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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---------------

FORM 10-K

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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 2002.

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)


930 Thompson Place, Sunnyvale, California 94085
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: (408) 733-3030

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
------------------- -------------------
None None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value

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 Exchange Act of
1934 during the preceding 12 months (or for such 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on July
19, 2002 as reported on the Nasdaq National Market, was approximately
$274,635,891. Shares of Common Stock held by each executive officer and
director and by each person who owns five percent or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of July 19, 2002, registrant had outstanding 22,498,279 shares of
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated by reference into Part III of this Annual
Report on Form 10-K portions of its Proxy Statement for the 2002 Annual Meeting
of Stockholders.

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OMNIVISION TECHNOLOGIES, INC.

INDEX TO

ANNUAL REPORT ON FORM 10-K

FOR YEAR ENDED APRIL 30, 2002




Page
----

PART I

Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 15
Item 3. Legal Proceedings................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16


PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................ 17
Item 6. Selected Financial Data.......................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 40
Item 8. Financial Statements and Supplementary Data...................... 41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 41


PART III


Item 10. Directors and Executive Officers of the Registrant............... 42
Item 11. Executive Compensation........................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management... 42
Item 13. Certain Relationships and Related Transactions................... 43

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 44

Signatures................................................................ 46



2



PART I


ITEM 1. BUSINESS
- ------ --------

This Annual Report on Form 10-K, including the information incorporated by
reference herein, includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All of the statements contained in this Item 1, other than
statements of historical fact, should be considered forward-looking statements,
including, but not limited to, the statements relating to the statements
regarding the timing of the marketability of emerging applications; the growth
of the PC camera market; the growth of the number of pictures generated as
different uses of imaging and video emerge; the increased ease of transferring
images across PC systems and communication networks; opportunities for small,
low power, low cost digital still cameras to be integrated directly into
portable devices; the growth of the CMOS image sensor market and the time at
which the CMOS image sensor market will surpass the CCD image sensor market;
the role which new CMOS image sensors will play in moving video applications
into many new mass markets; the suitability of multiple chip image sensors for
many new mass market applications; the advantages derived by us and our
customers from directly working together; our expectation of international
sales continuing to account for a significant portion of our revenues; our
continued investment of significant funds in research and development; our
future success being dependent upon our ability to protect our intellectual
property; our plan to vigorously defend ourselves in lawsuits regarding
intellectual property; our continued evaluation of the benefits of migrating to
a smaller circuit technology, using other color filter vendors and other
packaging technologies and making our testing facilities available to third
parties and the retention of future earnings and the payment of cash dividends.
There can be no assurance that these expectations will prove to have been
correct. Certain important factors that could cause actual results to differ
materially from our expectations are disclosed in this Annual Report on Form
10-K, including, without limitation, in the section entitled "Factors Affecting
Future Results" in Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operation and this section. 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.

All forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ
materially from those included within the forward-looking statements as a
result of various factors. These forward-looking statements are made in
reliance upon the safe harbor provision of The Private Securities Litigation
Reform Act of 1995.


Overview
- --------

We were organized in 1995 as a California corporation and completed a
reincorporation in Delaware in March 2000 prior to our initial public offering.
We design, develop and market high performance, high quality and cost efficient
semiconductor imaging devices for computing, communications, industrial,
automotive and consumer electronics applications. Our main product, an image
sensing device called a CameraChip(tm), is used to capture an image in cameras
and camera related products in high-volume imaging applications such as
personal computer cameras, digital still cameras, security and surveillance
cameras, personal digital assistant cameras and mobile phone cameras and
cameras for automobiles and toys for both still picture and live video
applications. We have developed our CameraChips using the standard
semiconductor manufacturing process used for approximately ninety percent of
modern integrated circuits. This enables us to take advantage of the many
benefits of high volume, mainstream semiconductor manufacturing such as low
cost, high reliability, volume capacity and competitive lead times. In
addition, unlike competitive image sensors, which require multiple chips to
achieve the same functions, we are able to integrate nearly all camera
functions into a single CameraChip. This leads us to believe that we supply the
most highly integrated, single chip image sensing device. Our highly integrated
chip design offers competitive advantages that can allow our customers to
design cameras that are lower in cost, smaller, lighter in weight, consume less
power, are more reliable and more easily integrated with other circuits than
cameras using multiple chip image sensors. Our CameraChips are currently used
for the following applications:

o digital still cameras, personal computer video cameras, personal digital
assistant cameras and mobile phone cameras which are used for capturing
images that can be stored, downloaded, viewed, edited and manipulated,
and for Internet applications such as creating still and live video for
websites and e-mail;


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o security and surveillance systems and closed circuit television systems
including onsite and remote security cameras for both home and business
and surveillance systems such as baby monitors and door phones; and

o toys and games such as highly interactive participatory video games
where the users' motions and images can be incorporated into the game
and his or her motions, rather than a joystick or mouse, control actions
in the game.

We assist our customers in developing new CameraChip specifications that
are required for emerging applications. We believe that these applications will
be marketable within the next three years. Examples of such applications
include:

o personal identification systems such as fingerprint scanners, retina
scanners and face recognition systems;

o medical imaging devices used for routine doctors' office examinations;

o machine control systems such as bar code readers, production control
systems and quality inspection systems;

o automotive applications such as cameras that may replace rear and side
view mirrors, provide inadvertent lane departure and blind-spot
collision detection, air bag inflation sensors, rear-approach headlight
auto-dimming sensors, accident recorders, driver monitors and
maintenance inspection systems; and

o videophones integrated in tabletop phones.

We have shipped approximately 6.0 million CameraChips in the year ended
April 30, 2002, or Fiscal Year 2002, as compared to approximately 6.5 million
CameraChips in the year ended April 30, 2001, or Fiscal Year 2001. Our
customers include industry leading original equipment manufacturers, or OEM,
such as Alaris, Inc., or Alaris, Creative Technologies Ltd., or Creative,
Teksel Co., Ltd., or Teksel, who distributes our products to Kyocera
Corporation, or Kyocera, X10 Wireless Technology, Inc., or X10, and Viewquest
Technologies, Inc., or Viewquest.

Our objective is to be a leading supplier of CameraChips for camera
manufacturers by:

o focusing on capturing and expanding mass market applications;

o targeting camera manufacturers by assisting them in the design and
development of their products;

o maintaining our technology leadership by continuing to develop our core
technology;

o continuing to develop new products aimed at new and existing markets;
and

o continuing to establish both formal and informal strategic relationships
with key suppliers and customers.


Industry Background
- -------------------

Growth of Digital Video Imaging
-------------------------------

Multimedia technology and its uses have grown in the past decade. A
significant driver of this growth in multimedia has been the growth of video
technologies. Many large industries including the movie, television, publishing
and computer industries depend directly on video technologies to create and
deliver their products. Traditionally all video, still image and sound products
were based on analog technologies. More recently, computer based video
technology has been replacing traditional analog image and sound capture
technologies, such as conventional cameras, film and tape recorders. This has
begun to occur because digital technology offers enhanced quality, manipulation
and storage capabilities that analog technologies lack. For example, a movie
recorded and stored digitally can be easily edited and enhanced, can be easily
searched and will not suffer degradation over time.


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The Internet and Miniaturization of Electronics Fuel Demand for Video Imaging
-----------------------------------------------------------------------------

Video and image capture on PCs was first used in videoconferencing
applications. However, early videoconferencing applications were expensive, and
suffered from poor image quality and inadequate network infrastructure. Video
conferencing grew rapidly as image quality improved and cameras became more
affordable. According to a study published by the Cahners In-Stat Group in July
2001, the market for PC cameras is predicted to grow from approximately 10.5
million units in 2000 to approximately 42.5 million units by 2005. As cameras
became readily available on PCs, applications other than videoconferencing
quickly followed. The introduction of the World Wide Web browser, with its
hypertext and Uniform Resource Locator, or URL, address system, changed the
Internet from a text based system to a multimedia driven network that features
sound, pictures and live video clips. Fueled by the growth of the Internet as a
method to publish, transport and store images, the number of pictures generated
is expected to grow significantly as different uses of imaging and video
continue to emerge. Today PC video cameras are used for capturing still
pictures and live video clips used for web sites, video email, video greeting
cards, web based photo exchanges, desktop publishing and interactive games. As
network bandwidth continues to improve, transferring images across PC systems
and communication networks will become even easier, further driving the demand
for video and multimedia applications.

Miniaturization has moved computing from the desktop to a wide assortment
of portable and hand held devices including laptops, personal digital
assistants, electronic games and mobile phones. These battery operated devices
are creating an opportunity for small, low power, low cost digital still
cameras to be integrated directly into the portable device so that images can
be captured for transfer to computer systems using wired or wireless methods.
Examples of commercial uses for these captured images include property damage
pictures for insurance claims, images of competitive products for analysis, or
enhancement of computer contact databases.

The more recent digital still cameras use a live video image sensor to
display a real time image on a miniature, built in display which serves as a
viewfinder. Still images captured by the same image sensor and stored in the
camera are transferred to a computer system for viewing, editing, transmitting
and printing. When connected to the computer, digital still cameras can also
function like PC video cameras. These devices have made a significant impact on
the camera market by taking market share from film based cameras and are one of
the fastest growing consumer electronic products.

Advances in Image Sensor Technology
-----------------------------------

Image sensors are at the center of all electronic cameras. Image sensors
capture an image through a lens and convert that image into electronic signals.
Charged couple device, or CCD, technology has dominated the image sensor market
for over 25 years. However, production is concentrated with relatively few,
large, primarily vertically integrated manufacturers. According to the Cahners
July 2001 study, the top six CCD image sensor manufacturers, Fuji Corporation,
or Fuji, Matsushita Electric Industrial, or Matsushita, Nippon Electric
Corporation or NEC, Sharp Corporation, or Sharp, Sony Corporation, or Sony, and
Toshiba Corporation, or Toshiba, account for approximately 97.1% of total CCD
image sensor production.

A newer, easier to use semiconductor technology, complementary metal oxide
semiconductor, or CMOS, has been adopted for most common integrated circuits.
Although CMOS technology has been available for image sensor designs for over
20 years, until recently it has not been used in commercial products because of
poorer image quality. Recent improvements in CMOS, including smaller size
circuits, better current control, and a more stable fabrication process, have
made it possible to design CMOS image sensors that provide high image quality
and that have many advantages over CCD image sensors.

Advantages of CMOS Over CCD Technology
--------------------------------------

CMOS technology has many advantages over CCD technology including:

o Cameras using CMOS image sensors consume as little as one tenth as much
power as those using CCD technology, making them more suitable for
battery operated applications.

o CMOS image sensors require only one voltage, the three or five volts
typically used for modern integrated CMOS circuits, while CCD image
sensors require three separate and different voltages, which means that
CMOS image sensors are easier and less costly to integrate into
companion circuit boards.


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o CMOS technology permits integration of more functions into fewer chips,
providing space, cost, product design and reliability advantages.
Cameras using CMOS technology do not require as many semiconductors as
cameras using CCD technology.

o The CMOS fabrication process requires fewer masking steps than the CCD
fabrication process. The CCD fabrication process generally requires 20
to 40 masking steps, which is two to three times more complex than the
typical CMOS fabrication process.

o CMOS image sensors do not cause an image to lose definition when
directed towards bright light while CCD image sensors create a blurry or
smeared image.

In addition, since CCD technology is used only for image sensors, future
improvements in the core technology and the fabrication process are
concentrated among a few large, vertically integrated equipment manufactures.
Such concentration tends to limit innovation and investments. Because of the
advantages of CMOS technology as compared to CCD technology, CMOS image sensors
are projected to constitute the majority of all image sensor units shipped by
2004 according to the Cahners July 2001 study. Again, according to that study,
Cahners forecasts that CMOS's share of the image sensor market will grow from
approximately 29.4% in 2000 to 76.8% in 2005. In particular, Cahners In-Stat
Group predicts that in 2005, approximately 100.0% of the expected 42.5 million
PC cameras will use CMOS image sensors. Cahners In-Stat Group also predicts
that in 2005, CMOS technology will account for approximately 41.5% of the 41.0
million digital still cameras.

Applications for CMOS Image Sensors
-----------------------------------

Based on discussions with current and potential customers, we anticipate
that the newer CMOS image sensors will help move video applications into many
new mass markets, particularly where low cost, low power consumption and small
size are important. Some of these applications include:

o a wide array of personal identification systems, including fingerprint
scanners, retina scanners and face recognition systems that can be used
for credit card and debit card authorization, opening a hotel door,
entering a car or home, accessing a computer or online network, and any
number of applications where a system needs to validate an individual's
identity;

o a wide array of medical instruments used for routine doctors' office
examinations;

o videophones integrated into tabletop phones;

o automotive applications such as cameras that may replace rear and side
view mirrors, sensors that provide inadvertent lane departure and blind
spot collision detection, air bag inflation sensors, rear-approach
headlight auto-dimming sensors, accident recorders, driver monitors and
maintenance inspection systems; and

o machine control applications, including bar code readers, production
control systems and quality control monitors.

However, we believe that multiple chip CMOS image sensors do not fully
take advantage of the benefits enabled by CMOS technology. Image sensors that
require more than one chip are more expensive, larger and heavier, consume more
power, are less reliable and are more difficult to integrate with other
electronic circuits. As a result, multiple chip image sensors may not be ideal
for many new mass-market applications.


Our Solution
- ------------

We design, develop and market our high performance, high quality and cost
efficient CameraChips for computing, communications, industrial, automotive,
and consumer electronics applications. We have developed our CameraChips using
the standard CMOS manufacturing process used for approximately 90% of modern
integrated circuits. Our proprietary circuit design integrates the image
capture, the image processing function, the color processing and the conversion
and output into a single chip. The result is a fully processed and formatted
image or video stream capable of being easily utilized by industry standard
digital or analog equipment. This allows


6




integrators of our technology to focus on their specific image application
without specialized development or specific expertise on image sensor
functions.

As a result, unlike competitive image sensors, which require multiple
chips to achieve the same functions, we are able to integrate nearly all the
camera functions into a single chip. Customers can use our highly integrated
CameraChip to design camera products that are lower in cost, smaller in size,
lighter in weight, consume less power and are more reliable and easier to
integrate with other electronic circuits than cameras using the traditional CCD
technology or multiple chip CMOS image sensors. Our CameraChips are used in
conjunction with our interface chips or other manufacturers' adaptor chips to
connect directly to a personal computer or to provide additional functions such
as video and still image compression.

Our CameraChips provide a number of benefits to our customers, including
the following:

o Lower Cost. The highly integrated design of our CameraChips allows our
----------
customers to build cameras that are generally less expensive than ones
using CCD technology. Our single chip technology also allows our
customers to build cameras that generally are less expensive than
cameras using multiple chip CMOS image sensors.

o Lower Power Consumption. A device using our CameraChip can require as
-----------------------
little as one tenth of the power required for a CCD camera and half the
power required for a multiple chip CMOS camera, making our solution more
suitable for battery powered operation. In addition, CMOS CameraChips
use a single voltage while CCD image sensors require three voltages. As
a result of this simplicity, our customers can more easily and quickly
design camera products.

o Smaller Size. Our highly integrated chip design allows our customers to
------------
develop cameras that are smaller in size and lighter in weight than
cameras that use CCD or multiple chip CMOS image sensors. For portable
applications, size and weight are critical factors in a consumer's
buying decision. Additionally, devices using our CameraChips are
generally more reliable because there are fewer parts to fail.

o Streamlined Manufacturing and Production. Our CameraChips are well
----------------------------------------
suited for large-scale production. Competing CCD image sensors must
each be individually hand calibrated to match companion components to
maximize the image quality due to the inconsistency of the image output.
Our CameraChips provide consistent quality making streamlined
manufacturing possible. Additionally, our CameraChips can be mounted
onto a printed circuit board using automatic insertion equipment and can
run through standard automatic re-flow soldering lines, whereas CCD
image sensors must each be individually placed and soldered by hand.

o Ease of Use. Our CameraChips are offered as part of a complete design
-----------
solution for many markets. As opposed to CCD and other CMOS image sensor
manufacturers, we offer a complete solution for our customers which
includes camera designs, optimized interface chips, and Windows(r) and
Apple Computer iMac(r) software drivers to enable a plug and play
connection of the camera to a personal computer.

o Accelerated Time to Market. The highly integrated nature of our
--------------------------
CameraChips simplifies the design of cameras and allows our customers to
shorten their product design time. We also help our customers accelerate
their time to market by providing camera reference designs, engineering
design review services and customer product evaluation testing and
debugging services.


Products
- --------

We design, develop and market our high performance, high quality and cost
efficient CMOS CameraChips for computing, communications, industrial,
automotive and consumer electronics applications.

We have developed proprietary designs for CameraChips that include the
image capture, image processing circuitry, color processing and image
formatting. Our products allow our customers to control the chip functions and
thereby provide custom, proprietary features in their application software or
hardware design so that they can offer unique products to end users. Our
technology provides a platform for different products that allow our customers
to choose the most appropriate features for their applications. These features
include:


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Product Features
- -------------------------------------------------------------------------------

Complementary Metal Oxide
Semiconductor CameraChip Black and white or color
Low resolution
Resolutions Medium resolution
High resolution
Output Signal Analog (for television)
Digital (for computers & other digital devices)
Operating Voltage 5 volt or 3 volt
Optical Lens Size 1/6, 1/5, 1/4, 1/3 or 1/2 inch format
Interface Chips For connecting to computers & other devices
Software Drivers Windows, Windows CE, Linux and Apple(tm)
computer software drivers




The following table summarizes our current CameraChip product offerings:





CMOS CameraChips
- -------------------------------------------------------------------------------
Product
Black and Color Introduction
White Sensors Sensors Resolution Output Target Markets Date
- ------------- ------- ---------- ------------------ -------------- ----

OV5116 Low NTSC or PAL for TV Security and
surveillance 2/01
Toys and games
OV7410 OV7910 Medium NTSC or PAL for TV Security and
surveillance
Close circuit 2/99
television
Toys and games
OV6120 OV6620 Low For computers PC video cameras
Toys and games 4/99
Machine control
OV6130 OV6630 Low For computers PC video cameras
Toys and games 2/00
Machine control
OV6140 OV6640 Low For computers Mobile devices
(3.3 Volt) 7/01
PC video cameras
OV7120 OV7620 Medium For computers PC video cameras
Digital still
cameras 10/99
Machine control
OV7130 OV7630 Medium For computers Mobile devices
(3.3 Volt)
PC video cameras
Digital still 7/01
cameras
Machine control

OV8110 OV8610 Medium For computers PC video cameras
High Digital still 2/01
cameras
Machine control
OV9120 OV9620 High For computers PC video cameras
Digital still 10/01
cameras
Machine control



We also provide companion chips used to interface our CameraChips to the
universal serial bus, a connection which allows add-on devices to be connected
to personal computers. These low cost, proprietary designed chips accept the
live video output from our CameraChips, perform data compression and handle the
bus protocol for transferring the image data to the personal computer. They
also act as a master for passing programming information to and from our
CameraChip.

We also design, develop and license plug and play software drivers for
Microsoft Windows and Apple Computer iMac system. These software drivers accept
the image data being received from the universal serial bus, provide the data
decompression if required and manage interface protocols with the camera. These
drivers have been


8




designed for speed and flexibility and allow easy customization of the user
interface to represent the customer's brand to the end-user.


Customers
- ---------

Our customers include industry leading camera manufacturers, contract
manufacturers and distributors. During Fiscal Year 2002, we shipped
approximately 6.0 million CameraChips as compared to approximately 6.5 million
CameraChips during Fiscal Year 2001. The following table describes
representative camera manufacturer customers who purchase our products for
their own branded products and contract manufacturers who build products for a
camera manufacturer. Also shown are representative distributors who purchase
our products for resale.





