##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
    Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

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

(I.R.S. Employerincorporation or
    organization)

Identification No.)48401 Fremont Blvd.,
    Fremont, California

94538(Zip Code)(Address of principal executive
    offices)   Registrants telephone number, including area code:
 (510) 492-1088
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, no par value

The NASDAQ Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



ESS
    TECHNOLOGY, INC.
  2006
    FORM 10-K
  TABLE OF
    CONTENTS
  PagePART IItem 1.


Business


3Item 1A.


Risk
    Factors


12Item 1B.


Unresolved Staff
    Comments


22Item 2.


Properties


22Item 3.


Legal
    Proceedings


22Item 4.


Submission of
    Matters to a Vote of Security Holders


23PART IIItem 5.


Market for the
    Registrants Common Equity, Related Shareholder Matters and
    Issuer Purchases of Equity Securities


24Item 6.


Selected Financial
    Data


25Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


26Item 7A.


Quantitative and
    Qualitative Disclosures about Market Risk


38Item 8.


Financial
    Statements and Supplementary Data


40Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


75Item 9A.


Controls and
    Procedures


75Item 9B.


Other
    Information


75PART IIIItem 10.


Directors,
    Executive Officers and Corporate Governance


75Item 11.


Executive
    Compensation


76Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Shareholder Matters


76Item 13.


Certain
    Relationships and Related Transactions, and Director
    Independence


76Item 14.


Principal
    Accountant Fees and Services


76PART IVItem 15.


Exhibits and
    Financial Statement Schedules


77Signatures


78EXHIBIT 3.02EXHIBIT 10.37EXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Certain information contained in or incorporated by reference
    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
    our expectations, beliefs, intentions or strategies regarding
    the future. All forward-looking statements included in this
    Report are based on information available to us on the date
    hereof, and we assume no obligation to update any such
    forward-looking statements. Our 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 Item 1A, Risk Factors, and elsewhere
    in this Report. References herein to ESS, the
    Company, we, our, us
    and similar words or phrases are references to ESS Technology,
    Inc. and its subsidiaries, unless the context otherwise
    requires. Unless otherwise provided in this Report, trademarks
    identified by-Registered Trademark- and -TM- are registered
    trademarks or trademarks, respectively, of ESS Technology, Inc.
    or its subsidiaries. All other trademarks are the properties of
    their respective owners.
 2




---



##### Table of Contents



PART I  Item 1.
    Business          Industry
    Background
   3




---



##### Table of Contents



,
        Our
    Current Businesses
     4




---



##### Table of Contents



Our
    Future Businesses
    digital-to-analog-converter
  Our
    Strategy
    sub-segments
  Leverage Expertise Across Market
    Applications.
  Offer a Low-Cost Solution. bill-of-material bill-of-material bill-of-material.
  Leverage Our Existing Relationships with OEMs and ODMs
    Worldwide.
 5




---



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Employ Our Software and Hardware Expertise to Develop New
    Technologies.
  Leverage Our Relationships with Large Suppliers to Be One of
    the Low-Cost Providers.
  Pursue Acquisitions of Complementary and Advanced
    Technologies.
  Explore Opportunities To Maximize Shareholder
    Value.
  Pursue Licenses of Complementary
    Technologies.
  Leverage Our Proprietary Technology.
  Products
  and/or
    DVD Decoder Chips.
  Video CD Chips.
 6




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##### Table of Contents



Image Sensor Chips.
  Consumer Digital Audio Chips. class-D
  Communication Chips.
  PC Audio Chips.
    Percentage of NetRevenues for YearsEnded December 31,2006


2005


2004Video business:DVD


67
%


55
%


54
%VCD


18
%


17
%


27
%Recordable


1
%


2
%


3
%Royalty


2
%


11
%


8
%Other


7
%


3
%


2
%Total Video business


95
%


88
%


94
%Digital Imaging business


5
%


12
%


6
%Total


100
%


100
%


100
%     Technology
    and Research and Development
       7




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##### Table of Contents



Customers
        Sales and
    Distribution
         8




---



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Manufacturing
      Competition
       9




---



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Proprietary
    Technology
        Backlog
  and/or
  Employees
   10




---



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Available
    Information
    Executive
    Officers of the Registrant
    Name

Age

PositionFred S.L. Chan


60


Chairman of the Board of DirectorsRobert L. Blair


59


President, Chief Executive Officer
    and DirectorJames B. Boyd


54


Chief Financial Officer, Senior
    Vice President and Assistant Secretary   Fred S.L. Chan
  Robert L. Blair
  James B. Boyd
 11




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##### Table of Contents



Item 1A.
    Risk
    Factors  We
    have a history of losses and expect to continue to incur net
    losses in the near-term.
    If our
    new business strategy is unsuccessful, it could significantly
    harm our business and operating results.
  and/or and/or
  Our
    business strategy is currently going through significant
    evaluation and change.
  and/or and/or
 12




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Our
    business is highly dependent on the expansion of the consumer
    electronics market and our ability to respond to changes in such
    market.
    We
    operate in highly competitive markets.
        
    The timing and success of our new product introductions and
    those of our customers and competitors;
    The ability to control product cost and produce consistent yield
    of our products;
    The ability to obtain adequate foundry capacity and sources of
    raw materials;
    The price, quality and performance of our products and the
    products of our competitors;
    The emergence of new multimedia standards;
    The development of technical innovations;
    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. 13




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We may
    need additional funds to execute our business plan, and if we
    are unable to obtain such funds, we may not be able to expand
    our business, and if we do raise such funds, the
    shareholders ownership in ESS may be subject to
    dilution.
    To
    compete in our industry, we may need to acquire other companies
    and technologies
    and/or
    restructure our businesses, and we may not be successful
    acquiring key targets, integrating our acquisitions into our
    businesses or restructuring our businesses
    effectively.
    
    The failure of the acquired products or technology to attain
    market acceptance, which may result from our inability to
    leverage such products and technology successfully;
    The failure to integrate acquired products and business with
    existing products and corporate culture;
    The inability to restructure or realign our businesses
    effectively and cost-efficiently;
    The inability to retain key employees from the acquired company;
    Diversion of management attention from other business concerns;
    The potential for large write-offs of intangible assets;
    Issuances of equity securities dilutive to our existing
    shareholders;
    The incurrence of substantial debt and assumption of unknown
    liabilities; and
    Our ability to properly access and maintain an effective
    internal control environment over an acquired company in order
    to comply with public reporting requirements.  Our
    quarterly operating results are subject to fluctuations that may
    cause volatility or a decline in the price of our
    stock.
    
    Charges related to the net realizable value of inventories;
    Changes in demand or sales forecast for our products; 14




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
    Changes in the mix of products sold and our revenue mix;
    Changes in the cost of producing our products;
    The timely implementation of customer-specific hardware and
    software requirements for specific design wins;
    Increasing pricing pressures and resulting reduction in the ASP
    of any or all of our products;
    Availability and cost of foundry capacity;
    Gain or loss of significant customers;
    Seasonal customer demand;
    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
    and/or
    design wins;
    Charges related to the impairment of other intangible assets;
    Loss of key employees which could impact sales or the pace of
    product development;
    The turns basis of most of our orders, which makes
    backlog a poor indicator of the next quarters revenue;
    The potential for large adjustments due to resolution of
    multi-year tax examinations;
    The lead time we normally receive for our orders, which makes it
    difficult to predict sales until the end of the quarter;
    Availability and cost of raw materials;
    Significant increases in expenses associated with the expansion
    of operations; and
    A shift in manufacturing of consumer electronic products away
    from Asia.  We
    often purchase inventories based on sales forecasts and if
    anticipated sales do not materialize, we may continue to
    experience significant inventory charges.
    Our
    research and development investments may fail to enhance our
    competitive position.
   15




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Our
    success within the semiconductor industry depends upon our
    ability to develop new products in response to rapid
    technological changes and evolving industry
    standards.
    
