maturity. All of these trends will require the development of an increasingvariety of products.

As the markets for imagesensors have grown, we have experienced competition from manufacturers of CMOSand CCD image sensors. Our principal competitors in the market for CMOS imagesensors include MagnaChip, Micron, Samsung, ST Microelectronics and Toshiba. Weexpect to see continued price competition in the image sensor market for cameracell phones and digital cameras as those markets continue to grow. Although webelieve that we currently compete effectively in those markets, our competitiveposition could be impaired by companies that have greater financial, technical,marketing, manufacturing and distribution resources, broader product lines,better access to large customer bases, greater name recognition, longeroperating histories and more established strategic and financial relationshipsthan we do. Such companies may be able to adapt more quickly to new or emergingtechnologies and customer requirements or devote greater resources to thepromotion and sale of their products. Manyof these competitors own and operate their own fabrication facilities, which incertain circumstances 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.

As a result of theincrease in competition and the growth of various consumer-product applicationsfor image sensors, we have experienced a shortening in the life cycle of someimage-sensor products. For example, although in the security and surveillancemarket we continue to sell image sensors introduced more than four years ago,in the camera cell phone market, product life cycles can be as short as sixmonths. With the shortening of product life cycles, it will be increasinglydifficult to accurately forecast customer demand for our products. As a result,we face the risk of being unable to fulfill customer orders if we underestimatemarket demand and the risks of excess inventory and product obsolescence if weoverestimate market demand for our products. The shortening of product lifecycles also increases the importance of having short product development cyclesand being accurate in the prediction of market trends in the design of newproducts. The reduction in product life cycles increases the importance of ourcontinued investment in research and development, which we consider to be criticalto our future success.

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

We have migrated theproduction of our new sensors to the 0.13μ process geometries, which hasenabled us to increase the resolution of our image sensors while decreasingoverall chip size. We initiated mass production volumes at the end ofcalendar 2005. Given the rapidly changing nature of our technology, therecan be no assurance that we will not encounter delays or other unexpected yieldissues with future products. During the early stages of production, productionyields and gross margins for new products are typically lower than those ofestablished products. We can encounter unexpected manufacturing issues, such asthe unexpected back-end problems that resulted in low yields on two of ourproducts, the first of which arose in the fourth quarter of fiscal 2005and in the first quarter of fiscal 2006. In addition, in preparation fornew product introductions, we gradually decrease production of establishedproducts. Due to our 12-14 week production cycle, it is extremelydifficult to predict precisely how many units of established products we willneed. It is also difficult to accurately predict the speed of the ramp of newproducts. As a result, it is possible that we could suffer from shortages forcertain products and build inventories in excess of demand for other products.We carefully consider the risk that our inventories may be excess to expectedfuture demand and record appropriate reserves. If, as sometimes happens, we aresubsequently able to sell these reserved products, the sales have little or noassociated cost and consequently they have a favorable impact on gross margins.

**Strategy**

Our strategic goal is toproduce the image sensors of choice for all available end-use markets. The mostimportant elements of our strategy are the following:

*MaintainTechnology Leadership.*We intend to maintain our position asa leader in CMOS image sensor technology by continuing to develop our expertisein mixed-signal implementation, advanced pixel design, feature integration, andmanufacturing processes and controls, including automated testing. Our imagesensor integrates both the sensor and the signal processor into a single chip,often eliminating the requirement for a separate DSP. As a result, ourCameraChip image sensors offer camera device manufacturers advantages in termsof size, power consumption, cost and ease of design. For example, we havesuccessfully migrated full volume production from 0.80μ, 0.60μ, 0.50μ, 0.45μ ,0.25μ and 0.18μ to 0.13μ process geometries, which has enabled us toincrease the resolution of our image sensors while decreasing overall chipsize. We have announced the latest generation of our OmniPixel technology, ourOmniPixel3 architecture, which is based on 0.11μ process geometry andexpect to begin volume production in the near future. We are continuing todevelop products using still narrower geometries. We have successfullydeveloped sensor technology from 100,000 pixels to 5.17 megapixels,underscoring our ability to deliver a wide range of solutions to addresschanging market demands. We are committed to continue increasing image qualityand to reducing the overall size of the CameraChip image sensor’s array.

*Continueto Develop Our Proprietary Technology to Maintain Competitive**Advantage.*We intend to continueto develop proprietary intellectual property to maintain our competitiveadvantage. We have developed a variety of proprietary technologies that expandthe utility of our CameraChip solutions. For example, we have producedCameraChip image sensors capable of generating useable data in both low lightand bright light conditions simultaneously. This high dynamic range, or HDR,technology enables the use of CameraChip image sensors in demandingenvironments such as in automotive and security applications. Our commitment toenhancing our proprietary technology is also reflected in our acquisition ofCDM and its Wavefront Coding technology.

*LeverageExpertise Across Multiple Mass-Market Applications.*We intendto continue to focus on developing our CameraChip image sensors for multiplemass-market applications. To date we have shipped over 550 million 

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

 

CameraChip imagesensors. As camera functionality becomes a standard feature in a wider varietyof consumer, commercial and industrial applications, we expect that additionalmarkets will emerge. In the past, we have leveraged our expertise in certainend-markets to expand into emerging mass-market applications for our CameraChipimage sensors. For example, we used the expertise we developed in camera cellphone markets to develop image sensors for laptop PC applications. Othermarkets and applications we are focusing on include security and surveillance,toys and interactive video game consoles, and the multiple opportunities inautomotive and medical applications.

*IncreaseOur Market Presence.*We intend to increase our visibility andpenetration into new product designs by collaborating with OEMs, VARs anddistributors and by entering into partnerships with other companies that offercomplementary and supporting technologies. In certain instances we will providedesign services to our contract manufacturing partners, enabling them toincrease their overall value-added through the production of highly tailoredend products, which we believe will increase the likelihood that they willrecommend the use of our products to branded manufacturers. In addition, wewill team with companies that offer complementary and supporting technologiesto integrate our products with theirs for use in the reference designs thatthey promote to manufacturers. As a result, we believe that we are able toprovide our customers with valuable design and marketing references.

*FurtherDevelop Close Customer Relationships.*We intend to enhanceour customer relationships by continuing to collaborate with our customers onthe design and specification of their products. We work with customers duringvarious stages of their product development cycles, including strategicdecision-making, new product design and replacement design to help them developa logical technology migration path and to ensure that our products meet theirfuture design needs. By working closely with our customers, we believe we canbetter anticipate their future design needs and increase the likelihood thatthey will incorporate our CameraChip image sensors into their products.

**Our Solution**

We specifically designour highly integrated CameraChip image sensors to be cost effective and toprovide high image quality. By integrating a number of distinct functions ontoa single CMOS chip, including image capture, image processing, colorprocessing, signal conversion and output of images for either digital or analogequipment, our CameraChip image sensors offer camera device manufacturers anumber of benefits, including:

*HighImage Quality and Resolution.*We have developed a number ofproprietary methods for enhancing image quality by increasing our CameraChipimage sensors’ sensitivity to light and significantly improving their signal tonoise ratio. These methods allow us to reduce the size of each individual pixeland thereby increase the number of pixels in a given sensor. The result is aportfolio of several high resolution CameraChip image sensors currently rangingup to a 5.17-megapixel product. In addition, we are able to produce CameraChipimage sensors at lower resolutions with smaller pixel arrays, which serves toreduce the overall cost of the CameraChip image sensor and its supportingcomponents, such as lenses.

*LowerCost.*The highly integrated design of our CameraChip imagesensor enables us to deliver image sensors to our customers at a cost whichmakes the cameras they are part of less and less expensive.  This cost saving is driven, in large part, bythe fact that we have been able to achieve a high level of functionality in asingle chip, while at the same time reducing the overall size of thedevice.  In some cases, our competitors’solutions requires components or chips to achieve the same level offunctionality. Our integrated solution reduces the number of parts subject tofailure and thus increases the reliability of our image sensors.

*SmallerSize and Lower Power Consumption.*Our highly integratedsolution enables our customers to develop cameras that are smaller in size anduse less power than cameras based on multi-chip solutions. For portableapplications such as cell phones, size and power consumption are criticaldesign considerations for device manufacturers. Our CameraChip image sensorsintegrate the image capture and signal processing circuitry on a single chip,often eliminating the requirement for a separate digital signal processor, orDSP, thus consuming less board space in the device and enabling our customersto reduce the overall size of their products or to integrate additionalfunctions. We believe that the size and power characteristics of our CameraChipimage sensors will 

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enable us topenetrate new mass-market applications as device manufacturers take advantageof their ability to integrate complete camera functionality in their productswithout sacrificing other key functions or performance.

*AcceleratedTime to Market.*The highly integrated nature of ourCameraChip image sensor simplifies the design of cameras and allows ourcustomers to shorten their product design cycles. This provides our cell phoneindustry and consumer electronics customers with critical competitiveadvantages, as time to market is typically a major determinant of productsuccess and longevity. We also work closely with our customers to accelerateproduct development cycles by providing camera reference designs, engineeringdesign review services and customer product evaluation, testing and debuggingservices. In addition, we have designed our manufacturing and productionprocesses to allow us to quickly ramp production volumes to meet increasedcustomer demand, which is particularly important in the high volume markets inwhich we participate.

*StreamlinedManufacturing and Production.*Our CameraChip image sensorsare well suited for production using the relatively simple, low cost andlarge-scale wafer fabrication processes developed for other semiconductorproducts that use the CMOS process. We work closely with our foundry partnersand with all the other providers of the manufacturing services we require toproduce our final products to refine their processes in order to optimizesensor performance and yields.

*Ease ofUse*. Our single chip CMOS design outputs video in industrystandard formats directly from the chip. These formats include the National TelevisionSystem Committee, or NTSC, format and/or the Phase Alternating Line, or PAL,format for analog video. For digital video, our sensors output unprocessed datacalled RGB and/or a standard signal color encoding system known as YUV. As aresult, our CameraChip image sensors can be quickly and easily integrated intoproducts targeted at numerous mass-markets. This is especially important inmarkets such as in cell phones, PCs and PDAs, where video-imaging expertise hasnot been fully developed.

## ***Capital Resources***

As of April 30,2007, we had approximately $190.9 million in cash and cash equivalents andapproximately $114.4 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. Our policy is to invest infinancial instruments with short maturities, limiting interest rate exposure,and to measure performance against comparable benchmarks. We maintain ourportfolio of cash equivalents and short-term investments in a variety ofsecurities, including both government and corporate obligations with ratings ofA or better and money market funds.

In June 2005, our boardof directors authorized us to use up to $100 million of our available cashin an open-market program to repurchase our common stock. At the expiration ofthe program on June 21, 2006, we had cumulatively repurchased5,870,000 shares of our common stock for an aggregate cost ofapproximately $79.6 million.

In February 2007,our board of directors approved an additional stock repurchase program thatprovides for the repurchase of up to $100 million of our outstandingcommon stock. Subject to applicable securities laws, such repurchases will beat times and in amounts as we deem appropriate, based on factors such as marketconditions, legal requirements and other corporate considerations. See Note 14 *– “Treasury Stock”*to our consolidated financialstatements.

## ***Sources of Revenues***

We generate almost allour revenue by selling our products directly to OEMs and VARs and indirectlythrough distributors. We treat sales to OEMs and VARs as one source of revenue,and distributors as another. Our revenue recognition policies for the twogroups are different. See *“CriticalAccounting Policies and Estimates—Revenue Recognition”*below foradditional information regarding recognition of revenue.

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**Critical Accounting Policies andEstimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. By their nature, these estimates and judgments are subject toan inherent degree of uncertainty. On an ongoing basis we re-evaluate ourjudgments and estimates including those related to product returns, bad debts,inventories, long-lived assets, income taxes, litigation and contingencies. Webase our estimates and judgments on our historical experience, knowledge ofcurrent conditions and our beliefs of what could occur in the futureconsidering available information. Actual results could differ from thoseestimates, and material effects on our operating results and financial positionmay result. Our significant accounting policies are more fully described inNote 2 — “*Summary of Significant AccountingPolicies”* to the consolidated financial statements included in thisAnnual Report on Form 10-K. Our estimates reflect the following criticalaccounting policies:

## ***Revenue Recognition***

In general, we sell toour customers on FOB shipping point or FCA terms.

For shipments tocustomers without agreements that allow for returns or credits, principallyOEMs and VARs, we recognize revenue using the “sell-in” method. Under thismethod, we recognize revenue when title passes to the customer provided that wehave received a signed purchase order, the price is fixed or determinable,title and risk of loss has transferred to the customer, collection of resultingreceivables is considered reasonably assured, product returns are reasonablyestimable, there are no customer acceptance requirements and there are noremaining material obligations. We provide for future returns of 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 shipments todistributors under agreements allowing for returns or credits, we recognizerevenue using the “sell-through” method under which we defer revenue andrelated costs of sales until the distributor resells the product to ourend-user customer and notifies us in writing of such sale. The amount billed tothese distributors, less the cost of inventory shipped to but not yet sold bythe distributors, is shown net on the consolidated balance sheets as deferredincome. Accounting for revenue on the “sell-through” method requires that weobtain sales and inventory information from our distributors. As part of ourinternal control process, we observe our distributors’ physical counts of theirinventories of our products on a regular basis.

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

In addition, we recognizerevenue from the performance of services to a limited number of our customersby our wholly-owned subsidiary, CDM, and, through December 31, 2006, by ourthen consolidated affiliate, VisEra. We recognize the CDM-associated revenueunder either the completed-contract or the percentage-of-completion methods.The percentage-of-completion method of accounting is used for costreimbursement-type contracts, where revenues recognized are that portion of thetotal contract price equal to the ratio of costs expended to date to theanticipated final total costs based on current estimates of the costs tocomplete the projects. CDM-associated revenue has not been material in any ofthe periods presented. Until December 31, 2006 we recognized VisEra’sservice revenue from third-party customers when the production servicesprovided by VisEra were complete and the product was shipped to the customer.

## ***Allowance forDoubtful Accounts***

We undertake creditevaluations for all major sale transactions before we release product forshipment. Normal payment terms apply upon transfer of risk of loss. On anongoing basis, we analyze the payment history of customer accounts, includingrecent customer purchases. We evaluate aged items in accounts receivable andprovide 

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allowances fordoubtful accounts. Customer creditworthiness and economic conditions may changeand increase the risk of collectibility and may require additional allowances,which would negatively impact our operating results. As of April 30, 2007,our allowance for doubtful accounts represented approximately 1.4% of totalaccounts receivable.

## ***Allowance for SalesReturns and Warranties***

Based on historical salesreturns and other known factors, we provide for estimated sales returns in thesame period we record the related revenues. To estimate sales returns andallowances, we analyze potential customer specific product application issues,potential quality and reliability issues and historical returns. We evaluatequarterly the adequacy of the allowance for sales returns. This allowance isreflected as a reduction to accounts receivable in our consolidated balancesheets. Increases to the reserve are recorded as a reduction to net revenues.Because the allowance for sales returns is based on our judgments andestimates, particularly as to product application, quality and reliabilityissues, our reserves may not be adequate to cover actual sales returns andother allowances. If our reserves are not adequate, our net revenues could beadversely affected. We warrant to our customers that our products will work inaccordance with their respective specifications. Due to the cost and othercomplexities associated with rectifying any product defects, we do not repairany defective products. If a product is defective, the customer notifies usand, with our approval, returns the defective product. We then send replacementproducts to the customer. Accordingly, we account for any exposure related todefective products as a portion of our allowance for sales returns. The netchange in our allowance for sales returns balance in fiscal 2007 wasapproximately 0.2% of revenues, and the allowance was approximately 7.6% oftotal accounts receivable at April 30, 2007.

## ***Excess and ObsoleteInventory and Effect on Gross Margin***

We regularly monitor inventoryquantities on hand and record allowances for excess and obsolete inventoriesbased primarily on historical usage rates and our forecast of future demand forour products. We record allowances for the cost of inventories when the numberof units on hand exceeds the number of units that we forecast will be sold overa certain period of time, generally 12 months. When we recognize the allowance,a new, lower-cost basis for that inventory is established, and subsequentchanges in facts and circumstances do not result in the restoration of orincrease in that newly established cost basis. Because of risk of obsolescence,we will generally provide for the costs of our inventories in excess of ourforecast for the applicable period.

In fiscal 2007, 2006and 2005, from time to time, we sold certain previously reserved products. Eventhough we have sold some products at a price that was less than our originalcost, sales of these products improved our gross margins because the inventorywas previously reserved.

We attempt to control ourinventory levels so that we do not hold inventories in excess of demand for thesucceeding three months. However, because we need to place non-cancelableorders with significant lead time and because it is difficult to estimateproduct demand, it is possible that we will build inventories in excess ofdemand for future periods. If we have inventories in excess of estimatedproduct demand, we will provide an allowance, which could have a materialadverse effect on our reported results of operations and financial position. Inpreparation for new product introductions, we gradually decrease production ofestablished products, while preparing for production of newer products. Givenour 12-14 week production cycle, it is extremely difficult to predict preciselyhow many units of established products we need. It is also difficult toaccurately predict the speed of the ramp of new products or the projected lifecycles of new products which have continued to shorten in duration. Under thesecircumstances, it is possible that we could suffer from shortages of certainproducts and also build inventories in excess of demand for other products.

## ***Stock-BasedCompensation Expense***

Effective May 1,2006, we adopted the provisions of SFAS No. 123(R). SFAS No. 123(R)requires all share-based payments to employees, including grants of employeestock options and employee stock purchases under our employee stock purchaseplan, to be recognized in our financial statements based on their respective grantdate fair values. We currently use the Black-Scholes option pricing model toestimate the fair value of our share-based payment awards. The Black-Scholesoption pricing model requires the use of highly subjective and complexassumptions, including our stock price, expected volatility, expected term,risk-free interest rate and expected 

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dividend yield.For expected volatility, we use an average between the historical volatility ofour common stock, and the implied volatility of traded options on our commonstock. The expected term of the awards is based on historical data regardingour employees’ option exercise behaviors. The risk-free interest rateassumption is based on observed interest rates appropriate for the terms of ourawards. The dividend yield assumption is based on our history and expectationof dividend payouts. In addition to the requirement for fair value estimates,SFAS No. 123(R) also requires the recording of expense that is net of ananticipated forfeiture rate. Only expenses associated with awards that areultimately expected to vest are included in our financial statements. Ourforfeiture rate is determined based on our historical option cancellationexperience.

We evaluate theBlack-Scholes assumptions that we use to value our awards on a quarterly basis.With respect to the forfeiture rate, we will revise the rate, if necessary, insubsequent periods if actual forfeitures differ from our estimates. If factorschange and we employ different assumptions, stock-based compensation expenserelated to future stock-based payments may differ significantly from estimatesrecorded in prior periods.

In November 2005,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)No. FAS123(R)-3, *“Transition ElectionRelated to Accounting for Tax Effects of Share-based Payment Awards”*(“FSP123(R)-3”). FSP 123(R)-3 provides an alternative transition method ofaccounting for the tax effects of adopting SFAS No. 123(R). This FSPgrants one year from the later of the date of the FSP or the adoption of SFASNo. 123(R) to us for determination of the one-time election for purposesof transition. We have elected to use the long-form method to establish thebeginning balance of the additional paid-in capital pool related to the taxeffects of employee stock-based awards granted prior to the adoption of SFASNo. 123(R).

Uponadoption of SFAS No. 123(R), we also chose to derecognize both the grossdeferred tax assets and the offsetting valuation allowance pertaining to netoperating loss and tax credit carryforwards that represent excess tax benefitsfrom stock-based awards.

We have also elected touse the “with and without” approach as described in EITF Topic No. D-32 indetermining the order in which tax attributes are utilized.  As a result, we will recognize a tax benefitfrom stock-based awards in additional paid-in capital only if an incrementaltax benefit is realized after all other tax attributes currently available to ushave been utilized.  In addition, we haveelected to account for the indirect effects of stock-based awards on other taxattributes, such as R&D tax credit, through the income statement.

## ***Valuation ofLong-Lived Assets***

Although to date, we havenot recognized any impairment losses, we assess whether the value ofidentifiable intangibles and long-lived assets, including property andequipment and prepaid wafer credits, has been impaired annually and wheneverevents or changes in circumstances indicate that the carrying value of an assetor asset group may not be recoverable. Impairment evaluations involvemanagement estimates of assets’ useful lives and future cash flows. If suchevents occur, we would estimate the undiscounted future cash flows expected toresult from the use of the asset and its eventual disposition. If theundiscounted expected future cash flows were less than the carrying amount ofthe asset, we would recognize an impairment loss. Actual useful lives and cashflows could be different from those estimated by our management. This couldhave a material effect on our operating results and financial position. Factorswe consider important that could trigger an impairment review include thefollowing:

·    operatinglosses;

·    significantnegative industry trends;

·    significantunderutilization of the assets; and

·    significantchanges in how we use the assets or our plans for their use.

## ***Accounting forIncome Taxes***

As of April 30,2007, we had recorded a valuation allowance of $2.9 million to offsetCalifornia R&D tax credit carryovers. We believe that it is more likelythan not that we will not realize these carryovers. In the future, 

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when the credit isutilized and the valuation allowance is released, the release of valuationallowance will be accounted for as a reduction of the income tax expense in theyear such event occurs. For fiscal 2007, 2006 and 2005, the income taxprovision reflected an effective tax rate of 24%, 20% and 28%, respectively.These rates are less than the combined federal and state statutory rate ofapproximately 40% principally because we earn a portion of our profits injurisdictions where tax rates are lower than the combined federal and statestatutory rate.

We expect that ourconsolidated effective tax rate in fiscal 2008 may be higher than infiscal 2007 but will continue to be less than the combined federal andstate statutory rates. Achieving an effective tax rate in fiscal 2008 thatis less than the combined federal and state statutory rates is principallydependent upon the amount of non-deductible stock-based compensation expensesand the proportion and geographic mix of our income.

## ***Litigation andContingencies***

From time to time, wehave been subject to legal proceedings and claims with respect to such mattersas patents and other actions arising out of the normal course of business, aswell as other matters identified in *“Legal**Proceedings”*in Part I,Item 3 of this Annual Report.

It is possible that othercompanies might pursue litigation with respect to any claims such companiespurport to have against us. The results of any litigation are inherentlyuncertain. In the event of an adverse result in any litigation with respect tointellectual property rights relevant to our products that could arise in thefuture, we could be required to obtain licenses to the infringed technology,pay substantial damages under applicable law, including treble damages if weare held to have willfully infringed, cease the manufacture, use and sale ofinfringing products or to expend significant resources to develop non-infringingtechnology. Litigation frequently involves substantial expenditures and canrequire significant management attention, even if we ultimately prevail.

Given the uncertaintiesassociated with litigation, if our assessments prove to be wrong, or ifadditional information becomes available such that we estimate that there is apossible loss or possible range of loss associated with these contingencies,then we would record the minimum estimated liability, which could materiallyimpact our results of operations, financial position or cash flows.

**Results of Operations**

The following table setsforth the results of our operations as a percentage of revenues. Our historicaloperating results are not necessarily indicative of the results we can expectfor any future period.
|                                                   | ** ** | **Fiscal Year Ended April 30,** | ** ** |                                         |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------|
| ** **                                        | ** ** | **   2007   **        | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** |
| ** **                                        | ** ** |                                                | ** ** | ** **                                   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Revenues                                          |       |                                                | 100.0      | %                                            |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of revenues                                  |       |                                                | 70.6       |                                         |   |   | 63.1 |   |   |   | 59.7 |   |   |
| Gross margin                                      |       |                                                | 29.4       |                                         |   |   | 36.9 |   |   |   | 40.3 |   |   |
| Operating expenses:                               |       |                                                |       |                                         |   |   |   |   |   |   |   |   |   |
| Research, development and related                 |       |                                                | 12.8       |                                         |   |   | 8.2 |   |   |   | 6.5 |   |   |
| Selling, general and administrative               |       |                                                | 11.1       |                                         |   |   | 7.2 |   |   |   | 7.5 |   |   |
| Litigation settlement, net of recovery of $13,000 |       |                                                | 0.6        |                                         |   |   | — |   |   |   | — |   |   |
| Total operating expenses                          |       |                                                | 24.5       |                                         |   |   | 15.4 |   |   |   | 14.0 |   |   |
| Income from  operations                           |       |                                                | 4.9        |                                         |   |   | 21.5 |   |   |   | 26.3 |   |   |
| Interest income,  net                             |       |                                                | 2.7        |                                         |   |   | 1.8 |   |   |   | 1.1 |   |   |
| Other income  (expense), net                      |       |                                                | (0.2       | )                                            |   |   | 0.2 |   |   |   | — |   |   |
| Income before  income taxes and minority interest |       |                                                | 7.4        |                                         |   |   | 23.5 |   |   |   | 27.4 |   |   |
| Provision for  income taxes                       |       |                                                | 1.8        |                                         |   |   | 4.7 |   |   |   | 7.7 |   |   |
| Minority  interest                                |       |                                                | 1.1        |                                         |   |   | 0.7 |   |   |   | — |   |   |
| Net income                                        |       |                                                | 4.5        | %                                            |   |   | 18.1 | % |   |   | 19.7 | % |   |

 

**Revenues**

We derive substantiallyall of our revenues from the sale of our image-sensor products.  Revenues increased 7.4% to approximately$528.1 million in fiscal 2007 from $491.9 million in fiscal 2006.Revenues increased 26.8%

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to$491.9 million in fiscal 2006 from $388.1 million in fiscal2005. Revenue growth was driven primarily by an increase in unit sales of ourimage-sensor products, primarily for cell phones, partially offset by adecrease in average selling prices.

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

We sell our image-sensorproducts either directly to OEMs and VARs or indirectly through distributors.The percentage of revenues from sales to distributors was significantly higherin fiscal 2007 as compared to the prior fiscal year. We expect thatrevenues from sales through distributors will continue to represent a higherproportion of our total revenues than they have in prior fiscal years. Thefollowing table shows the percentage of revenues from sales to OEMs and VARsand distributors in each of fiscal 2007, 2006 and 2005:
|               | ** ** | **Fiscal Year Ended April 30,**      | ** ** |                                                     |
|---------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|
| ** **    | ** ** | **    2007    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| ** **    | ** ** |                                                     | ** ** | ** **                                               |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| OEMs and VARs |       |                                                     | 60.0       | %                                                        |   |   | 68.9 | % |   |   | 79.4 | % |   |
| Distributors  |       |                                                     | 40.0       |                                                     |   |   | 31.1 |   |   |   | 20.6 |   |   |
| Total         |       |                                                     | 100.0      | %                                                        |   |   | 100.0 | % |   |   | 100.0 | % |   |

 

*OEMsand VARs.*The one OEM customer that accounted for 10% or moreof our revenues in fiscal 2007 was Foxconn, which accounted forapproximately 14.0% of our revenues. The two OEM customers that accounted for10% or more of our revenues in fiscal 2006 were Lite-On TechnologyCorporation, or Lite-On, which accounted for approximately 14.6% of ourrevenues and Sanshin Electronics Co., Ltd., or Sanshin Electronics, whichaccounted for approximately 11.6% of our revenues. The two OEM customers thataccounted for 10% or more of our revenues in fiscal 2005 were Lite-On,which accounted for approximately 19.1% of our revenues and SanshinElectronics, which accounted for approximately 15.6% of our revenues. Forfiscal 2007, 2006 and 2005, no other OEM or VAR customer accounted for 10%or more of our revenues.