Customer Product Family Markets
-------- -------------- -------
Camera Manufacturer and Contract Manufacturer Customers
- -------------------------------------------------------------------------------

Alaris, Inc. Color digital CameraChips Toys and games
Color analog CameraChips
COMedia Ltd. Black and white analog Security and
CameraChips surveillance
Color analog CameraChips
Concord Camera HK Limited Color digital CameraChips Digital still cameras
Cell phone accessory
Creative Technologies Color digital CameraChips PC video cameras
Limited USB interface companion chips Digital still cameras
CRS Electronic Co. Color analog CameraChips Toys and games
Curitel Communications,
Inc. Color digital CameraChips Embedded cell phone
Mtek Vision Co., Ltd. Color digital CameraChips PC video cameras
USB interface companion chips
Olympus Optical Co., Ltd. Color digital CameraChips Security and
Color analog CameraChips surveillance
PC video cameras
Philips Portuguosa, SA Color digital CameraChips PC video cameras
Sector Industrial de USB interface companion chips
Ovar
Samsung Electro-Mechanics Color digital CameraChips PC video cameras
Co., Ltd. USB interface companion chips
Teksel Co. Ltd./Kyocera Color digital CameraChips Cell phone accessory
Viewquest Technologies, Color digital CameraChips PC video cameras
Inc. USB interface companion chips
Welch Allyn Corporation Black and white analog Bar code readers
CameraChips
Color analog CameraChips
X10 Wireless Technology, Color analog CameraChips Security and
Inc. surveillance

Distributors
- -------------------------------------------------------------------------------
SEC Development Co., Ltd. Color digital CameraChips PC video cameras
(Hong Kong) Black and white digital Digital still cameras
CameraChips Security and
Color analog CameraChips surveillance
USB interface companion chips General purpose
cameras
World Peace Industrial Color digital CameraChips PC video cameras
(Taiwan) Black and white digital Digital still cameras
CameraChips Security and
Color analog CameraChips surveillance
USB interface companion chips General purpose
cameras



In many cases, our camera manufacturer customers outsource manufacturing
functions to third parties. In these cases we typically help these third party
manufacturers bring the design to production. Once the production is ready, we
sell our products to these third party manufacturers either directly or through
distributors. For example, Samsung Electronics Manufacturing Company, or SEMCO,
a major manufacturer in Korea, manufactures a personal digital assistant camera
for Creative. In many cases these third party manufacturers may also introduce
us to additional camera manufacturers with whom they have relationships.


9




In Fiscal Year 2002, approximately 66% of our revenues were derived from
camera manufacturers and their contract manufacturers. Our largest customer,
X10, accounted for approximately 20% of our revenues. No other single camera
manufacturer customer represented more than 10% of revenues.

In Fiscal Year 2002, approximately 34% of our revenues were derived from
distributors. The largest distributor was World Peace Industrial Co. Ltd., or
World Peace, which represented approximately 15% of revenues. No other single
distributor represented more than 10% of revenues. We have signed distribution
agreements with most of our distributors, including World Peace.


Strategic Relationships
- -----------------------

We have established an informal strategic relationship with Taiwan
Semiconductor Manufacturing Corp., or TSMC, both in Taiwan and in the United
States. TSMC is one of our primary sources of wafer fabrication. This
relationship includes joint engineering projects aimed at improving production
yields, improving image quality and correlating final packaged chip testing and
wafer level testing. We provide extensive, in depth technical expertise on
CameraChip design issues, which has allowed TSMC to develop an image sensor
production business. TSMC provides us with extensive, in depth technical
expertise on variations of the CMOS semiconductor fabrication process which
assists us in improving the design and production of our CameraChips. We are
one of TSMC's largest customers for CMOS image sensors and in the past we have
received preferential capacity scheduling.

We have signed an agreement with Powerchip Semiconductor Corp., or PSC, as
a second source for wafer fabrication. By working closely with PSC's engineers,
we have been able to design new CameraChip products that take advantage of
PSC's memory chip fabrication processes. PSC's fabrication process gives us a
number of important improvements, including better current control for better
image quality. In return, we have assisted PSC in image sensor fabrication.

We have several informal strategic relationships with key customers in the
development of new camera products incorporating our CameraChips. By working
directly with key customers, we can help them take advantage of our
CameraChips' capabilities and can inform them of new developments so they can
market their products more quickly. By learning more about our customers'
desires and requirements we are able to plan and prioritize our product
development projects. Some of these key customers include Creative, for PC
video cameras and digital still cameras, Alaris for cameras for toys, Viewquest
for PC video cameras, Teksel/Kyocera for cameras for mobile telephones, Welch
Allyn for cameras for bar code readers, and X10 for cameras for home
entertainment and surveillance cameras.


Sales and Marketing
- -------------------

We sell our products through a direct sales force and indirectly through
distributors and manufacturer's representatives. As of April 30, 2002, our
sales and marketing organizations had a total of 36 employees. We also have 18
independent distributors and manufacturers' representatives, four of whom are
domestic and 14 of whom are located outside the United States. We continuously
evaluate whether to use a direct sales force or to utilize independent
representatives in a particular region or for a given potential customer
depending upon the scope of the potential sales opportunities. Sales outside of
the United States represented 74% of revenues in Fiscal Year 2002, 84% of
revenues in Fiscal Year 2001, and 78% of revenues for the fiscal year ended
April 30, 2000, or Fiscal Year 2000. Sales outside of the United States are
primarily denominated in U.S. dollars in order to reduce the risks associated
with the fluctuations of foreign currency exchange rates. We expect that sales
outside of the United States will continue to account for a significant portion
of our revenues.

In Fiscal Year 2002, we sold our CameraChips to camera manufacturers who
market camera products under their own brand. We also sold CameraChips to large
manufacturing companies that produce camera products for others to market under
different brand names. Through our relationships, we have developed expertise
in the design of cameras. We have used that expertise to assist our customers
in developing their products which incorporate our CameraChips. We also have
provided reference designs and engineering design review and engineering
product evaluation testing and debugging services for our customers.


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Technology
- ----------

We have key technical competencies in analog signal processing design,
mixed signal circuit design, advanced CMOS CameraChip design, automatic testing
and single chip semiconductor design.

Analog Circuit Design
---------------------

We have in-house expertise to design sophisticated analog semiconductor
circuits. This expertise is unique because most semiconductor design engineers
today work in the area of digital circuit design. Our in-house expertise has
allowed us to process the video data captured in the analog domain, which has
many significant advantages over digital processing. Analog processing works
directly on the original image signals without the loss of data typical with
conversion to digital processing. Analog circuits require considerably less
space which means we can design smaller chips with far less noise caused by
heat or cross talk than digital circuits. The image processing circuits take
approximately 20% to 30% of the space in our typical CameraChip design, leaving
70% to 80% for the image sensing array. Most CCD image sensors and other
competitive CMOS image sensor products convert the image signal to digital as
the very first step and then export the data to another chip for image
processing and formatting. In our digital output product designs, conversion to
a digital signal is the last step taken before the output step rather than the
first. Analog processing is the key for integrating all the functions on a
single chip thereby taking full advantage of the benefits of CMOS technology.

Analog Output Designs
---------------------

Our analog output CameraChips are designed to output a PAL or NTSC video
signal that can be used directly by standard television equipment without any
additional conversion technology. These CameraChips take advantage of the
analog processing technology on our digital output chips. Prior to output, the
signal is formatted specifically for industry-adopted television standards.
There is no digital conversion on our analog output CameraChips. CCD image
sensors and other competitive CMOS image sensor products that process their
images in a digital format must convert their video signal to a standard
television format in a separate chip in order to generate the same output,
resulting in an increase in complexity, cost and space needed for a product
design.

Mixed Analog/Digital Circuit Design
----------------------------------

We have developed extensive in house expertise in the technology of mixing
analog and digital signals in the same semiconductor design without suffering
the common problems of interference from noise caused by heat or crosstalk. We
use digital circuits in our CameraChips to interface to the outside digital
world. We have developed a method of programming the analog processing circuits
which gives our customers extensive and flexible programming capability from
digitally based microprocessors and micro controllers.


Advanced CMOS CameraChip Design
-------------------------------

Our in house semiconductor design engineers are skilled in the design of
high speed, low power and mixed analog/digital CMOS CameraChips. We use
advanced design techniques to develop high speed, highly integrated
semiconductors which can be fabricated using standard CMOS processes and which
can be manufactured using conventional low cost packages.

Automatic Testing
-----------------

Automatic testing methods and equipment designed for conventional CMOS
devices are not sufficient for testing an image sensor. In addition to testing
all the normal logic and electrical functions, an optical test must be
performed on the image sensor. In our proprietary testing process, the
CameraChip is turned on and captures a live image, which is subsequently
analyzed for quality and color. Our in house expertise has allowed us to design
automatic testing equipment, specifically for CMOS image sensors. Using low
cost commercially available modules and components, we have designed and
developed a complete microcomputer based testing system that has automatic
handling capability, an image source, a lighting and lens system and automatic
output sorting. This low cost system is programmable so that testing criteria
and testing methodology can be easily changed and can be replicated to meet
increased production requirements. The system produces detailed reports on test
results that are used for feedback to our quality control and operations
department.

11





Single Chip Semiconductor Design
--------------------------------

Our expertise has allowed us to create single chip CMOS image sensing
devices. Our single chip integrates the image capture, the image processing,
the color processing and conversion and output for either television or
computers.


Research and Development
- ------------------------

The internal design of our CMOS CameraChips has been done in a modular
fashion. The major functions, such as the image capture, image sensor control
logic, color processing, analog output, digital output and programming control,
are stand alone circuits that can rapidly be modified or used in new product
developments. As a result, circuit improvements easily migrate to each new
product, and the total development time and cost for new products is greatly
reduced.

We use a team approach to design new products, which includes a senior
design engineer and additional engineers with specific design expertise. As of
April 30, 2002, we had a total of 53 employees in research and development.

We have invested, and expect that we will continue to invest, significant
funds in research and development. Our research and development expenses were
approximately $7.8 million in Fiscal Year 2002, $5.5 million in Fiscal Year
2001, and $3.7 million in Fiscal Year 2000.


Intellectual Property
- ---------------------

Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. We rely on a combination of patent,
copyright, trademark and trade secrets, as well as nondisclosure agreements and
other methods to protect various aspects of our CameraChips such as the image
capture and the image processing circuit. As of April 30, 2002, we have been
issued 19 United States patents. We have also received 11 foreign patents. We
have filed and pending 31 additional United States patent applications, of
which two have been allowed. These patents and patent applications protect the
single chip image sensor design, noise reduction and cancellation circuits,
image enhancement, color processing, and applications technologies of our
semiconductor CameraChips.

From time to time, we have been subject to legal proceedings and claims
with respect to such matters as patents and other actions arising out of the
normal course of business. It is possible that companies might pursue
litigation with respect to any claims such companies purport to have against
us. The results of any litigation are inherently uncertain. In the event of an
adverse result in any litigation with respect to intellectual property rights
relevant to our products that could arise in the future, we could be required
to obtain licenses to the infringing technology, pay substantial damages under
applicable law, including treble damages if we are held to have willfully
infringed, cease the manufacture, use and sale of infringing products or to
expend significant resources to develop non-infringing technology. Litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail.


Manufacturing
- -------------

Wafer Fabrication
-----------------

Our semiconductor products are fabricated using standard CMOS processes,
which permit us to engage independent wafer foundries to fabricate our
semiconductors. By outsourcing our manufacturing to semiconductor foundries, we
are able to avoid the high cost of owning and operating a semiconductor wafer
fabrication facility. This allows us to focus our resources on the design,
development and marketing of our CameraChips.

We outsource our wafer manufacturing to TSMC and PSC. Our CameraChips are
currently fabricated using a standard process at 0.25, 0.40, 0.50 and 0.60
microns. We continue to evaluate the benefits and feasibility of migrating to a
smaller circuit technology in order to reduce costs or to increase quality and
performance.


12




We have signed agreements with Samsung Electronics Co. Ltd., or Samsung,
and CoAsia Microelectronics Corp., Samsung's sales agent, under which Samsung
fabricates one of our interface chips on its standard fabrication line. Samsung
not only fabricates the wafers, but also packages the chips and performs a
final test, delivering a final product that can be shipped by CoAsia
Microelectronics Corp. directly to our customers when required. We also
purchase selected interface chips from Winbond Electronics Corp., or Winbond,
for re-sale to our customers.

Color Filter Application
------------------------

A majority of our unit sales of CameraChips for Fiscal Year 2002 are color
CameraChips. These require a color filter to be applied to the wafer before
packaging. This color filter application uses a series of masks to place red,
green and blue dyes on the individual picture elements in an industry standard
Bayer pattern. As a final step, a micro lens is applied to each picture
element. We outsource the application of our color filters to Toppan Printing
Co., Ltd. in Japan and to TSMC in Taiwan.

Assembly
--------

After wafer fabrication, and color filter application if required, the
wafers are diced into chips, which are then assembled into packages. Our
products are designed to use low cost standard packages that are widely in use
for optical sensor chips. These packages have a glass lid to allow light to
pass through to the image sensor array. In Fiscal Year 2002, we outsourced the
majority of our packaging requirements to Alphatec Semiconductor Packaging Co.,
or Alphatec, in Thailand, Pan Pacific Semiconductor Co., Ltd., or PPSC, in
Taiwan, and Kyocera in Japan. We continue to evaluate the benefits of using
other vendors and other packaging technologies in order to further reduce costs
or increase quality or performance.

Testing
-------

High volume product testing is an important part of the production of
CameraChips and is a substantial barrier to entry for many companies.
Production testing equipment designed for conventional CMOS devices is not
sufficient for testing image sensors because an optical image must be captured
and checked in addition to checking the normal logic and electrical functions.
The few commercially available image sensor testers are expensive and do not
meet our high standards.

We have designed our own automatic test equipment, using readily available
modules and components. These testers are computer based and have automatic
handling capability, a lighting and lens system, a changeable image source and
automatic output sorting by grade. The system is programmable so that testing
criteria and methodology can be changed easily to accommodate new products or
special testing requests. Our cost to build a system is substantially less than
that of commercially available testers. We can expand our production capability
by building additional systems at a low cost. Current testing capacity is in
excess of one million units per month.

Our policy is to do a complete optical test of all our CameraChips.
Currently, substantially all of our testing is done on our testing machines
installed at our headquarters facility in Sunnyvale, California, although a
very small amount of testing for a few older products is done by hand by a
third party. We continue to evaluate the benefits of making our testing
machines available to outside vendors who could perform our testing in order to
reduce costs.

We use the reports from our testing machines to monitor the cause of any
failure in order to place responsibility with the appropriate vendor, i.e.
wafer fabrication, color filter application or packaging and to assist with
corrective actions. Since CameraChips are optical products, the exposure to
impurities is a major concern during the color filter application and packaging
process. We use test data to establish yield goals at each step of the
manufacturing process and to take appropriate remedial action.

Quality Assurance
-----------------

We focus on product quality through all stages of the design and
manufacturing process. Our designs are subjected to in depth circuit simulation
before being committed to silicon. Test wafers are fabricated and test chips
are packaged and live tested before a new product is committed to production.
Initial production runs are kept at a minimum until sufficient products have
completed the entire manufacturing and testing process and are delivered to and
approved by customers. Full production runs are committed at that time.


13





We qualify each of our vendors through a series of industry standard
environmental product stress tests, as well as an audit and an analysis of the
subcontractor's quality system and manufacturing capability. We also
participate in quality and reliability monitoring through each stage of the
production cycle by reviewing electrical parametric data from our foundries and
other subcontractors. We closely monitor wafer foundry production to obtain
consistent overall quality, reliability and yield levels.


Competition
- -----------

We compete in an industry characterized by intense competition, rapid
technological changes, evolving industry standards, declining average selling
prices and rapid product obsolescence. We believe that the principal factors
affecting competition in our markets are time to market, quality, total system
design cost, availability of foundry capacity, customer support and supplier
reputation. Our primary competition comes from CCD image sensor manufacturers
and multi-chip CMOS image sensor manufacturers:

o CCD Image Sensor Manufacturers. Image sensor manufacturers using CCD
technology include a number of well-established companies, particularly
vertically integrated camcorder and high-resolution digital still camera
manufacturers. Our main competition comes from the top six companies
that collectively account for approximately 97.1% of the total CCD image
sensor market, according to the Cahners In-Stat Group. These six
companies are Fuji, Matsushita, NEC, Sharp, Sony, and Toshiba.

o Multiple-chip CMOS Image Sensor Manufacturers. Image sensor
manufacturers using CMOS technology include a number of well established
companies such as Agilent Technologies, Inc., ST Microelectronics,
Conexant Systems, Inc., Hyundai Electronics Industries Co. Ltd.,
Mitsubishi Electronic, Motorola, Inc., and Toshiba Corporation. In
addition, we compete with a large number of smaller CMOS manufacturers
including Zoran Corporation, or Zoran, and IC Media Corporation.

Our competitors include many large domestic and international companies
that have greater access to advanced wafer foundry capacity, substantially
greater financial, technical, marketing, distribution and other resources,
broader product lines, access to large customer bases and longer standing
relationships with suppliers and customers than we do.


Backlog
- -------

Sales are generally made pursuant to standard purchase orders. Our backlog
includes only those customer orders for which we have accepted purchase orders
and assigned shipment dates within the upcoming twelve months. As of April 30,
2002 and 2001, our backlog was approximately $11.7 million and $8.3 million,
respectively. Although our backlog is typically filled within two to four
quarters, our current backlog is subject to changes in delivery schedules and
backlog may not necessarily be an indication of future revenue.


Employees
- ---------

As of April 30, 2002 we had a total of 119 full-time employees, 94 located
at our headquarters in Sunnyvale, California and 25 in foreign sales support
offices located in Taiwan, China, Republic of South Korea and Japan. Our future
success will depend, in part, on our ability to continue to attract, retain and
motivate highly qualified technical and management personnel. None of our
employees are represented by a collective bargaining agreement, and we have
never experienced any work stoppage. We believe that our employee relations are
good.


14





Executive Officers of the Registrant
- ------------------------------------

The following table sets forth, as of April 30, 2002, certain information
concerning our executive officers and directors:




Name Age Position
- --------------------------------- --- ---------------------------------------

Shaw Hong........................ 64 Chief Executive Officer, President and
Director
Qi Dong.......................... 36 Vice President of Systems
Xinping He....................... 38 Vice President of Core Technologies
John A. Lynch.................... 37 Vice President of Sales and Marketing
H. Gene McCown................... 66 Vice President of Finance and Chief
Financial Officer
Robert J. Stroh.................. 62 Vice President of Strategic Marketing
and Business Development
Raymond Wu....................... 47 Executive Vice President and Director




Shaw Hong, one of our cofounders, has served as one of our directors and
---------
as our Chief Executive Officer and President since May 1995. Mr. Hong holds a
B.S. degree in Electrical Engineering from Jiao Tong University in China and an
M.S. degree in Electrical Engineering from Oregon State University.

Qi Dong has served as our Vice President of Systems since May 2000. From
-------
July 1998 to May 2000, Mr. Dong served as a Design Manager in our Core
Technologies Group. Mr. Dong joined our company in February 1996 and served as
a Senior Design Engineer until his promotion in July 1998. Mr. Dong holds a
B.S. degree and an M.S. degree in Electrical Engineering from Tsinghua
University in Beijing.

Xinping He has served as our Vice President of Core Technologies since May
----------
2000. From July 1998 to May 2000, Mr. He served as a Design Manager in our Core
Technologies Group. Mr. He joined our company in June 1995 and served as a
Senior Design Engineer until his promotion in July 1998. Mr. He holds a B.S.
degree and an M.S. degree in Electrical Engineering from Tsinghua University in
Beijing.

John A. Lynch has served as our Vice President of Sales and Marketing
-------------
since August 2001. From May 2000 to August 2001, Mr. Lynch served as Vice
President of Sales of SCM Microsystems Inc., a technology company providing
chips and products to the digital camera, digital TV and video editing markets.
From April 1995 to May 2000, Mr. Lynch served in various sales and marketing
management positions at SCM Microsystems Inc. Mr. Lynch attended Brigham Young
University where he majored in International Relations.

H. Gene McCown has served as our Vice President of Finance and Chief
--------------
Financial Officer since July 1999. From July 1998 to January 1999, Mr. McCown
served as Vice President of Finance and Chief Financial Officer of Innovative
Robotic Solutions, Inc., a manufacturer of semiconductor equipment. From July
1991 to July 1998, Mr. McCown served as Vice President of Finance and Chief
Financial Officer of Chrontel, Inc., a semiconductor manufacturer. Mr. McCown
holds a B.S. degree in Accounting from San Jose State University.

Robert J. Stroh has served as our Vice President of Strategic Marketing
---------------
and Business Development since November 2000. From June 1998 to November 2000,
Mr. Stroh served as our Vice President of Sales and Marketing. From January
1997 to June 1998, Mr. Stroh served as our Director of Marketing and Sales. Mr.
Stroh holds an M.B.A. degree from Indiana University and a B.S. degree in
Business from Pennsylvania State University.

Raymond Wu, one of our cofounders, has served as one of our directors
----------
since May 1995 and as our Executive Vice President since October of 1999. From
July 1998 to October 1999, Mr. Wu served as our Vice President of Business
Development. From May 1995 to July 1998, Mr. Wu was the head of our Sales
department and our Engineering department. Mr. Wu received a B.S. degree in
Electrical Engineering from Chung-Yuan University in Taiwan and an M.S. degree
in Electrical Engineering from Wayne State University.