    Anticipation of market trends;
    Timely completion of design, development, and testing of both
    the hardware and software for each product;
    Timely completion of customer specific design, development and
    testing of both hardware and software for each design win;
    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
    sales may fluctuate due to seasonality and changes in customer
    demand.
   16




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Our
    products are subject to increasing pricing
    pressures.
    We may
    lose business to competitors who have significant competitive
    advantages.
    video-on-demand,
    Our
    business is dependent upon retaining key personnel and
    attracting new employees.
     17




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Changes
    in stock option accounting rules may adversely impact our
    reported operating results prepared in accordance with generally
    accepted accounting principles, our stock price and our
    competitiveness in the employee marketplace.
    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.
    Our
    customer base is highly concentrated, so the loss of a major
    customer could adversely affect our business.
    Because
    we are dependent upon a limited number of suppliers, we could
    experience delivery disruptions or unexpected product cost
    increases.
   18




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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.
      We
    have significant international sales and operations that are
    subject to the special risks of doing business outside the
    United States.
    
    Unexpected changes in legislative or regulatory requirements and
    related compliance problems;
    Political, social and economic instability;
    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;
    Longer payment cycles, greater difficulties in accounts
    receivable collection and greater difficulties in ascertaining
    the credit of our customers and potential business partners;
    Potentially adverse tax consequences, including withholding in
    connection with the repatriation of earnings and restrictions on
    the repatriation of earnings; 19




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##### Table of Contents




    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.
    
    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.      We
    have extended sales cycles, which increase our costs in
    obtaining orders and reduce the predictability of our
    earnings.
    Our
    products are subject to recall risks.
    The
    semiconductor industry is subject to cyclical variations in
    product supply and demand.
   20




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The
    value of our common stock may be adversely affected by market
    volatility.
    
    Future announcements concerning us, our competitors or our
    principal customers, such as quarterly operating results,
    changes in earnings estimates by analysts, technological
    innovations, new product introductions, governmental
    regulations, or litigation;
    Changes in accounting rules, particularly those related to the
    expensing of stock options and accounting for uncertainty in
    income taxes;
    The liquidity within the market for our common stock;
    Sales or purchases by the Company or by our officers, directors,
    other insiders and large shareholders;
    Investor perceptions concerning the prospects of our business
    and the semiconductor industry;
    Market conditions and investor sentiment affecting market prices
    of equity securities of high technology companies; and
    General economic, political and market conditions, such as
    recessions or international currency fluctuations.  We are
    incurring additional costs and devoting more management
    resources to comply with increasing regulation of corporate
    governance and disclosure.
    Failure
    to maintain effective internal controls could have a material
    adverse effect on our business, operating results and stock
    price.
  Form 10-K.
 21




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##### Table of Contents



Item 1B.
    Unresolved
    Staff Comment    Item 2.
    Properties        Item 3.
    Legal
    Proceedings     22




---



##### Table of Contents



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

For


WithheldFred S. L. Chan


35,532,112



956,541Robert Blair


35,517,623



971,030Gary L. Fischer


35,536,935



951,718Peter T. Mok


33,583,048



2,905,605Alfred J. Stein, Jr.


35,517,094



971,559    23




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##### Table of Contents



PART II  Item 5.
    Market
    for the Registrants Common Equity, Related Shareholder
    Matters and Issuer Purchases of Equity Securities    High


LowFiscal 2006:First Quarter ended March 31,
    2006

$
4.00


$
3.23Second Quarter ended June 30,
    2006

$
3.75


$
2.02Third Quarter ended
    September 30, 2006

$
2.17


$
0.81Fourth Quarter ended
    December 31, 2006

$
1.33


$
0.91Fiscal 2005:First Quarter ended March 31,
    2005

$
6.85


$
5.05Second Quarter ended June 30,
    2005

$
5.26


$
3.43Third Quarter ended
    September 30, 2005

$
4.83


$
3.36Fourth Quarter ended
    December 31, 2005

$
3.73


$
2.74     ISSUER
    PURCHASES OF EQUITY SECURITIES
  Total Number of


Maximum NumberWeighted


Shares Purchased as


of Shares That mayAverage Price


Part of Publicly


yet be PurchasedTotal Number of


Paid per


Announced


Under thePeriod

Shares Purchased


Share


Programs


Programs(1)October 1, 2006 
    October 31, 2006





$








4,400,000November 1, 2006 
    November 30, 2006


3,600,000



1.14



3,600,000



800,000December 1, 2006 
    December 31, 2006


112,000



1.20



112,000



688,000Total


3,712,000


$




3,712,000     (1)
    
    We announced on April 16, 2003 that our Board of Directors
    authorized us to repurchase up to 5,000,000 shares of our
    common stock. During the quarter ended December 31, 2006,
    we purchased 3,712,000 shares under this program. As of
    December 31, 2006, we had approximately 688,000 shares
    remaining available for repurchase under this program. There is
    no stated expiration for this program. In addition, we announced
    on February 16, 2007 that our Board of Directors authorized
    us to repurchase up to an additional 5,000,000 shares of
    our common stock with no stated expiration for this program.  Dividend
    Policy
     24




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##### Table of Contents



Item 6.
    Selected
    Financial Data      Years Ended December 31,2006


2005


2004


2003


2002(In thousands, except per share data)Statement of Operations
    Data:Net revenues:Product

$
97,797


$
161,921


$
237,278


$
190,273


$
273,442License and royalty


2,668



20,000



20,000



5,000



Total net revenues


100,465



181,921



257,278



195,273



273,442Cost of product revenues(1)


97,640



169,312



219,397



132,690



176,454Gross profit


2,825



12,609



37,881



62,583



96,988Operating expenses:Research and development(1)


36,044



33,983



37,467



33,184



26,964Selling, general and
    administrative(1)


27,566



34,973



41,056



31,761



34,170In-process research and development














2,690



Impairment of goodwill and
    intangible assets






42,743











Operating income (loss)


(60,785
)


(99,090
)


(40,642
)


(5,052
)


35,854Non-operating income (loss), net


(652
)


1,316



3,360



45,946



2,407Income (loss) before income taxes


(61,437
)


(97,774
)


(37,282
)


40,894



38,261Provision for (benefit from)
    income taxes


(17,343
)


1,779



(1,732
)


15,603



984Net income (loss)

$
(44,094
)

$
(99,553
)

$
(35,550
)

$
25,291


$
37,277Net income (loss) per share:Basic

$
(1.14
)

$
(2.50
)

$
(0.90
)

$
0.64


$
0.85Diluted

$
(1.14
)

$
(2.50
)

$
(0.90
)

$
0.61


$
0.80Shares used in calculating net
    income per share:Basic


38,723



39,781



39,476



39,517



44,044Diluted


38,723



39,781



39,476



41,238



46,731Balance Sheet Data:Cash, cash equivalents and
    short-term investments

$
43,995


$
99,722


$
126,688


$
164,846


$
199,102Working capital

$
20,975


$
58,718


$
107,305


$
145,221


$
210,001Total assets

$
90,428


$
171,841


$
283,744


$
352,593


$
281,602Current liabilities

$
43,405


$
78,507


$
90,384


$
113,804


$
44,558Total shareholders equity

$
47,023


$
93,334


$
192,912


$
227,081


$
229,368     (1)
    