*Distributors.*The two distributors that accounted for 10% or more of ourrevenues in fiscal 2007 were World Peace and SiDa Electronics, whichaccounted for approximately 15.1% and 12.9% of our revenues, respectively. Theone distributor that accounted for 10% or more of our revenues infiscal 2006 and 2005 was World Peace, which accounted for approximately13.7% and 10.9% of our revenues, respectively. For fiscal 2007, 2006 and 2005,no other distributor accounted for 10% or more of our revenues.

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

The following table showsthe percentage of our revenues derived from sales of our image-sensor productsto domestic customers as compared to foreign customers in each of fiscal 2007,2006 and 2005:
|                | ** ** | **Fiscal Year Ended April 30,**      | ** ** |                                                     |
|----------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|
| ** **     | ** ** | **    2007    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| ** **     | ** ** |                                                     | ** ** | ** **                                               |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Domestic sales |       |                                                     | 1.0        | %                                                        |   |   | 1.0 | % |   |   | 0.8 | % |   |
| Foreign sales  |       |                                                     | 99.0       |                                                     |   |   | 99.0 |   |   |   | 99.2 |   |   |
| Total          |       |                                                     | 100.0      | %                                                        |   |   | 100.0 | % |   |   | 100.0 | % |   |

 

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

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**Gross Profit**

## ***Comparison of Fiscal2007 and Fiscal 2006***

Our gross margin forfiscal 2007 was 29.4% of revenues, down from the 36.9% we reported forfiscal 2006. The principal cause of the year-over-year decline in ourgross margin was the decline in our average selling prices and a less favorableproduct mix, inparticular the larger share of lower-margin VGA sensors in our unit and dollarvolume as compared to the previous year, which were only partiallyoffset by reductions in our production costs.  

During fiscal 2007, we recognized creditsof $3.8 million incompensation from suppliers whose product quality in previous periods did notmeet our standards. In addition, we recorded approximately$3.7 million in stock-based compensation expense to cost of revenues infiscal 2007 in accordance with SFAS No. 123(R). We adoptedSFAS No. 123(R) effective May 1, 2006 and there was no similarexpense in the prior fiscal year. The sale of the products that were affectedby the back-end yield issues which arose in the fourth quarter offiscal 2005 and the first quarter of fiscal 2006 reduced our grossmargin in fiscal 2006 by approximately 400 basis points.

Revenue from sales ofpreviously reserved products in fiscal 2007 was $12.6 million, ascompared to $10.1 million in the prior fiscal year. In fiscal 2007,we recorded provisions of $8.2 million to cost of sales for excess and obsoleteinventory as compared to $11.5 million in the prior fiscal year.

In fiscal 2006, weconsolidated the operating results of SOI. Consolidating SOI reduced our grossmargin by approximately 40 and 70 basis points in fiscal 2007 and2006, respectively; however, because SOI’s operating expense ratio is lowerthan ours, SOI’s operating income as a percentage of revenue, or operatingmargins, are comparable to ours and do not have a material impact on ourconsolidated operating margins.

## ***Comparison of Fiscal2006 and Fiscal 2005***

Our gross margin forfiscal 2006 was 36.9% of revenues, down from the 40.3% we reported forfiscal 2005. The principal cause of the year-over-year decline in ourgross margin was a decline in our average selling prices, offset, in part, by amore favorable product mix and by reductions in our production costs.

Revenue from sales ofpreviously reserved products in fiscal 2006 was $10.1 million, ascompared to $13.0 million in the prior fiscal year. In fiscal 2006,we recorded an allowance for excess and obsolete inventory totaling$11.5 million to cost of sales as compared to $10.7 million in theprior fiscal year. In fiscal 2005, our gross profit benefited from a$1.4 million reduction in cost of goods sold as the result of thesettlement of a dispute related to the late cancellation of an order from oneof our customers.

In fiscal 2006, weconsolidated the operating results of SOI, whereas in the prior year period weaccounted for SOI under the equity method of accounting. Consolidating SOI reducedour gross margin by approximately 70 basis points in fiscal 2006;however, because SOI’s operating expense ratio is lower than ours, SOI’soperating income as a percentage of revenue, or operating margins, arecomparable to ours and do not have a material impact on our consolidatedoperating margins. Beginning in the second quarter of fiscal 2006, weconsolidated VisEra.

**Research, Development and Related**

Research, development andrelated expenses consist primarily of compensation and personnel-relatedexpenses, non-recurring engineering costs and costs for purchased materials,designs, tooling, depreciation of computers and workstations, and amortizationof acquired intangible intellectual property and computer aided designsoftware. Because the number of new designs can fluctuate from period toperiod, research, development and related expenses may fluctuate significantly.Research, development and related expenses for fiscal 2007, 2006 and 2005 wereapproximately $67.6 million, $40.6 million and $25.5 million,respectively. As a percentage of revenues, research, development and relatedexpenses for fiscal 2007, 2006 and 2005 represented 12.8%, 8.2% and 6.5%,respectively.

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## ***Comparison of Fiscal2007 and Fiscal 2006***

The increase in research,development and related expenses of approximately $27.0 million, or 66.5%,in fiscal 2007 as compared to fiscal 2006 resulted primarily from therecognition of $12.5 million in stock-based compensation expenserecognized with the adoption of SFAS No. 123(R), a $8.5 millionincrease in salary and payroll-related expenses associated with the hiring ofadditional personnel, a $1.9 million increase in software expenses, a$1.3 million increase in non-recurring engineering expenses related to newproduct development and a $1.0 million increase in amortization expensesof acquired intangible assets. The increase in non-recurring engineering expensesis primarily due to an increase in the number of new designs we released to ourfoundry partners. We anticipate that our research, development and relatedexpenses will continue to increase as we develop and introduce new productsemploying our OmniPixel3 and Wavefront Coding technologies and develop othernew technologies related to image sensors.

## ***Comparison of Fiscal2006 and Fiscal 2005***

The increase in research,development and related expenses of approximately $15.1 million, or 59.1%,in fiscal 2006 as compared to fiscal 2005 resulted primarily from a$5.7 million increase in salary and payroll-related expenses associatedwith the hiring of additional personnel, a $5.5 million increase inamortization expenses of acquired intangible assets primarily associated withthe acquisition of CDM, a $1.0 million increase in office expenses, a$0.7 million increase in patent-related expenses, a $0.5 millionincrease in facility-related expenses and a $0.5 million increase inoutside service expenses.

**Selling, General and Administrative**

Selling, general andadministrative expenses consist primarily of compensation and personnel relatedexpenses, commissions paid to distributors and manufacturers’ representativesand insurance and legal expenses. Selling, general and administrative expensesfor fiscal 2007, 2006 and 2005 were approximately $58.7 million,$35.3 million and $29.0 million, respectively. As a percentage ofrevenues, selling, general and administrative expenses for fiscal 2007, 2006and 2005 represented 11.1%, 7.2% and 7.5%, respectively.

## ***Comparison of Fiscal2007 and Fiscal 2006***

The increase in selling,general and administrative expenses of approximately $23.4 million, or66.1%, for fiscal 2007 from fiscal 2006 resulted primarily from therecognition of $13.4 million in stock-based compensation expenserecognized with the adoption of SFAS No. 123(R), a $5.7 millionincrease in salary and payroll-related expenses associated with the hiring ofadditional personnel, a $1.5 million increase in commissions paid todistributors and manufacturers’ representatives associated with increasedrevenues, a $1.4 million increase in outside service expenses and a$1.0 million increase in facility expenses, partially offset by a$1.5 million reduction in legal expenses. We anticipate that our selling,general and administrative expenses will increase in the future due to thecontinued expansion of our organization and the continuing upgrade of ourcomputer systems, including our enterprise resource planning, or ERP, and othermanagement information systems.

## ***Comparison of Fiscal2006 and Fiscal 2005***

The increase in selling,general and administrative expenses of approximately $6.3 million, or21.7%, for fiscal 2006 from fiscal 2005 resulted primarily from: a$5.5 million increase in salary and payroll-related expenses, a$0.9 million increase in accounting expenses resulting from the work weperformed to comply with the requirements of the Sarbanes-Oxley legislation andaudit-related expenses due to the increasing size and complexity of ourorganization, a $0.6 million increase in outside service expenses, a$0.6 million increase in travel expenses, and a $0.5 million increasein our provision for bad debts. These increases were partially offset by a $1.1 millionreduction in legal expenses due principally to the absence of the expensesincurred in the prior year for the investigation into, and subsequentrestatement of, our financial statements for the first three quarters offiscal 2004 and a $0.9 million reduction in stock compensationcharges.

**LitigationSettlement, net of recovery of $13.0 million**

We accrued$3.3 million in litigation settlement expenses in fiscal 2007, net ofrecovery of $13.0 million, to reflect our share of a tentative settlementof a securities class action lawsuit pending in the United States District 

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Court for theNorthern District of California. The parties have executed a Stipulation ofSettlement that was filed with the Court in May 2007. Notice of thesettlement must be provided to the purported shareholder class and the Courtmust approve the settlement in order for it to become final. Litigation settlementexpenses for fiscal 2007 represented 0.6% of revenue. See Note 17* – “Commitmentsand Contingencies”* of the Notes to our consolidated financialstatements.

**Interest Income, Net**

We invest our cash, cashequivalents and short-term investments in interest-bearing accounts consistingprimarily of money market funds, commercial paper, certificates of deposit,high-grade corporate securities and government bonds with maturities from thedate of purchase up to 39 years. Interest income, net, for fiscal 2007,2006 and 2005 was approximately $14.6 million, $8.9 million and$4.2 million, respectively. Interest income, net, increased infiscal 2007 as compared to fiscal 2006 as a result of both of higherbalances in interest-bearing accounts resulting primarily from cash fromoperations, and by higher interest rates. Interest income, net, increased infiscal 2006 as compared to fiscal 2005 as a result of higher balancesin interest-bearing accounts resulting primarily from cash from operations, andby higher interest rates.

**Other Income (Expense), Net**

Our portion of the incomerecorded under the equity method of accounting is included in Other income(expense), net. (See Note 5 – *“**Long-term Investments”*of the Notes to our consolidatedfinancial statements.) Other income (expense), net, for fiscal 2007 wasexpense of $1.3 million and consisted of approximately $1.7 millionrepresenting our portion of the income recorded by XinTec and $225,000representing our portion of the income recorded by ImPac Technology Co., Ltd., orImPac. Offsetting these items was a $2.9 million contra-income item, whichreflected residual income attributable to the 52.9% interest in VisEra that wedo not own. The income was earned through our sale of inventory purchased fromVisEra prior to January 1, 2007, the effective date of thedeconsolidation. Prior to the deconsolidation, we reported the incomeattributable to the equity interest that we did not own as part of minorityinterest expense. In the eight months ended December 31, 2006, we accountedfor XinTec under the equity method prior to our reversion to the cost methodbeginning on January 1, 2007. There was also a $492,000 expense reflectingthe change in fair value of an interest rate swap. See Note 9 – *“**Borrowing Arrangements”*of the Notes to our consolidated financial statements.

Other income (expense),net, for fiscal 2006 was income of $0.9 million on a net basis andconsisted of $1.3 million as our portion of the income recorded by XinTecwhich we accounted for in fiscal 2006 using the equity method ofaccounting, partially offset by other expenses. Other income (expense), net, for fiscal 2005 was an expense of$0.2 million on a net basis and consisted principally of our portion ofthe losses recorded by ImPac which we accounted for in fiscal 2005 usingthe equity method of accounting, partially offset by income recorded by SOIanother investee company which we accounted for during fiscal 2005 usingthe equity method of accounting.

**Provision for Income Taxes**

We generatedapproximately $39.1 million, $115.7 million and $106.1 millionin income before income taxes and minority interest for fiscal 2007, 2006and 2005, respectively. We recorded a provision for income taxes for fiscal2007, 2006 and 2005 of approximately $9.4 million, $23.1 million and$29.7 million, respectively. For fiscal 2007, 2006 and 2005, theeffective rates were 24.0%, 20.0% and 28.0%, respectively. These rates wereless than the combined federal and state statutory rate of approximately 40%because we earn a substantial portion of our income in jurisdictions where taxrates are lower than in the United States. The higher effective tax rate forfiscal 2007 as compared to fiscal 2006 was principally due to theunfavorable impact of the adoption of SFAS No. 123(R), partially offset byan increase in tax exempt interest income, an increase in the research anddevelopment, or R&D, tax credit due to the retroactive extension of theUnited States R&D tax credit, the release of tax reserves due to expirationof statute of limitations on assessment, and the change in proportion andgeographical mix of income. The lower effective tax rate for fiscal 2006as compared to fiscal 2005 was due to the geographic mix of income betweendomestic and foreign entities for fiscal 2006. We expect that ourconsolidated effective tax rate in fiscal 2008 will continue to be lessthan the combined federal and state statutory rates. The extent to which oureffective tax rate in fiscal 2008 is less than the combined federal andstate statutory rates is principally contingent upon the amount ofnon-deductible stock-based compensation and the proportion and geographic mixof 

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our total pre-taxincome. We anticipate that there will be greater volatility in our futureeffective tax rates due to the adoption of FIN 48, *See “RecentAccounting Pronouncements”* below for further discussion.

**Minority Interest**

Minority interest forfiscal 2007 and fiscal 2006 was $5.8 million and$3.4 million, respectively. There was no minority interest infiscal 2005. In fiscal 2007, approximately $267,000 represents the54.6% interest that we did not own in the net income of SOI and approximately$5.5 million represents the 52.9% interest that we did not own in the netincome of VisEra. In fiscal 2006, approximately $1.4 millionrepresents the 51.0% interest that we did not own in the net income of SOI andapproximately $2.0 million represents the 54.4% interest that we did notown in the net income of VisEra. There was no minority interest infiscal 2005.

**Liquidity and Capital Resources**

Our principal sources ofliquidity at April 30, 2007 consisted of cash, cash equivalents andshort-term investments of $305.3 million.

## ***Liquidity***

Our working capitaldecreased by approximately $6.3 million to $357.0 million as ofApril 30, 2007 from $363.3 million as of April 30, 2006. Thedecrease was primarily attributable to: a $49.3 million decrease in cash andcash equivalents; a $13.8 million increase in the accrual for thesettlement of the securities class-action litigation; a $13.5 millionincrease in accounts payable; a $9.2 million increase in accrued incometaxes payable which increased as a consequence of additional provisions infiscal 2007 and a $2.5 million increase in deferred income. Thesedecreases were partially offset by: a $64.7 million increase ininventories as the result of increases in product demand for the first quarter offiscal 2008 which required us to accelerate our production schedules in the fourth quarter; a$13.0 million increase in recoverable insurance proceeds associated withthe settlement of the securities class-action litigation; $3.8 milliondecrease in accrued expenses and other current liabilities to support increasedlevels of operations and a $1.6 million increase in refundable anddeferred income taxes.

In March 2007, wepurchased a complex of four buildings in Santa Clara, California, or the SantaClara Property. In connection with the purchase, we entered into a Loan andSecurity Agreement with a domestic bank on March 16,  2007. The 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. Borrowings under the Mortgage loan accrue interest at theLondon Interbank Borrowing Rate, or 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 September 30, 2012, respectively.

In order to secure theobligations, on March 16, 2007 we also entered into a Deed of Trust,Assignment of Rents and Leases, Security Agreement and Fixture Filing made by usto First American Title Insurance Company for the benefit of the domestic bankand a Stock Pledge Agreement between us and the domestic bank.

The Loan and SecurityAgreement requires us to comply with certain affirmative covenants including,but not limited to, meeting certain minimum financial standards, as well ascertain negative covenants limiting our ability to take certain actions withoutthe prior written consent of the domestic bank including, but not limited to,selling or leasing the Santa Clara Property or merging or consolidating withanother entity. In addition, the Loan and Security Agreement provides that uponthe occurrence of certain events of default our obligations under the Loan andSecurity Agreement may become immediately due and payable, or the domestic bankmay cease making additional advances under the Term Loan or otherwise extendingcredit to us under the Loan and Security Agreement. As of April 30, 2007, wewere in compliance with the financial covenants of the Loan and Securityagreement.

As of April 30,2007, the entire $27.9 million amount of the Mortgage Loan wasoutstanding. Of the $27.9 million, $27.4 million and was classifiedas a long-term obligation on the Consolidated Balance Sheets. At April 30,2007, the interest rate under the Mortgage Loan was 6.2%. As of April 30,2007, there were no borrowings 

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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)** |
|-------------|--------------------------------------------------------------------------------------------------------------------|

 

outstanding underthe Term Loan. See Note 9* – “BorrowingArrangements”* of the Notes to our consolidated financial statements.

Concurrent with theMortgage Loan, we also entered into an interest rate swap with the bank to helpmanage interest rate risk. The swap is for a period of ten years, and thenotional amount of the swap approximates the principal outstanding under theMortgage Loan. We are the fixed rate payer under the swap with a fixed rate of approximately5.3% per annum, and the effective rate on the Mortgage Loan is fixed atapproximately 6.2%. We measure the swap at fair value and record it as eitheran asset or a liability, depending on whether the fair value is a gain or lossto us.

SOI maintains fourunsecured lines of credit with three commercial banks, which provide a total ofapproximately $3.4 million in available credit. All borrowings under thefour lines of credit maintained by SOI bear interest at the market interestrate prevailing at the time of borrowing. There are no financial covenantrequirements for these facilities and at April 30, 2007, there were noborrowings outstanding under these facilities.

## ***Cash Flows FromOperating Activities***

For fiscal 2007, net cashprovided by operating activities totaled approximately $42.5 million ascompared to $136.9 million for fiscal 2006. The principal components ofthe current year amount were: net income of approximately $24.0 millionfor fiscal 2007, adjusted for non-cash charges of $29.7 million instock-based compensation, $13.0 million in depreciation and amortization,$5.8 million in the minority interest in the net income of ourconsolidated affiliate, $3.6 million of gains in equity investments and$1.8 million in excess tax benefits from stock-based compensation; a$16.0 million increase in accrued income taxes payable; a$34.4 million increase in accounts payable and a $10.2 millionincrease in accrued expenses and other current liabilities. These increaseswere partially offset by: a $70.1 million increase in inventories; a$19.9 million increase in prepaid expenses and other current assets; a$8.1 million increase in refundable and deferred income taxes and a$75,000 increase in accounts receivable, net. The $75,000 increase in accountsreceivable, net, reflects the decline in the level of revenues during thefourth quarter of fiscal 2007, and the increase in days of salesoutstanding as of April 30, 2007 to 49 days from 45 days as ofApril 30, 2006. The $19.9 million increase in prepaid expenses andother current assets principally reflects $13.0 million in recoverableinsurance proceeds associated with the settlement of securities class-actionlitigation. The $10.2 million increase in accrued expenses and othercurrent liabilities resulted from a litigation settlement accrual associatedwith the settlement of securities class-action litigation. The $70.1 millionincrease in inventories was principally the result of increases in productdemand for the first quarter of fiscal 2008  which required us to accelerate our production schedules in the fourth quarter. Theincrease in inventory balances resulted in a decline in annualized inventoryturns to 3.1 as of April 30, 2007 from 6.1 as of April 30, 2006.Our accrued income taxes payable increased as a consequence of additionalprovisions in fiscal 2007.

For fiscal 2006, net cashprovided by operating activities totaled approximately $136.9 million ascompared to $88.8 million for fiscal 2005, primarily due to net income ofapproximately $89.1 million for fiscal 2006, adjusted for non-cashcharges of $10.6 million in depreciation and amortization,$3.4 million in the minority interest in the net income of consolidatedaffiliates and $2.9 million in tax benefits from stock option exercises, a$19.8 million increase in accrued income taxes payable, a$15.4 million increase in accounts payable, a $6.6 million increasein accrued expenses and other current liabilities, a $3.7 million decreasein refundable and deferred income taxes and a $3.4 million decrease ininventories, partially offset by a $6.7 million increase in prepaidexpenses and other current assets, and $6.0 million increase in accountsreceivable, net. The $6.0 million increase in accounts receivable, net,reflects the higher level of revenues during fiscal 2006, partially offsetby a decrease in days of sales outstanding to 45 days as of April 30,2006 from 52 days as of April 30, 2005. The $3.4 milliondecrease in inventories was attributable to our reduction of finished goodsinventories late in the fiscal year, partially offset by an increase inwork-in-process inventory. Inventory turns increased to 6.1 as ofApril 30, 2006 from 4.5 as of April 30, 2005.

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

For fiscal 2007,cash used in investing activities increased to approximately $142.4 millionfrom $16.9 million for fiscal 2006 due primarily to: $82.8 million inpurchases of property, plant and equipment; $27.0 million in purchases oflong-term investments; $20.6 million resulting from the deconsolidation ofVisEra and $11.4 million in net purchases of short-term investments.

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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)** |
|-------------|--------------------------------------------------------------------------------------------------------------------|

 

For fiscal 2006,cash used in investing activities decreased to approximately $16.9 millionfrom $38.3 million for fiscal 2005 due primarily to: $22.7 million inpurchases of property, plant and equipment; $12.5 million of in purchasesof long-term investments, and $5.5 million in purchases of intangible assets.These uses were partially offset by a $13.8 million in proceeds from theconsolidation of VisEra, net of cash payments and $10.0 million in netproceeds from the sales or maturities of short-term investments.

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

For fiscal 2007, netcash provided by financing activities totaled approximately $50.5 millionas compared to net cash used in financing activities of $50.9 million forfiscal 2006 primarily due to: $27.9 million in proceeds from long-term borrowingsunder our Mortgage loan to purchase the Santa Clara Property;$10.5 million principally in a cash contribution to VisEra by TSMC and DaiNippon Printing Co., Ltd.; $10.6 million in proceeds from the exercise ofstock options and employee purchases through our employee stock purchase planfor fiscal 2007 as compared to $19.2 million for fiscal 2006 and$1.8 million in excess tax benefits from stock-based compensation.

For fiscal 2006, netcash used in financing activities totaled approximately $50.9 million ascompared to net cash provided by financing activities of $5.4 million forfiscal 2005 primarily due to $79.6 million in payments for repurchase ofour common stock, partially offset by an increase in proceeds from the exerciseof stock options and employee purchases through our employee stock purchaseplan to approximately $19.2 million for fiscal 2006 as compared to$5.4 million for fiscal 2005 and $9.5 million in a cashcontribution to VisEra by TSMC.

## ***Capital Resources***

We currently expect ouravailable cash, cash equivalents and short-term investments, together with cashthat we expect to generate from business operations, will be sufficient tosatisfy our foreseeable capital requirements. Other than normal working capitalrequirements, we expect our capital requirements in fiscal 2008 to consistprimarily of funding at VisEra to expand capacity available to us and tocomplete the upgrade and expansion of our testing capacity.

We are obligated to payan additional $10.0 million in cash upon the sale, prior to the end ofApril 2009, of a pre-determined number of revenue-producing productsincorporating CDM’s technology. CDM and the costs associated with theacquisition are included in our consolidated balance sheets at April 30, 2007and 2006.

In June 2005, our boardof directors authorized us to use up to $100 million of our available cashin an open-market program to repurchase our common stock. At the expiration ofthe program on June 21, 2006, we had cumulatively repurchased5,870,000 shares of our common stock for an aggregate cost ofapproximately $79.6 million.

In February 2007, ourboard of directors authorized a further $100 million stock repurchaseprogram.  As of April 30, 2007, we hadnot repurchased any shares under this program.

Our ability to generatecash from operations in the future is subject to substantial risks describedabove under Item 1A. *“Risk Factors.”*We encourage you to review these risks carefully.

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** **
| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)** |
|-------------|--------------------------------------------------------------------------------------------------------------------|

 

**Contractual Obligations andCommercial Commitments**

The following summarizesour contractual obligations and commercial commitments as of April 30, 2007 andthe effect such obligations and commitments are expected to have on ourliquidity and cash flows in future periods (in thousands):
| ** **                                                | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                                                | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **5 Years** | ** ** |
| **Contractual  Obligations:**                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating leases                                          |       | $                                         | 14,164     |   | $ | 4,324 |   | $ | 8,369 |   | $ | 1,274 |   | $ | 197 |   |
| Capital leases                                            |       | 280                                       |       | 146 |   | 134 |   | — |   | — |   |
| Mortgage obligation                                       |       | 27,927                                    | (3)        | 485 |   | 1,063 |   | 1,203 |   | 25,176 |   |
| Noncancelable orders                                      |       | 100,554                                   |       | 100,554 |   | — |   | — |   | — |   |
| Total contractual obligations                             |       | 142,925                                   |       | 105,509 |   | 9,566 |   | 2,477 |   | 25,373 |   |
|                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| **Other  Commercial Commitments:**                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Investment in HWSC                                        |       | 3,000                                     | (1)        | 3,000 |   | — |   | — |   | — |   |
| Investment in Shanghai Design Center                      |       | 22,060                                    | (2)        | — |   | 22,060 |   | — |   | — |   |
| Total commercial commitments                              |       | 25,060                                    |       | 3,000 |   | 22,060 |   | — |   | — |   |
| Total  contractual obligations and commercial commitments |       | $                                         | 167,985    |   | $ | 108,509 |   | $ | 31,626 |   | $ | 2,477 |   | $ | 25,373 |   |

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(1)           Represents theremaining $3.0 million of registered capital for our subsidiary, HWSC. SeeNote 17 – *“**Commitments and Contingencies”*to our consolidated financialstatements.

(2)           Over the next twoyears, we expect to invest a total of approximately $30.0 million in oursubsidiary, SDC, of which we have already invested $7.5 million. SDC willuse the funds to develop land and construct facilities for its use. See Note 17 – *“**Commitments andContingencies”* to our consolidated financial statements.

(3)           InMarch 2007, we entered into a mortgage loan with a domestic bank in theamount of $27.9 million. See Note 9 – *“**Borrowing Arrangements”*to our consolidated financial statements.

**Other Financial Arrangements**

As of April 30,2007, we did not have any off-balance sheet arrangements that have, or arereasonably likely to have, a current or future material effect on ourconsolidated financial condition, results of operations, liquidity, capitalexpenditures or capital resources.

**Recent Accounting Pronouncements**

In June 2006, theFASB issued FIN 48.FIN 48 requires that we recognize in our consolidated financial statementsthe impact of a tax position that is more likely than not to be sustained uponexamination based on the technical merits of the position. The evaluation of atax position in accordance with this interpretation is a two-step process. Inthe first step, recognition, we determine whether it is more likely than notthat a tax position will be sustained upon examination, including resolution ofany related appeals or litigation processes, based on the technical merits ofthe position. The second step addresses measurement of a tax position thatmeets the more-likely-than-not criterion. The tax position is measured at thelargest amount of benefit that has a greater than 50%  likelihood of beingrealized upon ultimate settlement. Tax positions that previously failed to meetthe more-likely-than-not recognition threshold should be recognized in thefirst subsequent financial reporting period in which that threshold is met.Previously recognized tax positions that no longer meet themore-likely-than-not recognition threshold should be derecognized in the firstsubsequent financial reporting period in which that threshold is no longer met.FIN 48 is effective for fiscal years beginning after December 15,2006. The differences between the amounts recognized in the consolidatedfinancial statements prior to the adoption of FIN 48 and the amounts 

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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)** |
|-------------|--------------------------------------------------------------------------------------------------------------------|

 

reported afteradoption will be accounted for as a cumulative-effect adjustment recorded tothe beginning balance of retained earnings. We are currently evaluating theimpact FIN 48 will have on our financial position, results of operationsor cash flows. Based on our preliminary analysis, we expect a substantialportion of our accrued income taxes payable balance of $61.6 million as ofApril 30, 2007 to be reclassified in fiscal 2008 as a non-currentliability. In addition, the adoption of FIN 48 may result in greatervolatility in our future effective tax rates.

