##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                           
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
	2001                                              
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
	from           to           .                                  

Commission File Number 0-26660



---

ESS Technology, Inc.

(Exact name of Registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|California                                                      |  | 94-2928582                           
|(State or other jurisdiction of
	Incorporation or organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|48401 Fremont Blvd., Fremont,
	California                       |  | 94538                                
|(Address of principal executive
	offices)                       |  | (Zip Code)                           

Registrants telephone number, including
area code:

(510) 492-1088


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

None


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

Common Stock, no par value


(Title of Class)


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 þ          No o

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.     o

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on
March 5, 2002 of $23.01 as reported on the NASDAQ National
Market, was approximately $747,298,945. Shares of Common Stock
held by each officer and director and by each person who owned
5% or more of the registrants outstanding Common Stock on
that date 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 March 5, 2002, registrant had
outstanding 45,363,776 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for
Registrants 2002 Annual Meeting of Shareholders are
incorporated by reference in Part III.



---






---

TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. Business                                                                             
|                  | Item 2. Properties                                                                           
|                  | Item 3. Legal Proceedings                                                                    
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II          
|                  | Item 5. Market for the Registrants Common Equity and Related Shareholder Matters            
|                  | Item 6. Selected Financial Data                                                              
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                  | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|                  | Item 8. Financial Statements and Supplementary Data                                          
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
|PART III         
|                  | Item 10. Directors and Executive Officers of the Registrant                                  
|                  | Item 11. Executive Compensation                                                              
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                  | Item 13. Certain Relationships and Related Transactions                                      
|PART IV          
|                  | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|                  | SIGNATURES                                                                                   
|INDEX TO EXHIBITS
|EXHIBIT 11.01    
|EXHIBIT 21.01    
|EXHIBIT 23.01    



---



##### Table of Contents



ESS TECHNOLOGY, INC.

2001 FORM 10-K

TABLE OF CONTENTS

|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                        |    | Page
|           |  |                                                                                        |    |     
|PART I    
|          
|Item 1.    |  | Business                                                                               |    |      | 1  | 
|Item 2.    |  | Properties                                                                             |    |      | 7  | 
|Item 3.    |  | Legal Proceedings                                                                      |    |      | 8  | 
|Item 4.    |  | Submission of Matters to a Vote of Security
	Holders                                   |    |      | 8  | 
|PART II   
|          
|Item 5.    |  | Market for the Registrants Common Equity
	and Related Shareholder Matters             |    |      | 10 | 
|Item 6.    |  | Selected Financial Data                                                                |    |      | 10 | 
|Item 7.    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 11 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |    |      | 24 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                            |    |      | 25 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosures |    |      | 54 | 
|PART III  
|          
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |    |      | 54 | 
|Item 11.   |  | Executive Compensation                                                                 |    |      | 54 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 54 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                         |    |      | 54 | 
|PART IV   
|          
|Item 14.   |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |    |      | 54 | 
|Signatures |  |                                                                                        | 59 |     



---



##### Table of Contents



The discussion in this report contains
forward-looking statements that involve risks and uncertainties.
The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended including statements regarding the Companys
expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this report
are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Companys actual results
could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but
are not limited to, those discussed in Factors That May
Affect Future Results, in the Managements Discussion
and Analysis Section and elsewhere in this report. References
herein to we, our, us and
similar words or phrases are references collectively to ESS
Technology, Inc. and its subsidiaries.




PART I






Item
1.     Business


We are a leading designer, developer and marketer
of highly-integrated digital system processor chips. These chips
are the primary processors driving digital video and audio
players including DVD, video CD and MP3 players. Our chips use
multiple processors and a programmable architecture that enable
us to offer a broad array of features and functionality. We
believe that multi-featured DVD players will serve as a platform
for the digital home system, or DHS, integrating various digital
home entertainment and information delivery products into a
single box. We are also a supplier of chips for use in modems
and similar communication products, and a supplier of PC audio
chips. We outsource all of our chip fabrication and assembly as
well as the majority of our test operations, allowing us to
focus on our design and development strengths.

ESS was incorporated in California in 1984 and
became a public company in 1995. In April 1999, we expanded our
business in the semiconductor segment by establishing Vialta, a
subsidiary that would operate in the internet segment. In April
2001, our board of directors adopted a plan to distribute to our
shareholders all of our shares of Vialta. The Vialta spin-off
was completed on August 21, 2001. Vialta is reported
separately as a discontinued operation.

Industry Background

From large screen televisions to VCRs to DVD
players, technology continues to improve the home entertainment
experience. Technology advancements have enhanced the clarity,
color, sound, functionality and convenience of television home
entertainment. In particular, the transition from analog to
digital formats has allowed audio and video data to be
compressed with little or no perceptible image degradation,
improving storage and transmission efficiency. Digital formats
provide users with several benefits, including random access to
data, superior editing capabilities and enhanced security
features such as protection against unauthorized copying. The
development of digital media has created markets for new
products such as video CD and DVD players. As digital processing
and transmission technology improves, we believe additional home
entertainment products will continue to be introduced.

Some of the more significant digital home
entertainment products include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | DVD Players.DVD
	players provide significantly higher quality playback than is
	possible with VCR or video CD technology through the use of
	MPEG-2 video decoding and high quality digital audio
	technologies. We believe we are currently the leading supplier
	of DVD processor chips.                                                                                                                                                                                                                                                                                                                                              
|
| |  | Video CD Players.Video CD players are music CD players
	that have been modified to display video on a television and
	typically sell for slightly less than a low end VCR. Video CD
	offers quality comparable to VCRs, but is limited to
	approximately 73 minutes of video information, using an MPEG
	format standard for compression. The video CD market is divided
	into the standard video CD, or VCD, and the subsequently
	developed super video CD, or SVCD. VCD is popular in many
	developing countries while SVCD is almost exclusively sold in
	China. We are currently the leading supplier of video CD
	processor chips.

1



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital Set-Top Box (STB) and Digital
	Video Recorder (DVR).Digital STBs
	enable subscriber-based digital television through cable,
	terrestrial broadcast, digital subscriber line (DSL) and
	satellite transmissions. DVRs provide local storage similar to a
	VCR and enable storage and playback of live video streams on a
	real-time basis. Industry analysts expect that digital STB
	manufacturers will incorporate DVR capabilities to enhance their
	functionality. We do not currently supply chips to the STB
	market.
|
| |  | Digital Audio Systems.Digital audio systems can include
	multi-channel surround sound products with movie theater quality
	sound systems, compressed audio (such as MP3) players and
	digital audio (such as music CD) players. Our chips incorporate
	these digital audio systems as components of a home
	entertainment system.                                                                                                                                                                                                 

The television, telephone and personal computer
(PC) have emerged as the three principal home systems that
manage digital entertainment and information. The television and
the PC are the principal devices for viewing and manipulating
digital content. Set-top boxes, DVD players and game consoles
connected to televisions, are emerging as the principal
platforms for viewing home entertainment, while PCs remain the
principle platform for storing data and accessing the internet.

Increasing advances in semiconductor technology
are allowing digital products to converge, resulting in cost
savings and added convenience for consumers. For example, CD
players were initially developed to play audio content in the CD
format only. Then, DVD players were introduced, combining video
with the CD audio format. Now, additional audio formats, such as
MP3, and other features are being added. Consumers can currently
buy separate set-top boxes that provide internet connectivity,
separate digital video recorders as well as boxes that deliver
digital programming. In the future, all of these features and
functions may become available through a single DVD platform. At
the same time, advances in communication devices allow better
distribution of information and home entertainment content to
the home and within the home, and provide opportunities for
further development of multimedia products.

As digital home entertainment systems converge
and become increasingly complex, makers of these systems
increasingly require sophisticated semiconductor chips that are
multi-featured, adaptable and cost-effective. Companies, such as
ESS, that provide a highly-integrated chip with multiple
processors and a programmable architecture to address the needs
of the latest digital home system products, are well placed to
benefit from the growth in this market.

Our Solution

Our chips are the primary processors driving
multi-featured DVD products that play DVD, CD, MP3, WMA (Windows
Media Audio and Video), full-featured karaoke and other audio
and video formats, through home entertainment systems. Our DVD
chips support high quality video formats such as Progressive
Scan, and high quality audio formats, including Dolby Digital,
DTS Surround, DVD audio and Sonys SACD audio. Our DVD
chips also allow consumers to browse the internet and view
digital photo CDs on their television. Our chips use multiple
processors and a programmable architecture that enable us to
offer a broad array of features and functionality. We believe
that multi-featured DVD players will serve as the platform for a
digital home system, or DHS, integrating various digital home
entertainment and information delivery products into a single
box. We are also a supplier of chips for use in video CD
players, MP3 players, modems and similar communication products,
and we are a supplier of PC audio chips.

We believe we have the following competitive
advantages:



| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our highly programmable chips are more flexible
	allowing us efficiently to add new capabilities that address
	advances in home entertainment technologies and enable our
	customers to accelerate their time to market;
|
| |  | our DVD chips offer a broad array of advanced
	features and functionality;                                                                                                                                              
|
| |  | our large workforce of engineers (approximately
	60% of our employees) is continually developing sophisticated
	solutions to our customers evolving needs using our chips;                                             

2



---



##### Table of Contents





| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we have approximately 100 sales and support
	personnel worldwide delivering outstanding customer service;                                                                                         
|
| |  | we work closely with our customers to develop
	cost-effective design solutions incorporating our
	high-functionality chips that enable our customers to lower
	their total manufacturing cost; and
|
| |  | our longstanding strategic relationships in China
	position us to capture additional business as consumer
	electronics manufacturing increasingly migrates to China.                              

Our Strategy

Our objective is to become the leading supplier
of system processor chips for the digital home system, or DHS,
based on a DVD platform. To achieve our objective, we are
pursuing the following strategies:

Leverage Our Proprietary Technology.Our chips are based on a programmable
architecture that uses multiple processors working
independently, which provides us with several advantages:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Multiple Processors.We believe our design approach of
	using multiple processors allows us to provide efficient,
	cost-effective solutions for our customers. We believe this
	design approach will allow us to develop an entire digital home
	entertainment system processor on a single chip.                                                                                                                                                                                                                                                                                      
|
| |  | Highly Programmable Chips.Our highly programmable chips enable
	us to add or modify features more quickly than competitors whose
	chips are less programmable. In the past we have successfully
	added significant features such as MP3 and Kodak picture CD
	formats through software enhancements without requiring hardware
	redesign and refabrication. This programmability also enables us
	to tailor our chips to meet our customers specific needs
	by making minor modifications that allow our customers to
	enhance features and improve time-to-market with new products.

Develop the Next Generation System Processor
Chip for the DHS.We are developing
the next generation DVD chip that will incorporate many new
advanced capabilities. We are designing this chip with a third
independent processor to enable us to support the following
standard operating systems: Linux, PocketPC (formerly WinCE) and
VxWorks. By supporting standard operating systems, we can
leverage third party software applications, such as standard web
browsers, and third party software drivers to support printers,
digital cameras and other consumer electronics products.

Offer a Low-Cost Total Solution.Our engineers have significant system
design expertise at the consumer product level. We design our
chips to either work with lower-cost components or to decrease
the number of components in our customers products to
lower their total manufacturing cost. We work in close
collaboration with our customers in their product development
process. By helping our customers design their products using
our chips, we can lower their total manufacturing costs. We
believe this approach enables us to provide our customers with a
low-cost total solution.

Leverage Our Relationships with Low-Cost
Manufacturers to Capture Additional Worldwide Market Share.We believe that consumer electronics
companies will continue to move contract manufacturing to
lower-cost manufacturers located in China. We are a leading
supplier of video system processor chips to original equipment
manufacturers, or OEMs, located in China. Our customers in China
manufacture and sell DVD and video CD players both as contract
manufacturers for well known brand labels and under their own
brands. We believe we can leverage our position in China to gain
design wins with additional key consumer electronics companies
as they migrate their manufacturing to China.

Expand Relationships with Leading Consumer
Electronics Companies.We are
increasing our sales efforts to, and actively pursuing key
design wins with, leading consumer electronics companies located
in Asia, Europe and South America.

Employ Our Software Expertise to Develop New
Technologies.Approximately 60% of our
employees are engineers, a significant portion of whom are
software engineers. We have a diversified base of technologies
and a strong track record for developing new technologies
in-house. We intend to leverage our software expertise to
continue to develop new technologies and add features to our
products.

3



---



##### Table of Contents



Pursue Acquisitions of Complementary and
Advanced Technologies.We have in the
past acquired and will continue to consider acquiring
complementary technology or product lines to enhance our own
product offerings and to accelerate our time to market. In
addition, we will continue to form agreements with other
companies to develop technologies. For example, we recently
entered into an agreement with NEC Electronics to develop
enhanced versions of NECs system controller chips used in
digital consumer electronics devices, such as set-top boxes.

Products

We offer a broad array of DVD chips, video CD
chips, communication chips and PC audio chips.

DVD Chips.Our
customers can choose from a variety of DVD chips with various
feature combinations and price points. We provide
highly-integrated chips using multiple processors and a
programmable architecture that enables us to offer a broad array
of features and functionality. At the high end, our DVD chips
enable consumers to play DVD, CD, MP3, WMA (Windows Media Audio
and Video), full-featured karaoke and other audio and video
formats through their home entertainment systems and to browse
the internet and view digital photo CDs on their television. Our
DVD chips support high quality video formats such as Progressive
Scan, and high quality audio formats, including Dolby Digital,
DTS Surround, DVD audio and Sonys SACD audio. These chips
can also be used as the primary processor in MP3 players.

Video CD Chips.Our
video CD products consist of both the standard VCD chips and the
enhanced version known as SVCD chips. Our customers can choose
from a variety of VCD and SVCD chip products, each with various
feature combinations and price points. Our VCD chips include an
MPEG-1 video and audio system decoder. They deliver full-screen,
full-motion video at 30 frames per second with selectable
CD-quality audio. Our SVCD chips include MPEG-2 video and MPEG-1
audio system decoders. The video quality of SVCD is roughly
comparable to that of a high-quality VCR, and VCDs have slightly
lower quality video. These chips are used in relatively low-cost
video CD players that are sold primarily in China, Malaysia,
India and other emerging markets.

Communication Chips.Internet-related applications, such as
voice e-mail, internet radio, audio home pages and
news-on-demand, are increasing the demand for integrated audio
and computer fax/ modem/ network functions on the PC. Our
communication products enable PC manufacturers to provide fax/
modem/ network capabilities to add-on cards and directly onto
the motherboards of desktops and notebook PCs. We provide a full
line of modem chips that are compliant with current worldwide
modem standards and have various feature combinations and price
points.

PC Audio Chips.Our
PC audio chips enable PC manufacturers to provide audio
capabilities on add-in sound cards and directly on the
motherboards of desktop and notebook computers. We were a
pioneer in this market, offering the first single-chip PC audio
solution with high-quality sound reproduction. We provide a full
line of PC audio chips with various feature combinations and
price points, but we are no longer emphasizing this business and
expect that sales of PC audio chips will continue to decline.

Sales of these products accounted for the
following percentages of our net revenues in the past three
years:

|                        |  |                            |     |      |  |      |     |   |  |  |     |  
|----------------------- |  | -------------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                        |  |                           
|                        |  | Percentage of Net Revenues
|                        |  |                           
|                        |  |                           
|                        |  | Years Ended December 31,  
|                        |  |                           
|                        |  | 2001                       |     | 2000 |  | 1999
|                        |  |                            |     |      |  |     
|DVD                     |  |                            | 37  | %    |  |      | 15  | % |  |  | 4   | %
|Video CD                |  |                            | 40  | %    |  |      | 42  | % |  |  | 45  | %
|PC Audio                |  |                            | 16  | %    |  |      | 35  | % |  |  | 48  | %
|Communication and Other |  |                            | 7   | %    |  |      | 8   | % |  |  | 3   | %
|                        |  |                            |     |      |  |      |     |   |  |  |     |  
|Total                   |  |                            | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                        |  |                            |     |      |  |      |     |   |  |  |     |  

4



---



##### Table of Contents



Technology and Research and
Development

Our DVD chips incorporate a digital signal
processor (DSP) and a reduced instruction set computer processor
(RISC). The two processors work asynchronously on separate
tasks, which allows us to build a highly-integrated chip. We
believe this architecture will enable us to efficiently add many
additional features and functionality to our DVD chips as we
pursue our overall DHS strategy.

We are developing the next generation DVD chip
that will incorporate many new advanced capabilities. We are
designing this chip with a third independent processor to enable
us to support the following standard operating systems: Linux,
PocketPC (formerly WinCE) and VxWorks. By supporting standard
operating systems, we can leverage third party software
applications, such as standard web browsers, and third party
software drivers to support printers, digital cameras and other
consumer electronics products.

We must continually design, develop and introduce
new products that take advantage of market opportunities and
address emerging technical standards. We intend to leverage our
base of design expertise, analog, digital and mixed-signal
design capabilities and process technologies, and software and
systems expertise to continue to develop audio, video and
communication solutions for the consumer electronics marketplace.

Our design environment is based on workstations,
dedicated product simulators, system simulation with hardware
and software modeling, and a high-level, design-description
language. We invest regularly in new advanced equipment and
software tools and we intend to maintain and enhance our library
of core cells.

On research and development activities, we spent
approximately $28 million during 2001, $27.8 million
during 2000, excluding a one-time pre- and post-tax charge of
$2.6 million related to acquired research and development
in-process from the acquisition of NetRidium Communications,
Inc. in the first quarter of 2000, and $36.0 million during
1999.

Customers

We sell our chips to distributors and OEMs of
DVD, video CD, MP3, modem and PC products. Our customers
manufacture and sell these products both as contract
manufacturers for well known brand labels and under their own
brands. As a result, our chips can be found in a diverse array
of DVD, video CD and PC products on store shelves in the United
States, Asia and Europe. For example, our chips can be found in
certain branded DVD players, such as Sharp, RCA, GE and Toshiba,
as well as in lower-cost DVD players, such as Apex.

A limited number of customers have accounted for
a substantial portion of our net revenues. Sales to our top five
customers, including sales to distributors, accounted for
approximately 73% of our net revenues in 2001, 56% of our net
revenues in 2000, and 53% of our net revenues in 1999. In 2001,
Dynax Electronics accounted for approximately 56% of our net
revenues. As a distributor, Dynax Electronics resells our
products to OEMs and other customers. We expect that a limited
number of customers may account for a substantial portion of our
net revenues for the foreseeable future. In 2000, Dynax
Electronics accounted for approximately 35% of our net revenues
and Digital AV accounted for approximately 10% of our net
revenues. In 1999, Dynax Electronics, our largest distributor,
accounted for approximately 22% of our net revenues and Digital
AV (formerly Shinco) accounted for approximately 13% of our net
revenues.

Sales and Distribution

We market our products worldwide through our
direct sales force, distributors and sales representatives. We
have sales and support offices in the United States, China and
in several other countries.

We believe customer service and technical support
are important competitive factors in selling to major customers.
Sales representatives and distributors supplement our efforts by
providing additional customer service at the local level. We
believe close contact with our customers not only improves the
customers level of satisfaction, but also provides
important insight into future market direction.

5



---



##### Table of Contents



International sales comprised approximately 97%
of our net revenues in 2001, 93% of our net revenues in 2000 and
95% of our net revenues in 1999. Our international revenues in
2001, 2000 and 1999 were derived primarily from Asian customers
who manufacture DVD, video CD, communications and PC products.
Companies in Asia manufacture a large percentage of the
worldwide supply of these products. We believe a significant
portion of our DVD chip products are incorporated into DVD
players that are ultimately sold into the United States. We have
direct sales personnel and technical staff located in Hong Kong
and Taiwan, where a significant portion of our sales have
historically been derived. Our products are also sold
internationally through distributors and sales representatives
located in China, Korea, Japan, and Singapore. Our sales
representatives and distributors are not subject to minimum
purchase requirements and can discontinue marketing any of our
products at any time. In addition, our distributors typically
have rights of return for unsold product and rights to pricing
allowances to compensate for rapid, unexpected price changes.

Manufacturing

We contract with third parties for all of our
fabrication and assembly as well as the majority of our test
operations. This manufacturing strategy enables us to focus on
our design and development strengths, minimize fixed costs and
capital expenditures and gain access to advanced manufacturing
capabilities. Semiconductor manufacturing consists of foundry
activity where wafer fabrication takes place, as well as chip
assembly and testing activities. We use two independent
foundries that use advanced manufacturing technologies to
fabricate our chips. Substantially all of our products are
manufactured by Taiwan Semiconductor Manufacturing Company, or
TSMC, which has manufactured products for us since 1989, and by
United Microelectronics Corporation, or UMC, which is also
located in Taiwan. Most of our products are currently fabricated
using both mixed-signal and logic CMOS 0.35 to 0.22 micron
process technologies.

After wafer fabrication by the foundry, all of
our semiconductor products are assembled and tested by
third-party vendors, primarily Advanced Semiconductor
Engineering, or ASE, Orient Semiconductor Electronics, or OSE,
and Sampo Semiconductor in Taiwan. We have internally designed
and developed our own test software and certain test equipment,
which are provided to our test vendors. See Factors That
May Affect Future Results  Our products are
manufactured by independent third parties.

Competition

Our markets are intensely competitive and are
characterized by rapid technological change, price reductions
and rapid product obsolescence. Competition typically occurs at
the design stage, where the customer evaluates alternative
design approaches that require integrated circuits. Because of
shortened product life cycles, there are frequent design win
competitions for next-generation systems. We expect competition
to remain intense from existing competitors and from companies
that may enter our existing or future markets. In general,
product prices in the semiconductor industry have decreased over
the life of a particular product. The markets for most of the
applications for our products are characterized by intense price
competition. As the markets for our products mature and
competition increases, we anticipate that prices for our
products will continue to decline.

Our existing and potential competitors consist
principally of large domestic and international companies that
have substantially greater financial, manufacturing, technical,
marketing, distribution and other resources, greater
intellectual property rights, broader product lines and
longer-standing relationships with customers than we have. Our
competitors also include a number of smaller and emerging
companies.

Our principal competitors include LSI Logic,
Zoran and Cirrus Logic. In addition, we expect that the DVD
platform for the digital home system will face competition from
other platforms including set-top-boxes, as well as
multi-function game boxes. Some of our competitors may supply
chips for multiple platforms, such as LSI Logic and
STMicroelectronics, each of which makes chips for both DVD
players and set-top-boxes.

Many of our current and potential competitors
have longer operating histories as well as greater name
recognition than we have. Any of these competitors may be able
to respond more quickly to new or emerging technologies and
changes in customer requirements and to devote greater resources
to the development, promotion and sale of their products than we
can.

6



---



##### Table of Contents



In addition, as the market for the digital home
system develops, a number of companies with significantly
greater resources than us could attempt to increase their
presence in the market by acquiring or forming strategic
alliances with our competitors resulting in increased
competition to us. For example, LSI Logic acquired C-Cube
Microsystems and Cirrus Logic acquired LuxSonor Semiconductors.

Proprietary Technology

We rely on a combination of patents, trademarks,
copyrights, trade secret laws and confidentiality procedures to
protect our intellectual property rights. As of
December 31, 2001, we had 15 patents granted in the United
States, which are going to expire over time commencing in 2008
and ending in 2019. In addition, as of December 31, 2001 we
had 11 corresponding foreign patents, which are going to expire
over time commencing in 2002 (the patents expiring in 2002
consist of two audio-related Japanese patents) and ending in
2015. We have several patent applications pending and we have a
continuous program and intent to seek further U.S. and
international patents on our technology whenever possible.

We have created significant intellectual property
in our software programs that run on our chips. We protect this
software as a trade secret.

The semiconductor industry is characterized by
vigorous protection and pursuit of intellectual property rights
or positions, which have resulted in significant and often
protracted and expensive litigation. As of December 31,
2001, there were several intellectual property litigation
matters pending against us which we are vigorously defending and
believe will not have a material adverse effect on our business.

We currently license certain of the technology we
use in our products, and we expect to continue to do so in the
future. We have, in the past, granted limited licenses to
certain of our technology, some of which have expired. We have
not derived material revenues from these licenses in recent
periods. See Factors That May Affect Future
Results  We may not be able to adequately protect our
intellectual property rights from unauthorized use and we may be
subject to claims of infringement of third-party intellectual
property rights.

Employees

As of March 5, 2002, we had approximately
440 full-time employees, including 194 in research and
development, 135 in marketing, sales and support, 57 in
operations, finance and administration and 54 in manufacturing.
Approximately 60% of our employees are engineers, a significant
portion of them are software engineers. Our future success will
depend, in part, on our ability to continue to attract, retain
and motivate highly qualified technical and management
personnel, particularly highly-skilled semiconductor design
personnel and software engineers involved in new product
development, for whom competition can be intense, particularly
in the Silicon Valley. Our employees are not represented by any
collective bargaining unit, and we have never experienced a work
stoppage. We believe our relationship with our employees is good.

Backlog

Our products are generally sold pursuant to
standard purchase orders, which are frequently revised to
reflect changes in the customers requirements. Product
deliveries are scheduled when we receive purchase orders.
Generally, these purchase orders allow customers to reschedule
delivery dates and cancel purchase orders without significant
penalties. For these reasons, we believe that our backlog, while
useful for scheduling production, is not necessarily a reliable
indicator of revenues.




Item
2.     Properties

We own nearly 12 acres of land in Fremont,
California, on which we built our two-story, 93,000 square-foot
corporate headquarters as well as a 77,000 square-foot building
next to our corporate headquarters, which we are currently
leasing to Vialta, Inc., our former subsidiary. In addition we
own an adjacent 11,000 square-foot dormitory building used to
house visitors and guest workers. We also maintain leased office
space in various locations. We believe our existing facilities
are adequate to meet our current requirements.

