OmniVision (OVTI) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2008

OR

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                           to                           

Commission file number: 0-29939

OMNIVISION TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

4275 Burton Drive, Santa Clara, California  95054

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 567-3000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for shorter 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 ¨

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

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

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

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

OMNIVISION TECHNOLOGIES, INC.

INDEX

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

2

PART I — FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

OMNIVISION TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

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

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

3

OMNIVISION TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

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

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

4

OMNIVISION TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

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

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

5

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

Note 1 — Basis of Presentation

Overview

The accompanying interim unaudited condensed consolidated financial statements as of October 31, 2008 and April 30, 2008 and for the three and six months ended October 31, 2008 and 2007 have been prepared by OmniVision Technologies, Inc., and its subsidiaries (“OmniVision” or the “Company”) in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The amounts as of April 30, 2008 come from the Company’s audited annual financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the audited annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2008 (the “Form 10-K”).

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and beliefs of what could occur in the future considering available information. Actual results could differ from these estimates.

Note 2 — Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its consolidated affiliate. All significant inter-company accounts and transactions have been eliminated.

Change-of-Interest Benefit/Impairment

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

Foreign Currency Translation

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

6

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity at the date of purchase of three months or less to be cash equivalents. Cash equivalents consist principally of commercial paper, government bonds, certificates of deposit and money market funds. (See Note 10.)

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

The Company places its cash investments in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines, and reviews its investments regularly to identify and evaluate investments for risk of possible impairment. Factors the Company considers in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

Inventories

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

The Company records an allowance to reduce the carrying value of inventories to their net realizable value when the Company believes that the net realizable value is less than cost. The Company also records an allowance for the cost of inventories when the number of units on hand exceeds the number of units that the Company forecasts will be sold over a certain period of time, generally 12 months. Where necessary, these allowances take into account the inventories owned and not yet sold by certain of the Company’s distributors. The recording of these allowances establishes a new and lower cost basis for each specifically identified inventory item, and the Company does not restore the cost basis to its original level regardless of any subsequent changes in facts or circumstances.

Goodwill

The Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired, including related tax effects. Goodwill is not amortized; instead goodwill is tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist. The performance of the test involves a two-step process. 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 market capitalization of the reporting unit as determined through quoted market prices. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process, which is performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s net assets other than goodwill and the fair value of the reporting unit. If this difference is less than the net book value of goodwill, an impairment exists and is recorded. For the three and six months ended October 31, 2008, the Company recorded a goodwill impairment charge of $7.5 million. The Company did not record a goodwill impairment charge in the three and six months ended October 31, 2007. (See Note 7.)

Comprehensive Income (Loss)

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

7

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

income, the impact of the initial adoption of Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” (“FIN 48”)  on retained earnings, unrealized gains (losses) from available-for-sale securities and translation gains (losses) from foreign subsidiaries.

Revenue Recognition

For shipments 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 this method, the Company recognizes revenue upon the shipment of products to the customer provided that the Company has received a signed purchase order, the price is fixed or determinable, title and risk of loss has transferred to the customer, collection of resulting receivables is considered reasonably assured, product returns are reasonably estimable, there are no customer acceptance requirements and there are no remaining material obligations. At the time revenue is recognized, the Company provides for future returns of potentially defective product based on historical experience. For cash consideration given to customers for which the Company does not receive a separately identifiable benefit or cannot reasonably estimate fair value, the Company records the amounts as reductions of revenue.

For shipment of products sold to distributors under agreements allowing for returns or credits, title and the risk of ownership to the products transfer to the distributor upon shipment, and the distributor is obligated to pay for the products whether or not the distributor has sold them at the time payment is due. Under the terms of the Company’s agreements with such distributors and subject to the Company’s prior approval, distributors are entitled to reclaim from the Company as price adjustments the difference, if any, between the prices at which the Company sold the product to the distributors and the prices at which the product is subsequently sold by the distributor. In addition, distributors have limited rights to return inventory that they determine is in excess of their requirements, and accordingly, in determining the appropriate level of allowances for excess and obsolete inventory, the Company takes into account the inventories held by its distributors. For these reasons, prices and revenues are not fixed or determinable until the distributor resells the products to the Company’s end-user customers and the distributor notifies the Company in writing of the details of such sales transactions. Accordingly, the Company recognizes revenue using the “sell-through” method. Under the “sell-through” method, the Company defers the revenue, adjustments to revenue and the related costs of revenue until the final resale of such products to end customers. The amounts billed to these distributors and adjustments to revenue and the cost of inventory shipped to, but not yet sold by, the distributors are shown net on the Condensed Consolidated Balance Sheets as “Deferred revenues, less cost of revenues.”

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

Recent Accounting Pronouncements

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

8

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

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

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”). This Statement requires enhanced disclosures for derivative instruments, including those used in hedging activities. It requires qualitative disclosures about objectives and strategies for using derivatives, and quantitative disclosures about fair value amounts of gains and losses on derivative instruments. The provisions of SFAS No. 161 are effective for fiscal years beginning on or after November 15, 2008. In September 2008, FASB issued FSP SFAS No. 133-1 and FASB Interpretation No. (“FIN”) 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. FIN 45, and Clarification of the Effective Date of FASB Statement No. 161” (“FSP SFAS No. 133-1 and FIN 45-4”). FSP SFAS No. 133-1 and FIN 45-4 clarifies that the effective date of SFAS No. 161 is applicable to any reporting period beginning after November 15, 2008. SFAS No. 161 is effective for the Company’s fourth quarter of fiscal 2009. The Company is currently evaluating the impact SFAS No. 161 may have on its financial position, results of operations and cash flows.

FSP SFAS No. 133-1 and FIN 45-4 also amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to require enhanced disclosures about credit derivatives and guarantees, and amends FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others,” to exclude derivative instruments accounted for at fair value under SFAS No. 133. The provisions of FSP SFAS No. 133-1 and FIN 45-4 that amended SFAS No. 133 and FIN 45 are effective for reporting periods ending after November 15, 2008.  The Company does not expect the adoption of FSP SFAS No. 133-1 and FIN 45-1 in its fourth quarter of fiscal 2009 to have any material effect on its financial condition, results of operations or cash flows.

Note 3 — Short-Term Investments

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

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

9

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

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

10

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

Note 4 — Balance Sheet Accounts (in thousands)

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

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

11

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

Note 5 — Long-term Investments

Long-term investments as of October 31, 2008 and April 30, 2008 consisted of the following (in thousands):

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

VisEra Technologies Company, Ltd.

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

Under the terms of the Amended VisEra Agreement, the parties reaffirmed their respective commitments to VisEra, and expanded the scope of and made certain modifications to the VisEra Agreement. The Company and TSMC have equal interests in VisEra Cayman. In the quarter ended October 31, 2005, the Company and TSMC each contributed $7.5 million to VisEra and VisEra Cayman. As a result of this additional investment, the Company’s and TSMC’s interest each increased from 25% to 43%, and consequently the Company re-evaluated its accounting for VisEra in accordance with FIN 46(R), “Consolidation of Variable Interest Entities.” Since the Company was the source of virtually all of VisEra’s revenues, the Company had a decisive influence over VisEra’s profitability. The Company concluded that, as a result of its step acquisition of VisEra, and because substantially all of the activities of VisEra either involved or were conducted on behalf of the Company, VisEra was a variable interest entity (“VIE”). Accordingly, the Company considered itself to be the primary beneficiary of VisEra, and included VisEra’s financial results in its consolidated financial statements through December 31, 2006. In the quarter ended January 31, 2006, the Company increased its interest in VisEra from 43% to 46% through purchases of $9.5 million of unissued shares.

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

In May 2006, VisEra purchased certain equipment and intellectual property from Dai Nippon Printing Co., Ltd. (“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 investment exceeded the Company’s average per share carrying value in VisEra Cayman, the Company recorded a one-time change-of-interest benefit of $1.2 million directly to “Additional paid-in capital,” a component of stockholders’ equity. In November 2006, the Company invested another $6.1 million in VisEra.

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

12

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

Financial Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (“FIN 46(R)”) and, as a result, the Company deconsolidated VisEra. Accordingly, beginning on January 1, 2007, the Company has accounted for its investment in VisEra under the equity method. The deconsolidation of VisEra did not have a material effect on the Company’s reported revenue or reported net income for the fiscal year ended April 30, 2007. In April 2007, pursuant to a January 2007 amendment to the Amended VisEra Agreement that provided for an increase in VisEra’s manufacturing capacity, the Company and TSMC each made an additional investment of $27.0 million in VisEra. This additional investment was part of an ongoing capacity expansion program at VisEra. The Company’s contribution to VisEra and VisEra Cayman thus totaled $51.6 million, effectively meeting its commitment under the terms of the January 2007 amendment to the Amended VisEra Agreement, in which the Company and TSMC have agreed to commit a total of $112.9 million to the joint venture. The Company has not made any subsequent contributions into VisEra.

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

China WLCSP Limited

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

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

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

XinTec, Inc.

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

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

13

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

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

ImPac Technology Co., Ltd.

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

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

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

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

Note 6 — Consolidated Affiliate – Silicon Optronics, Inc.

In May 2004, the Company entered into an agreement with Powerchip Semiconductor Corporation (“PSC”), a Taiwan based company that produces memory chips and provides semiconductor foundry services, to establish a joint venture in Taiwan. The purpose of the joint venture, Silicon Optronics, Inc. (“SOI”), is to conduct manufacturing, marketing and selling of certain of the Company’s legacy products. The Company contributed approximately $2.1 million to SOI in exchange for an ownership percentage of 49.0%. In March 2005, the Company assumed control of the board of directors of SOI and the Company has consolidated SOI since April 30, 2005.

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

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

14

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

Note 7 — Goodwill and Intangible Assets

During the second quarter of fiscal 2009, based on a combination of factors, including the significant decline in the Company’s market capitalization and the current global economic downturn, the Company concluded that there were sufficient factual circumstances for interim impairment analyses under SFAS No. 142 and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”).  As a result, the Company performed interim impairment tests on goodwill and certain other long-lived tangible and intangible assets as of October 31, 2008.