In September 2006,the FASB issued Statement of Financial Accounting Standards, or SFAS,No. 157, “*Fair Value Measurements*,”**or SFAS No. 157, which defines fairvalue, establishes guidelines for measuring fair value and expands therequisite disclosures for fair value measurements. SFAS No. 157 does not requireany new fair value measurements but rather establishes a common definition offair value to be used throughout generally accepted accounting principles. SFASNo. 157 is effective in fiscal years beginning after November 15,2007 and is required to be adopted by us in the first quarter of fiscal 2009.Our adoption of the provisions of SFAS No. 157 is not expected tohave a material effect on our financial condition, results of operations orcash flows.

In February 2007,the FASB issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities,”* orSFAS No. 159, which permits entities to choose to measure at fairvalue many financial instruments and certain other items that are not currentlyrequired to be measured at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.SFAS No. 159 also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choosedifferent measurement attributes for similar types of assets and liabilities.SFAS No. 159 does not affect any existing accounting literature thatrequires certain assets and liabilities to be carried at fair value.SFAS No. 159 does not establish requirements for recognizing andmeasuring dividend income, interest income, or interest expense. This Statementdoes not eliminate disclosure requirements included in other accountingstandards.**SFAS No. 159is effective in fiscal years beginning after November 15, 2007 and isrequired to be adopted by us in the first quarter of fiscal 2009. We arecurrently evaluating the impact SFAS No. 159 may have on ourfinancial position, results of operations or cash flows.

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## **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

## ***Foreign CurrencyExchange Risk***

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

The great majority of ourtransactions with our customers and vendors are denominated in U.S. dollars.The expenses we incur in currencies other than U.S. dollars include certaincosts affecting gross profit, selling, general and administrative and research,development and related expenses, which are primarily incurred in China, wherethe Chinese Yuan Renminbi (“CNY”) is the local currency and Taiwan, where the NewTaiwan dollar is the local currency. Since July 2005, the Chinese central bankhas benchmarked the CNY against a basket of currencies, and as of April 30,2007 has allowed the CNY to appreciate by approximately 6.8% against the U.S.dollar.

As of April 30,2007, the functional currency of our wholly-owned subsidiaries located in HongKong, OmniVision Technologies (Hong Kong) Company Limited and OmniVisionTrading (Hong Kong) Company Ltd., in the Cayman Islands, OmniVisionInternational Holding, Ltd. and HuaWei Technology International, Ltd., and inChina, HWSC and SDC, is the U.S. dollar. Our other wholly-owned subsidiarieshave their respective local currencies as their functional currencies. Thefunctional currency of our consolidated affiliate, SOI, is the New Taiwandollar. Transaction gains and losses resulting from transactions denominated incurrencies other than the respective functional currencies are included in “Otherincome (expense), net” for the periods presented. The amounts of transaction gainsand losses for fiscal 2007, 2006 and 2005 were not material.

Given that the onlyexpenses that we incur in currencies other than U.S. dollars are certain costswhich historically have not been a significant percentage of our revenues, wedo not believe that our foreign currency exchange rate fluctuation risk issignificant. Consequently, we do not believe that a 10% change in foreigncurrency exchange rates would have a significant effect on our future netincome or cash flows.

We have not hedged exposuresdenominated in foreign currencies or used any other derivative financialinstruments as we do not believe that we currently have any significant directforeign currency exchange rate risk. Although we transact our business in U.S.dollars, future fluctuations in the value of the U.S. dollar may affect thecompetitiveness of our products and results of operations.

## ***Market Interest RateRisk***

Our cash equivalents andshort-term investments are exposed to financial market risk due to fluctuationin interest rates, which may affect our interest income and, in the future, thefair market value of our investments. We manage our exposure to financialmarket risk by performing ongoing evaluations of our investment portfolio. Wepresently invest in money market funds, certificates of deposit issued bybanks, commercial paper, certificates of deposit, high-grade corporatesecurities and government bonds maturing approximately 18 months or less fromthe date of purchase. We also invest in auction rate securities which have afinal maturity date of up to thirty years but whose interest rate is resetprincipally up to every 35 days, and in variable rate demand notes, whichhave a final maturity date of up to thirty years but whose interest rate isreset at varying intervals typically between 1 and 7 days. Due to the shortmaturities of our investments, the carrying value should approximate the fairmarket value. In addition, we do not use our investments for trading or otherspeculative purposes. Due to the short duration of our investment portfolio, wedo not expect that an immediate 10% change in interest rates would have amaterial effect on the fair market value of our portfolio. Therefore, we wouldnot expect our operating results or cash flows to be affected to any significantdegree by the effect of a sudden change in market interest rates.

During fiscal 2007,we financed the purchase of a four-building complex with an $27.9 millionmortgage loan. The mortgage loan is a variable rate loan which bears interestat LIBOR plus 90 basis points and changes in the interest rate will affect ourinterest payments. Concurrent with the mortgage loan, we also entered into aninterest rate swap with a notional amount that approximates the principaloutstanding under the mortgage loan. We are the fixed rate payer under the swapwith a fixed rate of 5.27%. Consequently, we do not believe that a hypothetical10% change in LIBOR would have a material effect on our annual interestexpense.

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**ITEM 8.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

**OMNIVISIONTECHNOLOGIES, INC.**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                | **Page**   |
|--------------------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** |
| Report of Independent  Registered Public Accounting Firm                       | 55         |
| Consolidated  Balance Sheets                                                   | 57         |
| Consolidated  Statements of Income                                             | 58         |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income | 59         |
| Consolidated  Statements of Cash Flows                                         | 60         |
| Notes to  Consolidated Financial Statements                                    | 61         |
| Supplementary Data                                                             | 93         |

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of OmniVision Technologies,Inc.:

We have completed integrated audits of OmniVision Technologies, Inc.’sconsolidated financial statements and of its internal control over financialreporting in accordance with the standards of the Public Company AccountingOversight Board (United States). Ouropinions, based on our audits, are presented below.

Consolidated financial statementsand financial statement schedule

In our opinion, the consolidatedfinancial statements listed in the accompanyingindex present fairly, in all material respects, the financial positionof OmniVision Technologies, Inc. and its subsidiaries at April 30, 2007 and2006, and the results of their operations and their cash flows for each of thethree years in the period ended April 30, 2007 in conformity with accountingprinciples generally accepted in the United States of America. In addition, in our opinion, the financialstatement schedule listed in the accompanying indexpresents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements. These financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our audits ofthese statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit of financialstatements includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

As discussed in Note 13 to the consolidated financial statements,effective May 1, 2006, the Company changed its method of accounting forshare-based payments in accordance with Statement of Financial AccountingStandards No. 123 (Revised 2004), *“Share-based Payments.”*

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’sReport on Internal Control Over Financial Reporting appearing underItem 9A, that the Company maintained effective internal control overfinancial reporting as of April 30, 2007 based on criteria established in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), isfairly stated, in all material respects, based on those criteria. Furthermore,in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of April 30, 2007, based oncriteria established in *Internal Control - IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in 

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accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

**/s/ PRICEWATERHOUSECOOPERS LLP**

PricewaterhouseCoopers LLPSan Jose, CaliforniaJune 27, 2007

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**OMNIVISIONTECHNOLOGIES, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share and per share data)**
| ** **                                                                                                                                                                                                                                   | ** ** | **April 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                   | ** ** | **2007**           | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                   |       |               |       |   |   |
| Current assets:                                                                                                                                                                                                                              |       |               |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                    |       | $                  | 190,878    |   | $ | 240,227 |   |
| Short-term investments                                                                                                                                                                                                                       |       | 114,432            |       | 114,278 |   |
| Accounts receivable, net of allowances for doubtful  accounts and sales returns                                                                                                                                                              |       | 65,666             |       | 65,916 |   |
| Inventories                                                                                                                                                                                                                                  |       | 119,663            |       | 54,973 |   |
| Refundable and deferred income taxes                                                                                                                                                                                                         |       | 3,356              |       | 1,708 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                    |       | 8,717              |       | 9,158 |   |
| Recoverable insurance proceeds (Note 17)                                                                                                                                                                                                     |       | 13,000             |       | — |   |
| Total current assets                                                                                                                                                                                                                         |       | 515,712            |       | 486,260 |   |
| Property, plant  and equipment, net                                                                                                                                                                                                          |       | 64,363             |       | 38,010 |   |
| Long-term  investments                                                                                                                                                                                                                       |       | 67,281             |       | 18,673 |   |
| Goodwill                                                                                                                                                                                                                                     |       | 7,541              |       | 4,892 |   |
| Intangibles, net                                                                                                                                                                                                                             |       | 20,493             |       | 26,245 |   |
| Other long-term  assets                                                                                                                                                                                                                      |       | 12,669             |       | 3,189 |   |
| Total assets                                                                                                                                                                                                                                 |       | $                  | 688,059    |   | $ | 577,269 |   |
|                                                                                                                                                                                                                                         |       |               |       |   |   |
| **LIABILITIES, MINORITY INTEREST  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                            |       |               |       |   |   |
| Current liabilities:                                                                                                                                                                                                                         |       |               |       |   |   |
| Accounts payable                                                                                                                                                                                                                             |       | $                  | 56,290     |   | $ | 42,770 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                               |       | 17,524             |       | 21,351 |   |
| Litigation settlement accrual                                                                                                                                                                                                                |       | 13,750             |       | — |   |
| Accrued income taxes payable                                                                                                                                                                                                                 |       | 61,617             |       | 52,406 |   |
| Deferred income                                                                                                                                                                                                                              |       | 8,873              |       | 6,329 |   |
| Current portion of long-term debt                                                                                                                                                                                                            |       | 631                |       | 152 |   |
| Total current liabilities                                                                                                                                                                                                                    |       | 158,685            |       | 123,008 |   |
|                                                                                                                                                                                                                                         |       |               |       |   |   |
| Long-term liabilities:                                                                                                                                                                                                                       |       |               |       |   |   |
| Non-current portion of long-term debt                                                                                                                                                                                                        |       | 27,576             |       | 308 |   |
| Other long-term liabilities                                                                                                                                                                                                                  |       | 6,998              |       | 4,033 |   |
| Total long-term liabilities                                                                                                                                                                                                                  |       | 34,574             |       | 4,341 |   |
| Total liabilities                                                                                                                                                                                                                            |       | 193,259            |       | 127,349 |   |
|                                                                                                                                                                                                                                         |       |               |       |   |   |
| Commitments and  contingencies (Note 17)                                                                                                                                                                                                |       |               |       |   |   |
|                                                                                                                                                                                                                                         |       |               |       |   |   |
| Minority  interest                                                                                                                                                                                                                           |       | 4,344              |       | 27,113 |   |
|                                                                                                                                                                                                                                         |       |               |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                                                   |       |               |       |   |   |
| Common stock, $0.001 par value; 100,000,000 shares  authorized; 60,810,998 issued and 54,940,998 outstanding at  April 30, 2007 and 59,743,625 shares issued and 53,873,625  outstanding at April 30, 2006, respectively |       | 61                 |       | 60 |   |
| Additional paid-in capital                                                                                                                                                                                                                   |       | 329,012            |       | 285,112 |   |
| Accumulated other comprehensive income                                                                                                                                                                                                       |       | 867                |       | 1,092 |   |
| Treasury stock, 5,870,000 shares at April 30,  2007 and 2006                                                                                                                                                                            |       | (79,568            | )          | (79,568 | ) |
| Retained earnings                                                                                                                                                                                                                            |       | 240,084            |       | 216,111 |   |
| Total stockholders’ equity                                                                                                                                                                                                              |       | 490,456            |       | 422,807 |   |
| Total  liabilities, minority interest and stockholders’ equity                                                                                                                                                                          |       | $                  | 688,059    |   | $ | 577,269 |   |

 

The accompanying notesare an integral part of these Consolidated Financial Statements.

57

----

**OMNIVISIONTECHNOLOGIES, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(inthousands, except per share amounts)**
| ** **                                                        | ** ** | **Year Ended April 30,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                          |       | $                                       | 528,143    |   | $ | 491,926 |   | $ | 388,062 |   |
| Cost of revenues                                                  |       | 372,776                                 |       | 310,250 |   | 231,508 |   |
| Gross profit                                                      |       | 155,367                                 |       | 181,676 |   | 156,554 |   |
|                                                              |       |                                    |       |   |   |   |   |
| Operating expenses:                                               |       |                                    |       |   |   |   |   |
| Research, development and related                                 |       | 67,570                                  |       | 40,572 |   | 25,494 |   |
| Selling, general and administrative                               |       | 58,674                                  |       | 35,320 |   | 29,012 |   |
| Litigation settlement, net of recovery of $13,000  (Note 17) |       | 3,300                                   |       | — |   | — |   |
| Total operating expenses                                          |       | 129,544                                 |       | 75,892 |   | 54,506 |   |
|                                                              |       |                                    |       |   |   |   |   |
| Income from  operations                                           |       | 25,823                                  |       | 105,784 |   | 102,048 |   |
| Interest income,  net                                             |       | 14,580                                  |       | 8,949 |   | 4,218 |   |
| Other income  (expense), net                                      |       | (1,285                                  | )          | 933 |   | (173 | ) |
| Income before  income taxes and minority interest                 |       | 39,118                                  |       | 115,666 |   | 106,093 |   |
|                                                              |       |                                    |       |   |   |   |   |
| Provision for  income taxes                                       |       | 9,392                                   |       | 23,133 |   | 29,706 |   |
| Minority  interest                                                |       | 5,753                                   |       | 3,385 |   | — |   |
| Net income                                                        |       | $                                       | 23,973     |   | $ | 89,148 |   | $ | 76,387 |   |
|                                                              |       |                                    |       |   |   |   |   |
| Net income per share:                                             |       |                                    |       |   |   |   |   |
| Basic                                                             |       | $                                       | 0.44       |   | $ | 1.64 |   | $ | 1.35 |   |
| Diluted                                                           |       | $                                       | 0.43       |   | $ | 1.56 |   | $ | 1.24 |   |
|                                                              |       |                                    |       |   |   |   |   |
| Shares used in  computing net income per share:                   |       |                                    |       |   |   |   |   |
| Basic                                                             |       | 54,706                                  |       | 54,268 |   | 56,688 |   |
| Diluted                                                           |       | 55,234                                  |       | 56,958 |   | 61,566 |   |

 

The accompanying notesare an integral part of these Consolidated Financial Statements.

58

----

**OMNIVISIONTECHNOLOGIES, INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**(inthousands, except share data)**
|            | ** ** | ** **                                                             | ** ** | ** **   | ** ** | ** **       | ** ** | ** **                             | ** ** | **Accumulated**        | ** ** | ** **                                                            | ** ** | ** **   | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
|------------|------------|------------------------------------------------------------------------|------------|--------------|------------|------------------|------------|----------------------------------------|------------|------------------------|------------|-----------------------------------------------------------------------|------------|--------------|------------|-----------------------------------------------------------------------|------------|------------|------------|
| ** ** | ** ** | ** **                                                             | ** ** | ** **   | ** ** | ** **       | ** ** | **  Additional  ** | ** ** | **Other**              | ** ** | ** **                                                            | ** ** | ** **   | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Common Stock**                                                  | ** ** | **Deferred** | ** ** | **Paid-in**      | ** ** | **Comprehensive**                      | ** ** | **Treasury**           | ** ** | **Retained**                                                          | ** ** | ** **   | ** ** | **Comprehensive**                                                     | ** ** |
| ** ** | ** ** | **     Shares     ** | ** ** | **Amount**   | ** ** | **Compensation** | ** ** | **Capital**                            | ** ** | **Income (Loss)** | ** ** | **     Stock     ** | ** ** | **Earnings** | ** ** | **     Total     ** | ** ** | **Income** | ** ** |
| ** ** | ** ** |                                                                   |       | ** **   |       |             |       | ** **                             |       |                   |       | ** **                                                            |       |         |       | ** **                                                            |       |       |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
|            |            |                                                                        |            |              |            |                  |            |                                        |            |                        |            |                                                                       |            |              |            |                                                                       |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Balance at May 1, 2004                                                         |   |   | 56,212,119 | ** ** |   |   | $      | 56         | ** ** |   |   | $      | (20    | )      |    |   | $      | 249,405 |   |   |   | $      | (4      | )      |   |   | $       | —     |   |   |    | $      | 50,576  | ** ** |   |   | $      | 300,013 |   |   |   | $ | 58,741 |   |   |
|-------------------------------------------------------------------------------------|--------|--------|------------|------------|--------|--------|--------|------------|------------|--------|--------|--------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|---------|--------|--------|--------|---------|------------|--------|--------|---------|--------|---------|------------|--------|--------|--------|---------|--------|--------|--------|---|--------|--------|--------|
| Exercise of stock options                                                           |   |   | 934,326    | ** ** |   |   | 1      | ** ** |       |   | — |   |   |   | 3,835   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 3,836   |   |    |       |   |   |   |
| Employee stock purchase  plan                                                       |   |   | 119,690    | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 1,564   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 1,564   |   |    |       |   |   |   |
| Grant of fully-vested options to non-employees.                                     |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 938     |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 938     |   |    |       |   |   |   |
| Tax benefits from stock  options                                                    |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 2,104   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 2,104   |   |    |       |   |   |   |
| Shares issued for CDM Optics, Inc. acquisition                                      |   |   | 368,206    | ** ** |   |   | 1      | ** ** |       |   | — |   |   |   | 5,256   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 5,257   |   |    |       |   |   |   |
| Amortization of deferred compensation                                               |   |   | —     | ** ** |   |   | — | ** ** |       |   | 20     |   |   |   | —  |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 20      |   |    |       |   |   |   |
| Translation gains                                                                   |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | 1      |   |   |   | —  |   |   |   | —  | ** ** |   |   | 1       |   |    |       | $      | 1      |   |    |
| Unrealized losses on available-for-sale  securities, net                            |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | (22    | )      |   |   | —  |   |   |   | —  | ** ** |   |   | (22     | )      |    |       | (22    | )      |   |
| Net income                                                                          |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | — |   |   |   | —  |   |   |   | 76,387  | ** ** |   |   | 76,387  |   |    |       | 76,387 |   |   |
| Balance at April 30, 2005                                                           |   |   | 57,634,341 | ** ** |   |   | 58     | ** ** |       |   | — |   |   |   | 263,102 |   |   |    | (25    | )      |   |   | —  |   |   |   | 126,963 | ** ** |   |   | 390,098 |   |    |       | $      | 76,366 |   |    |
| Exercise of stock options                                                           |   |   | 1,992,887  | ** ** |   |   | 2      | ** ** |       |   | — |   |   |   | 17,584  |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 17,586  |   |    |       |   |   |   |
| Employee stock purchase  plan                                                       |   |   | 116,397    | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 1,565   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 1,565   |   |    |       |   |   |   |
| Purchase of stock for treasury                                                      |   |   | (5,870,000 | )          |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | — |   |   |   | (79,568 | )      |   |   | —  | ** ** |   |   | (79,568 | )      |    |       |   |   |   |
| Grant of fully-vested options to  non-employees.                                    |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 6       |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 6       |   |    |       |   |   |   |
| Tax benefits from stock   options                                                   |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 2,855   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 2,855   |   |    |       |   |   |   |
| Translation gains                                                                   |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | 1,142  |   |   |   | —  |   |   |   | —  | ** ** |   |   | 1,142   |   |    |       | $      | 1,142  |   |    |
| Unrealized losses on available-for-sale securities,  net                            |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | (25    | )      |   |   | —  |   |   |   | —  | ** ** |   |   | (25     | )      |    |       | (25    | )      |   |
| Net income                                                                          |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | — |   |   |   | —  |   |   |   | 89,148  | ** ** |   |   | 89,148  |   |    |       | 89,148 |   |   |
| Balance at April  30, 2006                                                          |   |   | 53,873,625 | ** ** |   |   | 60     | ** ** |       |   | — |   |   |   | 285,112 |   |   |    | 1,092  |   |   |   | (79,568 | )      |   |   | 216,111 | ** ** |   |   | 422,807 |   |    |       | $      | 90,265 |   |    |
| Exercise of stock options                                                           |   |   | 858,833    | ** ** |   |   | 1      | ** ** |       |   | — |   |   |   | 7,798   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 7,799   |   |    |       |   |   |   |
| Employee stock purchase   plan                                                      |   |   | 206,800    | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 2,829   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 2,829   |   |    |       |   |   |   |
| Employee stock-based compensation                                                   |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 29,660  |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 29,660  |   |    |       |   |   |   |
| Tax effect from stock-based compensation                                            |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | (728    | )      |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | (728    | )      |    |       |   |   |   |
| Goodwill adjustment for put rights  issued to CDM Optics, Inc. selling stockholders |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 1,894   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 1,894   |   |    |       |   |   |   |
| Shares issued for CDM Optics, Inc. acquisition                                      |   |   | 1,740      | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 34      |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 34      |   |    |       |   |   |   |
| Change-of-interest benefit from minority  investments                               |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | 2,413   |   |   |    | — |   |   |   | —  |   |   |   | —  | ** ** |   |   | 2,413   |   |    |       | $      | 2,413  |   |    |
| Translation losses                                                                  |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | (220   | )      |   |   | —  |   |   |   | —  | ** ** |   |   | (220    | )      |    |       | (220   | )      |   |
| Unrealized losses on available-for-sale  securities, net                            |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | (5     | )      |   |   | —  |   |   |   | —  | ** ** |   |   | (5      | )      |    |       | (5     | )      |   |
| Net income                                                                          |   |   | —     | ** ** |   |   | — | ** ** |       |   | — |   |   |   | —  |   |   |    | — |   |   |   | —  |   |   |   | 23,973  | ** ** |   |   | 23,973  |   |    |       | 23,973 |   |   |
| Balance at April 30, 2007                                                           |   |   | 54,940,998 | ** ** |   |   | $      | 61         | ** ** |   |   | $      | — |   |    |   | $      | 329,012 |   |   |   | $      | 867     |   |   |   | $       | (79,568    | )      |   |    | $      | 240,084 | ** ** |   |   | $      | 490,456 |   |   |   | $ | 26,161 |   |   |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

59

----

**OMNIVISIONTECHNOLOGIES, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(inthousands)**
| ** **                                                                         | ** ** | **Year Ended April 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                             |       |                                    |       |   |   |   |   |
| Net income                                                                         |       | $                                       | 23,973     |   | $ | 89,148 |   | $ | 76,387 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                    |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 13,012                                  |       | 10,598 |   | 3,037 |   |
| Change in fair value of interest rate swap                                         |       | 492                                     |       | — |   | — |   |
| Stock-based compensation                                                           |       | 29,660                                  |       | 6 |   | 958 |   |
| Tax effect from stock-based compensation                                           |       | (728                                    | )          | 2,855 |   | 2,104 |   |
| Minority interest in net income of consolidated  affiliates                        |       | 5,753                                   |       | 3,385 |   | — |   |
| Equity investment (gain) loss, net                                                 |       | (3,639                                  | )          | (847 | ) | 149 |   |
| Affiliate stock grants                                                             |       | 179                                     |       | — |   | — |   |
| Write-down of inventories                                                          |       | 8,235                                   |       | 11,544 |   | 10,702 |   |
| Excess tax benefits from stock-based compensation                                  |       | (1,836                                  | )          | — |   | — |   |
| Loss on disposal of property, plant and equipment                                  |       | 7                                       |       | 19 |   | 96 |   |
| Changes in  assets and liabilities, net of acquisitions:                           |       |                                    |       |   |   |   |   |
| Accounts receivable, net                                                           |       | (75                                     | )          | (6,049 | ) | (5,870 | ) |
| Inventories                                                                        |       | (70,131                                 | )          | (8,130 | ) | (27,076 | ) |
| Refundable and deferred income taxes                                               |       | (8,131                                  | )          | 3,709 |   | 1,391 |   |
| Prepaid expenses and other current assets                                          |       | (19,865                                 | )          | (6,713 | ) | (161 | ) |
| Accounts payable                                                                   |       | 34,375                                  |       | 15,449 |   | (1,939 | ) |
| Accrued expenses and other current liabilities                                     |       | 10,210                                  |       | 6,577 |   | 1,362 |   |
| Accrued income taxes payable                                                       |       | 15,976                                  |       | 19,784 |   | 31,019 |   |
| Deferred income                                                                    |       | 2,544                                   |       | 846 |   | (3,402 | ) |
| Deferred tax liabilities                                                           |       | 2,498                                   |       | (5,314 | ) | — |   |
| Net cash provided by operating activities                                          |       | 42,509                                  |       | 136,867 |   | 88,757 |   |
| Cash flows from  investing activities:                                             |       |                                    |       |   |   |   |   |
| Restricted cash                                                                    |       | —                                  |       | — |   | 1,072 |   |
| Purchases of short-term investments                                                |       | (259,208                                | )          | (184,372 | ) | (194,533 | ) |
| Proceeds from sales or maturities of short-term  investments                       |       | 247,838                                 |       | 194,322 |   | 171,050 |   |
| Purchases of property, plant and equipment, net of  sales                          |       | (82,787                                 | )          | (22,655 | ) | (1,483 | ) |
| Payment for acquisition of CDM Optics, Inc., net of  cash acquired                 |       | —                                  |       | — |   | (13,528 | ) |
| Additional investment made in Silicon Optronics,  Inc.                             |       | —                                  |       | — |   | (2,078 | ) |
| Consolidation of Silicon Optronics, Inc.                                           |       | —                                  |       | — |   | 2,662 |   |
| Proceeds from consolidation of VisEra, net of cash  payments                       |       | —                                  |       | 13,792 |   | — |   |
| De-consolidation of VisEra                                                         |       | (20,646                                 | )          | — |   | — |   |
| Purchases of long-term investments                                                 |       | (27,000                                 | )          | (12,471 | ) | — |   |
| Purchases of intangible assets                                                     |       | (548                                    | )          | (5,500 | ) | (1,460 | ) |
| Net cash used in investing activities                                              |       | (142,351                                | )          | (16,884 | ) | (38,298 | ) |
| Cash flows from  financing activities:                                             |       |                                    |       |   |   |   |   |
| Proceeds from short-term borrowings of consolidated  affiliate                     |       | —                                  |       | 3,981 |   | — |   |
| Repayment of short-term borrowings of consolidated  affiliate                      |       | —                                  |       | (3,981 | ) | — |   |
| Proceeds from long-term borrowings                                                 |       | 27,927                                  |       | — |   | — |   |
| Payment of capital lease obligations                                               |       | (142                                    | )          | (27 | ) | — |   |
| Cash contribution by minority shareholder                                          |       | 10,495                                  |       | 9,500 |   | — |   |
| Affiliate cash dividend paid to minority shareholder                               |       | (245                                    | )          | — |   | — |   |
| Proceeds from exercise of stock options and employee  stock purchase plan          |       | 10,628                                  |       | 19,151 |   | 5,400 |   |
| Payments for repurchases of common stock                                           |       | —                                  |       | (79,568 | ) | — |   |
| Excess tax benefits from stock-based compensation                                  |       | 1,836                                   |       | — |   | — |   |
| Net cash provided by (used in) financing activities                                |       | 50,499                                  |       | (50,944 | ) | 5,400 |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | (6                                      | )          | 731 |   | (55 | ) |
| Net (decrease)  increase in cash and cash equivalents                              |       | (49,349                                 | )          | 69,770 |   | 55,804 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 240,227                                 |       | 170,457 |   | 114,653 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                       | 190,878    |   | $ | 240,227 |   | $ | 170,457 |   |
| Supplemental cash flow  information:                                               |       |                                    |       |   |   |   |   |
| Taxes paid (refunds received),net                                                  |       | $                                       | (2,046     | ) | $ | 2,474 |   | $ | 310 |   |
| Interest paid                                                                      |       | $                                       | 25         |   | $ | 20 |   | $ | — |   |
| Supplemental schedule  of non-cash investing and financing activities:             |       |                                    |       |   |   |   |   |
| Capital equipment financing obligation                                             |       | $                                       | 2,915      |   | $ | 393 |   | $ | — |   |
| Affiliate shares issued to affiliate employees                                     |       | $                                       | 459        |   | $ | — |   | $ | — |   |
| Change-of-interest benefit from minority shareholder  cash contribution            |       | $                                       | 2,413      |   | $ | — |   | $ | — |   |
| Escrow shares issued to CDM selling stockholders                                   |       | $                                       | 34         |   | $ | — |   | $ | 5,257 |   |
| Escrow shares to be issued in connection with CDM  Optics, Inc. acquisition        |       | $                                       | —     |   | $ | — |   | $ | 2,095 |   |
| Capitalized  interest and other costs                                              |       | $                                       | 278        |   | $ | — |   | $ | — |   |

 

The accompanying notesare an integral part of these Consolidated Financial Statements.

