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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
(MARK ONE)

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

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

           FOR THE TRANSITION PERIOD FROM __________ TO __________ .

                         COMMISSION FILE NUMBER 0-26660
                            ------------------------

                              ESS TECHNOLOGY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                 CALIFORNIA                                     94-2928582
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)

  48401 FREMONT BLVD., FREMONT, CALIFORNIA                         94538
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

              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 [X]     No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant, based upon the closing sale price of
the Common Stock on February 4, 2000 ($18.72) as reported on the Nasdaq National
Market, was approximately $492,772,223. 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 February 4, 2000, registrant had outstanding 41,717,338 shares of
Common Stock.
                            ------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement for Registrant's 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III.
--------------------------------------------------------------------------------
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<PAGE>   2

                              ESS TECHNOLOGY, INC.

                                 1999 FORM 10-K

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>       <C>                                                             <C>
                                    PART I
Item 1.   Business....................................................      3
Item 2.   Properties..................................................     11
Item 3.   Legal Proceedings...........................................     12
Item 4.   Submission of Matters to a Vote of Security Holders.........     12

                                   PART II
Item 5.   Market for the Registrant's Common Equity and Related
          Shareholder Matters.........................................     14
Item 6.   Selected Financial Data.....................................     15
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of
          Operations..................................................     15
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
          Disclosure..................................................     46

                                   PART III
Item 10.  Directors and Executive Officers of the Registrant..........     46
Item 11.  Executive Compensation......................................     46
Item      Security Ownership of Certain Beneficial Owners and
  12....  Management..................................................     46
Item 13.  Certain Relationships and Related Transactions..............     46

                                   PART IV
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
          8-K.........................................................     46
Signatures............................................................     49
</TABLE>

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     Statements contained in this filing that are not statements of historical
fact may be deemed to be forward-looking statements. A number of important
factors could cause actual events or the Company's actual results to differ
materially from those indicated by such forward-looking statements, including
dependence on continued growth in demand for Internet, PC audio, video and other
multimedia capabilities for notebook and desktop computers, as well as consumer
electronic and Internet products; the Company's ability to take advantage of new
markets; increased competition and pricing pressures, general economic
conditions and conditions specific to the semiconductor industry; the timing and
market acceptance of new product introductions; the timely development of new
products; continued availability of quality foundry capacity; and other risks
set forth in this filing and in the Company's filings from time to time with the
Securities and Exchange Commission.

                                     PART I

ITEM 1. BUSINESS

     ESS Technology, Inc. and its subsidiaries ("ESS" or the "Company") designs,
markets and supports highly integrated mixed signal semiconductor, hardware,
software and system solutions for multimedia applications in the Internet,
personal computer ("PC") and consumer marketplaces. The Company offers
comprehensive solutions for audio, video and modem applications. ESS has
established itself as a leading supplier for mixed-signal PC audio solutions
which integrate all essential audio components on a single chip and Video CD
solutions ("VCD"). During 1999, ESS continued to strengthen its core family of
PCI audio solutions as well as its video and modem solutions. The Company was
incorporated in California in 1984. In April 1999, the Company established a
subsidiary, ViAlta.com, which plans to introduce advanced, user friendly
products and applications for the internet. ViAlta.com's products will include
multi-media appliances, applications and content for the Internet. In January
2000, ViAlta.com introduced its first of a series of multi-function Internet
appliances at CES show in Las Vegas. The ViAlta.com's Internet appliance is
based on ESS's core technologies in the digital video, telephony and videophone.
The product is designed to address the booming consumer desire and demand for
DVD and MP3 players, Internet telephony, videophone and Internet consumer in the
living room environment. This state-of-the-art full-featured Internet appliance
will provide the platform for consumers to enjoy the unique entertainment,
e-commerce and web content available at ViAlta.com's upcoming web portal. On
February 10, 2000, ViAlta.com completed its equity financing generating $141.0
million of which $111.5 million in cash and $29.6 million in promissory notes.
ESS contributed $62.1 million cash in the ViAlta.com's equity offering and
acquired a 63% ownership in ViAlta.com.

  AudioDrive Products

     ESS' AudioDrive products enable PC manufacturers to provide audio
capabilities on add-in sound cards and directly on the motherboards of desktop
and notebook computers. The Company has established itself as a leader in
integrated audio solutions and counts many of the leading manufacturers of
personal computers and sound cards among its customers.

     During 1999, the manufacturers in the PC market shifted demand from ISA
solutions to PCI solutions due to the higher performance which the PCI solutions
provide to meet the demands for advanced PC audio applications.

     The Company's AudioDrive products are based on ESS' audio technologies,
design methodologies, and software and firmware expertise. ESS has developed a
proven set of ISA and PCI product solutions for the PC market.

     The AudioDrive ISA and PCI product families integrate ESFM(TM), a
proprietary FM sound synthesis technology, that produces superior sound quality
by enhancing traditional FM synthesis techniques, with hardware, software and
music database technology. ESS also utilizes its proprietary advanced analog and
mixed signal design methodologies, together with its library of audio
semiconductor designs, to produce highly integrated mixed signal audio chips.
ESS software technology is bundled as part of its comprehensive solution

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and consists of its AudioDrive device drivers for Microsoft(R) Windows 2000(R),
Windows 98(R), Windows 95(R), Windows NT(R), Windows(R) 3.1, IBM OS/2(R)
Warp(R), DirectX(TM) PC games, and audio applications, including ESS
AudioRack(TM) controller, an integrated graphical controller for the entire PC
audio system.

  ISA AudioDrive Products

     ES692: a wavetable music synthesizer chip. The ES692 includes reverb
special effects without need for external RAM. With its embedded
microcontroller, the ES692 supports General MIDI, providing for 128 melodic
instruments with ability to play back 32 voices of 16-bit data at a sampling
rate of 44.1kHz. Music is produced in high fidelity with the realism of a live
symphony orchestra. The ES692 includes a 1MB wavetable ROM to provide a complete
wavetable solution. This internal ROM provides digitally recorded sound samples
of musical instruments.

     ES1869: a single mixed signal 16-bit stereo audio chip with integrated ESFM
synthesizer, plug-and-play, full-duplex operation, Zoom Video support, game
support and three-dimensional sound effect. The ES1869 integrates digital logic
and a microcontroller with audio CODEC and other analog functions onto one chip,
and includes ESFM synthesis. The ES1869 is PC games compatible in SB and SB Pro
modes and is compatible with Microsoft Windows and other operating systems. The
ES1869 provides full ISA plug-and-play support and includes hardware volume
control, 64 step volume control and dual game/joystick port for game support.
The ES1869 supports full-duplex operation with simultaneous record and playback
with two DMA channels and contains an I2S interface to support Zoomed Video port
for MPEG audio. It also integrates circuitry to produce a three-dimensional
sound effect from two speakers.

     ES1879: a single mixed signal 16-bit stereo audio chip with integrated ESFM
synthesizer, plug-and-play, full-duplex operation, Zoomed Video support,
telegaming and game support and three-dimensional sound effect. The ES1879
combines the features of the ES1878 with I2S interface for Zoomed Video support,
as well as circuitry to produce three-dimensional sound effect from two
speakers. The ES1879 provides full plug-and-play support and provides interface
to a docking station unit.

  PCI AudioDrive Products

     ES1918: PCI audio CODEC. The ES1918 is a single mixed signal AC '97 CODEC
and mixer for a digital audio controller. The ES1918 meets PC '99 and Audio
CODEC '97 Rev. 1.03 specifications.

     ES1920: PCI audio CODEC. The ES1920 is a single mixed signal AC '97 CODEC
and mixer for a digital audio controller. The ES1920 meets PC '99 and Audio
CODEC '97 Rev. 2.0 specifications.

     ES1921: PCI audio CODEC. The ES1921 is a single mixed signal AC '97 CODEC
and mixer for a digital audio controller. The ES1921 meets PC '99 and Audio
CODEC '97 Rev. 2.1 specifications.

     ES1938: a PCI single mixed signal audio chip. The ES1938 provides a single
chip PCI audio solution providing high-quality audio processing while
maintaining full legacy DOS game compatibility. The ES1938 has 16-bit stereo
with 7 channel record and playback mixers and an integrated 3-D sound effects
processor.

     ES1946: a PCI single mixed signal audio chip with I2S interface. The ES1946
combines the features of the ES1938 with I2S interface for Zoomed Video port
audio and 3.3 Volt digital supply operation.

     ES1948: a PCI digital audio accelerator. The ES1948 provides enhanced
audio, utilizing the additional bandwidth provided by the PCI bus and taking
advantage of the Intel AC-97 architecture. The ES1948 implements positional 3D
and 64 channel hardware wavetable using system memory to dramatically improve
the multimedia gaming experience. The ES1948 uses ESS proprietary technology
called TDMA to provide legacy compatibility for DOS games which is a requirement
for multimedia PCs.