7



---



##### Table of Contents






Item 3.     Legal
Proceedings

On April 9, 1999, we filed a complaint in
the U.S. District Court for the Northern District of California,
Case No. C-99 20292 RMW, against PCTEL, Inc., alleging
violations of the antitrust laws and other claims relating to
PCTELs failure to provide a license to us covering certain
patents that PCTEL maintains are essential to the manufacture
and sale of modems. On August 7, 2000, PCTEL filed an
answer and cross-complaint alleging infringement of such
patents, and in an amended cross-complaint filed October 4,
2000 PCTEL asserted infringement of three additional patents. In
a related proceeding, on September 15, 2000, we were named,
along with another respondent, in a complaint filed by PCTEL
with the International Trade Commission requesting exclusion
orders and other relief directed at products imported into the
United States that contain our modem products alleged to
infringe two of the patents that were asserted in the district
court action mentioned above. On February 6, 2002, we
jointly announced the settlement of all pending litigation
matters between us and PCTEL. As part of the settlement, we
entered into a cross-license agreement involving the PCTEL
patents asserted in the proceedings described above and
involving our modem patent portfolio. PCTEL will receive royalty
payments and additional technology from us. We believe this
settlement will have no material effect on our business or
financial performance.

On March 12, 2001, we filed a complaint in
the U.S. District Court for the Northern District of California,
Case No. C01-20208, against Brent Townshend alleging unfair
competition and various violations of the Sherman Act relating
to monopolization and antitrust. Our complaint seeks specific
performance of contractual obligations and declarations of
patent misuse, unenforceability, and estoppels against asserting
patent rights. All of the claims relate to the refusal of
Mr. Townshend to provide us with a license on reasonable
and nondiscriminatory terms, as we believe is required by
applicable standards. The license and patent issue relate to the
manufacture and sale of high-speed modems. We believe that the
license terms offered are unreasonable and discriminatory, and
we will vigorously pursue this litigation. Mr. Townshend
has yet to answer the complaint, and no trial date has been set.




Item
4.     Submission of Matters to a
Vote of Security Holders

We did not submit any matter to a vote of
security holders during the quarter ended December 31, 2001.

Executive Officers of the Registrant

The following table sets forth certain
information regarding the Companys current executive
officers:

|                |  |     |    |          |  |                                                      
|--------------- |  | --- | -- | -------- |  | -----------------------------------------------------
|Name            |  | Age |    | Position
|                |  |     |    |         
|Fred S.L. Chan  |  |     | 55 |          |  | Chairman of the Board of Directors of the Company    
|Robert L. Blair |  |     | 54 |          |  | President, Chief Executive Officer and Director      
|Patrick Ang     |  |     | 42 |          |  | Chief Operating Officer and Executive Vice
	President
|James B. Boyd   |  |     | 49 |          |  | Chief Financial Officer and Assistant Secretary      

Fred S.L. Chanhas
been a director since January 1986 and has served as Chairman of
the Board since October 1992. Mr. Chan is the Chairman of
the Board for Vialta, Inc. and has served in that capacity since
September 1999. Mr. Chan served as President and Chief
Executive Officer of Vialta from September 1999 to August 2001.
Mr. Chan served as our President from November 1985 until
October 1996 and from February 1997 to September 1999. He served
as our Chief Executive Officer from June 1994 until September
1999. Mr. Chan served as our Chief Financial Officer from
October 1992 to May 1995. From 1984 to 1985, Mr. Chan was
founder, President and Chief Executive Officer of AC Design,
Inc., a VLSI chip design center providing computer aided design
(CAD), engineering and other design services. From 1982 to 1984,
he was co-founder, President and Chief Executive Officer of
CADCAM Technology, Inc., a company in the business of computer
aided engineering (CAE) systems development. Mr. Chan holds
B.S.E.E. and M.S.C. degrees from the University of Hawaii.
Mr. Chan is the spouse of Annie M.H. Chan, another of our
directors.

Robert L. Blairhas
been our President and Chief Executive Officer since September
1999. Mr. Blair was elected as a director in 1999.
Mr. Blair served as our Executive Vice President of
Operations from April 1997

8



---



##### Table of Contents



to September 1999. From December 1994 to March
1997, he was our Vice President of Operations. From December
1991 to November 1994, he was Senior Vice President of
Operations (Software Packaging & Printing Division) of
Logistix Corporation, a software turn-key company, and from 1989
to November 1991, he was Vice President and co-owner of Rock
Canyon Investments, a real estate development-planning firm in
California. From 1986 to 1989, he held various positions at
Xidex Corporation, a computer diskette manufacturer, including
President/ General Manager, and at XEMAG, a division of Xidex
Corporation. From 1973 to 1986, he held several positions
including Vice President, High Reliability Operations at
Precision Monolithics, Inc.


Patrick Anghas
served as Chief Operating Officer and Executive Vice President
whose responsibilities include worldwide sales and marketing
since December 2001. From March 1998 to September 2001,
Mr. Ang served as President and Chief Executive Officer of
Broadxent, Inc. (formerly known as Digicom Systems, Inc.), a
broadband communications equipment manufacturer, and from
November 1997 to December 1999 Mr. Ang served as President
of Ectiva, Inc., an internet appliance manufacturer which was
acquired by Creative Technology Ltd. in November, 1997. From
December 1993 to November 1997, Mr. Ang was employed as
Division President for OPTi, Inc., a supplier of semiconductor
products for the personal computer market. He was the founder of
MediaSonics and co-founder of MediaChips, which was acquired by
OPTi, Inc. in November 1993. Mr. Ang has more than
17 years of management, systems and semiconductor
experience and has held various R&D positions at Telmos,
Sierra Semiconductor and Triptech Microelectronics. Mr. Ang
holds a B.S. in Electrical Engineering from the National
University of Singapore. He is serving on the boards of
directors for Sunrise Telecom, Inc. and Photoniko, Inc.

James B. Boydwas
appointed Chief Financial Officer in August 2000. Mr. Boyd
was also elected as Assistant Secretary in August 2000. Prior to
joining ESS, Mr. Boyd served from March 1998 until July
2000 as Chief Financial Officer of Gatefield Corporation, a
Fremont-based manufacturer of field programmable electronic
circuits used in PCs and consumer electronics. From August of
1997 until January of 1998, he was Chief Financial Officer of
AirMedia, a developer of wireless communications software and
from March of 1996 until August of 1997, he was Corporate
Controller at Farallon Communications. He has also held senior
management positions with Fritz Companies, GTE Sprint
Communications and Southern Pacific Companies. Mr. Boyd
holds a B.S. degree in accounting and an MBA in finance from the
University of Wisconsin  Madison, and a J.D. from
Golden Gate University.

The information concerning compliance with
Section 16 of the Securities Exchange Act of 1934 is
incorporated by reference to the section in the proxy statement
for the 2002 Annual Shareholders Meeting entitled
Compliance under Section 16(a) of the Securities
Exchange Act of 1934.

9



---



##### Table of Contents






PART II






|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
	Equity and Related Shareholder Matters

The Companys Common Stock has been trading
on the NASDAQ National Market under the symbol ESST
since October 6, 1995. The following table sets forth the
high and low last reported sales prices for the Common Stock as
reported by the NASDAQ National Market during the period
indicated.

|             |                                        |      |  |       |  |  |  |       | 
|------------ | -------------------------------------- | ---- |  | ----- |  |  |  | ----- | 
|             |                                        | High |  | Low  
|             |                                        |      |  |      
|Fiscal 2001: |                                        |      |  |       |  |  |  |      
|             | First Quarter ended March 31, 2001     |      |  | 8.87  |  |  |  | 4.50  | 
|             | Second Quarter ended June 30, 2001     |      |  | 10.60 |  |  |  | 4.75  | 
|             | Third Quarter ended September 30, 2001 |      |  | 16.12 |  |  |  | 5.89  | 
|             | Fourth Quarter ended December 31, 2001 |      |  | 24.45 |  |  |  | 9.95  | 
|Fiscal 2000: |                                        |      |  |       |  |  |  |      
|             | First Quarter ended March 31, 2000     |      |  | 26.25 |  |  |  | 14.50 | 
|             | Second Quarter ended June 30, 2000     |      |  | 17.93 |  |  |  | 10.50 | 
|             | Third Quarter ended September 30, 2000 |      |  | 18.81 |  |  |  | 13.06 | 
|             | Fourth Quarter ended December 31, 2000 |      |  | 16.68 |  |  |  | 4.68  | 

As of March 5, 2002, there were
approximately 205 record holders of the Companys Common
Stock. Since most shareholders are listed under their brokerage
firms names, the actual number of shareholders is higher.

Dividend Policy

We have never declared or paid cash dividends. We
currently intend to retain all available funds and any future
earnings for use in the operation of our business and do not
anticipate paying any cash dividends in the foreseeable future.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following data should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
financial statements and related notes thereto included
elsewhere in this report. All of the data presented has been
adjusted to give effect to the treatment of Vialta as a
discontinued operation.

We derived the selected consolidated statement of
operations data for the years ended December 31, 2001, 2000
and 1999 and the selected consolidated balance sheet data as of
December 31, 2001 and 2000 from our audited consolidated
financial statements appearing elsewhere in this report. We
derived the selected consolidated statement of operations data
for the years ended December 31, 1998 and 1997 and the
selected

10



---



##### Table of Contents



consolidated balance sheet data as of
December 31, 1999, 1998 and 1997 from our audited
consolidated financial statements, which are not included in
this report.


|                                                                                    |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |        |  
|----------------------------------------------------------------------------------- | ------------ | ------------------------------------- | ------- | ------ |  | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                    |              |                                      
|                                                                                    |              | Years Ended December 31,             
|                                                                                    |              |                                      
|                                                                                    |              | 2001                                  |         | 2000   |  | 1999 |         | 1998    |  | 1997
|                                                                                    |              |                                       |         |        |  |      |         |         |  |     
|                                                                                    |              |                                      
|                                                                                    |              | (In thousands, except per share data)
|Statement of Operations Data:                                                       |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|Net revenues                                                                        |              | $                                     | 271,380 |        |  | $    | 303,436 |         |  | $    | 310,651 |         |  | $ | 218,252 |        |   | $ | 249,517 |       
|Cost of revenues                                                                    |              |                                       | 180,231 |        |  |      | 192,452 |         |  |      | 191,529 |         |  |   | 182,417 |        |   |   | 171,859 |       
|                                                                                    |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|                                                                                    | Gross profit |                                       |         | 91,149 |  |      |         | 110,984 |  |      |         | 119,122 |  |   |         | 35,835 |   |   |         | 77,658 |  
|Operating expenses:                                                                 |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|Research and development                                                            |              |                                       | 27,957  |        |  |      | 27,832  |         |  |      | 36,028  |         |  |   | 30,529  |        |   |   | 29,471  |       
|In-process research and development                                                 |              |                                       |        |        |  |      | 2,625   |         |  |      |        |         |  |   |        |        |   |   | 22,200  |       
|Selling, general and administrative                                                 |              |                                       | 40,689  |        |  |      | 36,225  |         |  |      | 38,558  |         |  |   | 36,289  |        |   |   | 25,198  |       
|                                                                                    |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|Operating income (loss)                                                             |              |                                       | 22,503  |        |  |      | 44,302  |         |  |      | 44,536  |         |  |   | (30,983 | )      |   |   | 789     |       
|Non-operating income (loss), net                                                    |              |                                       | (18,780 | )      |  |      | 41,810  |         |  |      | 4,666   |         |  |   | 1,478   |        |   |   | 2,183   |       
|                                                                                    |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|Income (loss) before provision for income
	taxes                                    |              |                                       | 3,723   |        |  |      | 86,112  |         |  |      | 49,202  |         |  |   | (29,505 | )      |   |   | 2,972   |       
|Provision for (benefit from) income taxes                                           |              |                                       | (7,262  | )      |  |      | 22,946  |         |  |      | 7,877   |         |  |   | (1,489  | )      |   |   | 13,838  |       
|                                                                                    |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|Net income (loss) from continuing operations                                        |              |                                       | 10,985  |        |  |      | 63,166  |         |  |      | 41,325  |         |  |   | (28,016 | )      |   |   | (10,866 | )     
|Net income (loss) per share from continuing
	operations:                            |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|                                                                                    | Basic        |                                       | $       | 0.26   |  |      | $       | 1.49    |  |      | $       | 1.02    |  |   | $       | (0.68  | ) |   | $       | (0.27  | )
|                                                                                    |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|                                                                                    | Diluted      |                                       | $       | 0.24   |  |      | $       | 1.37    |  |      | $       | 0.91    |  |   | $       | (0.68  | ) |   | $       | (0.27  | )
|                                                                                    |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|Shares used in calculating net income (loss) per
	share from continuing operations: |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|                                                                                    | Basic        |                                       |         | 42,274 |  |      |         | 42,548  |  |      |         | 40,640  |  |   |         | 40,955 |   |   |         | 39,593 |  
|                                                                                    |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|                                                                                    | Diluted      |                                       |         | 45,262 |  |      |         | 45,943  |  |      |         | 45,625  |  |   |         | 40,955 |   |   |         | 39,593 |  
|                                                                                    |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|Balance Sheet Data:                                                                 |              |                                       |         |        |  |      |         |         |  |      |         |         |  |   |         |        |   |   |         |       
|Cash, cash equivalents and short-term investments                                   |              | $                                     | 129,034 |        |  | $    | 58,838  |         |  | $    | 68,687  |         |  | $ | 82,471  |        |   | $ | 42,284  |       
|Working capital excluding net assets of
	discontinued operation (See Note 4.)       |              |                                       | 156,966 |        |  |      | 138,541 |         |  |      | 85,228  |         |  |   | 81,124  |        |   |   | 74,238  |       
|Total assets                                                                        |              |                                       | 237,965 |        |  |      | 294,391 |         |  |      | 226,922 |         |  |   | 214,645 |        |   |   | 231,654 |       
|Current liabilities                                                                 |              |                                       | 54,056  |        |  |      | 73,901  |         |  |      | 72,804  |         |  |   | 72,573  |        |   |   | 60,547  |       
|Total shareholders equity                                                          |              | $                                     | 176,978 |        |  | $    | 211,429 |         |  | $    | 183,579 |         |  | $ | 142,072 |        |   | $ | 171,107 |       






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

The following Managements Discussion and
Analysis of Financial Condition and Results of Operations, as
well as information contained in Factors that May Affect
Future Results below and elsewhere in this Report, contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include statements concerning the
future of our industry, our product development, our business
strategy, our future acquisitions, the continued acceptance and
growth of our products, and our dependence on significant
customers. Actual results may differ materially from those
projected in the forward-looking statements as a result of
various factors. In some cases, these statements can be
identified by terminologies such as may,
will, expect, anticipate,
estimate, continue, or other similar
words.

11



---



##### Table of Contents



Although we believe that the assumptions
underlying the forward-looking statements contained in this
Report are reasonable, they may be inaccurate. In light of the
significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such statements
should not be regarded as a representation by us or any other
person that the results or conditions described in such
statements will be achieved.

Overview

We are a leading designer, developer and marketer
of highly-integrated digital system processor chips. These chips
are the primary processors driving digital video and audio
players including DVD, video CD and MP3 players. Our chips use
multiple processors and a programmable architecture that enable
us to offer a broad array of features and functionality. We
believe that multi-featured DVD players will serve as the
platform for a digital home system, or DHS, integrating various
digital home entertainment and information delivery products
into a single box. We are also a supplier of chips for use in
modems and similar communication products, and a supplier of PC
audio chips. We outsource all of our chip fabrication and
assembly as well as the majority of our test operations,
allowing us to focus on our design and development strengths.

In April 2001, our board of directors adopted a
plan to distribute all of our shares of Vialta, a startup
company with historical losses that is developing a
multi-featured DVD player with internet connectivity and other
advanced features. The Vialta spin-off was completed on
August 21, 2001. Vialta is reported separately as a
discontinued operation.

In February 2000, we acquired NetRidium, a
development stage company, for $5.3 million in cash.
NetRidium is a developer of broadband communication products
enabling high-speed networking over existing phone lines in the
home. The acquisition was recorded using the purchase method of
accounting and accordingly, the results of operations and cash
flows of such acquisition have been included from the date of
acquisition.

At the end of 1995, we purchased 16 acres of
land in Fremont, California, on which we built our corporate
campus. In October 2000, we sold the remaining undeveloped
4.32 acres of this land.

Critical Accounting Policies

Use of
Estimates

The preparation of the financial statements and
accompanying notes in accordance with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions related to the
reporting of assets and liabilities and the disclosures of
contingent assets and liabilities. Actual results could differ
from those estimates.

Revenue
Recognition

The Company provides for rebates and future
returns based on historical experiences at the time revenue is
recognized. Actual expenses may be different from
managements estimate; such differences, if any, are
recorded in the period they become known.

Inventories

Inventories are stated at the lower of cost or
market, with cost being determined by the first-in, first-out
method. We write down inventories to net realizable value based
on forecasted demand and market conditions. 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. These charges have been included
in cost of sales in our consolidated statements of operations.

12



---



##### Table of Contents



Impairment of
Long-Lived Assets

Pursuant to Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of (SFAS 121), the Company reviews
long-lived assets based upon a gross cash flow basis and will
reserve for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not
be fully recoverable. On January 1, 2002, SFAS No. 144
Accounting for the Impairment or Disposal of Long-lived
Assets (SFAS 144), 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. The
adoption of SFAS No. 144 will not have a material
effects on our financial statements.

Income
Taxes

The Company accounts for income taxes under an
asset and liability approach that requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of timing differences between the carrying amounts
and the tax bases of assets and liabilities. U.S. deferred
income taxes are not provided on all un-remitted earnings of the
Companys foreign subsidiaries as such earnings are
considered permanently invested. Assumptions underlying
recognition of deferred tax assets and non-recognition of U.S.
income tax on un-remitted earnings can change if our business
plan is not achieved.

Results of Operations

Our consolidated financial information presents
the net effect of the discontinued operation separate from the
results of our continuing operations. Historical financial
information has been reclassified to present consistently the
discontinued operation. The discussion and analysis that follows
below generally focus on the continuing operations. Inflation
has not had any material impact on our business to date.

The following table sets forth certain operating
data as a percentage of net revenues:

|                                          |                                     |                          |       |      |  |      |       |      |  |  |       |      | 
|----------------------------------------- | ----------------------------------- | ------------------------ | ----- | ---- |  | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                          |                                     |                         
|                                          |                                     | Years Ended December 31,
|                                          |                                     |                         
|                                          |                                     | 2001                     |       | 2000 |  | 1999
|                                          |                                     |                          |       |      |  |     
|Net revenues                              |                                     |                          | 100.0 | %    |  |      | 100.0 | %    |  |  | 100.0 | %   
|Cost of revenues                          |                                     |                          | 66.4  |      |  |      | 63.4  |      |  |  | 61.7  |     
|                                          |                                     |                          |       |      |  |      |       |      |  |  |       |     
|                                          | Gross margin                        |                          |       | 33.6 |  |      |       | 36.6 |  |  |       | 38.3 | 
|Operating expenses:                       |                                     |                          |       |      |  |      |       |      |  |  |       |     
|                                          | Research and development            |                          |       | 10.3 |  |      |       | 9.2  |  |  |       | 11.6 | 
|                                          | In-process research and development |                          |       |     |  |      |       | 0.9  |  |  |       |     | 
|                                          | Selling, general and administrative |                          |       | 15.0 |  |      |       | 11.9 |  |  |       | 12.4 | 
|                                          |                                     |                          |       |      |  |      |       |      |  |  |       |     
|Operating income                          |                                     |                          | 8.3   |      |  |      | 14.6  |      |  |  | 14.3  |     
|Non-operating income (loss), net          |                                     |                          | -6.9  |      |  |      | 13.8  |      |  |  | 1.5   |     
|                                          |                                     |                          |       |      |  |      |       |      |  |  |       |     
|Income before income taxes                |                                     |                          | 1.4   |      |  |      | 28.4  |      |  |  | 15.8  |     
|Provision for (benefit from) income taxes |                                     |                          | -2.6  |      |  |      | 7.6   |      |  |  | 2.5   |     
|                                          |                                     |                          |       |      |  |      |       |      |  |  |       |     
|Net income from continuing operations     |                                     |                          | 4.0   | %    |  |      | 20.8  | %    |  |  | 13.3  | %   
|                                          |                                     |                          |       |      |  |      |       |      |  |  |       |     

Net Revenues

Net revenues were $271.4 million in 2001,
$303.4 million in 2000 and $310.7 million in 1999. Net
revenues decreased 11% from 2000 to 2001 primarily due to the
continuing softness in the PC marketplace , which more than
offset the growth in our DVD business. Net revenues from 2000 to
2001 decreased by $64.6 million in our PC audio business,
decreased by $16.1 million in our video CD chip business,
increased by $54.6 million in our DVD chip business and
decreased by $6.0 million in our communication and other
businesses. We expect our DVD chip business will continue to
grow as a percentage of our net revenues, while

13



---



##### Table of Contents



our PC audio business continues to decline. Net
revenues decreased 2% from 1999 to 2000 primarily due to the
softness in the PC marketplace and a decrease in average selling
prices in the PC audio markets, which more than offset the
growth in our communication business and our video business
(which consists of both our DVD chip and video CD chip product
lines). Net revenues from 1999 to 2000 in our PC audio business
decreased by $41.7 million, and increased in our video
business by $19.0 million and $15.5 million in our
communication and other businesses. International revenues
accounted for approximately 97% of net revenues in 2001, 93% of
net revenues in 2000 and 95% of net revenues in 1999. We expect
that international sales will continue to remain a high
percentage of our net revenues. Our international sales are
denominated in U.S. dollars.


|                        |  |                            |     |      |  |      |     |   |  |  |     |  
|----------------------- |  | -------------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                        |  |                           
|                        |  | Percentage of Net Revenues
|                        |  |                           
|                        |  |                           
|                        |  | Years Ended December 31,  
|                        |  |                           
|                        |  | 2001                       |     | 2000 |  | 1999
|                        |  |                            |     |      |  |     
|DVD                     |  |                            | 37  | %    |  |      | 15  | % |  |  | 4   | %
|Video CD                |  |                            | 40  | %    |  |      | 42  | % |  |  | 45  | %
|PC Audio                |  |                            | 16  | %    |  |      | 35  | % |  |  | 48  | %
|Communication and Other |  |                            | 7   | %    |  |      | 8   | % |  |  | 3   | %
|                        |  |                            |     |      |  |      |     |   |  |  |     |  
|Total                   |  |                            | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                        |  |                            |     |      |  |      |     |   |  |  |     |  

Gross Profit

Gross profit was $91.1 million in 2001,
$111.0 million in 2000 and $119.1 million in 1999,
representing corresponding gross margins of 33.6% of net
revenues in 2001, 36.6% of net revenues in 2000 and 38.3% of net
revenues in 1999. The decrease in gross margin from 2000 to 2001
was primarily due to the underabsorption of fixed overhead:
certain fixed costs remained relatively constant for the two
periods, while production levels for 2001 were lower than for
2000. We recorded $7.0 million of excess and obsolete
inventory charges during 2001, a decrease of $3.3 million
from 2000. We expect gross margins to return to historic levels
in the future, based upon an increasing percentage of our sales
generated by our higher-margin DVD chip business. The decrease
in gross margin from 1999 to 2000 was primarily due to
$10.3 million in inventory charges in 2000. Excluding the
$10.3 million inventory charges, gross margin would have
been 39.5% of net revenues in 2000 compared to 38.3% of net
revenues in 1999, due to higher-margin product mix partially
offset by reduced average selling prices.

During 2000, we purchased inventory based on our
then current sales forecast and our intent to build up inventory
on key products from our foundries due to a forecasted tight
wafer capacity. However, during 2001, the overall market for PC
products declined significantly, and, as a result, the demand
for these products did not meet our forecasts resulting in those
inventory charges described above.

As a result of intense competition in our
markets, we expect the overall average selling prices for our
existing products to decline over the product life. We believe
that in order to maintain or increase gross profit, we must
achieve higher unit volume shipments, reduce costs, add new
features and introduce new products.

Operating Expenses



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

Research and development expenses were
$28.0 million, or 10.3% of net revenues, in 2001;
$27.8 million or 9.2% of net revenues, in 2000; and
$36.0 million, or 11.6% of net revenues, in 1999. The
increase in research and development expenses from 2000 to 2001
was the result of normal variations in project workload. We
expect that research and development will continue to be
critical to our business as we introduce new products. The
decrease in research and development expenses from 1999 to 2000
was primarily due to a decrease in internal projects and
reimbursement of consulting and other services provided to
Vialta.

Operating expenses in 2000 included an additional
$2.6 million for in-process research and development due to
the purchase of NetRidium, which is not included in the
foregoing research and development expenses.

14



---



##### Table of Contents





| |                                     
| | ------------------------------------
| | Selling, General and
	Administrative

Selling, general and administrative expenses were
$40.7 million, or 15.0% of net revenues, in 2001;
$36.2 million, or 11.9% of net revenues, in 2000; and
$38.6 million, or 12.4% of net revenues, in 1999. The
increase in selling, general and administrative expenses from
2000 to 2001 resulted primarily from the increase in legal
expenses. The decrease in selling, general and administrative
expenses from 1999 to 2000 resulted primarily from the
completion of a co-operative marketing campaign and a decrease
in bad debt expenses partially offset by an increase in salary
and legal expenses. The Company expects selling, general and
administrative expenses will remain relatively constant, at
approximately 15-17% of net revenues in the foreseeable future.