60

----

**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Years Ended April 30, 2007, 2006 and 2005**

**Note 1 — Basis of Presentation**

## ***TheCompany***

OmniVision Technologies,Inc. and its subsidiaries (“OmniVision” or the “Company”) design, develop,manufacture and market semiconductor image sensor devices. The Company’s mainproduct, a device called the CameraChipTM image sensor, is used to capture an image andis used in a number of commercial and consumer mass-market applications. TheCompany’s CameraChip image sensor is designed to use the complementary metaloxide semiconductor, or CMOS, fabrication process. The Company was incorporatedin California in May 1995 and reincorporated in Delaware in March 2000.

## ***Useof Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. The Company bases its estimates and judgments on itshistorical experience, knowledge of current conditions and beliefs of whatcould occur in the future considering available information. Actual resultscould differ from these estimates.

**Note 2 — Summaryof Significant Accounting Policies**

## ***Principlesof Consolidation***

The consolidatedfinancial statements include the accounts of the Company, its wholly-ownedsubsidiaries and its consolidated affiliate. All significant inter-companyaccounts and transactions have been eliminated.

In limited circumstanceswhere an unrelated third party invests in the Company’s consolidated subsidiaryor affiliate, 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.

## ***Consolidationof Affiliates***

Financial AccountingStandards Board Interpretation No. 46 (revised December 2003) (“FIN 46(R)”),*“Consolidation of Variable Interest Entities,”*requires that if an entity is the primary beneficiary of a variable interestentity (“VIE”), the entity should include the assets, liabilities and resultsof operations of the VIE in its consolidated financial statements. In thequarter ended October 31, 2005, the Company consolidated VisEraTechnologies Company, Ltd (“VisEra”) and VisEra Holding Company (“VisEra Cayman”),as the combined VisEra entity was deemed a VIE and the Company considereditself to be the primary beneficiary of VisEra. During the quarter endedJanuary 31, 2007, the Company assumed responsibility for logisticsmanagement previously provided by VisEra, and as a result, concluded that ithad lost its status as the primary beneficiary in VisEra and VisEra ceased tobe a VIE. As a result, the Company deconsolidated VisEra and VisEra Cayman onJanuary 1, 2007, and accounted for the combined VisEra entity under theequity method. (See Note 5.)

## ***ForeignCurrency Translation***

In general, thefunctional currencies of the Company’s wholly-owned subsidiaries are theirrespective local currencies. The functional currency of the Company’ssubsidiaries located in Hong Kong, OmniVision Technologies (Hong Kong) CompanyLimited and OmniVision Trading (Hong Kong) Company Ltd., in Shanghai, China,Hua Wei Semiconductors (Shanghai) Co. Ltd. (“HWSC”) and Shanghai OmniVision ICDesign Co., Ltd., (“SDC”)  and in theCayman Islands, OmniVision International Holding, Ltd. and HuaWei TechnologyInternational, Ltd., is the U.S. dollar.

Effective May 1,2006, the functional currency of one of the Company’s affiliates, VisEra,became the U.S. dollar. The change was necessitated by a significant increasein U.S. dollar-based transactions after VisEra’s 

61

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

acquisition of certain color-filter manufacturingassets from Taiwan Semiconductor Manufacturing Company Limited (“TSMC”). Thefunctional currency of Silicon Optronics, Inc., (“SOI”), the only consolidatedaffiliate of the Company as of April 30, 2007, remains the New Taiwandollar.

For subsidiaries withlocal currencies as the functional currencies, the assets and liabilities ofthe subsidiaries are translated at the rates of exchange prevailing on thebalance sheet date. Revenue and expense items are translated at the averagerate of exchange for the period. Unrealized gains and losses from foreigncurrency translation are included in “Accumulated other comprehensive income,”a component of stockholders’ equity. For subsidiaries or consolidatedaffiliates with assets denominated in currencies other than the functionalcurrency, 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. Remeasurement gains andlosses are included in “Other income (expense), net” and have not been materialin any of the periods presented.

## ***Cashand Cash Equivalents***

The Company considers allhighly liquid investments purchased with a maturity at the date of purchase ofthree months or less to be cash equivalents. Cash equivalents consistprincipally of commercial paper, government bonds, certificates of deposit andmoney market funds that are stated at cost, which approximates fair value.

The Company’s cash andcash equivalent amount is subject to concentration of credit risk. The Companymaintains some cash and cash equivalents balances with financial institutionsthat are in excess of Federal Deposit Insurance Corporation (“FDIC”) insurancelimits.

## ***RestrictedCash***

Restricted cashrepresents cash that was set aside as a result of court proceedings in whichthe parties stipulated to the filing of a bond that the Company posted with theSan Diego County Superior Court. In November 2004, the parties settled thedispute.

## ***Short-TermInvestments***

The Company’s short-terminvestments, which are classified as available-for-sale securities, areinvested in high-grade corporate securities, municipal bonds and notes andgovernment debt securities maturing in eighteen months or less from the date ofpurchase. The Company also invests in auction rate securities which have afinal maturity date of up to thirty years but whose interest rate is resetprincipally up to every 35 days, and in variable rate demand notes, whichhave a final maturity date of up to thirty years but whose interest rate isreset at varying intervals typically between 1 and 7 days. The market forauction rate securities is highly liquid and the Company has always been ableto sell its holdings at par on a reset date. Variable rate demand notes can bereadily liquidated at any interest rate reset date either by putting them backto the original issuer or by putting them to a third party remarketer asgenerally provided in the original prospectus. To date, the Company has alwaysbeen able to redeem its holdings of these securities in accordance with theirterms, and the Company believes that the risk of non-redemption is minimal.Consequently, these securities are available for use in current operations and theyare classified as short-term investments.

Short-term investmentsare reported at fair value at April 30, 2007 and 2006. Unrealized gains orlosses are recorded in stockholders’ equity and included in “Accumulated othercomprehensive income.” Declines in value judged to be other than temporary, ofwhich there were none in the periods presented, would be recorded in operationsat the time such judgment was made.

## ***AccountsReceivable***

Accounts receivable arerecorded at invoiced amounts and do not bear interest. The Company performsongoing credit evaluations of its customers’ financial condition and,generally, requires no collateral from its customers. Allowances for doubtfulaccounts and sales returns are established based on various factors includingcredit profiles of the Company’s customers, contractual terms and conditions,historical payments, returns and 

62

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

discounts experience, and current economic trends. TheCompany reviews its allowance for doubtful accounts quarterly by assessingindividual accounts receivable over a specific aging and amount, and all otherbalances on a pooled basis based on historical collection experience andeconomic risk assessment. Accounts receivable are written off on a case-by-casebasis, net of any amounts that may be collected. The Company determines itsallowance for sales returns through evaluation of historical sales returns andother known factors and provides for estimated sales returns in the same periodit records the related revenues. To estimate allowance for sales returns, theCompany analyzes potential customer specific product application issues,potential quality and reliability issues and historical returns. The Companyevaluates quarterly the adequacy of the allowance for sales returns. Thisallowance is reflected as a reduction to accounts receivable in the Company’sconsolidated balance sheets. Increases to the allowance are recorded as areduction to revenues.

## ***FairValue of Financial Instruments***

Due to their shortmaturities, the reported amounts of the Company’s financial instruments,including cash and cash equivalents, restricted cash, short-term investments,accounts receivable, accounts payable and other current liabilities approximatefair value.

The fair value of theCompany’s mortgage debt approximates book value as the underlying interest rateis based on a risk adjusted market rate. (See Note 9.)

Related to the mortgagedebt, the Company has also entered into an interest rate swap arrangement. Forsuch derivative instrument, the Company will recognize it at the reporting dateas either an asset or liability in its consolidated balance sheets and measurethe instrument at fair value. The accounting for changes in fair value of aderivative depends on the intended use of the derivative and the associatedhedging designation. For the swap, the Company has not designated it as a hedgeand has recorded the change in fair value to “Other income (expense), net.”(See Note 9.)

## ***Property,Plant and Equipment***

Property, plant andequipment, including land-use rights, is stated at cost less accumulateddepreciation and amortization. Depreciation is generally computed using thestraight-line method over the estimated useful lives of the assets as follows:
| Buildings                       | 40 years                              |
|---------------------------------|---------------------------------------|
| Building/leasehold improvements | Shorter of 20  years or life of lease |
| Machinery and equipment         | 3–10 years                       |
| Furniture and fixtures          | 3–7 years                        |
| Land-use rights                 | Life of right,  generally 50 years    |

 

Construction in progressincludes project costs paid to third parties that are clearly associated withthe acquisition, development, and construction of a real estate project and arecapitalized as a cost of that project prior to the use of the asset. Such costsinclude the costs of materials, interest, legal, and escrow services. Thesecapitalized project costs are not subject to depreciation until the assets towhich they are related are placed into production.

In December 2000, theCompany established HWSC, a Chinese subsidiary, to conduct testing operationsin China. Subsequently, the Company constructed a manufacturing facility inShanghai, China, owned by HWSC. This manufacturing facility was placed inservice in July 2003. HWSC does not own the land that underlies thefacility but holds a “land use right” that was acquired from the local Chinesegovernment in December 2000 for approximately $0.8 million, and entitlesthe Company to use the land for 50 years. The cost of the land use right wasrecorded as a component of property, plant and equipment and is beingdepreciated over 50 years, the useful life of the right.

In addition, inJanuary 2007, the Company, through its wholly-owned subsidiary, SDC,entered into a Land-Use-Right Purchase Agreement (the “Purchase Agreement”)with the Construction and Transportation Commission of the Pudong New District,Shanghai. The Purchase Agreement has an effective date of December 31,2006. Under

63

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

the terms of the Purchase Agreement, the Companyagreed to pay an aggregate amount of approximately $0.6 million (the “PurchasePrice”) in exchange for the right to use approximately 323,000 square feet ofland located in Shanghai, China, for a period of 50 years. AtApril 30, 2007, the cost of the land use right was temporarily recorded as“Prepaid expenses and other current assets” pending receipt of the formalCertificate of Ownership.

## ***Long-Lived Assets***

TheCompany reviews long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset might not berecoverable, and at least annually. When such an event occurs, the Companyestimates the future cash flows expected to result from the use of the assetand its eventual disposition. If the undiscounted expected future cash flowsare less than the carrying amount of the asset, an impairment loss isrecognized in order to write-down the carrying value of the asset to itsestimated fair market value. To date, the Company has not recognized anyimpairment losses.

## ***Inventories***

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

TheCompany records provisions to reduce the carrying value of inventories to theirnet realizable value when the Company believes that the net realizable value isless than cost. The Company also records allowances for the cost of inventorieswhen the number of units on hand exceeds the number of units that the Companyforecasts will be sold over a certain period of time, generally 12 months. Therecording of these allowances establishes new and lower cost basis forspecifically identified inventory items. The Company does not restore the costbases to their original levels despite subsequent changes in facts andcircumstances.

## ***Goodwill***

TheCompany records goodwill when the consideration paid for an acquisition exceedsthe fair value of net tangible and intangible assets acquired, includingrelated tax 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.

## ***Intangible AssetsOther than Goodwill***

TheCompany carries intangible assets other than goodwill at cost less accumulatedamortization. Intangible assets are generally amortized on a straight-linebasis over the estimated economic lives of the respective assets, generally twoto seven years. The Company reviews identifiable intangible assets other thangoodwill for impairment whenever events or changes in circumstances indicatethat the carrying amount of such assets may not be recoverable. Determinationof recoverability is based on an estimate of the undiscounted future cash flowsresulting from the use of the asset and its eventual disposition. Measurementof any impairment loss for long-lived assets and certain identifiableintangible assets that management expects to hold and use is based on theamount by which the carrying value exceeds the fair value of the asset.

## ***Warranty forDefective Products***

TheCompany warrants to its customers that its products will work in accordancewith their respective specifications. Due to the cost and other complexitiesassociated with rectifying any product defects, the Company does not repair anydefective products. If a product is defective, the customer notifies theCompany and, with the Company’s approval, returns the defective product. TheCompany then sends replacement products to the customer.

64

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

Accordingly, the Company accounts for any exposurerelated to defective products as a portion of its allowance for sales returns.

## ***Treasury Stock***

TheCompany accounts for treasury stock under the cost method and includes treasurystock as a component of stockholders’ equity.

## ***Revenue Recognition***

Forshipments to customers without agreements that allow for returns or credits,principally original equipment manufacturers (“OEMs”) and value added resellers(“VARs”), the Company recognizes revenue using the “sell-in” method. Under thismethod, the Company recognizes revenue upon the shipment of products to thecustomer provided that the Company has received a signed purchase order, theprice is fixed or determinable, title and risk of loss has transferred to thecustomer, collection of resulting receivables is considered reasonably assured,product returns are reasonably estimable, there are no customer acceptancerequirements and there are no remaining material obligations. At the time revenueis recognized, the Company provides for future returns of potentially defectiveproduct based on historical experience. For cash consideration given tocustomers for which the Company does not receive a separately identifiablebenefit or cannot reasonably estimate fair value, the Company records theamounts as reductions of revenue.

Forshipments to distributors under agreements allowing for returns or credits, theCompany recognizes revenue using the “sell-through” method under which theCompany defers revenue and the related costs of sale until the distributorresells the product to the Company’s end-user customer and the Company isnotified in writing by the distributor of such sale. The amount billed to thesedistributors less the cost of inventory shipped to but not yet sold by thedistributors is shown net on the consolidated balance sheets as deferredincome.

Inaddition, the Company recognizes revenue from the performance of services to alimited number of customers by its wholly-owned subsidiary, CDM Optics, Inc.,or CDM, and, through December 31, 2006, by its then consolidatedaffiliate, VisEra. (See Note 5.) 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. Until December 31, 2006, the Company recognizedVisEra’s service revenue from third party customers when the production servicesprovided by VisEra were complete and the product was shipped to the customer.

## ***Research,Development and Related***

Inaccordance with Statement of Financial Accounting Standards (“SFAS”)No. 2, *“Accounting for Research andDevelopment**Costs,”*theCompany recognizes the costs associated with the internal development ofintellectual property rights as expense when incurred. These costs includeexpenses associated with patent, copyright, trademark and trade secrets.

## ***Advertising***

All ofthe Company’s advertising costs are expensed as incurred.

## ***Income Taxes***

The Company accounts fordeferred income taxes using the liability method, under which the expectedfuture tax consequences of timing differences between the book and tax basis ofassets and liabilities are recognized as deferred tax assets and liabilities.Valuation allowances are established when necessary to reduce deferred taxassets when management estimates, based on available objective evidence, thatit is more likely than not that the benefit of deferred tax assets will not berealized.

 

65

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

## ***Stock-BasedCompensation***

EffectiveMay 1, 2006, the Company adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123 (revised 2004), *“Share-Based Payment,”* (“SFAS No. 123(R)”)which requires all share-based payments to employees, including grants ofemployee stock options and employee stock purchases under the 2000 EmployeeStock Purchase Plan (the “2000 Purchase Plan”), to be recognized in thefinancial statements based on their respective grant date fair values.SFAS No. 123(R) supersedes Accounting Principles Board (“APB”)Opinion No. 25, *“Accounting for StockIssued to Employees”* (“APB 25”) and related interpretations andeliminates the pro forma disclosures of SFAS No. 123, *“Accounting for Stock-Based Compensation”*(“SFAS No. 123”). In March 2005, the SEC issued SAB No. 107, “*Share-Based Payment*”**(“SAB 107”),which provides guidance regarding the interaction of SFAS No. 123(R) andcertain SEC rules and regulations. The Company has applied the provisionsof SAB 107 in its adoption of SFAS No. 123(R).

TheCompany adopted SFAS No. 123(R) using the modified prospectivemethod. The Company’s consolidated financial statements as of and for thefiscal year ended April 30, 2007 reflect the impact of adoptingSFAS No. 123(R). In accordance with the modified prospective method,the consolidated financial statements for prior periods have not been restatedto reflect, and do not include, the impact of SFAS No. 123(R). (SeeNote 13.)

UnderSFAS No. 123(R), stock-based compensation is measured at the grant date, basedon the fair value of the award using the Black-Scholes option pricing model (“Black-Scholes”),and is recognized as expense over the requisite service period of the award.The Company has chosen to recognize stock-based compensation expense using thestraight-line attribution method. Black-Scholes requires the use of highlysubjective, complex assumptions, including the expected term and the pricevolatility of the Company’s stock. SFAS No. 123(R) also requiresforfeiture rates to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from initialestimates. Stock-based compensation expense was recorded net of estimatedforfeitures for fiscal 2007 such that expense was recorded only for thosestock-based awards that are expected to vest. Previously under APB 25 tothe extent awards were forfeited prior to vesting, the corresponding previouslyrecognized expense was reversed in the period of forfeiture.

Inaccordance with Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”)No. FAS123(R)-3, *“Transition ElectionRelated to Accounting for Tax Effects of Share-based Payment Awards,”*asof April 30, 2007, the Company elected to use the long-form method toestablish the beginning balance of the additional paid-in capital pool (“APICPool”) related to the tax effects of employee stock-based awards granted priorto the adoption of SFAS No. 123(R).

TheCompany has also elected to use the “with and without” approach as described inEITF Topic No. D-32 in determining the order in which tax attributes areutilized.  As a result, the Company willrecognize a tax benefit from stock-based awards in additional paid-in capitalonly if an incremental tax benefit is realized after all other tax attributescurrently available to the Company have been utilized.  In addition, the Company has elected toaccount for the indirect effects of stock-based awards on other tax attributes,such as R&D tax credit, through the income statement.

Uponadoption of SFAS No. 123(R), the Company also chose to derecognize both the deferredtax assets pertaining to net operating loss and tax credit carryforwards thatrepresent excess tax benefits from stock-based awards and the offsettingvaluation allowance.

66

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

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

## ***Comprehensive Income***

Comprehensiveincome is defined as the change in the equity of a company during a period fromtransactions and other events and circumstances excluding transactionsresulting from investments by owners and distributions to owners. Comprehensiveincome for fiscal 2007, 2006 and 2005, was $26.2 million,$90.3 million and $76.4 million, respectively, and included netincome, unrealized losses from available-for-sale securities,change-of-interest benefits and translation gains (losses) from foreignsubsidiaries.

## ***Basic and DilutedNet Income (Loss) Per Share***

TheCompany computes net income (loss) per share in accordance with SFASNo. 128, *“Earnings per Share,”*underthe provisions of which basic income (loss) per share is computed by dividingthe income (loss) available to holders of common stock for the period by theweighted average number of shares of common stock outstanding during theperiod. The calculation of diluted income (loss) per share excludes potentialcommon stock if the effect of such stock is antidilutive. Potential commonstock consists of unvested common stock subject to repurchase and incrementalcommon shares issuable upon the exercise of stock options.

## ***Minority Interest***

Minorityinterest in the Company’s consolidated financial statements results from theaccounting for the acquisition of a noncontrolling interest in a consolidatedsubsidiary or affiliate. Minority interest represents a partially-ownedsubsidiary’s or consolidated affiliate’s income, losses, and components ofother comprehensive income which should be attributed to the controlling andnoncontrolling interests or other parties with a right or obligation thataffects the attribution of comprehensive income or loss, on the basis of theircontractual rights or obligations, if any, otherwise, on the basis of ownershipinterests. In fiscal 2007, approximately $267,000 represents the 54.6%interest that the Company did not own in the net income of SOI andapproximately $5.5 million represents the 52.9% interest that the Companydid not own in the net income of VisEra. In fiscal 2006, approximately$1.4 million represents the 51.0% interest that the Company did not own inthe net income of SOI and approximately $2.0 million represents the 54.4%interest that the Company did not own in the net income of VisEra. There was nominority interest in fiscal 2005.

## ***Recent AccountingPronouncements***

InJune 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) *“Accounting for Uncertainty in Income Taxes—anInterpretation of FASB Statement No. 109.”* FIN 48 requiresthat the Company recognize in the consolidated financial statements the impactof a tax position that, based on the technical merits of the position, is morelikely than not to be sustained upon examination. The evaluation of a taxposition in accordance with this interpretation is a two-step process. In thefirst step, recognition, the Company determines whether it ismore-likely-than-not that a tax position will be sustained upon examination,including resolution of any related appeals or litigation processes, based onthe technical merits of the position. The second step addresses measurement ofa tax position that meets the more-likely-than-not criterion. The tax positionis measured at the largest amount of benefit that has a greater than50 percent likelihood of being realized upon ultimate settlement. Taxpositions that previously failed to meet the more-likely-than-not recognitionthreshold will be recognized in the first subsequent financial reporting periodin which that threshold is met. Previously recognized tax positions that nolonger meet the more-

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

likely-than-not recognition threshold will bederecognized in the first subsequent financial reporting period in which thatthreshold is no longer met. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The differences between the amounts recognized inthe consolidated financial statements prior to the adoption of FIN 48 andthe amounts reported after adoption will be accounted for as acumulative-effect adjustment recorded to the beginning balance of retainedearnings. The Company is currently evaluating the impact FIN 48 will haveon its financial position, results of operations or cash flows. Based on itspreliminary analysis, the Company expects a substantial portion of its accruedincome taxes payable balance of $61.6 million as of April 30, 2007 tobe reclassified in fiscal 2008 as a non-current liability. In addition,the adoption of FIN 48 may result in greater volatility in the Company’sfuture effective tax rates.

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards No. 157, “*Fair ValueMeasurements’’*(“SFAS No. 157”), which defines fair value,establishes guidelines for measuring fair value and expands the requisitedisclosures for fair value measurements. SFAS No. 157 does notrequire any new fair value measurements but rather establishes a commondefinition of fair value to be used throughout generally accepted accountingprinciples. SFAS No. 157 is effective in fiscal years beginning afterNovember 15, 2007 and is required to be adopted by the Company in thefirst quarter of fiscal 2009. The Company’s adoption of the provisions ofSFAS No. 157 is not expected to have a material effect on itsfinancial condition, results of operations or cash flows.

InFebruary 2007, the FASB issued SFAS No. 159, *“The Fair Value Option for Financial Assets and Financial Liabilities,”*(“SFAS No. 159”) which permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accounting provisions.SFAS No. 159 also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choosedifferent measurement attributes for similar types of assets and liabilities.SFAS No. 159 does not affect any existing accounting literature thatrequires certain assets and liabilities to be carried at fair value.SFAS No. 159 does not establish requirements for recognizing andmeasuring dividend income, interest income, or interest expense. This Statementdoes not eliminate disclosure requirements included in other accountingstandards. SFAS No. 159 is effective in fiscal years beginning afterNovember 15, 2007 and is required to be adopted by the Company in thefirst quarter of fiscal 2009. The Company is currently evaluating theimpact SFAS No. 159 may have on its financial position, results ofoperations or cash flows.

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

**Note 3 — Short-TermInvestments**

Available-for-sale securities at April 30, 2007and 2006 were as follows (in thousands):
|                                                                      | ** ** | **As of April 30, 2007** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                           | ** ** | **Amortized**                                | ** ** | **Gross  Unrealized** | ** ** | **Gross  Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                           | ** ** | **Cost**                                     | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                                                           | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Certificates of  deposit                                             |       | $                                            | 3,332      |   | $ | — |   | $ | — |   | $ | 3,332 |   |
| U.S. government  debt securities with maturities less than one  year |       | 3,000                                        |       | — |   | — |   | 3,000 |   |
| U.S. government  debt securities with maturities over one year       |       | 10,034                                       |       | — |   | (12 | ) | 10,022 |   |
| Municipal bonds  and notes                                           |       | 70,521                                       |       | — |   | (23 | ) | 70,498 |   |
| Commercial paper  and bond funds                                     |       | 27,623                                       |       | — |   | (43 | ) | 27,580 |   |
|                                                                 |       | $                                            | 114,510    |   | $ | — |   | $ | (78 | ) | $ | 114,432 |   |
|                                                                 |       |                                         |       |   |   |   |   |   |   |
| Contractual  maturity dates, less than one year                      |       |                                         |       |   |   |   |   | $ | 20,130 |   |
| Contractual  maturity dates, one year to two years                   |       |                                         |       |   |   |   |   | 46,602 |   |
| Contractual  maturity dates, two years to 39 years(1)                |       |                                         |       |   |   |   |   | 47,700 |   |
|                                                                 |       |                                         |       |   |   |   |   | $ | 114,432 |   |

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

 

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

(2)    Representsvariable rate demand notes, which have a final maturity date of up to 34 yearsbut whose interest rate is reset at varying intervals typically between one andseven days.