    In 2006, the cost of product revenues, research and development
    expenses, and selling, general and administrative expenses
    include the effect of the adoption of SFAS No. 123(R).
    See Note 12, Stock-Based Compensation to our
    consolidated financial statements for additional information. 25




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations    Executive
    Overview
         26




---



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Critical
    Accounting Policies and Estimates
  Use of
    Estimates
    
    Revenue Recognition
    Inventories and Inventory Reserves
    Income Taxes
    Legal Contingencies
    Stock-based Compensation    Revenue
    Recognition
   27




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Inventories
    and Inventory Reserves
  work-in-process first-in,
      Income
    Taxes
      Legal
    Contingencies
     28




---



##### Table of Contents



Stock-based
    Compensation
    Recent
    Accounting Pronouncements
    No. 06-03 No. 06-03). No. 06-03 No. 06-03
       29




---



##### Table of Contents



Comparison
    of Year ended December 31, 2006 and December 31,
    2005
  Results
    of Operations
    Year Ended December 31,


2006 Over 20052006


2005


% of Change(In thousands, except percentage data)Net revenues

$
100,465



100.0
%

$
181,921



100.0
%


(44.8
)%Cost of product revenues


97,640



97.2



169,312



93.1



(42.3
)%Gross profit


2,825



2.8



12,609



6.9



(77.6
)%Operating expenses:Research and development


36,044



35.9



33,983



18.6



6.1
%Selling, general and administrative


27,566



27.4



34,973



19.2



(21.2
)%Impairment of goodwill and
    intangible assets










42,743



23.5



n/aOperating loss


(60,785
)


(60.5
)


(99,090
)


(54.4
)


(38.7
)%Non-operating income (loss), net


(652
)


(0.6
)


1,316



0.7



(149.5
)%Loss before income taxes


(61,437
)


(61.1
)


(97,774
)


(53.7
)


(37.2
)%Provision for (benefit from)
    income taxes


(17,343
)


(17.2
)


1,779



1.0



(1,074.9
)%Net loss

$
(44,094
)


(43.9
)%

$
(99,553
)


(54.7
)%


(55.7
)%     Net
    Revenues
      Year EndedDecember 31,2006


2005Video business:DVD


67
%


55
%VCD


18
%


17
%Recordable


1
%


2
%Royalty & License


2
%


11
%Other


7
%


3
%Total Video business


95
%


88
%Digital Imaging
    business


5
%


12
%Total


100
%


100
%  30




---



##### Table of Contents



31




---



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Gross
    Profit
    Research
    and Development Expenses
    Selling,
    General and Administrative Expenses
   32




---



##### Table of Contents



Impairment
    of Goodwill and Intangible Assets
    Non-operating
    Income (Loss), Net
    Provision
    for (Benefit from) Income Taxes
        Comparison
    of Year ended December 31, 2005 and December 31,
    2004
  Results
    of Operations
    Year Ended December 31,


2005 Over 20042005


2004


% of Change(In thousands, except percentage data)Net revenues

$
181,921



100.0
%

$
257,278



100.0
%


(29.3
)%Cost of product revenues


169,312



93.1



219,397



85.3



(22.8
)%Gross profit


12,609



6.9



37,881



14.7



(66.7
)%Operating expenses:Research and development


33,983



18.6



37,467



14.5



(9.3
)%Selling, general and administrative


34,973



19.2



41,056



16.0



(14.8
)%Impairment of goodwill and
    intangible assets


42,743



23.5











n/aOperating loss


(99,090
)


(54.4
)


(40,642
)


(15.8
)


143.8
%Non-operating income, net


1,316



0.7



3,360



1.3



(60.8
)%Loss before income taxes


(97,774
)


(53.7
)


(37,282
)


(14.5
)


162.3
%Provision for (benefit from)
    income taxes


1,779



1.0



(1,732
)


(0.7
)


(202.7
)%Net loss

$
(99,553
)


(54.7
)%

$
(35,550
)


(13.8
)%


180.0
%    33




---



##### Table of Contents



Net
    Revenues
      Year EndedDecember 31,2005


2004Video business:DVD


55
%


54
%VCD


17
%


27
%Recordable


2
%


3
%Royalty


11
%


8
%Other


3
%


2
%Total Video business


88
%


94
%Digital Imaging
    business


12
%


6
%Total


100
%


100
%                34




---



##### Table of Contents



Gross
    Profit
    Research
    and Development Expenses
    Selling,
    General and Administrative Expenses
    Impairment
    of Goodwill and Intangible Assets
    Non-operating
    Income, Net
   35




---



##### Table of Contents



Provision
    for (Benefit from) Income Taxes
        Liquidity
    and Capital Resources
         36




---



##### Table of Contents



Contractual
    Obligations, Commitments and Contingencies
    Payment Due by PeriodsLess Than


1-3


3-5


More ThanContractual Obligations

Total


1 Year


Years


Years


5 Years(In thousands)Operating lease obligations

$
1,977


$
1,896


$
81







Purchase order commitments


11,101



11,101











Total

$
13,078


$
12,997


$
81







            37




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##### Table of Contents



Off-Balance
    Sheet Arrangements
    Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk    Foreign
    Exchange Risks
    Interest
    Rate Risks
  available-for-sale,
  Investment
    Risk
  available-for-sale. available-for-sale
 38




---



##### Table of Contents



start-up
 39




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data    Managements
    Report on Internal Control over Financial Reporting


41Report of
    Independent Registered Public Accounting Firm


421. Financial
    Statements:Consolidated
    Balance Sheets


44Consolidated
    Statements of Operations


45Consolidated
    Statements of Shareholders Equity


46Consolidated
    Statements of Cash Flows


47Notes to
    Consolidated Financial Statements


482. Supplementary
    Data:Selected Quarterly
    Financial Data


733. Financial
    statement schedule:Valuation and
    Qualifying Accounts


74  40




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##### Table of Contents



MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING  Rule 13a-15(f)
  Internal Control  Integrated
    Framework
    By:

/s/  ROBERT
    L. BLAIR

By:

/s/  JAMES
    B. BOYDROBERT L. BLAIR



JAMES B. BOYDPresident and Chief Executive
    Officer



Senior Vice President and
    Chief Financial Officer    41




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM      Consolidated
    financial statements and financial statement schedule
      Internal
    control over financial reporting
  Internal Control  Integrated Framework Internal Control 
    Integrated Framework
   42




---



##### Table of Contents



43




---



##### Table of Contents



1.
    Financial
    Statements:  ESS
    TECHNOLOGY, INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2006


2005(In thousands)ASSETSCash and cash equivalents

$
33,731


$
68,630Short-term investments


10,264



31,092Accounts receivable, net


9,189



14,990Other receivables


1,154



5,795Inventory


8,278



12,477Prepaid expenses and other assets


1,764



4,241Total current assets


64,380



137,225Property, plant and equipment, net


16,996



21,133Other intangible assets, net






795Other assets


9,052



12,688Total assets

$
90,428


$
171,841LIABILITIES AND
    SHAREHOLDERS EQUITYAccounts payable and accrued
    expenses

$
20,404


$
35,916Income tax payable and deferred
    income taxes


23,001



42,591Total current liabilities


43,405



78,507Commitments and contingencies
    (Note 14)Shareholders equity:Preferred stock, no par value,
    10,000 shares authorized; none issued and outstanding