Goodwill

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

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

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

Intangible Assets

The Company also tested its long-lived assets, including its intangible assets, for potential impairment. Under SFAS No. 144, potential impairment assessments are preceded by recoverability tests where undiscounted expected future cash flows would be compared to carrying amounts of asset groups. If the carrying amount is less than the undiscounted expected future cash flows, the Company will not recognize any asset impairment loss. Based on the recoverability analysis, the Company determined that the undiscounted expected future cash flows as generated by the Company’s primary asset group, which is its supply chain assets, exceeded the asset carrying values. Consequently, the Company did not record any impairment of its intangible assets or its other long-lived assets. Intangible assets as of October 31, 2008 consist of the following (in thousands):

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

15

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

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

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

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

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

Note 8 — Borrowing Arrangements

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

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

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

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

Mortgage Loan

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

16

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

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

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

In conjunction with the Mortgage Loan, the Company entered into an interest rate swap with the same bank to effectively convert the variable interest rate described above to a fixed rate. The swap is for a period of ten years, and the notional amount of the swap approximates the principal outstanding under the Mortgage Loan. The Company is the fixed rate payer under the swap and the rate is fixed at 5.3% per annum and the effective rate on the Mortgage Loan is fixed at approximately 6.2%. In July 2008, in connection with the Term Loan, the Company entered into a second interest rate swap with the bank to effectively convert the variable interest rate described above to a fixed rate. This second swap is for a period of four years. The Company is the fixed rate payer and the rate is fixed at 4.3% per annum and the effective rate on the Term Loan is fixed at approximately 5.5%. The Company remeasures both swaps at fair values at each balance sheet date and records them as either assets or liabilities, depending on whether the fair value represents net gains or net losses. As of October 31, 2008 and April 30, 2008, the Company recorded $2.4 million and $2.2 million, respectively, in “Other long-term liabilities.” For the three and six months ended October 31, 2008, the Company recorded expense of $0.6 million and $165,000, respectively, in “Other expense, net.” For the three and six months ended October 31, 2007, the Company recorded expense of $0.8 million and $169,000, respectively, in “Other expense, net.”

Lines of Credit at SOI

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

Capital Lease Obligations

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

Note 9 — Net Income (Loss) Per Share

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

Diluted net income per share is computed according to the treasury stock method using the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares represent the effect of stock options, restricted stock units and employee stock purchase plan shares. For the three months ended October 31, 2008, the Company excluded all options and restricted stock units outstanding as the Company recorded a net loss of $5.3 million. For the six months ended October 31, 2008, 12,261,000 shares of common stock subject to outstanding options were not included in the calculation of diluted net income per share because they were antidilutive. For the three and six months ended October 31, 2007, 4,711,000 and 5,382,000 shares,

17

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

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

The Company’s earnings per share were calculated under the provisions of the SFAS No. 128, “Earnings Per Share,” (“SFAS No. 128”). SFAS No. 128 requires that the Company take into account the effect on consolidated earnings per share of options, warrants and convertible securities issued by its subsidiaries. The effect on consolidated earnings per share depends on whether the securities issued by the subsidiary enable their holders to obtain common stock of the subsidiary company or common stock of the parent company. Securities issued by a subsidiary that enable their holders to obtain the subsidiary’s common stock are included in computing the subsidiary’s earnings per share data. The diluted per-share earnings of the subsidiary are included in the Company’s consolidated earnings per share computations based on the consolidated group’s holding of the subsidiary’s securities. Through October 31, 2008, SOI issued options to various of its employees exercisable for 2,700,000 shares of its common stock. In the calculation of its earnings per share for the three and six months ended October 31, 2008 and 2007, the Company included the effect of SOI’s options in its consolidated earnings per share.

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

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

Note 10 — Fair Value Measurements

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

18

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumption of market participant valuation (unobservable inputs). The fair value hierarchy consists of the following three levels:

·Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.

·Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

·Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

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

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

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis which were presented on the Company’s Condensed Consolidated Balance Sheets as of October 31, 2008, (in thousands):

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

Note 11 — Segment and Geographic Information

The Company 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.

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

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

19

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

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

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

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

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

Note 12 — Employee Stock Purchase, Equity Incentive and Stock Option Plans

2007 Equity Incentive Plan

In September 2007, on the recommendation of the Company’s board of directors, the stockholders of the Company approved the 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan replaced the Company’s 2000 Stock Plan. The Company has reserved 6,000,000 shares of common stock for issuance under the 2007 Plan. The 2007 Plan provides for the grant of the following types of incentive awards: (i) stock options; (ii) stock appreciation rights; (iii) restricted stock; (iv) restricted stock units; (v) performance shares and performance units; and (vi) other stock or cash awards. In general, stock option and stock appreciation right awards under the 2007 Plan will be granted at a price not less than 100% of the fair market value of the Company’s common stock on the date of grant. Through October 31, 2008, the Company had granted stock options for approximately 594,000 shares and 511,000 restricted stock units to employees under the 2007 Plan. In general, the Company’s stock option awards have a maximum contractual term of ten years and vest over four years. Restricted stock units granted under the 2007 Plan generally vest over three years. In July 2008, the Company also granted approximately 196,000 performance shares to certain employees. These 196,000 shares represent the “target” number of shares of common stock that will be issued if certain performance goals are achieved. The actual number of shares to be issued will be determined at the end of a one-year performance period, and can range from 0% to 175% of the target number, depending on the degree of achievement then of the performance goals. After determining the final share count, the awards will vest over two years.

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

20

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

The Company’s equity incentive and stock-based compensation plans as of October 31, 2008 are summarized as follows (in thousands):

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

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

Stock-Based Compensation Award Activity

The following table summarizes the equity award activities under the 2000 Stock Plan, the 2000 Director Option Plan and the 2007 Plan, for the six months ended October 31, 2008:

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

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

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

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

21

OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

(unaudited)

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

Valuation Assumptions

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

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

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

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

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

22

Omnivision Technologies, Inc.

Notes to condensed consolidated financial statements — (Continued)

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

(unaudited)

The following weighted average assumptions are included in the estimated grant date fair value calculations for rights to purchase stock under the 2000 Purchase Plan:

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

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

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

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

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

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

·Estimated pre-vesting forfeitures: When estimating pre-vesting forfeitures, the Company considers forfeiture behavior based on actual historical information.

Note 13 — Additional Paid-in Capital

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

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

Note 14 — Treasury Stock

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

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

23

Omnivision Technologies, Inc.

Notes to condensed consolidated financial statements — (Continued)

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

(unaudited)

Note 15 — Income Taxes

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

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

During the three months ended October 31, 2008, the Company accrued an additional $0.6 million of interest related to the Company’s unrecognized tax benefits determined in accordance with FIN 48.

Note 16 — Commitments and Contingencies

Commitments

The Company maintains a wholly-owned subsidiary in Shanghai, China, OmniVision Technologies (Shanghai) Co. Ltd. (“OTC”) which provides assistance to the Company in various product design projects and in marketing and sales support. On January 10, 2007, OTC entered into a Land-Use-Right Purchase Agreement (the “Purchase Agreement”) with the Construction and Transportation Commission of the Pudong New District, Shanghai. The Purchase Agreement has an effective date of December 31, 2006. Under the terms of the Purchase Agreement, the Company agreed to pay an aggregate amount of approximately $0.6 million (the “Purchase Price”) in exchange for the right to use approximately 323,000 square feet of land located in Shanghai for a period of 50 years. In addition, the Company is obligated to invest a minimum of approximately $33.7 million to develop the land and construct facilities, which amount includes the Purchase Price. As of October 31, 2008, the Company has already contributed $12.0 million of the $33.7 million total investment. Construction of the facilities on the land has commenced and according to the Purchase Agreement, construction must be completed by June 30, 2009, subject to an additional one-year extension under limited circumstances. The Company may use the land solely for the purposes of industrial use and/or scientific research. The Company intends to use OTC’s registered capital to partially fund its commitment to this project.

During the three months ended October 31, 2008, the Company formed Shanghai OmniVision Semiconductor Technology, Co. Ltd, a new subsidiary in Shanghai, China, for the purpose of expanding its testing capabilities. The Company is required to contribute $1.5 million by January 2009. The Company is required to contribute the remaining $8.5 million of a $10.0 million commitment by October 2010.

The Company has various commitments arising from the Amended VisEra Agreement, and the subsequent amendments to it. In particular, as of October 31, 2008, the Company and TSMC have agreed to commit a total of $112.9 million to the joint venture, which commitments may be made in the form of cash or asset contributions. Through October 31, 2008, the Company has contributed $51.6 million to VisEra and VisEra Cayman and, as of October 31, 2008, the Company has effectively met its commitment under the terms of this agreement. Additional contributions may be made by additional investors, additional contributions by the Company and TSMC, or a combination thereof, provided that the Company and TSMC have and will maintain equal interests in VisEra and VisEra Cayman. To the extent, if any that the value of assets contributed in the future exceeds the value of the Company’s commitment, the Company will receive cash from VisEra Cayman. (See Notes 5 and 17.)

24

Omnivision Technologies, Inc.

Notes to condensed consolidated financial statements — (Continued)

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

(unaudited)

Litigation

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

On November 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 New York against OmniVision, some of the Company’s directors and officers, and various underwriters for the Company’s initial public offering. Plaintiffs generally allege that the named defendants violated federal securities laws because the prospectus related to the Company’s offering failed to disclose, and contained false and misleading statements regarding, certain commissions purported to have been received by the underwriters, and other purported underwriter practices in connection with their allocation of shares in the Company’s offering. The complaint seeks unspecified damages on behalf of a purported class of purchasers of the Company’s common stock between July 14, 2000 and December 6, 2000. Substantially similar actions have been filed concerning the initial public offerings for more than 300 different issuers, and the cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. Claims against the Company’s directors and officers have been dismissed without prejudice pursuant to a stipulation. On February 19, 2003, the Court issued an order dismissing all claims against the Company except for a claim brought under Section 11 of the Securities Act of 1933.

In June 2004, the issuer defendants and plaintiffs negotiated a stipulation of settlement for the claims against the issuer defendants, including OmniVision, that was submitted to the Court for approval. In August 2005, the Court preliminarily approved the settlement. In December 2006, the appellate court overturned the certification of classes in the six test cases that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings. The action involving OmniVision is not one of the six test cases. Because class certification was a condition of the settlement, it is unlikely that the current settlement will receive final court approval. On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement. Plaintiffs have filed amended master allegations and amended complaints in the six test cases. On March 26, 2008, the Court largely denied the test case defendants’ motion to dismiss the amended complaints. It is uncertain whether there will be any revised or future settlement. If the litigation proceeds, the Company believes that it has meritorious defenses to plaintiffs’ claims and intends to defend the action vigorously.