     ES1968: a PCI digital audio accelerator. The ES1968 provides enhanced
audio, utilizing the additional bandwidth provided by the PCI bus and taking
advantage of the Intel AC-97 architecture. The ES1968 implements positional 3D
using CRL's Digital Ear(TM) and Sensaura(TM) 3D audio technology to dramatically
improve the multimedia gaming experience. The ES1968 implements 64 channel
hardware wavetable using system memory to reduce size, cost and host utilization
while increasing sound quality for MIDI. The ES1968

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utilizes ACPI and small form factor to enable low power designs for notebooks
and motherboards. The ES1968 also uses ESS proprietary technology, TDMA to
provide legacy compatibility for DOS games, a requirement for multimedia PCs.

     ES1968M: a PCI audio/modem combo solution. The ES1968M provides the
features of the ES1968 with a parallel modem interface to a modem DSP processor.

     ES1978: a PCI digital audio accelerator. The ES1978 provides the features
of the ES1968 with an EEPROM interface for system configuration and S/PDIF
output for interface to consumer stereo equipment.

     ES1978M: a PCI audio/modem combo solution. The ES1978M provides the
features of the ES1978 in a 144 pin TQFP package with a parallel modem interface
to a modem DSP processor.

     ES1980: The ES1980 takes the ES1978 design, eliminates the internal Wave
Processor block (which transfers the wavetable music synthesis to the host
microprocessor), implements a faster internal DSP processor, and adds a second
AC link interface for audio-modem combination solutions.

     ES1983: The ES1983 provides the features of the ES1980, plus adds a
bidirectional S/PDIF port for consumer electronics interface and
Notebook/Docking Station interface.

     ES1989: a PCI single mixed signal audio chip. The ES1989 provides a
single-chip PCI audio solution, containing the ES1980 digital audio processor
plus an integrated 16-bit audio CODEC, and provides legacy compatibility for DOS
games.

     ES1988: a PCI single mixed signal audio chip. The ES1988 provides the
features of the ES1989, plus I2S, input port for Zoomed Video port plus 2nd AC
link for Notebook/Docking interface.

     ES1930: a PCI single mixed signal audio chip. The ES1930 provides the
features of the ES1989 less joystick interface and less AC-link.

     Canyon3D(TM): a high-performance audio chipset for multi-speaker PC Audio
configurations, especially for 4.1-speaker game audio and 5.1-speaker DVD audio
configurations. Canyon3D consists of ES1970-3D and ES1921 ESS products, plus
associated support chips supplied by third parties.

  TeleDrive Products

     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 functions on the personal computer. ESS TeleDrive
products enable PC manufacturers to provide fax/modem capabilities to add-on
cards and directly onto the motherboards of desktop and notebook PCs.

     ES56-PI, ES56T-PI: V.90 chip sets for data/fax/voice controllerless modem
solution. These chipsets are compliant with the V.90 (56 kbps) worldwide modem
standard via proprietary software. The ES56T-PI adds Telephone Answering Machine
functionality to the ES56-PI.

     ES56CV-PI, ES56CVH-PI: V.90 modem chipset solution plus PCI accelerated 16
or 32 bit stereo audio. ES56CVH-PI combines the ES2818 Modem AFE, ES1918 Audio
CODEC, and ES1978M/Maestro-2EM into an integrated Audio-Modem solution.
ES56CV-PI adds the ES2890 Modem DSP to add DSP acceleration to ES56CVH-PI.

  VideoDrive Products

     ESS VideoDrive products provide consumer original equipment manufacturers
("OEMs") of VCD, SuperVCD ("SVCD") and DVD players with total programmable
system solutions. The VideoDrive products provide OEMs of VCD players with a
programmable single-chip processor which includes MPEG-1 video, audio and system
decoder. It delivers full-screen, full-motion video at 30 frames per second with
selectable CD-quality audio and can be combined with memory and video/audio
DACs. The products also provide OEMs of SVCD and DVD players with a programmable
single chip processor which includes MPEG-2 audio/video/system and transport
layer decoder and video post-processing. In addition, the MPEG-2 decoder

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also integrates Dolby Digital, DTS Audio, and Navigation Software for DVD
players. These chips are designed for a variety of applications in consumer
electronics such as Internet set-top boxes, SVCD and DVD players.

  VCD Player Products

     ES3210: Single chip programmable VCD processor which includes MPEG-1
audio/video/system decoder for use in standalone and portable VCD players. The
ES3210 is a single chip that supports MPEG-1 video decoding and incorporates
on-screen display, Karaoke functions, programmable playback control, trick play
mode features, an integrated SRAM and remote control interface logic in a
smaller form factor allowing a more compact design.

     ES3880: Single chip programmable VCD processor. The ES3880 incorporates the
ES3210 features and functions with improved video quality.

     ES3883: Analog companion chip. The ES3883 provides echo, surround sound, 3D
audio, TV encoder with clock generation, audio DAC functions with HTML,
hyperlink and a graphic user interface.

     ES4108: Single chip programmable SVCD processor which includes MPEG-2 video
and MPEG-1 audio. The ES4108 incorporates on-screen display, Karaoke functions,
programmable playback control, trick play mode features, integrated remote
control interface logic and a direct CD loader interface for small form factor
and cost effective design.

  DVD Player Products

     ES4308: Single chip programmable DVD processor with integrated system
navigation software and direct DVD loader interface. ES4308 supports two
channels stereo down mix and MPEG-2 video decoding and provides on screen
display and transport layer compliance with DVD standard with the integrated
system navigation software and a direct DVD loader interface for a smaller form
factor and cost effective design.

     ES4408: Single chip programmable DVD processor with 5.1 channel Dolby
Digital outputs. The ES4408 incorporates all the features of the ES4308 with
support of 5.1 channel Dolby Digital audio.

  Internet Set-Top Box Products

     ES4228: Single chip programmable SVCD and Internet set-top box
processor. ES4228 incorporates the ES4108 features with a graphic function and
flicker filter algorithm to enhance viewing quality on the television.

     ES4227: Analog companion chip. The ES4227 incorporates features of echo,
surround sound, 3D audio, TV encoder with clock generation, audio DAC functions
with HTML, hyperlink and a graphic user interface with a programmable I/O
interface to communicate with ES56V modem chip set.

  Software and Support

     ESS provides comprehensive support for its products by offering software
that can be bundled with its products. This software includes device drivers for
Microsoft(R) Windows 2000(R), Windows 98(R), Windows 95(R), Windows NT(R),
Windows 3.1(R), IBM OS/2(R) Warp(R), Intel NSP and PC games, for PC products and
systems support for the Company's VCD and DVD products. Other support software
that is available to customers includes localization software and installation
software that allows customers to tailor their products for specific
applications and needs.

     Customer development support includes an Evaluation Kit that contains a
reference add-in card design with all the necessary information to incorporate
an ESS chip in the customer's product. To assist customers in further reducing
their time to market, ESS also provides a Manufacturing Kit that contains
manufacturing information, including a bill-of-materials, printed circuit board
layout and production test software.

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CUSTOMERS

     ESS sells its products principally to OEMs of PCs, PC-related add-in boards
and consumer electronics systems. The Company sells its product through a direct
sales force, distributors and manufacturer representatives. The following table
shows representative customers worldwide:

<TABLE>
<CAPTION>
HONG KONG    UNITED STATES     TAIWAN     JAPAN(1)   REST OF THE WORLD
---------    -------------     ------     --------   -----------------
<S>         <C>              <C>         <C>         <C>
Dynax(2)    Compaq           Acer        Fujitsu       Hyundai
Shinco      Dell             FIC         NEC           Philips
Vnet        Hewlett Packard  GVC         Sanyo         Samsung
            IBM              Inventec    Sony          Trigem
            Solectron        Labway      Toshiba       Jabil
                             Mitac       Sharp
                             Quanta
                             Weikeng(2)
</TABLE>

---------------
(1) Sales in Japan are made through a distributor.

(2) Distributors of the Company.

     A limited number of customers have accounted for a substantial portion of
the Company's net revenues. In 1997, 1998 and 1999 sales to the Company's top
five customers, including sales to distributors, accounted for approximately
49%, 54% and 53% respectively, of the Company's net revenues. In 1997, Eastbase
and Dynax, a Hong Kong distributor, each accounted for approximately 13% of the
Company's net revenues. In 1998, Dynax and Shinco accounted for approximately
16% and 15% of the Company's net revenues. In 1999, Dynax and Shinco accounted
for approximately 22% and 13% of the Company's net revenues. The Company expects
that a limited number of customers may account for a substantial portion of the
net revenues for the foreseeable future.

SALES AND MARKETING

     The Company sells and markets to leading PC and consumer OEM's worldwide.
The Company markets its products through its direct sales force, distributors
and manufacturer representatives.