Common stock, no par value,
    100,000 shares authorized; 35,508 and 39,564 shares
    issued and outstanding at December 31, 2006 and 2005,
    respectively


175,528



177,545Accumulated other comprehensive
    income


86



286Accumulated deficit


(128,591
)


(84,497
)Total shareholders equity


47,023



93,334Total liabilities and
    shareholders equity

$
90,428


$
171,841    44




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS  Years Ended December 31,2006


2005


2004(In thousands, except per share data)Net revenues:Product

$
97,797


$
161,921


$
237,278License and royalty


2,668



20,000



20,000Total net revenues


100,465



181,921



257,278Cost of product revenues


97,640



169,312



219,397Gross profit


2,825



12,609



37,881Operating expenses:Research and development


36,044



33,983



37,467Selling, general and administrative


27,566



34,973



41,056Impairment of goodwill and
    intangible assets






42,743



Operating loss


(60,785
)


(99,090
)


(40,642
)Non-operating income (loss), net


(652
)


1,316



3,360Loss before income taxes


(61,437
)


(97,774
)


(37,282
)Provision for (benefit from)
    income taxes


(17,343
)


1,779



(1,732
)Net loss

$
(44,094
)

$
(99,553
)

$
(35,550
)Net loss per share 
    basic and diluted

$
(1.14
)

$
(2.50
)

$
(0.90
)Shares used in per share
    calculation  basic and diluted


38,723



39,781



39,476    45




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY
  AccumulatedOther


RetainedComprehensive


Earnings


Total


TotalCommon Stock


Income


(Accumulated


Shareholders


ComprehensiveShares


Amount


(Loss)


Deficit)


Equity


Income(Loss)(In thousands)Balance at December 31, 2003


39,246



175,546



929



50,606



227,081Issuance of common stock upon
    exercise of options


275



1,582











1,582Issuance of common stock for
    employee stock purchase plan


160



880











880Income tax reversal on
    disqualifying disposition of common stock options






(117
)










(117
)Stock-based compensation expense






139











139Unrealized loss on marketable
    securities, net of tax










(1,103
)






(1,103
)

$
(1,103
)Net loss














(35,550
)


(35,550
)


(35,550
)Total comprehensive loss





















$
(36,653
)Balance at December 31, 2004


39,681



178,030



(174
)


15,056



192,912Issuance of common stock upon
    exercise of options


52



203











203Issuance of common stock for
    employee stock purchase plan


160



457











457Repurchase of common stock


(329
)


(1,165
)










(1,165
)Stock-based compensation expense






20











20Unrealized gain on marketable
    securities, net of tax










460







460


$
460Net loss














(99,553
)


(99,553
)


(99,553
)Total comprehensive loss





















$
(99,093
)Balance at December 31, 2005


39,564



177,545



286



(84,497
)


93,334Issuance of common stock upon
    exercise of options


6



17











17Issuance of common stock for
    employee stock purchase plan


123



227











227Repurchase of common stock


(4,185
)


(5,852
)










(5,852
)Stock-based compensation expense






3,591











3,591Unrealized loss on marketable
    securities, net of tax










(200
)






(200
)

$
(200
)Net loss














(44,094
)


(44,094
)


(44,094
)Total comprehensive loss





















$
(44,294
)Balance at December 31, 2006


35,508


$
175,528


$
86


$
(128,591
)

$
47,023    46




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended December 31,2006


2005


2004(In thousands)Cash flows from operating
    activities:Net loss

$
(44,094
)

$
(99,553
)

$
(35,550
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation


5,981



6,022



5,489Amortization


795



4,321



4,796Write-down of goodwill and
    intangible assets






42,743



698(Gain) loss on sale of property,
    plant and equipment


(234
)


(628
)


12Loss on equity investments


3,534



1,316



Stock-based compensation


3,591



20



139Income tax benefit (reversal) on
    disqualifying disposition of common stock options










(117
)Changes in assets and liabilities:Accounts receivables, net


5,801



6,104



36,065Other receivables


4,641



(5,433
)


153Inventory, net


4,199



33,192



(12,123
)Prepaid expenses and other assets


2,527



(453
)


3,435Accounts payable and accrued
    expenses


(15,512
)


(14,730
)


(33,768
)Income tax payable and deferred
    income taxes


(19,397
)


2,103



(236
)Net cash used in operating
    activities


(48,168
)


(24,976
)


(31,007
)Cash flows from investing
    activities:Purchase of property, plant and
    equipment


(1,854
)


(4,708
)


(3,914
)Sale of property, plant and
    equipment


244



1,190



34Purchase of short-term investments


(14,420
)


(44,135
)


(129,758
)Maturities and Sales of short-term
    investments


35,365



98,573



152,369Purchase of long-term investments






(282
)


(5,176
)Purchase of other assets


(458
)






Refund of acquisition
    consideration under escrow






1,946



Net cash provided by investing
    activities


18,877



52,584



13,555Cash flows from financing
    activities:Repurchase of common stock


(5,852
)


(1,165
)


Issuance of common stock under
    employee stock purchase plan and stock option plans


244



660



2,462Net cash provided by (used in)
    financing activities


(5,608
)


(505
)


2,462Net increase (decrease) in cash
    and cash equivalents


(34,899
)


27,103



(14,990
)Cash and cash equivalents at
    beginning of year


68,630



41,527



56,517Cash and cash equivalents at end
    of year

$
33,731


$
68,630


$
41,527Supplemental disclosure of cash
    flow informationCash paid for income taxes

$
2,363


$



$
460Cash refund for income taxes

$
698


$
491


$
1,872    47




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1.
    Nature of
    Business           48




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 2.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
        Use of
    Estimates
    Foreign
    Currency Translation
    Cash,
    Cash Equivalents, and Short-Term Investments
    available-for-sale
  Fair
    Value of Financial Instruments
   49




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Inventory
  work-in-process first-in,
  Property,
    Plant and Equipment
    Building and building improvements


7-30 yearsMachinery and equipment


3-5 yearsFurniture and fixtures


3-5 years     Equity
    Investments
  other-than-temporary
  Goodwill
    Acquisition-Related
    Intangible Assets
    Impairment
    of Long-Lived Assets
   50




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Revenue
    Recognition
        Research
    and Development Costs
    Income
    Taxes
      Net
    Loss per Share
    Stock-Based
    Compensation
   51




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    No. D-32
  Warranty
    Year-Ended December 31,2006


2005


2004(In thousands)Beginning balance

$
506


$
324


$
800Accrual for warranty during the
    year


47



406



152Settlements made during the year


(299
)


(224
)


(416
)Adjustments










(212
)Ending balance

$
254


$
506


$
324   Risks
    and Uncertainties
    Concentration
    of Credit Risk
       52




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Recent
    Accounting Pronouncements
    No. 06-03 No. 06-03). No. 06-03 No. 06-03
       53




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 3.
    Intangible
    Assets    Gross


Accumulated AmortizationCarrying


December 31,


December 31,Amounts


2006


2005(In thousands)Identifiable intangible assets:Existing technology

$
3,600


$
3,600


$
3,070Patents and core technology


1,800



1,800



1,535Customer relationships


1,080



1,080



1,080Distributor relationships


90



90



90Foundry agreement


930



930



930Order backlog


350



350



350Total identifiable intangible
    assets

$
7,850


$
7,850


$
7,055     Note 4.
    Balance
    Sheet Components  December 31,2006


2005(In thousands)Cash and cash equivalents:Cash and money market accounts

$
20,137


$
39,706U.S. government and corporate
    debt securities


13,594



28,924$
33,731


$
68,630Short-term investments:U.S. government and corporate
    debt securities

$
10,285


$
31,231Unrealized loss on marketable
    securities, net


(21
)