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

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

Note 17 — Related Party Transactions

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

25

Omnivision Technologies, Inc.

Notes to condensed consolidated financial statements — (Continued)

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

(unaudited)

During the three months ended January 31, 2007, the Company and ImPac agreed to initiate payment of licensing fees for the use of certain software developed by ImPac at OmniVision Semiconductor (Shanghai) Co. Ltd., the Company’s wholly-owned subsidiary in China. During the three and six months ended October 31, 2008, the Company paid ImPac a nominal amount for software licensing fees. During the three and six months ended October 31, 2007, the Company paid ImPac approximately $45,000 and $90,000, respectively, in software licensing fees.  In addition, the Company paid ImPac approximately $3.2 million and $5.9 million for manufacturing services for the three and six months ended October 31, 2008, respectively. In addition, for the three and six months ended October 31, 2007, the Company paid ImPac approximately $3.7 million and $6.4 million, respectively, for manufacturing services. During fiscal 2008, the Company loaned $1.3 million to ImPac for the purpose of expanding its manufacturing capacities for a term of one year, but can be extended upon mutual consent of the parties for one year. The loan is fully collateralized by assets held by ImPac. (See Note 5.) In August, 2008, the Company entered into an additional agreement with ImPac under which the Company agreed to place certain manufacturing equipment with ImPac on a consignment basis for a period of up to five years.

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

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

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

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

The Company purchases a substantial portion of its wafers from TSMC. The Company also purchases a portion of its wafers from PSC.

26

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

The following information should be read in conjunction with our unaudited condensed interim financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve risks and uncertainties. Forward-looking statements generally include words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “outlook,” “plans,” “seeks,” “will”  and words of similar import as well as the negative of those terms. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q, including, but not limited to, statements regarding our projected results of operations for future reporting periods, the extent of future sales through distributors, future growth trends and opportunities in certain markets, the development, introduction and capabilities of new products, future sales of our products outside the United States, the increasing competition in our industry, the continued importance of the mobile phone market to our business, continued price competition and the consequent reduction in the average selling prices of our products, future expenses we expect to incur, our future investments, our working capital requirements in fiscal 2009 and thereafter, the effect of a change in foreign currency rates, and the sufficiency of our available cash, cash equivalents and short-term investments are based on current expectations and are subject to important factors that could cause actual results to differ materially from those projected in the forward-looking statements. Such important factors include, but are not limited to, those set forth under the caption “Item 1A. Risk Factors,” beginning on page 49 of this Quarterly Report and elsewhere in this Quarterly Report and in other documents we file with the U.S. Securities and Exchange Commission, or SEC. All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors.

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

Overview

We design, develop and market high performance, highly integrated and cost efficient semiconductor image-sensor devices. Our main products, image-sensing devices which we refer to by the name CameraChip™ image sensors, capture an image electronically and are used in a number of consumer and commercial mass-market applications. Our CameraChip image sensors are manufactured using the complementary metal oxide semiconductor, or CMOS, fabrication process and are predominantly single-chip solutions that integrate several distinct functions including image capture, image processing, color processing, signal conversion and output of a fully processed image or video stream. We believe that our highly integrated image sensors enable camera device manufacturers to build high quality camera products that are smaller, less complex, more reliable, more cost effective and more power efficient than cameras using traditional charge-coupled devices, or CCDs.

Technology

In August 2004, we announced the introduction of our OmniPixel® technology. In September 2005, we announced the introduction of our OmniPixel2™ architecture. The OmniPixel2 architecture, which is based on a 2.2 µm x 2.2 µm pixel and uses a 0.13 µm process geometry, is less than half the size of the OmniPixel architecture introduced in 2004, but with improved performance.

In February 2007, we introduced our first TrueFocus™ camera with Wavefront Coding™ technology for the mobile phone market. Our patented Wavefront Coding technology is a method of optically encoding light using a special lens to form an intermediate image on the image sensor, and decoding this intermediate image with digital processing to create a picture that is in focus across virtually the entire image. TrueFocus technology is designed to provide ‘point-and-shoot’ capability to our customers with a product that effectively targets the mobile phone market by being small, durable, easy to manufacture and cost-competitive.

In May 2007, we announced the introduction of our OmniPixel3™ architecture. The OmniPixel3 architecture is based on a 1.75 µm x 1.75 µm pixel and a 0.11 µm process geometry which further reduced the size of a given image-sensor array without any reduction in image quality.

27

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

In February 2008, we announced our new OmniPixel3-HS™ architecture, which incorporates a new pixel design that doubles the sensitivity of our 1.75 µm OmniPixel3 architecture. The performance of the new OmniPixel3-HS architecture significantly enhances image capture under very low lighting conditions, and thereby, we believe, allows for a new generation of compact camera solutions for mobile phones, notebook computers and other applications that require exceptional low-light performance.

In May 2008, we announced a new approach to CMOS image sensor design we call OmniBSI™ technology. OmniBSI technology is based on an idea called back side illumination, or BSI. Our first OmniBSI product, an 8-megapixel image sensor is built using an advanced 1.4 µm pixel, and we believe we are the first image sensor company to announce a viable process for the mass production of BSI sensors.

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

In addition to increasing the amount of light the image sensor can collect, our OmniBSI architecture significantly increases the quantum efficiency and reduces the cross talk of the sensor. Increasing the quantum efficiency increases the quality of the sensor’s color reproduction. Reducing cross talk reduces electrical noise, which produces sharper images and better color.

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

Given the rapidly changing nature of our technology, there can be no assurance that we will not encounter delays or other unexpected production or performance issues with future products. During the early stages of production, production yields and gross margins for products based on new technology are typically lower than those of established products.

New Products

In January 2008, we introduced two new products. The first, the OV9710, is our first true high-definition, or HD, video CameraChip image sensor for mobile phone and notebook computer markets. The OV9710 is a 1-megapixel CMOS image sensor built with our proprietary OmniPixel3 architecture and a 3 µm x 3 µm pixel for optimal low-light sensitivity and high-quality HD video performance at 30 frames per second, or FPS. We designed the OV9710 specifically to meet all mobile phone (1280 x 720 pixels) and notebook and personal computer (1280 x 800 pixels) market requirements in terms of performance, quality, reliability and power consumption.

The second new product is the OV7725. The ¼-inch OV7725 is built with a 6 µm x 6 µm pixel to deliver the ultra-high light sensitivity required for the low light conditions in which most consumers use their notebook computers. The OV7725 is a highly integrated CameraChip image sensor that provides the full functionality of a VGA camera and image processor on a single chip. A unique feature of the OV7725 is its high chief ray angle which allows for a reduction in module height, a critical element in building cameras that can fit in today’s thin notebook computers. A second highlight of the OV7725 is its ability to operate at 60 FPS, in VGA mode, or 120 FPS in quarter VGA, or QVGA, for optimal performance in notebook and personal computer and gaming applications.

In February 2008, we introduced two additional new products. The first, the OV3642, is a ¼-inch, 3-megapixel CameraChip image sensor with extended depth of field technology embedded on-chip. The fully integrated OV3642 is built with our new OmniPixel3-HS technology and offers best-in-class low light performance. Additionally, the OV3642 incorporates our most advanced ISP technology resulting in increased picture clarity and sharpness.

28

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

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

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

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

In June 2008, we introduced the OV3647, a ¼-inch 3-megapixel image sensor that supports the mobile display digital interface, or MDDI. The OV3647 is also equipped with a standard parallel interface which has the unique ability to act as an input for a secondary camera, so it can share the MDDI interface while also functioning as an MDDI hub. Sharing the MDDI reduces the number of interconnects to the Baseband processor, which increases reliability, reduces power consumption and enables rapid two-way data transfer. Sharing the MDDI also eliminates high frequency electro-magnetic interference, or EMI, issues, which often have adverse effects on system performance. The OV3647 is small enough to enable 7 x 7 x 5 mm camera modules with a very short optical track, and thus is versatile enough to work well both with fixed focus and auto-focus modules. The OV3647’s embedded, one-time programmable memory is designed for part recognition and simplification of module designs using different lenses. In addition to targeting the mobile phone market, the OV3647 is well-suited to applications in the digital still camera, or DSC, notebook and personal computer and toy sectors.

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

The first OmniBSI device introduced, the OV8810, is a 1/3-inch, 8-megapixel CameraChip image sensor targeted at the mobile phone market. The device is small enough to fit within an 8.5 x 8.5 x 7 mm camera module and outputs data in full 8-megapixel resolution at 10 fps, and records 720p HD video at 60 fps, or 1080p at 30 fps. In QVGA resolution, the OV8810 can output data at 120 fps, ideal for slow motion preview. For fast transfer of image data, the OV8810 is outfitted with a parallel interface and a two-lane, high-speed MIPI interface. This enables mobile phone makers to use the OV8810’s parallel interface as input for a secondary camera, while alternately providing output via the MIPI interface.

The second OmniBSI product, the OV5642, is a ¼-inch, 5-megapixel fully integrated system-on-chip (SOC) image sensor with integrated TrueFocus ISP, our most advanced ISP technology. The TrueFocus ISP increases picture clarity and sharpness and offers extended depth of field, or EDoF, capabilities.  EDoF enables customers to utilize fixed focus lenses which reduces overall cost of their camera modules.  The OV5642 can output video in full resolution at 15 fps, supports 720p HD video at 60 fps and 1080p at 30 fps.  An integrated JPEG compression engine simplifies data transfer for bandwidth limited interfaces.  For fast transfer of image data, the OV5642 has a two-lane, high-speed MIPI interface.

In October 2008, we announced that the ¼”, all digital OV7710 VGA CameraChip sensor is in volume production and has shipped to multiple top-tier automotive customers.