     International sales comprised approximately 89%, 92% and 95% in 1997, 1998
and 1999, respectively of the Company's net revenues. The Company's
international revenues in 1997, 1998 and 1999 have been derived primarily from
Asian customers who manufacture PCs, PC-related add-in boards and consumer OEM's
of VCD and DVD players. A large percentage of the worldwide supply of these
products is manufactured by suppliers in Asia. ESS has direct sales personnel
and technical staff located in Taiwan. A significant portion of the Company's
Asian sales have been to customers located in Hong Kong and Taiwan. See "Factors
That May Affect Future Results -- International Operations." The Company's
products are also sold internationally through distributors and manufacturer
representatives located in Japan, China, Singapore, Korea, India and Germany.
The Company's manufacturer representatives and distributors are not subject to
minimum purchase requirements and can discontinue marketing any of the Company's
products at any time. In addition, certain of the Company's manufacturer
representatives, distributors and customers typically are authorized certain
rights of return for unsold product or pricing allowances to compensate for
rapid, unexpected prices changes. See "Factors That May Affect Future
Results -- Customer Concentration."

     The Company believes that customer service and technical support are
important competitive factors in selling to major customers. The Company
provides technical support to its customers. Manufacturer representatives and
distributors supplement the Company's efforts by providing additional customer
service at the local level. The Company believes that close contact with its
customers not only improves the customers' level of satisfaction, but also
provides important insight into future market direction.

     Sales of the Company's products are generally made pursuant to standard
purchase orders, which are frequently revised to reflect changes in the
customer's requirements. Product deliveries are scheduled upon the Company's
receipt of purchase orders. Generally, these purchase orders allow customers to
reschedule

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delivery dates and cancel purchase orders without significant penalties. For
these reasons, the Company believes that its backlog, while useful for
scheduling production, is not necessarily a reliable indicator of future
revenues. See "Factors That May Affect Future Results -- Potential Fluctuations
in Operating Results."

RESEARCH AND DEVELOPMENT

     In order to compete successfully, the Company believes that it must
continually design, develop and introduce new products that take advantage of
market opportunities and address emerging technical standards. The Company's
strategy is to leverage its base of design expertise, analog, digital and mixed
signal design capabilities and process technologies, and software and systems
expertise to develop audio, modem and video solutions for the Internet, PC and
consumer marketplace. ESS has in the past acquired and in the future will
consider acquiring technology and product lines to enhance its own product
offerings and to accelerate its time-to-market. The Company intends to continue
to provide comprehensive solutions for its customers by developing
state-of-the-art semiconductor chips, device drivers, firmware and application
software in its chosen markets.

     ESS utilizes a design environment based on workstations, dedicated product
simulators, system simulation with hardware and software modeling, and a high
level design description language. The Company invests regularly in new advanced
equipment and software tools and intends to maintain and enhance its library of
core cells.

     At February 4, 2000, ESS had a staff of approximately 221 research and
development personnel, 46 of which were involved in semiconductor design and
process development and 175 of which were involved in software development. In
addition, ESS has engaged outside developers to develop certain technologies to
the Company's specifications and intends to continue to utilize outside
developers in the future. During 1997, 1998 and 1999 the Company spent
approximately $29.5 million, $30.5 million and $37.4 million, respectively, on
research and development activities, excluding a one-time pre and post-tax
charge of $22.2 million related to acquired research and development in-process
from the acquisition of Platform Technologies, Inc. ("Platform") in the second
quarter of 1997.

     In April 1999, the Company established a subsidiary, ViAlta.com which plans
to develop and market advanced, user-friendly products and applications for the
Internet. In October 1999, ViAlta.com entered into an agreement with EnReach
Technology for the acquisition of EnReach's website software. As part of the
agreement, eight contract engineers were transferred from EnReach's Canadian
office to ViAlta.com as regular fulltime employees. In December 1999, ViAlta.com
established a wholly owned subsidiary Vcom Canada Holdings which operates a
branch office in Toronto as a research and development center for ViAlta.com
portal development. During 1999, ViAlta.com spent approximately $1.4 million in
research and development activities.

     In June 1997, the Company completed its acquisition of Platform pursuant to
which the Company acquired all the outstanding capital stock of Platform in
exchange for approximately 2.54 million shares of the Company's Common Stock
including approximately 954,000 options with a value of $32.7 million. Platform
is a wholly-owned subsidiary of the Company. The acquisition of Platform
provided the Company with certain PCI audio expertise and designs in process,
along with significant engineering talent. The Company may continue to utilize
cash and equity 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, the Company may evaluate potential acquisitions of
or investments in such businesses, products or technologies owned by third
parties.

MANUFACTURING

     The Company contracts with independent foundries and assembly and test
service providers to manufacture all of its products. This manufacturing
strategy enables the Company to focus on its design 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, and assembly and test activities. Wafer
fabrication is performed by two independent foundries, which utilize

                                        8
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advanced manufacturing technologies. A substantial majority of the Company's
products are manufactured by Taiwan Semiconductor Manufacturing Company Ltd.
("TSMC"), which has manufactured certain of the Company's products since 1989.
The Company also has a foundry arrangement with United Microelectronics
Corporation ("UMC") in Taiwan. Most of the Company's devices are currently
fabricated using a mixed signal CMOS 0.35 micron process technology.

     The Company is dependent on its foundries to allocate to the Company a
portion of their foundry capacity sufficient to meet the Company's needs and to
produce products of acceptable quality and with acceptable manufacturing yields
in a timely manner. These foundries fabricate products for other companies and
manufacture products of their own design. In November 1995, the Company entered
into long-term agreements with TSMC and UMC. Under the TSMC Agreement, in
exchange for TSMC's increased wafer capacity commitments, the Company committed
to pay approximately $32 million during 1996 and 1997 as deposits for wafers
through 1999. The cash requirements associated with this agreement were two $16
million payments due June 30, 1996 and 1997. The Company issued two promissory
notes totaling $32 million securing these payments which were cancelled
subsequent to the payments in 1996 and 1997. The payments were applied in full
to offset wafers purchased from 1996 to 1999. In November 1999, the Company
secured wafer capacity that it believes will be adequate to meet its growth
plans for the next 12 months.

     Under the Company's agreement with UMC, the Company entered into a joint
venture arrangement with UMC and other U.S. semiconductor companies to build a
separate semiconductor manufacturing facility to be located in Taiwan at an
estimated cost of $1 billion. The Company has invested approximately $24.6
million in this joint venture. Under the terms of the agreement, the Company
received approximately a 5% equity ownership in the joint venture company and
capacity rights. On October 17, 1998, the Company entered into an agreement with
UMC to sell UMC approximately 63.8 million shares of the joint venture for a
purchase price of $22.4 million dollars. On April 8, 1999, the Company sold its
remaining 6 million shares of stock of the joint venture at book value for a
purchase price of $2.2 million. The Company received the cash on April 30, 1999.

     All of the Company's semiconductor products are assembled and tested by
third-party vendors, primarily Advanced Semiconductor Engineering, OSE, and
Sampo Semiconductor in Taiwan and ASAT in Hong Kong. The Company has internally
designed and developed its own test software and certain test equipment, which
are provided to the Company's test vendors. Shortages of raw materials or
disruptions in the provision of services by the Company's assembly vendors could
lead to supply constraints or delays in the delivery of the Company's products.
Such constraints or delays might result in the loss of customers, limitations or
reductions in the Company's revenues or other material adverse effects on the
Company's business, financial condition and results of operations. The Company's
reliance on third-party assembly and testing vendors involves a number of other
risks, including reduced control over delivery schedules, quality assurance and
costs. The inability of such third parties to deliver products of acceptable
quality and in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Factors
That May Affect Future Results -- Dependence on TSMC and Other Third Parties"
and "-- International Operations."

COMPETITION

     The markets in which the Company competes are intensely competitive and are
characterized by rapid technological change, price reductions and rapid product
obsolescence. The Company currently competes with add-in card suppliers and
other semiconductor manufacturers. The Company expects competition to increase
in the future from existing competitors and from other companies that may enter
the Company's existing or future markets with products that may be at lower
costs or provide higher levels of integration, higher performance or additional
features. The Company is unable to predict the timing and nature of any such
competitive product offerings. The announcement and commercial shipment of
competitive products could adversely affect sales of the Company's products and
may result in increased price competition that would adversely affect the
average selling prices ("ASPs") and margins of the Company's products. 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 the
Company's products are characterized by intense price competition. The

                                        9
<PAGE>   10

willingness of prospective customers to design the Company's products into their
products depends to a significant extent upon the ability of the Company to sell
its products at a price that is cost-effective for such customers. As the
markets for the Company's products mature and competition increases, the Company
anticipates that prices for its products will continue to decline. If the
Company is unable to reduce its costs sufficiently to offset declines in product
prices or is unable to introduce more advanced products with higher product
prices, the Company's business, financial condition and results of operations
would be materially adversely affected. See "Factors That May Affect Future
Results -- Potential Fluctuations in Operating Results."

     The Company's 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 the Company. The Company's
competitors also include a number of smaller and emerging companies. The
Company's principal audio competitors include Cirrus Logic, Creative Technology
and Yamaha. The Company's principal video competitors include C-Cube
Microsystems, Winbond, LSI Logic, Zoran and SGS Thomson. The Company's principal
modem competitors include Lucent Technologies, PC-TEL, Conexant, 3Com and Texas
Instruments.