(139
)$
10,264


$
31,092Accounts receivable, net:Accounts receivable

$
9,465


$
15,439Less: Allowance for doubtful
    accounts


(276
)


(449
)$
9,189


$
14,990 54




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31,2006


2005(In thousands)Other receivables:Receivable from vendor

$



$
4,993Receivable from Vialta






20Insurance


966



581Other


188



201$
1,154


$
5,795Inventories:Raw materials

$
1,210


$
3,048Work-in-process


758



2,527Finished goods


6,310



6,902$
8,278


$
12,477Prepaid expenses and other assets:Prepaid insurance

$
527


$
724Prepaid maintenance


327



813Deposit to vendor






1,012Prepaid royalty


713



904Other


197



788$
1,764


$
4,241Property, plant and equipment, net:Land

$
2,860


$
2,860Building and building improvements


24,679



24,640Machinery and equipment


37,260



36,776Furniture and fixtures


23,607



23,29588,406



87,571Less: Accumulated depreciation and
    amortization


(71,410
)


(66,438
)$
16,996


$
21,133Investments and other assets:Investments  Best Elite
    (note 7)

$
7,000


$
10,000Investments  other


1,344



2,388Other


708



300$
9,052


$
12,688Accounts payable and accrued
    expenses:Accounts payable

$
6,167


$
16,116Accrued compensation costs


6,057



5,667Accrued commission and royalties


281



1,740Deferred revenue related to
    distributor sales, net of deferred cost of goods sold


216



552Non-cancelable, adverse purchase
    order commitments


3,077



8,468Deposit from SiS


1,500



Other accrued liabilities


3,106



3,373$
20,404


$
35,916  55




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 5.
    Marketable
    Securities  available-for-sale
  Gross


GrossAmortized


Unrealized


UnrealizedDecember 31, 2006

Cost


Gains


(Loss)


Fair Value(In thousands)Money market accounts

$
3,363


$



$



$
3,363Corporate debt securities


17,203



2



(3
)


17,202Corporate equity securities


1,233



111







1,344Government agency bonds


6,676



1



(21
)


6,656Total
    available-for-sale

$
28,475


$
114


$
(24
)

$
28,565Classified as:Cash equivalents













$
16,957Short-term marketable securities














10,264Long-term marketable securities














1,344$
28,565   Gross


GrossAmortized


Unrealized


UnrealizedDecember 31, 2005

Cost


Gains


(Loss)


Fair Value(In thousands)Money market accounts

$
24,016


$



$



$
24,016Municipal bonds


21,159











21,159Corporate debt securities


28,917



7







28,924Corporate equity securities


1,486



621







2,107Government agency bonds


10,079







(146
)


9,933Total
    available-for-sale

$
85,657


$
628


$
(146
)

$
86,139Classified as:Cash equivalents













$
52,940Short-term marketable securities














31,092Long-term marketable securities














2,107$
86,139   available-for-sale
  EstimatedDecember 31, 2006

Fair Value(In thousands)Maturing in 90 days or less

$
21,398Maturing between 90 days and
    one year


502Maturing in more than one year


1,958Total
    available-for-sale
    debt securities

$
23,858   available-for-sale
 56




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    available-for-sale
  In Loss Position for


In Loss Position forLess Than 12 Months


More Than 12 Months


TotalGross





Gross





GrossUnrealized





Unrealized





UnrealizedFair Value


Gains


Fair Value


Losses


Fair Value


Losses(In thousands)Corporate debt securities

$



$



$
4,485


$
(3
)

$
4,485


$
(3
)Government agency bonds










4,032



(21
)


4,032


$
(21
)   other-than-temporarily
    MosChip
    Semiconductor Technology Limited
    C-Com
    Corporation
  other-than-temporary
 57




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 6.
    Investments
    in Equity Securities    Year EndedDecember 31,2006


2005(In thousands)Best Elite International Limited

$
7,000


$
10,000Raymedia Co., Ltd.






282Total cost-method investments

$
7,000


$
10,282   Best
    Elite International Limited
    Raymedia
    Co., Ltd.
    Note 7.
    Non-Operating
    Income (Loss), Net    Years Ended December 31,2006


2005


2004(In thousands)Interest income

$
2,611


$
2,212


$
1,971Income on other investments






102



Impairment of investments


(3,534
)


(1,316
)


Vialta rental income


17



345



503Other


254



(27
)


886Total non-operating income (loss)

$
(652
)

$
1,316


$
3,360  58




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 8.
    Income
    Taxes    Years Ended December 31,2006


2005


2004(In thousands)Domestic

$
(3,701
)

$
(51,289
)

$
(12,561
)Foreign


(57,736
)


(46,485
)


(24,721
)$
(61,437
)

$
(97,774
)

$
(37,282
)     Years Ended December 31,2006


2005


2004(In thousands)Current:Federal

$
(15,715
)

$
1,859


$
(1,349
)State


(2,213
)


(369
)


Foreign


531



540



551(17,397
)


2,030



(798
)DeferredFederal


54



(708
)


(923
)State






457



(11
)54



(251
)


(934
)Total

$
(17,343
)

$
1,779


$
(1,732
)     Years Ended December 31,2006


2005


2004(In thousands)Provision (benefit) at statutory
    rate

$
(21,503
)

$
(34,221
)

$
(13,049
)Tax expense related to foreign
    jurisdictions


6,710



25,935



14,976State income taxes, net of federal
    tax benefit


(3,250
)


(5,299
)


(2,089
)General business credit


(497
)


(1,882
)


(1,670
)Impairment of goodwill






16,745



Other


1,197



501



100Provision for (benefit from)
    income taxes

$
(17,343
)

$
1,779


$
(1,732
)  59




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2006


2005(In thousands)Current:Accrued liabilities and reserves

$
1,163


$
1,343Unrealized gains/losses on
    investments


660



336Other


15



Current deferred tax assets

$
1,838


$
1,679Non-current:Depreciation and amortization

$
3,818


$
4,513Acquired intangible assets






(321
)Net operating loss carryforwards


21,468



24,193Credit carryforwards


8,249



6,405Other


357



Non-current deferred tax assets


33,892



34,790Total deferred tax assets


35,730



36,469Valuation allowance


(34,497
)


(35,377
)Net deferred tax assets

$
1,233


$
1,092         Transition
    Election Related to Accounting for Tax Effects of Share-Based
    Payment Awards.
 60




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 9.
    Net Loss
    Per Share      Years Ended December 31,2006


2005


2004(In thousands)Numerator:Net loss available to common
    stockholders

$
(44,094
)

$
(99,553
)

$
(35,550
)Denominator:Weighted shares outstanding used
    for basic and diluted loss per share


38,723



39,781



39,476     Note 10.
    Shareholders
    Equity  Common
    Stock
  Stock
    Repurchase
  time-to-time
  1995
    Equity Incentive Plan
        1995
    Employee Stock Purchase Plan
   61




---



##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  24-month
  1995 Directors
    Stock Option Plan
  3-year
  1997
    Equity Incentive Plan
    2002
    Non-executive Stock Option Plan
    Platform
    Stock Option Plan
    Stock
    Option Exchange Offer
   62