29

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

Joint Venture with TSMC

In October 2003, we entered into a Shareholders’ Agreement, or the VisEra Agreement, with Taiwan Semiconductor Manufacturing Company Limited, or TSMC, pursuant to which we agreed with TSMC to form VisEra Technologies Company, Ltd., or VisEra, a joint venture in Taiwan. VisEra’s mission is to provide back-end manufacturing services. In connection with the formation of VisEra, both TSMC and we entered into separate nonexclusive license agreements with VisEra pursuant to which each party licenses certain intellectual property to VisEra relating to manufacturing services. The VisEra Agreement also provided that once VisEra had acquired the capability to deliver high quality manufacturing services, we would be committed to direct a substantial portion of our requirements in these areas to VisEra, subject to pricing and technology requirements. Both TSMC and we have also committed not to compete directly or indirectly with VisEra in the provision of certain manufacturing services. Historically, we have relied on TSMC to provide us with a substantial proportion of our wafers. As a part of the VisEra Agreement, TSMC agreed to commit substantial wafer manufacturing capacity to us in exchange for our commitment to purchase a substantial portion of our wafers from TSMC, subject to pricing and technology requirements.

In August 2005, we entered into an Amended and Restated Shareholders’ Agreement with TSMC, or the Amended VisEra Agreement, under which the parties reaffirmed their respective commitments to VisEra, expanded the scope of and made certain modifications to the VisEra Agreement. Under the Amended VisEra Agreement, the parties agreed to raise the total capital committed to the joint venture from $50.0 million to $68.0 million. The $18.0 million increase was designated principally for the acquisition from unrelated existing shareholders of approximately 29.6% of the issued share capital of XinTec, Inc., or XinTec, a Taiwan-based provider of chip scale packaging services, of which 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 enable XinTec to expand its production capacity. As a result of the increase in our beneficial interest in XinTec due to VisEra’s investment in XinTec during fiscal 2006, we accounted for our investment in XinTec under the equity method. In January 2007, TSMC, through the purchase of approximately 90,500,000 previously unissued shares, acquired a controlling interest in XinTec. As a result of TSMC’s investment, our direct ownership percentage in XinTec declined from 7.8% to 4.4% and VisEra’s ownership percentage declined from 29.6% to 16.9%. Due to the reduction in our ownership percentage in XinTec and the deconsolidation of VisEra described below, effective January 1, 2007, we began to account for our interest in XinTec under the cost method.

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

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

30

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

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

Joint Venture with Powerchip Semiconductor Corporation

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

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

Acquisition of CDM

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

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

During the second quarter of fiscal 2009, we performed our “Goodwill” impairment analysis in accordance with Statement of Financial Accounting Standards, or SFAS, SFAS No. 142, “Goodwill and Other Intangible Assets,” or SFAS No. 142, and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No. 144. The reduction of our market capitalization and the current economic downturn prompted our management to perform such analysis. From the analysis, we recorded a full impairment of $7.5 million of the “Goodwill” related to our acquisition of CDM.

Capital Resources

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

31

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

In June 2005, our board of directors authorized us to use up to $100 million of our available cash under an open-market program to repurchase our common stock. At the expiration of the program in June 2006, we had cumulatively repurchased 5,870,000 shares of our common stock for an aggregate cost of approximately $79.6 million.

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

Current Economic Environment

We operate in a challenging economic environment that has undergone significant changes in technology and in patterns of global trade. We remain a leader in the development and marketing of image sensing devices based on the CMOS fabrication process and have benefited from the growing market demand for and acceptance of this technology.

Recently, general domestic and global economic conditions have been negatively impacted by several factors, including, among others, the subprime-mortgage crisis in the housing market, going concern threats to investment banks and other financial institutions, reduced corporate spending, and decreased consumer confidence. These economic conditions have resulted in our facing one of the most challenging periods in our history. The image sensor market has been negatively impacted by the current global economic environment. In particular, we believe the current economic conditions have reduced spending by consumers and businesses in markets into which we sell our products. End customer demand has decreased significantly throughout the industry, affecting all consumer electronic products, security products and products for the automotive industry.  Consequently, the overall demand for image sensors has also decreased. This decrease in demand is having a significant impact on our business. Our revenues for the three-month period ended October 31, 2008 were lower than similar historical periods. In addition, the current global economic environment has negatively impacted our business outlook and we expect that our revenues in the three-month period ending January 31, 2009, will be significantly lower than our reported revenues for the three-month period ended October 31, 2008.

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

Market Environment

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

In the mobile phone market in particular, future revenues depend to a large extent on design wins where, on the basis of an exhaustive evaluation of available products, a particular mobile phone maker determines which image sensor to design into one or more specific models. The time lag between design win and volume shipments varies from as little as three months to as much as twelve months, which could cause an unexpected delay in generating revenues, especially during periods of product transitions. Design wins are also an important driver in the many other markets that we address, and in some cases, such as automotive or medical applications, the time lag between a particular design win and first revenue can be longer than one year.

32

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

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

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

To increase and enhance our production capabilities, we work closely with TSMC, our principal wafer supplier and one of the largest wafer fabrication companies in the world, to increase, as necessary, the number of its fabrication facilities, at which our products can be produced. VisEra, our joint venture with TSMC, and our investments in three key back-end packaging suppliers are part of a broad strategy to ensure that we have sufficient back-end capacity for the processing of our image sensors in the various formats required by our customers. In January 2007, we and TSMC each invested an additional $27.0 million in VisEra for its manufacturing capacity expansion. In April 2008, VisEra substantially completed the relocation and expansion of its capacity at a newly constructed manufacturing facility in Taiwan. Separately, TSMC purchased 90,526,000 shares from XinTec to enable XinTec to expand its capacity. In February 2007, we also entered into a foundry manufacturing agreement with PSC.

We currently perform the final testing of the majority of our products at our own facility in China. We are currently expanding our testing capacity, as well as our overall capability to design more custom products for our customers. As necessary, we will make further investments to ensure that we have sufficient production capacity to meet the demands of our customers.

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

Many of the products using our image sensors, such as mobile phones, notebook and personal computers, DSCs and cameras for toys and games, are consumer electronics goods. These mass-market camera devices generally have seasonal cycles which historically have caused the sales of our customers to fluctuate quarter-to-quarter. Historically, demand from OEMs and distributors that serve such consumer product markets has been stronger in the second and third quarters of our fiscal year and weaker in the first and fourth quarters of our fiscal year. However, because of the current economic downturn, we expect to see declines in all of these markets in the third quarter of fiscal 2009. In addition, since a very large number of the manufacturers who use our products are located in China, Hong Kong and Taiwan, the pattern of demand for our image sensors has been increasingly influenced by the timing of the extended lunar or Chinese New Year holiday, a period in which the factories which use our image sensors generally close. We believe that the market opportunity represented by mobile phones remains very large, although the opportunities presented will be deferred until the current global economic conditions improve.

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

33

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

As the markets for image sensors have grown, we have experienced competition from manufacturers of CMOS and CCD image sensors. Our principal competitors in the market for CMOS image sensors include Hynix, Kodak, Micron, Samsung, Sharp, Sony, ST Microelectronics and Toshiba. We expect to see continued price competition in the image-sensor market for mobile phones, notebook and personal computers and digital cameras as those markets continue to grow. Although we believe that we currently compete effectively in those markets, our competitive position 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, longer operating histories and more established strategic and financial relationships than we do. Such companies may be able to adapt more quickly to new or emerging technologies and customer requirements or devote greater resources to the promotion and sale of their products. Many of these competitors own and operate their own fabrication facilities, which in certain circumstances may give them the ability to price their products more aggressively than we can or may allow them to respond more rapidly than we can to changing market opportunities.

In addition, from time to time, other companies enter the CMOS image sensor market by using obsolete and available manufacturing equipment. While these efforts have rarely had any long-term success, the new entrants do sometimes manage to gain market share in the short term by pricing their products significantly below current market levels which puts additional downward pressure on the prices we can obtain for our products.

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

As part of our ongoing efforts to achieve both higher resolutions and smaller chip sizes, we initiated mass production volumes of our OmniPixel3 sensors with 0.11 µm process technologies in January 2008. Given the rapidly changing nature of our technology, there can be no assurance that we will not encounter delays or other unexpected yield issues with future products. During the early stages of production, production yields and gross margins for new products are typically lower than those of established products. We can encounter unexpected manufacturing issues, such as unexpected back-end yield problems. In addition, in preparation for new product introductions, we gradually decrease production of established products. Due to our 12-14 week production cycle, it is extremely difficult to predict precisely how many units of established products we will need. It is also difficult to accurately predict the speed of the ramp of new products. Given the current economic downturn, the visibility of our business outlook is extremely limited and forecasting is even more difficult than under normal market conditions. As a result, it is possible that we could suffer from shortages for certain products and build inventories in excess of demand for other products. We carefully consider the risk that our inventories may be excess to expected future demand and record appropriate reserves. If, as sometimes happens, we are subsequently able to sell these reserved products, the sales have little or no associated cost and consequently they have a favorable impact on gross margins.

Sources of Revenues

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

For shipments to customers without agreements that allow for returns or credits, principally OEMs and VARs, we recognize revenue using the “sell-in” method. Under this method, we recognize revenue when title passes to the customer provided that we have received a signed purchase order, the price is fixed or determinable, title and risk of loss has transferred to the customer, collection of resulting receivables is considered reasonably assured, product returns are reasonably estimable, there are no customer acceptance requirements and there are no remaining material obligations. We provide for future returns of potentially defective products based on historical experience at the time we recognize revenue. For cash consideration given to customers for which we do not receive a separately identifiable benefit or cannot reasonably estimate fair value, we record the amounts as reductions of revenue.

34

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

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

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

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

Critical Accounting Policies and Estimates

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

Stock-Based Compensation Expense for Performance Shares

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

35

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

Results of Operations

The following table sets forth the results of our operations as a percentage of revenues. Our historical operating results are not necessarily indicative of the results we can expect for any future period.

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

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

Revenues

We derive substantially all of our revenues from the sale of our image-sensor products for use in a wide variety of consumer and commercial mass-market applications including mobile phones, notebooks and personal computers, security and surveillance cameras, DSCs, interactive video and toy cameras, and automotive and medical products. Revenues for the three months ended October 31, 2008 decreased by 29.5% to approximately $163.9 million from $232.6 million for the three months ended October 31, 2007. The decrease in revenues was due to a decline in unit sales of our image-sensor products, primarily for mobile phones, and notebooks and personal computers, combined with a decline in our ASPs, partially offset by favorable changes in product mix. Due to the global economic downturn, we expect our revenues for the three months ending January 31, 2009 to be significantly lower than the revenues for the three months ended October 31, 2008. Visibility beyond January 31, 2009 is extremely limited.