ITEM 2. PROPERTIES

Our headquarters, including our principal engineering, administrative,
marketing and testing facilities, are located in approximately 21,280 square
feet of space we have leased in Sunnyvale, California under a lease expiring
April 30, 2003.


15





In December 2001, our subsidiary in Shanghai entered into an agreement to
lease 41,564 square meters of space in Shanghai, People's Republic of China
which will be used for product design and testing. This agreement expires in
December 2051.


ITEM 3. 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.

In March 2000, we received a letter from Koninklijke Philips N.V., or
Philips, in which Philips claimed to have patent rights in a serial bus system
for data transmission, known as the I2C bus system. Although we do not believe
any of our products infringe any Philips patent, we have discussed possible
royalty or licensing arrangements as a means of business resolution. In the
meantime, we have completed implementation of a new serial bus system for our
products.

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 our
company, 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. 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. The complaint against us was amended in April 2002, and
seeks unspecified damages on behalf of a purported class of purchasers of our
common stock between July 14, 2000 and December 6, 2000. We believe that we
have meritorious defenses to this lawsuit and will defend this lawsuit
vigorously.

It is possible that other companies might pursue litigation with respect
to any claims such companies purport to have against us. The results of any
litigation are inherently uncertain. In the event of an adverse result in any
litigation with respect to intellectual property rights relevant to our
products that could arise in the future, we could be required to obtain
licenses to the infringing technology, pay substantial damages under applicable
law, including treble damages if we are held to have willfully infringed, cease
the manufacture, use and sale of infringing products or to expend significant
resources to develop non-infringing technology. Litigation frequently involves
substantial expenditures and can require significant management attention, even
if we ultimately prevail.


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

Not applicable.

16




PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) Market Information
------------------

Our Common Stock has been traded on the Nasdaq National Market tier of the
Nasdaq Stock Market under the trading symbol "OVTI" since July 14, 2000. The
following table sets forth for the period indicated the high and low closing
prices for our Common Stock, as reported by the Nasdaq National Market.




Period Ended July 19, 2002 High Low
- -------------------------- ---- ---

First Quarter (through July 19, 2002)............... $ 14.290 $ 10.000

Fiscal Year Ended April 30, 2002 High Low
- -------------------------------- ---- ---
Fourth Quarter...................................... $ 13.500 $ 6.180
Third Quarter....................................... $ 12.200 $ 3.360
Second Quarter...................................... $ 5.000 $ 2.530
First Quarter....................................... $ 6.200 $ 3.480

Fiscal Year Ended April 30, 2001 High Low
- -------------------------------- ---- ---
Fourth Quarter...................................... $ 5.781 $ 2.370
Third Quarter....................................... $ 35.000 $ 2.938
Second Quarter...................................... $ 47.250 $ 23.141
First Quarter (from July 14, 2000).................. $ 40.438 $ 22.750



The reported last sale price of our Common Stock on the Nasdaq National
Market on July 19, 2002 was $12.31. The approximate number of holders of record
of the shares of our Common Stock was 109 as of July 19, 2002. This number does
not include stockholders whose shares are held in trust by other entities. The
actual number of stockholders is greater than this number of holders of record.
We estimate that the number of beneficial stockholders of the shares of our
Common Stock as of July 19, 2002 was approximately 3,000.

We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the next 12 months.


17





ITEM 6: SELECTED FINANCIAL DATA




Year Ended April 30,
-----------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----

(in thousands, except per share data)
Statement of Operations Data:

Revenues......................$ 46,518 $ 53,707 $ 40,253 $ 5,243 $ 1,476
Cost of revenues (1)(2)....... 25,983 54,696 28,191 4,085 2,652
-------- -------- -------- -------- --------
Gross profit (loss)........... 20,535 (989) 12,062 1,158 (1,176)
-------- -------- -------- -------- --------
Operating expenses:
Research and development(2). 7,754 5,539 3,702 3,290 3,440
Selling, general and
administrative(2)......... 11,505 6,703 3,243 1,853 1,323
Stock compensation charge(2) 527 1,018 1,552 459 206
Litigation settlement....... 3,500 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses...... 23,286 13,260 8,497 5,602 4,969
-------- -------- -------- -------- --------
Income (loss) from operations. (2,751) (14,249) 3,565 (4,444) (6,145)

Interest income (expense), net 1,477 2,692 174 396 106
-------- -------- -------- -------- --------
Income (loss) before income
taxes....................... (1,274) (11,557) 3,739 (4,048) (6,039)
Provision for income taxes.... -- -- 300 -- --
-------- -------- -------- -------- --------
Net income (loss).............$ (1,274) $(11,557) $ 3,439 $ (4,048)$ (6,039)
======== ======== ======== ======== ========
Net income (loss) per share:
Basic.......................$ (0.06) $ (0.67) $ 1.15 $ (5.59)$ (12.71)
======== ======== ======== ======== ========
Diluted.....................$ (0.06) $ (0.67) $ 0.21 $ (5.59)$ (12.71)
======== ======== ======== ======== ========

Shares used in computing per
share amounts:
Basic....................... 21,862 17,134 2,985 724 475
======== ======== ======== ======== ========
Diluted..................... 21,862 17,134 16,399 724 475
======== ======== ======== ======== ========

April 30,
-------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Cash and cash equivalents.... $ 55,803 $ 51,053 $ 5,888 $ 5,374 $ 2,686
Working capital.............. 65,067 66,903 11,667 6,819 2,343
Total assets................. 82,341 78,647 26,298 10,536 3,721
Total current liabilities.... 10,822 7,371 12,529 2,632 633
Total redeemable convertible
preferred stock............ -- -- 21,082 21,082 12,745
Accumulated deficit.......... (23,493) (22,219) (10,662) (14,101) (10,053)
Total stockholders' equity
(deficit).................. $ 71,519 $ 71,276 $(7,313) $ (13,178)$ (9,658)

- ---------------------------

(1) Includes inventory write-off of $18,652 in the fiscal year ended April
30, 2001 and a related benefit of $4,966 in the fiscal year ended April
30, 2002.

(2) Stock-based compensation charges included in:

Year Ended April 30,
-----------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Cost of revenues............. $ 25 $ 59 $ 310 $ 86 $ 42
======== ======== ======== ======== ========
Operating expenses:
Research and development... $ 232 $ 618 $ 997 $ 278 $ 134
Selling, general and
administrative........... 295 400 555 155 75
-------- -------- -------- -------- --------
$ 527 $ 1,018 $ 1,552 $ 433 $ 209
======== ======== ======== ======== ========





18




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The Annual Report on Form 10-K, including the information incorporated by
reference herein, includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act) and
Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act).
All of the statements contained in this Item 7 and Item 7A, other than
statements of historical fact, should be considered forward-looking statements,
including but not limited to, the statements relating to the development of new
products in new and existing markets, the expansion of the range of picture
resolutions offered in our products, the development of new products which
require only three volts for portable applications, the improvement of image
quality, the integration of additional functions and the continued improvement
to the interface chip in the second paragraph under "Overview;" the statements
under "Overview;" the statements relating to the generation of revenues from
five-volt and three-volt products in 2002 in the third paragraph under
"Overview;" the statements relating to technology leadership and increase in
research and development expenses in the seventh paragraph under "Overview;"
the statements regarding the administrative, legal and governmental barriers in
China in the last paragraph under "Overview;" the statements regarding the
expected increases of research and development costs under "Research and
Development;" the statements regarding potential decreases in selling, general
and administrative expenses under "Selling, General and Administrative;" the
statements regarding the amortization of compensation charges under "Stock
Compensation Charge;" the statements regarding cash resources available to meet
capital requirements, the statements regarding the factors affecting future
capital requirements, the raising and availability of additional funds and the
factors affecting capital requirements in the sixth paragraph under "Liquidity
and Capital Resources;" the statements regarding evaluation of acquisitions in
the seventh paragraph under "Liquidity and Capital Resources;" the statements
regarding the effect of and exposure to foreign currency exchange rate risk
under "Foreign Currency Exchange Risk;" and the effect of and exposure to
market interest rate risk under "Quantitative and Qualitative Discussion of
Market Interest Rate Risk." There can be no assurance that these expectations
will prove to have been correct. Certain important factors that could cause
actual results to differ materially from our expectations are disclosed in this
Annual Report on Form 10-K, including, without limitation, in the section
entitled "Factors Affecting Future Results" in Item 7. - Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
this section. 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.

All forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ
materially from those included within the forward-looking statements as a
result of various factors. These forward-looking statements are made in
reliance upon the safe harbor provision of The Private Securities Litigation
Reform Act of 1995.

Overview
- --------

We design, develop and market high performance, high quality, highly
integrated and cost efficient semiconductor image sensor devices. Our main
product, an image sensing device called a CameraChip(tm), is used to capture an
image in cameras and camera related products in high-volume imaging
applications such as personal computer cameras, digital still cameras, security
and surveillance cameras, personal digital assistant cameras and mobile phone
cameras and cameras for automobiles and toys for both still picture and live
video applications. Our CameraChips are designed to use the CMOS fabrication
process. Our single chip image sensors can allow our customers to build cameras
that are smaller, require fewer chips, consume less power and cost less to
build than cameras using traditional CCD technology, or multiple chip CMOS
image sensors. Unlike competitive image sensors, which require multiple chips
to achieve the same functions, we are able to integrate nearly all camera
functions into a single chip. This leads us to believe that we supply one of
the most highly integrated single chip CMOS image sensor solutions.

Image sensors are characterized by several important attributes such as
picture resolution, color, lens size, voltage requirements and type of video
output. We intend to continue developing new CameraChips aimed at new and
existing markets. We plan to expand the range of picture resolutions we offer,
provide additional CameraChips that require only three volts for portable
applications and further improve image quality and integrate additional
functions into our image sensor. In addition, we developed and market an
interface chip that connects a camera to


19





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

the universal serial bus on personal computers, and we plan to continue to make
improvements to that product as well.

Our first image sensor was a low resolution, black and white sensor
introduced in 1996. We introduced an improved version of this sensor in early
1997. In addition, we introduced color and digital image sensors in 1997 and
higher resolution and higher quality image sensors in 1998 and 1999. For Fiscal
Years 2002, 2001 and 2000, the majority of our revenues were generated from
sales of our five-volt color image sensors. Given the growth of the Internet
and multimedia applications which allow for digital images to be captured,
stored and transported, we expect that a significant portion of our revenues in
fiscal year ending April 30, 2003, or Fiscal Year 2003, will be generated from
our five-volt color image sensors, which are used primarily in affordable and
easy to use personal computer cameras, and increasingly from 3.2 volt color
image sensors which are used in both personal computer cameras and cellular
phone accessories.

We sell our products worldwide through a direct sales force and indirectly
through distributors and manufacturers' representatives. Our image sensors are
sold to camera manufacturers who market camera products under their own brand.
We also sell to large manufacturing companies that produce camera products for
others to market under different brand names.

We outsource all of our semiconductor manufacturing and assembly. This
approach allows us to focus our resources on the design, development and
marketing of our products and significantly reduces our capital requirements.
We outsource our wafer manufacturing to TSMC and PSC. A majority of our unit
sales of CameraChips for the Fiscal Year 2002 were color image sensors. These
require a color filter to be applied to the wafer before packaging. We
outsource the application of this color filter to Toppan and TSMC. We outsource
the packaging of our image sensors to Kyocera, PPSC and Alphatec. Outside
testing services do not offer suitable tests for the key parameter of product
performance and image quality. Therefore, we design and produce our own
automatic testing equipment specifically for image sensor testing, and we do
substantially all of our testing in-house. Our control over the testing process
helps us maintain consistent product quality and identify areas to improve
product quality and reduce costs.

We recognize revenue upon the shipment of our products to the customer
provided that we have received a signed purchase order, the price is fixed,
title has transferred, collection of resulting receivables is probable, product
returns are reasonably estimable, there are no customer acceptance requirements
and there are no remaining significant obligations. For certain shipments to
distributors under agreements allowing for return or credits, revenue is
deferred until the distributor resells the product. We provide for future
returns based on historical experiences at the time revenue is recognized.

Sales of our CameraChips are subject to seasonality. Some of the products
using our CameraChips such as personal computer video cameras and digital still
cameras are consumer electronics goods. Typically, these goods are subject to
seasonality with generally increased consumer sales in November and December
due to the holidays. As a result, product sales are impacted by seasonal
purchasing patterns with higher sales generally occurring in the second half of
the calendar year. In addition, we typically experience a decrease in orders in
the quarter ended January 31 from our Chinese and Taiwanese customers primarily
due to the Chinese New Year.

We intend to maintain our technology leadership by continuing to develop
our core technology through our in house research and development efforts. As a
result, we expect that our future research and development expenses will
increase in absolute dollars and may increase as a percentage of revenues as we
design and develop our next generation of image sensor products during Fiscal
Year 2003.

In December 2000, we formed a subsidiary to conduct design and testing
operations in Shanghai, the People's Republic of China. The registered capital
of this company is $12.0 million, of which $3.8 million was funded by us in the
fiscal year ended April 30, 2001, as required by Chinese law. We funded an
additional $3.7 million during Fiscal Year 2002. We are further obligated to
fund the remaining $4.5 million of registered capital by December 2003. As of
April 30, 2002, $4.4 million of the $7.5 million funded to date was paid for
land use rights and to building contractors in partial payment for the
construction of the facility, $2.5 million was deposited in a bank account in
China and $0.6 million was expended for general purposes. The formation and
operation of our subsidiary in China requires a large initial capital
investment. Also there may be significant administrative, legal and


20


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

governmental barriers in China, which may prevent our ability to begin
operation of the subsidiary and prevent us from using the funds outside of
China.


Critical Accounting Policies
- ----------------------------

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and 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. By their nature, these estimates and
judgments are subject to an inherent degree of uncertainty. On an ongoing
basis we re-evaluate our judgments and estimates including those related to
product returns, bad debts, inventories, long-lived assets, income taxes,
litigation and contingencies. We base our estimates and judgments on our
historical experience, knowledge of current conditions and our beliefs of what
could occur in the future considering available information. Actual results
could differ from those estimates, and material effects on our operating
results and financial position may result. Our significant accounting policies
are more fully described in Note 1 to the consolidated financial statements
included in this Annual Report on Form 10-K. Our estimates are guided by
observing the following critical accounting policies:

We believe the following critical accounting policies, among others,
affect the more significant judgments and estimates used in the preparation of
our consolidated financial statements.

o revenue recognition,
o allowance for doubtful accounts and sales return reserve,
o inventory valuation,
o valuation of long-lived assets,
o accounting for income taxes, and
o litigation and contingencies.

Revenue Recognition
-------------------

We generate our revenue by selling our products to original equipment
manufacturers, or OEMs, and distributors. We recognize revenue upon the
shipment of our products to our customer provided that we have received a
signed purchase order, the price is fixed, title has transferred, collection of
resulting receivables is considered probable, product returns are reasonably
estimable, there are no customer acceptance requirements and there are no
remaining significant obligations. For certain shipments to distributors under
agreements allowing for return or credits, revenue is deferred until the
distributor resells the product. We provide for future returns based on
historical experiences at the time revenue is recognized.

In order to determine whether collection is probable, we assess a number
of factors, including past transaction history with the customer and the
credit-worthiness of the customer. We do not request collateral from our
customers. If we determine that collection is not reasonably assured, we defer
the recognition of revenue at the time until collection becomes reasonably
assured, which is generally upon receipt of cash.

Allowance For Doubtful Accounts and Sales Return Reserve
--------------------------------------------------------

Credit evaluations are undertaken for all major sale transactions before
shipment is authorized. Normal payment terms require payment upon transfer of
risk of loss. On an on-going basis, we analyze the payment history of customer
accounts, including recent customer purchases. We evaluate aged items in the
accounts receivable aging and provide reserves for doubtful accounts and
estimated sales returns. Customer credit-worthiness and economic conditions
may change and increase the risk of collectibility and potential sales returns
and may require additional provisions, which would negatively impact our
operating results. As of April 30, 2002, our allowance for doubtful accounts
represented approximately 5.5% of total accounts receivable and our sales
return reserve represented approximately 6.2% of total accounts receivable.


21





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

Inventory Valuation
-------------------

The semiconductor manufacturing industry is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements, and evolving industry standards. Inventories are stated at the
lower of cost, determined on first-in, first-out, or FIFO, basis, or market. We
regularly monitor inventory quantities on hand and record a provision for
excess and obsolete inventories based primarily on historical usage rates and
our estimated forecast of product demand and production requirements for the
next six months. These reserves are associated with specific inventory items
and will be relieved when specific inventory is scrapped or sold. Actual demand
and market conditions may be different from those projected by our management.
This could have a material effect on our operating results and financial
position. In Fiscal Year 2001, as a result of unfavorable economic conditions
in the PC cameras market, the demand for certain color CameraChips did not meet
our expectations. Therefore, we recorded an $18.7 million charge for excess
inventories in Fiscal Year 2001.

Valuation of Long-lived assets
------------------------------

We evaluate the recoverability of our long-lived assets under Statement of
Financial Accounting Standards, or SFAS, No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
or SFAS No. 121. SFAS No. 121 requires us to review for impairment of our long-
lived assets, whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. Impairment evaluations
involve management estimates of asset useful lives and future cash flows. When
such an event occurs, we estimate the future cash flows expected to result from
the use of the asset and its eventual disposition. If the undiscounted expected
future cash flows are less than the carrying amount of the asset, an impairment
loss is recognized. Actual useful lives and cash flows could be different from
those estimated by our management. This could have a material effect on our
operating results and financial position. To date, no impairment loss has been
recognized.

We assess the impairment in value to our long-lived assets whenever events
or circumstances indicate that their carrying value may not be recoverable.
Factors we consider important which could trigger an impairment review include
the following:

o significant negative industry trends,
o significant underutilization of the assets, and
o significant changes in how we use the assets or our plans for their use.

On May 1, 2002, SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" became effective. This standard supersedes SFAS No. 121
and requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. Our
adoption is not expected to have a material effect on our consolidated
financial statements.

Accounting for Income Taxes
---------------------------

We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. We consider historical
levels of income, expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event that we determine
that we would be able to realize deferred tax assets in the future in excess of
the net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, should we determine
that we would not be able to realize all or part of the net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made. We have recorded valuation
allowances against our deferred tax assets of $6.0 million and $6.3 million at
April 30, 2002 and 2001, respectively.

Litigation and Contingencies
----------------------------

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


22




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

Our success and future revenue growth will depend, in part, on our ability
to protect our intellectual property. 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 assure you 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. In addition, it is possible that
existing or future patents may be challenged, invalidated or circumvented. It
may be possible for a third party to copy or otherwise obtain and use our
products, or technology without authorization, develop corresponding technology
independently or design around our patents. Effective copyright, trademark and
trade secret protection may be unavailable or limited in foreign countries.
These disputes may result in costly and time consuming litigation or the
license of additional elements of our intellectual property for free.

It is possible that other companies might pursue litigation with respect
to any claims such companies purport to have against us. The results of any
litigation are inherently uncertain. In the event of an adverse result in any
litigation with respect to intellectual property rights relevant to our
products that could arise in the future, we could be required to obtain
licenses to the infringing technology, pay substantial damages under applicable
law, including treble damages if we are held to have willfully infringed, cease
the manufacture, use and sale of infringing products or to expend significant
resources to develop non-infringing technology. Litigation frequently involves
substantial expenditures and can require significant management attention, even
if we ultimately prevail.


Results of Operations
- ---------------------

The following tables set forth, for the periods indicated, certain
statement of operations data reflected as a percentage of revenues. Our results
of operations are reported as a single business segment.