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 11.
    Stock-Based
    Compensation    Impact
    of the Adoption of SFAS No. 123(R)
      Year EndedDecember 31, 2006(In thousands)Stock-based compensation expense
    by type of award:Employee stock options:Cost of product revenues

$
210Research and development


1,700Selling, general and administrative


1,527Employee stock purchase plan:Selling, general and administrative


154Total stock-based compensation


3,591Tax effect on stock-based
    compensation


Net effect on net loss

$
3,591Effect on loss per
    share  basic and diluted

$
0.09      63




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Valuation
    Assumptions
       64




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Years Ended December 31,2006


2005


2004Stock option plans:Expected life (in years)


3.79



2.31



3.82Expected stock price volatility


71
%


83
%


89
%Risk-free interest rate


4.6
%


3.7
%


2.9
%Expected dividend yield


0
%


0
%


0
%Stock purchase plan:Expected life (in years)


0.5



0.5



0.5Expected stock price volatility


69
%


76
%


79
%Risk-free interest rate


5.1
%


4.0
%


1.9
%Expected dividend yield


0
%


0
%


0
%      65




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Combined
    Activity
    WeightedAvailable





Weighted


Averagefor


Options


Average


ContractualGrant


Outstanding


Exercise Price


Term(In thousands)





(In years)Balances at December 31, 2003


4,441



8,566


$
9.58Authorized


400







Granted


(2,055
)


2,055



12.03Exercised






(275
)


5.76Forfeited


4,784



(4,784
)


13.53Balances at December 31, 2004


7,570



5,562


$
7.29Granted


(5,284
)


5,284



4.06Exercised






(52
)


3.86Forfeited


1,041



(1,041
)


7.73Expired


(84
)






Balances at December 31, 2005


3,243



9,753


$
5.51Granted


(293
)


293



2.33Exercised






(6
)


2.66Forfeited


1,123



(1,123
)


4.82Expired


1,458



(1,458
)


5.92Expired  1995 Plan and
    Platform Plan






(172
)


5.36Balances at December 31, 2006


5,531



7,287


$
5.40Fully vested and exercisable at
    December 31, 2006






6,078


$
5.54



6.16Expected at December 31, 2006
    to vest in the future






1,143


$
4.75



6.48        66




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Prior
    to the Adoption of SFAS No. 123(R)
    Years Ended December 31,2005


2004Net loss  as reported

$
(99,553
)

$
(35,550
)Stock based compensation expense
    related to non-employees included in reported net loss


20



39Stock based compensation
    determined under fair value based method for all awards, net of
    tax


(8,593
)


(3,787
)Pro forma net loss

$
(108,126
)

$
(39,298
)Net loss per share 
    basic and diluted:As reported

$
(2.50
)

$
(0.90
)Pro forma

$
(2.72
)

$
(1.00
)   Note 12.
    Business
    Segment Information and Concentration of Certain Risks  Business
    Segments
      Percentage of NetRevenues for YearsEnded December 31,2006


2005


2004Video business:DVD


67
%


55
%


54
%VCD


18
%


17
%


27
%Recordable


1
%


2
%


3
%Royalty and License


2
%


11
%


8
%Other


7
%


3
%


2
%Total Video business


95
%


88
%


94
%Digital Imaging business


5
%


12
%


6
%Total


100
%


100
%


100
%  67




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Years Ended December 31,2006


2005


2004(In thousands)Net revenues:Video

$
95,736


$
159,522


$
242,424Digital Imaging


4,729



22,399



14,854Total net revenues

$
100,465


$
181,921


$
257,278Segment operating income (loss):Video

$
(36,089
)

$
(15,176
)

$
1,640Digital Imaging


(12,388
)


(25,159
)


(22,542
)Total segment operating loss

$
(48,477
)

$
(40,335
)

$
(20,902
)     Years Ended December 31,2006


2005


2004(In thousands)Segment operating loss

$
(48,477
)

$
(40,335
)

$
(20,902
)Unallocated corporate expenses


(12,308
)


(16,012
)


(19,740
)Impairment of goodwill and
    intangible assets






(42,743
)


Operating loss

$
(60,785
)

$
(99,090
)

$
(40,642
)  68




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Geographic
    Information
    Property,Plant,Net


andRevenue


EquipmentYear Ended December 31,
    2006United States

$
59


$
15,663Hong Kong


44,577



Taiwan


18,360



96Japan


9,708



China (excluding Hong Kong)


2,363



292Korea


15,053



156Turkey


2,484



Singapore


2,997



Rest of the world


4,864



789Total foreign


100,406



1,333Total

$
100,465


$
16,996Year Ended December 31,
    2005United States

$
499


$
19,990Hong Kong


72,220



52Taiwan


44,089



268Japan


16,297



China (excluding Hong Kong)


1,439



335Korea


29,659



156Turkey


8,337



Singapore


2,221



Rest of the world


7,160



332Total foreign


181,422



1,143Total

$
181,921


$
21,133Year Ended December 31,
    2004United States

$
2,365


$
21,369Hong Kong


135,954



630Taiwan


38,683



413Japan


22,489



China (excluding Hong Kong)


14,466



265Korea


11,730



180Turkey


10,398



Singapore


9,409



Rest of the world


11,784



152Total foreign


254,913



1,640Total

$
257,278


$
23,009  69




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Significant
    Customers and Distributors
        Note 13.
    Related
    Party Transactions with Vialta, Inc.    time-to-time,
  Transactions BetweenESS and VialtaYears Ended December 31,2006


2005


2004(In thousands)Lease charges to Vialta under Real
    Estate Matters Agreement

$
15


$
346


$
503Products sold to Vialta






12



782Products purchased from Vialta






(31
)


(22
)Selling, general, administrative
    and other services provided to Vialta, net of charges from Vialta


(1
)


4



10Total charges to Vialta, net of
    charges from Vialta

$
14


$
331


$
1,273   70




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  As ofDecember 31,2006


2005Receivable from Vialta

$



$
20   Note 14.
    Commitments
    and Contingencies    Payment Due by PeriodsLess Than


1-3


3-5


More thanContractual Obligations

Total


1 Year


Years


Years


5 Years(In thousands)Operating lease obligations

$
1,977


$
1,896


$
81







Purchase order commitments


11,101



11,101











Total

$
13,078


$
12,997


$
81







             Legal
    Proceedings
   71




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Note 15.
    Employee
    Benefit Plan   72




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2.
    Supplementary
    Data:  Selected
    Quarterly Financial Data (unaudited)  Form 10-K.
  2005


2006Mar. 31


Jun. 30


Sept. 30


Dec. 31


Mar. 31


Jun. 30


Sept. 30


Dec. 31(In thousands, except per share data)Statement of Operations
    Data:Net revenues:Product

$
37,763


$
41,491


$
43,588


$
39,079


$
26,886


$
29,066


$
23,190


$
18,655Royalty


5,000



5,000



5,000



5,000











4



2,664Total net revenues


42,763



46,491



48,588



44,079



26,886



29,066



23,194



21,319Cost of product revenues


48,587



40,613



43,047



37,065



24,523



28,354



27,219



17,544Gross profit (loss)


(5,824
)


5,878



5,541



7,014



2,363



712



(4,025
)


3,775Operating expenses:Research and development


7,753



8,844



8,738



8,648



9,597



9,941



8,691



7,815
(a)Selling, general and administrative


9,654



9,051



8,456



7,812



7,999



7,045



7,567



4,955
(a)Impairment of goodwill and
    intangible assets














42,743
(c)