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

**Note 4** — **Balance Sheet Accounts (in thousands)**

|                                                         | ** ** | **April 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|
| ** **                                              | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Cash and cash  equivalents:                             |       |               |       |   |   |
| Cash                                                    |       | $                  | 18,274     |   | $ | 8,597 |   |
| Money market funds and certificates of deposit          |       | 89,020             |       | 197,030 |   |
| Commercial paper and government bonds                   |       | 83,584             |       | 34,600 |   |
|                                                    |       | $                  | 190,878    |   | $ | 240,227 |   |
| Accounts receivable,  net:                              |       |               |       |   |   |
| Accounts receivable                                     |       | $                  | 72,113     |   | $ | 73,412 |   |
| Less:    Allowance for doubtful accounts |       | (980               | )          | (1,067 | ) |
| Allowance for sales returns                             |       | (5,467             | )          | (6,429 | ) |
|                                                    |       | $                  | 65,666     |   | $ | 65,916 |   |
| Inventories:                                            |       |               |       |   |   |
| Work in progress                                        |       | $                  | 64,159     |   | $ | 34,310 |   |
| Finished goods                                          |       | 55,504             |       | 20,663 |   |
|                                                    |       | $                  | 119,663    |   | $ | 54,973 |   |
| Prepaid expenses and  other current assets:             |       |               |       |   |   |
| Prepaid expenses                                        |       | $                  | 2,967      |   | $ | 2,758 |   |
| Deposits and other                                      |       | 4,693              |       | 4,556 |   |
| Interest receivable                                     |       | 1,057              |       | 1,844 |   |
|                                                    |       | $                  | 8,717      |   | $ | 9,158 |   |
| Property, plant and  equipment, net:                    |       |               |       |   |   |
| Land(1)                                                 |       | $                  | 26,074     |   | $ | — |   |
| Buildings and land use right                            |       | 7,612              |       | 7,163 |   |
| Buildings/leasehold improvements                        |       | 4,666              |       | 2,702 |   |
| Machinery and equipment(2)                              |       | 19,745             |       | 34,185 |   |
| Furniture and fixtures                                  |       | 718                |       | 713 |   |
| Software                                                |       | 2,546              |       | 2,280 |   |
| Construction in progress                                |       | 17,496             |       | 3,248 |   |
|                                                    |       | 78,857             |       | 50,291 |   |
| Less:  Accumulated depreciation and amortization        |       | (14,494            | )          | (12,281 | ) |
|                                                    |       | $                  | 64,363     |   | $ | 38,010 |   |
| Other long-term assets:                                 |       |               |       |   |   |
| Deferred income taxes – noncurrent                 |       | $                  | 6,869      |   | $ | 179 |   |
| Prepaid wafer credits                                   |       | 4,000              |       | — |   |
| Long-term employee loan receivable                      |       | 1,000              |       | — |   |
| Other long-term assets                                  |       | 800                |       | 3,010 |   |
|                                                    |       | $                  | 12,669     |   | $ | 3,189 |   |
| Accrued expenses and  other current liabilities:        |       |               |       |   |   |
| Employee compensation                                   |       | $                  | 4,713      |   | $ | 5,301 |   |
| Third party commissions                                 |       | 1,021              |       | 1,876 |   |
| Acquisition costs                                       |       | —             |       | 2,095 |   |
| Professional services                                   |       | 1,830              |       | 2,494 |   |
| Noncancelable purchase commitments                      |       | 906                |       | 2,627 |   |
| Pricing adjustments                                     |       | 4,022              |       | 3,968 |   |
| Other                                                   |       | 5,032              |       | 2,990 |   |
|                                                    |       | $                  | 17,524     |   | $ | 21,351 |   |
| Other long-term  liabilities:                           |       |               |       |   |   |
| Deferred tax liabilities                                |       | $                  | 6,506      |   | $ | 4,033 |   |
| Other                                                   |       | 492                |       | — |   |
|                                                    |       | $                  | 6,998      |   | $ | 4,033 |   |

 

----

(1)    The Company acquired fourbuildings and land in Santa Clara County, California, in March 2007, andallocated $26.1 million of the purchase price to Land. (See Note 9.)

(2)    Thedeconsolidation of VisEra effective January 1, 2007 reduced machinery andequipment by approximately $53.7 million. (See Note 5.)

70

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

**Note 5 — Long-TermInvestments**

Long-term investments as of April 30, 2007 and2006 consisted of the following (in thousands):

|            | ** ** | **April 30,** | ** ** |
|------------|------------|--------------------|------------|
| ** ** | ** ** | **2007**           | ** ** | **2006** | ** ** |
|       |       |               |       |   |   |
| ImPac      |       | $                  | 2,355      |   | $ | 2,130 |   |
| VisEra     |       | 60,265             |       | — |   |
| XinTec     |       | 4,661              |       | 16,543 |   |
| Total      |       | $                  | 67,281     |   | $ | 18,673 |   |

 

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

In2003, in order to enhance its access to plastic and ceramic packaging servicesthat were in short supply, the Company purchased approximately 27% of thecommon stock of ImPac Technology Co., Ltd. (“ImPac”), a privately-held companybased in Taiwan for a total of $2.0 million in cash. InDecember 2003, the Company made an additional cash contribution ofapproximately $0.8 million to maintain its equity ownership percentage inImPac. Unrelated third parties own the balance of ImPac’s equity. Duringfiscal 2004, the Company’s equity interest declined to approximately 23%due to additional rounds of financing obtained by ImPac in which the Companydid not participate. The Company’s purchases from ImPac are at arm’s length andthe Company accounts for this investment using the equity method. The Companyrecorded equity income of $225,000 and $14,000 in “Other income (expense), net”for its portion of the net income in fiscal 2007 and 2006, respectively,recorded by ImPac. For fiscal 2005, the Company recorded an equity loss of$0.6 million in “Other income (expense), net”, as its portion of the netloss of ImPac. (See Note 18.)

## ***VisEra TechnologiesCompany, Ltd.***

InAugust 2005, the Company entered into an Amended and Restated Shareholders’Agreement (the “Amended VisEra Agreement”) with TSMC, VisEra, and 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 manufacturingservices and automated final testing services related to complementary metaloxide semiconductor, or CMOS, image sensors. In November 2003, pursuant tothe terms of the original Shareholders’ Agreement, the Company contributed$1.5 million in cash to VisEra and granted a non-exclusive license tocertain of its manufacturing and automated final testing technologies andpatents. In order to provide greater financial and fiscal flexibility toVisEra, in connection with the Amended VisEra Agreement, the parties formedVisEra Cayman, a company incorporated in the Cayman Islands and VisEra became asubsidiary of VisEra Cayman.

Underthe terms of the Amended VisEra Agreement, the parties reaffirmed theirrespective commitments to VisEra, and expanded the scope of and made certainmodifications to the original Shareholders’ Agreement. In particular, theparties agreed to raise the total capital committed to the joint venture from$50.0 million to $68.0 million, which commitments may be met ordischarged in the form of cash or asset contributions. The Company and TSMChave equal interests in VisEra Cayman. In the quarter ended October 31,2005, the Company contributed $7.5 million to VisEra Cayman. At a futuredate yet to be determined, the Company expects to contribute certain of itsassets to the joint venture, including technology and plant and equipmentcurrently owned by it or to be purchased with funds for existing commercialcommitments. To the extent, if any, that the value of the assets contributed bythe Company exceeds the balance of the Company’s commitment, the Company willreceive cash from VisEra Cayman.

As aresult of the additional investment that the Company and TSMC made in VisEraduring the quarter ended October 31, 2005, the Company’s and TSMC’sinterest each increased from 25% to 43%, and consequently the Companyre-evaluated its accounting for VisEra in accordance with FIN 46(R). TheCompany concluded that, as a result of its step acquisition of VisEra, andbecause substantially all of the activities of VisEra either involved or wereconducted on behalf of the Company, VisEra was a variable interest entity.Since the Company was the source

71

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

of virtually all of VisEra’s revenues, the Company hada decisive influence over VisEra’s profitability. In the quarter endedJanuary 2006, the Company increased its interest in VisEra from 43% to 46%through purchases of $9.5 million of unissued shares. Accordingly, theCompany considered itself to be the primary beneficiary of VisEra, and includedVisEra’s financial results in its consolidated financial statements throughDecember 31, 2006.

InJanuary 2006, in accordance with the Amended VisEra Agreement, VisEra purchasedcolor filter processing equipment and related assets from TSMC for an aggregateprice equivalent to $16.9 million. In connection with the purchase, VisEraentered into a three-year lease agreement with TSMC. Under this agreement,VisEra leases from TSMC approximately 14,000 square feet of factory and officespace where the assets are located at an annual cost of approximately$2.4 million.

In May2006, VisEra purchased certain equipment and intellectual property from DaiNippon Printing Co., Ltd., or Dai Nippon, for approximately $3.1 million.Dai Nippon 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 in VisEra.

OnJanuary 1, 2007, the Company assumed responsibility for logisticsmanagement services previously provided to the Company by VisEra. As aconsequence of the change, the Company concluded that, as of the date of thechange, it would lose its status as the primary beneficiary of the jointventure, VisEra would cease to be VIE as defined under FIN 46(R), andthat, as a result, the Company was required to deconsolidate VisEra.Accordingly, beginning on January 1, 2007, the Company accounted for itsinvestment in VisEra under the equity method. The deconsolidation of VisEra didnot have a material effect on the Company’s reported revenue or reported netincome for the fiscal year ended April 30, 2007. In April 2007, pursuantto a January 2007 amendment to the Amended VisEra Agreement that provided foran increase in VisEra’s manufacturing capacity, the Company and TSMC each madean additional investment of $27.0 million. This additional investment ispart of an ongoing capacity expansion program at VisEra. Through April 30,2007, the Company has contributed $51.6 million to VisEra and VisEraCayman.

Allother material terms of the original Shareholders’ Agreement remain in effect.(See Note 17.)

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

BetweenOctober 2005 and March 2006, pursuant to the terms of the AmendedVisEra Agreement (as defined below), VisEra Cayman completed the acquisition ofapproximately 29.6% of the issued and outstanding shares of XinTec, Inc. (“XinTec”),a Taiwan-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, the Company began to account for its investment inXinTec under the equity method.

InJanuary 2007, TSMC purchased approximately 90.5 millionpreviously-unissued shares from XinTec. The purchased shares representedapproximately a 43.0% ownership interest in XinTec. Because the per share valueof the TSMC investment exceeded the Company’s average per share carrying valuein XinTec, the Company recorded a one-time change-of-interest benefit of$1.2 million directly to “Additional paid-in capital,” a component ofstockholders’ equity. Other existing shareholders, including the Company andthe Company’s affiliate, VisEra, did not purchase additional shares.Consequently, the Company’s direct ownership percentage in XinTec declined toapproximately 4.4%. VisEra’s ownership interest declined to 16.9%, and theCompany’s beneficial ownership percentage in XinTec declined to 12.4%.Consequently, in accordance with APB Opinion No. 18, *“The EquityMethod of Accounting For Investments in Common Stocks,”* (“APB 18”),the Company began to account for XinTec as a cost method investment effectiveJanuary 1, 2007.

Beginningin the three months ended October 31, 2005 and through December 31,2006, the Company accounted for its investment in XinTec under the equitymethod. For fiscal 2007 and 2006, the Company recorded

72

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

equity income of $1.7 million and $1.3 million,respectively, in “Other income (expense), net.” Prior to October 2005, theCompany recorded its investment in XinTec under the cost method.

InAugust 2006, the Company entered into an Equipment Procurement Agreement(the “Equipment Agreement”) with XinTec. Under the Equipment Agreement, XinTecagreed to provide chip-scale packaging services to the Company, and the Companyagreed to procure, through XinTec, up to $50.0 million of certainequipment to be located at XinTec’s facilities for the sole purpose ofproviding such chip-scale packaging services to the Company. InJanuary 2007, OmniVision and XinTec mutually determined that, as a resultof the acquisition by TSMC of a controlling interest in XinTec, it was in eachcompany’s best interest to terminate the Equipment Agreement, and for XinTec toown and operate the capital equipment which, as of January 1, 2007,was in place and operational in the same manner as it operates its existingequipment. Pursuant to the agreement between the Company and XinTec toterminate the Equipment Agreement, XinTec refunded to the Company approximately$32.0 million, representing all funds previously remitted by the Companyto XinTec for the purpose of the equipment purchase contemplated by theEquipment Agreement, plus interest accrued thereon. The deposits made to XinTecpursuant to the original Equipment Agreement, and the refund upon thetermination of the agreement, are presented in the “Cash flows from investingactivities” section of Consolidated Statements of Cash Flows forfiscal 2007.

Thefollowing table presents the summary combined financial information of ImPacand VisEra, as derived from the ImPac and VisEra financial statements for thefiscal year ended April 30, 2007, 2006 and 2005 and as of April 30,2007 and 2006 (in thousands):
|                               | ** ** | **Year Ended April 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                    | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***Operating  data:***        |       |                                    |       |   |   |   |   |
| Revenues                      |       | $                                       | 179,584    |   | $ | 115,192 |   | $ | 78,570 |   |
| Gross profit                  |       | 30,936                                  |       | 10,153 |   | 4,215 |   |
| Income (loss) from operations |       | 21,701                                  |       | 1,979 |   | (110 | ) |
| Net income  (loss)            |       | 14,315                                  |       | 2,130 |   | (1,209 | ) |
|                          |       |                                    |       |   |   |   |   |
| ** **                    | ** ** | **April 30,**                      | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **2007**                                | ** ** | **2006** | ** ** | ** ** | ** ** |
| ***Balance  sheet data:***    |       |                                    |       |   |   |   |   |
| Current assets                |       | $                                       | 98,557     |   | $ | 39,178 |   |   |   |
| Long-term assets              |       | 94,158                                  |       | 43,657 |   |   |   |
| Current liabilities           |       | 49,902                                  |       | 27,112 |   |   |   |
| Long-term  liabilities        |       | 729                                     |       | 1,118 |   |   |   |
|                               |            |                                         |            |  |  |  |  |  |  |  |

 

Thesummarized financial information for the twelve months ended April 30,2006 and 2005 was derived from financial statements prepared under Taiwanesegenerally accepted accounting principles. The differences between United Statesand Taiwanese generally accepted accounting principles did not materiallyimpact the amounts reflected in the Company’s financial statements.

Theamount of consolidated retained earnings that represented undistributedearnings of investees accounted for by the equity method totaled$6.8 million and $298,000 at April 30, 2007 and 2006, respectively.

**Note 6 — ConsolidatedAffiliate**

## ***Silicon Optronics,Inc.***

In May2004, the Company entered into an agreement with Powerchip SemiconductorCorporation (“PSC”), a Taiwan based company that produces memory chips and alsoprovides semiconductor foundry services to fabless companies, to establish ajoint venture in Taiwan. The purpose of the joint venture, Silicon Optronics,Inc.,  or SOI, is to conductmanufacturing, marketing and selling of certain of the Company’s legacyproducts. The Company contributed approximately $2.1 million to SOI inexchange for an ownership percentage of 49.0%. In March 2005,

73

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

the Company assumed control of the board of directorsof SOI and the Company has consolidated SOI since April 30, 2005.

InJuly 2006, SOI declared a cash dividend of $482,000, of which the Companyreceived $237,000 when the cash dividend was paid in August 2006. SOI alsoissued in July 2006, shares to its employees with an estimated fair valueof $459,000 which caused the Company’s ownership percentage to decline from49.0% to 46.6%.

InApril 2007, SOI became listed on the Taiwan GreTai Securities Market, (“TGSM”).The TGSM is the approximate equivalent in Taiwan of the Over-The-Counter marketin the United States. In conjunction with the TGSM listing, various employeesof SOI exercised their options and increased the number of shares outstanding,which caused the Company’s ownership percentage to decline to 45.4% as ofApril 30, 2007. (See Note 18.)

**Note 7** — **Acquisition of CDM Optics, Inc.**

InApril 2005, the Company acquired all of the outstanding common stock ofprivately-held CDM. CDM is the exclusive licensee from an affiliate of theUniversity of Colorado of a technology known as Wavefront CodingTM technology.The closing consideration consisted of $10.0 million in cash andapproximately 515,000 shares of OmniVision common stock, representing $10.0million at an agreed valuation of $19.42 per share. Approximately 147,000 ofthese shares were retained as security for certain indemnities given by thesellers.

Underthe terms of the agreement, upon the date of the sale of a predetermined numberof revenue-producing products, or April 18, 2007, whichever came earlier,the holders of the approximate 515,000 shares had the right to put the sharesto the Company at $19.42 per share; unless, prior to the exercise of the putoption, the Company’s common stock closed above a price of $19.42 per share fora period of ten consecutive trading days, in which case the put right wouldterminate. On December 15, 2005, the Company’s common stock closed above$19.42 for the tenth consecutive day and the put right terminated.  In fiscal 2007, the Company subsequentlyissued the 147,000 escrow shares to the original shareholders. The escrowshares were puttable back to the Company at a premium and 145,000 shares wereput to the Company for cash totaling $2.8 million. The Company is alsoobligated to pay an additional $10.0 million in cash upon the sale, priorto the end of April 2009, of a pre-determined number of revenue-producingproducts incorporating CDM’s technology.

CDMand the costs associated with the acquisition are included in the consolidatedbalance sheets at April 30, 2007 and 2006. CDM’s results of operations havebeen included in the Company’s consolidated financial statements commencing infiscal 2006. (See Note 8.)

74

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

In accordance with SFAS No. 141, *“Business Combinations,”* the Companyallocated the purchase price to tangible assets, intangible assets andliabilities based on their estimated fair values. The excess purchase priceover the fair values was recorded as goodwill. The fair value assigned tointangible assets acquired was based on estimates and assumptions determined bymanagement. In accordance with SFAS No. 142, *“Goodwill and Other Intangible Assets,”*goodwill and purchased intangibles with indefinite lives acquired afterJune 30, 2001 are not amortized but reviewed periodically for impairment.Purchased intangibles with finite lives are amortized on a straight-line basisover their respective useful lives. The purchase consideration has beenallocated as follows, based on the estimated fair value of asset acquired andliabilities assumed (in thousands):

|                                                     | ** ** | **Fair  Value** | ** ** | ** **               | ** ** |
|-----------------------------------------------------|------------|-----------------|------------|--------------------------|------------|
| Purchase consideration:                        |       |            |       |                     |       |
| Cash                                                |       | $               | 13,000     |                     |       |   |
| OmniVision common stock and limited price guarantee |       | 9,246           |       |                     |       |
| Acquisition costs                                   |       | 729             |       |                     |       |
| Total purchase consideration                        |       | $               | 22,975     |                     |       |   |
|                                                |       |            |       |                     |       |
| ** **                                          | ** ** | **Fair  Value** | ** ** | **Amortization  Period** | ** ** |
| Allocation:                                         |       |            |       |                     |       |
| Property, plant and equipment                       |       | $               | 97         |                     |       |   |
| Core technology                                     |       | 17,800          |       | 5 years             |       |
| Patents                                             |       | 5,800           |       | 5 years             |       |
| Trademarks and tradenames                           |       | 1,400           |       | 5 years             |       |
| Customer contracts and related relationships        |       | 100             |       | 3 years             |       |
| Goodwill                                            |       | 7,541           |       |                     |       |
| Current liabilities, net                            |       | (416            | )          |                     |       |
| Deferred tax liability                              |       | (9,347          | )          |                     |       |
| Total                                               |       | $               | 22,975     |                     |       |   |

 

In performing the purchase price allocation, theCompany considered, among other factors, its intention for future use of theacquired assets, analyses of historical financial performance and estimates offuture performance of CDM’s products. The fair values of intangible assets wereestimated using the income approach for core technology, patents, trademarksand tradenames and customer relationships. The net cash flows were discountedto their present values based on an estimated weighted-average cost of capitalof 25%. This discount rate was determined after consideration of the requiredweighted average return on debt and invested capital and the risk associatedwith achieving forecasted sales related to the technology and assets acquiredfrom CDM.

Goodwill represents the excess of the purchase priceof CDM over the fair value of net tangible and intangible assets acquired afterthe provision for the deferred tax liability, which represents the differencebetween the book and tax basis of the intangibles acquired.

The goodwill is not expected to be deductible for taxpurposes. (See Note 8.)

75

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

The following unaudited pro forma financialinformation combines the consolidated results of operations as if theacquisition of CDM had occurred as of the beginning of the periods presented.Pro forma adjustments include only the effects of events directly attributed totransactions that are factually supportable and expected to have a continuingimpact. The pro forma results contained in the table below (in thousands,except per share amounts) include pro forma adjustments for amortization ofacquired intangibles, of $4.9 million for fiscal 2005:
|                                             | ** ** | **Year Ended  April 30,  2005** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                | ** ** |
| Revenues                                    |       | $                                         | 390,159    |   |
| Net income                                  |       | $                                         | 72,638     |   |
| Net income per common share – basic    |       | $                                         | 1.27       |   |
| Net income per  common share – diluted |       | $                                         | 1.17       |   |

 

**Note 8 **— **Intangible Assets and Goodwill**

In September 2004, the Company purchased certainintellectual property rights that have been recorded in Other long-term assets.In April 2005, the Company acquired all of the outstanding common stock ofprivately-held CDM. (See Note 7.) In fiscal 2006, the Companypurchased approximately $5.5 million of intangible assets, consisting of a$4.0 million licensing fee in connection with the use of a CMOS patent anda $1.5 million licensing fee paid by VisEra to TSMC in accordance with theprovisions of the Amended VisEra Agreement.

Intangibleassets as of April 30, 2007 consist of the following (in thousands):
|                            | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|----------------------------|------------|----------|------------|-------------------------------|------------|--------------------------|------------|
| Core technology            |       | $        | 17,800     |                          | $          | 7,120                    |       | $ | 10,680 |   |
| Patents and  licenses      |       | 13,460   |       | 4,520                         |       | 8,940                    |       |
| Trademarks and  tradenames |       | 1,400    |       | 560                           |       | 840                      |       |
| Customer  relationships    |       | 100      |       | 67                            |       | 33                       |       |
| Intangible  assets, net    |       | $        | 32,760     |                          | $          | 12,267                   |       | $ | 20,493 |   |

 

Intangible assets as of April 30, 2006 consist ofthe following (in thousands):
|                            | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|----------------------------|------------|----------|------------|-------------------------------|------------|--------------------------|------------|
| Core technology            |       | $        | 17,800     |                          | $          | 3,560                    |       | $ | 14,240 |   |
| Patents and  licenses      |       | 11,260   |       | 1,865                         |       | 9,395                    |       |
| Other intangible  assets   |       | 1,525    |       | 102                           |       | 1,423                    |       |
| Trademarks and  tradenames |       | 1,400    |       | 280                           |       | 1,120                    |       |
| Customer  relationships    |       | 100      |       | 33                            |       | 67                       |       |
| Intangible  assets, net    |       | $        | 32,085     |                          | $          | 5,840                    |       | $ | 26,245 |   |

 

During fiscal 2007 and 2006, the Company recorded$6.8 million and $5.7 million, respectively, in total amortizationexpense of intangible assets. The total expected future annual amortization ofthese intangible assets are as follows (in thousands):
| Years Ended April 30, | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| 2008                                 |       | $          | 6,565      |   |
| 2009                                 |       | 6,532      |       |
| 2010                                 |       | 6,386      |       |
| 2011                                 |       | 973        |       |
| 2012                                 |       | 37         |       |
| Total                                |       | $          | 20,493     |   |

 

76

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

The following table shows the activity recorded to “Goodwill”during fiscal 2007 (in thousands):
|                                                                               | ** ** | **   Goodwill   ** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Balance at April 30, 2006                                                |       | $                                                | 4,892      |   |
| Increase in goodwill associated with CDM acquisition  in fiscal 2005 (1) |       | 2,649                                            |       |
| Balance at  April 30, 2007                                               |       | $                                                | 7,541      |   |

----

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

**Note 9 — BorrowingArrangements**

Thefollowing table shows the Company’s debt and lease obligations (in thousands):

|                                        | ** ** | **April 30,** | ** ** |
|----------------------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **2007**           | ** ** | **2006** | ** ** |
|                                   |       |               |       |   |   |
| Mortgage loan                          |       | $                  | 27,927     |   | $ | — |   |
| Capital lease obligations              |       | 280                |       | 460 |   |
|                                   |       | 28,207             |       | 460 |   |
| Less: amount due within one year       |       | (631               | )          | (152 | ) |
| Non-current  portion of long-term debt |       | $                  | 27,576     |   | $ | 308 |   |

 

At April 30, 2007, aggregate debt maturities wereas follows: (in thousands):
| Years Ended April 30, | ** ** | **Mortgage  Loan** | ** ** | **Capital  Lease** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|--------------------|------------|--------------------|------------|-----------|------------|
| 2008                                 |       | $                  | 485        |               | $          | 146       |       | $ | 631 |   |
| 2009                                 |       | 515                |       | 134                |       | 649       |       |
| 2010                                 |       | 548                |       | —             |       | 548       |       |
| 2011                                 |       | 583                |       | —             |       | 583       |       |
| 2012                                 |       | 620                |       | —             |       | 620       |       |
| Thereafter                           |       | 25,176             |       | —             |       | 25,176    |       |
| Total                                |       | $                  | 27,927     |               | $          | 280       |       | $ | 28,207 |   |

 

## ***Mortgage Loan***

OnMarch 16,  2007, the Company entered into a Loan and SecurityAgreement with a domestic bank. The Loan and Security Agreement provides for aterm mortgage loan in the principal amount of $27.9 million (the “MortgageLoan”) and a secured line of credit with an aggregate maximum principal amountof up to $12.0 million (the “Term Loan”). Borrowings under the Mortgageloan accrue interest at the London Interbank Borrowing Rate (“LIBOR”) rate plus90 basis points. Borrowings under the Term loan accrue interest at theLIBOR rate plus 125 basis points. The Mortgage and Term Loans mature onMarch 31, 2017 and September 30, 2012, respectively.

In order to secure the obligations and duties of theCompany under the Loan and Security Agreement, the Company granted to the banka security interest in the following assets:

·                      allpresently existing and later acquired collateral relating to a complex of fourbuildings in Santa Clara County, California, totaling approximately 207,000square feet (collectively, the “Santa Clara Property”), including, but notlimited to, goods, equipment, inventory, contract rights, rents, royalties, andfinancial assets; and

77

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

·                         sixty-fivepercent of the issued and outstanding shares of capital stock of OmniVisionInternational Holdings Ltd, a wholly-owned subsidiary of the Company.

TheLoan and Security Agreement requires the Company to comply on a periodic basiswith certain affirmative covenants including, but not limited to, meetingcertain minimum financial standards, as well as certain negative covenants. TheCompany has the right to repay the Mortgage Loan at any time prior to itsmaturity.

As ofApril 30, 2007, the entire $27.9 million amount of the Mortgage Loanwas outstanding for purposes of completing the purchase of the Santa ClaraProperty. At April 30, 2007, the interest rate under the Mortgage Loan was6.2%. The Company was in compliance with the financial covenants of the Loanand Security agreement as of April 30, 2007.

Concurrentwith the Mortgage Loan, the Company also entered into an interest rate swapwith the bank to help manage interest rate risk. The swap is for a period often years, and the notional amount of the swap approximates the principaloutstanding under the Mortgage Loan. The Company is the fixed rate payer underthe swap with a fixed rate of 5.27% per annum. The Company measures the swap atfair value and records it as either an asset or a liability, depending onwhether the fair value is a net gain or net loss to the Company. As ofApril 30, 2007, the Company recorded $492,000 in “Other long-termliabilities” and an expense of $492,000 in “Other income (expense), net.”