Year Ended April 30,
----------------------------------
2002 2001 2000
---- ---- ----

Statement of Operations Data as a Percentage
of Revenues:
Revenues....................................... 100.0% 100.0% 100.0%
Cost of revenues............................. 55.9 101.8 70.0
Gross profit (loss).......................... 44.1 (1.8) 30.0
Operating expenses:
Research and development..................... 16.7 10.3 9.2
Selling, general and administrative.......... 24.7 12.5 8.1
Stock compensation charge.................... 1.1 1.9 3.9
Litigation settlement........................ 7.5 -- --
------ ------ ------
Total operating expenses................... 50.0 24.7 21.2
------ ------ ------
Income (loss) from operations.................. (5.9) (26.5) 8.8
Interest income, net........................... 3.2 5.0 0.4
------ ------ ------
Income (loss) before income taxes.............. (2.7) (21.5) 9.2
Provision for income taxes..................... -- -- 0.7
------ ------ ------
Net income (loss).............................. (2.7)% (21.5)% 8.5%
====== ====== ======



Results of Operations for the Fiscal Years Ended April 30, 2002, 2001 and 2000
- ------------------------------------------------------------------------------

Revenues. We derive revenues from the sale of our CameraChip products and
--------
other companion circuits for use in a variety of applications. Revenues for
Fiscal Years 2002, 2001 and 2000 were approximately $46.5 million, $53.7
million and $40.3 million, respectively. Revenues decreased $7.2 million, or
13%, from Fiscal Year 2001 to Fiscal Year 2002. From Fiscal Year 2001 to Fiscal
Year 2002, revenues from PC camera sales declined by an estimated $16.2 million
as a result of a decrease in the number of PC camera units sold due in large
part to the customer inventory build-up that occurred in the October through
November 2000 time frame. The effect of this decline was partially offset by
an estimated $5.3 million increase in security camera revenues and by an
estimated

23




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

$4.9 million increase in digital still camera revenues. Revenues increased
$13.4 million, or 33%, from Fiscal Year 2000 to Fiscal Year 2001 primarily as a
result of greater demand for PC cameras and security and surveillance cameras.
Domestic and international revenues for Fiscal Year 2002 were $11.9 million and
$34.6 million, respectively, as compared to $8.4 million and $45.3 million,
respectively, for Fiscal Year 2001 and $8.7 million and $31.6 million,
respectively, for Fiscal Year 2000. For Fiscal Year 2002, one of our
distributors, World Peace, represented approximately 15% of revenues and one of
our camera manufacturer customers, X10, accounted for approximately 20% of
revenues. For Fiscal Year 2001, World Peace represented approximately 17% of
revenues and one of our camera manufacturer customers, Creative, accounted for
approximately 14% of revenues. For Fiscal Year 2000, World Peace represented
approximately 30% of total revenues and two of our camera manufacturer
customers, Creative and Alaris, accounted for approximately 18% and 11% of
total revenues, respectively. No other distributor or camera manufacturer
customer accounted for 10% or more of total revenues in Fiscal Years 2002, 2001
and 2000.

Gross profit (loss). Gross margins for Fiscal Years 2002, 2001 and 2000
-------------------
were 44.1%, (1.8)% and 30.0%, respectively. Gross margins during Fiscal Year
2002 included an approximately $5.0 million one-time benefit from the sale of
inventory that was previously written off in Fiscal Year 2001. During Fiscal
Year 2001, we recognized an $18.7 million charge for excess inventory.
Excluding the benefit of previously written-off inventory, the adjusted gross
margin for Fiscal Year 2002 was 40.8% of revenues as compared to adjusted gross
margin of 32.9% and 30.0% of revenues in Fiscal Years 2001 and 2000,
respectively. The increase in gross margins on an adjusted basis for Fiscal
Year 2002 was due to favorable changes in product mix and yield improvements on
certain products. The decrease in gross margins from Fiscal Year 2000 to Fiscal
Year 2001 was primarily due to an $18.7 million charge for excess inventory
that we recognized in Fiscal Year 2001. The increase in gross margins on an
adjusted basis from Fiscal Year 2000 to Fiscal Year 2001 was due to modest
yield improvements resulting from higher capacity utilization and favorable
changes in product mix.

Research and development. Research and development expenses consist
------------------------
primarily of compensation and personnel related expenses and costs for
purchased materials, designs and tooling, depreciation of computers and
workstations, and amortization of computer aided design software. Research and
development expenses for Fiscal Years 2002, 2001 and 2000 were approximately
$7.8 million, $5.5 million and $3.7 million, respectively. For Fiscal Years
2002, 2001 and 2000, research and development expenses represented 16.7%, 10.3%
and 9.2% of revenues, respectively. Research and development expenses increased
on an absolute dollar and percentage of revenue basis due primarily to lower
revenue levels on a year-to-year basis and increases in salaries, payroll-
related expenses associated with additional personnel, and contracted costs
associated with new product development. Our research and development expenses
for Fiscal Year 2001 increased at a rate proportionately greater than revenues.
Research and development expenses increased for Fiscal Year 2001 due to
increases in salaries and payroll-related expenses associated with additional
personnel, contracted costs associated with new product development, software
installation and expenses related to the application for new patents. Research
and development expenses may fluctuate significantly from period to period as a
result of our product development cycles. We expect that our future research
and development expenses will increase in absolute dollars and may increase as
a percentage of revenues as we design and develop our next generation of
CameraChips.

Selling, general and administrative. Selling, general and administrative
-----------------------------------
expenses consist primarily of compensation and personnel related expenses and
commissions paid to distributors and manufacturers' representatives. Selling,
general and administrative expenses were $11.5 million, $6.7 million and $3.2
million for Fiscal Years 2002, 2001 and 2000, respectively. For Fiscal Years
2000, 2001 and 2002, selling, general and administrative expenses represented
24.7%, 12.5% and 8.1% of revenues, respectively. The increase in selling,
general and administrative expenses in Fiscal Year 2002 was due principally to
approximately $2.1 million in increased litigation expenses associated with
patent litigation, an increase of $1.0 million in salaries and payroll related
expenses associated with additional personnel, and an increase of $0.7 million
associated with sales activities in Asia. Our selling, general and
administrative expenses increased on an absolute dollar basis in Fiscal Year
2001 by approximately $3.5 million due to an increase in salaries and payroll
related expenses associated with additional personnel, an increase in
commissions paid to distributors and manufacturers' representatives, and
increased legal expenses associated with legal actions resulting from
infringement claims by Photobit Corporation, or Photobit, and the California
Institute of Technology, or Cal Tech and accounting costs associated with
business development and operations. The increase in selling, general and
administrative expenses as a percentage of revenues for Fiscal Year 2001
resulted from expenses that increased at a rate greater than the rate of
increase in revenues. As a result of



24





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

our recent settlement of certain intellectual property claims, we expect that
our future selling, general and administrative expenses may decrease in
absolute dollars and are likely to decrease as a percentage of revenues.

Stock compensation charge. We incurred stock compensation charges of
-------------------------
approximately $0.5 million, $1.1 million and $1.9 million for Fiscal Years
2002, 2001 and 2000, respectively. As of April 30, 2002, deferred compensation
totaled approximately $5.2 million and represents the difference between the
deemed fair market value of our common stock on the date of grant and the
exercise price of stock options to purchase our common stock on the date of
grant, is amortized on an accelerated basis as the options vest. Deferred
compensation charges of $0.5 million as of April 30, 2002 are to be amortized
on an accelerated basis over the vesting period of the stock options of
generally five years.

Stock option exchange program. On November 1, 2001, we announced a
-----------------------------
voluntary stock option exchange program for our employees. Under the program,
our employees were given the opportunity to elect to cancel outstanding stock
options held by them in exchange for an equal number of new options to be
granted on June 5, 2002. The exchange program was not available to our
executives, directors or any of our employees who live or work outside the
United States. These elections were required to be made by December 3, 2001.
On June 5, 2002, we issued options to purchase 46,400 shares of common stock at
an exercise price equal to the closing price of our common stock on June 4,
2002. We did not record any compensation expenses associated with this
exchange program.

Litigation settlement. Litigation settlement expense for Fiscal Year 2002
---------------------
amounted to $3.5 million. The litigation settlement expense for Fiscal Year
2002 was due to a one-time payment of $3.5 million to Photobit, to settle all
pending litigation that we had with Photobit and CalTech. As a percentage of
revenues, litigation settlement expenses for Fiscal Year 2002, 2001 and 2000
represented 7.5%, zero and zero, respectively.

Interest income, net. Interest income, net for Fiscal Years 2002 and 2001
--------------------
was approximately $1.5 million and $2.7 million, respectively. Interest income
and interest expense, net, decreased from Fiscal Year 2001 to Fiscal Year 2002
primarily due to a decline in interest rates. These funds are invested in
interest-bearing accounts consisting primarily of high-grade corporate
securities and government bonds maturing approximately twelve months or less
from the date of purchase. Interest income, net for Fiscal Year 2000 was minor
because our cash balances were minor prior to our initial public offering of
common stock in July 2000.

Provision for income taxes. We generated losses before income taxes in
--------------------------
Fiscal Years 2002 and 2001 and therefore had no provision for income taxes in
those periods. We generated approximately $3.7 million in operating profits for
the Fiscal Year 2000 and had a provision for income taxes amounting to $300,000
after taking into consideration the utilization of the prior years' net
operating loss carryforwards and credits.

Recent Accounting Pronouncements
- --------------------------------

On June 29, 2001, the Financial Accounting Standards Board, or FASB,
approved its Statement of Financial Accounting Standards, or SFAS, No. 141, or
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets."

Under FAS 141, all business combinations should be accounted for using the
purchase method of accounting; use of the pooling-of-interests, or pooling,
method is prohibited. The provisions of the statement will apply to all
business combinations initiated after June 30, 2001.

SFAS No. 142 will apply to all acquired intangible assets whether acquired
singly, as part of a group, or in a business combination. The statement will
supersede Accounting Principals Board, or APB, Opinion No. 17, "Intangible
Assets," and will carry forward provisions in APB Opinion No.17 related to
internally developed intangible assets. Adoption of SFAS No. 142 will result in
ceasing amortization of goodwill. We will adopt SFAS No. 142 effective May 1,
2002. We do not expect the adoption of SFAS No. 142 to have any material effect
on our consolidated financial statements.


25




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for fiscal years
beginning after December 15, 2001. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." It establishes a single accounting
method, based on the framework established in SFAS 121, for long-lived assets
to be disposed of by sale. We are currently assessing, but have not yet
determined, the impact of SFAS 144 on our consolidated financial position and
results of operations.

We do not expect the adoption of these standards to have a material effect
on our consolidated financial statements.


Liquidity and Capital Resources
- -------------------------------

Since inception, we have financed our growth principally through sales of
common stock and private sales of equity securities, totaling approximately
$90.8 million. Principal sources of liquidity at April 30, 2002 consisted of
cash, cash equivalents and short-term investments of $57.8 million.

Our working capital decreased by $1.8 million to $65.1 million as of April
30, 2002 from $66.9 million as of April 30, 2001. The decrease primarily was
attributable to an $8.2 million decrease in inventories due principally to an
improvement in inventory turnover and a reduction in inventory levels
consistent with the decline in revenues from Fiscal Year 2001 to Fiscal Year
2002 partially offset by a $5.5 million increase in accounts receivable, net.
Our decreased working capital was also attributable to a $2.1 million increase
in accrued expenses and other liabilities, combined with a $1.6 million
increase in accounts payable and a $1.0 million decrease in short-term
investments.

For Fiscal Year 2002, cash provided by operating activities was
approximately $4.7 million as compared to our use of cash for operating
activities of $17.2 million in Fiscal Year 2001, primarily due to an $8.2
million reduction in inventories, a $1.6 million increase in accounts payable
and a $1.2 million increase in accrued expenses and other liabilities, which
was partially offset by a net loss of $1.3 million for Fiscal Year 2002 as
compared to a net loss of $11.6 million for Fiscal Year 2001, and a $6.2
million increase in accounts receivable. For Fiscal Year 2001, our use of cash
for operating activities was approximately $17.2 million from cash provided of
$1.5 million in Fiscal Year 2000, primarily due to a net loss of $11.6 million
in Fiscal Year 2001 as compared to net income of $3.4 million for Fiscal Year
2000, a $5.7 million decrease in accounts payable and a $2.8 million increase
in refundable and deferred income taxes partially offset by a $1.0 million
decrease in accounts receivable combined with a $0.4 million increase in
accrued expenses and other liabilities and a net $66,000 decrease in inventory
including the recognition of an $18.7 million charge for excess inventory. For
Fiscal Year 2000, we generated $1.5 million in cash from operating activities.

For Fiscal Year 2002, our use of cash in investing activities decreased to
approximately $1.9 million from a use of approximately $5.6 million for Fiscal
Year 2001, due to $2.9 million in purchases of property, plant and equipment
combined with a reduction of approximately $1.0 million in purchases of short-
term investments, partially offset by $3.0 million in proceeds from sales of
short-term investments. For Fiscal Year 2001, our use of cash for investing
activities increased to approximately $5.6 million from a use of $1.6 million
in Fiscal Year 2000, due to $3.0 million in net purchases of short-term
investments combined with $2.6 million in purchases of property, plant and
equipment. Net cash used for investing activities for Fiscal Year 2000 resulted
from purchases of property, plant and equipment.

Our net cash provided by financing activities was approximately $1.9
million for Fiscal Year 2002 compared to approximately $68.0 million for Fiscal
Year 2001 and $600,000 for Fiscal Year 2000. Net cash provided by financing
activities for Fiscal Year 2002 resulted principally from issuance and sale of
common stock from employee purchases through the employee stock purchase plan
and exercises under employee stock option plans. In Fiscal Year 2001 we
received approximately $68.0 million in aggregate net proceeds from our initial
public offering, or IPO. IPO proceeds resulted from the issuance and sale in
Fiscal Year 2001 of 5,000,000 shares of common stock and the issuance and sale
of an additional 750,000 shares of common stock following the exercise by the
underwriters' of their over-allotment option. Net cash provided from financing
activities for Fiscal Year 2000 resulted from the issuance and sale of common
stock upon the exercise of employee stock options during the year.


26



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

Based on our current working capital position and the cash flows that we
expect to generate, we believe these cash resources will be sufficient to meet
our capital and investment requirements, including anticipated capital
expenditures in the amount of approximately $2.5 million and anticipated
investment expenditures of approximately $5.5 million associated with the
subsidiary that we have formed in China, and other potential investments, for
at least the next 12 months. After this period, capital requirements will
depend on many factors, including the levels at which we maintain inventory and
accounts receivable, costs of establishing and maintaining our Chinese
subsidiary, costs of securing access to adequate manufacturing capacity,
product yields, average selling price of our products, and increases in our
operating expenses. To the extent that existing cash resources are insufficient
to fund our future activities, we may need to raise additional funds through
public or private equity or debt financing. Additional funds may not be
available, or if available, we may not be able to obtain them on terms
favorable to us or to our shareholders. In the event that we do raise
additional cash through financings, current investors could be further diluted.

From time to time, we may evaluate acquisitions of business, products or
technologies that complement our business. Although we have no current plans in
this regard, any transactions, if consummated, may consume a portion of our
working capital or require the issuance of securities that may result in
further dilution to existing stockholders.


Related Party Transactions
- --------------------------

Frank Huang, a former director of our company who resigned in May 2001, is
the Chairman of the Board of Directors of Powerchip Semiconductor Corp., or
Powerchip, a joint venture between UMAX Group and Mitsubishi Electrical
Corporation. Mr. Huang is also the Chairman of the Board of Directors of UMAX
Group. In March 1998, we entered into a Foundry Agreement with Powerchip
pursuant to which we purchase semiconductor wafers from Powerchip. Our total
purchases from Powerchip were approximately $2.0 million, $22.0 million, and
$6.9 million for Fiscal Years 2002, 2001 and 2000, respectively. We believe
these transactions were on terms no less favorable than we could have obtained
from unaffiliated third parties. In addition, Powerchip owns 233,333 shares of
our common stock.

Mr. Huang is also the Chairman of the Board of Directors of Power World
Capital Management, Inc. ("Power World") and Tsuey-Jiuan Chen, a director of
our company, was an Executive Vice President of Power World until February 2002
when she resigned her employment with Power World. Power World is the general
partner of each of Universal Venture Fund and Power World Venture Fund, which
own 330,333 shares of our common stock and 125,000 shares of our common stock,
respectively.


Contractual Obligations and Commercial Commitments
- --------------------------------------------------

The following summarizes our contractual obligations and commercial
commitments as of April 30, 2002 and the effect such obligations and
commitments are expected to have on our liquidity and cash flows in future
periods (in thousands):




Less than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------

Contractual Obligations
Operating leases................ $ 1,659 $ 815 $ 844 $ -- $ --

Other Commercial Commitments
Investment in China............. 4,500 -- 4,500 -- --
------- ----- ------ ----- -----
Total contractual obligations
and commercial commitments.. $ 6,159 $ 815 $5,344 $ -- $ --
======= ===== ====== ===== =====



27





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

In December 2000, we formed a wholly-owned Cayman Islands subsidiary, Hua
Wei Technology International, Ltd., or Hua Wei. In December 2000, Hua Wei
formed a wholly-owned Chinese subsidiary, Hua Wei Semiconductor (Shanghai) Co.,
Ltd., or Hua Wei Semiconductor, to conduct design and testing operations. The
registered capital of Hua Wei Semiconductor is $12.0 million, of which $3.8
million was funded by us in the fiscal year ended April 30, 2001, as required
by Chinese law. We funded an additional $3.7 million during Fiscal Year 2002.
We are further obligated to fund the remaining $4.5 million of registered
capital by December 2003. As of April 30, 2002, $4.4 million of the $7.5
million funded to date was paid for land use rights and to building contractors
in partial payment for the construction of the facility, $2.5 million was
deposited in a bank account in China and $0.6 million was expended for general
purposes.

In connection with the formation of Hua Wei, we purchased 4,000,000 shares
of Hua Wei's common stock at a purchase price of $0.03 per share for an
aggregate purchase price of $120,000. As of July 18, 2002, we anticipate
granting to certain of our employees options to purchase approximately
3,000,000 of Hua Wei' s common stock. One-half of the shares underlying each of
these options vested as of June 5, 2002 and 1/24th of such shares shall vest on
the last day of each month thereafter. The exercise price of these options
shall be $0.25. We anticipate that in the second quarter of Fiscal Year 2003 we
will grant an option to purchase 500,000 of these shares to Shaw Hong, an
option to purchase 400,000 of these shares to Raymond Wu, an option to purchase
150,000 of these shares to H. Gene McCown, an option to purchase 150,000 of
these shares to Qi Dong and an option to purchase 150,000 of these shares to
Xinping He.


FACTORS AFFECTING FUTURE RESULTS
--------------------------------

You should carefully consider these risk factors, together with all of the
other information included in this Annual Report on Form 10-K. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem
immaterial may also harm our business.


We have a history of losses, we were only profitable on an annual basis in
- --------------------------------------------------------------------------
Fiscal Year 2000 and we may not ever return to profitability on an annual
- -------------------------------------------------------------------------
basis.
- -----

We incurred net losses of approximately $1.3 million in Fiscal Year 2002
and $11.6 million in Fiscal Year 2001. For the year ended April 30, 2000, the
only year in which we have been profitable, our net income was approximately
$3.4 million. In the future, as we develop new products, we expect research and
development expenses to increase. Also, as we hire additional personnel and
possibly engage in larger business transactions, we expect selling, general and
administrative expenses to increase. We will also incur substantial noncash
charges relating to the amortization of unearned compensation. If these
expenses increase and our revenues do not increase, we may not subsequently
sustain profitability.


The recent economic slowdown and other economic conditions have reduced and may
- -------------------------------------------------------------------------------
continue to reduce our revenues and to harm our business.
- --------------------------------------------------------

Since the third quarter of Fiscal Year 2001, our customers and
distributors, primarily our PC video camera customers and distributors, have
been impacted by significantly lower demand for camera related products, which
forced them to unexpectedly reschedule or cancel orders for our products in
recent quarters. As a result, our revenues and earnings were adversely
affected. In June 2002, we announced projected revenues and earnings for the
first quarter of Fiscal Year 2003. If demand for camera-related products, in
particular PC video cameras, does not recover in the first quarter of Fiscal
Year 2003, or if we are unable to manage our operating expenses, we will not be
able to meet these projections.


28





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

We may not adequately forecast the number of wafers we need, and therefore we
- -----------------------------------------------------------------------------
may not be able to react to fluctuations in demand for our products, which
- --------------------------------------------------------------------------
could result in higher operating expenses and lower revenues.
- ------------------------------------------------------------

We must forecast the number of wafers we need from each of our foundries.
However, if customer demand falls below our forecast and we are unable to
reschedule or cancel our wafer orders, we may retain excess wafer inventories,
which could result in higher operating expenses and reduced gross margins.
Conversely, if customer demand exceeds our forecasts, we may be unable to
obtain an adequate supply of wafers to fill customer orders, which could result
in lower revenues and could harm our relationship with key customers. For
example, as a consequence of a product order forecast which proved to be
greater than market demand for our products, we recognized an $18.7 million
inventory adjustment in Fiscal Year 2001.