Non-Operating Income (Loss), Net

Net non-operating income (loss) was
($18.8) million in 2001, $41.8 million in 2000 and
$4.7 million in 1999. In 2001, net non-operating loss
consisted primarily of a $21.2 million loss from the sale
of 565,178 shares of Cisco Systems stock in June of 2001,
partially offset by interest income and rental income from
Vialta. In 2000, net non-operating income consisted primarily of
a pre-tax gain of $35.0 million on our exchange of
preferred stock in Komodo Technology for restricted shares of
common stock of Cisco Systems in September 2000, in addition to
a $2.9 million gain from the sale of land and property,
plant and equipment, and $2.4 million of net interest
income on cash, cash equivalents and short-term investments. In
1999, net non-operating income consisted primarily of interest
income.

Income Taxes

During the fourth quarter of 1997, we established
a wholly owned foreign subsidiary in the Cayman Islands, British
West Indies, which has reduced our effective tax rate.

The Companys effective tax rate was (241%),
37%, and 15% for 2001, 2000, and 1999, respectively. Our
effective tax rate, excluding the provision taken on the
exchange of Komodo Technology shares for Cisco Systems shares
and subsequent sale of Cisco Systems stock, was 5% for 2001 and
17% for 2000. The Company used an estimated 40% tax rate on the
$21.3 million loss from sale of the investment, which
resulted in an $8.5 million tax benefit. The tax rate for
2001 of 5% was lower than the combined federal and state
statutory rate of 40% primarily as a result of the lower foreign
tax rate on earnings from the Companys foreign subsidiary
that was considered to be permanently reinvested. The tax rate
for 2000 of 17% was lower than the combined federal and state
statutory rate of 40% primarily as a result of the lower foreign
tax rate on earnings from the Companys foreign subsidiary
that was considered to be permanently reinvested.

Net Income From Continuing
Operations

Net income from continuing operations was
$11.0 million in 2001, $63.2 million in 2000 and
$41.3 million in 1999. The decreased net income from
continuing operations during 2001 compared to 2000 was primarily
due to the $21.2 million loss incurred on sale of
investments in 2001, as compared to the $35.0 million gain
recorded in 2000, the decrease in net revenues and the
lower-margin product mix. The increased net income from
continuing operations during 2000 compared to 1999 was primarily
due to the $35.0 million gain on the Komodo investment and
offset by an increase in inventory charges.

Net Loss From Discontinued Operation

Net loss from discontinued operation was
$12.8 million in 2001, $14.9 million in 2000 and
$1.2 million in 1999. The increased net loss from
discontinued operation during 2001 compared to 2000 was
primarily due to the $13.3 million loss from disposal of
discontinued operation recorded in the first quarter of 2001 for
the estimated spin-off cost and anticipated losses, net of
minority interest, from operating the Vialta business between
April 1, 2001 and the estimated completion date for the
spin-off, which was completed earlier than estimated on
August 21, 2001. The increased loss from discontinued
operation during 2000 compared to 1999

15



---



##### Table of Contents



was due to additional costs and expenses related
to product development, expansion of operations and marketing
activities of Vialta.


Eight Quarters Ended December 31,
2001

The following table sets forth our statement of
operations data for each of the eight quarters ended
December 31, 2001. All of the data presented has been
restated to reflect Vialta as a discontinued operation. We
believe that going forward we will be more seasonal, depending
on the timing of customer orders and demand for the holiday
season, which typically occur during the third and fourth
quarters. The operating results for any quarter are not
necessarily indicative of results for any future period.

|                                             |                                     |                           |        |          |  |           |        |          |  |          |        |          |  |          |        |          |  |   |        |       |  |   |         |       |  |   |        |       |  |   |        |       | 
|-------------------------------------------- | ----------------------------------- | ------------------------- | ------ | -------- |  | --------- | ------ | -------- |  | -------- | ------ | -------- |  | -------- | ------ | -------- |  | - | ------ | ----- |  | - | ------- | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                             |                                     |                          
|                                             |                                     | Quarter Ended            
|                                             |                                     |                          
|                                             |                                     | Mar. 31,                  |        | Jun. 30, |  | Sept. 30, |        | Dec. 31, |  | Mar. 31, |        | Jun. 30, |  | Sept. 30 |        | Dec. 31,
|                                             |                                     | 2000                      |        | 2000     |  | 2000      |        | 2000     |  | 2001     |        | 2001     |  | 2001     |        | 2001    
|                                             |                                     |                           |        |          |  |           |        |          |  |          |        |          |  |          |        |         
|                                             |                                     |                          
|                                             |                                     | (Unaudited, in thousands)
|Net revenues                                 |                                     | $                         | 83,597 |          |  | $         | 79,587 |          |  | $        | 87,714 |          |  | $        | 52,538 |          |  | $ | 50,808 |       |  | $ | 64,909  |       |  | $ | 72,397 |       |  | $ | 83,266 |      
|Cost of revenues                             |                                     |                           | 53,114 |          |  |           | 49,296 |          |  |          | 52,521 |          |  |          | 37,521 |          |  |   | 39,606 |       |  |   | 45,970  |       |  |   | 45,930 |       |  |   | 48,725 |      
|                                             |                                     |                           |        |          |  |           |        |          |  |          |        |          |  |          |        |          |  |   |        |       |  |   |         |       |  |   |        |       |  |   |        |      
|Gross profit                                 |                                     |                           | 30,483 |          |  |           | 30,291 |          |  |          | 35,193 |          |  |          | 15,017 |          |  |   | 11,202 |       |  |   | 18,939  |       |  |   | 26,467 |       |  |   | 34,541 |      
|Operating Expenses:                          |                                     |                           |        |          |  |           |        |          |  |          |        |          |  |          |        |          |  |   |        |       |  |   |         |       |  |   |        |       |  |   |        |      
|                                             | Research and development            |                           |        | 4,854    |  |           |        | 8,328    |  |          |        | 7,111    |  |          |        | 7,539    |  |   |        | 6,411 |  |   |         | 7,592 |  |   |        | 7,273 |  |   |        | 6,681 | 
|                                             | In-process research and development |                           |        | 2,625    |  |           |        |         |  |          |        |         |  |          |        |         |  |   |        |      |  |   |         |      |  |   |        |      |  |   |        |      | 
|Selling, general and administrative          |                                     |                           | 8,592  |          |  |           | 9,638  |          |  |          | 10,946 |          |  |          | 7,049  |          |  |   | 8,666  |       |  |   | 8,917   |       |  |   | 11,686 |       |  |   | 11,420 |      
|                                             |                                     |                           |        |          |  |           |        |          |  |          |        |          |  |          |        |          |  |   |        |       |  |   |         |       |  |   |        |       |  |   |        |      
|Operating income (loss)                      |                                     |                           | 14,412 |          |  |           | 12,325 |          |  |          | 17,136 |          |  |          | 429    |          |  |   | (3,875 | )     |  |   | 2,430   |       |  |   | 7,508  |       |  |   | 16,440 |      
|Non-operating income (loss), net             |                                     |                           | 928    |          |  |           | 518    |          |  |          | 36,576 |          |  |          | 3,788  |          |  |   | 325    |       |  |   | (20,795 | )     |  |   | 989    |       |  |   | 701    |      
|                                             |                                     |                           |        |          |  |           |        |          |  |          |        |          |  |          |        |          |  |   |        |       |  |   |         |       |  |   |        |       |  |   |        |      
|Income (loss) before income taxes            |                                     |                           | 15,340 |          |  |           | 12,843 |          |  |          | 53,712 |          |  |          | 4,217  |          |  |   | (3,550 | )     |  |   | (18,365 | )     |  |   | 8,497  |       |  |   | 17,141 |      
|Provision for (benefit from) income taxes    |                                     |                           | 3,054  |          |  |           | 2,127  |          |  |          | 17,183 |          |  |          | 582    |          |  |   | (382   | )     |  |   | (8,167  | )     |  |   | 425    |       |  |   | 862    |      
|                                             |                                     |                           |        |          |  |           |        |          |  |          |        |          |  |          |        |          |  |   |        |       |  |   |         |       |  |   |        |       |  |   |        |      
|Net income (loss) from continuing operations |                                     | $                         | 12,286 |          |  | $         | 10,716 |          |  | $        | 36,529 |          |  | $        | 3,635  |          |  | $ | (3,168 | )     |  | $ | (10,198 | )     |  | $ | 8,072  |       |  | $ | 16,279 |      
|                                             |                                     |                           |        |          |  |           |        |          |  |          |        |          |  |          |        |          |  |   |        |       |  |   |         |       |  |   |        |       |  |   |        |      

Liquidity and Capital Resources

Since inception, we have financed our cash
requirements from cash generated by operations, the sale of
equity securities, bank lines of credit and short-term and
long-term debt. At December 31, 2001, we had cash, cash
equivalents and short-term investments of $129.0 million
and working capital (excluding net assets of the discontinued
operation) of $157.0 million. At December 31, 2001, we
had a $15.0 million unsecured line of credit, which will
expire on May 1, 2002. We expect to be able to renew this
line of credit . This line of credit requires us to maintain
certain financial ratios and operating results. On
December 31, 2001, we were in compliance with these
borrowing criteria. There were no borrowings under the line of
credit at December 31, 2001.

In 2001, we generated $93.5 million of cash
from operating activities. This amount resulted primarily from
the selling of inventories. We used $16.5 million of cash
in investing activities, which consisted primarily of a net
purchase of short-term investments, cash paid for the
acquisition of SAS, other long-term investments and fixed asset
purchases. We used $5.7 million of cash in financing activities,
primarily as a result of using $14.3 million to repurchase
Common Stock offset by the receipt of $8.6 million from the
issuance of Common Stock under employee stock plans.

In 2000, we used $11.1 million of cash in
operating activities. This amount resulted primarily from the
increase in our inventories of $56.6 million and accounts
receivable of $17.5 million, offset by the increase in
income tax related liabilities of $15.7 million and the
current year net income before non-cash charges (loss from
discontinued operations, deprecation and amortization) of
$85.4 million. We generated $14.1 million of cash from
investing activities, which mainly resulted from our net sales
of investments of $17.1 million,

16



---



##### Table of Contents



partially offset by the acquisition of property,
plant and equipment and the acquisition of NetRidium. We used
$17.7 million of cash in financing activities, which
resulted primarily from using $27.8 million to repurchase
shares of our Common Stock, which was partially offset by
issuance of Common Stock under employee stock option plans.


In 1999, we generated $61.6 million of cash
from operating activities. This amount resulted from current
year net income before non-cash charges of $58.8 million,
increase in accounts payable and accrued expenses of $13.6
million, offset by an increase of current assets net of
liabilities of $2.8 million. We used $85.9 million of cash
in investing activities, which resulted primarily from using
$62.0 million to purchase shares of Vialta preferred stock,
using $11.5 million to buy property, plant and equipment
and using $14.6 million for the net purchase of short-term
investment. We used $1.0 million of cash for financing
activities.

We believe that our existing cash and cash
equivalents as of December 31, 2001 together with
short-term investments, the cash generated from operations,
available borrowings under our line of credit and other
financing options, will be sufficient to fund acquisitions of
property and equipment and provide adequate working capital
through at least the next twelve months. Capital expenditures
for the next twelve months are anticipated to be approximately
$1.0 million. We may also use cash to acquire or invest in
complementary businesses or products or to obtain the right to
use complementary technologies. From time to time, in the
ordinary course of business, we may evaluate potential
acquisitions of or investment in such businesses, products or
technologies owned by third parties.

On February 1, 2002, we announced that we
had commenced a public offering of 4,800,000 shares of our
common stock at a price of $19.38 per share. We sold 2,500,000
shares, and 2,300,000 shares were sold by selling shareholders
 we did not receive any of the proceeds from the sale of
shares by the selling shareholders: Annie M.H. Chan, the
Annie M.H. Chan Living Trust and the Shiu Leung
Chan & Annie M.H. Chan Gift Trust. We received the
net proceeds of $45,550,000 on February 6, 2002, which will
be used for general corporate purposes, which may include
acquisitions of companies, acquisitions of technology and
capital expenditures. Pending such uses, we intend to invest the
net proceeds from the offering in short term, interest bearing,
investment grade securities.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards No. 141 Business Combinations, (SFAS
141). SFAS 141 requires the purchase method of accounting
for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. ESSs
management believes that the adoption of SFAS 141 will not have
a significant impact on the Companys financial statements.

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 Goodwill and
Other Intangible Assets, (SFAS 142), which is
effective for fiscal years beginning after December 15,
2001. SFAS 142 requires, among other things, the discontinuance
of goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously
reported goodwill and the testing for impairment of existing
goodwill and other intangibles. ESS believes that the adoption
of SFAS 142 will not have a significant impact on the
Companys financial position and results of operations.

On October 3, 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144). SFAS 144 supercedes
SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. SFAS 144 applies to all
long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion
No. 30. SFAS 144 develops one accounting model for
long-lived assets that are to be disposed of by sale. SFAS 144
requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity
with operations that (1) can be distinguished from the rest
of the entity and (2) will

17



---



##### Table of Contents



be eliminated from the ongoing operations of the
entity in a disposal transaction. SFAS 144 is effective for the
Company for all financial statements issued in fiscal 2002.


Factors That May Affect Future
Results



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Our business is highly dependent on the
	expansion of the consumer electronics market.

We have shifted our primary focus from the PC
audio business to developing products primarily for the consumer
digital video market. Since the second half of 2000, sales of
video system processor chips to the DVD and video CD (including
VCD and SVCD) player markets accounted for a majority of our net
revenues. We expect that the consumer electronics market will
continue to account for a significant portion of our net
revenues for the foreseeable future. However, our strategy in
this market may not be successful. Given the large installed
base of VCRs and other consumer electronics products, coupled
with the current economic environment, consumer spending on DVD
players and other home electronics may not grow as anticipated.

Historically, sales of audio and modem chips to
the PC market have accounted for a significant portion of our
net revenues. However, we are no longer emphasizing this
business and expect future sales in the PC market will continue
to decline. If the decline in our sales to the PC market is not
offset by an increase in sales to the consumer electronics
market, our business, financial condition and results of
operations would be materially adversely affected.

In addition, the potential decline in consumer
confidence and consumer spending that may be occasioned by
terrorist attacks or armed conflict could have a material
adverse effect on our business, financial condition and results
of operations. We have not yet determined the ultimate effect of
the recent terrorist attacks and armed conflict on our results
of operations.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly operating results are subject
	to fluctuations that may cause volatility or a decline in the
	price of our stock.

Historically, our quarterly operating results
have fluctuated significantly. Our future quarterly operating
results will likely fluctuate from time to time and may not meet
the expectations of securities analysts and investors in a
particular future period. The price of our Common Stock could
decline due to such fluctuations. The following factors may
cause significant fluctuations in our future quarterly operating
results:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in demand for our products;                                                                                                                                             
|
| |  | changes in the mix of products sold and our
	revenue mix;                                                                                                                       
|
| |  | charges related to excess inventory;                                                                                                                                            
|
| |  | seasonal customer demand;                                                                                                                                                       
|
| |  | increasing pricing pressures;                                                                                                                                                   
|
| |  | gain or loss of significant customers;                                                                                                                                          
|
| |  | the cyclical nature of the semiconductor industry;                                                                                                                              
|
| |  | the timing of our and our competitors new
	product announcements and introductions, and the market
	acceptance of new or enhanced versions of our and our
	customers products;
|
| |  | the timing of significant customer orders;                                                                                                                                      
|
| |  | availability and cost of raw materials;                                                                                                                                         
|
| |  | significant increases in expenses associated with
	the expansion of operations; and                                                                                             
|
| |  | availability and cost of foundry capacity.                                                                                                                                      

18



---



##### Table of Contents





| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We often purchase inventory based on sales
	forecasts and if anticipated sales do not materialize, we may
	continue to experience significant inventory
	charges.

We currently place non-cancelable orders to
purchase our products from independent foundries on an
approximately three-month rolling basis, while our customers
generally place purchase orders with us that may be cancelled
without significant penalty less than four weeks prior to
delivery. If anticipated sales and shipments in any quarter are
cancelled or do not occur as quickly as expected, expense and
inventory levels could be disproportionately high and we may be
required to record significant inventory charges in our
statement of operations in a particular period. We have
experienced significant inventory charges in the past and we may
continue to experience these charges in future periods.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Our research and development investments
	may fail to enhance our competitive position.

We invest a significant amount of time and
resources in our research and development activities to maintain
and enhance our competitive position. Technical innovations are
inherently complex and require long development cycles and the
commitment of extensive engineering resources. We incur
substantial research and development costs to confirm the
technical feasibility and commercial viability of a product that
in the end may not be successful. If we are not able to
successfully complete our research and development projects on a
timely basis, we may face competitive disadvantages. There is no
assurance that we will recover the development costs associated
with these projects or that we will be able to secure the
financial resources necessary to fund future research and
development efforts.

One of our significant projects is the
development of a next generation DVD system processor chip that
will incorporate three independent processors and allow us to
support additional features, including the Linux, PocketPC
(formerly WinCE) and VxWorks operating systems. This will
require a new architecture and a complete system on a chip
design, which is extremely complex and may not be ultimately
feasible. If we are unable to successfully develop this next
generation DVD system processor chip, or complete other
significant research and development projects, our business,
financial condition and results of operations could be
materially adversely affected.



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need to acquire other companies or
	technologies to successfully compete in our industry and we may
	not be successful acquiring key targets or integrating these
	acquisitions with our business.

We will continue to regularly consider the
acquisition of other companies or the products and technologies
of other companies to complement our existing product offerings,
improve our market coverage and enhance our technological
capabilities. There may be technologies that we need to acquire
or license in order to remain competitive. However, we may not
be able to identify and consummate suitable acquisitions and
investments. Acquisitions and investments carry risks that could
have a material adverse effect on our business, financial
condition and results of operations, including:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | the failure to integrate with existing products
	and corporate culture;   
|
| |  | the inability to retain key employees from the
	acquired company;         
|
| |  | diversion of management attention from other
	business concerns;          
|
| |  | the potential for large write-offs;                                       
|
| |  | issuances of equity securities dilutive to our
	existing shareholders; and
|
| |  | the incurrence of substantial debt and assumption
	of unknown liabilities.

Our sales may
fluctuate due to seasonality of customer demand.

Our customers have experienced and may continue
to experience significant seasonality in the sales of their
products, which affects their orders of our products. A majority
of consumer home electronics products are sold during the
holiday season. Consequently, as more of our chips are sold into
the consumer electronics market, we expect a disproportionate
amount of our sales to occur in the third and fourth quarters.

19



---



##### Table of Contents



Our products
are subject to increasing pricing pressures.

The markets for most of the applications for our
chips are characterized by intense price competition. The
willingness of original equipment manufacturers, or OEMs, to
design our chips into their products depends, to a significant
extent, upon our ability to sell our products at cost-effective
prices. We expect the average selling prices of our existing
products to decline significantly over the life of each product
as the markets for our products mature and competition
increases. If we are unable to reduce our costs sufficiently to
offset declines in product prices or are unable to introduce
more advanced products with higher margins, our gross margins
may decline.

We may lose
business to competitors who have significant competitive
advantages.

Our existing and potential competitors consist
principally of large domestic and international companies that
have substantially greater financial, manufacturing, technical,
marketing, distribution and other resources, greater
intellectual property rights, broader product lines and
longer-standing relationships with customers than we have. Our
competitors also include a number of independent and emerging
companies who may be able to better adapt to changing market
conditions and customer demand. In addition, some of our current
and potential competitors maintain their own semiconductor
fabrication facilities and could benefit from certain capacity,
cost and technical advantages.

DVD and video CD players face significant
competition from video on demand, VCRs and other video formats.
In addition, we expect that the DVD platform for the digital
home system will face competition from other platforms including
set-top-boxes, as well as multi-function game boxes being
manufactured and sold by large companies. Some of our
competitors may be more diversified than us and supply chips for
multiple platforms. A decline in DVD sales may have a
disproportionate affect on us as we shift our focus to this
market. Any of these competitive factors could reduce our sales
and market share and may force us to lower our prices, adversely
affecting our business, financial condition and results of
operations.

Our business
is dependent upon retaining key personnel and attracting new
employees.

Our success depends to a significant degree upon
the continued contributions of Fred S.L. Chan, our Chairman
of the Board, and Robert L. Blair, our President and CEO.
In the past, Mr. Chan has served as our President and Chief
Executive Officer besides being our Chairman of the Board and
currently he serves as the Chairman of the Board of Vialta, our
former subsidiary. Mr. Chan is critical to maintaining many
of our key relationships with customers, suppliers and foundries
in Asia. The loss of the services of Mr. Chan,
Mr. Blair, or any of our other key executives could
adversely affect our business. We may not be able to retain
these employees and searching for their replacements could
divert the attention of other senior management and increase our
operating expenses. We currently do not maintain any key person
life insurance.

To manage our future operations effectively, we
will need to hire and retain additional management personnel,
design personnel and software engineers. We may have difficulty
recruiting these employees or integrating them into our
business. If we lose the services of a significant number of our
management personnel, design personnel or software engineers,
the implementation of our business strategy could be disrupted.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Our customer base is highly concentrated,
	so the loss of a major customer could adversely affect our
	business.

A substantial portion of our net revenues has
increasingly been derived from sales to a small number of our
customers. During 2001, sales to our top five customers
increased to approximately 73% of our net revenues, which
includes sales through Dynax Electronics, our largest
distributor. We expect this concentration of sales to continue
along with other changes in the composition of our customer
base. The reduction, delay or cancellation of orders from one or
more major customers or the loss of one or more major customers
could materially and adversely affect our business, financial
condition and results of operations. In addition, any difficulty
in collecting amounts due from one or more key customers could
harm our financial condition.

20



---



##### Table of Contents





| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on a single distributor for a
	significant portion of our revenues and if this relationship
	deteriorates our financial results could be adversely
	affected.

During 2001, sales through Dynax Electronics, our
largest distributor, increased to approximately 56% of our net
revenues. Dynax Electronics is not subject to any minimum
purchase requirements and can discontinue marketing any of our
products at any time. In addition, Dynax Electronics has rights
of return for unsold product and rights to pricing allowances to
compensate for rapid, unexpected price changes. Our business
would be adversely affected if our relationship with Dynax
Electronics deteriorates or their financial condition were to
decline. As our business grows, we may increasingly rely on
distributors, which may reduce our exposure to future sales
opportunities and impede our ability to accurately forecast
product orders.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to adequately protect
	our intellectual property rights from unauthorized use and we
	may be subject to claims of infringement of third-party
	intellectual property rights.

To protect our intellectual property rights we
rely on a combination of patents, trademarks, copyrights and
trade secret laws and confidentiality procedures. As of
December 31, 2001, we had 15 patents granted in the
United States. These patents will expire over time commencing in
2008 and ending in 2019. In addition, as of December 31,
2001, we had 11 corresponding foreign patents, which are going
to expire over time commencing in 2002 (the patents expiring in
2002 consist of two audio-related Japanese patents) and ending
in 2015. We cannot assure you that patents will be issued from
any of our pending applications or applications in preparation
or that any claims allowed from pending applications or
applications in preparation will be of sufficient scope or
strength. We may not be able to obtain patent protection in all
countries where our products can be sold. Also, our competitors
may be able to design around our patents. The laws of some
foreign countries may not protect our products or intellectual
property rights to the same extent as do the laws of the United
States. We cannot assure you that the actions we have taken to
protect our intellectual property will adequately prevent
misappropriation of our technology or that our competitors will
not independently develop technologies that are substantially
equivalent or superior to our technology.

The semiconductor industry is characterized by
vigorous protection and pursuit of intellectual property rights
or positions. Litigation by or against us could result in
significant expense and divert the efforts of our technical and
management personnel, whether or not such litigation results in
a favorable determination for us. Any claim, even if without
merit, may require us to spend significant resources to develop
non-infringing technology or enter into royalty or
cross-licensing arrangements, which may not be available to us
on acceptable terms, or at all. We may be required to pay
substantial damages or cease the use and sale of infringing
products, or both. In general, a successful claim of
infringement against us in connection with the use of our
technologies could adversely affect our business. In particular,
if we lose either of the related modem cases, our results of
operations could be significantly harmed. We may initiate claims
or litigation against third parties for infringement of our
proprietary rights or to establish the validity of our
proprietary rights. In the event of an adverse result in any
such litigation our business could be materially harmed.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | We have significant international sales and
	operations that are subject to the special risks of doing
	business outside the United States.

Substantially all of our sales have been to
customers in Hong Kong, Taiwan, China, Korea, Japan, Malaysia,
and Singapore. During 2001, sales to customers in
Hong Kong, Taiwan and China were in excess of 89% of our
net revenues. We expect that international sales will continue
to represent a significant portion of our net revenues. In
addition, substantially all of our products are manufactured,
assembled and tested by independent third parties in Asia. There
are special risks associated with conducting business outside of
the United States, including:



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | unexpected changes in legislative or regulatory
	requirements and related compliance problems;           
|
| |  | lack of adequate protection of our intellectual
	property rights;                                        
|
| |  | changes in diplomatic and trade relationships,
	including changes in most favored nations trading status;
|
| |  | tariffs, quotas and other trade barriers and
	restrictions;                                              

21



---



##### Table of Contents





| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | longer payment cycles and greater difficulties in
	accounts receivable collection;                                                                                                   
|
| |  | potentially adverse taxes;                                                                                                                                                           
|
| |  | difficulties in obtaining export licenses for
	technologies;                                                                                                                         
|
| |  | language and other cultural differences, which
	may inhibit our sales and marketing efforts and create internal
	communication problems among our U.S. and foreign counterparts;
	and
|
| |  | currency exchange risks.                                                                                                                                                             

Our products
are manufactured by independent third parties.

