Image sensors are semiconductor devices that transform analog light and color into digital information for processing, storage or display without the need for photographic film. Such devices either employ CMOS or CCD technology. Recent demand for image sensors has been spurred by the growing market for digital cameras and more recently, mobile camera phones. Other applications for image sensors include automobiles, biometrics, pattern recognition, medical devices, PC cameras, security and surveillance systems and toys. According to a November 2005 report issued by Gartner, the image sensor market generated US$1.7 billion in revenues in 2002 and is expected to grow to US$5.5 billion by 2005 and US$8.3 billion by 2010. CMOS image sensors are expected to replace CCD image sensors in many applications by 2006.

The demand for image sensors has been accelerated by improvements in CMOS technology. CMOS technology permits compact structures for image sensor chips and is a low cost alternative to CCD technology. CMOS technology was first used in image sensors in 1998, almost 40 years after the advent of CCD technology. When it was first introduced, CMOS technology was not used in commercial products due to lower light sensitivity, greater susceptibility to noise, and lower image quality at higher resolutions when compared to CCD technology. Recent improvements in CMOS technology, including a reduction in size, improvement in current control, and a more stable fabrication process, enable it to produce higher quality images at lower costs.

The camera mobile phone market is a major growth market for images sensors. According to an October 2004 report issued by Gartner, camera mobile phones will have penetrated 95% of the Japanese and Korean mobile phone markets by 2008. Other mobile phone markets are also expected to follow this trend in which cameras will become a standard feature of mobile phones.

The Company developed its first 1.3 megapixel CMOS image sensor for commercial production in September 2003, and its first 2.0 megapixel single chip product with auto-focus capabilities for commercial production in April 2005. In April 2005, the Company also integrated a four-channel motor controller into its commercially available 2.0 megapixel products to control mechanical shutter, aperture and auto focus functions as part of its camera SoC strategy.

The Company commercialized its first 0.1 megapixel CIF image sensors in June 2004. The Company’s CIF image sensors are its smallest product with optical sizes from 1/7 inch to 1/11 inch. The Company’s CIF image sensors are used mainly in dual camera mobile phones which utilize two image sensors, a smaller CIF image sensor for taking digital photos and a much larger CCD image sensor for video conferencing.

The Company developed its first 0.3 megapixel VGA image sensors using 0.25 µm technology for commercial production in September 2003 and using 0.18 µm BEOL process technology in May 2005. The Company’s VGA image sensors range in optical size from 1/4.5 inch to 1/6.2 inch.

The Company developed its first 1.3 megapixel SXGA image sensors for the mobile camera phone application using 0.25 µm technology for commercial production in December 2003, using 0.18 µm BEOL process technology in May 2005 and using 0.15 µm process technology in November 2005.

The Company’s 2.0 megapixel UXGA image sensors with 1/2.7 inch optical size are currently its highest-end product. The Company has also integrated mechanical shutter motor control mechanisms into this product.

The Company’s NTSC/PAL image sensors are highly integrated products combining on a single chip CMOS image sensors, ISP, a television encoder, which is used to convert the digital video generated from the sensors to a composite 10 bit signal, and a video discretionary access control mechanism that converts composite 10 bit signal to an analog signal for television viewing.

Cost of revenues from sales of products decreased 4.8% to (Won)22.6 billion (US$21.7 million) in the nine months ended September 30, 2005 from (Won)23.7 billion in the nine months ended September 30, 2004.

Operating expenses increased 18.1% to (Won)6.0 billion (US$5.8 million) in the first nine months of 2005 from (Won)5.1 billion in the first nine months of 2004.

Net interest expense increased 224.0% to (Won)389 million (US$0.4 million) in the first nine months of 2005 from (Won)120 million in the first nine months of 2004.

Net income from operations was (Won)1.3 billion (US$1.2 million) in the first nine months of 2005, compared to a net loss of (Won)4.4 billion in the first nine months of 2004.