Operating loss


(23,231
)


(12,017
)


(11,653
)


(52,189
)


(15,233
)


(16,274
)


(20,283
)


(8,995
)Non-operating income (loss), net


(112
)


807



451



170



476



883



505



(2,516
)Loss before income taxes


(23,343
)


(11,210
)


(11,202
)


(52,019
)


(14,757
)


(15,391
)


(19,778
)


(11,511
)Provision for (benefit from) income
    taxes


667



413



(106
)


805



(687
)


(167
)


(15,411
)(b)


(1,078
)Net loss

$
(24,010
)

$
(11,623
)

$
(11,096
)

$
(52,824
)

$
(14,070
)

$
(15,224
)

$
(4,367
)

$
(10,433
)Net loss per
    share  basic and diluted

$
(0.60
)

$
(0.29
)

$
(0.28
)

$
(1.33
)

$
(0.36
)

$
(0.39
)

$
(0.11
)

$
(0.28
)Shares used in per share
    calculation  basic and diluted


39,706



39,772



39,806



39,839



39,122



39,150



39,177



37,450     (a)
    
    Our operating expenses decreased from prior quarters primarily
    due to reduced headcount resulting from actions taken after our
    September 18, 2006 announcement of an operational
    reorganization and change to our business plan (See Note 1
    to the Consolidated Financial Statements).(b)
    
    Benefit from income taxes includes a favorable tax adjustment of
    $14.9 million.(c)
    
    We recorded a $42.7 million impairment charge related to
    fiscal 2003 acquisitions (See Note 3 to the Consolidated
    Financial Statements). 73




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##### Table of Contents



ESS
    TECHNOLOGY, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  3.
    Financial
    Statement Schedule: VALUATION
    AND QUALIFYING ACCOUNTS  AdditionsBalance at


Charged to





Balance atBeginning


Costs and





Ending ofof Period


Expenses


Deductions


Period(In thousands)Year Ended December 31, 2006Allowance for doubtful accounts

$
449


$
(169
)

$
4


$
276Allowance for sales returns and
    warranty reserve

$
742


$
(67
)

$
310


$
365Year Ended December 31, 2005Allowance for doubtful accounts

$
787


$



$
338


$
449Allowance for sales returns and
    warranty reserve

$
757


$
601


$
616


$
742Year Ended December 31, 2004Allowance for doubtful accounts

$
990


$
176


$
379


$
787Allowance for sales returns and
    warranty reserve

$
1,711


$
653


$
1,607


$
757   Form 10-K.
 74




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rule 13a-15(e)
    Managements
    Report on Internal Control over Financial Reporting
    Changes
    in Internal Control over Financial Reporting
  Rule 13a-15(f)
  Item 9B.
    Other
    Information   PART III    Item 10.
    Directors,
    Executive Officers and Corporate Governance    http://www.ESSTECH.com.
 75




---



##### Table of Contents



Form 8-K.
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Shareholder Matters      Equity
    Compensation Plan Information(1)
  Number of SecuritiesRemaining Availablefor Future IssuanceNumber of Securities


Weighted-Average


Under Equityto be Issued Upon


Exercise Price of


Compensation PlansExercise of Outstanding


Outstanding Options,


(Excluding SecuritiesOptions, Warrants


Warrants and


Reflected inPlan Category

and Rights(a)


Rights(b)


Column(a))(c)Equity compensation plans approved
    by security holders


6,030,572


$
5.57



4,925,492
(2)Equity compensation plans not
    approved by security holders


1,256,422


$
4.57



729,248Total


7,286,994


$
5.40



5,654,740     (1)
    
    Includes only options outstanding under ESS stock option
    plans, as no stock warrants or rights were outstanding as of
    December 31, 2006.(2)
    
    Includes 169,257 shares of common stock reserved for future
    issuance under the ESS Technology, Inc. 1995 Employee Stock
    Purchase Plan.    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   76




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statements
  Form 10-K.
  Financial Statement Schedule
  Form 10-K.
    Exhibits
  Form 10-K.
 77




---



##### Table of Contents



SIGNATURES  Form 10-K
  
  By:
    /s/  ROBERT
    L. BLAIR   President and Chief Executive Officer
    POWER OF
    ATTORNEY
  attorneys-in-fact, Form 10-K, attorneys-in-fact
    Signature

Title

Date/s/  ROBERT
    L. BLAIRRobert
    L. Blair

President and Chief Executive
    Officer (principal executive officer)

March 16, 2007/s/  JAMES
    B. BOYDJames
    B. Boyd

Chief Financial Officer, Senior
    Vice President and Assistant
    Secretary (principal financial
    officer and principal accounting officer)

March 16, 2007/s/  FRED
    S.L. CHANFred
    S.L. Chan

Chairman of the Board of Directors

March 16, 2007/s/  BRUCE
    J.
    ALEXANDERBruce
    J. Alexander

Director

March 16, 2007/s/  GARY
    L. FISCHERGary
    L. Fischer

Director

March 16, 2007/s/  PETER
    T. MOKPeter
    T. Mok

Director

March 16, 2007/s/  ALFRED
    J. STEINAlfred
    J. Stein

Director

March 16, 2007  78




---



##### Table of Contents



INDEX TO
    EXHIBITS
  ExhibitNumber

Exhibit Title2
.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
    (file
    no. 000-26660)
    filed September 5, 2001.2
.05

Agreement and Plan of Merger dated
    June 9, 2003, by and among the Registrant, Pictos
    Technologies, Inc. and Pictos Acquisition Corporation,
    incorporated herein by reference to Exhibit 2.1 to the
    Registrants Current Report on From
    8-K (file
    no. 000-26660)
    filed June 24, 2003.2
.06

Agreement and Plan of Merger dated
    August 15, 2003, by and among the Registrant, Divio, Inc.
    and Divio Acquisition Corporation, incorporated herein by
    reference to Exhibit 2.1 to the Registrants Current
    Report on
    Form 8-K
    (file
    no. 000-26660)
    filed September 2, 2003.3
.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 Amended and
    Restated Bylaws.4


Registrants Registration
    Rights Agreement dated May 28, 1993, by and among the
    Registrant and certain shareholders, incorporated herein by
    reference to Exhibit 10.07 to the
    Form S-1
    (file
    no. 33-95388).10
.1

Registrants Amended 401(k)
    Plan, incorporated herein by reference to Exhibit 10.06 to
    the
    Form S-1
    (file
    no. 33-95388).*10
.2

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
    (file
    no. 33-95388).10
.6

1995 Employee Stock Purchase Plan
    amended and restated as of April 26, 2003, incorporated
    herein by reference to Exhibit 10.49 to the
    Registrants Quarterly Report on
    Form 10-Q
    (file
    no. 000-26660)
    filed August 14, 2003.10
.7

Master Technology Ownership and
    License Agreement between the Registrant and Vialta, Inc. dated
    August 20, 2001, incorporated herein by reference to
    Exhibit 10.38 to the Registrants Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed September 5, 2001.10
.8

Employee Matters Agreement between
    the Registrant and Vialta, Inc. dated August 20, 2001,
    incorporated herein by reference to Exhibit 10.39 to the
    Registrants Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed September 5, 2001.10
.9

Tax Sharing and Indemnity
    Agreement between the Registrant and Vialta, Inc. dated
    August 20, 2001, incorporated herein by reference to
    Exhibit 10.40 to the Registrants Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed September 5, 2001.10
.10