We rely on independent foundries to manufacture
all of our products. Substantially all of our products are
currently manufactured by Taiwan Semiconductor Manufacturing
Company, Ltd., or TSMC, and by United Microelectronics
Corporation, or UMC. Our reliance on these or other independent
foundries involves a number of risks, including:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the possibility of an interruption or loss of
	manufacturing capacity;                                                                                                          
|
| |  | reduced control over delivery schedules,
	manufacturing yields and costs; and                                                                                                   
|
| |  | the inability to reduce our costs as rapidly as
	competitors who perform their own manufacturing and who are not
	bound by volume commitments to subcontractors at fixed prices.

Any failure of these third party foundries to
deliver products or otherwise perform as requested, could damage
our relationships with our customers and harm our sales and
financial results.

To address potential foundry capacity constraints
in the future, we may be required to enter into arrangements,
including equity investments in or loans to independent wafer
manufacturers in exchange for guaranteed production capacity,
joint ventures to own and operate foundries, or take or
pay contracts that commit us to purchase specified
quantities of wafers over extended periods. These arrangements
could require us to commit substantial capital or to grant
licenses to our technology. If we need to commit substantial
capital, we may need to obtain additional debt or equity
financing, which could result in dilution to our shareholders.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Because we purchase raw materials from a
	limited number of suppliers, we could experience disruptions or
	cost increases.

We depend on a limited number of suppliers to
obtain adequate supplies of quality raw materials on a timely
basis. We do not generally have guaranteed supply arrangements
with our suppliers. If we have difficulty in obtaining materials
in the future, alternative suppliers may not be available, or if
available, these suppliers may not provide materials in a timely
manner or on favorable terms. If we cannot obtain adequate
materials for the manufacture of our products, we may be forced
to pay higher prices, experience delays and our relationships
with our customers may suffer.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | We have extended sales cycles, which
	increase our costs in obtaining orders and reduce the
	predictability of our earnings.

Our potential customers often spend a significant
amount of time to evaluate, test and integrate our products. Our
sales cycles often last for several months and may last for up
to a year or more. These longer sales cycles require us to
invest significant resources prior to the generation of revenues
and subject us to the risk that customers may not order our
products as anticipated. In addition, orders expected in one
quarter could shift to another because of the timing of
customers purchase decisions. Any cancellation or delay in
ordering our products after a lengthy sales cycle could
adversely affect our business.

22



---



##### Table of Contents





| |                                           
| | ------------------------------------------
| | Our products are subject to recall
	risks.

The greater integration of functions and
complexity of our products increases the risk that our customers
or end users could discover latent defects or subtle faults in
our products. These discoveries could occur after substantial
volumes of product have been shipped, which could result in
material recalls and replacement costs. Product recalls could
also divert the attention of our engineering personnel from our
product development needs and could adversely impact our
customer relationships. In addition, we could be subject to
product liability claims that could distract management,
increase costs and delay the introduction of new products.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | The semiconductor industry is subject to
	cyclical variations in product supply and demand.

The semiconductor industry is subject to cyclical
variations in product supply and demand. Downturns in the
industry have been characterized by abrupt fluctuations in
product demand, production over-capacity and accelerated decline
of average selling prices. Current trade association data
indicate that the semiconductor industry has experienced a
severe downturn since the third quarter of 2000 and this
downturn may continue for the foreseeable future. This downturn
could harm our net revenues and gross margins if average selling
prices continue to decline or demand falls. We cannot assure you
that the market will stabilize or improve in the near term. A
prolonged downturn in the semiconductor industry could
materially and adversely impact our business and results of
operations.



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our success within the semiconductor
	industry depends upon our ability to develop new products in
	response to rapid technological changes and evolving industry
	standards.

The semiconductor industry is characterized by
rapid technological changes, evolving industry standards and
product obsolescence. Our success is highly dependent upon the
successful development and timely introduction of new products
at competitive prices and performance levels. The success of new
products depends on a number of factors, including:



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | anticipation of market trends;                                                         
|
| |  | timely completion of product development, design
	and testing;                         
|
| |  | market acceptance of our products and the
	products of our customers;                  
|
| |  | offering new products at competitive prices;                                           
|
| |  | meeting performance, quality and functionality
	requirements of customers and OEMs; and
|
| |  | meeting the timing, volume and price requirements
	of customers and OEMs.              

Our products are designed to conform to current
specific industry standards, however we have no control of
future modifications to these standards. Manufacturers may not
continue to follow the current standards, which would make our
products less desirable to manufacturers and reduce our sales.
Our success is highly dependent upon our ability to develop new
products in response to these changing industry standards.



| |                                           
| | ------------------------------------------
| | We operate in highly competitive
	markets.

The markets in which we compete are intensely
competitive and are characterized by rapid technological
changes, price reductions and rapid product obsolescence.
Competition typically occurs at the design stage, when customers
evaluate alternative design approaches requiring integrated
circuits. Because of shortened life cycles, there are frequent
design win competitions for next-generation systems.

We expect competition to increase in the future
from existing competitors and from other companies that may
enter our existing or future markets with products that may be
provided at lower costs or provide higher levels of integration,
higher performance or additional features. Advancements in
technology can change the competitive environment in ways that
may be adverse to us. For example, todays high-performance
central processing units in PCs have enough excess computing
capacity to perform many of the functions that formerly required
a separate chip set, which has reduced demand for our PC audio
chips. The announcements and commercial shipments of competitive
products could adversely affect sales of our products and may
result

23



---



##### Table of Contents



in increased price competition that would
adversely affect the average selling prices and margins of our
products.


The following factors may affect our ability to
compete in our highly competitive markets:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | the price, quality and performance of our
	products and the products of our competitors;            
|
| |  | the timing and success of our new product
	introductions and those of our customers and competitors;
|
| |  | the emergence of new multimedia standards;                                                          
|
| |  | the development of technical innovations;                                                           
|
| |  | ability to obtain adequate foundry capacity and
	sources of raw materials;                          
|
| |  | the rate at which our customers integrate our
	products into their products;                        
|
| |  | the number and nature of our competitors in a
	given market; and                                    
|
| |  | the protection of our intellectual property
	rights.                                                




Item
7A.     Quantitative and Qualitative
Disclosures about Market Risk

Foreign Exchange Risks

We fund our operations with cash generated by
operations, the sale of marketable securities and short and
long-term debt. As we operate primarily in Asia, we are exposed
to market risk from changes in foreign exchange rates, which
could affect our results of operations and financial condition.
In order to reduce the risk from fluctuation in foreign exchange
rates, our product sales and all of our arrangements with our
foundry and test and assembly vendors are denominated in
U.S. dollars. We have not entered into any currency hedging
activities.

Interest Rate Risks

We also invest in short-term investments.
Consequently, we are exposed to fluctuation in rates on these
investments. Increases or decreases in interest rates generally
translate into decreases and increases in the fair value of
these investments. In addition, the credit worthiness of the
issuer, relative values of alternative investments, the
liquidity of the instrument, and other general market conditions
may affect the fair values of interest rate sensitive
investments. In order to reduce the risk from fluctuation in
rates, we invest in highly liquid governmental notes and bonds
with contractual maturities of less than two years. All of the
investments have been classified as available for a sale, and at
December 31, 2001, the fair market value of our investments
approximated their costs.

Risk Associated with Investment

We are exposed to fluctuations due to changes in
the market price of shares of Cisco Systems we hold as
marketable securities. Since we do not use hedging instruments,
these fluctuations could have an adverse impact on our net
income should we decide to sell our remaining Cisco shares for a
loss.

24



---



##### Table of Contents






Item
8.     Financial Statements and
Supplementary Data

The following documents are filed as part of this
Report:

Report of Independent Accountants

Consolidated Balance Sheets as of
December 31, 2001 and 2000

Consolidated Statements of Operations for the
years ended December 31, 2001, 2000 and 1999

Consolidated Statements of Shareholders
Equity for the years ended December 31, 2001, 2000 and 1999

Consolidated Statements of Cash Flows for the
years ended December 31, 2001, 2000 and 1999

Notes to Consolidated Financial Statements

25



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of ESS
Technology, Inc.

In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, of shareholders equity and of cash flows
present fairly, in all material respects, the financial position
of ESS Technology, Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001, 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

San Jose, California

January 23, 2002, except for Note 17,


as to which the date is February 6, 2002.


26



---



##### Table of Contents



ESS TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2001 and 2000


|                                                                |                                                                                                                                                      |                                            |        |         |         |   |        |         |         | 
|--------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                |                                                                                                                                                      |                                           
|                                                                |                                                                                                                                                      | December 31,                              
|                                                                |                                                                                                                                                      |                                           
|                                                                |                                                                                                                                                      | 2001                                       |        | 2000(1)
|                                                                |                                                                                                                                                      |                                            |        |        
|                                                                |                                                                                                                                                      |                                           
|                                                                |                                                                                                                                                      | (In thousands)                            
|ASSETS                                                         
|Cash and cash equivalents                                       |                                                                                                                                                      | $                                          | 96,995 |         |         | $ | 25,715 |        
|Short-term investments                                          |                                                                                                                                                      |                                            | 32,039 |         |         |   | 33,123 |        
|Accounts receivable, net                                        |                                                                                                                                                      |                                            | 42,642 |         |         |   | 51,884 |        
|Inventories, net                                                |                                                                                                                                                      |                                            | 37,452 |         |         |   | 98,940 |        
|Prepaid expenses and other assets                               |                                                                                                                                                      |                                            | 1,894  |         |         |   | 2,780  |        
|Net assets of discontinued operation, net of
	minority interest |                                                                                                                                                      |                                            |       |         |         |   | 46,131 |        
|                                                                |                                                                                                                                                      |                                            |        |         |         |   |        |        
|                                                                |                                                                                                                                                      | Total current assets                       |        |         | 211,022 |   |        |         | 258,573 | 
|Property, plant and equipment, net                              |                                                                                                                                                      |                                            | 22,438 |         |         |   | 31,081 |        
|Other assets                                                    |                                                                                                                                                      |                                            | 4,505  |         |         |   | 4,737  |        
|                                                                |                                                                                                                                                      |                                            |        |         |         |   |        |        
|                                                                |                                                                                                                                                      | Total assets                               |        | $       | 237,965 |   |        | $       | 294,391 | 
|                                                                |                                                                                                                                                      |                                            |        |         |         |   |        |        
|LIABILITIES AND SHAREHOLDERS
	EQUITY                          
|Accounts payable and accrued expenses                           |                                                                                                                                                      | $                                          | 49,173 |         |         | $ | 70,300 |        
|Income tax payable and deferred income taxes                    |                                                                                                                                                      |                                            | 4,883  |         |         |   | 3,601  |        
|                                                                |                                                                                                                                                      |                                            |        |         |         |   |        |        
|                                                                |                                                                                                                                                      | Total current liabilities                  |        |         | 54,056  |   |        |         | 73,901  | 
|Non-current deferred tax liability                              |                                                                                                                                                      |                                            | 6,931  |         |         |   | 9,061  |        
|                                                                |                                                                                                                                                      |                                            |        |         |         |   |        |        
|                                                                |                                                                                                                                                      | Total liabilities                          |        |         | 60,987  |   |        |         | 82,962  | 
|Commitments and Contingencies (Note 12.)                        |                                                                                                                                                      |                                            |        |         |         |   |        |        
|Shareholders equity:                                           |                                                                                                                                                      |                                            |        |         |         |   |        |        
|                                                                | Preferred stock, no par value, 10,000 shares
	authorized; none issued and outstanding                                                                |                                            |        |        |         |   |        |        |        
|                                                                | Common stock, no par value, 100,000 shares
	authorized; 42,334 and 42,133 shares issued and outstanding at
	December 31, 2001 and 2000, respectively |                                            |        | 153,678 |         |   |        | 149,197 |        
|Other comprehensive loss                                        |                                                                                                                                                      |                                            | (1,374 | )       |         |   | (7,378 | )      
|Retained earnings                                               |                                                                                                                                                      |                                            | 24,674 |         |         |   | 69,610 |        
|                                                                |                                                                                                                                                      |                                            |        |         |         |   |        |        
|                                                                |                                                                                                                                                      | Total shareholders equity                 |        |         | 176,978 |   |        |         | 211,429 | 
|                                                                |                                                                                                                                                      |                                            |        |         |         |   |        |        
|                                                                |                                                                                                                                                      | Total liabilities and shareholders equity |        | $       | 237,965 |   |        | $       | 294,391 | 
|                                                                |                                                                                                                                                      |                                            |        |         |         |   |        |        



---



|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(1) | Year 2000 amounts have been reclassified to
	reflect separately the results of Vialta, Inc. as a discontinued
	operation.

The accompanying notes are an integral part of
these consolidated financial statements.

27



---



##### Table of Contents



ESS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

Years Ended December 31, 2001, 2000 and
1999


|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |         |       |  
|-------------------------------------------------------- | --------------------------------------------------------------------- | ---------------------------------------- | ------- | ------- | ----- | ------- | ------- | ------- | ----- | - | ------- | ------- | ----- | -
|                                                         |                                                                       |                                         
|                                                         |                                                                       | Years Ended December 31,                
|                                                         |                                                                       |                                         
|                                                         |                                                                       | 2001                                     |         | 2000(1) |       | 1999(1)
|                                                         |                                                                       |                                          |         |         |       |        
|                                                         |                                                                       |                                         
|                                                         |                                                                       | (In thousands, except per share amounts)
|Net revenues                                             |                                                                       | $                                        | 271,380 |         |       | $       | 303,436 |         |       | $ | 310,651 |        
|Cost of revenues                                         |                                                                       |                                          | 180,231 |         |       |         | 192,452 |         |       |   | 191,529 |        
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|                                                         | Gross profit                                                          |                                          |         | 91,149  |       |         |         | 110,984 |       |   |         | 119,122 |      
|Operating expenses:                                      |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|                                                         | Research and development                                              |                                          |         | 27,957  |       |         |         | 27,832  |       |   |         | 36,028  |      
|                                                         | In-process research and development                                   |                                          |         |        |       |         |         | 2,625   |       |   |         |        |      
|                                                         | Selling, general and administrative                                   |                                          |         | 40,689  |       |         |         | 36,225  |       |   |         | 38,558  |      
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|Operating income                                         |                                                                       |                                          | 22,503  |         |       |         | 44,302  |         |       |   | 44,536  |        
|Non-operating income (loss), net                         |                                                                       |                                          | (18,780 | )       |       |         | 41,810  |         |       |   | 4,666   |        
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|Income before income taxes                               |                                                                       |                                          | 3,723   |         |       |         | 86,112  |         |       |   | 49,202  |        
|Provision for (benefit from) income taxes                |                                                                       |                                          | (7,262  | )       |       |         | 22,946  |         |       |   | 7,877   |        
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|Net income from continuing operations                    |                                                                       |                                          | 10,985  |         |       |         | 63,166  |         |       |   | 41,325  |        
|Discontinued operation, net of minority interest:        |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|                                                         | Loss from discontinued operation, net of minority
	interest           |                                          |         | (4,205  | )     |         |         | (14,860 | )     |   |         | (1,220  | )    
|                                                         | Loss on disposal of discontinued operation, net
	of minority interest |                                          |         | (8,597  | )     |         |         |        |       |   |         |        |      
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|Net income (loss)                                        |                                                                       | $                                        | (1,817  | )       |       | $       | 48,306  |         |       | $ | 40,105  |        
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|Net income (loss) per share:                             |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|                                                         | Basic:                                                                |                                          |         |         |       |         |         |         |       |   |         |         |      
|                                                         |                                                                       | Continuing operations                    |         | $       | 0.26  |         |         | $       | 1.49  |   |         | $       | 1.02  |  
|                                                         |                                                                       | Discontinued operation                   |         |         | (0.30 | )       |         |         | (0.35 | ) |         |         | (0.03 | )
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|                                                         |                                                                       | $                                        | (0.04   | )       |       | $       | 1.14    |         |       | $ | 0.99    |        
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|                                                         | Diluted:                                                              |                                          |         |         |       |         |         |         |       |   |         |         |      
|                                                         |                                                                       | Continuing operations                    |         | $       | 0.24  |         |         | $       | 1.37  |   |         |         | 0.91  |  
|                                                         |                                                                       | Discontinued operation                   |         |         | (0.28 | )       |         |         | (0.32 | ) |         |         | (0.03 | )
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|                                                         |                                                                       | $                                        | (0.04   | )       |       | $       | 1.05    |         |       | $ | 0.88    |        
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|Shares used in calculating net income
	(loss) per share: |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|                                                         | Basic                                                                 |                                          |         | 42,274  |       |         |         | 42,548  |       |   |         | 40,640  |      
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        
|                                                         | Diluted                                                               |                                          |         | 45,262  |       |         |         | 45,943  |       |   |         | 45,625  |      
|                                                         |                                                                       |                                          |         |         |       |         |         |         |       |   |         |        



---



|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | Year 2000 and 1999 amounts have been reclassified
	to reflect separately the results of Vialta, Inc. as a
	discontinued operation.

The accompanying notes are an integral part of
these consolidated financial statements.

28



---



##### Table of Contents



ESS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

Years Ended December 31, 2001, 2000 and
1999


|                             |                                                                          |                |        |               |   |          |         |               |   |        |        |        |   |   |        |         |   |   |         |         |  
|---------------------------- | ------------------------------------------------------------------------ | -------------- | ------ | ------------- | - | -------- | ------- | ------------- | - | ------ | ------ | ------ | - | - | ------ | ------- | - | - | ------- | ------- | -
|                             |                                                                          |                |        |               |   |          |         |              
|                             |                                                                          | Common Stock   |        | Other         |   |          |         | Total        
|                             |                                                                          |                |        | Comprehensive |   | Retained |         | Shareholders
|                             |                                                                          | Shares         |        | Amount        |   | Loss     |         | Earnings      |   | Equity
|                             |                                                                          |                |        |               |   |          |         |               |   |       
|                             |                                                                          |               
|                             |                                                                          | (In thousands)
|Balance at December 31, 1998 |                                                                          |                | 40,849 |               |   | $        | 137,312 |               |   | $      |       |        |   | $ | 4,760  |         |   | $ | 142,072 |        
|                             | Issuance of common stock upon exercise of options                        |                |        | 1,138         |   |          |         | 2,683         |   |        |        |       |   |   |        |        |   |   |         | 2,683   |  
|                             | Issuance of common stock for employee stock
	purchase plan               |                |        | 88            |   |          |         | 510           |   |        |        |       |   |   |        |        |   |   |         | 510     |  
|                             | Income tax benefit on disqualifying disposition
	of common stock options |                |        |              |   |          |         | 2,438         |   |        |        |       |   |   |        |        |   |   |         | 2,438   |  
|                             | Repurchase of common stock                                               |                |        | (703          | ) |          |         | (2,346        | ) |        |        |       |   |   |        | (1,883  | ) |   |         | (4,229  | )
|                             | Net income                                                               |                |        |              |   |          |         |              |   |        |        |       |   |   |        | 40,105  |   |   |         | 40,105  |  
|                             |                                                                          |                |        |               |   |          |         |               |   |        |        |        |   |   |        |         |   |   |         |        
|Balance at December 31, 1999 |                                                                          |                | 41,372 |               |   |          | 140,597 |               |   |        |       |        |   |   | 42,982 |         |   |   | 183,579 |        
|                             | Issuance of common stock upon exercise of options                        |                |        | 2,660         |   |          |         | 9,290         |   |        |        |       |   |   |        |        |   |   |         | 9,290   |  
|                             | Issuance of common stock for employee stock
	purchase plan               |                |        | 74            |   |          |         | 837           |   |        |        |       |   |   |        |        |   |   |         | 837     |  
|                             | Income tax benefit on disqualifying disposition
	of common stock options |                |        |              |   |          |         | 4,639         |   |        |        |       |   |   |        |        |   |   |         | 4,639   |  
|                             | Repurchase of common stock                                               |                |        | (1,973        | ) |          |         | (6,166        | ) |        |        |       |   |   |        | (21,678 | ) |   |         | (27,844 | )
|                             | Unrealized loss on marketable securities                                 |                |        |              |   |          |         |              |   |        |        | (7,378 | ) |   |        |        |   |   |         | (7,378  | )
|                             | Net income                                                               |                |        |              |   |          |         |              |   |        |        |       |   |   |        | 48,306  |   |   |         | 48,306  |  
|                             |                                                                          |                |        |               |   |          |         |               |   |        |        |        |   |   |        |         |   |   |         |        
|Balance at December 31, 2000 |                                                                          |                | 42,133 |               |   |          | 149,197 |               |   |        | (7,378 | )      |   |   | 69,610 |         |   |   | 211,429 |        
|                             | Issuance of common stock upon exercise of options                        |                |        | 1,772         |   |          |         | 8,174         |   |        |        |       |   |   |        |        |   |   |         | 8,174   |  
|                             | Issuance of common stock for employee stock
	purchase plan               |                |        | 69            |   |          |         | 405           |   |        |        |       |   |   |        |        |   |   |         | 405     |  
|                             | Income tax benefit on disqualifying disposition
	of common stock options |                |        |              |   |          |         | 1,670         |   |        |        |       |   |   |        |        |   |   |         | 1,670   |  
|                             | Repurchase of common stock                                               |                |        | (1,640        | ) |          |         | (5,768        | ) |        |        |       |   |   |        | (8,544  | ) |   |         | (14,312 | )
|                             | Unrealized loss on marketable securities                                 |                |        |              |   |          |         |              |   |        |        | (6,705 | ) |   |        |        |   |   |         | (6,705  | )
|                             | Net loss                                                                 |                |        |              |   |          |         |              |   |        |        |       |   |   |        | (1,817  | ) |   |         | (1,817  | )
|                             | Loss on sale of marketable security                                      |                |        |              |   |          |         |              |   |        |        | 12,709 |   |   |        |        |   |   |         | 12,709  |  
|                             | Net book value of discontinued operation at date
	of spin-off            |                |        |              |   |          |         |              |   |        |        |       |   |   |        | (34,575 | ) |   |         | (34,575 | )
|                             |                                                                          |                |        |               |   |          |         |               |   |        |        |        |   |   |        |         |   |   |         |        
|Balance at December 31, 2001 |                                                                          |                | 42,334 |               |   | $        | 153,678 |               |   | $      | (1,374 | )      |   | $ | 24,674 |         |   | $ | 176,978 |        
|                             |                                                                          |                |        |               |   |          |         |               |   |        |        |        |   |   |        |         |   |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

29



---



##### Table of Contents



ESS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years Ended December 31, 2001, 2000 and
1999


|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |         |        |         |         |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------------------------- | ---------------------------------------------------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | -
|                                                     |                                                                                                      |                                                                         
|                                                     |                                                                                                      | Years Ended December 31,                                                
|                                                     |                                                                                                      |                                                                         
|                                                     |                                                                                                      | 2001                                                                     |                                              | 2000(1)                                              |        | 1999(1)
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |        
|                                                     |                                                                                                      |                                                                         
|                                                     |                                                                                                      | (In thousands)                                                          
|Cash flows from operating
	activities:               |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|Net income (loss)                                    |                                                                                                      | $                                                                        | (1,817                                       | )                                                    |        | $       | 48,306  |         |         | $       | 40,105  |        
|                                                     | Adjustments to reconcile net income
	(loss) to net cash provided by (used in) operating
	activities: |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |         |       
|                                                     |                                                                                                      | Loss from discontinued operation                                         |                                              |                                                      | 12,802 |         |         |         | 14,860  |         |         |         | 1,220  |        
|                                                     |                                                                                                      | Depreciation and amortization                                            |                                              |                                                      | 14,640 |         |         |         | 15,005  |         |         |         | 15,127 |        
|                                                     |                                                                                                      | Gain on sale of property, plant and equipment                            |                                              |                                                      |       |         |         |         | (2,911  | )       |         |         |       |        
|                                                     |                                                                                                      | Charges for in-process research and development                          |                                              |                                                      |       |         |         |         | 2,625   |         |         |         |       |        
|                                                     |                                                                                                      | Net (gain) loss from sale of investments                                 |                                              |                                                      | 12,709 |         |         |         | (35,045 | )       |         |         |       |        
|                                                     |                                                                                                      | Income tax benefit on disqualifying disposition
	of common stock options |                                              |                                                      | 1,670  |         |         |         | 4,639   |         |         |         | 2,438  |        
|                                                     |                                                                                                      | Changes in assets and liabilities:                                       |                                              |                                                      |        |         |         |         |         |         |         |         |        |        
|                                                     |                                                                                                      |                                                                          | Accounts receivable                          |                                                      |        | 9,242   |         |         |         | (17,524 | )       |         |        | 3,259   |        
|                                                     |                                                                                                      |                                                                          | Inventories                                  |                                                      |        | 61,488  |         |         |         | (56,593 | )       |         |        | (19,465 | )      
|                                                     |                                                                                                      |                                                                          | Prepaid expenses and other assets            |                                                      |        | 286     |         |         |         | 1,153   |         |         |        | 12,039  |        
|                                                     |                                                                                                      |                                                                          | Accounts payable and accrued expenses        |                                                      |        | (20,276 | )       |         |         | (1,272  | )       |         |        | 13,642  |        
|                                                     |                                                                                                      |                                                                          | Income tax payable and deferred income taxes |                                                      |        | 4,042   |         |         |         | 15,687  |         |         |        | (6,744  | )      
|                                                     |                                                                                                      |                                                                          | Net assets of discontinued operations        |                                                      |        | (1,246  | )       |         |         |        |         |         |        |        |        
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|                                                     |                                                                                                      |                                                                          |                                              | Net cash provided by (used in) operating
	activities |        |         | 93,540  |         |         |         | (11,070 | )       |        |         | 61,621  |  
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|Cash flows from investing
	activities:               |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|                                                     | Purchase of property, plant and equipment                                                            |                                                                          |                                              | (2,036                                               | )      |         |         | (2,568  | )       |         |         | (11,552 | )     
|                                                     | Sale of property, plant and equipment                                                                |                                                                          |                                              | 192                                                  |        |         |         | 3,949   |         |         |         |        |       
|                                                     | Purchase of short-term investments                                                                   |                                                                          |                                              | (35,433                                              | )      |         |         | (10,155 | )       |         |         | (58,337 | )     
|                                                     | Sale of short-term investments                                                                       |                                                                          |                                              | 13,788                                               |        |         |         | 29,869  |         |         |         | 46,782  |       
|                                                     | Purchase of long-term investments                                                                    |                                                                          |                                              | (2,100                                               | )      |         |         | (2,640  | )       |         |         | (3,000  | )     
|                                                     | Cash paid for acquisitions                                                                           |                                                                          |                                              | (2,072                                               | )      |         |         | (4,266  | )       |         |         |        |       
|                                                     | Purchase of Vialta stock                                                                             |                                                                          |                                              |                                                     |        |         |         | (100    | )       |         |         | (62,000 | )     
|                                                     | Sale of joint venture investments                                                                    |                                                                          |                                              |                                                     |        |         |         |        |         |         |         | 2,183   |       
|                                                     | Proceeds from sale of Cisco stock                                                                    |                                                                          |                                              | 11,134                                               |        |         |         |        |         |         |         |        |       
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|                                                     |                                                                                                      |                                                                          |                                              | Net cash provided by (used in) investing
	activities |        |         | (16,527 | )       |         |         | 14,089  |         |        |         | (85,924 | )
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|Cash flows from financing
	activities:               |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|                                                     | Repurchase of common stock                                                                           |                                                                          |                                              | (14,312                                              | )      |         |         | (27,844 | )       |         |         | (4,229  | )     
|                                                     | Issuance of common stock under employee stock
	plans and stock option plans                          |                                                                          |                                              | 8,579                                                |        |         |         | 10,127  |         |         |         | 3,193   |       
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|                                                     |                                                                                                      |                                                                          |                                              | Net cash used in financing activities                |        |         | (5,733  | )       |         |         | (17,717 | )       |        |         | (1,036  | )
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|Net increase(decrease) in cash and cash
	equivalents |                                                                                                      |                                                                          | 71,280                                       |                                                      |        |         | (14,698 | )       |         |         | (25,339 | )      
|Cash and cash equivalents at beginning of period     |                                                                                                      |                                                                          | 25,715                                       |                                                      |        |         | 40,413  |         |         |         | 65,752  |        
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|Cash and cash equivalents at end of period           |                                                                                                      | $                                                                        | 96,995                                       |                                                      |        | $       | 25,715  |         |         | $       | 40,413  |        
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|Supplemental disclosure of cash flow
	information    |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|                                                     | Cash paid for income taxes                                                                           |                                                                          | $                                            | 3,300                                                |        |         | $       | 5,795   |         |         | $       | 11,763  |       
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        
|                                                     | Cash refund for income taxes                                                                         |                                                                          | $                                            | 6,684                                                |        |         | $       | 3,975   |         |         | $       |        |       
|                                                     |                                                                                                      |                                                                          |                                              |                                                      |        |         |         |         |         |         |         |        






|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | Year 2000 and 1999 amounts have been reclassified
	to reflect separately the results of Vialta, Inc. as a
	discontinued operation.