If we do not achieve acceptable wafer manufacturing yields, our costs could
- ---------------------------------------------------------------------------
increase, and our products may not be deliverable which could lead to higher
- ----------------------------------------------------------------------------
operating expenses and lower revenues and could damage our customer
- -------------------------------------------------------------------
relationships.
- -------------

The fabrication of our products requires wafers to be produced in a highly
controlled and clean environment. Semiconductor companies that supply our
wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of both
our design technology and the particular foundry's manufacturing process
technology. Low yields may result from design errors or manufacturing failures
in new or existing products. Yield problems may not be determined or improved
until an actual image sensor is made and can be tested. As a result, yield
problems may not be identified until the wafers are well into the production
process. We only test our products after they are assembled, as their optical
nature makes earlier testing difficult and expensive. The risks associated with
yields are even greater because we rely on third party offshore foundries for
our wafers which increases the effort and time required to identify,
communicate and resolve manufacturing yield problems. If the foundries cannot
achieve the planned yields, this will result in higher costs and reduced
product availability.


Fluctuations in our quarterly operating results make it difficult to predict
- ----------------------------------------------------------------------------
our future performance and may result in volatility in the market price of our
- ------------------------------------------------------------------------------
common stock.
- ------------

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 related to how we manage our business. These factors, many
of which are more fully discussed in other risk factors, include:

o our ability to manage our product transitions;

o our ability to accurately forecast the number of wafers we need;

o our ability to achieve acceptable wafer manufacturing yields;

o the mix of the products we sell and the distribution channels through
which they are sold; and

o the availability of production capacities at the semiconductor foundries
that manufacture our products or components of our products.

In the past, our introduction of new products and our product mix have
affected our quarterly operating results. We also anticipate that the rate of
orders from our customers may vary significantly from quarter to quarter. Our
expenses and inventory levels are based on our expectations of future revenues
and our expenses are relatively fixed in the short term. Consequently, if
revenues in any quarter do not occur when expected, expenses and inventory
levels could be disproportionately high and our operating results for that
quarter and, potentially future quarters, may be harmed.


29




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

Certain other factors have in the past caused and are likely in the future
to cause fluctuations in our quarterly operating results. These factors are
industry risks over which we have little or no control. These factors include:

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

o the timing and amount of orders from our camera manufacturers and
distributor customers;

o the deferral of customer orders in anticipation of new products, designs
or enhancements by us or our competitors; and

o the announcement and introduction of products and technologies by our
competitors.

Any one or more of these factors is difficult to forecast and could result
in fluctuations in our quarterly operating results. 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. Due to the
potential volatility of our stock price, you should not rely on the results of
any one quarter as an indication of our future performance. It is likely that
at some point our quarterly operating results will fall below the expectations
of security analysts and investors. In this event, the price of our common
stock would likely decrease.

We do not have long-term commitments from our customers, and we allocate
- ------------------------------------------------------------------------
resources based on our estimates of customer demand, which could lead to excess
- -------------------------------------------------------------------------------
inventory and lost revenue opportunities.
- ----------------------------------------

Our sales are generally made on the basis of purchase orders rather than
long-term purchase commitments. In addition, our customers may cancel or defer
purchase orders. We manufacture our products according to our estimates of
customer demand. This process requires us to make multiple demand forecast
assumptions, each of which may introduce error into our estimates. If we
overestimate customer demand, we may allocate resources to manufacturing
products which we may not be able to sell or we may have to sell our products
to other customers for lower prices. As a result, we would have excess
inventory, which would have an adverse impact on our results of operations.
For example, one customer, Creative, unexpectedly cancelled its purchase orders
for one of our products in the second quarter of Fiscal Year 2001 which
resulted in our shipping substantially fewer quantities to them in the third
and fourth quarters of Fiscal Year 2001 and contributed to a higher than
expected inventory position. Conversely, if we underestimate customer demand or
if sufficient manufacturing capacity is unavailable, we may forego revenue
opportunities, lose market share and damage our customer relationships.


We depend on the acceptance of CMOS technology for mass market image sensor
- ---------------------------------------------------------------------------
applications, and any delay in the widespread acceptance of this technology
- ---------------------------------------------------------------------------
could adversely affect our ability to increase our revenues and improve our
- ---------------------------------------------------------------------------
earnings.
- --------

Our business strategy depends on the rapid and widespread adoption of the
CMOS fabrication process for image sensors and the acceptance of our single
chip technology. The image sensor market has been dominated by CCD technology
for over 25 years. Although CMOS technology has been available for over 20
years, CMOS technology has only recently been used in image sensors. Along with
the other risk factors described in this section, the following factors may
delay the widespread adoption of the CMOS fabrication process and our single
chip technology, the occurrence of any of which could adversely affect our
ability to increase our revenues and earnings:

o the failure of the emergence of a universal platform for imaging
solutions for computers and the Internet;

o improvements or cost reductions to CCD image sensors, which could slow
the adoption of CMOS image sensors in markets already dominated by CCD
image sensors, such as the security and surveillance market.

o the failure of development of user friendly and affordable products; and

o the limited availability of bandwidth to run CMOS image sensor
applications; and


30





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

o the uncertainty of emerging markets for products incorporating CMOS
technology.


We depend on third party vendors for color filter processing and assembly,
- --------------------------------------------------------------------------
which reduces our control over delivery schedules, product quality and cost.
- ---------------------------------------------------------------------------

After our wafers are produced, they are color filter processed and
assembled by six independent vendors: TSMC and Toppan for the color filtering
process and Kyocera and Alphatec for additional processing and assembly. We do
not have long-term agreements with any of these vendors and typically obtain
services from them on a purchase order basis. Our reliance on these vendors
involves risks such as reduced control over delivery schedules, quality
assurance and costs. These risks could result in product shortages or could
increase our costs of manufacturing, assembling or testing our products. If
these vendors are unable or unwilling to continue to provide color filter
processing and assembly services and deliver products of acceptable quality, at
acceptable costs and in a timely manner, our business would be seriously
harmed. We would also have to identify and qualify substitute vendors, which
could be time consuming and difficult and result in unforeseen operations
problems.


We depend on a limited number of third party wafer foundries to manufacture a
- -----------------------------------------------------------------------------
substantial majority of our products, which reduces our ability to control the
- ------------------------------------------------------------------------------
manufacturing process.
- ---------------------

We do not own or operate a semiconductor fabrication facility. We rely on
TSMC and PSC to produce a substantial majority of our wafers and final
products. Our reliance on these third party foundries involves a number of
significant risks, including:

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

o lack of guaranteed production capacity or product supply; and

o unavailability of, or delayed access to, next generation or key process
technologies.

We do not have long term supply agreements with any of our foundries and
instead secure manufacturing availability on a purchase order basis. These
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. Our requirements represent a small portion of the
total production capacities of these foundries and TSMC or PSC may reallocate
capacity to other customers, even during periods of high demand for our
products. If any of our foundries were to become unable or unwilling to
continue manufacturing our wafers in the required volumes, at acceptable
quality, yields and costs and in a timely manner, our business would be
seriously harmed. As a result, we would have to identify and qualify substitute
foundries, which would be time consuming and difficult and could result in
unforeseen manufacturing and operations problems. In addition, if competition
for foundry capacity increases, our product costs may increase, and we may be
required to pay or invest significant amounts to secure access to manufacturing
services. We are also exposed to additional risks if we decide to transfer our
production of semiconductors from one foundry to another. We may qualify
additional foundries in the future which is a time consuming and difficult
process that could result in unforeseen product or operation problems. If we do
not qualify additional foundries, we may be exposed to increased risk of
capacity shortages due to our complete dependence on our foundries.


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

A lengthy manufacturing, packaging and assembly process, typically lasting
four months or more, is required to manufacture our image sensors. It can take
additional time before a customer commences 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 revenues, if any, from
these expenditures. As a result, our revenues and


31





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

profits could be seriously harmed if a significant customer reduces or delays
orders or chooses not to release products incorporating our products.


If the demand for our products in current markets and emerging markets fails to
- -------------------------------------------------------------------------------
increase as we anticipate, our growth prospects would be diminished.
- -------------------------------------------------------------------

Our success depends in large part on the continued growth of various
markets that use our products and the emergence of new markets for our
products. The current markets that use our products include digital still
cameras, personal computer cameras, personal digital assistant cameras, mobile
phone cameras, cameras for security and surveillance systems, closed circuit
television systems, cameras for toys and games and automotive applications.
Emerging markets for our products include cameras for personal identification
systems, medical imaging devices, machine control systems, and videophones. If
these markets do not continue to grow and develop, the need for cameras which
are lower in cost, smaller, lighter in weight, consume less power and are more
reliable might not fully develop. In such case, it would be unlikely that our
products would achieve commercial success.


Failure to obtain design wins could cause our revenues to level off or decline.
- ------------------------------------------------------------------------------

Our future success will depend on camera manufacturers designing our image
sensors into their systems. To achieve design wins, which are decisions by
those manufacturers to design our products into their systems, we must define
and deliver cost effective, innovative and integrated semiconductor solutions.
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 associated with qualifying a new supplier. Accordingly, the
failure to achieve design wins with key camera manufacturers could decrease our
market share or revenues.

Declines in our average sales prices may result in declines in our gross
- ------------------------------------------------------------------------
margins.
- -------

Because the image sensor market is characterized by intense competition,
and price reductions for our products are necessary to meet consumer price-
points, we expect to experience market driven pricing pressures. This will
likely result in a decline in average sales prices for many of our products. We
believe that we can offset declining average sales prices by achieving
manufacturing cost efficiencies, developing new products that incorporate more
advanced technology and including more advanced features that can be sold at
stable average gross margins. However, if we are unable to achieve such cost
reductions and technological advances, or are unable to timely introduce new
products, we will lose revenues and gross margins will decline.

Seasonality in our business will cause our results of operations to fluctuate
- -----------------------------------------------------------------------------
from period to period and could cause our stock price to fluctuate or decline.
- -----------------------------------------------------------------------------

Sales of our image sensors are subject to seasonality. Some of the
products using our image sensors such as personal computer video cameras and
digital still cameras are consumer electronics goods. Typically, these goods
are subject to seasonality with generally increased consumer sales in November
and December due to the holidays. As a result, product sales are impacted by
seasonal purchasing patterns with higher sales generally occurring in the
second half of the calendar year. In addition, we typically experience a
decrease in orders in the quarter ended January 31 from our Chinese and
Taiwanese customers primarily due to the Chinese New Year. As a result, we
believe product sales are impacted by seasonal purchasing patterns with higher
sales generally occurring in the second half of each calendar year.


We depend on a few key customers and distributors, and the loss of any of them
- ------------------------------------------------------------------------------
could significantly reduce our revenues.
- ---------------------------------------

Historically, a relatively small number of customers and distributors has
accounted for a significant portion of our product revenues. For Fiscal Year
2002, one of our distributors, World Peace represented approximately 15% of
revenues and one of our camera manufacturer customers, X10, accounted for
approximately 20% of revenues. For


32





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

Fiscal Year 2001, World Peace represented approximately 17% of revenues and one
of our camera manufacturer customers, Creative, accounted for approximately 14%
of revenues.

A significant reduction, delay or cancellation of orders from our key
customers or distributors, or a decision by them to select or distribute
products manufactured by a competitor could seriously harm our business. For
example, in 1999, we had to replace one of our largest distributors with Wintek
Electronics Co., Ltd. because that distributor decided to distribute a
competitor's products. We expect our operating results to continue to depend on
sales to or design decisions of a relatively small number of distributors and
camera manufacturers.


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

A substantial portion of our business, in particular, the manufacturing,
processing and assembly of our products, is conducted outside of the United
States, and as a result, we are subject to foreign business, political and
economic risks. All of our products are manufactured outside of the United
States. Many of our customers are camera manufacturers or are the manufacturers
or suppliers for camera manufacturers and are located in Japan, Korea,
Singapore and Taiwan. In addition, sales outside of the United States accounted
for approximately 74% of our revenues for Fiscal Year 2002, 84% of our revenues
for Fiscal Year 2001 and 78% of our revenues for Fiscal Year 2000. We
anticipate that sales outside of the United States will continue to account for
a substantial portion of our revenue in future periods. Accordingly, we are
subject to foreign risks, including:

o difficulties in managing distributors;

o difficulties in staffing and managing foreign operations;

o difficulties in managing foundries and third party manufacturers;

o political and economic instability which may have an adverse impact on
foreign exchange rates in Asia;

o inadequacy of local infrastructure, in particular with respect to our
future expansion in China;

o longer payment cycles;

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

o difficulties in accounts receivable collections.

In addition, camera manufacturers who design our solutions into their
products sell them outside of the United States. This exposes us indirectly to
foreign risks. Because sales of our products have been denominated to date
exclusively in United States dollars, increases in the value of the United
States dollar will increase the price of our products so that they become
relatively more expensive to customers in the local currency of a particular
country, leading to a reduction in revenues and profitability in that country.
A portion of our international revenues may be denominated in foreign
currencies in the future, which will subject us to risks associated with
fluctuations in those foreign currencies.


Our dependence on selling through distributors increases the complexity of our
- ------------------------------------------------------------------------------
business which may increase our operating costs and may reduce our ability to
- -----------------------------------------------------------------------------
forecast revenues.
- -----------------

Our revenues depend on design wins with new camera manufacturers which, in
turn, rely on third party manufacturers or distributors to provide inventory
management and purchasing functions. Selling through distributors reduces our
ability to forecast sales and increases the complexity of our business,
requiring us to:

o manage a more complex supply chain;


33





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

o manage the level of inventory at each distributor;

o provide for credits, return rights and price protection;

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

o monitor the financial condition and credit worthiness of our
distributors.

Any failure to manage these challenges could reduce our revenues and
damage our relationships with our distributors.


We face intense competition in our markets from more established CCD image
- --------------------------------------------------------------------------
sensor manufacturers and CMOS image sensor manufacturers and if we are unable
- -----------------------------------------------------------------------------
to compete successfully, we will not achieve our financial objectives.
- ---------------------------------------------------------------------

The image sensor market is intensely competitive. These markets are
characterized by rapid technological change, evolving standards, short product
life cycles and decreasing prices. Our current products face competition from a
number of sources including companies which sell charged couple device image
sensors as well as other companies which sell multiple chip CMOS image sensors.
We expect competition in our markets to increase.

Many of our competitors have longer operating histories and greater
presence in key markets, greater name recognition, access to large customer
bases and significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we do. 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
product than we may. Our competition includes CCD image sensor manufacturers,
including Fuji Corporation, or Fuji, Matsushita Electric Industrial, or
Matsushita, Nippon Electric Corporation or NEC, Sharp Corporation, or Sharp,
Sony Corporation, or Sony, and Toshiba Corporation, or Toshiba, as well as CMOS
image sensor manufacturers such as Agilent Technologies, Inc., ST
Microelectronics, Conexant Systems, Inc., Hyundai Electronics Industries Co.
Ltd., Mitsubishi Electronic, Motorola, Inc., and Toshiba Corporation. In
addition, there are a large number of smaller startup companies including
Photobit Corporation and Zoran Corporation, which may or do compete with us. In
particular, Hyundai and Agilent Technologies have introduced multiple chip CMOS
image sensors. We cannot assure you that we can compete successfully against
current or potential competitors, or that competition will not seriously harm
our business by reducing sales of our products, reducing our profits and
reducing our market share.


Our success depends on the development and introduction of new products, which
- ------------------------------------------------------------------------------
we may not be able to do in a timely manner because the process of developing
- -----------------------------------------------------------------------------
products using CMOS image sensors is complex and costly.
- -------------------------------------------------------

The development of new products is highly complex, and we have experienced
delays in completing the development and introduction of new products on
several occasions in the past, some of which exceeded six months. As our
products integrate new and more advanced functions, they become more complex
and increasingly difficult to design and debug. Successful product development
and introduction depend on a number of factors, including:

o 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;

o development of advanced technologies and capabilities;

o definition of new products which satisfy customer requirements;


34





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

o timely completion and introduction of new product designs;

o use of leading edge foundry processes and achievement of high
manufacturing yields; and

o market acceptance of the new products.

Accomplishing all of this is extremely challenging, time consuming and
expensive. We cannot assure you that any new products or product enhancements
will be developed in time to capture market opportunities or achieve a
significant or sustainable level of acceptance in new and existing markets.


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

Because we integrate many functions on a single chip, our products are
complex. The greater integration of functions and complexity of operations of
our products, the greater the risk that latent defects or subtle faults could
be discovered by customers or end users after volumes of product have been
shipped. Although we test our products, they may contain defects and errors. In
the past we have encountered defects and errors in our products. Delivery of
products with defects or reliability, quality or compatibility problems may
damage our reputation and our 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.

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

We manufacture and market primarily standard products. 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. Although our backlog is
typically filled within two to four quarters, 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. In addition,
the current backlog will not necessarily lead to revenues in any future period.
Any cancellation or delay in orders which constitute our current or future
backlog may result in lower than expected revenues. Our bookings visibility
continues to be limited with a substantial majority of our quarterly product
revenues coming from orders that are received and fulfilled in the same
quarter.


We must attract and retain qualified personnel to be successful, and
- --------------------------------------------------------------------
competition for qualified personnel is intense in our market.
- ------------------------------------------------------------

Our success depends to a significant extent upon the continued
contributions of our key management, technical and sales personnel, many of who
would be difficult to replace. The loss of one or more of these employees could
seriously harm our business. We do not have key person life insurance on any of
our key personnel. We have no agreements which obligate our employees to
continue working for us. Our success also depends on our ability to identify,
attract and retain qualified technical (particularly analog or mixed signal
design engineers), sales, marketing, finance and management personnel.
Competition for qualified personnel is particularly intense in our industry and
in Silicon Valley, California. This is due to a number of factors, including
the high concentration of established and emerging growth technology companies.
This competition makes it difficult to retain our key personnel and to recruit
new qualified 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 and product development efforts could be harmed.


35





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

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
assure you that any patent will issue as a result of any applications or, if
issued, that any claims allowed will be sufficiently broad to protect our
technology. In addition, it is possible that existing or future patents may be
challenged, invalidated or circumvented. It may be possible for a third party
to copy or otherwise obtain and use our products, or technology without
authorization, develop corresponding technology independently or design around
our patents. Effective copyright, trademark and trade secret protection may be
unavailable or limited in foreign countries. These disputes may result in
costly and time consuming litigation or the license of additional elements of
our intellectual property for free.


We could become subject to litigation regarding intellectual property, which
- ----------------------------------------------------------------------------
could divert management attention, be costly to defend and prevent us from
- --------------------------------------------------------------------------
using or selling the challenged technology.
- ------------------------------------------


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.

In March 2000, we received a letter from Koninklijke Philips N.V. in which
Philips claimed to have patent rights in a serial bus system for data
transmission, known as the I2C bus system. Although we do not believe any of
our products infringe any Philips patent, we are currently discussing possible
royalty or licensing arrangements as a means of business resolution. In the
meantime, we have completed implementation of a new serial bus system for our
products.

We entered into an agreement with Photobit Corporation ("Photobit") and
the California Institute of Technology ("CalTech"), effective September 18,
2001, to settle all litigation that we had with Photobit and CalTech, including
an action in the U.S. District Court, Northern District of California, Case No.
C 00 3791 PJH, and an investigation before the U.S. International Trade
Commission ("ITC"), Inv. No. 337-TA-451. Both actions involved patents alleged
to pertain to our CMOS image sensor products, such as those used in digital
cameras, PC cameras and other optical applications. The action pending in
California was dismissed on September 24, 2001, and final termination of the
ITC investigation occurred on November 9, 2001. The confidential settlement
includes non-exclusive cross-licenses for seven years under our and Photobit's
respective patent portfolios, including patents and applications licensed by
CalTech to Photobit. We have also made a one-time payment to Photobit of $3.5
million dollars.

The settlement agreement referred to in the above paragraph relates only
to claims made by Photobit and CalTech. It is possible that other companies
might pursue litigation with respect to any claims such companies purport to
have against us. The results of any litigation are inherently uncertain. In
the event of an adverse result in any litigation with respect to intellectual
property rights relevant to our products that could arise in the future, we
could be required to obtain licenses to the infringing technology, pay
substantial damages under applicable law, including treble damages if we are
held to have willfully infringed, cease the manufacture, use and sale of
infringing products or to expend significant resources to develop non-
infringing technology. Litigation frequently involves substantial expenditures
and can require significant management attention, even if we ultimately
prevail.


Failure to effectively manage our growth could adversely affect our ability to
- ------------------------------------------------------------------------------
increase our revenues and improve our earnings.
- ----------------------------------------------

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:

o implement and improve operational and financial systems;

o train and manage our employee base; and


36





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

o attract and retain qualified personnel with relevant experience.

We must also manage multiple relationships with customers, business
partners and other third parties, such as our foundries and process and
assembly vendors. Moreover, our growth may significantly overburden our
management and financial systems and other resources. We also cannot assure you
that we have made 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 on expanding sales and marketing, research and
development and administrative support.