Revenues from Sales to OEMs and VARs as Compared to Distributors

We sell our image-sensor products either directly to OEMs and VARs or indirectly through distributors. The percentage of revenues from sales to OEMs and VARs was lower in the three months ended October 31, 2008 than in the prior-year period. We expect that the percentage of revenues from sales through OEMs and VARs will vary from year to year in response to changes in the make-up of our customer list, but that it will continue to represent a majority of our revenues. The gross margin that we earn on sales to OEMs and VARs or through distributors is not significantly different. The following table shows the percentage of revenues from sales to OEMs and VARs and distributors in the three months ended October 31, 2008 and 2007:

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

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

36

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

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

Revenues from Domestic Sales as Compared to Foreign Sales

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

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

We derive the majority of our 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 a result of the continuing trend of outsourcing the production of consumer electronics products to Asia-Pacific manufacturers and facilities and to the increasing markets in Asia for consumer products. Because of the preponderance of Asia-Pacific manufacturers and the fact that virtually all products incorporating our image-sensor products are sold globally, we believe that the geographic distribution of our sales does not accurately reflect the geographic distribution of sales into end-user markets of products which incorporate our image sensors.

Gross Profit

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

Research, Development and Related Expenses

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

The increase in research, development and related expenses of approximately $3.0 million, or 15.0%, for the three months ended October 31, 2008 from the similar period in the prior year resulted primarily from a $1.4 million increase in salary and payroll-related expenses associated with salary increases and the hiring of additional personnel, a

37

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

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of compensation and personnel related expenses, commissions paid to distributors and manufacturers’ representatives and insurance and legal expenses. Selling, general and administrative expenses for the three months ended October 31, 2008 increased to approximately $16.9 million from $15.8 million the three months ended October 31, 2007. As a percentage of revenues, selling, general and administrative expenses for the three months ended October 31, 2008 and 2007 represented 10.3% and 6.8%, respectively.

The increase in selling, general and administrative expenses of approximately $1.1 million, or 7.0%, for the three months ended October 31, 2008 from the similar period in the prior year resulted primarily from a $468,000 increase in depreciation expenses, a $392,000 increase in fees for outside services, a $321,000 increase in salary and payroll-related expenses associated with salary increases and the hiring of additional personnel, a $224,000 increase in office and facility expenses and a $221,000 increase in marketing expenses, partially offset by a $448,000 decrease in stock-based compensation expense recognized in accordance with SFAS No. 123(R), a $383,000 decrease in legal and accounting expenses, a $211,000 decrease in provisions for bad debts and a $107,000 decrease in commissions paid primarily to distributors and sales representatives. We anticipate that our selling, general and administrative expenses will likely decrease as we implement certain cost reduction measures.

Goodwill Impairment

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

Interest Income, Net

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

Other Expense, Net

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

38

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

Provision for Income Taxes

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

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

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

Minority Interest

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

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

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

Revenues from Sales to OEMs and VARs as Compared to Distributors

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

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

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

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

39

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

Revenues from Domestic Sales as Compared to Foreign Sales

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

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

We derive the majority of our 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 a result of the continuing trend of outsourcing the production of consumer electronics products to Asia-Pacific manufacturers and facilities and to the increasing markets in Asia for consumer products. Because of the preponderance of Asia-Pacific manufacturers and the fact that virtually all products incorporating our image-sensor products are sold globally, we believe that the geographic distribution of our sales does not accurately reflect the geographic distribution of sales into end-user markets of products which incorporate our image sensors.

Gross Profit

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

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

Research, Development and Related Expenses

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

The increase in research, development and related expenses of approximately $5.9 million, or 15.7%, for the six months ended October 31, 2008 from the similar period in the prior year resulted primarily from a $2.1 million increase in salary and payroll-related expenses associated with salary increases and the hiring of additional personnel, a $1.4 million increase in non-recurring engineering expenses related to new product development, a $1.0 million increase in depreciation and amortization expenses of acquired intangible assets, a $0.5 million increase in patent-related expenses, a $406,000 increase in office and facility expenses and a $404,000 increase in stock-based compensation expense recognized in accordance with SFAS No. 123(R).

Selling, General and Administrative Expenses

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

The increase in selling, general and administrative expenses of approximately $3.3 million, or 10.7%, for the six months ended October 31, 2008 from the similar period in the prior year resulted primarily from a $1.4 million increase in salary and payroll-related expenses associated with salary increases and the hiring of additional personnel, a

40

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

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

Goodwill Impairment

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

Interest Income, Net

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

Other Expense, Net

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

Provision for Income Taxes

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

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

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

Minority Interest

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

41

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

Liquidity and Capital Resources

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

Liquidity

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

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

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

Cash Flows from Operating Activities

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

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

42

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

higher level of revenues during the six months ended October 31, 2007, partially offset by a decrease in days of sales outstanding as of October 31, 2007 to 35 days from 49 days as of April 30, 2007. The $27.7 million increase in inventories was in anticipation of increased sales in the third quarter of fiscal 2008. The inventory balances increased concurrently with an increase in annualized inventory turns to 5.2 as of October 31, 2007 from 3.1 as of April 30, 2007. The $1.7 million decrease in prepaid expenses and other current assets was principally due to the reclassification of a deposit paid for land from other current assets to property, plant and equipment upon transfer of title.

Cash Flows From Investing Activities

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

Cash Flows From Financing Activities

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

Capital Commitments and Resources

Over the next two years, we expect to invest a total of approximately $33.7 million in our wholly-owned subsidiary in Shanghai, OmniVision Technologies (Shanghai) Co. Ltd., or OTC, of which we have already contributed $12.0 million. The funding requirement arises from our execution of a Land-Use-Right Purchase Agreement with the Construction and Transportation Commission of the Pudong New District, Shanghai with a concomitant commitment to spend approximately $33.7 million to develop the land. See Note 16 — “Commitments and Contingencies” to our condensed consolidated financial statements. We expect to fund our capital commitments to OTC from our available working capital.

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

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

We currently expect our available cash, cash equivalents and short-term investments, together with cash that we anticipate generating from operating activities, will be sufficient to satisfy our capital requirements over approximately the next twelve months. Other than normal working capital requirements, we expect our capital requirements totaling approximately $40 million over approximately the next twelve months will consist primarily of funding capital investments at OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, OTC and Shanghai OmniVision Semiconductor Technology, Co. Ltd, or OST. We formed OST during the three months ended October 31, 2008, for the purpose of expanding our testing capabilities in Shanghai, China.

43

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

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

Contractual Obligations and Commercial Commitments

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

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

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

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

(3)During the three months ended October 31, 2008, we formed Shanghai OmniVision Semiconductor Technology, Co. Ltd, a new subsidiary in Shanghai, China, for the purpose of expanding our testing capabilities. We are required to contribute $1.5 million by January 2009. We are required to contribute the remaining $8.5 million of a $10.0 million commitment by October 2010. See Note 16 – “Commitments and Contingencies” to our condensed consolidated financial statements.

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

Off-Balance Sheet Arrangements

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

44

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

Recent Accounting Pronouncements

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

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” or SFAS No. 161. This Statement requires enhanced disclosures for derivative instruments, including those used in hedging activities. It requires qualitative disclosures about objectives and strategies for using derivatives, and quantitative disclosures about fair value amounts of gains and losses on derivative instruments. The provisions of SFAS No. 161 are effective for fiscal years beginning on or after November 15, 2008. In September 2008, FASB issued FSP SFAS No. 133-1 and FASB Interpretation No. (“FIN”) 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. FIN 45, and Clarification of the Effective Date of FASB Statement No. 161” (“FSP SFAS No. 133-1 and FIN 45-4”). FSP SFAS No. 133-1 and FIN 45-4 clarifies that the effective date of SFAS No. 161 is applicable to any reporting period beginning after November 15, 2008. SFAS No. 161 is effective for our fourth quarter of fiscal 2009. We are currently evaluating the impact SFAS No. 161 may have on our financial position, results of operations and cash flows.

FSP SFAS No. 133-1 and FIN 45-4 also amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to require enhanced disclosures about credit derivatives and guarantees, and amends FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others,” to exclude derivative instruments accounted for at fair value under SFAS No. 133. The provisions of FSP SFAS No. 133-1 and FIN 45-4 that amended SFAS No. 133 and FIN 45 are effective for reporting periods ending after November 15, 2008.  We do not expect the adoption of FSP SFAS No. 133-1 and FIN 45-1 in our fourth quarter of fiscal 2009 to have any material effect on our financial condition, results of operations or cash flows.

45

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

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

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

As of October 31, 2008, the functional currency of our wholly-owned subsidiaries located in Hong Kong, OmniVision Technologies (Hong Kong) Company Limited, OmniVision Trading (Hong Kong) Company Ltd., and OmniVision Holding (Hong Kong) Co., Ltd.; in the Cayman Islands, OmniVision International Holding, Ltd. and OmniVision Technology International Ltd. (formerly HuaWei Technology International, Ltd.); in China, OSC and OTC and OST, and in Taiwan, Taiwan OmniVision Technologies Co., Ltd., Taiwan OmniVision International Technologies Co., Ltd., and Taiwan OmniVision Investment Holding Co., Ltd., is the U.S. dollar. Our other wholly-owned subsidiaries have their respective local currencies as their functional currencies. The functional currency of our consolidated affiliate, SOI, is the New Taiwan dollar. Transaction gains and losses resulting from transactions denominated in currencies other than the respective functional currencies are included in “Other expense, net” for the periods presented. The amounts of transaction gains and losses for the six months ended October 31, 2008 and 2007 were not material.

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

Because we do not believe that we currently have any significant direct foreign currency exchange rate risk, we have not hedged exposures denominated in foreign currencies or used any other derivative financial instruments. Although we transact the overwhelming majority of our business in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the competitiveness of our products and thus may impact our results of operations.

Market Interest Rate Risk

Our cash equivalents and short-term investments are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income and, from time to time, the fair market value of our investments. We manage our exposure to financial market risk by performing ongoing evaluations of our investment portfolio. We presently invest in money market funds, certificates of deposit issued by banks, commercial paper, certificates of deposit, high-grade corporate securities and government bonds maturing approximately 18 months or less from the date of purchase. In the past, we also invested in auction rate securities and in variable rate demand notes, which have a final maturity date of up to thirty-nine years but whose interest rate is reset at varying intervals typically between seven and 35 days. As of October 31, 2008, we did not hold any auction rate securities or variable rate demand notes.