The accompanying notes are an integral part of
these consolidated financial statements.

30



---



##### Table of Contents



ESS TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1.     Nature of
Business

ESS Technology, Inc. and its subsidiaries
(ESS or the Company) is a leading
designer, developer and marketer of highly-integrated digital
system processor chips. These chips are the primary processors
driving digital video and audio players, including DVD, video CD
and MP3 players. ESS is also a supplier of chips for use in
modems and other communication products and a supplier of PC
audio chips. ESS out sources all of its chip fabrication and
assembly operations, as well as the majority of its test
operations.

The Company was incorporated in California in
1984 and became a public company in 1995. In April 1999, the
Company established a subsidiary, Vialta, Inc. a Delaware
corporation (Vialta), through which ESS planned to
introduce various internet related products, including a
multi-featured DVD player with internet connectivity and other
advanced features. Vialta is headquartered in Fremont. As of
December 31, 2000, ESS had a 62.1% ownership and voting
interest in Vialta. On April 21, 2001, ESSs Board of
Directors adopted a plan to distribute all of ESSs Vialta
shares to ESS shareholders within twelve months thereafter.
Effective as of August 21, 2001, ESS spun off Vialta by
distributing to ESSs shareholders all 50.6 million
shares of Vialta Class A Common Stock then held by ESS. As
such Vialta is reported separately as a discontinued operation
for all periods presented within ESSs financial
statements. See Note 4. and Note 14.

Note 2.     Summary
of Significant Accounting Policies



| |                 
| | ----------------
| | Use of Estimates

The preparation of the financial statements and
accompanying notes in accordance with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions related to the
reporting of assets and liabilities and the disclosures of
contingent assets and liabilities. Actual results could differ
from those estimates.



| |                            
| | ---------------------------
| | Principles of Consolidation

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

Foreign
Currency Translation

The Companys subsidiaries primarily use the
U.S. dollar as their functional currency. Accordingly, assets
and liabilities of these subsidiaries are translated using
exchange rates in effect at the end of the period, except for
non-monetary assets that are translated using historical
exchange rates. Revenues and costs are translated using average
exchange rates for the period, except for costs related to those
balance sheet items that are translated using historical
exchange rates. The resulting translation gains and losses are
included in the Consolidated Statement of Operations as they are
incurred.



| |                                                    
| | ---------------------------------------------------
| | Cash, Cash Equivalents, and Short-Term
	Investments

The Company considers all highly liquid
investments with an initial maturity of 90 days or less to
be cash equivalents and investments with original maturity dates
of greater than 90 days to be short-term investments.

Short-term investments are comprised of primarily
debt instruments and marketable securities. Short-term
investments are accounted for as available-for-sale and are
reported at fair value with unrealized gains and losses, net of
related tax, recorded as a separate component of comprehensive
income in shareholders equity until realized in accordance
with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Gains and losses on
securities sold are based on the specific identification method
and are included in gain on sale of equity securities.

31



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                     
| | ------------------------------------
| | 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. The
carrying amount of the Vialta note payable (See Note 4. and
Note 14.) approximates fair value because the contractual
interest rate approximates the interest rate the Company could
obtain on similar financing transactions.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market, with cost being determined by the first-in, first-out
method. We write down inventories to net realizable value based
on forecasted demand and market conditions. 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. These charges have been included
in cost of sales in our consolidated statements of operations.



| |                       
| | ----------------------
| | Property and Equipment

Property 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 and building improvements |  | 7 - 30 years
|Machinery and equipment            |  | 3 - 5 years 
|Furniture and fixtures             |  | 3 - 5 years 

Repairs and maintenance costs are expensed as
incurred.



| |             
| | ------------
| | Other Assets

Other assets consist of investments, technical
infrastructure and covenants not to compete.

Investment in over 50% owned companies are
consolidated. Investments in 20% to 50% owned companies are
accounted for using the equity method. Investments in less than
20% owned companies are accounted for using the cost method
unless the Company can exercise significant influence or the
investee is economically dependent upon the Company, in which
case the equity method is used. The Company currently does not
have any unconsolidated investments for which it accounts for
under the equity method.

Technical infrastructure and covenants not to
compete are amortized over estimated useful lives that range
from 3 to 4 years.



| |                                 
| | --------------------------------
| | Impairment of Long-Lived
	Assets

Pursuant to SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, the Company reviews long-lived
assets based upon a gross cash flow basis and will reserve for
impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be fully recoverable.
On January 1, 2002, SFAS No. 144,
Accounting for the Impairment or Disposal of Long-lived
Assets (SFAS 144) 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. The
adoption of SFAS 144 not have a material effects on our
financial statements.

32



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue upon the shipment
of its products to the customers provided that the Company has
received a signed purchase order, the price is fixed, the title
has been 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 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.



| |                                
| | -------------------------------
| | Research and Development
	Costs

The Company expenses research and development
costs as incurred.



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes under an
asset and liability approach that requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of timing differences between the carrying amounts
and the tax bases of assets and liabilities. U.S. deferred
income taxes are provided on all un-remitted earnings of the
Companys foreign subsidiaries as such earnings are
considered permanently invested. Assumptions underlying
recognition of deferred tax assets and non-recognition of U.S.
income tax on un-remitted earnings can change if our business
plan is not achieved.



| |                          
| | -------------------------
| | Earnings (Loss) Per Share

Basic earnings per share (EPS)
excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that would
occur if securities or other contracts to issue Common Stock
were exercised or converted into common stock.



| |                         
| | ------------------------
| | Stock Based Compensation

The Company accounts for stock-based
compensation, including stock options granted and shares issued
under the 1995 Employee Stock Purchase Plan, using the intrinsic
value method prescribed in APB No. 25, Accounting for
Stock Issued to Employees, and related interpretations.
Compensation cost for stock options, if any, is recognized
ratably over the vesting period. The Companys policy is to
grant options with an exercise price equal to the quoted market
price of the Companys stock on the grant date. The Company
provides additional pro forma disclosures as required under SFAS
No. 123, Accounting for Stock-Based
Compensation.



| |                                         
| | ----------------------------------------
| | Accounting Policy for Minority
	Interest

Minority interest in subsidiary represents the
minority stakeholders proportionate share of net assets
and results of operations of the Companys majority-owned
subsidiary. Sales of common stock of the Companys
subsidiaries and purchases of such shares may result in changes
in the Companys proportionate share of the
subsidiaries net assets. The Company reflects such changes
as an element of minority interest. ESS spun off Vialta as of
August 21, 2001, thereby eliminating the minority interest.



| |                        
| | -----------------------
| | Risks and Uncertainties

The Company operates in one business segment that
is characterized by rapid technological advances, changes in
customer requirements and evolving industry standards. Any
failure by the Company to anticipate or respond to such advances
and changes could have a material adverse effect on its business
and operating results.

33



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                    
| | -----------------------------------
| | Derivative and Hedging
	Instruments

Derivative instruments are recorded in the
balance sheets at fair market value. Changes in the fair value
of derivatives are recorded in Statements of Operations for the
years covered. In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133,
Accounting for Derivative instruments and Hedging
Activities (SFAS 133). SFAS 133
establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. In July 1999,
FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities  Deferral of the
Effective Date of FASB Statement No. 133
(SFAS 137). SFAS 137 deferred the
effective date until fiscal year beginning after June 15,
2000. The Companys adoption of SFAS 137 as of
January 1, 2001 did not have a significant effect on its
financial position and results of operations. SFAS 137
requires that all derivative instruments be recorded on the
balance sheet at their fair value.



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

Financial Accounting Standard No. 130
Reporting Comprehensive Income, (SFAS
No. 130), establishes a standard for the reporting
and display of comprehensive income and its components within
the financial statements. Comprehensive income is composed of
two subsets, net income and other comprehensive income. Included
in other comprehensive income for the Company is unrealized
gains and losses on marketable securities, net of deferred tax.
This adjustment is accumulated within the Consolidated Statement
of Shareholders Equity under the caption Other
Comprehensive Loss.



| |                  
| | -----------------
| | Industry Segments

In 1998, the Company adopted Statement of
Financial Accounting Standard No. 131 Disclosures
About Segments of an Enterprise and Related Information
(SFAS No. 131). SFAS No. 131 supersedes
SFAS No. 14 and requires segment information be reported on
the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments.
The Company and its subsidiaries operate in one reportable
segments: the semiconductor segment. From April 1999 to August
2001, ESS operated in two reportable segments  the
semiconductor segment and the internet segment through its
majority owned subsidiary Vialta. Effective as of
August 21, 2001, ESS spun off Vialta by distributing to
ESSs shareholders all 50.6 million shares of Vialta
Class A common stock then held by ESS. Prior to 1999, the
Company operated in a single business segment, semiconductor.

In the semiconductor segment, the Company
designs, develops, supports and manufactures highly integrated
mixed-signal semiconductor solutions for DVD, Internet related
semiconductor, communications, VCD/SVCD, and PC Audio
applications.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist primarily
of cash equivalents, short-term investments, and accounts
receivable. By policy, the Company places its investments, other
than U.S. Government Treasury instruments, only with
financial institutions meeting its credit guidelines. Almost all
of the Companys accounts receivable are derived from sales
to manufacturers and distributors, in the consumer electronics,
computer and communications markets. (See Note 11.)



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made in the
prior years financial statements to conform to the 2001
presentation.

34



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

In July 2001, the FASB issued SFAS No. 141
Business Combinations, (SFAS 141).
SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. ESSs
management believes that the adoption of SFAS 141 will not
have a significant impact on the Companys financial
statements.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets,
(SFAS 142) which is effective for fiscal years
beginning after December 15, 2001. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization.
In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the testing for
impairment of existing goodwill and other intangibles. ESS
believes that the adoption of SFAS 142 will not have a
significant impact on the Companys financial position and
results of operations.

On October 3, 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144).
SFAS 144 supercedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. SFAS 144 applies to all long-lived
assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30.
SFAS 144 develops one accounting model for long-lived
assets that are to be disposed of by sale. SFAS 144
requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity
with operations that (1) can be distinguished from the rest
of the entity and (2) will be eliminated from the ongoing
operations of the entity in a disposal transaction.
SFAS 144 is effective for the Company for all financial
statements issued in fiscal 2002.

35



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Balance Sheet
Components

|                               |                                                 |                |        |         |        |   |        |         |        | 
|------------------------------ | ----------------------------------------------- | -------------- | ------ | ------- | ------ | - | ------ | ------- | ------ | 
|                               |                                                 |               
|                               |                                                 | December 31,  
|                               |                                                 |               
|                               |                                                 | 2001           |        | 2000   
|                               |                                                 |                |        |        
|                               |                                                 |               
|                               |                                                 | (In thousands)
|Cash and cash equivalents:     |                                                 |                |        |         |        |   |        |        
|                               | Cash and money market accounts                  |                | $      | 29,327  |        |   | $      | 23,597  |       
|                               | U.S. government notes and bonds                 |                |        | 67,541  |        |   |        | 1,991   |       
|                               | Certificates of deposit                         |                |        | 127     |        |   |        | 127     |       
|                               |                                                 |                |        |         |        |   |        |        
|                               |                                                 | $              | 96,995 |         |        | $ | 25,715 |        
|                               |                                                 |                |        |         |        |   |        |        
|Short-term investments:        |                                                 |                |        |         |        |   |        |        
|                               | U.S. government notes and bonds                 |                | $      | 30,931  |        |   | $      | 9,025   |       
|                               | Marketable equity securities                    |                |        | 3,615   |        |   |        | 36,029  |       
|                               | Unrealized loss on marketable securities        |                |        | (2,507  | )      |   |        | (11,931 | )     
|                               |                                                 |                |        |         |        |   |        |        
|                               |                                                 | Total          |        | $       | 32,039 |   |        | $       | 33,123 | 
|                               |                                                 |                |        |         |        |   |        |        
|Accounts receivable:           |                                                 |                |        |         |        |   |        |        
|                               | Accounts receivable                             |                | $      | 43,541  |        |   | $      | 54,277  |       
|                               | Less: Allowance for doubtful accounts           |                |        | (899    | )      |   |        | (2,393  | )     
|                               |                                                 |                |        |         |        |   |        |        
|                               |                                                 | $              | 42,642 |         |        | $ | 51,884 |        
|                               |                                                 |                |        |         |        |   |        |        
|Inventories:                   |                                                 |                |        |         |        |   |        |        
|                               | Raw materials                                   |                | $      | 20,807  |        |   | $      | 45,923  |       
|                               | Work-in-process                                 |                |        | 10,918  |        |   |        | 21,301  |       
|                               | Finished goods                                  |                |        | 5,727   |        |   |        | 31,716  |       
|                               |                                                 |                |        |         |        |   |        |        
|                               |                                                 | $              | 37,452 |         |        | $ | 98,940 |        
|                               |                                                 |                |        |         |        |   |        |        
|Property, plant and equipment: |                                                 |                |        |         |        |   |        |        
|                               | Land                                            |                | $      | 2,860   |        |   | $      | 2,860   |       
|                               | Building and building improvements              |                |        | 22,766  |        |   |        | 22,796  |       
|                               | Machinery and equipment                         |                |        | 31,013  |        |   |        | 30,205  |       
|                               | Furniture and fixtures                          |                |        | 13,080  |        |   |        | 12,221  |       
|                               |                                                 |                |        |         |        |   |        |        
|                               |                                                 |                | 69,719 |         |        |   | 68,082 |        
|                               | Less: Accumulated depreciation and amortization |                |        | (47,281 | )      |   |        | (37,001 | )     
|                               |                                                 |                |        |         |        |   |        |        
|                               |                                                 | $              | 22,438 |         |        | $ | 31,081 |        
|                               |                                                 |                |        |         |        |   |        |        

Depreciation expense was approximately
$9.6 million, $10.9 million and $9.2 million in
2001, 2000 and 1999, respectively.

|                  |                                                       |   |        |        |  |   |        |        | 
|----------------- | ----------------------------------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                 
|Other assets:     |                                                       |   |        |        |  |   |        |       
|                  | Investments                                           |   | $      | 677    |  |   | $      | 1,358  | 
|                  | Covenants not to compete                              |   |        | 1,937  |  |   |        | 1,414  | 
|                  | Technical infrastructure                              |   |        | 533    |  |   |        | 1,495  | 
|                  | Other                                                 |   |        | 1,358  |  |   |        | 470    | 
|                  |                                                       |   |        |        |  |   |        |       
|                  |                                                       | $ | 4,505  |        |  | $ | 4,737  |       
|                  |                                                       |   |        |        |  |   |        |       
|Accounts payable: |                                                       |   |        |        |  |   |        |       
|                  | Payable to third parties                              |   | $      | 10,283 |  |   | $      | 37,007 | 
|                  | Payable to related party                              |   |        | 113    |  |   |        | 650    | 
|                  |                                                       |   |        |        |  |   |        |       
|                  |                                                       | $ | 10,396 |        |  | $ | 37,657 |       
|                  |                                                       |   |        |        |  |   |        |       
|Accrued expenses: |                                                       |   |        |        |  |   |        |       
|                  | Accrued compensation costs                            |   | $      | 5,927  |  |   | $      | 5,044  | 
|                  | Accrued commission and royalties                      |   |        | 18,655 |  |   |        | 12,073 | 
|                  | Marketing and advertising related accruals            |   |        | 5,945  |  |   |        | 911    | 
|                  | Deferred revenue margin related to distributor
	sales |   |        | 1,571  |  |   |        | 5,761  | 
|                  | Other accrued liabilities                             |   |        | 6,679  |  |   |        | 8,854  | 
|                  |                                                       |   |        |        |  |   |        |       
|                  |                                                       | $ | 38,777 |        |  | $ | 32,643 |       
|                  |                                                       |   |        |        |  |   |        |       

36



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Discontinued
Operation

As of December 31, 2000, ESS had a 62.1%
ownership and voting interest in Vialta. On April 21, 2001,
ESSs Board of Directors adopted a plan to distribute all
of ESSs Vialta shares to ESS shareholders within twelve
months thereafter. Effective as of August 21, 2001, ESS
spun-off Vialta by distributing to ESSs shareholders all
50.6 million shares of Vialta Class A common stock then
held by ESS. For all periods presented, Vialta is accounted for
as a discontinued operation in the Companys financial
statements in accordance with APB No. 30. Amounts in the
financial statements and related notes for all periods shown
have been reclassified to reflect the discontinued operation.

For the period up to March 31, 2001,
operating results for the discontinued operation are reported,
net of minority interest, under Loss from discontinued
operation, net of minority interest in the accompanying
Statements of Operations. Gain (loss) on disposal of
discontinued operation, net of minority interest in the
accompanying Statements of Operations includes the initially
estimated anticipated loss on the disposal of the discontinued
operation and operating losses incurred between the measurement
date and the estimated disposal date. Upon the distribution of
Vialta shares on August 21, 2001, ESS recognized a
$4.7 million gain within Gain (loss) on disposal
of discontinued operation, net of minority interest
because the Vialta spin-off occurred sooner than initially
estimated.

The Company had initially estimated that the
disposal of Vialta, assuming a tax-free distribution, would
result in a total loss of $21.4 million, of which
$13.3 million was assigned to ESS due to its 62.1% share
ownership. Included in the estimate were a $1.1 million
charge, net of minority interest, related to the spin-off of
Vialta and a $12.2 million charge of anticipated operating
losses, net of minority interest, from operating the Vialta
business between April 1, 2001 and September 30, 2001,
the initially estimated completion date for the spin-off.

For financial reporting purposes, the assets,
liabilities and provision for losses of the discontinued
operation are combined and classified in the accompanying
Balance Sheets as of December 31, 2000, under Net
assets of discontinued operation.

Operating results through March 31, 2001
were recorded as Loss from discontinued operation, net of
minority interest. Since the Board of Directors approved
the spin off of Vialta prior to the finalization of
March 31, 2001 financial statements, Vialtas
operating loss from April 1, 2001 through April 21, 2001
(the measurement date) has been included in the estimated loss
on the disposal of the discontinued operation, net of minority
interest, under Gain (loss) on disposal of
discontinued operation, net of minority interest in the
accompanying Statements of Operations in the first quarter of
2001 (in thousands).

|                                                                         |  |                 |         |                   |  |   |         |  
|------------------------------------------------------------------------ |  | --------------- | ------- | ----------------- |  | - | ------- | -
|                                                                         |  | Period From     |         |                  
|                                                                         |  | January 1, 2001 |         |                  
|                                                                         |  | Through         |         |                  
|                                                                         |  | August 20,      |         | Year Ended       
|                                                                         |  | 2001            |         | December 31, 2000
|                                                                         |  |                 |         |                  
|Operating expenses                                                       |  | $               | 21,482  |                   |  | $ | 29,555  |  
|Net loss before minority interest                                        |  |                 | (18,468 | )                 |  |   | (23,289 | )
|Loss attributable to minority interest                                   |  |                 | (6,912  | )                 |  |   | (8,429  | )
|                                                                         |  |                 |         |                   |  |   |         |  
|Loss from Vialta operation, net of minority
	interest                    |  |                 | (11,556 | )                 |  |   | (14,860 | )
|Expenses incurred in connection with spin-off of
	Vialta                 |  |                 | (1,246  | )                 |  |   |        |  
|                                                                         |  |                 |         |                   |  |   |         |  
|Loss from and on disposal of Vialta operation,
	net of minority interest |  | $               | (12,802 | )                 |  | $ | (14,860 | )
|                                                                         |  |                 |         |                   |  |   |         |  

37



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Summarized below are the assets and liabilities
of the Vialta business in the accompanying Balance Sheets under
Net assets of discontinued operation, net of minority
interest (in thousands).

|                                                                |                   |                   |         |         | 
|--------------------------------------------------------------- | ----------------- | ----------------- | ------- | ------- | 
|                                                                |                   | December 31, 2000
|                                                                |                   |                  
|Assets:                                                         |                   |                   |         |        
|Cash and cash equivalents                                       |                   | $                 | 109,378 |        
|Short-term investments                                          |                   |                   | 27,112  |        
|Inventories                                                     |                   |                   | 2,057   |        
|Prepaid expenses and other current assets                       |                   |                   | 4,857   |        
|Property, plant and equipment                                   |                   |                   | 9,230   |        
|Other assets                                                    |                   |                   | 1,057   |        
|                                                                |                   |                   |         |        
|                                                                | Total assets      |                   |         | 153,691 | 
|                                                                |                   |                   |         |        
|                                                               
|Liabilities:                                                    |                   |                   |         |        
|Accounts payable                                                |                   |                   | 1,376   |        
|Accrued expenses and other current liabilities                  |                   |                   | 2,218   |        
|Payable to related parties                                      |                   |                   | 30,000  |        
|                                                                |                   |                   |         |        
|                                                                | Total liabilities |                   |         | 33,594  | 
|                                                                |                   |                   |         |        
|Minority interest                                               |                   |                   | 73,966  |        
|                                                                |                   |                   |         |        
|Provision for losses                                            |                   |                   |        |        
|                                                                |                   |                   |         |        
|Net assets of discontinued operation, net of
	minority interest |                   | $                 | 46,131  |        
|                                                                |                   |                   |         |        

5.     Debt

We have an unsecured line of credit agreement
with a foreign bank of $15 million, which will expire on
May 1, 2002. We expect to be able to renew this line of
credit. Under the terms of the agreement, we may borrow at a
fixed rate of LIBOR plus 1.5% or a variable rate at the foreign
banks reference rate. The line of credit requires the
Company to achieve certain financial ratios and operating
results. During December 31, 2001, we were in compliance
with its borrowing criteria. There were no borrowings under the
line of credit as of December 31, 2001.