Our investment in a Chinese entity to conduct design and testing operations may
- -------------------------------------------------------------------------------
not reduce our design and testing costs nor improve our gross margins and as a
- ------------------------------------------------------------------------------
result our earnings would be adversely affected.
- -----------------------------------------------

In December 2000, we formed a subsidiary to conduct design and testing
operations in Shanghai, the People's Republic of China. The registered capital
of this company is $12.0 million, of which $3.8 million was funded by us in the
fiscal year ended April 30, 2001, as required by Chinese law. We funded an
additional $3.7 million during Fiscal Year 2002. We are further obligated to
fund the remaining $4.5 million of registered capital by December 2003. As of
April 30, 2002, $4.4 million of the $7.5 million funded to date was paid for
land use rights and to building contractors in partial payment for the
construction of the facility, $2.5 million was deposited in a bank account in
China and $0.6 million was expended for general purposes. The formation and
operation of this Chinese subsidiary requires a large initial capital
investment, and there may be significant administrative, legal and governmental
barriers in China, which may prevent or harm us from beginning operation of
this Chinese subsidiary as well as using the funds outside of China.

We cannot be sure that our investment in our Chinese subsidiary will
eventually result in the reduction of our design and testing costs. The
formation and operation of our Chinese subsidiary requires a large initial
capital investment and will also require significant future capital investment
as we continue to maintain and upgrade our facility. In addition, the design
and testing of our products is a highly complex, sensitive and precise process
which is subject to a wide variety of factors, any number of which could result
in an increase of our costs. If our design and testing costs fail to decrease
as a result of our investment in our China subsidiary our earnings may be
adversely affected.

The incorporation, formation and development of our Chinese subsidiary has
resulted and will continue to result in the diversion of capital away from
other business issues, as the operation of our design and testing facility will
require that we constantly upgrade our technology to remain competitive. The
incorporation, formation and development of our Chinese subsidiary has also
resulted in the diversion of management's attention away from other business
issues. If our ongoing investment in the Chinese subsidiary does not result in
offsetting gains in the form of design and testing improvements accompanied by
reduced design and testing costs, whether because of the risks and difficulties
entailed by foreign operations or for other reasons, our business and financial
condition will be adversely affected.


Provisions in our charter documents and Delaware law, as well as our
- --------------------------------------------------------------------
Stockholders Rights Plan, could prevent or delay a change in control of us 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:

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

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

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


37





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

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

o 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 (the "Rights Agreement").
Pursuant to the Rights Agreement, our Board of Directors declared a dividend of
one right (a "Right") to purchase one one-thousandth share of our Series A
Participating Preferred Stock ("Series A Preferred") 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 $40.00, subject to
adjustment. The exercise of the Rights could have the effect of delaying,
deferring or preventing a change of control of us, 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 will be
- -------------------------------------------------------------------------
beyond our control, that may prevent our stockholders from reselling our common
- -------------------------------------------------------------------------------
stock at a profit.
- -----------------

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:

o actual or anticipated fluctuations in our operating results;

o changes in expectations as to our future financial performance;

o changes in financial estimates of securities analysts;

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

o changes in market valuations of other technology companies; and

o 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.


We rely on a continuous power supply to conduct our operations and any
- ----------------------------------------------------------------------
interruption of our power supply could disrupt our operations and increase our
- ------------------------------------------------------------------------------
expenses.
- --------

In the event of an acute power shortage in California, that is, when power
reserves for the State of California fall below one and one-half percent, the
State of California has in the past implemented, and may in the future
implement, rolling blackouts throughout the state. We currently do not have
backup generators or alternate sources of power in the event of a blackout, and
our current insurance does not provide coverage for any damages we or our


38





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)

customers or distributors may suffer as a result of any interruption in our
power supply. If blackouts interrupt our ability to continue operations at our
facilities, then our reputation could be damaged, our ability to retain
existing customers could be harmed and we could fail to obtain new customers.
These interruptions could also result in lost revenue, any of which could
substantially harm our business and results of operations.

Furthermore, the deregulation of the energy industry instituted in 1996 by
the California state government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices skyrocketed. If wholesale
energy prices increase in the future, our operating expenses will likely
increase, as our U.S. facilities are located in California.


Class action litigation due to stock price volatility could lead to substantial
- -------------------------------------------------------------------------------
costs and divert our management's attention and resources.
- ---------------------------------------------------------

In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. Companies in the semiconductor industry and other technology
industries are particularly vulnerable to this kind of litigation due to the
high volatility of their stock prices. Accordingly, we may in the future be the
target of securities litigation. Securities litigation could result in
substantial costs and could divert our management's attention and resources.


39




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Foreign Currency Exchange Risk
------------------------------

We are an international company, selling our products globally and, in
particular in China, Japan, Korea, Singapore and Taiwan. Although we transact
our business in U.S. dollars, future fluctuations in the value of the U.S.
dollar may affect the competitiveness of our products, gross profits realized,
and results of operations. Further, we incur expenses in Japan, Korea, Taiwan,
Thailand, China and other countries that are denominated in currencies other
than the U.S. dollar. We cannot estimate the effect that an immediate 10%
change in foreign currency exchange rates would have on our future operating
results or cash flows as a direct result of changes in exchange rates. However,
we do not believe that we currently have any significant direct foreign
currency exchange rate risk, and we have not hedged exposures denominated in
foreign currencies or any other derivative financial instruments.


Quantitative and Qualitative Discussion of 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, in the future, 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 short term bank market rate
accounts, certificates of deposit issued by banks, high-grade corporate
securities and government bonds maturing approximately 12 months or less from
the date of purchase. 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
or 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.


40





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUARTERLY RESULTS - UNAUDITED



Three Months Ended
------------------------------------
July 31, Oct. 31, Jan. 31, April 30,
(in thousands, except per share data) 2001 2001 2002 2002
---- ---- ---- ----

Revenues................................ $11,161 $12,265 $ 9,973 $13,119
Cost of revenues(1)..................... 6,133 7,591 5,732 6,527
Gross profit............................ 5,028 4,674 4,241 6,592
Net income (loss)....................... $ 510 $(3,721) $ 330 $ 1,607
Net income (loss) per share:
Basic................................. $ 0.02 $ (0.17) $ 0.02 $ 0.07
======= ======= ======= =======
Diluted............................... $ 0.02 $ (0.17) $ 0.01 $ 0.07
======= ======= ======= =======


Shares used in computing per share
amounts:
Basic................................. 21,693 21,795 21,936 22,071
======= ======= ======= =======
Diluted............................... 24,377 21,795 24,605 23,989
======= ======= ======= =======

Three Months Ended
------------------------------------
July 31, Oct. 31, Jan. 31, April 30,
2000 2000 2001 2001
---- ---- ---- ----

Revenues................................ $17,819 $18,385 $ 8,110 $ 9,393
Cost of revenues(1)..................... 12,295 12,949 23,774 5,678
Gross profit (loss)..................... 5,524 5,436 (15,664) 3,715
Net income (loss)....................... $ 1,888 $ 2,148 $(15,620) $ 27
Net income (loss) per share:
Basic................................. $ 0.42 $ 0.10 $ (0.73) $ 0.00
======= ======= ======= =======
Diluted............................... $ 0.11 $ 0.09 $ (0.73) $ 0.00
======= ======= ======= =======

Shares used in computing per share
amounts:
Basic................................. 4,486 21,113 21,414 21,536
======= ======= ======= =======
Diluted............................... 17,534 23,367 21,414 24,325
======= ======= ======= =======


(1) Includes inventory write-off of $18,652 in the fiscal year ended April 30,
2001 and a related benefit of $4,966 in the fiscal year ended April 30,
2002.



Our consolidated financial statements and the independent accountants'
reports appear on pages F-1 through F-23 of this Report.


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

None.


41



PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item concerning our directors is
incorporated by reference to the sections captioned "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in our
Proxy Statement related to our 2002 Annual Meeting of Stockholders, to be filed
with the Securities and Exchange Commission within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). Certain information required by this item concerning executive
officers is set forth in Part I of this Report in "Business - Executive
Officers of the Registrant" and certain other information required by this item
is incorporated by reference from the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" contained in the Proxy Statement.


ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item concerning security ownership of
certain beneficial owners and management is incorporated by reference to the
sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Record Date; Outstanding Shares" contained in the Proxy
Statement.


Equity Compensation Plan Information
- ------------------------------------

We maintain the 2000 Stock Plan (the "2000 Plan"), the 2000 Director Stock
Option Plan (the "Director Plan"), the 1995 Stock Option Plan (the "1995
Plan"), and the 2000 Employee Stock Purchase Plan (the "Employee Plan"),
pursuant to which we may grant equity awards to eligible persons. In February
2000, the Board of Directors terminated the 1995 Plan as to future grants.
However, options outstanding under the 1995 Plan continue to be governed by the
terms of the 1995 Plan. The 2000 Plan, the Director Plan, the 1995 Plan and
the Employee Plan are described more fully below.

The following table provides information about our securities that may be
issued under the 2000 Plan, the Director Plan, the 1995 Plan and the Employee
Plan as of April 30, 2002:




Number of
Securities
Number of Remaining Available
Securities to for Future
Be Issued Weighted-Average Issuance Under
Upon Exercise Exercise Price Equity Compensation
of Outstanding of Outstanding Plans (Excluding
Options, Warrants Options, Warrants Securities Reflected
Plan Category and Rights and Rights in Column (a))
- -------------------- ---------------- ----------------- --------------------
(a) (b) (c)

Equity compensation
plans approved by
security holders (1) 2,930,466(2) $5.75 (2) 2,374,659 (3)
Equity compensation
plans not approved
by security holders -- -- --
---------- ----- ----------
Total................ 2,930,466 $5.75 2,374,659
========== ===== ==========
- ----------------------

42





(1) These plans consist of: (i) the 2000 Plan; (ii) the 1995 Plan; (iii) the
Director Plan and (iii) the Employee Plan. The 2000 Plan incorporates an
evergreen formula pursuant to which on May 1 of each year, the aggregate number
of shares reserved for issuance under the 2000 Plan will automatically increase
by the lesser of (i) a number of shares equal to 6% of the outstanding shares
on April 30 of such calendar year; (ii) 1,500,000 shares and (iii) such other
amount as determined by the Board of Directors. The Director Plan incorporates
an evergreen formula pursuant to which on May 1 of each year, the aggregate
number of shares reserved for issuance under the Director Plan will
automatically increase by the lesser of (i) a number of shares equal to 0.25%
of the outstanding shares on April 30 of such calendar year; (ii) 75,000 shares
and (iii) such other amount as determined by the Board of Directors. The
Employee Plan incorporates an evergreen formula pursuant to which on May 1 of
each year, the aggregate number of shares reserved for issuance under the
Employee Plan will automatically increase by the lesser of (i) a number of
shares equal to 4% of the outstanding shares on April 30 of such calendar year;
(ii) 1,000,000 shares and (iii) such other amount as determined by our Board of
Directors.

(2) We are unable to ascertain with specificity the number of securities to be
issued upon exercise of outstanding rights under the Employee Plan or the
weighted average exercise price of outstanding rights under the Employee Plan.
Accordingly, the number of shares listed in column (a) and the weighted average
exercise priced described in column (b) apply only to options outstanding under
the 2000 Plan, the 1995 Plan and the Director Plan. The Employee Plan provides
that shares of our common stock may be purchased at a per share price equal to
85% of the fair market value of the common stock on the beginning of the
offering period or a purchase date applicable to such offering period,
whichever is lower.

(3) Of these shares of common stock, 658,992 remain available for future
issuance under the 2000 Plan, 234,300 remain available for future issuance
under the 1995 Plan, 170,000 remain available for future issuance under the
Director Plan and 1,311,367 remain available for purchase under the Employee
Plan. In February 2000, the Board of Directors terminated the 1995 Plan as to
future option grants.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the
sections captioned "Employment Contracts" contained in the Proxy Statement.


43




PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

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

1. Financial Statements. The following consolidated financial statements
--------------------
are included in this report on Form 10-K:




Page
----

Report of Independent Accountants................................ F-2
Consolidated Balance Sheets...................................... F-3
Consolidated Statements of Operations............................ F-4
Consolidated Statements of Stockholders' Equity.................. F-5
Consolidated Statements of Cash Flows............................ F-6
Notes to Consolidated Financial Statements....................... F-7



2. Financial Statement Schedules. The following financial schedule is
-----------------------------
filed as part of this Report under "Schedule II": Schedule II - Valuation and
Qualifying Accounts for the Years Ended April 30, 2002, 2001 and 2000. All
other schedules called for by Form 10-K have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.

3. Exhibits.
--------



Exhibit
Number Description
------ --------------------------------------------------------------

2.1(1) Merger Agreement between OmniVision Technologies, Inc., a
Delaware corporation and OmniVision Technologies, Inc., a
California corporation
2.1(1) Restated Certificate of Incorporation
3.2(1) Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
4.2(1) Amended and Restated Registration Rights Agreement, dated as
of May 20, 1998, by and among the Registrant and certain
stockholders of the Registrant
4.3(3) Preferred Stocks Rights Agreement, dated August 21, 2001,
between the Registrant and Equiserve Trust Company, N.A.,
including the Certificate of Designation, the form of Rights
Certificate and Summary of Rights attached thereto as Exhibits
A, B and C, respectively
10.1(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2(1) 2000 Stock Plan and form of option agreement
10.3(1) 2000 Employee Stock Purchase Plan and form of subscription
agreement
10.4(1) 2000 Director Stock Option Plan and form of option agreement
10.5(1) Lease Agreement dated April 4, 1997 between the Registrant and
Lewis Duckor for the premises at 930 Thompson Avenue,
Sunnyvale, California 94086
10.6(1) First Amendment to Lease Agreement dated July 15, 1999 between
the Registrant and Lewis Duckor for the premises at 930
Thompson Avenue, Sunnyvale, California 94086
*10.7(1) Non-exclusive Distributor Agreement between the Registrant and
World Peace Industrial Co., Ltd. dated January 1, 1998
*10.8(1) Confidential Foundry Agreement between Registrant and
Powerchip Semiconductor Corp. dated March 13, 1998
*10.10(1) Software License Agreement between the Registrant and Creative
Technology Ltd. dated February 1, 1999


44



*10.11(1) Non-exclusive Distributor Agreement between the Registrant and
Wintek Electronics Co., Ltd. dated October 22, 1999
*10.12(1) Confidential Foundry Agreement between Registrant and Shanghai
HuaHong-NEC Electronics Co., Ltd. dated December 13, 1999
*10.13(1) Sales Agreement between the Registrant and CoAsia
MicroElectronics Corp. dated May 7, 1999
*10.14(1) Agreement between the Registrant, CoAsia MicroElectronics and
Samsung Electronics Taiwan Co., Ltd. dated July 17, 1998
*10.15(1) Letter Agreement between the Registrant and Creative
Technology Ltd. dated February 1, 1999
10.16(2) Agreement on Construction of Complete Municipal Facilities,
Shanghai Songjiang Export Processing Zone between OmniView
Technology International Ltd. and Shanghai Songjiang Export
Processing Zone Administrative Committee dated December 28,
2000
10.17(2) Shanghai Songjiang Export Processing Zone Administrative
Committee Official Reply to the Feasibility Study Report and
Articles of Association of Foreign Solely-funded Hao wei
Electronics (Shanghai) Co., Ltd. dated December 19, 2000
10.18(2) Contract on the Transfer of Shanghai State-owned Land Use
Right between OmniView Technology International Ltd. and
Shanghai Songjiang District Building and Land Administrative
Bureau dated December 28, 2000
10.19(4) Non-exclusive Distributor Agreement between the Registrant and
SEC Development Co., Ltd., dated February 23, 2001
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1 Power of Attorney (included on page 46)
____________________________


* Portions of this agreement has been omitted pursuant to a request for
confidential treatment and the omitted portions have been filed
separately with the Securities and Exchange Commission.

(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (File No. 333-31926) as declared
effective by the Securities and Exchange Commission on July 13, 2000.
(2) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31, 2001.
(3) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 8-A (Reg. No. 000-29939) as declared
effective by the Securities and Exchange Commission on September 12,
2001.
(4) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31, 2002.




(b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K
--------------------
during the three months ended April 30, 2002.

(c) Exhibits Pursuant to Item 601 of Regulation S-K. See Item 14(a)(3) above.
-----------------------------------------------

(d) Financial Statement Schedules. See Item 14(a)(2) above.
-----------------------------


45




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.

OMNIVISION TECHNOLOGIES, INC.

By: /s/ SHAW HONG
-----------------------------
Shaw Hong
President and Chief Executive Officer

Date: July 25, 2002


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Shaw Hong and H. Gene McCown, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to sign any and all amendments (including
post-effective amendments) to this Annual Report on Form 10-K and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto each of said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that each of said attorneys-in-
facts and agents, or his substitute or substitutes, or any of them, shall do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:




Signature Title Date
- --------------------------- ------------------------------------ -------------

/s/ SHAW HONG Chief Executive Officer, President July 25, 2002
- --------------------------- and Director
Shaw Hong (Principal Executive Officer)

/s/ H. GENE MCCOWN Vice President of Finance and Chief July 25, 2002
- --------------------------- Financial Officer
H. Gene McCown (Principal Financial and Accounting
Officer)

/s/ TSUEY-JIUAN CHEN Director July 25, 2002
- ---------------------------
Tsuey-Jiuan Chen


/s/ LEON MALMED Director July 25, 2002
- ---------------------------
Leon Malmed

/s/ EDWARD C.V. WINN Director July 25, 2002
- ---------------------------
Edward C.V. Winn

/s/ RAYMOND WU Executive Vice President July 25, 2002
- --------------------------- and Director
Raymond Wu





46




OMNIVISION TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





Page
----


Report of Independent Accountants........................................ F-2

Consolidated Balance Sheets.............................................. F-3

Consolidated Statements of Operations.................................... F-4

Consolidated Statements of Stockholders' Equity.......................... F-5

Consolidated Statements of Cash Flows.................................... F-6

Notes to Consolidated Financial Statements............................... F-7




F-1




REPORT OF INDEPENDENT ACCOUNTANTS

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


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
OmniVision Technologies, Inc. and its subsidiaries at April 30, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 2002, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.



/s/ PRICEWATERHOUSECOOPERS LLP


PricewaterhouseCoopers LLP
San Jose, California
June 11, 2002


F-2





OMNIVISION TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)



April 30,
--------------------------
2002 2001
------------ ------------

ASSETS

Current assets:
Cash and cash equivalents......................... $ 55,803 $ 51,053
Short-term investments............................ 2,002 3,000
Accounts receivable, net.......................... 10,787 5,269
Inventories....................................... 3,244 11,445
Refundable and deferred income taxes.............. 3,066 3,288
Prepaid expenses and other assets................. 987 219
--------- ---------
Total current assets............................ 75,889 74,274

Property, plant and equipment, net.................. 6,164 4,080
Other non-current assets............................ 288 293
--------- ---------
Total assets.................................... $ 82,341 $ 78,647
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable.................................. $ 5,865 $ 4,284
Accrued expenses and other liabilities............ 4,306 2,255
Deferred revenue.................................. 651 832
--------- ---------
Total current liabilities....................... 10,822 7,371
--------- ---------

Commitments and contingencies (Note 11)

Stockholders' equity:
Common stock, $0.001 par value; 100,000,000 shares
authorized; 22,286,855 and 21,999,580 shares
issued and outstanding.......................... 22 22
Additional paid-in capital........................ 95,469 94,531
Deferred compensation related to stock options.... (479) (1,058)
Accumulated deficit............................... (23,493) (22,219)
--------- ---------
Total stockholders' equity...................... 71,519 71,276
--------- ---------
Total liabilities and stockholders' equity...... $ 82,341 $ 78,647
========= =========



The accompanying notes are an integral part of these
Consolidated Financial Statements.


F-3




OMNIVISION TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)




Year Ended April 30,
----------------------------
2002 2001 2000
---- ---- ----

Revenues....................................... $ 46,518 $ 53,707 $ 40,253
Cost of revenues(2)............................ 25,983(1) 54,696(1) 28,191
-------- -------- --------
Gross profit (loss)............................ 20,535 (989) 12,062
-------- -------- --------
Operating expenses:
Research and development(2).................. 7,754 5,539 3,702
Selling, general and administrative(2)....... 11,505 6,703 3,243
Stock compensation charge(2)................. 527 1,018 1,552
Litigation settlement........................ 3,500 -- --
-------- -------- --------
Total operating expenses................... 23,286 13,260 8,497
-------- -------- --------
Income (loss) from operations.................. (2,751) (14,249) 3,565
Interest income, net........................... 1,477 2,692 174
-------- -------- --------
Income (loss) before income taxes.............. (1,274) (11,557) 3,739
Provision for income taxes..................... -- -- 300
-------- -------- --------
Net income (loss).............................. $ (1,274) $(11,557) $ 3,439
======== ======== ========

Net income (loss) per share:
Basic........................................ $ (0.06) $ (0.67) $ 1.15
======== ======== ========
Diluted...................................... $ (0.06) $ (0.67) $ 0.21
======== ======== ========

Shares used in computing net income (loss)
per share:
Basic........................................ 21,862 17,134 2,985
======== ======== ========
Diluted...................................... 21,862 17,134 16,399
======== ======== ========
- --------------------------

(1) Includes inventory write-off of $18,652 in the fiscal year ended April
30, 2001 and a related benefit of $4,966 in the fiscal year ended April
30, 2002.