     Certain of the Company's current and potential competitors maintain their
own semiconductor foundries and may therefore benefit from certain capacity,
cost and technical advantages. The Company believes that its ability to compete
successfully depends on a number of factors, both within and outside of its
control, including the price, quality and performance of the Company's and its
competitors' products, the timing and success of new product introductions by
the Company, its customers and its competitors, the emergence of new multimedia
standards, the development of technical innovations, the ability to obtain
adequate foundry capacity and sources of raw materials, the efficiency of
production, the rate at which the Company's customers design the Company's
products into their products, the number and nature of the Company's competitors
in a given market, the assertion of intellectual property rights and general
market and economic conditions. There can be no assurance that the Company will
be able to compete successfully in the future.

     Each successive generation of microprocessors has provided increased
performance, which could result in microprocessors capable of performing
multimedia functions. In this regard, Intel Corporation includes MMX
Instructions (Multimedia Extensions) in its current generation of
microprocessors, which improve the microprocessor's performance for graphics,
image processing, and data computation applications. Intel is promoting the
processing power of the Pentium-III processor for data and signal intensive
functions such as graphics acceleration and other multimedia functions. The
microprocessor still requires analog and mixed-signal interface chips, such as
ESS-supplied IC products, to complete a multimedia subsystem; but there can be
no assurance that the increased capabilities of microprocessors will not
adversely affect demand for the Company's products. See "Factors That May Affect
Future Results -- Importance of New Products and Technological Changes."

PATENTS AND PROPRIETARY RIGHTS

     The Company relies on a combination of patents, trademarks, copyrights,
trade secret laws and confidentiality procedures to protect its intellectual
property rights. As of December 31, 1999, the Company had 8 patents granted in
the United States, which expire over time, commencing in 2000 and ending in
2015, and 13 corresponding foreign patents. In addition, the Company intends to
seek further United States and international patents on its technology. There
can be no assurance that patents will be issued from any of the Company's
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, or be issued in all countries where the Company's products
can be sold, to provide meaningful protection or any commercial advantage to the
Company. Also, competitors of the Company may be able to design around the
Company's patents. The laws of certain foreign countries in which the Company's
products are or may be designed, manufactured or sold, including various
countries in Asia, may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and thus
make the possibility of piracy of the Company's technology and products more
likely. Although the Company is not aware of the development, distribution or

                                       10
<PAGE>   11

sales of any illegal copies of the Company's hardware or software, any
infringements of its patents, copyrights or trademarks, or any violation of its
trade secrets, confidentiality procedures or licensing agreements to date, there
can be no assurance that the steps taken by the Company to protect its
proprietary information will be adequate to prevent misappropriation of its
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.

     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 1999,
there was no pending intellectual property litigation against the Company.
However, the Company or its foundries may from time to time receive notice of
claims that the Company has infringed patents or other intellectual property
rights owned by others. The Company may seek licenses under such patents or
other intellectual property rights. However, there can be no assurance that
licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products or the use by the
Company's foundries of processes requiring the technology. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology, discontinue the use of certain
processes or obtain licenses for the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Although patent disputes in the semiconductor industry
have often been settled through cross-licensing arrangements, there can be no
assurance that in the event that any third party makes a successful claim
against the Company or its customers, a cross-licensing arrangement could be
reached. In such a case, if a license is not made available to the Company on
commercially reasonable terms, the Company's business, financial condition and
results of operations could be materially adversely affected.

     The Company currently licenses certain of the technology utilized by the
Company in its products, and expects to continue to do so in the future. The
Company has in the past granted licenses to certain of its technology, some of
which have expired, such licenses have been limited and the Company has not
derived material revenues from such licenses in recent periods. See "Factors
That May Affect Future Results -- Uncertainty Regarding Patents and Protection
of Proprietary Rights."

EMPLOYEES

     As of February 4, 2000, the Company had approximately 470 full-time
employees, including 221 in research and development, 122 in marketing, sales
and support and 127 in operations, finance and administration. The Company's
subsidiary ViAlta.com had approximately 40 employees including 9 employees in
its Canadian branch office. The Company's future success will depend, in part,
on its 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 is intense. The Company's employees are not represented by any
collective bargaining unit, and the Company has never experienced a work
stoppage. See "Factors That May Affect Future Results -- Dependence on Key
Personnel."

ITEM 2. PROPERTIES

     At the end of 1995 ESS purchased 16 acres of land in Fremont, California.
By the end of 1996, the Company completed and occupied a two-story,
93,000-square-foot headquarters. In 1998, the Company completed construction of
a 77,000 square foot building to support headcount growth. An 11,000 square foot

                                       11
<PAGE>   12

dormitory was also completed during 1998 to house visitors and guest workers. As
of December 31, 1999, ViAlta.com's employees occupied approximately 7% of the
Company's facility space.

ITEM 3. LEGAL PROCEEDINGS

     On March 11, 1998, Creative Technology Ltd. and its subsidiary E-mu
Systems, Inc. (together, "Creative") filed a lawsuit against the Company and one
of its customers, Diamond Multimedia Systems, Inc. ("Diamond"), alleging
infringement of U.S. Patent No. 5,698,803 (the "803 patent"), by the Company's
Maestro products, one of which is included in products sold by Diamond. The
complaint requested preliminary and permanent injunctions, and unspecified
damages. Creative also claimed willful infringement and requests treble damages
and attorney's fees. The lawsuit, entitled Creative Technology Ltd. et al v. ESS
Technology, Inc. et al, was filed in the U.S. District Court for the Central
District of California.

     On September 25, 1998, the lawsuit between the Company and Creative was
settled to the parties' mutual satisfaction, and ESS is now under a license from
Creative regarding sales of its Maestro products. Further terms of the
settlement are confidential.

     On February 26, 1999, the Company was named in a complaint, along with 87
other defendants, brought by the Lemelson Medical, Education & Research
Foundation (the "Lemelson Foundation") in the United States District Court for
the District of Arizona, no. Civ99-0377PHXRGS. The complaint alleges
infringement of unspecified claims in some or all of sixteen U.S. patents, and
seeks both injunctive relief and unspecified damages, with a request for damage
enhancement and attorneys' fees pursuant to 35 U.S.C. section 285. On September
22, 1999, the complaint between the Company and the Lemelson Foundation was
settled to the parties' mutual satisfaction, and the Company is now under a
license from the Lemelson Foundation. Further terms of the settlement are
confidential.

     On April 27, 1999, the Company and one other defendant were named in a
complaint by Dollinger-Fremont Associates in the Superior Court of California,
County of Alameda, Case No. H206962-7. The complaint alleges breach of contract
in connection with the aborted sale of certain property to the plaintiff and
seeks specific performance requiring the Company to convey the property, as well
as damages for lost profits, expenses arising from delay and attorneys' fees.
Based on the limited amount of damages being claimed, the Company's management
believes that the resolution of this matter will not have a material adverse
effect on the Company's financial condition.

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

     No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.

EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
            NAME               AGE                         POSITION
            ----               ---                         --------
<S>                            <C>    <C>
Robert L. Blair..............  52     President, Chief Executive Officer
                                      Chief Financial Officer, Secretary and Director
Frank Effler Jr..............  53     Vice President, Sales and Marketing -- PC Products
</TABLE>

     The following provides certain additional information regarding the
Company's current executive officers and certain other individuals who served as
executive officers during 1999.

     Mr. Chan joined the Company in November 1985 as President and served as
such until October 1996 and then began to serve as President again from February
1997 to September 1999. Mr. Chan has been a director since January 1986. He was
appointed Chairman of the Board of Directors in October 1992 and Chief Executive
Officer in June 1994 and served as Chief Executive Officer until September 1999.
Mr. Chan served as Secretary of the Company from October 1992 to August 1995 and
its 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 CAD, engineering and design services. From
1982 to 1984,

                                       12
<PAGE>   13

he was co-founder, President and Chief Executive Officer of CADCAM Technology,
Inc., a company in the business of CAE systems development. Mr. Chan holds
B.S.E.E. and M.S.C. degrees from the University of Hawaii. Mr. Chan is the
husband of Annie M. H. Chan, a director of the Company.

     Mr. Blair was promoted to President and Chief Executive Officer in
September 1999. Mr. Blair was elected a director in October 1999. Mr. Blair
served as Executive Vice President, Operations of the Company from April 1997 to
September 1999. From December 1994 to March 1997, he was Vice President of
Operations of the Company. From December 1991 to November 1994, he was Senior
Vice President Operations (Software Packaging & Printing Division) of Logistix
Corporation, a software turnkey 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, at XEMAG, a division of Xidex Corporation. From 1973
to 1986 he was Vice President, High Reliability Operations at Precision
Monolithics, Inc.

     Mr. Lindly served as Vice President of Finance, Chief Financial Officer and
Secretary of the Company from September 1998 to January 2000. From February 1997
to August 1998, he was Vice President and Corporate Controller at S3, Inc. From
September 1995 to January 1997, he was Vice President Finance and Chief
Financial Officer at Echelle, Inc. From September 1990 to August 1995, he was
Director of Finance at Adaptec, Inc. and from May 1986 to August 1990, he was
Vice President Finance and Chief Financial Officer of International
Microcircuits, Inc. Mr. Lindly holds a B.S. degree in Business from San Jose
State University. Mr. Lindly resigned from his positions held with the Company
in January 2000.