6.     Income
Taxes

Income before provision for (benefit from) income
taxes consisted of the following (in thousands):

|         |  |                          |         |      |  |      |        |  |  |   |        | 
|-------- |  | ------------------------ | ------- | ---- |  | ---- | ------ |  |  | - | ------ | 
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  | 2001                     |         | 2000 |  | 1999
|         |  |                          |         |      |  |     
|Domestic |  | $                        | (24,886 | )    |  | $    | 44,024 |  |  | $ | 16,724 | 
|Foreign  |  |                          | 28,609  |      |  |      | 42,088 |  |  |   | 32,478 | 
|         |  |                          |         |      |  |      |        |  |  |   |        | 
|         |  | $                        | 3,723   |      |  | $    | 86,112 |  |  | $ | 49,202 | 
|         |  |                          |         |      |  |      |        |  |  |   |        | 

38



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Provision for (benefit from) income taxes
consisted of the following (in thousands):

|         |         |                          |         |         |        |      |        |        |        |  |        |        |       | 
|-------- | ------- | ------------------------ | ------- | ------- | ------ | ---- | ------ | ------ | ------ |  | ------ | ------ | ----- | 
|         |         |                         
|         |         | Years Ended December 31,
|         |         |                         
|         |         | 2001                     |         | 2000    |        | 1999
|         |         |                          |         |         |        |     
|Current: |         |                          |         |         |        |      |        |        |        |  |        |       
|         | Federal |                          | $       | 4,310   |        |      | $      | 4,630  |        |  | $      | 11,851 |      
|         | State   |                          |         | 29      |        |      |        | 904    |        |  |        | 2,123  |      
|         | Foreign |                          |         | 42      |        |      |        |       |        |  |        | 49     |      
|         |         |                          |         |         |        |      |        |        |        |  |        |       
|         |         |                          | 4,381   |         |        |      | 5,534  |        |        |  | 14,023 |       
|         |         |                          |         |         |        |      |        |        |        |  |        |       
|        
|Deferred |         |                          |         |         |        |      |        |        |        |  |        |       
|         | Federal |                          |         | (10,505 | )      |      |        | 15,169 |        |  |        | (4,818 | )    
|         | State   |                          |         | (1,138  | )      |      |        | 2,243  |        |  |        | (1,328 | )    
|         |         |                          |         |         |        |      |        |        |        |  |        |       
|         |         |                          | (11,643 | )       |        |      | 17,412 |        |        |  | (6,146 | )     
|         |         |                          |         |         |        |      |        |        |        |  |        |       
|         |         | Total                    |         | $       | (7,262 | )    |        | $      | 22,946 |  |        | $      | 7,877 | 
|         |         |                          |         |         |        |      |        |        |        |  |        |       

Reconciliation between the provisions for
(benefit from) income taxes computed at the federal statutory
rate of 35% for the years ended December 31, 2001, 2000 and
1999 and the provision for (benefit from) income taxes is as
follows (in thousands):

|                                                     |  |                          |         |      |  |      |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                     |  |                         
|                                                     |  | Years Ended December 31,
|                                                     |  |                         
|                                                     |  | 2001                     |         | 2000 |  | 1999
|                                                     |  |                          |         |      |  |     
|Provision at statutory rate                          |  | $                        | 1,303   |      |  | $    | 21,988  |   |  | $ | 17,221  |  
|Tax cost (benefit) related to foreign
	jurisdictions |  |                          | (11,275 | )    |  |      | (16,672 | ) |  |   | (12,204 | )
|State income taxes, net of federal tax benefit       |  |                          | 171     |      |  |      | 2,898   |   |  |   | 1,034   |  
|General business credit                              |  |                          | (800    | )    |  |      | (227    | ) |  |   |        |  
|Nondeductible research and development costs         |  |                          | 812     |      |  |      | 5,474   |   |  |   | 1,826   |  
|Vialta valuation allowance                           |  |                          |        |      |  |      | 9,485   |   |  |   |        |  
|Other                                                |  |                          | 2,527   |      |  |      |        |   |  |   |        |  
|                                                     |  |                          |         |      |  |      |         |   |  |   |         |  
|Provision for (benefit from) income taxes            |  | $                        | (7,262  | )    |  | $    | 22,946  |   |  | $ | 7,877   |  
|                                                     |  |                          |         |      |  |      |         |   |  |   |         |  

39



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred tax assets (liabilities) are comprised
of the following (in thousands):

|                                                                |                                        |              |        |        |   |   |         |        |  
|--------------------------------------------------------------- | -------------------------------------- | ------------ | ------ | ------ | - | - | ------- | ------ | -
|                                                                |                                        |             
|                                                                |                                        | December 31,
|                                                                |                                        |             
|                                                                |                                        | 2001         |        | 2000  
|                                                                |                                        |              |        |       
|Current:                                                        |                                        |              |        |        |   |   |         |       
|State income taxes                                              |                                        | $            | 1      |        |   | $ | 1       |       
|Accounts receivable and inventory reserves                      |                                        |              | 1,083  |        |   |   | 2,053   |       
|Accrued liabilities                                             |                                        |              | 2,015  |        |   |   | 2,949   |       
|Legal reserves and other                                        |                                        |              | (764   | )      |   |   | 1,004   |       
|Deferred tax asset arising from unrealized loss
	on investments |                                        |              | 1,018  |        |   |   | 4,553   |       
|Deferred stock gain                                             |                                        |              | (1,466 | )      |   |   | (14,653 | )     
|                                                                |                                        |              |        |        |   |   |         |       
|                                                                | Current deferred tax asset (liability) |              | $      | 1,887  |   |   | $       | (4,093 | )
|                                                                |                                        |              |        |        |   |   |         |       
|Non-current:                                                    |                                        |              |        |        |   |   |         |       
|Depreciation and amortization                                   |                                        |              | 2,208  |        |   |   | 1,992   |       
|Un-remitted earning from a foreign subsidiary                   |                                        |              | (9,139 | )      |   |   | (9,139  | )     
|Covenants not to compete and technical
	infrastructure          |                                        |              |       |        |   |   | (1,914  | )     
|                                                                |                                        |              |        |        |   |   |         |       
|                                                                | Non-current deferred tax liability     |              | $      | (6,931 | ) |   | $       | (9,061 | )
|                                                                |                                        |              |        |        |   |   |         |       

7.     Shareholders
Equity



| |             
| | ------------
| | Common Stock

On each of July 15, 2000 and
February 13, 2001, the Companys Board of Directors
authorized the repurchase, at managements discretion, of
up to 2 million shares of the Companys Common Stock,
respectively, at market prices and as market and business
conditions warrant. As of December 31, 2001, we had
repurchased 3,612,600 shares, at market prices ranging from
$5.13 to $17.97 per share under these programs. Upon repurchase,
the shares have been retired.

On October 24, 2001, the Companys
Board of Directors authorized the repurchase, at
managements discretion, of up to 2 million shares of
the Companys Common Stock at market prices and as market
and business conditions warrant. As of December 31, 2001,
we had not made any repurchases under this program.



| |                       
| | ----------------------
| | 1992 Stock Option Plan

In January 1992, the Company adopted the 1992
Stock Option Plan (the 1992 Plan). Company
authorized 6,966,000 shares to be reserved for issuance under
the 1992 Plan. In December 1999, the Company modified the
vesting schedule for subsequent options grants such that initial
grants would generally vest 25% at the end of the first year,
after the date of the date of grant and ratably thereafter over
the remaining vesting period. Other grants would vest ratably
over the vesting term.

This plan is no longer active and we will no
longer issue options under this plan. The 1992 Plan
terminates in January 2002, however, outstanding options issued
under this plan will remain exercisable.



| |                           
| | --------------------------
| | 1995 Equity Incentive Plan

In August 1995, the Company adopted the 1995
Equity Incentive Plan (the Incentive Plan), which
provides for the grant of stock options and stock bonuses and
the issuance of restricted stock by the Company to its
employees, directors and others. The Company has reserved
3,000,000 shares of the Companys

40



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Common Stock for issuance under the Incentive
Plan. The terms of the Incentive Plan are generally similar to
those of the 1992 Plan outlined above.



| |                                   
| | ----------------------------------
| | 1995 Employee Stock Purchase
	Plan

In August 1995, the Company adopted the 1995
Employee Stock Purchase Plan (the Purchase Plan) and
reserved a total of 225,000 shares of the Companys Common
Stock for issuance thereunder. The Purchase Plan, as amended in
May 1998, authorizes the issuance of 425,000 shares under the
Purchase Plan. The Purchase Plans, as amended in May 2000,
authorizes the issuance of 625,000 shares under the Purchase
Plan. The Purchase Plan, as amended in April 2001, authorizes
the issuance of 925,000 shares under the Purchase Plan. The
Purchase Plan permits eligible employees to acquire shares of
the Companys Common Stock through payroll deductions at a
price equal to the lower of 85% of the fair market value of the
Companys common stock at the beginning of the offering
period or on the purchase date. The purchase Plan was amended as
of April 21, 2001. The amended plan provides a 24-month
rolling period beginning on each Enrollment Date, and the
purchase price will be automatically adjusted to reflect the
lower enrollment price. As of December 31, 2001, 438,027
shares have been issued under the Purchase Plan.



| |                                  
| | ---------------------------------
| | 1995 Directors Stock Option
	Plan

In August 1995, the Company adopted the 1995
Directors Stock Option Plan (the Directors Plan) and
reserved a total of 300,000 shares of the Companys Common
Stock for issuance thereunder. The Directors Plan, as
amended in April 2001, authorizes the issuance of 600,000 shares
under the Directors Stock Option Plan. The Directors Plan allows
for granting of stock options to members of the Board of
Directors of the Company. The plan was amended as of
April 21, 2001 to increase the number of options granted to
new Board members and options granted subsequent to their
initial appointment to the Board.



| |                           
| | --------------------------
| | 1997 Equity Incentive Plan

In May 1997, the Company adopted the 1997 Equity
Incentive Plan (the 1997 Incentive Plan) and
reserved a total of 3,000,000 shares of the Companys
Common Stock for issuance thereunder. The 1997 Incentive Plan,
as amended in May 1998, authorizes the issuance of 5,000,000
shares under the 1997 Incentive Plan. The 1997 Incentive Plan,
as amended in April 2000, authorizes the issuance of 7,500,000
shares under the 1997 Incentive Plan. . The 1997 Incentive Plan,
as amended in May 2001, authorizes the issuance of 10,000,000
shares under the 1997 Incentive Plan. The vesting schedule of
the 1997 Incentive Plan are generally similar to those of the
1992 Plan outlined above.



| |                           
| | --------------------------
| | Platform Stock Option Plan

In June 1997, in connection with the acquisition
of Platform Technologies, Inc. (Platform), the
Company assumed the Platform Stock Option Plan (the
Platform Plan). The Company does not plan to issue
any additional options under the Platform Plan and has reserved
approximately 954,000 shares of Common Stock for issuance under
the Platform Plan pursuant to the exercise of options that were
outstanding at the time of the Platform acquisition. The
Platform options vest ratably over four years.

41



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Summary of Stock Option
	Activity

Transactions under the Companys various
stock option plans are summarized as follows (in thousands,
except per share amounts):

|                             |            |           |       |             |   |                |       |        |   |   |      |       | 
|---------------------------- | ---------- | --------- | ----- | ----------- | - | -------------- | ----- | ------ | - | - | ---- | ----- | 
|                             |            |           |       |             |   | Weighted      
|                             |            | Available |       | Options     |   | Average       
|                             |            | for Grant |       | Outstanding |   | Exercise Price
|                             |            |           |       |             |   |               
|Balance at December 31, 1998 |            |           | 4,198 |             |   |                | 7,230 |        |   | $ | 2.79 |      
|                             | Authorized |           |       | (1,306      | ) |                |       |       |   |   |      |      | 
|                             | Granted    |           |       | (2,184      | ) |                |       | 2,184  |   |   |      | 11.21 | 
|                             | Exercised  |           |       |            |   |                |       | (1,138 | ) |   |      | 2.38  | 
|                             | Canceled   |           |       | 747         |   |                |       | (747   | ) |   |      | 4.10  | 
|                             |            |           |       |             |   |                |       |        |   |   |      |      
|Balance at December 31, 1999 |            |           | 1,455 |             |   |                | 7,529 |        |   |   | 5.14 |      
|                             | Authorized |           |       | 2,500       |   |                |       |       |   |   |      |      | 
|                             | Granted    |           |       | (3,150      | ) |                |       | 3,150  |   |   |      | 15.36 | 
|                             | Exercised  |           |       |            |   |                |       | (2,660 | ) |   |      | 3.49  | 
|                             | Canceled   |           |       | 1,867       |   |                |       | (1,867 | ) |   |      | 8.77  | 
|                             |            |           |       |             |   |                |       |        |   |   |      |      
|Balance at December 31, 2000 |            |           | 2,672 |             |   |                | 6,152 |        |   |   | 9.99 |      
|                             | Authorized |           |       | 2,800       |   |                |       |       |   |   |      |      | 
|                             | Granted    |           |       | (4,184      | ) |                |       | 4,184  |   |   |      | 6.42  | 
|                             | Exercised  |           |       |            |   |                |       | (1,772 | ) |   |      | 4.74  | 
|                             | Canceled   |           |       | 1,045       |   |                |       | (1,045 | ) |   |      | 9.00  | 
|                             |            |           |       |             |   |                |       |        |   |   |      |      
|Balance at December 31, 2001 |            |           | 2,333 |             |   |                | 7,519 |        |   | $ | 8.34 |      
|                             |            |           |       |             |   |                |       |        |   |   |      |      

The weighted average fair value of options
granted during the years ended December 31, 2001, 2000 and
1999 were $3.75, $9.37 and $6.19, respectively.

The following table summarizes information about
stock options outstanding at December 31, 2001 (in
thousands, except per share amounts):

|                |                |                     |  |                     |       |                  |  |                   |      |                  |  |   |       |  |  |  |       |  |  |   |       | 
|--------------- | -------------- | ------------------- |  | ------------------- | ----- | ---------------- |  | ----------------- | ---- | ---------------- |  | - | ----- |  |  |  | ----- |  |  | - | ----- | 
|                |                |                     |  |                    
|                |                | Options Outstanding |  | Options Exercisable
|                |                |                     |  |                    
|                |                |                     |  | Average             |       |                  |  |                  
|                |                | Number              |  | Remaining           |       |                  |  | Number            |      |                 
|Range of        |                | Outstanding at      |  | Contractual Life    |       | Weighted Average |  | Exercisable at    |      | Weighted Average
|Exercise Prices |                | December 31, 2001   |  | (Years)             |       | Exercise Price   |  | December 31, 2001 |      | Exercise Price  
|                |                |                     |  |                     |       |                  |  |                   |      |                 
|                | $ 0.03 -  4.44 |                     |  |                     | 692   |                  |  |                   | 4.64 |                  |  | $ | 2.77  |  |  |  | 476   |  |  | $ | 2.55  | 
|                | 4.45 -  4.88   |                     |  |                     | 3,081 |                  |  |                   | 6.54 |                  |  |   | 4.88  |  |  |  | 333   |  |  |   | 4.88  | 
|                | 4.89 -  6.99   |                     |  |                     | 645   |                  |  |                   | 8.33 |                  |  |   | 5.89  |  |  |  | 32    |  |  |   | 4.74  | 
|                | 7.00 - 12.14   |                     |  |                     | 804   |                  |  |                   | 8.49 |                  |  |   | 9.50  |  |  |  | 100   |  |  |   | 8.53  | 
|                | 12.15 - 13.19  |                     |  |                     | 969   |                  |  |                   | 6.38 |                  |  |   | 12.92 |  |  |  | 188   |  |  |   | 12.58 | 
|                | 13.20 - 29.25  |                     |  |                     | 1,328 |                  |  |                   | 6.44 |                  |  |   | 16.45 |  |  |  | 417   |  |  |   | 17.57 | 
|                |                |                     |  |                     |       |                  |  |                   |      |                  |  |   |       |  |  |  |       |  |  |   |       | 
|                | Total          |                     |  |                     | 7,519 |                  |  |                   | 6.69 |                  |  | $ | 8.34  |  |  |  | 1,546 |  |  | $ | 8.76  | 
|                |                |                     |  |                     |       |                  |  |                   |      |                  |  |   |       |  |  |  |       |  |  |   |       | 

At December 31, 2001, 2000 and 1999, options
to purchase approximately 1,546,000, 2,069,000, and 3,112,000
shares, were exercisable at an average exercise price of $8.76,
$5.68 and $2.89, respectively.

42



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Fair Value Disclosures

The Companys pro forma net income
(loss) and pro forma net income (loss) per share would have
been as follows had compensation costs for options granted under
the Companys option plans and shares purchased under the
Companys 1995 Employee Stock Purchase Plan been determined
based on the fair value at the grant dates, as prescribed in
SFAS 123 (in thousands, except per share amounts):

|                                        |             |                          |   |         |   |      |   |        |  |  |   |        | 
|--------------------------------------- | ----------- | ------------------------ | - | ------- | - | ---- | - | ------ |  |  | - | ------ | 
|                                        |             |                         
|                                        |             | Years Ended December 31,
|                                        |             |                         
|                                        |             | 2001                     |   | 2000    |   | 1999
|                                        |             |                          |   |         |   |     
|Net income (loss):                      |             |                          |   |         |   |      |   |        |  |  |   |       
|                                        | As reported |                          | $ | (1,817  | ) |      | $ | 48,306 |  |  | $ | 40,105 | 
|                                        | Pro forma   |                          |   | (13,099 | ) |      |   | 26,538 |  |  |   | 31,990 | 
|Net income (loss) per share 
	basic:   |             |                          |   |         |   |      |   |        |  |  |   |       
|                                        | As reported |                          |   | (0.04   | ) |      |   | 1.14   |  |  |   | 0.99   | 
|                                        | Pro forma   |                          |   | (0.31   | ) |      |   | 0.62   |  |  |   | 0.79   | 
|Net income (loss) per share 
	diluted: |             |                          |   |         |   |      |   |        |  |  |   |       
|                                        | As reported |                          |   | (0.04   | ) |      |   | 1.05   |  |  |   | 0.88   | 
|                                        | Pro forma   |                          | $ | (0.29   | ) |      | $ | 0.58   |  |  | $ | 0.70   | 

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:

|                         |  |               |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | ------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  |              
|                         |  | Employee     
|                         |  | Stock Options
|                         |  |              
|                         |  | 2001          |      | 2000 |  | 1999
|                         |  |               |      |      |  |     
|Expected dividend yield  |  |               | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %
|Risk-free interest rate  |  |               | 4.43 | %    |  |      | 6.00 | % |  |  | 5.75 | %
|Expected volatility      |  |               | 90   | %    |  |      | 60   | % |  |  | 80   | %
|Expected life (in years) |  |               | 3    |      |  |      | 4    |   |  |  | 5    |  

The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the
input of highly subjective assumptions, including expected stock
price volatility. Because the Companys employee stock
options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.

Sales under the Purchase Plan in 2001, 2000 and
1999 were approximately 69,000 shares, 74,000 shares
and 88,000 shares respectively, at an average price per
share of $5.78, $11.24 and $5.95 respectively. Pro forma
compensation expense for the grant date fair value, as defined
by SFAS 123, of the purchase rights granted

43



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

under the Purchase Plan was calculated using the
Black-Scholes model with the following assumptions for 2001,
2000 and 1999:

|                                       |  |                     |       |      |  |      |       |  |  |   |       | 
|-------------------------------------- |  | ------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                       |  |                    
|                                       |  | 1995 Employee Stock
|                                       |  | Purchase Plan      
|                                       |  |                    
|                                       |  | 2001                |       | 2000 |  | 1999
|                                       |  |                     |       |      |  |     
|Expected dividend yield                |  |                     | 0.0%  |      |  |      | 0.0%  |  |  |   | 0.0%  | 
|Risk-free interest rate                |  |                     | 4.43% |      |  |      | 6.00% |  |  |   | 5.75% | 
|Expected volatility                    |  |                     | 90%   |      |  |      | 60%   |  |  |   | 80%   | 
|Expected life (in Months)              |  |                     | 6     |      |  |      | 6     |  |  |   | 6     | 
|Weighted average grant date fair value |  | $                   | 3.92  |      |  | $    | 4.30  |  |  | $ | 2.58  | 

Because additional option grants are expected to
be made each year, the above pro forma disclosures are not
representative of pro forma effects of reported net income
(loss) for future years.

8.     Earnings Per
Share

EPS is calculated in accordance with the
provisions of SFAS No. 128 Earnings Per Share
(SFAS 128). SFAS No. 128, requires the
Company to report both basic EPS, which is based on the weighted
average number of common shares outstanding, and diluted
earnings per share, which is based on the weighted average
number of common shares outstanding and all dilutive potential
common shares outstanding.

In addition to net income (loss) per share,
the Company has also reported per share amounts on the separate
income statement components required by Accounting Principles
Board Opinion No. 30, Reporting the Results of
Operation  Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions (APB
No. 30) (in thousands, except per share amounts).

|                                              |  |               |         |        |  |           |        |  |  |   |       |  
|--------------------------------------------- |  | ------------- | ------- | ------ |  | --------- | ------ |  |  | - | ----- | -
|                                              |  | Net           |         |        |  | Per Share
|Year Ended December 31, 2001                  |  | Income (Loss) |         | Shares |  | Amount   
|                                              |  |               |         |        |  |          
|Basic EPS from continuing operations          |  | $             | 10,985  |        |  |           | 42,274 |  |  | $ | 0.26  |  
|Basic EPS from discontinued operation         |  |               | (12,802 | )      |  |           | 42,274 |  |  |   | (0.30 | )
|                                              |  |               |         |        |  |           |        |  |  |   |       |  
|Basic EPS                                     |  |               | (1,817  | )      |  |           | 42,274 |  |  |   | (0.04 | )
|                                              |  |               |         |        |  |           |        |  |  |   |       |  
|Effects of Dilutive Securities: Stock options |  |               |         |        |  |           | 2,988  |  |  |   |       |  
|Diluted EPS from continuing operations        |  |               | 10,985  |        |  |           | 45,262 |  |  |   | 0.24  |  
|Diluted EPS from discontinued operation       |  |               | (12,802 | )      |  |           | 45,262 |  |  |   | (0.28 | )
|                                              |  |               |         |        |  |           |        |  |  |   |       |  
|Diluted EPS                                   |  | $             | (1,817  | )      |  |           | 45,262 |  |  | $ | (0.04 | )
|                                              |  |               |         |        |  |           |        |  |  |   |       |  

|                                              |  |               |         |        |  |           |        |  |  |   |       |  
|--------------------------------------------- |  | ------------- | ------- | ------ |  | --------- | ------ |  |  | - | ----- | -
|                                              |  | Net           |         |        |  | Per Share
|Year Ended December 31, 2000                  |  | Income (Loss) |         | Shares |  | Amount   
|                                              |  |               |         |        |  |          
|Basic EPS from continuing operations          |  | $             | 63,166  |        |  |           | 42,548 |  |  | $ | 1.49  |  
|Basic EPS from discontinued operation         |  |               | (14,860 | )      |  |           | 42,548 |  |  |   | (0.35 | )
|                                              |  |               |         |        |  |           |        |  |  |   |       |  
|Basic EPS                                     |  |               | 48,306  |        |  |           | 42,548 |  |  |   | 1.14  |  
|                                              |  |               |         |        |  |           |        |  |  |   |       |  
|Effects of Dilutive Securities: Stock options |  |               |         |        |  |           | 3,395  |  |  |   |       |  
|Diluted EPS from continuing operations        |  |               | 63,166  |        |  |           | 45,943 |  |  |   | 1.37  |  
|Diluted EPS from discontinued operation       |  |               | (14,860 | )      |  |           | 45,943 |  |  |   | (0.32 | )
|                                              |  |               |         |        |  |           |        |  |  |   |       |  
|Diluted EPS                                   |  | $             | 48,306  |        |  |           | 45,943 |  |  | $ | 1.05  |  
|                                              |  |               |         |        |  |           |        |  |  |   |       |  

44



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                              |  |               |        |        |  |           |        |  |  |   |       |  
|--------------------------------------------- |  | ------------- | ------ | ------ |  | --------- | ------ |  |  | - | ----- | -
|                                              |  | Net           |        |        |  | Per Share
|Year Ended December 31, 1999                  |  | Income (Loss) |        | Shares |  | Amount   
|                                              |  |               |        |        |  |          
|Basic EPS from continuing operations          |  | $             | 41,325 |        |  |           | 40,640 |  |  | $ | 1.02  |  
|Basic EPS from discontinued operation         |  |               | (1,220 | )      |  |           | 40,640 |  |  |   | (0.03 | )
|                                              |  |               |        |        |  |           |        |  |  |   |       |  
|Basic EPS                                     |  |               | 40,105 |        |  |           | 40,640 |  |  |   | 0.99  |  
|                                              |  |               |        |        |  |           |        |  |  |   |       |  
|Effects of Dilutive Securities: Stock options |  |               |        |        |  |           | 4,985  |  |  |   |       |  
|Diluted EPS from continuing operations        |  |               | 41,325 |        |  |           | 45,625 |  |  |   | 0.91  |  
|Diluted EPS from discontinued operation       |  |               | (1,220 | )      |  |           | 45,625 |  |  |   | (0.03 | )
|                                              |  |               |        |        |  |           |        |  |  |   |       |  
|Diluted EPS                                   |  | $             | 40,105 |        |  |           | 45,625 |  |  | $ | 0.88  |  
|                                              |  |               |        |        |  |           |        |  |  |   |       |  

For the years ended December 31, 2001, 2000
and 1999, there were options to purchase approximately
2,540,000, 157,000 and 124,000 shares of the Companys
Common Stock with exercise prices greater than the
weighted-average market value of such Common Stock,
respectively. These options were excluded from the calculation
of diluted earnings per share.