Due to the short maturities of our investments, the carrying value should approximate the fair market value. In addition, we do not use our investments for trading or other speculative purposes. Due to the short duration of our investment portfolio, we do not expect that an immediate 10% change in interest rates would have a material effect on the fair market value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates. We do not believe that the recent instability in global financial markets has significantly affected the value of our cash and short-term investments.

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

46

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

ITEM 4.CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures.

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

(b)  Changes in Internal Controls.

There have been no changes in our internal control over financial reporting during the three month period ended October 31, 2008, as covered by this Quarterly Report on Form 10-Q, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

47

PART II — OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

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

On November 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 New York against us, some of our directors and officers, and various underwriters for our initial public offering. Plaintiffs generally allege that the named defendants violated federal securities laws because the prospectus related to our offering failed to disclose, and contained false and misleading statements regarding, certain commissions purported to have been received by the underwriters, and other purported underwriter practices in connection with their allocation of shares in our offering. The complaint seeks unspecified damages on behalf of a purported class of purchasers of our common stock between July 14, 2000 and December 6, 2000. Substantially similar actions have been filed concerning the initial public offerings for more than 300 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 prejudice pursuant to a stipulation. On February 19, 2003, the Court issued an order dismissing all claims against us except for a claim brought under Section 11 of the Securities Act of 1933.

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

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

On February 21, 2008, we filed a lawsuit against Qualcomm Incorporated in the United States District Court for the Northern District of California, or the Northern District Action, alleging claims of trademark infringement arising from Qualcomm’s use of, and attempt to register, the mark OMNIVISION for a computer hardware system and related services. We seek an injunction and unspecified damages. We had previously filed opposition proceedings before the Trademark Trial and Appeal Board of the United States Patent and Trademark office against Qualcomm’s applications to register the OMNIVISION mark, and we successfully moved to suspend those proceedings based upon the new parallel federal litigation. Qualcomm has filed its Answer denying the allegations of infringement. Trial is currently set for November 30, 2009.

48

ITEM 1A.   RISK FACTORS

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition or results of operations to differ materially from our historical results or currently anticipated results, including those set forth below.

The following description of these risk factors includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Item 1A of our 2008 Annual Report on Form 10-K filed with the SEC on June 30, 2008. As a result of the following risk factors, as well as of other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

Risks Related to Our Business

Recent domestic and worldwide economic conditions have adversely affected and may further adversely affect our business, results of operations, and financial condition.

Recently, general domestic and global economic conditions have been negatively impacted by several factors, including, among others, the subprime-mortgage crisis in the housing market, going concern threats to investment banks and other financial institutions, reduced corporate spending, and decreased consumer confidence. These economic conditions have resulted in our facing one of the most challenging periods in our history. The image sensor market has been negatively impacted by the current global economic environment. In particular, we believe the current economic conditions have reduced spending by consumers and businesses in markets into which we sell our products. End customer demand has decreased significantly throughout the industry, affecting all consumer electronic products, security products and products for the automotive industry. Consequently, the overall demand for image sensors has also decreased. This decrease in demand is having a significant impact on our business. Our revenues for the three-month period ended October 31, 2008 were lower than similar historical periods. In addition, the current global economic environment has negatively impacted our business outlook and we expect that our revenues in the three-month period ending January 31, 2009, will be significantly lower than our reported revenues for the three-month period ended October 31, 2008.

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

We face intense competition in our markets from CMOS and CCD image-sensor manufacturers, and if we are unable to compete successfully we may not be able to maintain or grow our business.

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

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

49

and operate their own fabrication facilities, which in certain circumstances may give them the ability to price their products more aggressively than we can or may allow them to respond more rapidly than we can to changing market opportunities. In addition, we compete with a large number of smaller CMOS manufacturers including Foveon, MagnaChip, PixArt, Pixelplus, Pixim, SETi and SiliconFile. Competition with these and other companies has required, and in the future may require, us to reduce our prices. For instance, we have seen increased competition in the markets for VGA image sensor products with resulting pressures on product pricing. Downward pressure on pricing could result both in decreased revenues and lower gross margins, which would adversely affect our profitability. From time to time, other companies enter the CMOS image sensor market by using obsolete and available manufacturing equipment. These new entrants gain market share in the short term by pricing their products significantly below current market levels, which puts additional downward pressure on the prices we can obtain for our products.

Our competitors may acquire or enter into strategic or commercial agreements or arrangements with foundries or providers of color filter processing, assembly or packaging services. These strategic arrangements between our competitors and third party service providers could involve preferential or exclusive arrangements for our competitors. Such strategic alliances could impair our ability to secure sufficient capacity from foundries and service providers to meet our demand for wafer manufacturing, color filter processing, assembly or packaging services, adversely affecting our ability to meet customer demand for our products. In addition, competitors may enter into exclusive relationships with distributors, which could reduce available distribution channels for our products 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, business and prospects.

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

We have experienced and expect to continue to experience pressure to reduce the selling prices of our products, and our average selling prices have declined as a result. Competition in our product markets is intense and as this competition continues to intensify, we anticipate that these pricing pressures will increase. We expect that the average selling prices for many of our products will continue to decline over time. Unless we can increase unit sales sufficiently to offset these declines in our average selling prices, our revenues will decline. Reductions in our average selling prices have adversely affected our gross margins, and unless we can reduce manufacturing costs to compensate, additional reductions in our average selling prices will continue to adversely affect our gross margins and could materially and adversely affect our operating results and impair our financial condition. Although we may decrease our research, development and related expenses in the short-term as we implement certain cost reduction measures, historically we have increased and may continue to increase our research, development and related expenses in the long-term to continue the development of new image sensor products that can be sold at higher selling prices and/or manufactured at lower cost. However, if we are unable to timely introduce new products that incorporate more advanced technology and include more advanced features that can be sold at higher average selling prices, or if we are unable to successfully develop more cost-effective technologies, our financial results could be adversely affected.

Sales of our image-sensor products for mobile phones account for a large portion of our revenues, and any decline in sales to the mobile phone market or failure of this market to continue to grow as expected could adversely affect our results of operations.

Sales to the mobile phone market account for a large portion of our revenues. Although we can only estimate the percentages of our products that are used in the mobile phone market due to the significant number of our image-sensor products that are sold to module makers or through distributors and VARs, we believe that the mobile phone market accounted for approximately 70% of our revenues in fiscal 2008 and 64% in the six months ended October 31, 2008, respectively. We expect that revenues from sales of our image-sensor products to the mobile phone market will continue to account for a significant portion of our revenues during fiscal 2009 and beyond. Any factors adversely affecting the demand for our image sensors in this market could cause our business to suffer and adversely affect our operating results. The digital image sensor market for mobile phones is extremely competitive, and we expect to face increased competition in this market in the future. In addition, we believe the market for mobile phones is also relatively concentrated and the top five producers account for more than 80% of the annual sales of these products. If we do not continue to achieve design wins with key mobile phone manufacturers, our market share or revenues could decrease. The mobile phone image-sensor market is also subject to rapid technological change. In order to compete successfully in this market, we will have to correctly forecast customer demand for technological improvements and be able to deliver such products on a timely basis at competitive prices. If we fail to do this, our results of operations, business and prospects would be materially and adversely affected. In the past, we have experienced problems accurately forecasting customer demand in other markets. In addition, current domestic and global economic conditions could negatively

50

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

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

Our failure to successfully develop new products that achieve market acceptance in a timely fashion would adversely affect our ability to grow our business and our operating results. The development, introduction and market acceptance of new products is critical to our ability to sustain and grow our business. Any failure to successfully develop, introduce, market and sell new products could materially adversely affect our business and operating results. The development of new products is highly complex, and we have in the past experienced delays in completing the development and introduction of new products. From time to time, we have also encountered unexpected manufacturing problems as we increase the production of new products. As our products integrate new and more advanced technologies and functions, they become more complex and increasingly difficult to design, debug and produce. Successful product development and introduction depends on a number of factors, including:

·accurate prediction of market requirements and evolving standards, including pixel resolution, output interface standards, power requirements, optical lens size, input standards and operating systems for personal computers and other platforms;

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

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

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

·market acceptance of the new products.

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

Design wins are a key determinant of future revenues, and failure to obtain design wins adversely affects our revenues and impairs our ability to grow our business.

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

We depend on a limited number of third party wafer foundries, which reduces our ability to control our manufacturing process.

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

51

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

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

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

·lack of guaranteed production capacity or product supply;

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

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

If TSMC, PSC, or any of our other foundries were unable to continue manufacturing our wafers in the required quantities, at acceptable quality, yields and costs, or in a timely manner, we would have to identify and qualify substitute foundries, which would be time consuming and difficult, and could increase our costs or result in unforeseen manufacturing problems. In addition, if competition for foundry capacity increases we may be required to pay increased amounts for manufacturing services. We are also exposed to additional risks if we transfer our production of semiconductors from one foundry to another, as such transfer could interrupt our manufacturing process. Further, some of our foundries may also develop their own of image-sensor products and if one or more of our other foundries were to decide not to fabricate our companion DSP chips for competitive or other reasons, we would have to identify and qualify other sources for these products.

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

We rely on VisEra, our joint venture with TSMC, for the color filter processing of our completed wafers. In addition, we rely on Advanced Semiconductor Engineering, Inc. and on ImPac, our equity investee, for substantially all of our ceramic chip packages. We rely on XinTec and WLCSP, two investee companies, for chip scale packages, which are generally used in our products designed for the smallest form factor applications. We rely on several specialized service providers, one of which is ImPac, to perform the necessary wafer probe tests and prepare good die for use in a form called chip-on-board, a process called reconstructing wafers. If for any reason one or more of these service providers were to become unable or unwilling to continue to provide services of acceptable quality, at acceptable costs or in a timely manner, our ability to deliver our products to our customers could be severely impaired. We would have to identify and qualify substitute service providers, which could be time consuming and difficult and could result in unforeseen operational problems. Substitute service providers might not be available or, if available, might be unwilling or unable to offer services on acceptable terms.

In addition, if competition for color filter processing, packaging, capacity or other back-end services increases, we may be required to pay or invest significant amounts to secure access to these services, which could adversely impact our operating results. The number of companies that provide these services is limited and some of them have limited operating histories and financial resources. In the event our current providers refuse or are unable to continue to provide these services to us, we may be unable to procure services from alternate service providers. Furthermore, if customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current service providers on commercially reasonable terms, if at all. These factors may cause unforeseen product shortages or may increase our costs of manufacturing, assembling or testing of our products, which would adversely affect our operating results.