## ***Line of Credit atSOI***

SOImaintains four unsecured lines of credit with three commercial banks, whichprovide a total of approximately $3.4 million in available credit. Allborrowings under the four lines of credit maintained by SOI bear interest atthe market interest rate prevailing at the time of borrowing. There are nofinancial covenant requirements for these facilities and at April 30,2007, there were no borrowings outstanding under these facilities.

## ***Capital LeaseObligations***

InFebruary 2006, the Company leased telecommunications equipment under athree-year capital lease at an imputed interest rate of 7.5% per annum. Termsof the agreement require the Company to make monthly payments of approximately$14,000 through February 2009. Accordingly, the Company recorded a capitalasset for $393,000 that is being depreciated over a five-year period inaccordance with the Company’s capitalization policy. As of April 30, 2007and 2006, $280,000 and $460,000, respectively, were outstanding under thecapital lease. As of April 30, 2007 and 2006, $134,000 and $308,000,respectively, was classified as a long-term obligation.

**Note 10** — **Income Taxes**

The provision for income taxes consists of thefollowing (in thousands):
|                 | ** **   | **Year Ended April 30,** | ** **   |
|-----------------|--------------|-----------------------------------------|--------------|
| ** **      | ** **   | **2007**                                | ** **   | **2006** | ** ** | **2005** | ** ** |
|            |         |                                    |         |   |   |   |   |
| ***Current:***  | *** *** | *** ***                            | *** *** | *** *** | *** *** | *** *** | *** *** |
| Federal         |         | $                                       | 3,680        |   | $ | 13,761 |   | $ | 16,764 |   |
| State           |         | 2                                       |         | 3 |   | 1 |   |
| Foreign         |         | 12,167                                  |         | 11,351 |   | 11,591 |   |
| Total current   |         | 15,849                                  |         | 25,115 |   | 28,356 |   |
|            |         |                                    |         |   |   |   |   |
| ***Deferred:*** |         |                                    |         |   |   |   |   |
| Federal         |         | (5,916                                  | )            | (939 | ) | 1,879 |   |
| State           |         | (616                                    | )            | (914 | ) | (529 | ) |
| Foreign         |         | 75                                      |         | (129 | ) | — |   |
| Total deferred  |         | (6,457                                  | )            | (1,982 | ) | 1,350 |   |
| Total provision |         | $                                       | 9,392        |   | $ | 23,133 |   | $ | 29,706 |   |

 

78

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

Incomebefore provision for income taxes consisted of (in thousands):
|               | ** ** | **Year Ended April 30,** | ** ** |
|---------------|------------|-----------------------------------------|------------|
| ** **    | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|          |       |                                    |       |   |   |   |   |
| United States |       | $                                       | (30,282    | ) | $ | 3,375 |   | $ | 19,563 |   |
| International |       | 69,400                                  |       | 112,291 |   | 86,530 |   |
| Total         |       | $                                       | 39,118     |   | $ | 115,666 |   | $ | 106,093 |   |

 

The provision for income taxes differs from the amountcomputed by applying the federal income tax rate of 35% to pretax income fromoperations as a result of the following (in thousands):
|                                                      | ** ** | **Year Ended April 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                | ** ** | **2006(1)** | ** ** | **2005(1)** | ** ** |
|                                                 |       |                                    |       |   |   |   |   |
| Statutory federal income tax                         |       | $                                       | 13,692     |   | $ | 40,483 |   | $ | 37,133 |   |
| State income tax benefit, net of federal tax benefit |       | (615                                    | )          | (592 | ) | (343 | ) |
| Foreign rate differential                            |       | (7,111                                  | )          | (14,846 | ) | (5,426 | ) |
| Non-deductible stock-based compensation              |       | 7,012                                   |       | (34 | ) | 7 |   |
| Tax credits                                          |       | (3,140                                  | )          | (907 | ) | (1,235 | ) |
| Other                                                |       | (446                                    | )          | (971 | ) | (430 | ) |
| Tax provision                                        |       | $                                       | 9,392      |   | $ | 23,133 |   | $ | 29,706 |   |

 

----

(1)          Certain reclassifications have been made toprior year amounts in order to conform to the current year presentation.

Thecomponents of deferred tax assets (liabilities) included in the consolidatedbalance sheets are (in thousands):
|                                       | ** ** | **April 30,** | ** ** |
|---------------------------------------|------------|--------------------|------------|
| ** **                            | ** ** | **2007(1)**        | ** ** | **2006(2)** | ** ** |
|                                  |       |               |       |   |   |
| Net operating loss carryforwards      |       | $                  | 101        |   | $ | 512 |   |
| Tax credits                           |       | 4,455              |       | 9,528 |   |
| Reserves                              |       | 2,277              |       | 3,159 |   |
| Fixed assets                          |       | 312                |       | 499 |   |
| Stock-based compensation expenses     |       | 3,613              |       | — |   |
| Accruals and other                    |       | 1,947              |       | 681 |   |
| Gross deferred tax  assets            |       | 12,705             |       | 14,379 |   |
| Valuation allowance                   |       | (2,876             | )          | (9,264 | ) |
| Deferred tax assets                   |       | 9,829              |       | 5,115 |   |
|                                  |       |               |       |   |   |
| Intangible assets                     |       | (6,110             | )          | (7,261 | ) |
| Deferred tax liabilities              |       | (6,110             | )          | (7,261 | ) |
|                                  |       |               |       |   |   |
| Net deferred tax assets (liabilities) |       | $                  | 3,719      |   | $ | (2,146 | ) |

 

----

(1)          TheApril 30, 2007 amounts are presented net of the fully reserved stock-basedcompensation related net operating loss and tax credit deferred tax assets.

(2)          Certainreclassifications have been made to prior year amounts in order to conform tothe current year presentation.

In fiscal 2007, the Company chose to derecognizeboth the gross deferred income tax assets and the offsetting valuationallowance pertaining to net operating loss and tax credit carryforwards thatrepresent excess tax benefits from stock-based awards due to a change inpresentation as a result of the adoption of SFAS No. 123(R). In prioryears, such excess tax benefits, with an offsetting valuation allowance, wererecorded in the Company’s

79

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

consolidated balance sheet. As the excess tax benefitswere realized, the valuation allowance was released and additional paid-in capitalwas increased. SFAS No. 123(R) prohibits recognition of a deferred taxasset for excess tax benefits due to stock-based compensation deductions thathave not yet been realized through a reduction in income taxes payable.Accordingly, in fiscal 2007, the Company reversed the deferred tax assetand the offsetting valuation allowance relating to excess tax benefits forstock-based compensation deductions. Such unrecognized deferred tax benefitstotaled $7.2 million as of April 30, 2007 and will be accounted foras a credit to additional paid-in capital, if and when realized through areduction in income taxes payable.

Managementregularly assess the realizability of deferred tax assets recorded based uponthe weight of available evidence, including such factors as recent earningshistory and expected future taxable income on a jurisdiction by jurisdictionbasis. Deferred tax assets in the amount of $2.9 million at April 30,2007 pertain to California R&D tax credit carryovers. Management believesit is more likely than not that the Company will not realize such deferred taxassets; therefore, a valuation allowance has been established against thedeferred tax assets. In the future, if the credit is utilized and the valuationallowance is released, the release of valuation allowance will be accounted foras a reduction of the income tax expense in the year such event occurs.

As ofApril 30, 2007, the Company has federal and state research and developmentcredits of approximately $1.6 million and $2.9 million, respectively.If not utilized, the federal credits will begin to expire in fiscal 2026and the state credits will be carried over indefinitely.

TheCompany has not provided federal, state, and foreign withholding taxes onapproximately $155.2 million of undistributed earnings for certainnon-U.S. subsidiaries, because such earnings are intended to be indefinitelyreinvested.

TheCompany is subject to income taxes in the United States and numerous foreigntax jurisdictions. Significant judgment is required in determining the Company’sworldwide provision for income taxes and recording the related assets andliabilities. There are transactions in the ordinary course of the Company’sbusiness where the ultimate tax determination is uncertain. Accruals for tax contingenciesare provided for in accordance with the requirements of SFAS No. 5, *“Accounting for Contingencies.”*

**Note11 — Net Income Per Share**

Basicnet income per share is computed by dividing net income by the weighted averagenumber of common shares outstanding during the period.

Dilutednet income per share is computed according to the treasury stock method usingthe weighted average number of common and potentially dilutive common sharesoutstanding during the period. Potentially dilutive common shares represent theeffect of stock options. For the years ended April 30, 2007, 2006 and2005, 5,857,125, 2,718,909 and 3,005,800 shares of common stock, respectively,of common stock subject to outstanding options were not included in thecalculation of diluted net income per share because they were antidilutive(i.e., the per share exercise price for such options exceeded the averagetrading price of the Company’s common stock as reported on The Nasdaq StockMarket for the periods presented).

TheCompany’s earnings per share were calculated under the provisions of theStatement of Financial Accounting Standards (or “SFAS”) No. 128, *“Earnings Per Share,”* or SFASNo. 128. SFAS No. 128 requires that the Company take into account theeffect on consolidated earnings per share of options, warrants and convertiblesecurities issued by its subsidiaries. The effect on consolidated earnings pershare depends on whether the securities issued by the subsidiary enable theirholders to obtain common stock of the subsidiary company or common stock of theparent company. Securities issued by a subsidiary that enable their holders toobtain the subsidiary’s common stock are included in computing the subsidiary’searnings per share data. The diluted per-share earnings of the subsidiary areincluded in the Company’s consolidated earnings per shares computations basedon the consolidated group’s holding of the subsidiary’s securities. InFebruary 2005, SOI issued options exercisable for 1,400,000 shares of itsown common stock. Subsequently, in June 2006, SOI issued optionsexercisable for an additional 700,000

80

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

shares of its own common stock. In the calculation ofits earnings per share for fiscal 2007 and 2006, the Company included theeffect of SOI’s options in its consolidated earnings per share.

The following table sets forth the computation ofbasic and diluted earnings per share attributable to common stockholders forthe periods indicated (in thousands, except per share data):
|                                                                  | ** **   | **Year Ended April 30,** | ** **   |
|------------------------------------------------------------------|--------------|-----------------------------------------|--------------|
| ** **                                                       | ** **   | **2007**                                | ** **   | **2006** | ** ** | **2005** | ** ** |
| ***Basic:***                                                     | *** *** | *** ***                            | *** *** | *** *** | *** *** | *** *** | *** *** |
| Numerator:                                                       |         |                                    |         |   |   |   |   |
| Net income                                                       |         | $                                       | 23,973       |   | $ | 89,148 |   | $ | 76,387 |   |
|                                                             |         |                                    |         |   |   |   |   |
| Denominator:                                                     |         |                                    |         |   |   |   |   |
| Weighted average shares                                          |         | 54,706                                  |         | 54,268 |   | 56,691 |   |
| Weighted average  unvested common stock subject to repurchase    |         | —                                  |         | — |   | (3 | ) |
| Weighted average common  shares for net income per share         |         | 54,706                                  |         | 54,268 |   | 56,688 |   |
|                                                             |         |                                    |         |   |   |   |   |
| Basic net income per  share                                      |         | $                                       | 0.44         |   | $ | 1.64 |   | $ | 1.35 |   |
|                                                             |         |                                    |         |   |   |   |   |
| ***Diluted:***                                                   |         |                                    |         |   |   |   |   |
| Numerator:                                                       |         |                                    |         |   |   |   |   |
| Net income                                                       |         | $                                       | 23,973       |   | $ | 89,148 |   | $ | 76,387 |   |
| Dilutive effect of SOI  consolidation                            |         | (13                                     | )            | (47 | ) | — |   |
| Net income for diluted  computation                              |         | $                                       | 23,960       |   | $ | 89,101 |   | $ | 76,387 |   |
|                                                             |         |                                    |         |   |   |   |   |
| Denominator:                                                     |         |                                    |         |   |   |   |   |
| Denominator for basic  net income per share                      |         | 54,706                                  |         | 54,268 |   | 56,688 |   |
| Weighted average effect of dilutive securities:                  |         |                                    |         |   |   |   |   |
| Common stock options                                             |         | 528                                     |         | 2,690 |   | 4,875 |   |
| Unvested common stock  subject to repurchase                     |         | —                                  |         | — |   | 3 |   |
| Weighted average common  shares for diluted net income per share |         | 55,234                                  |         | 56,958 |   | 61,566 |   |
|                                                             |         |                                    |         |   |   |   |   |
| Diluted net income per share                                     |         | $                                       | 0.43         |   | $ | 1.56 |   | $ | 1.24 |   |

 

**Note 12 — Common Stock**

TheCompany is authorized to issue up to 100,000,000 shares of common stock. As ofApril 30, 2007 and 2006, approximately 54,941,000 and53,874,000 shares were issued and outstanding, respectively. As ofApril 30, 2007 and 2006, 5,870,000 shares were held as treasury stock. Inaddition, as of April 30, 2007, approximately 26,827,000 shares of commonstock have been reserved for issuance under the Company’s employee stock optionplans, the directors’ stock option plan and employee stock purchase plan.

Inconnection with the CDM acquisition, the Company issued 515,000 shares ofcommon stock representing $10 million at an agreed valuation of $19.42 pershare. Approximately 147,000 of these shares were retained as security forcertain indemnities given by the sellers. In fiscal 2007, the Companysubsequently issued the 147,000 escrow shares to the original shareholders. Theescrow shares were puttable back to the Company at a premium and 145,000 shareswere put to the Company for cash totaling $2.8 million.

InJune 2005, the Company’s board of directors authorized management to use up to$100 million of the Company’s available cash in an open-market program torepurchase its common stock. The program expired in June 2006. Under theprogram, the Company repurchased 5,870,000 shares of its common stock. InFebruary 2007, the Company’s board of directors approved another stockrepurchase program that, subject to applicable securities laws, provides forthe repurchase of up to $100 million of its outstanding common stock. Asof April 30, 2007 and 2006, the Company had cumulatively repurchased5,870,000 shares of its common stock. (See Note 14.)

81

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

**Note 13** — **Employee Stock Purchase and Stock Option Plans**

## ***2000 Employee StockPurchase Plan***

The2000 Employee Stock Purchase Plan (the “2000 Purchase Plan”) wasadopted by the board of directors in February 2000 and was approved by theshareholders in March 2000. The 2000 Purchase Plan became effectiveupon the closing of the Company’s initial public offering. Under the2000 Purchase Plan, 3,000,000 shares of common stock were initiallyreserved for issuance together with an annual increase in the number of sharesreserved thereunder beginning on the first day of the fiscal year commencingMay 1, 2001 in an amount equal to the lesser of: 2,000,000 shares, orfour percent of the Company’s outstanding common stock on the last day of theprior fiscal year, or an amount determined by the Company’s board of directors.The offering periods under this plan are the periods of approximately24 months commencing on the first trading day on or after June 1 andDecember 1 of each year and terminating on the last trading day in theperiods ending twenty-four months later. Depending on the fair market value ofthe common stock, the offer periods can be consecutive or overlapping. Thepurchase period under the 2000 Purchase Plan begins on the first tradingday on or after June 1 and December 1 of each year and ends sixmonths later. The purchase price of the common stock under this plan is 85% ofthe lesser of the fair market value per share on the first trading day of theoffering period or on the last trading day of the purchase period. Employeesmay end their participation in an offering period at any time, and theirparticipation ends automatically on termination of employment with the Company.The 2000 Purchase Plan will terminate in February 2010, unless theboard of directors determines to terminate it sooner. As of April 30,2007, 1,868,825 shares had been purchased under the 2000 Purchase Plan.

## ***1995 Stock OptionPlan***

InMay 1995, the Company adopted the 1995 Stock Option Plan under which7,200,000 shares of common stock were reserved for issuance to eligibleemployees, directors and consultants upon exercise of the stock options andstock purchase rights. Incentive stock options were granted at a price not lessthan 100% of the fair market value of the Company’s common stock and at a priceof not less than 110% of the fair market value for grants to any person whoowned more than 10% of the voting power of all classes of stock on the date ofgrant. Nonstatutory stock options were granted at a price not less than 85% ofthe fair market value of the common stock and at a price not less than 110% ofthe fair market value for grants to a person who owned more than 10% of thevoting power of all classes of stock on the date of the grant. Options grantedunder the 1995 Stock Option Plan generally vest over five years and areexercisable immediately or for up to ten years (five years for grants to anyperson who owned more than 10% of the voting power of all classes of stock onthe date of the grant).

InFebruary 2000, the Company terminated the 1995 Stock Option Plan asto future grants. However, options outstanding under the 1995 Stock OptionPlan continue to be governed by the terms of the 1995 Stock Option Plan.

## ***2000 Stock Plan***

InFebruary 2000, the Company adopted the 2000 Stock Plan under which6,000,000 shares of common stock were initially reserved for issuancetogether with an annual increase in the number of shares reserved thereunderbeginning on the first day of the Company’s fiscal year, commencing May 1,2002, in an amount equal to the lesser of: 3,000,000 shares, or 6% ofoutstanding shares of common stock on the last day of the prior fiscal year, oran amount determined by the Company’s board of directors. The 2000 StockPlan provides for grants of incentive stock options to its employees includingofficers and employees, directors and nonstatutory stock options to itsconsultants including nonemployee directors. Incentive stock options aregranted at a price not less than 100% of the fair market value of the Company’scommon stock and at a price not less than 110% of the fair market value forgrants to any person who owns more than 10% of the voting power of all classesof stock on the date of grant. Nonstatutory stock options are granted at aprice not less than 85% of the fair market value of the common stock and at aprice not less than 110% of the fair market value for grants to a person whoowns more than 10% of the voting power of all classes of stock on the date ofthe grant. Options granted under the 2000 Stock Plan have been at fairmarket value on the date of the grant and generally vest over four years andare exercisable up to ten years (five years for grants to any person who ownedmore than 10% of the voting power of all classes of stock on the date of thegrant).

82

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

Underthe 2000 Stock Plan, options to purchase approximately 5,273,000 and1,871,000 shares of common stock were granted to employees duringfiscal 2007 and 2006, respectively. As of April 30, 2007, options topurchase approximately 12,149,000 shares of common stock were outstandingunder the 2000 Stock Plan.

## ***2000 Director OptionPlan***

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

The following table summarizes stock-basedcompensation award activity under the 2000 Stock Plan and the2000 Director Option Plan, and the related weighted average exerciseprice, for the three fiscal years ended April 30, 2007:

|                                                     | ** ** | **Options outstanding**           | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **Options  Available For  Grant** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Price Per  Share** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Balance at May 1, 2004                         |       | 1,661                                  |       | 7,537 |   | $ | 10.51 |   |
| Replenished                                         |       | 3,140                                  |       | — |   | — |   |
| Granted                                             |       | (3,984                                 | )          | 3,984 |   | 19.58 |   |
| Exercised                                           |       | —                                 |       | (934 | ) | 4.11 |   |
| Canceled                                            |       | 841                                    |       | (841 | ) | 16.87 |   |
| Balance at April 30, 2005                           |       | 1,658                                  |       | 9,746 |   | 14.28 |   |
| Replenished                                         |       | 3,144                                  |       | — |   | — |   |
| Granted                                             |       | (1,931                                 | )          | 1,931 |   | 18.22 |   |
| Exercised                                           |       | —                                 |       | (1,993 | ) | 8.83 |   |
| Canceled                                            |       | 721                                    |       | (721 | ) | 15.83 |   |
| Expired – 1995 Stock  Option Plan              |       | (551                                   | )          | — |   | — |   |
| Balance at April 30, 2006                           |       | 3,041                                  |       | 8,963 |   | 16.22 |   |
| Replenished                                         |       | 3,135                                  |       | — |   | — |   |
| Granted                                             |       | (5,333                                 | )          | 5,333 |   | 21.26 |   |
| Exercised                                           |       | —                                 |       | (859 | ) | 9.08 |   |
| Expired or forfeited                                |       | 900                                    |       | (900 | ) | 20.58 |   |
| Balance at April 30, 2007                           |       | 1,743                                  |       | 12,537 |   | $ | 18.54 |   |
| Vested and  expected to vest at April 30, 2007 |       |                                   |       | 11,816 |   | $ | 18.36 |   |

 

83

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

As of April 30, 2007 and 2006, options to purchase 6,126,000 and 4,768,000 shares,respectively, were vested. Information regarding the options outstanding as ofApril 30, 2007 is summarized below:
|                                           | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                        | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| **Range of Exercise  Prices**   | ** ** | **Options  Outstanding**     | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Options  Vested and  Exercisable** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| ** **                                | ** ** | **(in thousands)**      | ** ** | **(in years)**                                 | ** ** | ** ** | ** ** | **(in  thousands)** | ** ** | **(in  thousands)** | ** ** | **(in years)** | ** ** | ** ** | ** ** | **(in  thousands)** | ** ** |
| $  0.15 – $14.58 |       | 2,221                        |       | 6.07                                                |       | $ | 8.85 |   |   |   | 1,737 |   |   |   | $ | 7.70 |   |   |   |
| $14.59 – $16.40            |       | 2,317                        |       | 6.69                                                |       | 16.02 |   |   |   | 2,078 |   |   |   | 16.01 |   |   |   |
| $16.41 – $18.00            |       | 2,611                        |       | 9.24                                                |       | 16.89 |   |   |   | 547 |   |   |   | 16.90 |   |   |   |
| $18.01 – $25.40            |       | 2,809                        |       | 7.50                                                |       | 23.11 |   |   |   | 1,651 |   |   |   | 23.02 |   |   |   |
| $25.41 – $30.05            |       | 2,579                        |       | 9.01                                                |       | 25.83 |   |   |   | 113 |   |   |   | 28.06 |   |   |   |
| $  0.15 – $30.05 |       | 12,537                       |       | 7.77                                                |       | $ | 18.54 |   | $ | 10,584 |   | 6,126 |   | 6.74 |   | $ | 15.84 |   | $ | 10,209 |   |
|                                           |            |                              |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theaggregate intrinsic value in the table above represents the total pretaxintrinsic value (the aggregate difference between the closing stock price ofthe Company’s common stock on April 30, 2007 of $13.52 and the exerciseprice of in-the-money options) that would have been received by the optionholders had all option holders exercised their options as of that date. Thetotal number of shares of common stock underlying in-the-money optionsexercisable as of April 30, 2007 was 1,598,000.

The totalintrinsic value of options exercised during fiscal 2007 was $3.8 million. Total cash received fromemployees as a result of employee stock option exercises duringfiscal 2007 was approximately $7.8 million.

As ofApril 30, 2007, net of forfeitures, there was $44.5 million ofunrecognized compensation cost related to unvested stock options, which isexpected to be recognized over a weighted average period of 1.2 years. Forthe 2000 Purchase Plan, as of April 30, 2007, there was $1.2 millionof unrecognized compensation cost which is expected to be recognized over aweighted average period of 1.1 years. The Company’s current practice is toissue new shares to settle share option exercises.

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

TheCompany adopted SFAS No. 123(R) beginning May 1, 2006 and usedthe modified prospective transition method. In accordance with the modifiedprospective transition method, the Company’s consolidated financial statementsfor prior periods have not been restated to reflect, and do not include, theimpact of SFAS No. 123(R). Effective with the adoption of SFASNo. 123(R), stock-based compensation expense is recognized in the Company’sConsolidated Statements of Operations and includes (i) compensationexpense for stock-based compensation awards granted prior to, but not yetvested as of May 1, 2006, based on the grant-date fair value estimated inaccordance with the pro forma provisions of SFAS No. 123 and(ii) compensation expense for the stock-based compensation awards grantedor modified subsequent to May 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS No. 123(R). The impactof SFAS No. 123(R) on the Company’s consolidated financial statements byaward type during fiscal 2007 was as follows (in thousands):
|                                                     | ** ** | **Year Ended**          | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **April 30, 2007** | ** ** |
| Stock-based  compensation expense by type of award: |       |                         |       |
| Employee stock options                              |       | $                            | 28,277     |   |
| Employee stock purchase  plan                       |       | 1,383                        |       |
| Total stock-based compensation                      |       | 29,660                       |       |
| Tax effect                                          |       | 3,613                        |       |
| Net effect on  net income                           |       | $                            | 26,047     |   |

 

84

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

## ***ValuationAssumptions***

SFAS No. 123(R) requirescompanies to estimate the fair value of stock-based compensation awards on thegrant date using an option pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice period in the Company’s Consolidated Statements of Income. The Companymeasures the fair value of stock-based compensation awards using Black-Scholesconsistent with the provisions of SFAS No. 123(R), SEC SABNo. 107 and the Company’s prior period pro forma disclosures of net earnings,including stock-based compensation (determined under a fair value method asprescribed by SFAS No. 123). Black-Scholes was developed to estimatethe fair value of freely tradable, fully transferable options without vestingrestrictions. These assumptions differ significantly from the characteristicsof the Company’s stock-based compensation awards. Black-Scholes also requiresthe use of highly subjective, complex assumptions, including expected term andthe price volatility of the Company’s stock.

Thefair value for these options was estimated using the Black-Scholes optionpricing model. The per share weighted average estimated grant date fair valuefor employee options granted during the years ended April 30, 2007, 2006and 2005 was $11.37, $9.36 and $14.59, respectively.

The following weighted average assumptions areincluded in the estimated fair value calculations for stock options granted infiscal 2007, 2006 and 2005:
|                                     | ** ** | **Employee Stock Option  Plans Year Ended April 30,** | ** ** | ** ** | **Employee Stock Purchase  Plan Year Ended April 30,** | ** ** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------|--------------------------------------------------------------------------------------|------------|------------|
| ** **                          | ** ** | **2007**                                                                            | ** ** | ** ** | **2006**                                                                             | ** ** | ** ** | **2005** | ** ** | ** ** | **2007** | ** ** | ** ** | **2006** | ** ** | ** ** | **2005** | ** ** | ** ** |
| Risk-free interest rate             |       | 4.9                                                                                 | %          |       | 4.1                                                                                  | %          |       | 3.2 | % |   | 5.0 | % |   | 4.0 | % |   | 2.3 | % |   |
| Expected term of options (in years) |       | 4.1                                                                                 |       |       | 3.5                                                                                  |       |       | 3.4 |   |   | 0.5 |   |   | 0.5 |   |   | 0.5 |   |   |
| Expected volatility                 |       | 64                                                                                  | %          |       | 79                                                                                   | %          |       | 123 | % |   | 52 | % |   | 46 | % |   | 65 | % |   |
| Expected  dividend yield            |       | 0                                                                                   | %          |       | 0                                                                                    | %          |       | 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 years endedApril 30, 2007, 2006 and 2005 was $7.41, $3.92 and $4.37, respectively.

Themethodologies for determining the above values were as follows:

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

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

·               *Expected volatility:* Upon the adoption ofSFAS No. 123(R), the Company determines expected volatility based onan average between the historical volatility of the Company’s common stock andthe implied volatility based on the Company’s traded options. Averaging two datasources may provide a better proxy to what market place participants would useto value the Company’s options. Previously, the Company determined expectedvolatility based on the historical volatility of the Company’s common stock.