9.     Non-Operating
Income (Loss), Net

The following table lists the major components of
Non-Operating Income (Loss) for the years ended
December 31, 2001, 2000 and 1999, respectively (in
thousands).

|                                                  |  |                          |         |      |  |      |        |  |  |   |       | 
|------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ |  |  | - | ----- | 
|                                                  |  |                         
|                                                  |  | Years Ended December 31,
|                                                  |  |                         
|                                                  |  | 2001                     |         | 2000 |  | 1999
|                                                  |  |                          |         |      |  |     
|Interest income                                   |  | $                        | 2,019   |      |  | $    | 2,428  |  |  | $ | 3,841 | 
|Gain on exchange of Komodo shares to Cisco shares |  |                          |        |      |  |      | 35,045 |  |  |   |      | 
|Sales of Cisco Stock                              |  |                          | (21,187 | )    |  |      |       |  |  |   |      | 
|Vialta rental income                              |  |                          | 640     |      |  |      |       |  |  |   |      | 
|Gain on sale of property, plant and equipment     |  |                          |        |      |  |      | 2,896  |  |  |   |      | 
|Other                                             |  |                          | (252    | )    |  |      | 1,441  |  |  |   | 825   | 
|                                                  |  |                          |         |      |  |      |        |  |  |   |       | 
|Total Non-Operating Income                        |  | $                        | (18,780 | )    |  | $    | 41,810 |  |  | $ | 4,666 | 
|                                                  |  |                          |         |      |  |      |        |  |  |   |       | 

10.     Comprehensive
Income (loss)

Comprehensive income (loss) is comprised of
net income (loss) and the unrealized loss on marketable
securities. Comprehensive income (loss) was
$4.2 million, $40.9 million, and $40.1 million
for the years ended December 31, 2001, 2000 and 1999,
respectively. The following table reconciles Net Income (Loss)
to Comprehensive Income (Loss) for the years ended
December 31, 2001, 2000 and 1999 (in thousands).

|                                                                  |  |                          |        |      |  |      |        |   |  |   |        | 
|----------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                                                  |  |                         
|                                                                  |  | Years Ended December 31,
|                                                                  |  |                         
|                                                                  |  | 2001                     |        | 2000 |  | 1999
|                                                                  |  |                          |        |      |  |     
|Net Income (Loss)                                                 |  | $                        | (1,817 | )    |  | $    | 48,306 |   |  | $ | 40,105 | 
|Change in Unrealized Gain (Loss) on Marketable
	Equity Securities |  |                          | 6,004  |      |  |      | (7,378 | ) |  |   |       | 
|                                                                  |  |                          |        |      |  |      |        |   |  |   |        | 
|Total Comprehensive Income                                        |  | $                        | 4,187  |      |  | $    | 40,928 |   |  | $ | 40,105 | 
|                                                                  |  |                          |        |      |  |      |        |   |  |   |        | 

45



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table shows the individual
components of the Other Comprehensive Income (Loss) on the
Consolidated Balance Sheet as of December 31, 2001 and 2000
(in thousands).

|                                                |  |              |        |      |  |   |        |  
|----------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                                |  |             
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2001         |        | 2000
|                                                |  |              |        |     
|Unrealized Loss on Cisco Shares                 |  | $            | (1,527 | )    |  | $ | (7,378 | )
|Unrealized Gain on Marketable Equity Securities |  |              | 153    |      |  |   |       |  
|                                                |  |              |        |      |  |   |        |  
|Total Other Comprehensive Loss                  |  | $            | (1,374 | )    |  | $ | (7,378 | )
|                                                |  |              |        |      |  |   |        |  

11.     Industry and
Geographical Segment



| |                  
| | -----------------
| | Industry segments

The Company and its subsidiaries operate in one
business segment: the semiconductor segment. The Company
designs, develops, supports manufactures and markets highly
integrated mixed-signal semiconductor, hardware, software and
system solutions for DVD, internet related, communications, VCD/
SVCD, and PC Audio applications.



| |                    
| | -------------------
| | Geographic segments

The Company sells and markets to leading PC and
consumer OEMs worldwide. International sales comprised of
significant portion of the Companys revenues. The
geographic location of the Companys revenues is based upon
destination of the shipment. Most of the long-lived assets
located outside the United States are in Asia Pacific. The
following is a summary of the Companys geographic
locations (in thousands):

|                             |  |           |         |            |  |   |        | 
|---------------------------- |  | --------- | ------- | ---------- |  | - | ------ | 
|                             |  |           |         | Long Lived
|Year Ended December 31, 2001 |  | Net Sales |         | Assets    
|                             |  |           |         |           
|United States                |  | $         | 6,885   |            |  | $ | 21,800 | 
|                             |  |           |         |            |  |   |        | 
|Taiwan                       |  |           | 43,567  |            |  |   |       | 
|Japan                        |  |           | 6,661   |            |  |   |       | 
|Singapore                    |  |           | 1,975   |            |  |   |       | 
|Hong Kong                    |  |           | 186,394 |            |  |   | 638    | 
|Rest of the World            |  |           | 25,898  |            |  |   |       | 
|                             |  |           |         |            |  |   |        | 
|Total Foreign                |  |           | 264,495 |            |  |   | 638    | 
|                             |  |           |         |            |  |   |        | 
|Total                        |  | $         | 271,380 |            |  | $ | 22,438 | 
|                             |  |           |         |            |  |   |        | 

46



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                             |  |           |         |            |  |   |        | 
|---------------------------- |  | --------- | ------- | ---------- |  | - | ------ | 
|                             |  |           |         | Long Lived
|Year Ended December 31, 2000 |  | Net Sales |         | Assets    
|                             |  |           |         |           
|United States                |  | $         | 20,551  |            |  | $ | 30,344 | 
|                             |  |           |         |            |  |   |        | 
|Taiwan                       |  |           | 79,302  |            |  |   |       | 
|Japan                        |  |           | 15,138  |            |  |   |       | 
|Singapore                    |  |           | 6,157   |            |  |   |       | 
|Hong Kong                    |  |           | 149,925 |            |  |   | 689    | 
|Canada                       |  |           |        |            |  |   | 28     | 
|Rest of the World            |  |           | 32,363  |            |  |   | 20     | 
|                             |  |           |         |            |  |   |        | 
|Total Foreign                |  |           | 282,885 |            |  |   | 737    | 
|                             |  |           |         |            |  |   |        | 
|Total                        |  | $         | 303,436 |            |  | $ | 31,081 | 
|                             |  |           |         |            |  |   |        | 

|                             |  |           |         |            |  |   |        | 
|---------------------------- |  | --------- | ------- | ---------- |  | - | ------ | 
|                             |  |           |         | Long Lived
|Year Ended December 31, 1999 |  | Net Sales |         | Assets    
|                             |  |           |         |           
|United States                |  | $         | 14,812  |            |  | $ | 39,720 | 
|                             |  |           |         |            |  |   |        | 
|Taiwan                       |  |           | 98,342  |            |  |   |       | 
|Japan                        |  |           | 24,480  |            |  |   |       | 
|Singapore                    |  |           | 14,547  |            |  |   |       | 
|Hong Kong                    |  |           | 124,427 |            |  |   | 624    | 
|Rest of the World            |  |           | 34,043  |            |  |   |       | 
|                             |  |           |         |            |  |   |        | 
|Total Foreign                |  |           | 295,839 |            |  |   | 624    | 
|                             |  |           |         |            |  |   |        | 
|Total                        |  | $         | 310,651 |            |  | $ | 40,344 | 
|                             |  |           |         |            |  |   |        | 



| |                      
| | ---------------------
| | Significant Customers

The following table summarizes the percentage of
net revenues accounted for by the Companys significant
customers for any year in which a customer or distributor
accounts for 10% or more of revenues.

|                             |  |              |    |      |  |      |    |   |  |  |    |  
|---------------------------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                             |  |             
|                             |  | Years Ended 
|                             |  | December 31,
|                             |  |             
|                             |  | 2001         |    | 2000 |  | 1999
|                             |  |              |    |      |  |     
|Dynax                        |  |              | 56 | %    |  |      | 35 | % |  |  | 22 | %
|Digital AV (formerly Shinco) |  |              | 9  | %    |  |      | 10 | % |  |  | 13 | %
|                             |  |              |    |      |  |      |    |   |  |  |    |  
|Total from the two customers |  |              | 65 | %    |  |      | 45 | % |  |  | 35 | %

A majority of the Companys trade
receivables are derived from sales to the Companys
distributors. The Company generally extends 30-day credit terms
to its customers, which is consistent with industry business
practices. The Company performs ongoing credit evaluations of
its customers financial condition and generally, requires
letters of credit from international customers. The Company
maintains an allowance for doubtful accounts on its receivables
based upon the expected collections of all accounts receivable.
At

47



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2001 and 2000, approximately
84% and 67%, respectively, of trade accounts receivable
represent amounts due from two customers, as shown in the table
below.

|                                                          |  |              |    |      |  |  |    |  
|--------------------------------------------------------- |  | ------------ | -- | ---- |  |  | -- | -
|                                                          |  |             
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2001         |    | 2000
|                                                          |  |              |    |     
|Dynax, as a percentage of trade accounts
	receivable      |  |              | 79 | %    |  |  | 60 | %
|Digital AV, as a percentage of trade accounts
	receivable |  |              | 5  | %    |  |  | 7  | %
|                                                          |  |              |    |      |  |  |    |  
|Total from the two customers                              |  |              | 84 | %    |  |  | 67 | %
|                                                          |  |              |    |      |  |  |    |  

12.     Commitments
and Contingencies

The Company maintains leased office space in
various locations. Future minimum rental payments under these
operating leases are as follows (in thousands):

|                       |  |        |       | 
|---------------------- |  | ------ | ----- | 
|Year Ended December 31 |  | Amount
|                       |  |       
|2002                   |  | $      | 1,050 | 
|2003                   |  |        | 544   | 
|2004                   |  |        | 97    | 
|2005                   |  |        | 81    | 
|                       |  |        |       | 
|                       |  | $      | 1,772 | 
|                       |  |        |       | 

Lease expenses were $1.5 million,
$1.4 million and $0.9 million in 2001, 2000 and 1999,
respectively.

From time to time, the Company is subject to
legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of trademarks,
copyrights and other intellectual property rights. In addition,
from time to time, third parties assert patent infringement
claims against the Company in the form of letters, lawsuits and
other forms of communication. As of December 31, 2001, the
Company was engaged in two lawsuits regarding patent and
trademark issues.

The Company is not currently aware of any legal
proceedings or claims that the Company believes are likely to
have a material adverse effect on the Companys financial
position, results of operations or cash flows. However, the
Company may incur substantial expenses in defending against
third-party claims. In the event of a determination adverse to
the Company, the Company may incur substantial monetary
liability, and be required to change its business practices.
Either of these could have a material adverse effect on the
Companys financial position, results of operations and
cash flows.

48



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Acquisitions
and Related Charges

In February 2000, the Company acquired all of the
outstanding shares and vested stock options of NetRidium
Communications, Inc. (NetRidium) for
$5.3 million in cash, of which 10% was paid in November
2000. NetRidium is a development stage company, which develops
broadband communication products enabling high-speed networking
over existing phone lines in the home. NetRidiums assets,
liabilities and expenses were not material to the Company. The
purchase price was allocated to assets acquired and liabilities
assumed based upon the book value of NetRidiums current
assets, equipment and liabilities, which management believes
approximate their fair market value and independent appraisal
for all other identifiable assets as follows (in thousands).

|                                           |  |        |        |  
|------------------------------------------ |  | ------ | ------ | -
|                                           |  | Amount
|                                           |  |       
|In-process research and development        |  | $      | 2,625  |  
|Technical infrastructure                   |  |        | 797    |  
|Covenants not to complete                  |  |        | 730    |  
|Current assets, net of liabilities assumed |  |        | 1,105  |  
|Property and equipment                     |  |        | 75     |  
|                                           |  |        |        |  
|                                           |  |        | 5,332  |  
|Less cash acquired from acquisition        |  |        | (1,066 | )
|                                           |  |        |        |  
|Net cash paid for acquisition              |  | $      | 4,266  |  
|                                           |  |        |        |  

The acquisition was recorded using the purchase
method of accounting and accordingly, the results of operations
and cash flows of such acquisition have been included from the
date of acquisition. Acquired in-process research and
development aggregating $2.6 million for the NetRidium
acquisition was charged to operations in the second quarter of
2000. Technical infrastructure and covenants not to compete are
being amortized over four years. In connection with the
acquisition, the Company granted certain NetRidium
employees stock options to purchase 500,000 shares of the
Companys stock at $17.68 per share, the fair market value
on the date of grant. In addition, certain employees of
NetRidium have signed employment contracts, which, among other
things, provide that if the employee stays with the Company for
the applicable vesting periods during the four-year term of the
employment agreement, the employees stock options will
have a value of at least $8.85 more than the exercise price when
such options become exercisable. The Company is accordingly
accruing the additional compensation expense over the four year
term of the agreement. Approximately 428,000 of the options
issued upon acquisition are subject to this guarantee. During
2001, the Company recorded approximately $0.5 million as
compensation expense under this guarantee.

In April 2001, the Company entered into a
definitive agreement (the Agreement) to acquire
Silicon Analog Systems (SAS) in a merger transaction
to be accounted for as a purchase business combination. SAS is a
Canadian start-up company engaged in developing single chip
solutions for wireless communications. This acquisition was
consummated on April 12, 2001. The Company paid
$1 million dollars on the consummation date and will pay an
additional $1 million dollars one year from the
consummation date. The total purchase price of two million
dollars along with $75 thousand dollars of acquisition cost was
primarily allocated to goodwill, based on an independent
appraisal. The assets, liabilities and operating expenses for
SAS were not material to the financial position or results of
operations of the Company. The Companys results would not
have been materially different if the acquisition occurred as of
the beginning of the year.

49



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     Related Party
Transactions with Vialta

In connection with the spin off of Vialta, the
Company entered into a Master Distribution Agreement that
outlines the general terms and conditions of the distribution
and a number of ancillary agreements that govern the various
relationships between ESS and Vialta following the spin off.

In addition, Mr. Fred S.L. Chan serves as
Chairman of the Board for ESS and Vialta. He also serves as
Chief Executive Officer of Vialta.

The Master Technology Ownership and License
Agreement supercedes the prior Intellectual Property and
Research and Development Agreements between ESS and Vialta and
allocates ownership rights generally along the product lines of
each of ESS and Vialta. In the Master Technology Ownership and
License Agreement, the Company acknowledges Vialtas
exclusive ownership of specific technology and trademarks
related to Vialtas products. Vialta has unrestricted
rights to use the assigned technology and related trademarks
that Vialta alone owns.

The Master Technology Ownership and License
Agreement does not obligate either Vialta or ESS to provide the
other improvements that it makes to its own technology.

The Employee Matters Agreement allocates
responsibilities relating to current and former employees of
Vialta and their participation in any benefits plans that ESS
has sponsored and maintained. Prior to the distribution, ESS
transferred to Vialta approximately 9,839,672 shares of Vialta
Class A common stock. This same number of shares of Vialta
Class A common stock has been authorized and reserved for
issuance under the Vialta 2001 Non-Statutory Stock Option Plan.
Immediately prior to the distribution, Vialta granted options to
all ESS employees who held ESS options, based on ESS options
outstanding as of the record date for the spin-off distribution.
As a result, on the date of the distribution, approximately
9,839,672 of the total shares authorized under the 2001
Non-Statutory Stock Options plan became subject to outstanding
options. The resulting Vialta options will vest, become
exercisable, expire and otherwise be treated under terms that
essentially mirror the provisions of the corresponding ESS
option held by the ESS employee.

The Tax Sharing and Indemnity Agreement allocate
responsibilities for tax matters between ESS and Vialta. Vialta
will indemnify ESS in the event the distribution initially
qualifies for tax-free treatment and later becomes disqualified
as a result of actions taken by Vialta or within Vialtas
control. The Tax Sharing and Indemnity Agreement also assigns
responsibilities for administrative matters such as the filing
of returns, payment of taxes due, retention of records and
conduct of audits, examinations and similar proceedings.

The Real Estate Matters Agreement addresses real
estate matters relating to property owned by ESS that ESS leases
to Vialta, as well as other properties already leased by Vialta.
The Real Estate Matters Agreement also amends and restates the
terms of the lease from ESS to Vialta for the Fremont facility
that currently serves as Vialtas corporate headquarters.

The Master Confidential Disclosure Agreement
provides that Vialta and ESS agree not to disclose confidential
information of the other except in specific circumstances or as
may be permitted in an ancillary agreement.

The Master Transitional Services Agreement
governs corporate support services that ESS has agreed to
provide to Vialta, including, without limitation, information
technology systems, human resources administration, product
order administration, customer service, buildings and facilities
and finance and accounting services, each as specified and on
the terms set forth in the Master Transitional Services
Agreement and in the schedules to the Master Transitional
Services Agreement. The Master Transitional Services Agreement
also provides for the provision of additional services
identified from time to time after the distribution date that
Vialta reasonably believes were inadvertently or unintentionally
omitted from the specified services, or that are essential to
effectuate an orderly transition under the Master Distribution
Agreement, so long as the provision

50



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of such services would not significantly disrupt
ESSs operations or significantly increase the scope of
ESSs obligations under the agreement.

In addition, Vialta continues to be a customer of
ESS and purchases chips from ESS from time to time pursuant to
standard purchase orders.

The Company anticipates that it will continue to
provide products and services to Vialta under the terms of these
agreements. The following is a summary of major transactions
between ESS and Vialta for the periods presented (in thousands):

|                                                    |  |                       |       |           |  |   |       | 
|--------------------------------------------------- |  | --------------------- | ----- | --------- |  | - | ----- | 
|                                                    |  |                      
|                                                    |  | ESS Charges to Vialta
|                                                    |  |                      
|Intercompany Agreements                             |  | Year 2001             |       | Year 2000
|                                                    |  |                       |       |          
|Master Transitional Services Agreement R&D          |  | $                     | 1,895 |           |  | $ | 3,077 | 
|Master Transitional Services Agreement G&A
	and S&M |  |                       | 3,139 |           |  | $ | 3,361 | 
|Real Estate Matters Agreement                       |  |                       | 640   |           |  |   |      | 
|Master Technology Ownership and License Agreement   |  |                       |      |           |  | $ | 2,000 | 
|Chip Purchases                                      |  |                       | 1,127 |           |  | $ | 1,004 | 
|                                                    |  |                       |       |           |  |   |       | 
|Total                                               |  | $                     | 6,801 |           |  | $ | 9,442 | 
|                                                    |  |                       |       |           |  |   |       | 

In the years ended December 31, 2001, 2000
and 1999, ESS incurred approximately $0, $260,000 and $800,000
of inter-company charges for sharing Vialtas tax credit
resulting from Vialtas net operating loss in 2001, 2000
and 1999, respectively.

On December 18, 2000, Vialta received a
$30.0 million loan from a related party controlled by
Annie M.H. Chan, a director of the Company and the spouse
of Fred S.L. Chan. The $30.0 million short-term loan along
with $194,000 accrued interest at 5.25% was repaid on
January 31, 2001.

In September 1999, Vialta issued 40 million
shares of Series A Convertible Preferred Stock
(Series A) at $0.25 per share to the Company for
$10.0 million in cash. In October 1999, Mr. Fred Chan,
Chairman of ESS and Vialta, purchased 4 million shares of
Vialta common stock at $0.25 per share for $1.0 million by
issuing a full recourse promissory note to Vialta, which bore
interest at a market rate. The principal and accrued interest
under this promissory note was paid in full in March 2000. Also
in October 1999, Vialta issued 400,000 and 1,820,000 common
shares at $0.25 per share to the Company and certain employees,
respectively, for full recourse promissory notes in the
aggregate principal amount of $555,000. These notes were fully
paid in cash to Vialta in the first quarter of 2000.

In December 1999, Vialta issued 40.3 million
shares of Series B Preferred Stock (Series B) at $2.60
per share for $104.8 million: 20 million shares to the
Company for $52.0 million and 20.3 million shares to
third party investors for $52.8 million in cash. In January
2000, Vialta received $20.8 million in the form of a full
recourse promissory note, which bore interest at a market rate,
from a party controlled by Mr. Fred S.L. Chan and his wife
Ms. Annie Chan, a director of the Company, for the purchase
of 8 million shares of Series B Preferred Stock at
$2.60 per share. The principal and accrued interest under this
promissory note were paid in full in March 2000. During the
first quarter of 2000, Vialta received $7.0 million in cash
from third party investors for subscriptions to purchase
2.7 million shares of its Series B Preferred Stock.

15.     Transactions
with Dynax Electronics

ESS Technology sells its products through its
direct sales force as well as through distributors. Dynax
Electronics (HK) LTD. is our largest distributor. Most of our
sales are sold through our direct sales force and ESS engineers
located in our Fremont headquarters do all the design
specifications and custom development work with a
customers design team. However, when a customer in China
and Hong Kong places an order for our semiconductor products we
ask them to place it with Dynax, who functions much like a
trading company.

51



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Dynax manages the order process, arranges
shipment into China and Hong Kong, manages the letters of
credit, and provides credit and collection expertise and
services.

The following table summarizes Dynaxs
percentage of net revenues for the year ended December 31,
2001, 2000 and 1999, respectively (in thousands, except
percentage amounts).

|                           |  |                          |          |      |  |      |          |  |  |  |          | 
|-------------------------- |  | ------------------------ | -------- | ---- |  | ---- | -------- |  |  |  | -------- | 
|                           |  |                         
|                           |  | Years Ended December 31,
|                           |  |                         
|                           |  | 2001                     |          | 2000 |  | 1999
|                           |  |                          |          |      |  |     
|Net revenues               |  |                          | $271,380 |      |  |      | $303,436 |  |  |  | $310,651 | 
|Net revenues from Dynax    |  |                          | 151,972  |      |  |      | 106,203  |  |  |  | 68,343   | 
|Percentage of net revenues |  |                          | 56%      |      |  |      | 35%      |  |  |  | 22%      | 

The following table summarizes Dynaxs
percentage of trade accounts receivable as of December 31,
2001 and 2000 (in thousands, except percentage amounts).

|                                        |  |              |         |      |  |  |         | 
|--------------------------------------- |  | ------------ | ------- | ---- |  |  | ------- | 
|                                        |  |             
|                                        |  | December 31,
|                                        |  |             
|                                        |  | 2001         |         | 2000
|                                        |  |              |         |     
|Trade accounts receivable               |  |              | $42,799 |      |  |  | $55,342 | 
|Trade accounts receivable from Dynax    |  |              | 33,811  |      |  |  | 33,459  | 
|Percentage of trade accounts receivable |  |              | 79%     |      |  |  | 60%     | 

16.     ESS 401K
Plan

The Company has a 401(K) Plan (the 401(K)
Plan), which covers substantially all employees. Each
eligible employee may elect to contribute to the 401(K) Plan,
through payroll deductions, up to 10% of their compensation,
subject to current statutory limitations. No contributions were
made by the Company through December 31, 2001.

17.     Subsequent
Events

On February 1, 2002, we announced that we
had commenced a public offering of 4,800,000 shares of our
common stock at a price of $19.38 per share. We sold 2,500,000
shares, and 2,300,000 shares were sold by selling shareholders
 we did not receive any of the proceeds from the sale of
shares by the selling shareholders: Annie M.H. Chan, the
Annie M.H. Chan Living Trust and the Shiu Leung
Chan & Annie M.H. Chan Gift Trust. We received the
net proceeds of $45,550,000 on February 6, 2002, which will
be used for general corporate purposes, which may include
acquisitions of companies, acquisitions of technology and
capital expenditures. Pending such uses, we intend to invest the
net proceeds from the offering in short term, interest bearing,
investment grade securities.