(2) Stock-based compensation charges included in:

Cost of revenues........................... $ 25 $ 59 $ 310
======== ======== ========
Operating expenses:
Research and development................. $ 232 $ 618 $ 997
Selling, general and administrative...... 295 400 555
-------- -------- --------
$ 527 $ 1,018 $ 1,552
======== ======== ========



The accompanying notes are an integral part of these
Consolidated Financial Statements.


F-4





OMNIVISION TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)





Additional
Common Stock Paid-in Deferred Accumulated
-----------------
Shares Amount Capital Compensation Deficit Total
---------- ------ ------- ------------ ------- -----

Balance at May 1, 1999.......... 1,256,000 $ 1 $ 1,656 $ (734) $(14,101) $(13,178)
Exercise of stock options..... 2,718,050 3 567 -- -- 570
Deferred compensation related
to stock options granted.... -- -- 3,687 (3,687) -- --
Purchase of common stock...... (88,500) -- (9) -- -- (9)
Forfeiture of stock option
granted..................... -- -- (61) 35 -- (26)
Amortization of deferred
Compensation................ -- -- -- 1,891 -- 1,891
Net income.................... -- -- -- -- 3,439 3,439
---------- --- ------- ------- -------- --------
Balance at April 30, 2000....... 3,885,550 4 5,840 (2,495) (10,662) (7,313)
Exercise of stock options..... 84,300 -- 99 -- -- 99
Employee stock purchase plan.. 48,479 -- 247 -- -- 247
Shares issued in connection
with Initial Public Offering 5,750,000 6 67,655 -- -- 67,661
Conversion of preferred stock
at Initial Public Offering.. 12,305,001 12 21,070 -- -- 21,082
Grant of fully-vested options
to non-employees.............. -- -- 31 -- -- 31
Re-purchase of common stock... (73,750) -- (20) -- -- (20)
Forfeiture of stock option
Granted..................... -- -- (391) 198 -- (193)
Amortization of deferred
compensation................ -- -- -- 1,239 -- 1,239
Net loss...................... -- -- -- -- (11,557) (11,557)
---------- --- ------- ------- -------- --------
Balance at April 30, 2001....... 21,999,580 22 94,531 (1,058) (22,219) 71,276
Exercise of stock options..... 107,142 -- 343 -- -- 343
Employee stock purchase plan.. 188,633 -- 627 -- -- 627
Grant of fully-vested options
to non-employees............ -- -- 94 -- -- 94
Re-purchase of common stock... (8,500) -- (5) -- -- (5)
Forfeiture of stock option
granted..................... -- -- (121) 62 -- (59)
Amortization of deferred
Compensation................ -- -- -- 517 -- 517
Net loss...................... -- -- -- -- (1,274) (1,274)
---------- --- ------- ------- -------- --------
Balance at April 30, 2002....... 22,286,855 $22 $95,469 $ (479) $(23,493) $ 71,519
========== === ======= ======= ======== ========


The accompanying notes are an integral part of these Consolidated Financial Statements.




F-5





OMNIVISION TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)





Year Ended April 30,
-------------------------
2002 2001 2000
---- ---- ----

Cash flows from operating activities:
Net income (loss).............................. $ (1,274) $(11,557) $ 3,439
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 773 615 547
Allowance for doubtful accounts and sales
Returns.................................... 678 (84) 286
Amortization of deferred compensation........ 552 1,077 1,862
Changes in assets and liabilities:
Accounts receivable........................ (6,196) 971 (4,709)
Inventories................................ 8,201 66 (9,270)
Refundable and deferred income taxes....... 222 (2,842) --
Prepaid expenses and other assets.......... (763) (317) (538)
Accounts payable........................... 1,581 (5,688) 8,237
Accrued expenses and other liabilities..... 1,151 414 1,226
Deferred revenue........................... (181) 116 434
-------- -------- --------
Net cash provided by (used in) operating
Activities............................. 4,744 (17,229) 1,514
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments............ (2,002) (3,000) --
Proceeds from sales of short-term investments.. 3,000 -- --
Purchases of property, plant and equipment..... (2,857) (2,593) (1,564)
-------- -------- --------
Net cash used in investing activities.... (1,859) (5,593) (1,564)
-------- -------- --------
Cash flows from financing activities:
Deposit received............................... 900 -- --
Proceeds from issuance of common stock, net.... 970 68,007 569
Payment for repurchase of common stock, net.... (5) (20) (5)
-------- -------- --------
Net cash provided by financing activities 1,865 67,987 564
-------- -------- --------

Net increase in cash and cash equivalents........ 4,750 45,165 514
Cash and cash equivalents at beginning of period. 51,053 5,888 5,374
-------- -------- --------
Cash and cash equivalents at end of period....... $ 55,803 $ 51,053 $ 5,888
======== ======== ========

Supplemental cash flow information:
Interest paid.................................. $ -- $ 36 $ --
======== ======== ========
Taxes paid..................................... $ 36 $ 3,483 $ 129
======== ======== ========

Supplemental non-cash investing and financial
information:
Conversion of redeemable convertible preferred
stock to common stock........................ $ -- $ 21,082 $ --
======== ======== ========





The accompanying notes are an integral part of these
Consolidated Financial Statements.


F-6






OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended April 30, 2002, 2001 and 2000


NOTE 1 - OMNIVISION AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES

The Company
-----------

OmniVision Technologies, Inc. and subsidiaries (the "Company") designs,
develops and markets complementary metal oxide semiconductor ("CMOS") image
sensors. The Company was incorporated in California in May 1995 and
reincorporated in the State of Delaware in March 2000.

Use of estimates
----------------

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Principles of consolidation
---------------------------

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

Foreign currency translation
----------------------------

The functional currencies of the Company's subsidiaries are the local
currencies. Transaction gains and losses resulting from transactions
denominated in currencies other than the U.S. dollar for the Company or in the
local currencies for the subsidiaries are included in other income for the
periods presented.

The assets and liabilities of the subsidiaries are translated at the rates
of exchange on the balance sheet date. Revenue and expense items are translated
at the average rate of exchange for the period. Gains and losses from foreign
currency translation are included in other comprehensive income in the
stockholders' equity.

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 money market deposit
accounts that are stated at cost, which approximates fair value.

Short-term investments
----------------------

The Company's short-term investments, which are classified as available-
for-sale, are invested in high-grade corporate securities and government bonds
maturing approximately twelve months or less from the date of purchase. These
investments are reported at fair value. Unrealized gains or losses are recorded
in stockholders' equity and included in other comprehensive income (losses).
Unrealized gains or losses were not significant during any period covered.

Fair value of financial instruments
-----------------------------------

The reported amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued expenses and other current liabilities
approximate fair value due to their short maturities.


F-7




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


Property, plant and equipment
-----------------------------

Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is generally computed using the
straight-line method over the estimated useful lives of the assets.




Building improvements...................................... 5 years
Machinery and equipment.................................... 3 - 5 years
Furniture and fixtures..................................... 3 - 7 years



Long-lived assets
-----------------

The Company accounts for long-lived assets under Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," which requires the
Company to review for impairment of long-lived assets, whenever events or
changes in circumstances indicate that the carrying amount of an asset might
not be recoverable. When such an event occurs, the Company estimates the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the undiscounted expected future cash flows are less than the
carrying amount of the asset, an impairment loss is recognized. To date, no
impairment loss has been recognized.

Revenue recognition
-------------------

The Company recognizes revenue upon the shipment of its products to the
customer provided that the Company has received a signed purchase order, the
price is fixed, title has transferred, collection of resulting receivables is
considered probable, product returns are reasonably estimable, there are no
customer acceptance requirements and there are no remaining significant
obligations. For certain shipments to distributors under agreements allowing
for return or credits, revenue is deferred until the distributor resells the
product. The Company provides for future returns based on historical
experiences at the time revenue is recognized.

Inventories
-----------

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

Research and development
------------------------

Research and development costs are expensed as incurred.

Income taxes
------------

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

Comprehensive income (losses)
-----------------------------

Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investment by owners and distribution to owners.
Comprehensive income was not significant during any period covered.


F-8




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


Certain risks and uncertainties
-------------------------------

The Company's products are concentrated in a single segment in the
semiconductor imaging devices industry which is characterized by rapid
technological advances, changes in customer requirements and evolving industry
standards. These products depend in part on a limited number of suppliers of
wafers. Also, the Company has depended on a limited number of products and
customers for substantially all revenue to date. Failure by the Company to
anticipate or to respond adequately to technological developments in its
industry, changes in customer or supplier requirements or changes in industry
standards, or any significant delays in the development or introduction of
products or services, could have a material adverse effect on the Company's
business and operating results.

Stock-based compensation
------------------------

The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and FASB Interpretation
44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN
44") and complies with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Under APB 25, compensation cost is recognized based on the difference,
if any, on the date of grant between the fair value of the Company's stock and
the amount an employee must pay to acquire the stock. Deferred compensation is
amortized over the vesting period on an accelerated basis using the model
presented in paragraph 24 of FIN 28. SFAS 123 requires a "fair value" based
method of accounting for an employee stock option or similar equity investment.
The pro forma disclosures of the difference between the compensation expense
included in net loss and the related cost measured by the fair value method are
presented in Note 8.

The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS 123 and Emerging Issues Task Force Consensus No. 96-18,
"Accounting for Equity Instruments that are offered to other than employees for
acquiring or in conjunction with selling goods or services" ("EITF 96-18").
Under SFAS 123 and EITF 96-18, stock option awards issued to non-employees are
accounted for at their fair value, determined using the Black-Scholes option
pricing model.

Basic and diluted net income (loss) per share
---------------------------------------------

The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings per Share," under the provisions of which basic income
(loss) per share is computed by dividing the income (loss) available to holders
of common stock for the period by the weighted average number of shares of
common stock outstanding during the period. The calculation of diluted income
(loss) per share excludes potential common stock if the effect of such stock is
antidilutive. Potential common stock consists of unvested restricted common
stock, incremental common or preferred shares issuable upon the exercise of
stock options and shares issuable upon conversion of the redeemable convertible
preferred stock.

Reclassifications
-----------------

Certain reclassifications have been made in the 2000 balance sheet to
conform to the 2002 and 2001 presentations.

Recent accounting pronouncements
--------------------------------

On June 29, 2001, the Financial Accounting Standards Board, or FASB,
approved its proposed Statement of Financial Accounting Standards, or SFAS, No.
141, or SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets."


F-9





OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000

Under FAS 141, all business combinations should be accounted for using the
purchase method of accounting; use of the pooling-of-interests, or pooling,
method is prohibited. The provisions of the statement will apply to all
business combinations initiated after June 30, 2001.

SFAS No. 142 will apply to all acquired intangible assets whether acquired
singly, as part of a group, or in a business combination. The statement will
supersede Accounting Principals Board, or APB, Opinion No. 17, "Intangible
Assets," and will carry forward provisions in APB Opinion No.17 related to
internally developed intangible assets. Adoption of SFAS No. 142 will result in
ceasing amortization of goodwill. We will adopt SFAS No. 142 effective May 1,
2002. The Company does not expect the adoption of SFAS No. 142 to have any
material effect on its consolidated financial statements.

In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for fiscal years
beginning after December 15, 2001. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." It establishes a single accounting
method, based on the framework established in SFAS 121, for long-lived assets
to be disposed of by sale. The Company is currently assessing, but has not yet
determined, the impact of SFAS 144 on its consolidated financial position and
results of operations.

F-10




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000



NOTE 2 - BALANCE SHEET ACCOUNTS (IN THOUSANDS)



April 30,
--------------------------
2002 2001
------------ ------------

Cash and cash equivalents:
Cash.............................................. $ 3,625 $ 1,918
Money market funds................................ 10,303 3,563
Commercial paper.................................. 41,875 45,572
-------- --------
$ 55,803 $ 51,053
======== ========

Short-term investments:
Corporate notes................................... $ 2,002 $ 3,000
======== ========

Accounts receivable:
Accounts receivable............................... $ 12,212 $ 6,016
Less: Allowance for doubtful accounts............. (671) (114)
Sales return reserve........................ (754) (633)
-------- --------
$ 10,787 $ 5,269
======== ========

Inventories:
Work in progress.................................. $ 2,361 $ 3,752
Finished goods.................................... 883 7,693
-------- --------
$ 3,244 $ 11,445
======== ========

Property and equipment:
Machinery and equipment........................... $ 3,352 $ 2,917
Furniture and fixtures............................ 231 222
Software.......................................... 829 798
Construction in progress.......................... 4,315 1,933
-------- --------
8,727 5,870
Less: Accumulated depreciation and amortization... (2,563) (1,790)
-------- --------
$ 6,164 $ 4,080
======== ========

Accrued expenses and other liabilities:
Employee compensation............................. $ 1,379 $ 695
Other............................................. 2,927 1,560
-------- --------
$ 4,306 $ 2,255
======== ========




F-11





OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


NOTE 3 - INCOME TAXES

The provision for income taxes consists of the following (in thousands):



Year Ended April 30,
----------------------------
2002 2001 2000
---- ---- ----

Current:
Federal...................................... $ (1,262) $ 2,516 $ 626
State........................................ -- 63 120
-------- -------- --------
Total current.............................. (1,262) 2,579 746
-------- -------- --------
Deferred:
Federal...................................... 1,262 (2,579) (347)
State........................................ -- -- (99)
-------- -------- --------
Total deferred............................. 1,262 (2,579) (446)
-------- -------- --------
Total provision.......................... $ -- $ -- $ 300
======== ======== ========



The provision for income taxes differs from the amount computed by
applying the federal income tax rate of 34% to pretax income (loss) from
operations as a result of the following (in thousands):



Year Ended April 30,
----------------------------
2002 2001 2000
---- ---- ----

Statutory federal income tax................... $ (433) $ (3,929) $ 1,271
State income taxes expense (benefit), net of
federal tax benefits......................... -- (315) 150
Amortization of stock compensation............. 188 489 639
Foreign rate differential...................... 735 -- --
Release of valuation allowance................. (497) 3,653 (2,281)
Alternative minimum tax........................ -- -- 337
Other.......................................... 7 102 184
-------- -------- --------
Tax provision.................................. $ 1 $ - $ 300
======== ======== ========



Management regularly assesses the realizability of deferred tax assets
recorded based upon the weight of available evidence, including such factors as
the recent earnings history and expected future taxable income. Management
believes that it is more likely than not that the Company will not realize a
significant portion of its deferred tax assets and, accordingly, valuation
allowances of $6,021,000 and $6,307,000 have been established for such amounts
at April 30, 2002 and 2001, respectively.


F-12




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000

The components of refundable and deferred income taxes included in the
balance sheet are (in thousands):



Year Ended April 30,
----------------------
2002 2001
---- ----

Net operating loss carryforward and credit carryforwards. $ 705 $ 470
Reserves................................................. 6,149 8,369
Accruals and other....................................... 930 493
------- -------
7,784 9,332
Valuation allowance...................................... (6,021) (6,307)
------- -------
Net deferred tax assets.................................. 1,763 3,025
Refundable income taxes.................................. 1,303 263
------- -------
$ 3,066 $ 3,288
======= =======



As of April 30, 2002, the Company had net operating loss carryforwards of
approximately $1,500,000 for federal and state income tax purposes. These
losses are available to reduce taxable income and expire through 2007. Because
of certain changes in the Company's ownership in December 1996, there is an
annual limitation of approximately $200,000 on the use of these net operating
loss carryforwards pursuant to Section 382 of the Internal Revenue Code.


NOTE 4 - RELATED PARTIES TRANSACTIONS

The chairman of Powerchip Semiconductor Corp. ("PSC") was a board member
of the Company until May 2001. PSC has been a vendor for the Company since the
year ended April 30, 1999. Total purchases were $1,977,000, $22,011,000 and
$6,857,000 for the years ended April 30, 2002, 2001 and 2000, respectively.


NOTE 5 - NET INCOME (LOSS) PER SHARE

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



Year Ended April 30,
----------------------------
2002 2001 2000
---- ---- ----

Numerator:
Net income (loss).............................. $ (1,274) $(11,557) $ 3,439
======== ======== ========
Denominator:
Weighted average shares........................ 22,157 17,757 3,558
Weighted average unvested common stock
subject to repurchase........................ (295) (623) (573)
-------- -------- --------
Denominator for basic net income (loss) per
share........................................ 21,862 17,134 2,985
Weighted average effect of dilutive securities:
Common stock options......................... -- -- 536
Unvested common stock subject to repurchase.. -- -- 573
Convertible preferred stock.................. -- -- 12,305
-------- -------- --------
Denominator for dilutive net income (loss)
per share...................................... 21,862 17,134 16,399
======== ======== ========
Basic net income (loss) per share................ $ (0.06) $ (0.67) $ 1.15
======== ======== ========
Diluted net income (loss) per share.............. $ (0.06) $ (0.67) $ 0.21
======== ======== ========




F-13




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


The following table sets forth weighted average potential shares of common
stock that are not included in the diluted net income (loss) per share
calculation above because to do so would be antidilutive for the periods
indicated (in thousands):




Year Ended April 30,
----------------------------
2002 2001 2000
---- ---- ----

Weighted average effect of common stock
equivalents:
Unvested common stock subject to repurchase.... 295 623 --
Options outstanding............................ 2,261 1,237 --
Shares resulting from the conversion of the:
Series A convertible preferred stock......... -- 985 --
Series B convertible preferred stock......... -- 842 --
Series C convertible preferred stock......... -- 993 --
Total common stock equivalents excluded from the
computation of earnings (loss) per share as
their effect was antidilutive.................. 2,556 4,680 --
======= ======= =======



NOTE 6 - REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company is authorized to issue 10,000,000 shares of Convertible
preferred stock ("preferred stock"). As of April 30, 2002, no shares of
preferred stock were issued and outstanding as all shares of preferred stock
were converted into 12,305,001 shares of common stock at the time of the
Company's initial public offering.




Series A Series B Series C Additional
Preferred Stock Preferred Stock Preferred Stock Paid-in
--------------- --------------- ---------------
(in thousands) Shares Amount Shares Amount Shares Amount Capital Total
------ ------ ------ ------ ------ ------ ------- -----

Balance at April 30, 1999
and at April 30, 2000...... 4,300 $ 4 3,672 $ 4 4,334 $ 4 $ 21,070 $ 21,082
Conversion of preferred stock
at Initial Public Offering (4,300) (4) (3,672) (4) (4,334) (4) (21,070) (21,082)
------ ----- ------ ---- ------ ---- -------- --------
Balance at April 30, 2001.... -- $ -- -- $ -- -- $ -- $ -- $ --
====== ===== ====== ==== ====== ==== ======== ========
Balance at April 30, 2002.... -- $ -- -- $ -- -- $ -- $ -- $ --
====== ===== ====== ==== ====== ==== ======== ========



The rights, preferences and restrictions of the preferred stock are as
follows:

Conversion. Each share of Series A, Series B and Series C preferred stock
----------
was convertible into such number of shares of common stock as is determined by
dividing the original issuance price by $0.60, $1.50 and $3.00, respectively
("Initial Conversion Price").

Dividends. Holders of Series A, Series B and Series C preferred stock were
---------
entitled to receive, when and as declared by the Board of Directors,
noncumulative dividends at the annual rate of $0.06, $0.15 and $0.30 per share,
respectively. Such dividends were payable in preference to any dividend for
common stock declared by the Board of Directors. No dividends were declared
since inception.

Voting. The holders of the preferred stock had the right to vote with the
------
common stock, on an as-if-converted basis, on all other matters as provided
under California law. The holder of each share of preferred stock was entitled
to the number of votes equal to the number of shares of common stock into which
such share of preferred stock could be converted on the record date for the
vote or the consent of shareholders and shall have voting rights and powers
equal to the voting rights and powers of the common stock.