     Mr. Effler Jr. has been Vice President, Sales and Marketing -- PC Products
of the Company since April 1998. From October 1993 to March 1998, he was
Director of Sales and Marketing, Flat Panel Display Division at Hitachi America,
Ltd. From April 1992 to September 1993, he was Area Sales Manager of the western
United States at Hitachi America Ltd. From 1988 to 1992, he was a regional sales
manager for Toshiba America Electronic Components. Mr. Effler holds a B.A.
degree from California State University at Northridge.

     Mr. Hideshima served as Chief Accounting Officer of the Company from July
1997 to December 1999 and Vice President of Finance of the Company from January
1999 to December 1999 and Controller of the Company from December 1994 to
December 1999. Prior to joining the Company, he was Controller of Hoya
MicroMask, Inc., a semiconductor mask company from August 1991 to November 1994
and Accounting Manager at Hoya Corporation USA from July 1990 to July 1991. From
June 1985 through June 1990, Mr. Hideshima was an auditor with Arthur Andersen &
Company. Mr. Hideshima holds a MBA degree from San Francisco State University
and BS degree in Business from University of California -- Berkeley. Mr.
Hideshima resigned from his positions held with the Company in December 1999.

     Mr. Chen served as Vice President of Consumer Products of the Company from
January 1998 to November 1999. From January 1997 to December 1997, he was Vice
President of APAC Sales of the Company. From February 1995 to December 1996, he
was Director of APAC Sales of the Company. Prior to joining the Company, he was
co-owner of Internet Corporation, a semiconductor sales representation company
for the Far East market, and served as Director of Sales and Marketing from
February 1992 to February 1995. From 1988 to 1992, he was Product Marketing
Manager at FIFO Division of Integrated Device Technology. From 1983 to 1988, Mr.
Chen held various engineering, marketing, and management positions at PMI
Division of Analog Devices, Inc., Siliconix, and Soletron. Mr. Chen holds a
B.S.E.E. degree from San Jose State University and a MBA degree from Santa Clara
University. Mr. Chen resigned from his positions held with the Company in
November 1999.

     The information concerning compliance with Section 16 of the Securities
Exchange Act of 1934 is incorporated by reference to the section in the
Company's proxy statement entitled "Compliance under Section 16(a) of the
Securities Exchange Act of 1934."

                                       13
<PAGE>   14

                                    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.

<TABLE>
<CAPTION>
                                                              HIGH         LOW
                                                              ----         ---
<S>                                                           <C>          <C>
FISCAL 1998:
First Quarter ended March 31, 1998..........................  8 7/16       6 1/4
Second Quarter ended June 30, 1998..........................  7 3/8        3 7/8
Third Quarter ended September 30, 1998......................  4 15/32      2 1/32
Fourth Quarter ended December 31, 1998......................  6 7/8        2 5/32

FISCAL 1999:
First Quarter ended March 31, 1999..........................  8 1/16       4 15/16
Second Quarter ended June 30, 1999..........................  13 7/16      5 3/32
Third Quarter ended September 30, 1999......................  15 7/8       11 1/8
Fourth Quarter ended December 31, 1999......................  23 1/16      12 1/8
</TABLE>

     As of February 4, 2000, there were approximately 250 record holders of the
Company's Common Stock. Since shareholders are listed under their brokerage
firm's names, the actual number of shareholders is higher.

     In connection with the Company's acquisition of Platform Technologies, Inc.
in June, 1997, the shareholders of Platform Technologies received an aggregate
of approximately 2.54 million shares of the Company's Common Stock, including
approximately 954,000 options with a value of $32.7 million.

     The issuance of securities in this Item 5 was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Act"), in
reliance on Section 4(2) of the Act as a transaction by an issuer not involving
any public offering. The recipients of the securities in such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in such transaction.
The recipients were given adequate access to information about the Company.

     The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future.

                                       14
<PAGE>   15

ITEM 6. SELECTED FINANCIAL DATA

     The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                1995       1996       1997       1998       1999
                                              --------   --------   --------   --------   --------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................  $105,744   $226,455   $249,517   $218,252   $310,651
Cost of revenues............................    39,584    106,818    171,859    182,417    191,529
                                              --------   --------   --------   --------   --------
  Gross profit..............................    66,160    119,637     77,658     35,835    119,122
Operating expenses:
  Research and development..................     8,665     20,270     29,471     30,529     37,383
  In-process research and development.......        --     30,355     22,200         --         --
  Selling, general and administrative.......     9,758     16,814     25,198     36,289     39,735
                                              --------   --------   --------   --------   --------
Operating income (loss).....................    47,737     52,198        789    (30,983)    42,004
Nonoperating income, net....................     2,694      3,241      2,183      1,478      5,178
                                              --------   --------   --------   --------   --------
Income (loss) before income taxes...........    50,431     55,439      2,972    (29,505)    47,182
Provision for (benefit from) income taxes...    20,545     33,813     13,838     (1,489)     7,077
                                              --------   --------   --------   --------   --------
Net income (loss)...........................  $ 29,886   $ 21,626   $(10,866)  $(28,016)    40,105
                                              --------   --------   --------   --------   --------
Net income (loss) per share:
  Basic.....................................  $   0.96   $   0.57   $  (0.27)  $  (0.68)  $   0.99
                                              ========   ========   ========   ========   ========
  Diluted(1)................................  $   0.79   $   0.52   $  (0.27)  $  (0.68)  $   0.88
                                              ========   ========   ========   ========   ========
Shares used in calculating net income (loss)
  per share:
  Basic.....................................    31,265     37,702     39,593     40,955     40,640
                                              ========   ========   ========   ========   ========
  Diluted(1)................................    37,775     41,588     39,593     40,955     45,625
                                              ========   ========   ========   ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                               ----------------------------------------------------
                                                 1995       1996       1997       1998       1999
                                               --------   --------   --------   --------   --------
                                                                  (IN THOUSANDS)
<S>                                            <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
  investments -- ESS.........................  $ 78,124   $ 69,204   $ 42,284   $ 82,471   $ 68,687
Cash, cash equivalents and short-term
  investments -- ViAlta.com..................        --         --         --         --    112,844
Working capital..............................    70,602     65,207     74,238     81,124    186,609
Total assets.................................   162,703    211,985    231,654    214,645    321,027
Long-term debt, less current portion.........    15,960         --         --         --         --
Minority interest in ViAlta.com..............        --         --         --         --     52,860
Total shareholders' equity...................  $105,208   $143,176   $171,107   $142,072   $183,579
</TABLE>

---------------
(1) See Note 6 of Notes to Consolidated Financial Statements for an explanation
    of shares used in calculating net income (loss) per share -- diluted.

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

     The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements contained in Item 8 of this report. Except for
the historical information contained herein, the

                                       15
<PAGE>   16

matters discussed in this report are forward-looking statements that involve
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Potential risks and
uncertainties include, without limitation, those mentioned in this report and,
in particular, the factors described below under "Factors That May Affect Future
Results."

OVERVIEW

     ESS designs, develops and markets highly integrated mixed signal
semiconductor products for sale to the Internet, PC and consumer marketplace. In
April 1999, the Company established a subsidiary, ViAlta.com, which plans to
introduce advanced, user friendly products and applications for the internet. In
1999, ESS had revenues totaling $310.7 million, a 42% increase from the 1998
total of $218.3 million, and a 25% increase from the 1997 total of $249.5
million. Net income increased to $40.1 million in 1999 compared to a net loss of
$28.0 million in 1998, which compares to net income of $11.3 in 1997 excluding a
one-time pre and post-tax charge of $22.2 million related to acquired research
and development in-process for the acquisition of Platform. The gross margin for
1999 was 38%, reflecting favorable product mix, manufacturing cost reductions
offset in part by decreased average selling price due to price competition. The
gross margin for 1998 was 16%, reflecting price competition offset in part by
manufacturing cost reductions, compared to gross margin in 1997 of 31%.

     The Company is a leader in semiconductor audio products for the PC
marketplace and semiconductor video products for the VCD player market. In June
1997, the Company completed its acquisition of Platform pursuant to which the
Company acquired all the outstanding capital stock of Platform in exchange for
approximately 2.54 million shares of the Company's Common Stock including
approximately 954,000 options. The acquisition was accounted for as a purchase
and the portion of the purchase price attributable to research and development
in-process was expensed in the second quarter of 1997. The acquisition of
Platform allowed the Company to develop and subsequently introduce products for
the PCI standard.

     ESS' AudioDrive products enable PC manufacturers to provide audio
capabilities on add-in sound cards and directly on the motherboards of desktop
and notebook computers. The Company has established itself as a leader in
integrated audio solutions and counts many of the leading manufacturers of
personal computers and sound cards among its customers.

     In 1997, the Company introduced its first MPEG-2 video chip solution, a
fully programmable, single-chip processor that incorporates the additional
features needed for consumer electronics applications such as DVD players,
set-top boxes, multimedia personal computers and home entertainment units.