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

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

85

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

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

Priorto the adoption of SFAS No. 123(R), the Company applied APB 25and related interpretations and provided the required pro forma disclosures ofSFAS No. 123, as amended by SFAS No. 148, *“Accounting for Stock-Based Compensation — Transitionand Disclosures.”* The pro forma information in the following tableillustrates the effect on net income and net income per share forfiscal 2006 and 2005 as if the Company had applied the fair valuerecognition provisions of SFAS No. 123 (in thousands, except pershare amounts):
|                                                                                                                                       | ** ** | **Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Net income, as reported                                                                                                               |       | $                                       | 89,148     |   | $ | 76,387 |   |
| Add:  Stock-based employee compensation expense  included in reported net income,  net of related tax effects                    |       | —                                  |       | 14 |   |
| Deduct: Total  stock-based employee compensation determined under fair value based method  for all awards, net of related tax effects |       | 19,164                                  |       | 24,422 |   |
| As adjusted net income                                                                                                                |       | $                                       | 69,984     |   | $ | 51,979 |   |
|                                                                                                                                  |       |                                    |       |   |   |
| Net income per share – Basic:                                                                                                    |       |                                    |       |   |   |
| As reported                                                                                                                           |       | $                                       | 1.64       |   | $ | 1.35 |   |
| As adjusted                                                                                                                           |       | $                                       | 1.29       |   | $ | 0.92 |   |
|                                                                                                                                  |       |                                    |       |   |   |
| Net income per share – Diluted:                                                                                                  |       |                                    |       |   |   |
| As reported                                                                                                                           |       | $                                       | 1.56       |   | $ | 1.24 |   |
| As adjusted                                                                                                                           |       | $                                       | 1.29       |   | $ | 0.92 |   |
|                                                                                                                                  |       |                                    |       |   |   |
| Shares used in computing net income per share –  Basic:                                                                          |       |                                    |       |   |   |
| As reported                                                                                                                           |       | 54,268                                  |       | 56,688 |   |
| As adjusted                                                                                                                           |       | 54,268                                  |       | 56,688 |   |
|                                                                                                                                  |       |                                    |       |   |   |
| Shares used in computing net income per share –  Diluted:                                                                        |       |                                    |       |   |   |
| As reported                                                                                                                           |       | 56,958                                  |       | 61,566 |   |
| As adjusted                                                                                                                           |       | 54,268                                  |       | 56,688 |   |

 

**Note 14 — TreasuryStock**

InJune 2005, the Company’s board of directors authorized the repurchase inan open-market program of up to an aggregate of $100 million of theCompany’s common stock. Repurchases under the open-market program wereauthorized for a twelve-month period that ended on June 21, 2006. As ofJanuary 31, 2007 and April 30, 2006, the Company had cumulativelyrepurchased 5,870,000 shares of its common stock under the open-marketprogram for an aggregate cost of approximately $79.6 million.

InFebruary 2007, the Company’s board of directors approved another stockrepurchase program that, subject to applicable securities laws, provides forthe repurchase of up to $100 million of its outstanding common stock in anopen-market program. Such purchases will be at times and in amounts as theCompany deems appropriate, based on factors such as market conditions, legalrequirements and other corporate considerations.

**Note 15** — **Risks and Uncertainties**

Financial instruments which potentially subject theCompany to concentrations of credit risk consist principally of cash and cashequivalents, short-term investments and trade receivables.

TheCompany maintains cash and cash equivalents and short-term investments withvarious financial institutions, located in several different jurisdictions.Deposits held with banks may generally be redeemed upon demand and may exceedthe limit of insurance provided on such deposits. All these deposits and otherfinancial

86

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

instruments are maintained with financial institutionsof reputable credit and therefore bear minimal credit risk. The Company has notsustained credit losses from instruments held at financial institutions.

The Company’s products are primarily sold to OEMs,VARs and to distributors. The Company’s sales to significant customers as a percentageof revenues for the fiscal years indicated were as follows:
|                         | ** ** | **Year Ended April 30,**      | ** ** |
|-------------------------|------------|----------------------------------------------|------------|
| ** **              | ** ** | **   2007   ** | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** |
| ** **              | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Percentage of revenues: |       |                                         |       |   |   |   |   |
| Customer A              |       | 15.1%                                        |       | 13.7% |   | 10.9% |   |
| Customer B              |       | 14.0%                                        |       | * |   | * |   |
| Customer C              |       | 12.9%                                        |       | * |   | * |   |
| Customer D              |       | *                                            |       | 14.6% |   | 19.1% |   |
| Customer E              |       | *                                            |       | 11.6% |   | 15.6% |   |

 

----

*   Lessthan ten percent of revenues.

The Company performs ongoing credit evaluations of itscustomers and maintains an allowance for doubtful accounts. Significantcustomer account receivables as a percentage of net accounts receivable for thefiscal years indicated were as follows:
|                                         | ** ** | **April 30,**                           | ** ** |
|-----------------------------------------|------------|----------------------------------------------|------------|
| ** **                              | ** ** | **   2007   ** | ** ** | **   2006   ** | ** ** |
| ** **                              | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Percentage of accounts receivable, net: |       |                                         |       |   |   |
| Customer A                              |       | 22.7%                                        |       | 20.3% |   |
| Customer B                              |       | 21.1%                                        |       | * |   |
| Customer C                              |       | 12.0%                                        |       | 16.7% |   |
| Customer D                              |       | *                                            |       | 17.8% |   |

 

----

*   Lessthan ten percent of accounts receivable, net.

Certainof the Company’s wafer, color filter application and packaging services areobtained from a single source or a limited group of suppliers. The partial orcomplete loss of one or more of these sources could have at least a temporaryadverse effect on the Company’s consolidated results of operations.

**Note 16 — Segment andGeographic Information**

TheCompany identifies its business segments based on business activities,management responsibility and geographic location. For all periods presented,the Company operated in a single reportable business segment.

TheCompany sells its image-sensor products either directly to OEMs and VARs orindirectly through distributors. The following table illustrates the percentageof revenues from sales to OEMs and VARs and to distributors for fiscal years2007, 2006 and 2005, respectively:
|               | ** ** | **Year Ended April 30,** | ** ** | ** ** |
|---------------|------------|-----------------------------------------|------------|------------|
| ** **    | ** ** | **2007**                                | ** ** | ** ** | **2006** | ** ** | ** ** | **2005** | ** ** | ** ** |
| ** **    | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| OEMs and VARs |       | 60.0                                    | %          |       | 68.9 | % |   | 79.4 | % |   |
| Distributors  |       | 40.0                                    |       |       | 31.1 |   |   | 20.6 |   |   |
| Total         |       | 100.0                                   | %          |       | 100.0 | % |   | 100.0 | % |   |

 

87

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**For the Years Ended April 30, 2007, 2006 and 2005**

Since theCompany’s end-user customers market and sell their products worldwide, itsrevenues by geographic location are not necessarily indicative of thegeographic distribution of end-user sales, but rather indicate where theproducts and/or their components are manufactured or sourced. The revenues bygeography in the following table are based on the country or region in which theCompany’s customers issue to us purchase orders (in thousands):
|               | ** ** | **Year Ended April 30,** | ** ** |
|---------------|------------|-----------------------------------------|------------|
| ** **    | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **    | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| China(1)      |       | $                                       | 365,204    |   | $ | 287,702 |   | $ | 206,997 |   |
| Taiwan        |       | 75,999                                  |       | 97,467 |   | 72,977 |   |
| South Korea   |       | 35,684                                  |       | 40,037 |   | 27,998 |   |
| Japan         |       | 31,387                                  |       | 57,422 |   | 69,393 |   |
| United States |       | 5,141                                   |       | 4,771 |   | 3,049 |   |
| All other     |       | 14,728                                  |       | 4,527 |   | 7,648 |   |
| Total         |       | $                                       | 528,143    |   | $ | 491,926 |   | $ | 388,062 |   |

 

----

(1)    Prioryear data reclassified to combine the results for Hong Kong and China.

The Company’s long-livedassets are located in the following countries (in thousands):
|               | ** ** | **April 30,** | ** ** |
|---------------|------------|--------------------|------------|
| ** **    | ** ** | **2007**           | ** ** | **2006** | ** ** |
| ** **    | ** ** | ** **         | ** ** | ** ** | ** ** |
| Taiwan        |       | $                  | 71,953     |   | $ | 40,637 |   |
| China         |       | 22,053             |       | 17,146 |   |
| United States |       | 41,896             |       | 1,633 |   |
| All other     |       | 542                |       | 456 |   |
|          |       | $                  | 136,444    |   | $ | 59,872 |   |

 

**Note 17** — **Commitments and Contingencies**

## ***Commitments***

InDecember 2000, the Company formed HWSC as a subsidiary to conduct testingoperations and other processes associated with the manufacturing of the Company’sproducts in China. The registered capital of HWSC is $30.0 million ofwhich the Company has funded a total of $27.0 million. Under an agreementwith the Chinese government, the date by which the remaining registered capitalmust be funded has been extended to July 17, 2007. The $27.0 millioninvested through April 30, 2007 was used primarily for payment to buildingcontractors for the construction of facilities and the purchase of equipment.

TheCompany also maintains a subsidiary in Shanghai, SDC, which provides assistanceto the Company in various product design projects. On January 10, 2007,SDC entered into a Land-Use-Right Purchase Agreement (the “Purchase Agreement”)with the Construction and Transportation Commission of the Pudong New District,Shanghai. The Purchase Agreement has an effective date of December 31,2006. Under the terms of the Purchase Agreement, the Company agreed to pay anaggregate amount of approximately $0.6 million (the “Purchase Price”) inexchange for the right to use approximately 323,000 square feet of land locatedin Shanghai for a period of 50 years. In addition, the Company is obligatedto invest a minimum of approximately $30 million to develop the land andconstruct facilities, which amount includes the Purchase Price. As ofApril 30, 2007, the Company has already contributed $7.5 million ofthe $30 million total investment. Construction of the facilities on theland must commence and be completed during the time period beginning onJune 30, 2007 and ending on June 30, 2009, subject to an additionalone-year extension under limited circumstances. The Company may use the landsolely for the purposes of industrial use and/or scientific research. TheCompany intends to use SDC’s registered capital to partially fund itscommitment to this project.

The Company has variouscommitments arising from the VisEra Agreement, as amended. In April 2007, theCompany contributed an additional $27 million to VisEra, which satisfiedits portion of the latest total capital

88

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)For the Years Ended April 30, 2007, 2006 and 2005**

commitment to the jointventure, of $112.9 million.  Thiscapital amount was established in the January 2007 amendment to the AmendedVisEra Agreement. Through April 30, 2007, the Company has contributed$51.6 million to VisEra and VisEra Cayman. The Company’s futurecontributions may be made in the form of cash or asset contributions. To theextent, if any, that the value of the assets contributed exceeds the value ofthe Company’s commitment, the Company will receive cash from VisEra Cayman.(See Note 5.)

TheCompany leases certain facilities and software under non-cancelable operatinglease agreements. The non-cancelable operating leases expire at various datesthrough fiscal 2013. At April 30, 2007, future minimum lease commitmentsunder operating leases are as follows (in thousands):
| Years Ended April 30, | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| 2008                                 |       | $          | 4,324      |   |
| 2009                                 |       | 4,910      |       |
| 2010                                 |       | 3,459      |       |
| 2011                                 |       | 640        |       |
| 2012                                 |       | 634        |       |
| Thereafter                           |       | 198        |       |
| Total                                |       | $          | 14,165     |   |

 

Rentalexpenses under all operating leases amounted to approximately$8.0 million, $4.0 million and $2.2 million for the years endedApril 30, 2007, 2006 and 2005, respectively.

## ***Litigation***

Fromtime to time, the Company has been subject to legal proceedings and claims withrespect to such matters as patents, product liabilities and other actionsarising out of the normal course of business.

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

Theissuer defendants and plaintiffs negotiated a stipulation of settlement for theclaims against the issuer defendants, including OmniVision, that was submittedto the Court for approval. In August 2005, the Court preliminarilyapproved the settlement. In December 2006, the appellate court overturnedthe certification of classes in the six test cases that were selected by theunderwriter defendants and plaintiffs in the coordinated proceedings. Becauseclass certification is a condition of the settlement, it is unlikely that thecurrent settlement will receive final court approval. In that event, anyrevised or future settlement would be uncertain. If the litigation proceeds,the Company believes that it has meritorious defenses to plaintiffs’ claims andintends to defend the action vigorously.

OnJune 10, 2004, the first of several putative class actions was filedagainst the Company and certain of its present and former directors andofficers in federal court in the Northern District of California on behalf ofinvestors who purchased its common stock at various times fromFebruary 2003 through June 9, 2004. Those actions were consolidatedunder the caption *In re OmniVisionTechnologies, Inc.,*No. C-04-2297-SC, and a consolidatedcomplaint was filed. The consolidated complaint asserts claims on behalf ofpurchasers of the Company’s common

89

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)For the Years Ended April 30, 2007, 2006 and 2005**

stock between June 11, 2003 and June 9,2004, and seeks unspecified damages. The consolidated complaint generallyalleges that defendants violated Sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934 by allegedly engaging in improper accountingpractices that purportedly led to the Company’s financial restatement. OnJuly 29, 2005, the court denied the Company’s motion to dismiss thecomplaint. The parties engaged in settlement discussions and inNovember 2006, the parties reached an agreement in principle to settlethis litigation. The total amount of the proposed settlement is approximately$13.8 million, of which approximately $0.8 million would be contributedby the Company and the remainder would be funded by insurance carriers thatissued Directors and Officers Liability Insurance Policies to the Company. TheCompany accrued $3.3 million during fiscal 2007, as its share of thesettlement, including unreimbursed defense costs, net of the $13.0 millionin recoverable insurance proceeds. The parties have executed a Stipulation ofSettlement that was filed with the Court on May 15, 2007. On May 25,2007, the Court issued an Order preliminarily approving the settlement andproviding for notice of the settlement to be provided to the purportedshareholder class. The Order also scheduled a hearing on September 7, 2007to determine whether the proposed settlement is fair, reasonable and adequateto the purported class and should receive final approval by the Court. As aresult of the pending settlement, the parties have agreed to stay discovery andother proceedings. The Company believes that ultimate settlement is probable atthe currently estimated amount. There is no assurance that the Court will grantsuch approval, or that the settlement will become final. If the settlement doesnot occur and litigation against it continues, the Company believes that it hasmeritorious defenses and intends to defend the case vigorously. If the litigationcontinues, the Company cannot estimate whether the result of the litigationwould have a material adverse effect on its financial condition, results ofoperations or cash flows.

OnOctober 20, 2005, a purported shareholder derivative complaint, captioned *Hackl v. Hong*, No. 1:05-CV-050985, was filed in SantaClara County Superior Court for the State of California. This derivative actioncontains allegations that were virtually identical to the prior state courtderivative actions that were voluntarily dismissed, and which were based on theallegations contained in the securities class actions. The complaint generallysought unspecified damages and equitable relief based on causes of actionagainst various of the Company’s present and former directors and officers forpurported breach of fiduciary duty, abuse of control, gross mismanagement,waste of corporate assets, unjust enrichment and violations of CaliforniaCorporations Code. The Company was named solely as a nominal defendant againstwhom no monetary recovery was sought. Pursuant to a January 20, 2006 CourtOrder, plaintiff furnished a bond for reasonable expenses in order to proceedwith his derivative action. On May 15, 2006, the Court sustained theCompany’s demurrer to the complaint with leave to amend on the grounds that theplaintiff failed to make a pre-litigation demand on the Company’s board ofdirectors and fails to sufficiently plead that demand is futile. OnOctober 4, 2006, the Court sustained the Company’s demurrer to thecomplaint as well and again granted plaintiff leave to amend. On May 10,2007, the Court sustained the Company’s demurrer contending that plaintiff'scomplaint failed to allege adequately why no pre-litigation demand had beenmade on the  Company’s Board ofDirectors, but granted plaintiff leave to further amend the complaint.Simultaneously, the parties advised the Court that they had reached asettlement in principle. The parties executed a Stipulation of Settlement thatwas filed with the Court on June 18, 2007. On June 26, 2007, theCourt entered an order approving the settlement, pursuant to which the Companyagreed to pay a settlement fee in the amount of $200,000.

**Note 18— RelatedParty Transactions**

InMay 2006, the Company consummated a loan agreement with one of itsemployees. Under the terms of the agreement, which was 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.

Inthe second quarter of fiscal 2006, the Company entered into an agreementwith ImPac (see Note 5) under which ImPac agreed to provide certainmanagement and support services to HWSC. The Company compensates ImPac for theservices provided in accordance with the Company’s policy regarding relatedparty transactions. The

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)For the Years Ended April 30, 2007, 2006 and 2005**

Company’s board of directors approved the agreement,which may be cancelled by either party at any time. During the three monthsended January 31, 2007, the Company and ImPac agreed to phase out ImPac’smanagement and support services over the next several months beginning onJanuary 1, 2007. During fiscal 2007 and 2006, the Company paid ImPacapproximately $3.5 million and $0.5 million, respectively, ascompensation for manufacturing and management support services. There were nosuch payments in fiscal 2005. In fiscal 2006 and 2005, the Company alsoreceived $1.3 million and $1.0 million, respectively, from ImPac for the saleof products to ImPac. In addition, from August 2005 to December 2006,Tsuey-Jiuan Chen, the president of ImPac, has also acted as president of HWSC.From August 2001 to April 2003, Tsuey-Jiuan Chen served on theCompany’s board of directors.

InJanuary 2006, in accordance with the Amended VisEra Agreement (seeNote 5), VisEra, the Company’s joint venture with TSMC, purchased fromTSMC color filter processing equipment and related assets for an aggregateprice equivalent to $16.9 million. In connection with the purchase, VisEraentered into a three-year lease agreement with TSMC. Under this agreement,VisEra leases from TSMC approximately 14,000 square feet of factory and officespace where the assets are located. Under a related services contract, TSMCagreed to provide VisEra with certain manufacturing support services, such asmail delivery and receipt and reception services, at prices which approximatecost.

TheCompany consolidated VisEra’s operating results from August 1, 2005 to December31, 2006. For the remainder of the three-year period ended April 30, 2007, theCompany accounted for its investment in VisEra under the equity method. For thefour-month period ended April 30, 2007, the three-month period ended July 31,2005, and fiscal year 2005, the Company paid $45.4 million, $18.1 million and$72.5 million, respectively, to VisEra for manufacturing and logistics supportservices.

91

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**OMNIVISION TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)For the Years Ended April 30, 2007, 2006 and 2005**

Thefollowing table summarizes the transactions that the Company’s consolidatedaffiliate, SOI, and its affiliate, VisEra, engaged in with related parties inthe ordinary course of business in each of the last three fiscal years (inthousands):
|                                     | ** **   | **Year Ended April 30,** | ** **   |
|-------------------------------------|--------------|-----------------------------------------|--------------|
| ** **                          | ** **   | **2007**                                | ** **   | **2006** | ** ** | **2005** | ** ** |
| ***SOI  transactions with:***       | *** *** | *** ***                            | *** *** | *** *** | *** *** | *** *** | *** *** |
| ImPac:                              |         |                                    |         |   |   |   |   |
| Purchases of manufacturing services |         | $                                       | 4,162        |   | $ | 5,700 |   | $ | 3,770 |   |
| Balance payable at year end         |         | 742                                     |         | 447 |   | 1,171 |   |
| PSC:                                |         |                                    |         |   |   |   |   |
| Purchases of wafers                 |         | 5,345                                   |         | 6,770 |   | 4,334 |   |
| Rent and other services             |         | 51                                      |         | 45 |   | 493 |   |
| Balance payable at year end         |         | 244                                     |         | 612 |   | 658 |   |
| VisEra:                             |         |                                    |         |   |   |   |   |
| Purchases of manufacturing services |         | —                                  |         | 50 |   | 188 |   |
| Balance payable at year end         |         | —                                  |         | — |   | 143 |   |
|                                |         |                                    |         |   |   |   |   |
| ***VisEra  transactions with:***    |         |                                    |         |   |   |   |   |
| ImPac:                              |         |                                    |         |   |   |   |   |
| Purchases of manufacturing services |         | 10,913                                  |         | 12,420 |   | 6,677 |   |
| Balance payable at year end         |         | 14                                      |         | 1,367 |   | 889 |   |
| TSMC:                               |         |                                    |         |   |   |   |   |
| Sales to TSMC                       |         | 2,409                                   |         | 1,195 |   | — |   |
| Purchases of manufacturing services |         | 923                                     |         | 21,516 |   | 17,681 |   |
| Rent, utilities and other services  |         | 5,544                                   |         | 1,832 |   | 856 |   |
| Balance payable at year end         |         | 1,601                                   |         | 2,414 |   | 2,230 |   |
| XinTec:                             |         |                                    |         |   |   |   |   |
| Sales to XinTec                     |         | 49                                      |         | — |   | — |   |
| Purchases of manufacturing services |         | 65,539                                  |         | 32,138 |   | 23,214 |   |
| Balance payable at year end         |         | $                                       | 11,333       |   | $ | 6,987 |   | $ | 3,513 |   |

 

TheCompany purchases a substantial portion of its wafers from TSMC. The Companyalso purchases a portion of its wafers from PSC.

**Note 19** — **Subsequent Event**

InMay 2007, the Company, through its wholly-owned subsidiary, OmniVisionTrading (Hong Kong) Company Limited, consummated an Investment Agreement withChina WLCSP Limited (“WLCSP”) (the “Investment Agreement”) and an EquityInterests Transfer Agreement with WLCSP and Infinity-CSVC Venture CapitalEnterprise (“Infinity-CSVC”) (the “Transfer Agreement”), each with an effectivedate as of April 6, 2007. Pursuant to the Investment Agreement, theCompany acquired 2,500,000 units of WLCSP’s equity interests from WLCSP at aper unit price of $2.00 for an aggregate purchase amount of $5,000,000. Underthe terms of the Transfer Agreement, the Company purchased from Infinity-CSVC2,000,000 units of WLCSP’s outstanding equity interests at a price per unit of$2.00 for an aggregate purchase amount of $4,000,000. Following the completionof the two transactions, the Company owns approximately 19.98% of WLCSP’sregistered capital on a fully-diluted basis and has appointed a member to WLCSP’sboard of directors and a supervisor to monitor the actions of WLCSP’s board ofdirectors and officers.

WLCSPis in the business of designing, manufacturing, packaging and selling certainwafer level chip scale packaging related services, for which the Company iscurrently a customer. Following the consummation of the investment transactionsdescribed above, the Company anticipates entering into a service agreement withWLCSP.

92

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**SupplementaryData (Unaudited)**
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Three Months Ended**                                   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **July 31,  2006(2)**                                         | ** ** | **Oct. 31,  2006(1)(2)** | ** ** | **Jan. 31,  2007(2)** | ** ** | **April 30,  2007(2)** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                                                               |       |   |   |   |   |   |   |
| Revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                                                                  | 136,875    |   | $ | 137,656 |   | $ | 134,381 |   | $ | 119,231 |   |
| Cost of revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 87,155                                                             |       | 92,101 |   | 100,892 |   | 92,628 |   |
| Gross profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 49,720                                                             |       | 45,555 |   | 33,489 |   | 26,603 |   |
| Net income  (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | $                                                                  | 15,881     |   | $ | 5,415 |   | $ | 4,130 |   | $ | (1,453 | ) |
| Net income (loss) per  share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                                               |       |   |   |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | $                                                                  | 0.29       |   | $ | 0.10 |   | $ | 0.08 |   | $ | (0.03 | ) |
| Diluted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | $                                                                  | 0.28       |   | $ | 0.10 |   | $ | 0.07 |   | $ | (0.03 | ) |
| Shares used in  computing per share amounts:                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                                                               |       |   |   |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 54,401                                                             |       | 54,620 |   | 54,872 |   | 54,929 |   |
| Diluted                                                                                |       | 56,704                                                             |       | 55,624 |   | 55,885 |   | 54,929 |   |

 

 
|                                              | ** ** | **Three Months Ended**                                   | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **July 31,  2005**                                            | ** ** | **Oct. 31,  2005** | ** ** | **Jan. 31,  2006** | ** ** | **April 30,  2006** | ** ** |
| ** **                                   | ** ** | **(in thousands, except per share data)** | ** ** |
|                                         |       |                                                               |       |   |   |   |   |   |   |
| Revenues                                     |       | $                                                                  | 95,994     |   | $ | 126,820 |   | $ | 137,283 |   | $ | 131,829 |   |
| Cost of revenues                             |       | 64,065                                                             |       | 80,997 |   | 81,922 |   | 83,266 |   |
| Gross profit                                 |       | 31,929                                                             |       | 45,823 |   | 55,361 |   | 48,563 |   |
| Net income                                   |       | $                                                                  | 14,382     |   | $ | 22,597 |   | $ | 29,636 |   | $ | 22,533 |   |
| Net income per share:                        |       |                                                               |       |   |   |   |   |   |   |
| Basic                                        |       | $                                                                  | 0.25       |   | $ | 0.42 |   | $ | 0.56 |   | $ | 0.42 |   |
| Diluted                                      |       | $                                                                  | 0.25       |   | $ | 0.41 |   | $ | 0.53 |   | $ | 0.39 |   |
| Shares used in  computing per share amounts: |       |                                                               |       |   |   |   |   |   |   |
| Basic                                        |       | 57,178                                                             |       | 53,807 |   | 52,576 |   | 53,529 |   |
| Diluted                                      |       | 58,194                                                             |       | 55,486 |   | 55,547 |   | 57,229 |   |

----

(1)          In the three months ended October 31, 2006, the Company recorded$3.3 million in litigation settlement expenses, net of $13.0million in recoverable insurance proceeds, to reflect the Company’s share of atentative settlement of a securities class action lawsuit.

(2)          On May 1, 2006, the Company adopted the provisions ofSFAS No. 123(R) for recording share-based compensation.

 
| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|------------------|-------------------------------------------------------------------------------------------|

 

None.
| **ITEM 9A.** | **CONTROLS AND PROCEDURES** |
|-------------------|-----------------------------|

 

***Evaluationof Disclosure Controls and Procedures***

Underthe supervision and with the participation of the Company’s chief executiveofficer and its chief financial officer, the Company conducted an evaluation ofits disclosure controls and procedures, as defined in the Securities ExchangeAct of 1934, as of the end of the period covered by this Annual Report onForm 10-K. The Company’s disclosure controls and procedures are designedto provide reasonable assurance that information the Company is required todisclose in reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms and that such informationis accumulated and communicated to its management, including the Company’schief executive officer and chief financial officer. Based on this evaluation,the Company’s chief executive officer and chief financial officer haveconcluded that, at the level of reasonable assurance, the Company’s disclosurecontrols and procedures were effective as of April 30, 2007.

93

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## ***Management’s Reporton Internal Control over Financial Reporting***

TheCompany’s management is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) of the Securities Exchange Act of 1934. OmniVision’s internal controlover financial reporting is designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. The Company’s internal control over financial reportingincludes those policies and procedures that:

(i)  pertain to the maintenanceof records that in reasonable detail accurately and fairly reflect thetransactions and dispositions of the assets of the company;

(ii)  provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and

(iii)  provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of the company’s assets that could have a material effecton the financial statements.