Real Estate Matters Agreement
    between the Registrant and Vialta, Inc. dated August 20,
    2001, incorporated herein by reference to Exhibit 10.41 to
    the Registrants Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed September 5, 2001.10
.11

Master Confidential Disclosure
    Agreement between the Registrant and Vialta, Inc. dated
    August 20, 2001, incorporated herein by reference to
    Exhibit 10.42 to the Registrants Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed September 5, 2001.10
.12

Master Transitional Services
    Agreement between the Registrant and Vialta, Inc, incorporated
    herein by reference to Exhibit 10.43 to the
    Registrants Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed with the SEC on September 5, 2001.10
.13

Registrants 1997 Equity
    Incentive Plan, amended and restated as of April 26, 2003,
    incorporated herein by reference to Exhibit 10.50 to the
    Registrants Quarterly Report on
    Form 10-Q
    (file
    no. 000-26660)
    filed August 14, 2003.10
.14

Registrants 2002
    Non-Executive Stock Option Plan dated May 22, 2002,
    incorporated herein by reference to Exhibits 99.1 to the
    Form S-8
    (file
    no. 333-89942)
    filed on June 6, 2002.*10
.15

Joint Development Agreement dated
    December 14, 2001, incorporated herein by reference to
    Exhibit 10.50 to the Registrants Annual Report on
    Form 10-K
    (file
    no. 000-26660)
    filed March 31, 2003.**10
.16

Amendment to Joint Development
    Agreement dated January 18, 2003, incorporated herein by
    reference to Exhibit 10.51 to the Registrants Annual
    Report on
    Form 10-K
    (file
    no. 000-26660)
    filed March 31, 2003.**




---



##### Table of Contents



ExhibitNumber

Exhibit Title10
.17

License Agreement and Mutual
    Release dated June 11, 2003, by and among the Registrant,
    ESS Technology International, Inc. and MediaTek Incorporation,
    incorporated herein by reference to Exhibit 10.51 to the
    Registrants Quarterly Report on
    Form 10-Q
    (file
    no. 000-26660)
    filed August 14, 2003.**10
.18

Addendum to the License Agreement
    and Mutual Release dated July 8, 2003, by and among the
    Registrant, ESS Technology International, Inc. and MediaTek
    Incorporation, incorporated herein by reference to
    Exhibit 10.52 to the Registrants Quarterly Report on
    Form 10-Q
    (file
    no. 000-26660)
    filed November 14, 2003.**10
.20

Registrants 1995 Equity
    Incentive Plan amended and restated as of January 25, 2003,
    incorporated herein by reference to Exhibit 10.57 to the
    Quarterly Report on
    Form 10-Q
    (file
    no. 000-26660)
    filed on November 9, 2004.*10
.21

Form of Stock Option Agreement
    under Registrants 1995 Equity Incentive Plan, incorporated
    herein by reference to Exhibit 10.58 to the Quarterly
    Report on
    Form 10-Q
    (file
    no. 000-26660)
    filed on November 9, 2004.*10
.22

Form of Stock Option Agreement
    under Registrants 1997 Equity Incentive Plan, incorporated
    herein by reference to Exhibit 10.59 to the Quarterly
    Report on
    Form 10-Q
    (file
    no. 000-26660)
    filed on November 9, 2004.*10
.23

Form of Directors Nonqualified
    Initial Stock Option Grant Agreement under Registrants
    1995 Directors Stock Option Plan, incorporated herein
    by reference to Exhibit 10.60 to the Quarterly Report on
    Form 10-Q
    (file
    no. 000-26660)
    filed on November 9, 2004.*10
.24

Form of Directors Nonqualified
    Succeeding Stock Option Grant Agreement under Registrants
    1995 Directors Stock Option Plan, incorporated herein
    by reference to Exhibit 10.61 to the Quarterly Report on
    Form 10-Q
    (file
    no. 000-26660)
    filed on November 9, 2004.*10
.25

Registrants
    1995 Directors Stock Option Plan, incorporated herein
    by reference to Exhibit 10.62 to the Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed on November 30, 2004.*10
.26

Form of Directors Nonqualified
    Initial Stock Option Grant Agreement under Registrants
    1995 Directors Stock Option Plan, amended effective
    November 23, 2004, incorporated herein by reference to
    Exhibit 10.63 to the Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed on November 30, 2004.*10
.27

Form of Directors Nonqualified
    Succeeding Stock Option Grant Agreement Registrants
    1995 Directors Stock Option Plan, amended effective
    November 23, 2004, incorporated herein by reference to
    Exhibit 10.64 to the Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed on November 30, 2004.*10
.28

Form of Stock Option Agreement
    under Registrants 1995 Equity Incentive Plan, 1997 Equity
    Incentive Plan and 2002 Non-Executive Stock Option Plan, amended
    effective November 23, 2004, incorporated herein by
    reference to Exhibit 10.65 to the Current Report on
    Form 8-K
    (file
    no. 000-26660)
    filed on November 30, 2004.*10
.29

Amended and Restated Stock Option
    Agreement for Audit Committee members, incorporated herein by
    reference to Exhibit 10.66 of the
    Form 8-K
    filed on February 3, 2005.*10
.30

Form of Stock Option Agreement for
    Audit Committee members, incorporated herein by reference to
    Exhibit 10.67 of the
    Form 8-K
    filed on February 3, 2005.*10
.31

Form of Acceleration Agreement for
    Directors, incorporated herein by reference to
    Exhibit 10.29 to the Registrants
    Form 10-K
    filed on March 16, 2005.*10
.32

Form of Acceleration Agreement for
    Officers, incorporated herein by reference to Exhibit 10.30
    to the Registrants
    Form 10-K
    filed on March 16, 2005.*10
.33

Description of Performance Based
    Compensation Plan Bonus Criteria for Fiscal Year 2005,
    incorporated herein by reference to Exhibit 10.31 to the
    Registrants
    Form 8-K
    filed on April 6, 2005.*10
.34

Description of Bonus Payment for
    Fiscal Year 2005 to James Boyd, incorporated herein by reference
    to text of the Registrants
    Form 8-K
    filed June 2, 2005.*10
.35

Description of Amendment of Stock
    Option Grant to Robert Blair Dated June 30, 2005,
    incorporated herein by reference to Exhibit 10.31 to the
    Registrants
    Form 10-Q
    filed on August 9, 2005.*10
.36

Silan-ESS Cooperation in VCD
    Agreement between the Registrant and Hangzhou Silan
    Microelectronics Joint-Stock Co. Ltd. dated September 14,
    2005, incorporated herein by reference to Exhibit 10.33 to
    the Registrants
    Form 10-Q
    filed on November 9, 2005.**




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##### Table of Contents



ExhibitNumber

Exhibit Title10
.37

ESS-Silan DVD Technology License
    Agreement between the Registrant and Hangzhou Silan
    Microelectronics Co., Ltd. dated November 3, 2006.**10
.38

Description of the amended
    compensation package for James Boyd, incorporated herein by
    reference to text of the Registrants
    Form 8-K
    filed December 27, 2006.*21


List of Registrants
    subsidiaries.23


Consent of Independent Registered
    Public Accounting Firm.24


Power of Attorney (included on the
    signature page of this report on
    Form 10-K).31
.1

Certification of Chief Executive
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.31
.2

Certification of Chief Financial
    Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.32
.1

Certification Pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.32
.2

Certification Pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.     *
    
    Represents a management contract or compensatory plan or
    arrangement.**
    
    Confidential treatment has been granted with respect to certain
    portions of this agreement.