The growth of video conferencing and other forms of video-enabled multimedia communications has greatly boosted demand for products such as PC cameras. According to International Data Corporation, or IDC, annual peripheral PC camera shipments increased from 9.9 million units in 2002 to 18.0 million in 2004 and are expected to grow to annual shipments of 30.1 million units by 2008. Annual shipments of PC cameras in 2004 represented a penetration rate of just 11.0% of the annual shipments of 117.8 million units of desktop PCs and 46.0 million units of notebook PCs.

According to the National Statistics Bureau of China, China’s annual per capita disposable income of urban residents has increased at a CAGR of 14.7% from 1992 to 2004. Fueled by this rapid growth in the domestic economy, China’s demand for electronics products has significantly increased, further boosting the need for semiconductor devices. According to the Ministry of Information Industry in China, or MII, the domestic market for electronics products in China in terms of overall sales grew from US$20.2 billion in 1999 to US$114.0 billion in 2004.

In addition, dedicated multimedia processors allow designers to upgrade multimedia capabilities of an end product without the need to significantly redesign the overall product architecture. The evolution of multimedia features for mobile phones has proceeded at a more rapid pace than the deployment of next generation wireless networks. As a result, by using a separate network connection semiconductor and dedicated multimedia processors, vendors of mobile phones are able to accelerate their time to market with new multimedia features, respond to distinct mobile phone service operator or geographic market demands and differentiate their products.

A PC camera multimedia processor is an image processing semiconductor embedded in a PC camera. It receives image signals from the camera sensor and processes and transmits the signals in digital format to the PC to which the camera is attached. The Company’s PC camera multimedia processors are fully compatible with sensors that are based on CMOS or CCD technology, the two primary types of technology for sensors. The Company designs different models of PC camera multimedia processors based on the same core technology platform with modifications in successive models with improved performance and functionality. All of the Company’s PC camera multimedia processors are single-chip processors manufactured under its own brand name using the proprietary intellectual property.

A mobile phone multimedia processor processes multimedia imaging, video and/or audio signals that the mobile phone receives captures or generates. A mobile phone multimedia processor is typically embedded in the chipset of the mobile phone. The Company’s mobile phone multimedia processors are specifically designed to address the need for quality, cost-effective solutions for embedded cameras and video and audio functions in mobile phones.

The Company has recently introduced the VC0701, a proprietary single-chip home TV camera multimedia processor, which can be used for both NTSC and PAL system display devices and which is fully compatible with sensors based on CMOS technology. A home TV camera multimedia processor is an image processing semiconductor embedded in a home TV camera. It receives image signals from the integrated camera sensor, processes the signals in digital format and transmits the analog output signals to the TV to which the TV camera is linked.

The Company developed and sold proprietary VXP solutions to affiliates of China Telecom and China Netcom to help them promote broadband services to end users.

Cost of revenue increased by $10.9 million, or 71.1%, to $26.2 million for the six months ended June 30, 2005 from $15.3 million for the six months ended June 30, 2004.

Operating expenses decreased by $9.0 million, or 51.4%, to $8.6 million for the six months ended June 30, 2005 compared to $17.6 million for the same period in 2004.

Research and development expenses, net decreased by $1.3 million, or 28.9%, to $3.2 million for the six months ended June 30, 2005 from $4.5 million for the six months ended June 30, 2004.

Net income was $5.3 million for the six months ended June 30, 2005, compared to a net loss of $8.2 million for the six months ended June 30, 2004.