TheCompany’s management conducted an evaluation of the effectiveness of itsinternal control over financial reporting based on the framework in the documententitled Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. In addition, projections of any evaluation ofeffectiveness to future periods are subject to the risk that, owing to changesin conditions, controls may become inadequate, or that the degree of compliancewith policies or procedures may deteriorate. Based on this evaluation, theCompany’s management concluded that, as of April 30, 2007 the Company’sinternal control over financial reporting was effective.

Management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of April 30, 2007 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report, which is included herein.

## ***Changes in InternalControl over Financial Reporting***

Therehave been no changes in the Company’s internal control over financial reportingduring the most recently completed fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

**ITEM 9B.     OTHER INFORMATION**

None.

94

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**PART III**
| **ITEM 10.** | **DIRECTORS, EXECUTIVE OFFICERS  AND CORPORATE GOVERNANCE** |
|-------------------|-------------------------------------------------------------|

 

Theinformation required by this item concerning our directors is incorporated byreference to the sections captioned *“Proposal 1 – Electionof Directors” and “Corporate Governance”* contained in our proxystatement related to our 2007 Annual Meeting of Stockholders, to be filed withthe SEC within 120 days of the end of our fiscal year pursuant to GeneralInstruction G(3) of Form 10-K (the “Proxy Statement”). The information requiredby this item concerning compliance with Section 16(a) of the Exchange Actis incorporated by references to the section captioned *“Section 16(a) Beneficial**Ownership Reporting Compliance”*in ourProxy Statement. Certain information required by this item concerning executiveofficers is set forth in Part I of this Report in Item 1. “*Business”* under the heading *“Executive Officers and Directors of the Registrant*.”

**Code ofEthics**

Wehave a code of ethics that applies to all of our employees, including ourprincipal executive officer, principal financial officer and principalaccounting officer. This code of ethics is posted on our Internet website. TheInternet address for our website is http://www.ovt.com, and the code of ethicsmay be found on the “Corporate Governance” section of our “Investors” webpage.

Weintend to satisfy the disclosure requirement under Item 5.05 of Form 8-Kregarding any amendment to, or waiver from, a provision of this code of ethicsby posting such information on our website, at the address and locationspecified above, or as otherwise required by the NASDAQ Global Market.
| **ITEM 11.** | **EXECUTIVE COMPENSATION** |
|-------------------|----------------------------|

 

Theinformation required by this item is incorporated by reference to the sectionscaptioned *“Executive Compensation and OtherMatters”*contained in the Proxy Statement.
| **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|-------------------|-----------------------------------------------------------------------------------------------------|

 

Theinformation required by this item is incorporated by reference to the sectionscaptioned *“Security Ownership of CertainBeneficial Owners and**Management”*and *“Equity Compensation PlanInformation”*contained in the Proxy Statement.
| **ITEM 13.** | **CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE** |
|-------------------|-------------------------------------------------------------------------------|

 

Theinformation required by this item is incorporated by reference to the sectioncaptioned *“Related Party Transactions”*containedin the Proxy Statement.
| **ITEM 14.** | **PRINCIPAL ACCOUNTING FEES AND  SERVICES** |
|-------------------|---------------------------------------------|

 

Theinformation required by this item is incorporated by reference to the sectioncaptioned *“Proposal Three — Ratification ofAppointment of Independent Registered Public Accounting Firm”*containedin the Proxy Statement.

95

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**PARTIV**

**ITEM 15.   EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

(a)  Thefollowing documents are filed as part of this Report:

1.   ConsolidatedFinancial Statements. Refer to the financial statements filed as a part of thisReport under *“Item 8—FinancialStatements and Supplementary Data.”*

2.   FinancialStatement Schedules. The following financial schedule is filed as part of thisReport under *“Schedule II—Valuation andQualifying**Accounts for the YearsEnded April 30, 2007, 2006 and 2005.”*All other schedulescalled for by Form 10-K have been omitted because they are not applicableor are not required or the information required to be set forth therein isincluded in the consolidated financial statements or notes thereto.

3.   Exhibits.
| Exhibit  Number | ** ** | ** ** | **Description** |
|-----------------|------------|------------|-----------------|
|            |       |       |            |   |
| +2.1            |       | (8)        |            | Agreement  and Plan of Merger by and among the Registrant, Ski-Jump Acquisition Corp,  R.C. Mercure, Jr., W. Thomas Cathy, Jr. and Edward Dowski, Jr., CDM Optics,  Inc., and R.C. Mercure, Jr., a representative of the CDM security holders |
| 3.1             |       | (1)        |            | Restated  Certificate of Incorporation |
| 3.2             |       | (1)        |            | Bylaws  of the Registrant |
| 4.1             |       | (1)        |            | Specimen  Common Stock Certificate |
| 4.2             |       | (1)        |            | Amended  and Restated Registration Rights Agreement, dated as of May 20, 1998, by and  among the Registrant and certain stockholders of the Registrant |
| 4.3             |       | (3)        |            | Preferred  Stock Rights Agreement, dated August 21, 2001, between the Registrant and  Equiserve Trust Company, N.A., including the Certificate of Designation, the  form of Rights Certificate and Summary of Rights attached thereto as Exhibits  A, B and C, respectively |
| 4.4             |       | (6)        |            | Amendment  to Preferred Stock Rights Agreement, dated August 21, 2001, between the  Registrant and EquiServe Trust Company, N.A., effective June 7, 2004 |
| 4.5             |       | (8)        |            | Registration  Rights Agreement dated April 19, 2005, by and among the Registrant and  former holders of CDM Optics, Inc. securities |
| 10.1            |       | (1)        |            | Form  of Indemnification Agreement between the Registrant and each of its directors  and officers |
| 10.2            |       | (1)        |            | 2000  Stock Plan and form of option agreement |
| 10.3            |       | (1)        |            | 2000  Employee Stock Purchase Plan and form of subscription agreement |
| 10.4            |       | (1)        |            | 2000  Director Stock Option Plan and form of option agreement |
| 10.5            |       | (4)        |            | Lease  Agreement between the Registrant and Caribbean/Geneva Investors and Crossman  Partners, L.P., dated March 14, 2003, for the premises at 1341 Orleans Drive,  Sunnyvale, California 94089-1136 |
| *10.6           |       | (1)        |            | Non-exclusive  Distributor Agreement between the Registrant and World Peace Industrial Co.,  Ltd. dated January 1, 1998 |
| 10.7            |       | (2)        |            | Agreement  on Construction of Complete Municipal Facilities, Shanghai Songjiang Export  Processing Zone between OmniView Technology International Ltd. and Shanghai  Songjiang Export Processing Zone Administrative Committee dated December 28,  2000 |
| 10.8            |       | (2)        |            | Shanghai  Songjiang Export Processing Zone Administrative Committee Official Reply to  the Feasibility Study Report and Articles of Association of Foreign  Solely-funded Omni View Electronics (Shanghai) Co., Ltd. dated December 19,  2000 |
| 10.9            |       | (2)        |            | Contract  on the Transfer of Shanghai State-owned Land Use Right between OmniView  Technology International Ltd. and Shanghai Songjiang District Building and  Land Administrative Bureau dated December 28, 2000 |
| *10.10          | (b)        | (5)        |            | Letter  of Comfort, dated October 29, 2003, by and between the Registrant and  Taiwan Semiconductor Manufacturing Company |
| 10.11           |       | (7)        |            | Executive  Officer Profit Sharing/Bonus Plan |
| 10.12           |       | (9)        |            | Amended  and Restated Shareholders’ Agreement dated August 12, 2005, by and  between the Registrant, Taiwan Semiconductor Manufacturing Company and  certain other parties |
| *10.13          |       | (10)       |            | Equipment  Procurement Agreement dated as of August 31, 2006, by and between OmniVision  Trading (Hong Kong) Co. Ltd. and XinTec Inc. |
| 10.14           |       | (11)       |            | Termination  Agreement, dated January 23, 2007, by and between XinTec, Inc. and OmniVision  Trading (Hong Kong) Co. Ltd. |
| 10.15           |       | (12)       |            | Land-Use-Right  Purchase Agreement by and between the Registrant and the Construction and  Transportation Commission of the Pudong New District, Shanghai, dated  December 31, 2006 |   |
| 10.16           |       | (12)       |            | First Amendment  to the Amended and Restated Shareholders’ Agreement by and between the  Registrant and Taiwan Semiconductor Manufacturing Co., Ltd. dated December  31, 2006 |   |
| *10.17          |       |       |            | Foundry  Manufacturing Agreement by and between OmniVision International Holding Ltd.  and Powerchip Semiconductor Corporation, dated February 27, 2007 |   |
| 10.18           |       |       |            | Loan and  Security Agreement by and between the Registrant and Citibank, N.A., dated  March 16, 2007 |   |
| 10.19           |       |       |            | Deed of Trust,  Assignment of Rents and Leases, Security Agreement and Fixture Filing made as  of March 20, 2007 by the Registrant, as trustor, to First American Title  Insurance Company, as trustee, for the benefit of Citibank, N.A., as  beneficiary |   |
| 10.20           |       |       |            | Stock Pledge  Agreement entered into as of March 16, 2007 by the Registrant, as pledgor, in  favor of Citibank, N.A., as secured party |   |

 

96

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| 10.21                |   |   |   | Promissory Note  Secured by Deed of Trust (Term Loan) issued by the Registrant to Citibank,  N.A., dated March 16, 2007                                                                   |   |
|----------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.22                |   |   |   | Promissory Note  Secured by Deed of Trust (Mortgage Loan) by the Registrant to Citibank, N.A.,  dated March 16, 2007                                                                      |   |
| 10.23                |   |   |   | Investment  Agreement by and between the OmniVision Trading (Hong Kong) Company Limited  and China WLCSP Limited, dated April 6, 2007                                                     |   |
| 10.24                |   |   |   | Equity Interests  Transfer Agreement by and among OmniVision Trading (Hong Kong) Company  Limited, China WLCSP Limited and Infinity-CSVC Venture Capital Enterprise,  dated April 6, 2007 |   |
| 10.25                |   |   |   | Letter Agreement  by and between the Registrant and Citibank, N.A., dated March 20, 2007                                                                                                  |   |
| 21.1                 |   |   |   | Subsidiaries  of the Registrant                                                                                                                                                           |
| 23.1                 |   |   |   | Consent  of Independent Registered Public Accounting Firm                                                                                                                                 |
| 24.1                 |   |   |   | Power  of Attorney (included on page 99)                                                                                                                                                  |
| 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 the Sarbanes-Oxley  Act of 2002.    |

----

*                       Portions ofthis agreement have been omitted pursuant to a request for confidentialtreatment and the omitted portions have been filed separately with theSecurities and Exchange Commission.

+                       Schedules,exhibits and similar attachments to the Merger Agreement, as described therein,have been omitted pursuant to Item 6.01(b)(2) of Regulation S-K. The registrantwill furnish supplementally a copy of any omitted schedule, exhibit or similarattachment to the Securities and Exchange Commission upon its request.

(1)                Incorporated byreference to exhibits filed with Registrant’s Registration Statement on FormS-1 (File No. 333-31926) as declared effective by the Securities and ExchangeCommission on July 13, 2000.

(2)                Incorporated byreference to exhibits filed with Registrant’s Quarterly Report on Form 10-Q forthe quarter ended January 31, 2001.

(3)                Incorporated byreference to exhibits filed with Registrant’s Registration Statement on Form8-A (Reg. No. 000-29939) as declared effective by the Securities and ExchangeCommission on September 12, 2001.

(4)                Incorporated byreference to exhibits filed with Registrant’s Annual Report on Form 10-K forthe fiscal year ended April 30, 2003.

(5)                Incorporated byreference to exhibits filed with Registrant’s Quarterly Report on Form 10-Q forthe quarter ended October 31, 2003.

(6)                Incorporated byreference to exhibits filed with Registrant’s Quarterly Report on Form 10-Q forthe quarter ended July 31, 2004.

(7)                Incorporated byreference to exhibits filed with Registrant’s Current Report on Form 8-K filedwith the Securities and Exchange Commission March 31, 2005.

(8)                Incorporated byreference to exhibits filed with Registrant’s Current Report on Form 8-K filedwith the Securities and Exchange Commission April 25, 2005.

(9)                Incorporated byreference to an exhibit filed with Registrant’s Quarterly Report on Form 10-Qfor the quarter ended July 31, 2005.

(10)   Incorporated by reference to an exhibit filedwith Registrant’s Quarterly Report on Form 10-Q for the quarter endedOctober 31, 2006.

(11)   Incorporated by reference to an exhibit filedwith Registrant’s Current Report on Form 8-K filed with the Securities andExchange Commission on January 29, 2007.

(12)   Incorporated by reference to exhibits filedwith Registrant’s Quarterly Report on Form 10-Q for the quarter endedJanuary 31, 2007.

97

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**SCHEDULEII**

**OMNIVISIONTECHNOLOGIES, INC.**

**VALUATIONAND QUALIFYING ACCOUNTS**

**Forthe Years Ended April 30, 2007, 2006 and 2005(In thousands)**
| Description                                      | ** ** | **Balance at  Beginning of  Year** | ** ** | **Additions  and Charges  to Expenses** | ** ** | **Write-offs  and  Deductions** | ** ** | **Balance at  End of Year** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                   | ** ** | ** **                                        | ** ** | ** **                      | ** ** | ** **                                 | ** ** |
| **Allowance for doubtful accounts  receivable:** | ** ** | ** **                                   | ** ** | ** **                                        | ** ** | ** **                      | ** ** | ** **                                 | ** ** |
| Fiscal year ended April 30, 2007                 |       | $                                            | 1,067      |                                              | $          | 179                             |       | $                                          | 266        |   | $ | 980 |   |
| Fiscal year ended April 30, 2006                 |       | $                                            | 1,237      |                                              | $          | (81                             | )          | $                                          | 89         |   | $ | 1,067 |   |
| Fiscal year ended April 30, 2005                 |       | $                                            | 1,780      |                                              | $          | (543                            | )          | $                                          | —     |   | $ | 1,237 |   |
|                                             |       |                                         |       |                                              |       |                            |       |                                       |       |
| **Deferred tax valuation  allowance:**           | ** ** | ** **                                   | ** ** | ** **                                        | ** ** | ** **                      | ** ** | ** **                                 | ** ** |
| Fiscal year ended April 30, 2007                 |       | $                                            | 9,264      |                                              | $          | 859                             |       | $                                          | 7,247      |   | $ | 2,876 |   |
| Fiscal year ended April 30, 2006                 |       | $                                            | 1,761      |                                              | $          | 7,503                           |       | $                                          | —     |   | $ | 9,264 |   |
| Fiscal year ended April 30, 2005                 |       | $                                            | 1,260      |                                              | $          | 501                             |       | $                                          | —     |   | $ | 1,761 |   |
|                                             |       |                                         |       |                                              |       |                            |       |                                       |       |
| **Allowance for sales returns:**                 | ** ** | ** **                                   | ** ** | ** **                                        | ** ** | ** **                      | ** ** | ** **                                 | ** ** |
| Fiscal year ended April 30, 2007                 |       | $                                            | 6,429      |                                              | $          | 945                             |       | $                                          | 1,907      |   | $ | 5,467 |   |
| Fiscal year ended April 30, 2006                 |       | $                                            | 5,293      |                                              | $          | 2,303                           |       | $                                          | 1,167      |   | $ | 6,429 |   |
| Fiscal year  ended April 30, 2005                |       | $                                            | 3,301      |                                              | $          | 6,224                           |       | $                                          | 4,232      |   | $ | 5,293 |   |

 

98

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Actof 1934, as amended, the Registrant has duly caused this Report to be signed onits behalf by the undersigned, thereunto duly authorized.
|        | ** ** | **OMNIVISION  TECHNOLOGIES, INC.**       |
|--------|------------|------------------------------------------|
|   | ** ** | ** **                               |
|   | By:        | /s/ SHAW HONG                            |
|   | ** ** | **  Shaw Hong**                     |
|   | * *   | *President  and Chief Executive Officer* |

 

Date: June 29, 2007

**POWEROF ATTORNEY**

KNOWALL PERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Shaw Hong and Peter V. Leigh, and each of them, histrue and lawful attorneys-in-fact and agents, with full power of substitutionand resubstitution, to sign any and all amendments (including post-effectiveamendments) to this Annual Report on Form 10-K and to file the same, withall exhibits thereto and other documents in connection therewith, with theSecurities and Exchange Commission, granting unto each of saidattorneys-in-fact and agents, full power and authority to do and perform eachand every act and thing requisite and necessary to be done in connectiontherewith, as fully to all intents and purposes as he or she might or could doin person, hereby ratifying and confirming all that each of saidattorneys-in-facts and agents, or his substitute or substitutes, or any ofthem, shall do or cause to be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisReport has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated:
| Signature              | ** ** | **Title**                            | ** ** | **Date**            |
|------------------------|------------|--------------------------------------|------------|---------------------|
| ** **             | ** ** | ** **                           | ** ** | ** **          |
| /s/ SHAW HONG          |       | Chief Executive Officer, President   |       | June 29,  2007 |
| **Shaw  Hong**         |       | and Director *(Principal Executive*  |       |                |
|                   | * *   | *Officer)*                           |       |                |
|                   |       |                                 |       |                |
| /s/ PETER V. LEIGH     |       | Chief Financial Officer              |       | June 29,  2007 |
| **Peter  V. Leigh**    | * *   | *(Principal Financial and*           |       |                |
|                   | * *   | *Accounting Officer)*                |       |                |
|                   |       |                                 |       |                |
| /s/ XINPING HE         |       | Chief Operating Officer and Director |       | June 29,  2007 |
| **Xinping  He**        |       |                                 |       |                |
|                   |       |                                 |       |                |
| /s/ JOSEPH JENG        |       | Director                             |       | June 29,  2007 |
| **Joseph  Jeng**       |       |                                 |       |                |
|                   |       |                                 |       |                |
| /s/ DWIGHT  STEFFENSEN |       | Director                             |       | June 29,  2007 |
| **Dwight  Steffensen** |       |                                 |       |                |
|                   |       |                                 |       |                |
| /s/ ANDREW WANG        |       | Director                             |       | June 29,  2007 |
| **Andrew  Wang**       |       |                                 |       |                |

 

99

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**EXHIBITINDEX**
| Exhibit  Number | ** ** | ** ** | **Description** |                                                                                                                                                                                                                                                                       |
|-----------------|------------|------------|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** ** | ** **      | ** **                                                                                                                                                                                                                                                                 |   |
| +2.1            |       | (8)        |            | Agreement and Plan of Merger by and among the  Registrant, Ski-Jump Acquisition Corp, R.C. Mercure, Jr., W. Thomas Cathy,  Jr. and Edward Dowski, Jr., CDM Optics, Inc., and R.C. Mercure, Jr., a  representative of the CDM security holders                              |   |
| 3.1             |       | (1)        |            | Restated Certificate of Incorporation                                                                                                                                                                                                                                      |   |
| 3.2             |       | (1)        |            | Bylaws of the Registrant                                                                                                                                                                                                                                                   |   |
| 4.1             |       | (1)        |            | Specimen Common Stock Certificate                                                                                                                                                                                                                                          |   |
| 4.2             |       | (1)        |            | Amended and Restated Registration Rights Agreement,  dated as of May 20, 1998, by and among the Registrant and certain  stockholders of the Registrant                                                                                                                     |   |
| 4.3             |       | (3)        |            | Preferred Stock Rights Agreement, dated August 21,  2001, between the Registrant and Equiserve Trust Company, N.A., including the  Certificate of Designation, the form of Rights Certificate and Summary of  Rights attached thereto as Exhibits A, B and C, respectively |   |
| 4.4             |       | (6)        |            | Amendment to Preferred Stock Rights Agreement, dated  August 21, 2001, between the Registrant and EquiServe Trust Company,  N.A., effective June 7, 2004                                                                                                         |   |
| 4.5             |       | (8)        |            | Registration Rights Agreement dated April 19,  2005, by and among the Registrant and former holders of CDM Optics, Inc.  securities                                                                                                                                   |   |
| 10.1            |       | (1)        |            | Form of Indemnification Agreement between the  Registrant and each of its directors and officers                                                                                                                                                                           |   |
| 10.2            |       | (1)        |            | 2000 Stock Plan and form of option agreement                                                                                                                                                                                                                               |   |
| 10.3            |       | (1)        |            | 2000 Employee Stock Purchase Plan and form of  subscription agreement                                                                                                                                                                                                      |   |
| 10.4            |       | (1)        |            | 2000 Director Stock Option Plan and form of option  agreement                                                                                                                                                                                                              |   |
| 10.5            |       | (4)        |            | Lease Agreement between the Registrant and  Caribbean/Geneva Investors and Crossman Partners, L.P., dated March 14, 2003,  for the premises at 1341 Orleans Drive, Sunnyvale, California 94089-1136                                                                        |   |
| *10.6           |       | (1)        |            | Non-exclusive Distributor Agreement between the  Registrant and World Peace Industrial Co., Ltd. dated January 1, 1998                                                                                                                                                     |   |
| 10.7            |       | (2)        |            | Agreement on Construction of Complete Municipal  Facilities, Shanghai Songjiang Export Processing Zone between OmniView  Technology International Ltd. and Shanghai Songjiang Export Processing Zone  Administrative Committee dated December 28, 2000                     |   |
| 10.8            |       | (2)        |            | Shanghai Songjiang Export Processing Zone  Administrative Committee Official Reply to the Feasibility Study Report and  Articles of Association of Foreign Solely-funded Omni View Electronics (Shanghai)  Co., Ltd. dated December 19, 2000                               |   |
| 10.9            |       | (2)        |            | Contract on the Transfer of Shanghai State-owned  Land Use Right between OmniView Technology International Ltd. and Shanghai  Songjiang District Building and Land Administrative Bureau dated December 28,  2000                                                          |   |
| *10.10          | (b)        | (5)        |            | Letter of Comfort, dated October 29, 2003, by and  between the Registrant and Taiwan Semiconductor Manufacturing Company                                                                                                                                                   |   |
| 10.11           |       | (7)        |            | Executive Officer Profit Sharing/Bonus Plan                                                                                                                                                                                                                                |   |
| 10.12           |       | (9)        |            | Amended and Restated Shareholders’ Agreement dated  August 12, 2005, by and between the Registrant, Taiwan Semiconductor  Manufacturing Company and certain other parties                                                                                        |   |
| *10.13          |       | (10)       |            | Equipment Procurement Agreement dated as of August  31, 2006, by and between OmniVision Trading (Hong Kong) Co. Ltd. and XinTec  Inc.                                                                                                                                      |
| 10.14           |       | (11)       |            | Termination Agreement, dated January 23, 2007, by  and between XinTec, Inc. and OmniVision Trading (Hong Kong) Co. Ltd.                                                                                                                                                    |
| 10.15           |       | (12)       |            | Land-Use-Right Purchase Agreement by and between the  Registrant and the Construction and Transportation Commission of the Pudong  New District, Shanghai, dated December 31, 2006                                                                                         |
| 10.16           |       | (12)       |            | First Amendment to the Amended and Restated  Shareholders’ Agreement by and between the Registrant and Taiwan  Semiconductor Manufacturing Co., Ltd. dated December 31, 2006                                                                                          |
| *10.17          |       |       |            | Foundry Manufacturing Agreement by and between  OmniVision International Holding Ltd. and Powerchip Semiconductor  Corporation, dated February 27, 2007                                                                                                                    |
| 10.18           |       |       |            | Loan and Security Agreement by and between the  Registrant and Citibank, N.A., dated March 16, 2007                                                                                                                                                                        |
|                 |            |            |                 |                                                                                                                                                                                                                                                                            |  |  |

 

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| 10.19                |   |   |   | Deed of Trust, Assignment of Rents and Leases,  Security Agreement and Fixture Filing made as of March 20, 2007 by the  Registrant, as trustor, to First American Title Insurance Company, as trustee,  for the benefit of Citibank, N.A., as beneficiary |
|----------------------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20                |   |   |   | Stock Pledge Agreement entered into as of March 16,  2007 by the Registrant, as pledgor, in favor of Citibank, N.A., as secured  party                                                                                                                    |
| 10.21                |   |   |   | Promissory Note Secured by Deed of Trust (Term Loan)  issued by the Registrant to Citibank, N.A., dated March 16, 2007                                                                                                                                    |
| 10.22                |   |   |   | Promissory Note Secured by Deed of Trust (Mortgage  Loan) by the Registrant to Citibank, N.A., dated March 16, 2007                                                                                                                                       |
| 10.23                |   |   |   | Investment Agreement by and between the OmniVision  Trading (Hong Kong) Company Limited and China WLCSP Limited, dated April 6,  2007                                                                                                                     |
| 10.24                |   |   |   | Equity Interests Transfer Agreement by and among  OmniVision Trading (Hong Kong) Company Limited, China WLCSP Limited and  Infinity-CSVC Venture Capital Enterprise, dated April 6, 2007                                                                  |
| 10.25                |   |   |   | Letter Agreement by and between the Registrant and  Citibank, N.A., dated March 20, 2007                                                                                                                                                                  |
| 21.1                 |   |   |   | Subsidiaries of the Registrant                                                                                                                                                                                                                            |
| 23.1                 |   |   |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                                 |
| 24.1                 |   |   |   | Power of Attorney (included on page 99)                                                                                                                                                                                                                   |
| 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 the Sarbanes-Oxley Act of 2002.                                                                     |

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*      Portions ofthis agreement have been omitted pursuant to a request for confidentialtreatment and the omitted portions have been filed separately with theSecurities and Exchange Commission.

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+                       Schedules,exhibits and similar attachments to the Merger Agreement, as described therein,have been omitted pursuant to Item 6.01(b)(2) of Regulation S-K. The registrantwill furnish supplementally a copy of any omitted schedule, exhibit or similarattachment to the Securities and Exchange Commission upon its request.

(1)                Incorporatedby reference to exhibits filed with Registrant’s Registration Statement on FormS-1 (File No. 333-31926) as declared effective by the Securities and ExchangeCommission on July 13, 2000.

(2)                Incorporatedby reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Qfor the quarter ended January 31, 2001.

(3)                Incorporatedby reference to exhibits filed with Registrant’s Registration Statement on Form8-A (Reg. No. 000-29939) as declared effective by the Securities and ExchangeCommission on September 12, 2001.

(4)                Incorporatedby reference to exhibits filed with Registrant’s Annual Report on Form 10-K forthe fiscal year ended April 30, 2003.

(5)                Incorporatedby reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Qfor the quarter ended October 31, 2003.

(6)                Incorporatedby reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Qfor the quarter ended July 31, 2004.

(7)                Incorporatedby reference to exhibits filed with Registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission March 31, 2005.

(8)                Incorporatedby reference to exhibits filed with Registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission April 25, 2005.

(9)                Incorporatedby reference to an exhibit filed with Registrant’s Quarterly Report on Form10-Q for the quarter ended July 31, 2005.

(10)   Incorporatedby reference to an exhibit filed with Registrant’s Quarterly Report on Form10-Q for the quarter ended October 31, 2006.

(11)   Incorporatedby reference to an exhibit filed with Registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on January 29, 2007.

(12)   Incorporatedby reference to exhibits filed with Registrant’s Quarterly Report on Form 10-Qfor the quarter ended January 31, 2007.

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