F-14





OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


Liquidation. In the event of any liquidation, dissolution or winding up of
-----------
the corporation, the holders of each share of preferred stock then outstanding
are entitled to be paid, before any payment made to the holders of the common
stock, an amount equal to the original issue price per share ("Preference
Amount") of preferred stock. If the assets of the corporation are insufficient
to pay the full liquidation preference to the preferred stock, the assets shall
be distributed ratably among the holders of the preferred stock in proportion
to the full preference amount each such holder is otherwise entitled to
receive. After payment has been made to the holders of the preferred stock of
their full preference amount, any remaining assets or surplus funds of the
corporation are to be shared by and distributed ratably among the holders of
common stock in proportion to the number of shares then held by each of them.

A consolidation or merger of the Company with or into any other
corporation or corporations, acquisition by any other corporation or
corporations, or a sale of all or substantially all of the assets or voting
control of the Company, in which the prior stockholders of the Company do not
own a majority of the outstanding shares of the surviving corporation (a
"change in control") is deemed to be a liquidation.

Redemption
----------

Series A, B and C preferred stock were redeemable upon a change in control
of the Company at an amount equal to the liquidation preference described
above.

Series A, B and C preferred stock were recorded at fair value at the date
of issuance outside of stockholder's equity, which equals the redemption value.


NOTE 7 - COMMON STOCK

The Company completed its initial public offering ("IPO") on July 14,
2000. In the IPO, the Company sold an aggregate of 5,000,000 shares of common
stock. In August 2000, the underwriters of the Company's initial public
offering exercised their over-allotment option to purchase an additional
750,000 shares of common stock at $13.00 per share. Net proceeds from exercise
of the over-allotment option aggregated approximately $8.5 million after paying
the underwriters' fee and related expenses. The sale of the shares of common
stock generated aggregate gross proceeds of approximately $74,750,000,
including proceeds from the exercise of the over-allotment option. The
aggregate net proceeds were approximately $67,661,000, including the proceeds
from the exercise of the over-allotment option, after deducting underwriting
discounts and commissions of approximately $5,233,000 and directly paying
expenses of the offering of approximately $1,857,000.

The Company is authorized to issue up to 100,000,000 shares of common
stock. As of April 30, 2002 and 2001, 22,286,855 and 21,999,580 shares were
issued and outstanding, respectively. In addition, 8,333,500 shares of common
stock have been reserved for issuance under the Company's employee stock option
plans, Directors' stock option plan and employee stock purchase plan.

Certain common stock option holders have the right to exercise unvested
options, subject to a repurchase right held by the Company, in the event of
voluntary or involuntary termination of employment of the stockholder. Of the
shares issued to date, 2,770,050 shares of the Company's common stock have been
issued under restricted stock purchase agreements, under which the Company has
the option to repurchase issued shares of common stock. Under these agreements,
20% of the Company's repurchase rights lapse after one year. The remaining
rights lapse quarterly over the following four years. As of April 30, 2002 and
2001, 175,700 and 449,500 shares of common stock were subject to repurchase by
the Company at the original exercise price, respectively.


F-15




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


NOTE 8 - STOCK PLANS

1995 Stock Option Plan
----------------------

In May 1995, the Company adopted the 1995 Stock Option Plan under which
3,600,000 shares of common stock were reserved for issuance to eligible
employees, directors and consultants upon exercise of the stock options and
stock purchase rights. Incentive stock options are granted at a price not less
than 100% of the fair market value of the Company's common stock and at a price
of not less than 110% of the fair market value for grants to any person who
owned more than 10% of the voting power of all classes of stock on the date of
grant. Nonstatutory stock options are granted at a price not less than 85% of
the fair market value of the common stock and at a price not less than 110% of
the fair market value for grants to a person who owned more than 10% of the
voting power of all classes of stock on the date of the grant. Options granted
under the 1995 Stock Option Plan generally vest over five years and are
exercisable immediately or for up to ten years (five years for grants to any
person who owned more than 10% of the voting power of all classes of stock on
the date of the grant). Those options exercised but unvested are subject to
repurchase by the Company at the exercise price.

In February 2000, the Company terminated the 1995 Stock Option Plan as to
future grants. However, options outstanding under the 1995 Stock Option Plan
continue to be governed by the terms of the 1995 Stock Option Plan.

2000 Stock Plan
---------------

In February 2000, the Company adopted the 2000 Stock Plan under which
3,000,000 shares of common stock were reserved for issuance together with an
annual increase in the number of shares reserved thereunder beginning on the
first day of the Company's fiscal year, commencing May 1, 2002, in an amount
equal to the lesser of: 1,500,000 shares, or 6% of outstanding shares of common
stock on the last day of the prior fiscal year; or an amount determined by the
Company's board of directors. The 2000 Stock Plan provides for grants of
incentive stock options to its employees including officers and employees,
directors and nonstatutory stock options to its consultants including
nonemployee directors. Incentive stock options are granted at a price not less
than 110% of the fair market value for grants to any person who owned more than
10% of the voting power of all classes of stock on the date of grant.
Nonstatutory stock options are granted at a price not less than 85% of the fair
market value of the common stock and at a price not less than 110% of the fair
market value for grants to a person who owned more than 10% of the voting power
of all classes of stock on the date of the grant. Options granted under the
2000 Stock Plan generally vest over four years and are exercisable up to ten
years (five years for grants to any person who owned more than 10% of the
voting power of all classes of stock on the date of the grant). Those options
exercised but unvested are subject to repurchase by the Company at the exercise
price.

2000 Director Option Plan
-------------------------

The 2000 Director Option Plan was adopted by the board of directors in
February 2000 and the shareholders in March 2000. Under this plan 250,000
shares of common stock were reserved for issuance together with an annual
increase in the number of shares reserved thereunder beginning on the first day
of the Company's fiscal year commencing May 1, 2002 equal to the lesser of
75,000 shares, 0.25% of the outstanding shares of the common stock on the last
day of the prior fiscal year or an amount determined by the board of directors.
The 2000 Director Option Plan provides for an initial grant to the nonemployee
director to purchase 20,000 shares of common stock. Subsequent to the initial
grants, each nonemployee director will be granted an option to purchase 10,000
shares of common stock at the next meeting of the board of directors following
the annual meeting of stockholders, if on the date of the annual meeting, the
director has served on the board of directors for six months. The terms of the
options granted under the 2000 Director Option Plan is ten years, but the
options expire three months following the termination of the optionee's status
as a director or twelve months if the termination is due to death or
disability. The initial 20,000 share grants will become exercisable at a rate
of one-fourth of the shares on the first anniversary of the grant date and at a
rate of 1/16th of the shares per quarter thereafter. The subsequent 10,000
share grants will become exercisable at the rate of 1/16th of the shares per
quarter.


F-16




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


2000 Employee Stock Purchase Plan
---------------------------------

The 2000 Employee Stock Purchase Plan was adopted by the board of
directors in February 2000 and was adopted by the shareholders in March 2000.
The 2000 Employee Stock Purchase Plan became effective upon the
closing of the Company's initial public offering. Under the 2000 Employee Stock
Purchase Plan, 1,500,000 shares of common stock were reserved for issuance
together with an annual increase in the number of shares reserved thereunder
beginning on the first day of the fiscal year commencing May 1, 2002 in an
amount equal to the lesser of: 1,000,000 shares, or 4% of the Company's common
stock on the last day of the prior fiscal year, or an amount determined by the
Company's board of directors. The offering period under this plan begins on the
first trading day on or after June 1 and December 1 of each year. The purchase
price of the common stock under this plan will be 85% of the lesser of the fair
market value per share on the start date of the offering period or on the end
date of the purchase period. Employees may end their participation in an
offering period at any time, and their participation ends automatically on
termination of employment with the Company. This plan will terminate in
February 2010, unless the board of directors determines to terminate it sooner.
As of April 30, 2002, 188,633 shares had been exercised under the 2000 Employee
Stock Purchase Plan.

The following table summarizes stock option activities:



Options Outstanding
-------------------------------------
Weighted
Options Average
Available Price
For Number of Price per per
Grant Shares Share Share
----- ------ ----- -----

Balance at May 1, 1999................. 783,000 2,761,000 $ -- $ 0.17
Adoption of 2000 Stock Plan.......... 3,000,000 -- -- --
Adoption of 2000 Director Option Plan 250,000 -- -- --
Granted.............................. (919,000) 919,000 0.75-7.00 1.41
2000 Stock Plan Granted.............. (5,000) 5,000 9.00 9.00
2000 Stock Plan Granted..............(1,157,000) 1,157,000 10.00 10.00
2000 Director Option Plan Granted.... (60,000) 60,000 10.00 10.00
Exercised............................ -- (2,718,050) 0.06-0.75 0.21
Canceled............................. 152,500 (152,500) 0.06-0.75 0.34
Termination of 1995 stock option plan (16,500) -- -- --
---------- ----------
Balance at April 30, 2000.............. 2,028,000 2,031,450 -- 6.57
Granted..............................(1,015,358) 1,015,358 2.75-29.06 6.10
Exercised............................ -- (84,300) 0.25-13.00 1.17
Repurchased.......................... 117,250 -- 0.06-0.75 0.23
Canceled............................. 196,512 (196,512) 0.75-13.00 5.76
---------- ----------
Balance at April 30, 2001.............. 1,326,404 2,765,996 -- 6.62
Granted.............................. (660,500) (660,500) 2.83-8.60 4.37
Exercised............................ -- (107,142) 0.25-10.00 3.20
Repurchased.......................... 8,500 -- 0.30-0.75 0.54
Canceled............................. 388,888 (388,888) 0.30-29.06 10.32
---------- ----------
Balance at April 30, 2002.............. 1,063,292 2,930,466 -- $ 5.75
========== ==========





F-17




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


The following table summarizes information about stock options outstanding
at April 30, 2002:




Options Outstanding Options Exercisable
----------------------------------- -------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
April 30, Contractual Exercise at April 30, Exercise
Exercise Prices 2002 Life Price 2002 Price
- ------------------ ---- ---- ----- ---- -----

$0.06 20,000 4.19 $ 0.06 20,000 $ 0.06
$0.25 - $0.30 91,000 6.09 0.29 53,400 0.29
$0.75 347,800 7.40 0.75 156,100 0.75
$2.75 - $3.98 452,771 9.21 3.65 116,508 3.50
$4.50 - $5.44 974,695 8.78 4.72 213,832 4.75
$7.00 - $8.60 131,000 8.83 7.93 34,290 7.35
$10.00 - $13.00 908,200 7.95 10.06 464,699 10.11
$29.06 5,000 8.48 29.06 1,979 29.06
--------- ---- ------ --------- ------
$0.06 - $29.06 2,930,466 8.31 $ 5.75 1,060,808 $ 6.19
========= ==== ====== ========= ======




Stock-based compensation under APB No. 25
-----------------------------------------

In connection with certain stock option grants the Company recorded
deferred stock compensation costs totaling $5,208,000 being the difference
between the exercise price and the deemed fair value at the date of grant,
which is being recognized over the vesting period of the related options of
generally five years. Future amortization of deferred compensation expense is
estimated to be approximately $314,000, $143,000 and $22,000 in the years ended
April 30, 2003, 2004 and thereafter, respectively.

Stock based compensation charge is comprised of the following (in
thousands):



Year Ended April 30,
----------------------------
2002 2001 2000
---- ---- ----

Cost of revenues.................................. $ 25 $ 59 $ 310
Operating expenses:
Research and development........................ 232 618 997
Selling, general and administrative............. 295 400 555
------ ------ ------
Total operating expenses...................... 527 1,018 1,552
------ ------ ------
Total compensation charge..................... $ 552 $1,077 $1,862
====== ====== ======



Fair value disclosures
----------------------

Pro forma information regarding net income and net income per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted under the fair value method. The fair value for these options was
estimated using the Black-Scholes option pricing model.



F-18





OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS No.
123 using the following assumptions:




Employee Stock Option Plan Employee Stock
Year Ended April 30, Purchase Plan
--------------------- Year Ended
2002 2001 2000 April 30, 2002
---- ---- ---- --------------

Risk-free interest rate............. 3.83% 5.56% 6.04% 2.79%
Expected term of options (in years). 2.0 3.6 4.1 0.5
Expected volatility................. 151% 185% 110% 151%
Expected dividend yield............. 0% 0% 0% 0%



The Company used 0% as expected volatility for all periods before March 8,
2000. For the period from March 8, 2000, the date of first filing of the
Registration Statement through April 30, 2000, 110% volatility was used.

The weighted average grant date fair value of options granted during the
years ended April 30, 2002, 2001 and 2000 was $3.55, $5.67 and $5.29,
respectively.

Had compensation cost been determined based upon the fair value at the
grant date, consistent with the methodology prescribed under SFAS No. 123, the
Company's pro forma net loss and pro forma basic and diluted net loss per share
under SFAS No. 123 would have been (in thousands, except per share data):





Year Ended April 30,
----------------------------
2002 2001 2000
---- ---- ----

Net income (loss) - as reported.................. $ (1,274) $(11,557) $ 3,439
Net income (loss) - as adjusted.................. $ (5,557) $(17,001) $ 2,412

Net income (loss) per share:
Basic as reported.............................. $ (0.06) $ (0.67) $ 1.15
======== ======== ========
Diluted as reported............................ $ (0.06) $ (0.67) $ 0.21
======== ======== ========

Net income (loss) per share:
Basic as adjusted.............................. $ (0.25) $ (0.99) $ 0.81
======== ======== ========
Diluted as adjusted............................ $ (0.25) $ (0.99) $ 0.15
======== ======== ========




F-19





OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


NOTE 9 - CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and
investments in a money market account. The Company's products are primarily
sold to OEM customers and to distributors. The Company performs ongoing credit
evaluations of its customers and maintains reserves for credit losses. The
Company's sales to significant customers as a percentage of revenues were as
follows for the indicated periods:




Year Ended April 30,
----------------------------
2002 2001 2000
---- ---- ----

Percentage of revenues:
Customer A.................................... 20% * *
Customer B.................................... 15% 17% 30%
Customer C.................................... * 14% 18%
Customer D.................................... * * 11%



Significant customer account receivables as a percentage of net accounts
receivable were as follows for the fiscal years indicated:







Year Ended April 30,
--------------------
2002 2001
---- ----

Percentage of accounts receivable, net:
Customer A............................................. 14% *
Customer B............................................. * 20%
Customer C............................................. * 15%

- -----------------------

* Less than ten percent.




NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION

For all periods presented, the Company operated in a single business
segment.

The Company sells its products in the United States and to the Asia
Pacific region. Revenues by geographic locations based on the country or region
of the customer were as follows (in thousands):




Year Ended April 30,
----------------------------
2002 2001 2000
---- ---- ----

Hong Kong....................................... $ 12,696 $ 5,061 $ 2,780
Taiwan.......................................... 12,104 14,604 16,848
United States................................... 11,907 8,355 8,709
South Korea..................................... 3,539 5,051 3,296
Japan........................................... 3,426 6,865 897
Singapore....................................... 636 7,611 6,670
China........................................... 293 3,042 536
All other....................................... 1,917 3,118 517
-------- -------- --------
$ 46,518 $ 53,707 $ 40,253
======== ======== ========



In December 2000, the Company formed a subsidiary to conduct design and
testing operations in Shanghai, the People's Republic of China. The registered
capital of this company is $12.0 million, of which $3.8 million was



F-20




OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


funded by the Company in the fiscal year ended April 30, 2001, as required by
Chinese law. The Company funded an additional $3.7 million during Fiscal Year
2002. The Company is further obligated to fund the remaining $4.5 million of
registered capital by December 2003. As of April 30, 2002, $4.4 million of the
$7.5 million funded to date was paid for land use rights and to building
contractors in partial payment for the construction of the facility, $2.5
million was deposited in a bank account in China and $0.6 million was expended
for general purposes. The formation and operation of the new company in China
requires a large initial capital investment, and there may be significant
administrative, legal and governmental barriers in China, which may prevent the
Company's ability to begin operation of the new company as well as using the
funds outside of China.


NOTE 11 - COMMITMENTS AND CONTINGENCIES

The Company leases its facilities in the U.S. under non-cancelable lease
agreements. The facility leases expire April 30, 2003. Future minimum lease
payments under all non-cancelable operating leases as of April 30, 2002 are as
follows (in thousands):





Years Ended April 30,
- ---------------------

2003................................................................ $815
2004................................................................ $511
2005................................................................ $333





Rental expenses under all operating leases amounted to $408,000, $340,000
and $278,000 for the years ended April 30, 2002, 2001 and 2000, respectively.

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 the
Company, some of its directors and officers, and various underwriters for its
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. 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. The complaint against the
Company seeks unspecified damages on behalf of a purported class of purchasers
of its common stock between July 14, 2000 and December 6, 2000.

In March 2000, the Company received written notice from Koninklijke
Philips N.V. ("Philips") in which Philips claimed to have patent rights in a
serial bus system for data transmission, known as the I2C bus system. Although
the Company does not believe that any of its products infringe any Philips
patent, the Company is currently discussing possible royalty or licensing
arrangements as a means of business resolution. In the meantime, the Company
has completed implementation of a new serial bus system for its products.

The Company entered into an agreement with Photobit Corporation
("Photobit") and the California Institute of Technology ("CalTech"), effective
September 18, 2001, to settle all litigation that the Company had with Photobit
and CalTech, including an action in the U.S. District Court, Northern District
of California, Case No. C 00 3791 PJH, and an investigation before the U.S.
International Trade Commission ("ITC"), Inv. No. 337-TA-451. Both actions
involved patents alleged to pertain to its CMOS image sensor products, such as
those used in digital cameras, PC cameras and other optical applications. The
action pending in California was dismissed on September 24, 2001, and final
termination of the ITC investigation occurred on November 9, 2001. The
confidential settlement includes non-exclusive cross-licenses for seven years
under the Company's and Photobit's respective patent


F-21





OMNIVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended April 30, 2002, 2001 and 2000


portfolios, including patents and applications licensed by CalTech to Photobit.
The Company has also made a one-time payment to Photobit of $3.5 million
dollars.

The settlement agreement referred to in the above paragraph relates only
to claims made by Photobit and CalTech. It is possible that other companies
might pursue litigation with respect to any claims such companies purport to
have against the Company. The results of any litigation are inherently
uncertain. In the event of an adverse result in any litigation with respect to
intellectual property rights relevant to the Company's products that could
arise in the future, the Company could be required to obtain licenses to the
infringing technology, pay substantial damages under applicable law, including
treble damages if the Company is held to have willfully infringed, cease the
manufacture, use and sale of infringing products or to expend significant
resources to develop non-infringing technology. Litigation frequently involves
substantial expenditures and can require significant management attention, even
if the Company ultimately prevails.

In conjunction with the formation of the subsidiary in China, and in
addition to the capital requirement, the Company has entered into certain
commitments related to leasing land and constructing a facility in Shanghai,
China for approximately $12.0 million, of which $7.5 million has been paid to
date. The Company is further obligated to fund the remaining $4.5 million of
registered capital by December 2003.


F-21





Report of Independent Accountants on
Financial Statement Schedule

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

Our audits of the consolidated financial statements referred to in our report
dated June 11, 2002 appearing in this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in Item 14(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.


/s/ PRICEWATERHOUSECOOPERS LLP


PricewaterhouseCoopers LLP
San Jose, California
June 11, 2002


F-23



SCHEDULE II


OMNIVISION TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended April 30, 2002, 2001, and 2000
(Amounts in thousands)





Additions
Balance at and Write-offs Balance at
Beginning Charges to and End of
Description of Year Expenses Deductions Year
----------- ------- -------- ---------- ----

Allowance for doubtful
accounts receivable:
Fiscal year ended April 30, 2002.. $ 114 $ 575 $ 18 $ 671
====== ====== ====== ======
Fiscal year ended April 30, 2001.. $ 156 $ (41) $ 1 $ 114
====== ====== ====== ======
Fiscal year ended April 30, 2000.. $ 56 $ 103 $ 3 $ 156
====== ====== ====== ======

Deferred tax valuation allowance:
Fiscal year ended April 30, 2002.. $6,307 $ -- $ 286 $6,021
====== ====== ====== ======
Fiscal year ended April 30, 2001.. $2,654 $3,653 $ -- $6,307
====== ====== ====== ======
Fiscal year ended April 30, 2000.. $4,973 $ -- $2,319 $2,654
====== ====== ====== ======

Sales return reserve:
Fiscal year ended April 30, 2002.. $ 633 $ 283 $ 162 $ 754
====== ====== ====== ======
Fiscal year ended April 30, 2001.. $ 675 $ 556 $ 598 $ 633
====== ====== ====== ======
Fiscal year ended April 30, 2000.. $ 489 $ 256 $ 70 $ 675
====== ====== ====== ======




S-1