52



---



##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Selected Quarterly Financial Data
(un-audited)

The following table presents un-audited quarterly
financial information for each of the Companys last eight
quarters. This information has been derived from the
Companys audited financial statements and has been
prepared on the same basis as the audited Consolidated Financial
Statements appearing elsewhere in this Form 10-K. In the
opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, have been included to
present fairly the quarterly results (in thousands, except per
share amount).

|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |        |      | 
|-------------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------- | ------ | ------- | ----- | -------- | ------ | ------- | ----- | ------- | ------ | ------- | ----- | -------- | ------ | ------- | ----- | - | ------- | ------- | ----- | - | ------- | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ | ---- | 
|                                                         |                                                                         |                         |        |        
|                                                         |                                                                         | 2000                    |        | 2001   
|                                                         |                                                                         |                         |        |        
|                                                         |                                                                         | Mar. 31                 |        | June 30 |       | Sept. 30 |        | Dec. 31 |       | Mar. 31 |        | June 30 |       | Sept. 30 |        | Dec. 31
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |        
|Statement of Operations Data:                            |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|Net revenues                                             |                                                                         | $                       | 83,597 |         |       | $        | 79,587 |         |       | $       | 87,714 |         |       | $        | 52,538 |         |       | $ | 50,808  |         |       | $ | 64,909  |        |      | $ | 72,397 |        |      | $ | 83,266 |       
|Cost of revenues                                         |                                                                         |                         | 53,114 |         |       |          | 49,296 |         |       |         | 52,521 |         |       |          | 37,521 |         |       |   | 39,606  |         |       |   | 45,970  |        |      |   | 45,930 |        |      |   | 48,725 |       
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|                                                         | Gross profit                                                            |                         |        | 30,483  |       |          |        | 30,291  |       |         |        | 35,193  |       |          |        | 15,017  |       |   |         | 11,202  |       |   |         | 18,939 |      |   |        | 26,467 |      |   |        | 34,541 |     
|Operating expenses:                                      |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|                                                         | Research and development                                                |                         |        | 4,854   |       |          |        | 8,328   |       |         |        | 7,111   |       |          |        | 7,539   |       |   |         | 6,411   |       |   |         | 7,592  |      |   |        | 7,273  |      |   |        | 6,681  |     
|                                                         | In-process research and development                                     |                         |        | 2,625   |       |          |        |        |       |         |        |        |       |          |        |        |       |   |         |        |       |   |         |       |      |   |        |       |      |   |        |       |     
|                                                         | Selling, general and administrative                                     |                         |        | 8,592   |       |          |        | 9,638   |       |         |        | 10,946  |       |          |        | 7,049   |       |   |         | 8,666   |       |   |         | 8,917  |      |   |        | 11,686 |      |   |        | 11,420 |     
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|Operating income (loss)                                  |                                                                         |                         | 14,412 |         |       |          | 12,325 |         |       |         | 17,136 |         |       |          | 429    |         |       |   | (3,875  | )       |       |   | 2,430   |        |      |   | 7,508  |        |      |   | 16,440 |       
|Nonoperating income, net                                 |                                                                         |                         | 928    |         |       |          | 518    |         |       |         | 36,576 |         |       |          | 3,788  |         |       |   | 325     |         |       |   | (20,795 | )      |      |   | 989    |        |      |   | 701    |       
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|Income (loss) before income taxes                        |                                                                         |                         | 15,340 |         |       |          | 12,843 |         |       |         | 53,712 |         |       |          | 4,217  |         |       |   | (3,550  | )       |       |   | (18,365 | )      |      |   | 8,497  |        |      |   | 17,141 |       
|Provision for (benefit from) income taxes                |                                                                         |                         | 3,054  |         |       |          | 2,127  |         |       |         | 17,183 |         |       |          | 582    |         |       |   | (382    | )       |       |   | (8,167  | )      |      |   | 425    |        |      |   | 862    |       
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|Net income (loss) from continuing operations             |                                                                         |                         | 12,286 |         |       |          | 10,716 |         |       |         | 36,529 |         |       |          | 3,635  |         |       |   | (3,168  | )       |       |   | (10,198 | )      |      |   | 8,072  |        |      |   | 16,279 |       
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|Discontinued operation, net of minority interest:        |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|                                                         | Loss from discontinued operation, net of minority
	interest             |                         |        | (3,595  | )     |          |        | (2,225  | )     |         |        | (3,810  | )     |          |        | (5,230  | )     |   |         | (4,205  | )     |   |         |       |      |   |        |       |      |   |        |       |     
|                                                         | Loss from disposal of discontinued operation, net
	of minority interest |                         |        |        |       |          |        |        |       |         |        |        |       |          |        |        |       |   |         | (13,312 | )     |   |         |       |      |   |        | 4,715  |      |   |        |       |     
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|Net income (loss)                                        |                                                                         | $                       | 8,691  |         |       | $        | 8,491  |         |       | $       | 32,719 |         |       | $        | (1,595 | )       |       | $ | (20,685 | )       |       | $ | (10,198 | )      |      | $ | 12,787 |        |      | $ | 16,279 |       
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|Net income (loss) per share:                             |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|                                                         | Basic                                                                   |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |        |     
|                                                         |                                                                         | Continuing operations   |        | $       | 0.29  |          |        | $       | 0.25  |         |        | $       | 0.85  |          |        | $       | 0.08  |   |         | $       | (0.07 | ) |         | $      | 0.24 |   |        | $      | 0.19 |   |        | $      | 0.39 | 
|                                                         |                                                                         | Discontinuing operation |        |         | (0.08 | )        |        |         | (0.05 | )       |        |         | (0.09 | )        |        |         | (0.12 | ) |         |         | (0.42 | ) |         |        |     |   |        |        | 0.11 |   |        |        |     | 
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|                                                         |                                                                         | $                       | 0.21   |         |       | $        | 0.20   |         |       | $       | 0.76   |         |       | $        | (0.04  | )       |       | $ | (0.49   | )       |       | $ | 0.24    |        |      | $ | 0.30   |        |      | $ | 0.39   |       
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|                                                         | Diluted                                                                 |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |        |     
|                                                         |                                                                         | Continuing operations   |        | $       | 0.26  |          |        | $       | 0.22  |         |        | $       | 0.79  |          |        | $       | 0.08  |   |         | $       | (0.07 | ) |         | $      | 0.24 |   |        | $      | 0.18 |   |        | $      | 0.35 | 
|                                                         |                                                                         | Discontinuing operation |        |         | (0.07 | )        |        |         | (0.04 | )       |        |         | (0.08 | )        |        |         | (0.12 | ) |         |         | (0.42 | ) |         |        |     |   |        |        | 0.10 |   |        |        |     | 
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|                                                         |                                                                         | $                       | 0.19   |         |       | $        | 0.18   |         |       | $       | 0.71   |         |       | $        | (0.04  | )       |       | $ | (0.49   | )       |       | $ | 0.24    |        |      | $ | 0.28   |        |      | $ | 0.35   |       
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|Shares used in calculating net income
	(loss) per share: |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|                                                         | Basic                                                                   |                         |        | 41,804  |       |          |        | 42,374  |       |         |        | 43,310  |       |          |        | 42,699  |       |   |         | 42,370  |       |   |         | 42,375 |      |   |        | 42,380 |      |   |        | 41,976 |     
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       
|                                                         | Diluted                                                                 |                         |        | 46,869  |       |          |        | 48,006  |       |         |        | 46,138  |       |          |        | 44,704  |       |   |         | 42,370  |       |   |         | 42,375 |      |   |        | 45,375 |      |   |        | 45,867 |     
|                                                         |                                                                         |                         |        |         |       |          |        |         |       |         |        |         |       |          |        |         |       |   |         |         |       |   |         |        |      |   |        |        |      |   |        |       

53



---



##### Table of Contents






Item
9.     Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosures

Not applicable.




PART III

Certain information required by Part III is
omitted from this Report since we plan to file with the
Securities and Exchange Commission the definitive proxy
statement for our 2002 Annual Meeting of Shareholders (the
Proxy Statement) not later than 120 days after
the end of the fiscal year covered by this Report, and certain
information included therein is incorporated herein by reference.




Item
10.     Directors and Executive
Officers of the Registrant

The information concerning our directors and
certain information concerning our Executive Officers required
by this Item are incorporated by reference in our Proxy
Statement, which we will file with the Commission not later than
120 days after our fiscal year-end. The notes concerning
the Companys executive officers required by this Item is
set forth at the end of Part I in a section captioned
Executive Officers of the Registrant, above.




Item
11.     Executive
Compensation

The information required by this Item is
incorporated by reference to the sections in our Proxy Statement
entitled Executive Compensation, which we will file
with the Commission not later than 120 days after our
fiscal year-end.




Item
12.     Security Ownership of
Certain Beneficial Owners and Management

The information required by this Item is
incorporated by reference in the Proxy Statement, which we will
file with the Commission not later than 120 days after our
fiscal year-end.




Item
13.     Certain Relationships and
Related Transactions

The information required by this Item is
incorporated by reference in the our Proxy Statement, which we
will file with the Commission not later than 120 days after our
fiscal year-end.




PART IV




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

(a)(1) Financial Statements

The consolidated financial statements of the
registrant as set forth under Item 8 are filed as part of
the Form 10-K.

(a)(2) Financial Statement Schedule

54



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS ON

FINANCIAL STATEMENT SCHEDULE


To the Board of Directors of

ESS Technology, Inc.


Our audits of the consolidated financial
statements referred to in our report dated January 23,
2002, except for Note 17, as to which the date is
February 6, 2002, appearing in this 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

San Jose, California

January 23, 2002, except for Note 17,


as to which the date is February 6, 2002.


55



---



##### Table of Contents



Schedule II

VALUATION AND QUALIFYING ACCOUNTS

|                             |                                            |                |   |            |  |            |   |            |  |  |   |        |   |  |   |        | 
|---------------------------- | ------------------------------------------ | -------------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | ------ | - |  | - | ------ | 
|                             |                                            |                |   | Additions  |  |            |   |           
|                             |                                            | Balance at     |   | Charged to |  |            |   | Balance at
|                             |                                            | Beginning      |   | Costs and  |  |            |   | Ending    
|                             |                                            | of Period      |   | Expenses   |  | Deductions |   | of Period 
|                             |                                            |                |   |            |  |            |   |           
|                             |                                            |               
|                             |                                            | (In thousands)
|Year Ended December 31, 2001 |                                            |                |   |            |  |            |   |            |  |  |   |        |   |  |   |       
|                             | Allowance for doubtful accounts            |                | $ | 2,393      |  |            | $ |           |  |  | $ | 1,494  |   |  | $ | 899    | 
|                             | Allowance for sales returns                |                |   | 920        |  |            |   | 6,044      |  |  |   | 5,534  |   |  |   | 1,430  | 
|                             | Inventory reserves                         |                |   | 27,040     |  |            |   | 6,964      |  |  |   | (1,055 | ) |  |   | 35,059 | 
|                             | Valuation allowance on deferred tax assets |                | $ | 9,485      |  |            | $ |           |  |  | $ | 9,485  |   |  | $ |       | 
|Year Ended December 31, 2000 |                                            |                |   |            |  |            |   |            |  |  |   |        |   |  |   |       
|                             | Allowance for doubtful accounts            |                | $ | 2,459      |  |            | $ | 1,534      |  |  | $ | 1,600  |   |  | $ | 2,393  | 
|                             | Allowance for sales returns                |                |   | 315        |  |            |   | 7,110      |  |  |   | 6,505  |   |  |   | 920    | 
|                             | Inventory reserves                         |                |   | 18,147     |  |            |   | 10,236     |  |  |   | 1,343  |   |  |   | 27,040 | 
|                             | Valuation allowance on deferred tax assets |                | $ |           |  |            | $ | 9,485      |  |  | $ |       |   |  | $ | 9,485  | 
|Year Ended December 31, 1999 |                                            |                |   |            |  |            |   |            |  |  |   |        |   |  |   |       
|                             | Allowance for doubtful accounts            |                | $ | 3,928      |  |            | $ |           |  |  | $ | 1,469  |   |  | $ | 2,459  | 
|                             | Allowance for sales returns                |                |   | 315        |  |            |   | 2,983      |  |  |   | 2,983  |   |  |   | 315    | 
|                             | Inventory reserves                         |                | $ | 18,077     |  |            | $ | 1,724      |  |  | $ | 1,654  |   |  | $ | 18,147 | 

All other schedules for which provision is make
in applicable accounting regulations of the Securities and
Exchange Commission are omitted because they are not required
under the related instructions or are applicable.

The independent accountants reports with
respect to the above listed financial statements and financial
statement schedule listed in Item 14(a)(1) and 14(a)(2),
respectively, are filed on page 26 and page 55,
respectively on Form 10-K.

(3) Exhibits

|        |       |               |  |                                                                                                                                                                                                                                                                         
|------- | ----- | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 2.04  |               |  | Master Distribution Agreement between the
	Registrant and Vialta, Inc. dated August 20, 2001
	(Incorporated herein by reference to Exhibit 2.04 to the
	Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).                          
|        | 3.01  |               |  | Registrants Articles of Incorporation
	(Incorporated herein by reference to Exhibit 3.01 to the
	Registrants Form S-1 registration statement (File
	No. 33-95388) declared effective by the Securities and
	Exchange Commission on October 5, 1995 (the
	Form S-1)).
|        | 3.02  |               |  | Registrants Bylaws as amended (Incorporated
	herein by reference to Exhibit 3.02 to the
	Registrants Annual Report on Form 10-K for the year
	ended December 31, 1998, filed on March 31, 1999, File
	No. 000-26660).                                                 
|        | 4.01  |               |  | Registrants Registration Rights Agreement
	dated May 28, 1993 among the Registrant and certain
	security holders (Incorporated herein by reference to
	Exhibit 10.07 to the Form S-1).                                                                                 
|        | 10.01 |               |  | Registrants 1986 Stock Option Plan and
	related documents (Incorporated herein by reference to
	Exhibit 10.01 to the Form S-1).*                                                                                                                                       
|        | 10.02 |               |  | Registrants 1992 Stock Option Plan and
	related documents (Incorporated herein by reference to
	Exhibit 10.02 to the Form S-1).*                                                                                                                                       
|        | 10.03 |               |  | Registrants 1995 Equity Incentive Plan and
	related documents as amended (Incorporated herein by reference
	to Exhibit 10.03 to the Registrants Annual Report on
	Form 10-K for the year ended December 31, 1998, filed
	on March 31, 1999), File No. 000-26660.*     
|        | 10.04 |               |  | Registrants 1995 Directors Stock Option
	Plan and related documents (Incorporated herein by reference to
	Exhibit 10.04 to the Form S-1).*                                                                                                                             

56



---



##### Table of Contents



|        |       |               |  |                                                                                                                                                                                                                                                                                                                                                                
|------- | ----- | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 10.05 |               |  | Registrants 1995 Employee Stock Purchase
	Plan and related documents as amended (Incorporated herein by
	reference to Exhibit 10.05 to the Registrants Annual
	Report on Form 10-K for the year ended December 31,
	1998, filed on March 31, 1999, File No. 000-26660).*                                                                                     
|        | 10.06 |               |  | Registrants Amended 401(k) Plan
	(Incorporated herein by reference to Exhibit 10.06 to the
	Form S-1).*                                                                                                                                                                                                                                                       
|        | 10.11 |               |  | Form of Indemnity Agreement entered into by
	Registrant with each of its directors and executive officers
	(Incorporated herein by reference to Exhibit 10.11 to the
	Form S-1).                                                                                                                                                                               
|        | 10.21 |               |  | Option I Agreement between Registrant and Taiwan
	Semiconductor Manufacturing Co., Ltd. (TSMC) dated
	November 30, 1995, as amended December 28, 1995.
	(Incorporated herein by reference to Exhibit 10.21 to the
	Registrants Annual Report on Form 10-K, dated
	February 29, 1996 as amended March 29, 1996, File
	No. 000-26660 (the 1995 Form 10-K).**
|        | 10.22 |               |  | Option II Agreement between Registrant and TSMC
	dated November 30, 1995. (Incorporated herein by reference
	to Exhibit 10.22 to the 1995 Form 10-K).**                                                                                                                                                                                                        
|        | 10.23 |               |  | Foundry Venture Agreement between Registrant and
	United Microelectronics Corporation (UMC) dated
	November 28, 1995, as amended January 31, 1996.
	(Incorporated herein by reference to Exhibit 10.23 to the
	1995 Form 10-K).**                                                                                                                            
|        | 10.30 |               |  | 1997 Equity Incentive Plan and related
	agreements, as amended (Incorporated herein by reference to
	Exhibit 10.30 to the Registrants Annual Report on
	Form 10-K for the year ended December 31, 1998, filed
	on March 31, 1999, File No. 000-26660).*                                                                                                       
|        | 10.35 |               |  | 1995 Employee Stock Purchase Plan amended and
	restated as of April 21, 2001 (Incorporated herein by
	reference to Exhibit 10.35 to the Registrants
	Quarterly Report on Form 10-Q, dated August 15, 2001).                                                                                                                                                   
|        | 10.36 |               |  | 1997 Equity Incentive Plan amended and restated
	as of April 21, 2001 (Incorporated herein by reference to
	Exhibit 10.35 to the Registrants Quarterly Report on
	Form 10-Q, dated August 15, 2001).                                                                                                                                                          
|        | 10.37 |               |  | 1995 Director Stock Option Plan amended and
	restated as of April 21, 2001 (Incorporated herein by
	reference to Exhibit 10.35 to the Registrants
	Quarterly Report on Form 10-Q, dated August 15, 2001).                                                                                                                                                    
|        | 10.38 |               |  | Master Technology Ownership and License Agreement
	between the Registrant and Vialta, Inc. dated August 20,
	2001 (Incorporated herein by reference to Exhibit 2.04 to
	the Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).                                                                                             
|        | 10.39 |               |  | Employee Matters Agreement between the Registrant
	and Vialta, Inc. dated August 20, 2001 (Incorporated herein
	by reference to Exhibit 2.04 to the Registrants
	Current Report on Form 8-K dated September 5, 2001,
	File No. 000-26660).                                                                                                                    
|        | 10.40 |               |  | Tax Sharing and Indemnity Agreement between the
	Registrant and Vialta, Inc. dated August 20,
	2001(Incorporated herein by reference to Exhibit 2.04 to
	the Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).                                                                                                            
|        | 10.41 |               |  | Real Estate Matters Agreement between the
	Registrant and Vialta, Inc. dated August 20,
	2001(Incorporated herein by reference to Exhibit 2.04 to
	the Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).                                                                                                                  
|        | 10.42 |               |  | Master Confidential Disclosure Agreement between
	the Registrant and Vialta, Inc. dated August 20,
	2001(Incorporated herein by reference to Exhibit 2.04 to
	the Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).                                                                                                       
|        | 10.43 |               |  | Master Transitional Services Agreement between
	the Registrant and Vialta, Inc. dated August 20,
	2001(Incorporated herein by reference to Exhibit 2.04 to
	the Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).                                                                                                         
|        | 11.01 |               |  | Computation of Net Income Per Share.                                                                                                                                                                                                                                                                                                                           
|        | 21.01 |               |  | List of Registrants subsidiaries.                                                                                                                                                                                                                                                                                                                             
|        | 23.01 |               |  | Consent of Independent Accountants.                                                                                                                                                                                                                                                                                                                            

57



---



##### Table of Contents





---



|  |                                                                       
|- | ----------------------------------------------------------------------
|* | Represents a management contract or compensatory
	plan of arrangement.



|   |                                                                                             
|-- | --------------------------------------------------------------------------------------------
|** | Confidential treatment has been granted with
	respect to certain portions of this agreement.

(b) Reports on Form 8-K:

On November 6, 2001, the Company filed a
Form 8-K to present a more detailed Managements
Discussion and Analysis and accompanying restated financial
statements that show the effect of Vialta as a discontinued
operation with respect to the periods presented.

With the exception of the information
incorporated by reference to the our Proxy Statement for the
2002 Annual Meeting of Shareholders in Items 10, 11, 12 and
13 of Part III, the Proxy Statement is not deemed to be
filed as part of this Report.

58



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of section 13 of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report on Form 10-K signed on its behalf by the
undersigned, thereunto duly authorized.



| |                     
| | --------------------
| | ESS TECHNOLOGY, INC.
| | (Registrant)        



| |     |                    
| | --- | -------------------
| | By: | /s/ ROBERT L. BLAIR

| |                                       
| | --------------------------------------
| |                                       
| | Robert L. Blair                       
| | President and Chief Executive
	Officer

Date: March 25, 2002

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below hereby constitutes and
appoints Robert L. Blair his or her true and lawful
attorneys-in-fact, each with full power of substitution, for him
or her in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact
or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done or by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this registration statement has been
signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|                                   |  |                                                       |  |               
|---------------------------------- |  | ----------------------------------------------------- |  | --------------
|Signature                          |  | Title                                                 |  | Date          
|                                   |  |                                                       |  |               
|/s/ ROBERT L. BLAIRRobert L. Blair |  | Director, President,
	Chief Executive Officer         |  | March 25, 2002
|/s/ JAMES B. BOYDJames B. Boyd     |  | Chief Financial Officer and
	Chief Accounting Officer |  | March 25, 2002
|/s/ FRED S.L. CHANFred S.L. Chan   |  | Chairman of the Board
	of Directors                   |  | March 25, 2002
|/s/ ANNIE M.H. CHANAnnie M.H. Chan |  | Director                                              |  | March 25, 2002
|/s/ PETER T. MOKPeter T. Mok       |  | Director                                              |  | March 25, 2002
|/s/ DAVID S. LEEDavid S. Lee       |  | Director                                              |  | March 25, 2002
|/s/ DOMINIC NGDominic Ng           |  | Director                                              |  | March 25, 2002

59



---



##### Table of Contents






INDEX TO EXHIBITS

|        |       |               |  |                                                                                                                                                                                                                                                                                                                                                                
|------- | ----- | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 2.04  |               |  | Master Distribution Agreement between the
	Registrant and Vialta, Inc. dated August 20, 2001
	(Incorporated herein by reference to Exhibit 2.04 to the
	Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).                                                                                                                 
|        | 3.01  |               |  | Registrants Articles of Incorporation
	(Incorporated herein by reference to Exhibit 3.01 to the
	Registrants Form S-1 registration statement (File
	No. 33-95388) declared effective by the Securities and
	Exchange Commission on October 5, 1995 (the
	Form S-1)).                                                                                       
|        | 3.02  |               |  | Registrants Bylaws as amended (Incorporated
	herein by reference to Exhibit 3.02 to the
	Registrants Annual Report on Form 10-K for the year
	ended December 31, 1998, filed on March 31, 1999, File
	No. 000-26660).                                                                                                                                        
|        | 4.01  |               |  | Registrants Registration Rights Agreement
	dated May 28, 1993 among the Registrant and certain
	security holders (Incorporated herein by reference to
	Exhibit 10.07 to the Form S-1).                                                                                                                                                                        
|        | 10.01 |               |  | Registrants 1986 Stock Option Plan and
	related documents (Incorporated herein by reference to
	Exhibit 10.01 to the Form S-1).*                                                                                                                                                                                                                              
|        | 10.02 |               |  | Registrants 1992 Stock Option Plan and
	related documents (Incorporated herein by reference to
	Exhibit 10.02 to the Form S-1).*                                                                                                                                                                                                                              
|        | 10.03 |               |  | Registrants 1995 Equity Incentive Plan and
	related documents as amended (Incorporated herein by reference
	to Exhibit 10.03 to the Registrants Annual Report on
	Form 10-K for the year ended December 31, 1998, filed on
	March 31, 1999), File No. 000-26660.*                                                                                            
|        | 10.04 |               |  | Registrants 1995 Directors Stock Option
	Plan and related documents (Incorporated herein by reference to
	Exhibit 10.04 to the Form S-1).*                                                                                                                                                                                                                    
|        | 10.05 |               |  | Registrants 1995 Employee Stock Purchase
	Plan and related documents as amended (Incorporated herein by
	reference to Exhibit 10.05 to the Registrants Annual
	Report on Form 10-K for the year ended December 31, 1998,
	filed on March 31, 1999, File No. 000-26660).*                                                                                     
|        | 10.06 |               |  | Registrants Amended 401(k) Plan
	(Incorporated herein by reference to Exhibit 10.06 to the
	Form S-1).*                                                                                                                                                                                                                                                       
|        | 10.11 |               |  | Form of Indemnity Agreement entered into by
	Registrant with each of its directors and executive officers
	(Incorporated herein by reference to Exhibit 10.11 to the
	Form S-1).                                                                                                                                                                               
|        | 10.21 |               |  | Option I Agreement between Registrant and Taiwan
	Semiconductor Manufacturing Co., Ltd. (TSMC) dated
	November 30, 1995, as amended December 28, 1995.
	(Incorporated herein by reference to Exhibit 10.21 to the
	Registrants Annual Report on Form 10-K, dated
	February 29, 1996 as amended March 29, 1996, File
	No. 000-26660 (the 1995 Form 10-K).**
|        | 10.22 |               |  | Option II Agreement between Registrant and TSMC
	dated November 30, 1995. (Incorporated herein by reference
	to Exhibit 10.22 to the 1995 Form 10-K).**                                                                                                                                                                                                        
|        | 10.23 |               |  | Foundry Venture Agreement between Registrant and
	United Microelectronics Corporation (UMC) dated
	November 28, 1995, as amended January 31, 1996.
	(Incorporated herein by reference to Exhibit 10.23 to the
	1995 Form 10-K).**                                                                                                                            
|        | 10.30 |               |  | 1997 Equity Incentive Plan and related
	agreements, as amended (Incorporated herein by reference to
	Exhibit 10.30 to the Registrants Annual Report on
	Form 10-K for the year ended December 31, 1998, filed on
	March 31, 1999, File No. 000-26660).*                                                                                                       
|        | 10.35 |               |  | 1995 Employee Stock Purchase Plan amended and
	restated as of April 21, 2001 (Incorporated herein by reference
	to Exhibit 10.35 to the Registrants Quarterly Report
	on Form 10-Q, dated August 15, 2001).                                                                                                                                                   
|        | 10.36 |               |  | 1997 Equity Incentive Plan amended and restated
	as of April 21, 2001 (Incorporated herein by reference to
	Exhibit 10.35 to the Registrants Quarterly Report on
	Form 10-Q, dated August 15, 2001).                                                                                                                                                          
|        | 10.37 |               |  | 1995 Director Stock Option Plan amended and
	restated as of April 21, 2001 (Incorporated herein by
	reference to Exhibit 10.35 to the Registrants
	Quarterly Report on Form 10-Q, dated August 15, 2001).                                                                                                                                                    
|        | 10.38 |               |  | Master Technology Ownership and License Agreement
	between the Registrant and Vialta, Inc. dated August 20,
	2001 (Incorporated herein by reference to Exhibit 2.04 to
	the Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).                                                                                             

60



---



##### Table of Contents



|        |       |               |  |                                                                                                                                                                                                                                                         
|------- | ----- | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 10.39 |               |  | Employee Matters Agreement between the Registrant
	and Vialta, Inc. dated August 20, 2001 (Incorporated herein
	by reference to Exhibit 2.04 to the Registrants Current
	Report on Form 8-K dated September 5, 2001, File
	No. 000-26660).             
|        | 10.40 |               |  | Tax Sharing and Indemnity Agreement between the
	Registrant and Vialta, Inc. dated August 20,
	2001(Incorporated herein by reference to Exhibit 2.04 to
	the Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).     
|        | 10.41 |               |  | Real Estate Matters Agreement between the
	Registrant and Vialta, Inc. dated August 20,
	2001(Incorporated herein by reference to Exhibit 2.04 to the
	Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).           
|        | 10.42 |               |  | Master Confidential Disclosure Agreement between
	the Registrant and Vialta, Inc. dated August 20,
	2001(Incorporated herein by reference to Exhibit 2.04 to
	the Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).
|        | 10.43 |               |  | Master Transitional Services Agreement between
	the Registrant and Vialta, Inc. dated August 20,
	2001(Incorporated herein by reference to Exhibit 2.04 to
	the Registrants Current Report on Form 8-K dated
	September 5, 2001, File No. 000-26660).  
|        | 11.01 |               |  | Computation of Net Income Per Share.                                                                                                                                                                                                                    
|        | 21.01 |               |  | List of Registrants subsidiaries.                                                                                                                                                                                                                      
|        | 23.01 |               |  | Consent of Independent Accountants.                                                                                                                                                                                                                     



---



|   |                                                                                             
|-- | --------------------------------------------------------------------------------------------
|*  | Represents a management contract or compensatory
	plan of arrangement.                      
|  
|** | Confidential treatment has been granted with
	respect to certain portions of this agreement.

61