52

Fluctuations in our quarterly operating results have caused volatility in the market price of our common stock and also make it difficult to predict our future operating results.

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

·the volume and mix of our product sales;

·competitive pricing pressures;

·our ability to accurately forecast demand for our products;

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

·our gain or loss of a large customer;

·our ability to manage our product transitions;

·the availability of production capacity at the suppliers that manufacture our products or process our products;

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

·the timing and size of orders from our customers;

·the volume of our product returns;

·the seasonal nature of customer demand for our products;

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

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

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

·the level of our operating expenses; and

·fluctuations in our effective tax rate from quarter to quarter.

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

All of these factors are difficult to forecast and could result in fluctuations in our quarterly operating results. Our operating results in a given quarter could be 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 the price of our common stock in a manner unrelated to our long-term operating performance.

Our business is subject to seasonal fluctuations which may in turn cause fluctuations in our results of operations from period to period.

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

53

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

Problems with wafer manufacturing and/or back-end processing yields could result in higher product costs and could impair our ability to meet customer demand for our products.

If the foundries manufacturing the wafers used in our products cannot achieve the yields we expect, we will incur higher unit costs and reduced product availability. Foundries that supply our wafers have experienced problems in the past achieving acceptable wafer manufacturing yields. Wafer yields are a function both of our design technology and the particular foundry’s manufacturing process technology. Certain risks are inherent in the introduction of new products and technology. Low yields may result from design errors or manufacturing failures in new or existing products. During the early stages of production, production yields for new products are typically lower than those of established products. Unlike many other semiconductor products, optical products can be effectively tested only when they are complete. Accordingly, we perform final testing of our products only after they are assembled. As a result, yield problems may not be identified until our products are well into the production process. The risks associated with low yields could be increased because we rely on third party offshore foundries for our wafers, which can increase the effort and time required to identify, communicate and resolve manufacturing yield problems. In addition to wafer manufacturing yields, our products are subject to yield loss in subsequent manufacturing steps, often referred to as back-end processing, such as the application of color filters and micro-lenses, dicing (cutting the wafer into individual devices, or die) and packaging. Any of these potential problems with wafer manufacturing and/or back-end processing yields could result in a reduction in our gross margins and/or our ability to timely deliver products to customers, which could adversely affect our customer relations and make it more difficult to sustain and grow our business.

If we do not forecast customer demand correctly, our business could be impaired and our stock price may decline.

Our sales are generally made on the basis of purchase orders rather than long-term purchase commitments; however, we manufacture products and build inventory based on our estimates of customer demand. Accordingly, we must rely on multiple assumptions to forecast customer demand. We are continually working to improve our sales forecasting procedures. If we overestimate customer demand, we may manufacture products that we may be unable to sell, or we may have to sell at lower prices. This could materially and adversely affect our results of operations and financial condition. In addition, our customers may cancel or defer orders at any time by mutual written consent. We have experienced problems with accurately forecasting customer demand in the past. For example, there was a shift in the mix of product demand, in particular a shift in demand towards VGA products late in the second quarter of fiscal 2007, and as a result our inventories at the end of the second and third quarters of fiscal 2007 were higher than we intended them to be. We need to accurately predict customer demand because we must often make commitments to have products manufactured before we receive firm purchase orders from our customers. Conversely, if we underestimate customer demand, we may be unable to manufacture sufficient products quickly enough to meet actual demand, causing us to lose customers and impairing our ability to grow our business. In preparation for new product introductions, we gradually ramp down production of established products. With our 12-14 week production cycle, it is extremely difficult to predict precisely how many units of established products we will need. It is also difficult to accurately predict the speed of the ramp of our new products and the impact on inventory levels presented by the shorter life cycles of end-user products. The shorter product life cycle is a result of an increase in competition and the growth of various consumer-product applications for image sensors. For example, although in the security and surveillance market we continue to sell image-sensor products introduced more than four years ago, in the mobile phone market, the product life cycle of image sensors can be as little as six months. Under these circumstances, it is possible that we could suffer from shortages for certain products and, if we underestimate market demand, we face the risk of being unable to fulfill customer orders. We also face the risk of excess inventory and product obsolescence if we overestimate market demand for our products and build inventories in excess of demand. Our ability to accurately forecast sales is also a critical factor in our ability to meet analyst expectations for our quarterly and annual operating results. Any failure to meet these expectations would likely lead to a substantial decline in our stock price.

54

We depend on the increased acceptance of mass-market image-sensor applications to grow our business and increase our revenues.

Our business strategy depends in large part on the continued growth of various markets into which we sell our image-sensor products, including the markets for mobile phones, notebook and personal computers, digital still and video cameras, commercial and security and surveillance applications, toys and games, including interactive video games, automotive and medical applications. If these markets do not grow and develop as we anticipate, we may be unable to sustain or grow the sales of our products. Each of these markets has already been adversely impacted by current global economic conditions where consumers and businesses have deferred purchases of products in these markets as a result of tighter credit, negative financial news, and decreased corporate or consumer spending. Such conditions have negatively affected our business.

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

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

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

Our ability to deliver products that meet customer demand is dependent upon our ability to meet new and changing requirements for color filter application and image-sensor packaging.

We expect that as we develop new products to meet technological advances and new and changing industry and customer demands, our color filter application and ceramic, plastic and chip scale packaging requirements will also evolve. Our ability to continue to profitably deliver products that meet customer demand is dependent upon our ability to obtain third party services that meet these new requirements on a cost-effective basis. There can be no assurances that any of these parties will be able to develop enhancements to the services they provide to us to meet these new and changing industry and customer requirements. Furthermore, even if these service providers are able to develop their services to meet new and evolving requirements, these services may not be available at a cost that enables us to sustain our profitability.

The high level of complexity and integration of our products increases the risk of latent defects, which could damage customer relationships and increase our costs.

Our products are based upon evolving technology, and because we integrate many functions on a single chip, are highly complex. The integration of additional functions into already complex products could result in a greater risk that customers or end users could discover latent defects or subtle faults after we have already shipped significant quantities of a product. Although we test our products, we have in the past and may in the future encounter defects or errors. For example, in the third quarter of fiscal 2005, we recorded a provision of $2.7 million related to the possible replacement of products that did not meet a particular customer’s standards. Delivery of products with defects or reliability, quality or compatibility problems may damage our reputation and ability 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 product returns, product warranty costs for recall and replacement and product liability claims against us which may not be fully covered by insurance.

55

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

A relatively small number of OEMs, VARs and distributors account for a significant portion of our revenues. Any material delay, cancellation or reduction of purchase orders from one or more of our major customers or distributors could result in our failure to achieve anticipated revenue for a particular period. In addition, if we are unable to retain one or more of our largest OEM, distributor or VAR customers, or if we are unable to maintain our current level of revenues from one or more of these significant customers, our business and results of operation would be impaired and our stock price could decrease, potentially significantly. In the six months ended October 31, 2008, two OEM customers accounted for approximately 11.3% and 10.2% of our revenues, and one distributor customer accounted for approximately 26.2% of our revenues. In the six months ended October 31, 2007, two OEM customers accounted for approximately 15.9% and 10.4%, respectively, of our revenues, and one distributor customer accounted for approximately 19.4% of our revenues. In addition, in fiscal 2008, approximately 55.0% of our revenues came from sales to our top five customers. Our business, financial condition, results of operations and cash flows will continue to depend significantly on our ability to retain our current key customers and to attract new customers, as well as on the financial condition and success of our OEMs, VARs and distributors.

We may be required to record a significant charge to earnings if our amortizable intangible assets or long-term investments become impaired.

Under generally accepted accounting principles, we are required to review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, and slower growth rates in our industry.

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

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

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

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

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

We have in the past discovered, and may in the future discover, areas of our internal control that need improvement. For example, we restated our financial statements for the first, second and third quarters of fiscal 2004. If these or similar types of issues 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-Oxley Act of 2002 and maintenance of effective internal control over financial reporting will require that we hire additional qualified finance and accounting personnel. Because other businesses face similar challenges, there is significant competition for such personnel, and there can be no assurance that we will be able to attract and/or retain suitably qualified employees.

56

Corporate governance regulations have increased our compliance costs and could further increase our expenses if changes occur within our business.

We are subject to corporate governance laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act, that impose certain requirements on us and on our officers, directors, attorneys and independent registered public accounting firm. In order to comply with these rules, we added internal resources and have utilized additional outside legal, accounting and advisory services, which increased our operating expenses. We expect to incur ongoing operating expenses as we maintain compliance with Section 404. In addition, if we undergo significant modifications to our structure through personnel or system changes, acquisitions, or otherwise, it may be increasingly difficult to maintain compliance with the existing and evolving corporate governance regulations.

We hold a significant amount of marketable securities which are subject to general market risks over which we have no control.

As of October 31, 2008, we held cash and cash equivalents totaling $238.9 million, and short-term investments totaling $43.8 million. These assets are managed on our behalf by unrelated third parties in accordance with a cash management policy that has been approved by our board of directors and restricts our investments to a maximum maturity of 18 months and to investment-grade instruments. As of October 31, 2008, we did not hold any illiquid investments and we have not realized any losses. However, recent uncertainties in global capital markets associated with a repricing of risk have caused disruptions in the orderly function of markets where ordinarily there is virtually unlimited liquidity. If we were to make a future investment in certain illiquid securities that are dependent on the orderly functioning of the capital markets, and if we were required to liquidate this type of securities at short notice, such liquidation could result in losses of principal.

There are risks associated with our operations in China.

In December 2000, we established OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, formerly Hua Wei Semiconductor (Shanghai) Co. Ltd., as part of our efforts to streamline our manufacturing process and reduce the costs and working capital associated with the testing of our image-sensor products, and relocated our automated image testing equipment from the United States to China. We are currently expanding our testing capabilities with additional automated testing equipment, which will also be located in China. Through our wholly-owned subsidiary, OmniVision Technologies (Shanghai) Co. Ltd., or OTC, we are also developing land and constructing research facilities in Shanghai. There are certain administrative, legal and governmental risks to operating in China that could result in increased operating expenses or could hamper us in the development of our operations in China. More recently we invested in a company in China that is providing a portion of our CSP packaging requirements. The risks from operating in China that could increase our operating expenses and adversely affect our operating results, financial condition and ability to deliver our products and grow our business include, without limitation:

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

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

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

·difficulties in enforcing contracts in China;

·difficulties in protecting intellectual property;

·diversion of management attention;

·imposition of burdensome governmental regulations;

·difficulties in maintaining uniform standards, controls, procedures and policies across our global operations, including inventory management and financial consolidation;

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

·inadequacy of the local infrastructure to support our operations.