     The TeleDrive products for the Internet and other modem markets were
developed following the Company's first quarter of 1996 acquisition of OSEE. In
1997, the Company began shipment of V.34bis modem solutions and introduced the
V.90 56K modem solutions. The Company is currently shipping both V.34bis and
V.90 56K modem solutions.

     At the end of 1995 ESS purchased 16 acres of land in Fremont, California.
By the end of 1996, the Company completed and occupied a two-story,
93,000-square-foot headquarters. In 1998, the Company completed construction of
a 77,000 square foot building to support headcount growth. An 11,000 square foot
dormitory was also completed during 1998.

     During the fourth quarter of 1997, the Company established a wholly-owned
foreign subsidiary in the Cayman Islands, British West Indies and transferred a
substantial portion of its business operations to it. In the second quarter of
1999, the Company established a subsidiary, ViAlta.com which plans to introduce
advanced, user friendly products and applications for the internet. In December
of 1999, ViAlta.com completed its 2nd round of funding generating $104.9 million
in cash, of which ESS contributed $52.0 million.

                                       16
<PAGE>   17

RESULTS OF OPERATIONS

     The following table sets forth certain items from the Company's
consolidated statements of operations as a percentage of net revenues for the
periods indicated.

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                            -------------------------
                                                            1997       1998     1999
                                                            -----      -----    -----
<S>                                                         <C>        <C>      <C>
Net revenues............................................    100.0%     100.0%   100.0%
Cost of revenues........................................     68.9       83.6     61.7
                                                            -----      -----    -----
  Gross margin..........................................     31.1       16.4     38.3
Operating expenses:
  Research and development..............................     11.8       14.0     12.0
  In-process research and development...................      8.9         --       --
  Selling, general and administrative...................     10.1       16.6     12.8
                                                            -----      -----    -----
Operating income (loss).................................      0.3      (14.2)    13.5
Nonoperating income, net................................      0.9        0.7      1.7
                                                            -----      -----    -----
Income (loss) before income taxes.......................      1.2      (13.5)    15.2
Provision for (benefit from) income taxes...............      5.5       (0.7)     2.3
                                                            -----      -----    -----
Net income (loss).......................................     (4.3)%*   (12.8)%   12.9%
                                                            =====      =====    =====
</TABLE>

---------------
* Includes a one-time pre and post-tax charge of 8.9% related to acquired
  in-process research and development.

     Net Revenues. Net revenues were $249.5 million, $218.3 million and $310.7
million in 1997, 1998 and 1999, respectively. Net revenues increased 42% between
1998 and 1999 primarily from increased video sales. Net revenues decreased 13%
between 1997 and 1998 primarily due to a decrease in ASP in both the audio and
video markets. The Company's video sales and PC audio sales accounted for a
significant portion of the Company's net revenues in 1999. The Company's PC
audio products accounted for a majority of the Company's net revenues in 1997
and 1998. International revenues accounted for approximately 89%, 92% and 95% of
net revenues for 1997, 1998 and 1999, respectively. The Company's net revenues
are denominated in U.S. dollars. The Company expects that its percentage of
international sales will remain high in the future.

     Gross Margin. Gross profit was $77.7 million, $35.8 million and $119.1
million in 1997, 1998 and 1999, respectively, representing corresponding gross
margins of 31.1%, 16.4% and 38.3% of net revenues for such years. The increase
in gross margins from 1998 to 1999 was the result of favorable product mix and
reduced manufacturing cost partially offset by reduced ASPs. The decrease in
gross margins from 1997 to 1998 was a result of lower ASPs on the Company's
products throughout the year. The Company's overall gross profit and margin are
subject to change due to various factors, including among others, competitive
product pricing, unit volumes shipped, new product introductions, yields, wafer
costs, assembly costs and product mix. The Company has encountered increased
competition from other suppliers who are offering competitive products and new
features. In addition, the Company expects the overall ASPs for its existing
products to decline significantly over the life of the products. The Company
believes that in order to maintain or increase gross profit, it must achieve
higher unit volume shipments, reduce costs, add new features and introduce new
products. However, no assurance can be given that the Company will be able to
ship higher volumes, reduce costs, add new features or introduce new products
that gain market acceptance.

     Research and Development Expenses. On-going research and development
expenses were $29.5 million, $30.5 million and $37.4 million or 11.8%, 14.0% and
12.0% of net revenues, in 1997, 1998 and 1999, respectively. Research and
development in-process represents one-time pre and post-tax charges of $22.2
million from the acquisition of Platform in the second quarter of 1997. The
growth in on-going research and development expenses between 1997 and 1998 was
primarily due to the increase in amortization of technical infrastructure and
covenants not to compete related to the Company's acquisitions and a one-time
charge for impaired assets related to previous acquisitions offset by lower
engineering test run and mask charges. The increase in research and development
expense from 1998 to 1999 was primarily due to increased payroll

                                       17
<PAGE>   18

related expense, software maintenance and depreciation and amortization. The
Company expects that research and development expenses will remain relatively
constant as a percentage of net revenues. There can be no assurance, however,
that revenues will grow at the same rate as the anticipated research and
development expenses.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $25.2 million, $36.3 million and $39.7 million or
10.1% 16.6% and 12.8% of net revenues, in 1997, 1998 and 1999, respectively. The
increase in selling, general and administrative expense from 1997 to 1998 was
primarily due to the increase in reserves for accounts receivable, the
amortization of covenants not to compete related to the Company's acquisitions,
one-time charge for impaired assets related to a previous acquisition and the
expenses associated with the Company's conversion to a new management
information system. The increase in selling, general and administrative expense
from 1998 to 1999 was primarily due to increased marketing expenses and legal
expenses partially offset by decreases in expenses relating to reserves for
accounts receivable. The Company expects selling, general and administrative
expenses will remain relatively constant as a percentage of net revenues. There
can be no assurance, however, that revenues will grow at the same rate as the
anticipated selling, general and administrative expenses.

     Non-Operating Income. Non-operating income was $2.2 million, $1.5 million
and $5.2 million in 1997, 1998, and 1999 respectively. In 1997, 1998 and 1999
non-operating income consisted primarily of interest income.

     Provision for Income Taxes. The Company's effective tax rate was 466%, (5%)
and 15% for 1997, 1998 and 1999 respectively. The reported tax rate for 1997 of
466% of pre-tax income significantly exceeds the combined federal and state
statutory tax rate of 41% due to two charges that are not deductible for federal
and state income tax purposes. The first charge is the one-time pre- and
post-tax charge of $22.2 million for the acquisition of Platform in the second
quarter of 1997. The second is the charge to increase inventory reserves in the
fourth quarter of 1997. Because the majority of the inventories were held by a
foreign subsidiary, a majority of the charge was not deductible in the U.S. The
reported tax benefit for 1998 of 5% of pre-tax losses is below the combined
federal and state statutory rate of 41%, since a majority of the losses were
incurred by a foreign subsidiary and were not deductible in the U.S. The
reported tax provision for 1999 of 15% of pre-tax income is below the combined
federal and state statutory rate of 41% as a result of the lower foreign tax
rate on earnings from the Company's foreign subsidiary that were considered to
be permanently reinvested. See Note 4 of Notes to Consolidated Financial
Statements.

LIQUIDITY AND CAPITAL RESOURCES

     Since its inception, the Company has financed its 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, 1999, the Company had
cash and cash equivalents and short-term investments of $181.5 million of which
$112.8 million is attributable to ViAlta.com and working capital of $186.6
million. As of December 31, 1999, the Company had a $15.0 million line of credit
which expires on October 1, 2001 and was secured by land and buildings with a
net book value of $23.0 million. The line of credit requires the Company to
achieve certain financial ratios and operating results. At December 31, 1999,
the Company was in compliance with its borrowing criteria. There were no
borrowings under the line of credit as of December 31, 1999.

     In 1999, the Company generated net cash from operating activities of $58.9
million. This resulted primary from net income of $40.1 million, an increase in
accounts payable and accrued liabilities of $14.4 million, and a decrease in
prepaids and other assets of $12.0 million, depreciation and amortization of
$15.1 million, partially offset by an increase in inventory of $19.5 million.
The Company invested $13.3 million in property and equipment, $33.9 million in
the net purchase of short-term investments, the Company received $5.6 million
for the issuance of common stock in connection with the exercise of employee
stock options and employee stock purchase plan and used $4.2 million in the
repurchase of stock. For the year, cash and cash equivalents increased by $65.2
million. The Company invested $62.0 million in cash in its ViAlta.com subsidiary
in which it retains a majority interest. ViAlta.com sold its Series B Preferred
Stock to outside investors for an additional $52.9 million in cash.