57

We may experience integration or other problems with potential future acquisitions, which could have an adverse effect on our business or results of operations. New acquisitions could dilute the interests of existing stockholders, and the announcement of new acquisitions could result in a decline in the price of our common stock.

We may in the future 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 or investments in, businesses that we believe could expand our distribution channels. Even if we were to announce an acquisition, we may not be able to complete it. In addition, any future acquisition or substantial investment could present numerous risks, including:

·difficulty in realizing the potential technological benefits of the transaction;

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

·unanticipated expenses related to technology integration;

·disruption of our ongoing business;

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

·difficulty in maintaining uniform standards, controls, procedures and policies;

·possible impairment of relationships with employees, customers, suppliers and strategic partners as a result of integration of new businesses and management personnel;

·reductions in our future operating results from amortization of intangible assets;

·impairment of resulting goodwill; and

·potential unknown or unexpected liabilities associated with acquired businesses.

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

We may not achieve continued benefits from our joint venture with TSMC.

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

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

We may not achieve all of the anticipated benefits of our alliances with, and strategic investments in, third parties.

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

58

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

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

Changes in our relationships with our joint ventures and/or companies in which we hold less than a majority interest could change the way we account for such interests in the future.

As part of our strategy, we have formed joint ventures with two of our foundry partners, and we hold a minority interest in three companies from which we purchase certain manufacturing services. Under the applicable provisions of generally accepted accounting principles in the United States of America, we currently consolidate one of these joint ventures into our consolidated financial statements and results of operations, and record the equity interests that we do not own as minority interests. For the investments that we account for under the equity method, we record as part of other income or expense our share of the increase or decrease in the equity of the companies in which we have invested. It is possible that, in the future, our relationships and/or our interests in or with these joint ventures or other investees could change. Such changes have in the past, and could in the future result in deconsolidation or consolidation of such entities, as the case may be, which could result in changes in our reported results.

We may be unable to adequately protect our intellectual property, and therefore we may lose some of our competitive advantage.

We rely on a combination of patent, copyright, trademark and trade secret laws as well as nondisclosure agreements and other methods to protect our proprietary technologies. We have been issued patents and have a number of pending United States and foreign patent applications. However, we cannot provide assurance that any patent will be issued as a result of any applications or, if issued, that any claims allowed will be sufficiently broad to protect our technology. It is possible that existing or future patents may be challenged, invalidated or circumvented. For example, in August 2002, we initiated a patent infringement action in Taiwan, Republic of China against IC Media Corporation of San Jose, California for infringement of a Taiwanese patent that had been issued to us. In response to our patent infringement action, in October 2002, IC Media Corporation initiated a cancellation proceeding in the Taiwan Intellectual Property Office with respect to our patent. In July 2003, the Taiwan Intellectual Property Office made an initial determination to grant the cancellation of the subject patent, which decision was upheld by the Taiwan Ministry of Economic Affairs and the High Administrative Court. We decided not to appeal such decision by the May 31, 2005 deadline. Although we do not believe the cancellation of the Taiwanese patent at issue in the dispute described above has had a material adverse effect on our business or prospects, there may be other situations where our inability to adequately protect our intellectual property rights could materially and adversely affect our competitive position and operating results. If a third party can copy or otherwise 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. Effective patent, copyright, trademark and trade secret protection may be unavailable or limited in foreign countries. Any disputes over our intellectual property rights, whatever the ultimate resolution of such disputes, may result in costly and time-consuming litigation or require the license of additional elements of intellectual property for a fee.

59

Litigation regarding intellectual property could divert management attention, be costly to defend and prevent us from using or selling the challenged technology.

In recent years, there has been significant litigation in the United States involving intellectual property rights, including in the semiconductor industry. We have in the past been, and may in the future be, subject to legal proceedings and claims with respect to our intellectual property, including such matters as trade secrets, patents, product liabilities and other actions arising out of the normal course of business. These claims may increase as our intellectual property portfolio becomes larger or more valuable. Intellectual property claims against us, and any resulting lawsuit, may cause us to incur significant expenses, subject us to liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation against us would likely be time-consuming and expensive to resolve and would divert management’s time and attention and could also force us to take actions such as:

·ceasing the sale or use of products or services that incorporate the infringed intellectual property;

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

·redesigning those products or services that incorporate the disputed intellectual property, which could result in substantial unanticipated development expenses and delay and prevent us from selling the products until the redesign is completed, if at all.

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

If we do not effectively manage our growth, our ability to increase our revenues and improve our earnings could be adversely affected.

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

·continuously improve our operational, financial and accounting systems;

·train and manage our existing employee base;

·attract and retain qualified personnel with relevant experience; and

·effectively manage accounts receivable and inventory.

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

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

Our future tax rates could be higher than we anticipate and may harm our results of operations

As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. The application of tax law is subject to legal and factual interpretation, judgment and uncertainty, and tax laws themselves are subject to change. Consequently, taxing authorities may impose tax assessments or judgments against us that could result in a significant charge to our earnings.

60

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

Our sales through distributors increase the complexity of our business and may reduce our ability to forecast revenues.

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

·manage a more complex supply chain;

·manage the level of inventory at each distributor;

·provide for credits, return rights and price protection;

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

·monitor the financial condition and creditworthiness of our distributors.

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

We face foreign business, political and economic risks, because a majority of our products and those of our customers are manufactured and sold outside of the United States.

We face difficulties in managing our third party foundries, color filter application service providers, packaging and other manufacturing service providers and our foreign distributors, most of whom are located in Asia. Any political and economic instability in Asia might have an adverse impact on foreign exchange rates and could cause service disruptions for our vendors and distributors and adversely affect our customers.

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

·longer payment cycles;

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

·decreased visibility as to future demand;

·difficulties in accounts receivable collections; and

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

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

61

Our business could be harmed if we lose the services of one or more members of our senior management team, or if we are unable to attract and retain qualified personnel.

The loss of the services of one or more of our executive officers or key employees, which has occurred from time to time, or the decision of one or more of these individuals to join a competitor, could adversely affect our business and harm our operating results and financial condition. Our success depends to a significant extent on the continued service of our senior management and certain other key technical personnel. None of our senior management is bound by an employment or non-competition agreement. We do not maintain key man life insurance on any of our employees.

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

We recently substantially completed the implementation of the first phase of a new enterprise resource planning system, a process which presents a number of significant operational risks.

As our business grows and becomes more complex, it is necessary that we expand and upgrade our enterprise resource planning system, or ERP, and other management information systems which are critical to the operational, accounting and financial functions of our company. We evaluated alternative solutions, both short-term and long-term, to meet the operating, administrative and financial reporting requirements of our business. During the three months ended July 31, 2008, we substantially completed the implementation of the first phase of a new ERP based on a suite of application software developed by Oracle Corporation. We will continue to make further enhancements and upgrades to the ERP, as necessary. Significant management attention and resources have been used and extensive planning has occurred to support effective implementation of the new ERP system, however, such implementation carries certain risks, including the risk of significant design errors that could materially and adversely affect our operating results and impact our ability to manage our business. We also made certain changes to our internal control over financial reporting during the three months ended July 31, 2008, which we believe are material. As a result, there is a risk that deficiencies may exist in the future and that they could constitute significant deficiencies, or, in the aggregate, a material weakness in internal control over financial reporting.

Our operations may be impaired as a result of disasters, business interruptions or similar events.

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

Acts of war and terrorist acts may seriously harm our business and revenue, costs and expenses and financial condition.

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

62

Risks Related to the Securities Markets and Ownership of Our Common Stock

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

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

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

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

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

·limiting the persons who may call special meetings of stockholders; and

·prohibiting stockholder actions by written consent.

Provisions of Delaware law also may discourage, delay or prevent another company from acquiring or merging with us. Our board of directors adopted a preferred stock rights agreement in August 2001. Pursuant to the rights agreement, our board of directors declared a dividend of one right to purchase one one-thousandth share of our Series A Participating Preferred Stock for each outstanding share of our common stock. The dividend was paid on September 28, 2001 to stockholders of record as of the close of business on that date. Each right entitles the registered holder to purchase from us one one-thousandth of a share of Series A Preferred at an exercise price of $176.00, subject to adjustment. The exercise of the rights could have the effect of delaying, deferring or preventing a change of control of our company, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The rights agreement could also limit the price that investors might be willing to pay in the future for our common stock.

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

The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Since the beginning of fiscal 2002 through October 31, 2008, the closing sales price of our common stock has ranged from a high of $33.90 per share to a low of $1.26 per share. The closing sales price of our common stock on December 1, 2008 was $5.52 per share. The securities markets have experienced significant price and volume fluctuations in the past, and the market prices of the securities of semiconductor companies have been especially volatile. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock in spite of our operating performance. The market price of our common stock may fluctuate significantly in response to a number of factors, including:

·actual or anticipated fluctuations in our operating results;

·changes in expectations as to our future financial performance;

·changes in financial estimates of securities analysts;

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

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

·changes in market valuations of other technology companies; and

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

Due to these factors, the price of our stock may decline and investors may be unable to resell their shares of our stock for a profit. In addition, the stock market experiences extreme volatility that often is unrelated to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance.

63

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

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

(1) On February 27, 2007, our board of directors approved a stock repurchase program that provides for the repurchase of up to $100 million of our outstanding common stock. Subject to applicable securities laws, such repurchases will be at times and in amounts as we deem appropriate, based on factors such as market conditions, legal requirements and other corporate considerations. See the section entitled “Liquidity and Capital Resources” in Item 2 of this Quarterly Report on Form 10-Q for further information on this program.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

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

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

The term of office of directors Shaw Hong, Joseph Jeng and Dwight Steffensen continued after the annual meeting.

2.To ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending April 30, 2009.

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

64

ITEM 6.   EXHIBITS

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

65

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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

66

Exhibit Index

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