                                       18
<PAGE>   19

     In 1998, the Company generated net cash from operating activities of $31.7
million. This resulted from a reduction in inventory of $24.4 million, a
decrease in prepaids and other assets of $13.3 million, an increase in accounts
payable and accrued liabilities of $7.1 million, an increase in income taxes
payable and deferred income taxes of $3.5 million, depreciation and amortization
of $12.5 million and a charge for compensation expense related to stock options
of $.5 million, partially offset by a net loss of $28.0 million and an increase
in accounts receivable of $1.6 million. The Company received $22.4 million from
sale of its UICC investment, $1.2 million from the issuance of common stock in
connection with the exercise of employee stock options and employee stock
purchase plan and the income tax credit from disqualifying disposition of common
stock options. The Company invested $12.3 million in property and equipment,
$2.8 million in the repurchase of stock and $2.2 million in the net purchase of
short-term investments. For the year, cash and cash equivalents increased by
$38.0 million.

     In 1997, the Company used net cash of $2.6 million in operating activities.
This resulted from a net loss of $10.9 million, a gain on sale of short-term
investments of $0.1 million, an increase in accounts receivable of $14.2
million, an increase in inventories of $14.0 million, a decrease in accounts
payable and accrued expenses of $8.4 million and a decrease in income taxes
payable and deferred income taxes of $7.5 million offset in part by reductions
in prepaid expenses and other assets of $22.4 million, a one-time non-cash
charge for research and development in-process of $22.2 million and depreciation
and amortization of $7.9 million. The company received net proceeds of $5.6
million from sale of short term investments, $3.1 million from the issuance of
common stock from exercise of stock options and employee stock purchase plan,
$3.0 million in income tax credits from disqualifying disposition of common
stock options and $2.5 million from the acquisition of Platform. The Company
invested $17.7 million in UICC joint venture and $15.2 million in property and
equipment. For the year, cash and cash equivalents declined $21.3 million.

     The Company believes that its existing cash and cash equivalents as of
December 31, 1999 together with the cash generated from operations, available
borrowings under its 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 $24.0 million of
which $5.6 million is to be used by ESS and $18.4 million is to be used by
ViAlta.com primarily for the acquisition of capital equipment. The Company may
also utilize 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, the Company may evaluate potential acquisitions
of or investment in such businesses, products or technologies owned by third
parties.

NEW ACCOUNTING STANDARDS

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges and establishes
respective accounting standards for reporting changes in the fair value of the
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 pursuant to the issuance of SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB statement No. 133", which deferred the effective date of
SFAS No. 133 by one year. Upon adoption of SFAS No. 133, the Company will be
required to adjust hedging instruments to fair value in the balance sheet and
recognize the offsetting gain or loss as transition adjustments to be reported
in net income or other comprehensive income, as appropriate, and presented in a
manner similar to the cumulative effect of a change in accounting principle. The
Company believes the adoption of this statement will not have a significant
effect on the Company's results of operations.

YEAR 2000 ISSUES

     The Company conducted a Year 2000 readiness program (the "Year 2000
Program") to ensure that its information systems and other date-sensitive
equipment continue uninterrupted into the Year 2000. All of the Company's
essential processes, systems and business functions were compliant with the Year
2000 require-

                                       19
<PAGE>   20

ments by the end of 1999. The Company did not experience any Year 2000
consequences that affected its business, financial position, liquidity or
results of operations.

     The costs of the Company's Year 2000 Program were funded with cash flows
from operations. Some of these costs related solely to the modification of
existing systems, while others were for new systems that also improved business
functionality. The total cost to the Company of its Year 2000 Program has not
been and is not presently anticipated to be material to the Company's business,
financial position, liquidity or results of operations. See "Factors That May
Affect Future Results -- Year 2000 Compliance" below.

                     FACTORS THAT MAY AFFECT FUTURE RESULTS

     This report contains certain forward-looking statements that are subject to
risk and uncertainties. For such statements, the Company desires to take
advantage of the "Safe Harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and of Section 21E of and Rule 3b-6 under the Securities
Exchange Act of 1934. Such forward-looking statements include, without
limitation, statements regarding the Company's expectations, intentions or
future strategies and involve known and unknown risks, uncertainties and other
factors. All forward looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update such forward-looking statements.

     Potential Fluctuations in Operating Results. The Company's operating
results are subject to quarterly and other fluctuations due to a variety of
factors, including the gain or loss of significant customers, increased
competitive pressures, changes in pricing policies by the Company, its
competitors or its suppliers, including decreases in unit average selling prices
("ASPs") of the Company's products, the timing of new product announcements and
introductions by the Company or its competitors and market acceptance of new or
enhanced versions of the Company's and its customers' products. Other factors
include the availability of foundry capacity, fluctuations in manufacturing
yields, availability and cost of raw materials, changes in the mix of products
sold, the cyclical nature of both the semiconductor industry and the market for
PCs, seasonal customer demand, the timing of significant orders and significant
increases in expenses associated with the expansion of operations. The Company's
operating results could also be adversely affected by economic conditions in
various geographic areas where the Company or its customers do business, or
order cancellations or rescheduling. These factors are difficult to forecast,
and these or other factors could materially affect the Company's quarterly or
annual operating results. There can be no assurance as to the level of sales or
earnings that may be attained by the Company in any given period in the future.
The Company currently places non-cancelable orders to purchase its products from
independent foundries on an approximately three month rolling basis, while its
customers generally place purchase orders with the Company less than four weeks
prior to delivery that may be canceled without significant penalty.
Consequently, if anticipated sales and shipments in any quarter are canceled or
do not occur as quickly as expected or forecasted sales levels are not realized,
expense and inventory levels could be disproportionately high and the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

     Competition; Pricing Pressures. The markets in which the Company competes
are intensely competitive and are characterized by rapid technological change,
price declines and rapid product obsolescence. See "Item
1. Business -- Competition."

     Dependence on the PC and Consumer Markets. In 1997 and 1998, sales of PC
audio semi-conductor chips accounted for a majority of the Company's net
revenues, the Company expects that sales of audio semiconductors will continue
to account for a significant portion of its net revenues for the foreseeable
future. Sales of video semiconductor chips to the video compact disk ("VCD") and
digital video disk ("DVD") player market accounted for a majority of the
Company's revenues in 1999 and a significant portion of its net revenues in
1998. Any reduction in ASPs or demand for the Company's semiconductor chips,
whether because of a reduction in demand for PCs, DVD or VCD players in general,
increased competition or otherwise, would have a material adverse effect on the
Company's business, financial condition and results of operations.

                                       20
<PAGE>   21

     The Company is currently engaged in the development and introduction of new
PC audio, video and modem semiconductor devices for the Internet, PC and
consumer markets. There can be no assurance that the Company will be able to
identify market trends or new product opportunities, develop and market new
products, achieve design wins or respond effectively to new technological
changes or product announcements by others. A failure in any of these areas
would have a material adverse effect on the Company's business, financial
condition and results of operations.

     The Company's products are sold for incorporation into desktop and notebook
computers, VCD and DVD players. Therefore, the Company is heavily dependent on
the growth of the markets and the cost requirements for desktop and notebook
computers VCD and DVD players. There can be no assurance that these markets will
be able to grow. A slowing in unit volume and a decrease in ASPs could result in
a decline in revenues which would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Item 1.
Business -- AudioDrive Products," "-- VideoDrive Products," "-- TeleDrive
Products" "-- VCD Player Products" and "DVD Player Products."

     Importance of New Products and Technological Changes. The markets for the
Company's products are characterized by evolving industry standards, rapid
technological change and product obsolescence. The Company's success is highly
dependent upon the successful development and timely introduction of new
products at competitive price and performance levels. The success of new
products depends on a number of factors, including timely completion of product
development, market acceptance of the Company's and its customers' new products,
securing sufficient foundry capacity for volume manufacturing of wafers,
achievement of acceptable wafer fabrication yields by the Company's independent
foundries and the Company's ability to offer new products at competitive prices.
In order to succeed in having the Company's products incorporated into new
products being designed by its customers, the Company must anticipate market
trends and meet performance, quality and functionality requirements of such OEMs
and must successfully develop and manufacture products that adhere to these
requirements. In addition, the Company must meet the timing and price
requirements of such manufacturers and must make such products available in
sufficient quantities. Accordingly, in selling to OEMs, the Company can often
incur significant expenditures prior to volume sales of new products, if any. In
order to help accomplish these goals, the Company has in the past and will
continue to consider in the future the acquisition of other companies or the
products and technologies of other companies. Such acquisitions carry additional
risks, such as a lack of integration with existing products and corporate
culture, the potential for large write-offs and the diversion of management
attention. There can be no assurance that the Company will be able to identify
market trends or new product opportunities, develop and market new products,
achieve design wins or respond effectively to new technological changes or
product announcements by others. A failure in any of these areas would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Item 1. Business -- Research and Development."

     New Business Venture. In 1999, the Company incorporated ViAlta.com,
originally as a wholly owned subsidiary of the Company, in order to develop and
market new products and applications for the Internet. As of December 31, 1999,
the Company had contributed $62.0 million in cash to ViAlta.com. In late 1999,
ViAlta.com raised an additional $52.9 million in cash by selling shares of its
preferred stock to outside investors. In October 1999 and January 2000,
ViAlta.com issued $5.9 million shares of common stock and 8 million shares of
Series B Preferred Stock, respectively, for $1.5 million and $20.8 million in
notes from Fred S.L. Chan, the Company's Chairman of the Board and an entity
controlled by Fred S.L. Chan and Annie M.H. Chan, a director of the Company and
spouse of Mr. Chan. The Company's investment in ViAlta.com involves all of the
risks normally associated with investments in development stage companies. In
order for ViAlta.com to begin earning revenues and ultimately achieve
profitability, it must successfully develop and market new products and
applications on a cost effective basis. There can be no assurance that
ViAlta.com will be able to do so, since, among other things, the Company has
limited experience in starting new business ventures and there is intense
competition in the marketplace for Internet products and applications generally.
In addition, the Company's investment in ViAlta.com may adversely affect the
Company's existing business, financial position and results of operations by
diverting management's attention, working capital and other resources from the
Company to the new ViAlta.com business venture.

                                       21
<PAGE>   22

     Dependence on TSMC and Other Third Parties. The Company relies on
independent foundries to manufacture all of its products. A substantial majority
of the Company's products are currently manufactured by TSMC, which has
manufactured certain of the Company's products since 1989. The Company also has
foundry arrangements with UMC, which has manufactured certain of the Company's
products since 1995. These relationships provide the Company with access to
advanced process technology necessary for the manufacture of the Company's
products. These foundries fabricate products for other companies and, in certain
cases, manufacture products of their own design. In November 1999, the Company
secured wafer capacity that it believes will be adequate to meet its growth
plans for the next 12 months. In September 1999, Taiwan experienced a series of
earthquakes. While the Company did not experience any material effects from
these earthquakes, there can be no assurance that any future earthquakes will
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 7. Business -- Manufacturing."

     While the Company has entered into agreements with its two foundries, the
Company's reliance on these independent foundries involves a number of risks,
including the absence of adequate capacity, the unavailability of, or
interruption in access to, certain process technologies and reduced control over
delivery schedules, manufacturing yields and costs, and the international risks
more fully described below. In addition, the Company has pre-negotiated certain
of its purchase orders and could be unable to benefit from enhanced yields
realized by its vendors. The Company expects to rely upon TSMC and UMC to
manufacture substantially all of the Company's products for the foreseeable
future. In the event that TSMC and UMC are unable to continue to manufacture the
Company's key products in required volumes, the Company will have to identify
and secure additional foundry capacity. In such an event, the Company may be
unable to identify or secure additional foundry capacity from another
manufacturer. Even if such capacity is available from another manufacturer, the
qualification process could take six months or longer. The loss of any of its
foundries as a supplier, the inability of the Company to acquire additional
capacity at its current suppliers or qualify other wafer manufacturers for
additional foundry capacity should additional capacity be necessary, or any
other circumstances causing a significant interruption in the supply of
semiconductors to the Company would have a material adverse effect on the
Company's business, financial condition and results of operations.

     To address potential foundry capacity constraints in the future, ESS will
continue to consider and may be required to enter into additional 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 the Company to purchase
specified quantities of wafers over extended periods. Any such arrangements
could require the Company to commit substantial capital and grant licenses to
its technology. The need to commit substantial capital may require the Company
to obtain additional debt or equity financing, which could result in dilution to
the Company's shareholders. There can be no assurance that such additional
financing, if required, will be available when needed or, if available, will be
obtained on terms acceptable to the Company.

     Customer Concentration. A limited number of customers have accounted for a
substantial portion of the Company's net revenues. In 1997, 1998 and 1999 sales
to the Company's top five customers, including sales to distributors, accounted
for approximately 49%, 54% and 53% respectively, of the Company's net revenues.
In 1997, Eastbase and Dynax, a Hong Kong distributor, each accounted for
approximately 13% of the Company's net revenues. In 1998, Dynax and Shinco
accounted for approximately 16% and 15% of the Company's net revenues. In 1999,
Dynax and Shinco accounted for approximately 22% and 13% of the Company's net
revenues. Sales to distributors are generally subject to agreements allowing
limited rights of return and price protection with respect to unsold products.
Returns and allowances in excess of reserves could have a material adverse
impact on the Company's business, financial condition and results of operation.
During 1997, the Company adopted a policy of deferring revenue recognition on
sales of devices to distributors in Hong Kong and Taiwan until devices are sold
to the end customers. This has led to increased operational visibility on
product moving through the channel. The Company expects that a limited number of
customers may account for a substantial portion of the net revenues for the
foreseeable future. The Company has experienced changes from year to year in the
composition of its major customer base and believes this pattern may continue.
The Company does not have long-term purchase agreements with any of its
customers. The reduction, delay or

                                       22
<PAGE>   23

cancellation of orders from one or more major customers for any reason or the
loss of one or more of such major customers could materially and adversely
affect the Company's business, financial condition and results of operations. In
addition, since the Company's products are often sole sourced to its customers,
the Company's operating results could be materially and adversely affected if
one or more of its major customers were to develop other sources of supply.
There can be no assurance that the Company's current customers will continue to
place orders with the Company, that orders by existing customers will not be
canceled or will continue at the levels of previous periods or that the Company
will be able to obtain orders from new customers.

     Management of Growth. The Company has experienced significant growth in
unit shipments and the addition of multiple product lines that require
additional management systems and processes. To manage its future operations and
growth effectively, the Company will need to hire and retain management, hire,
train, motivate, manage and retain its employees, continue to improve its
operational, financial and management information systems and implement
additional systems and controls. There can be no assurance that the Company will
be able to manage such growth effectively, and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations.

     International Operations. During 1997, 1998 and 1999, international sales
accounted for a substantial majority of the Company's net revenues.
Substantially all of the Company's international sales were to customers in Hong
Kong, Taiwan, Japan, China and Singapore. The Company expects that international
sales will continue to represent a significant portion of its net revenues for
the foreseeable future. In addition, substantially all of the Company's products
are manufactured, assembled and tested by independent third parties in Asia. Due
to its reliance on international sales and foreign third-party manufacturing,
assembly and testing operations, the Company is subject to the risks of
conducting business outside of the United States. These risks include unexpected
changes in, or impositions of legislative or regulatory requirements, delays
resulting from difficulty in obtaining export licenses for certain technology,
tariffs, quotas and other trade barriers and restrictions, longer payment
cycles, greater difficulty in accounts receivable collection, potentially
adverse taxes, the burdens of complying with a variety of foreign laws and other
factors beyond the Company's control. The Company is also subject to general
geopolitical risks in connection with its international trade relationships.
Although the Company has not to date experienced any material adverse effect on
its business, financial condition or results of operations as a result of such
regulatory, geopolitical and other factors, there can be no assurance that such
factors will not have a material adverse effect on the Company's business,
financial condition and results of operations in the future or require the
Company to modify its current business practices.

     In addition, the laws of certain foreign countries in which the Company's
products are or may be manufactured or sold, including various countries in
Asia, may not protect the Company's products or intellectual property rights to
the same extent as do the laws of the United States and thus make the
possibility of piracy of the Company's technology and products more likely.
Currently, all of the Company's product sales and all of its arrangements with
foundries and assembly and test vendors provide for pricing and payment in U.S.
dollars. The effect of significant currency fluctuations in Asia had no material
impact on the Company. There can be no assurance that future fluctuations in
currency exchange rates will not have a material adverse effect on the Company's
business, financial condition and results of operations. To date, the Company
has not engaged in any currency hedging activities, although the Company may do
so in the future. Furthermore, there can be no assurance that one or more of the
foregoing factors will not have a material adverse effect on the Company's
business, financial condition and results of operations or require the Company
to modify its current business practices.

     Semiconductor Industry. The semiconductor industry has historically been
characterized by rapid technological change, cyclical market patterns,
significant price erosion, periods of over-capacity and production shortages,
variations in manufacturing costs and yields and significant expenditures for
capital equipment and product development. In addition, the industry has
experienced significant economic downturns at various times, characterized by
diminished product demand and accelerated erosion of product prices. The Company
may experience substantial period-to-period fluctuations in operating results
due to general semiconductor industry conditions.

                                       23
<PAGE>   24

     Uncertainty Regarding Patents and Protection of Proprietary Rights. The
Company relies on a combination of patents, trademarks, copyrights, trade secret
laws and confidentiality procedures to protect its intellectual property rights.
See "Item 1. Business -- Patents and Proprietary Rights," "Item 3. Legal
Proceedings."

     Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continued contributions of Fred S.L. Chan, the Company's
Chairman of the Board of Directors. The present and future success of the
Company depends on its ability to continue to attract, retain and motivate
qualified senior management, sales and technical personnel, particularly highly
skilled semiconductor design personnel and software engineers, for whom
competition is intense. The loss of Mr. Chan, Mr. Blair, key executive officers,
key design personnel or software engineers or the inability to hire and retain
sufficient qualified personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be able to retain these employees. The
Company currently does not maintain any key man life insurance on the life of
any of its key employees.

     Control by Existing Shareholders. As of December 31, 1999, Fred S.L. Chan,
the Chairman of the Board of Directors, together with his spouse, Annie M.H.
Chan, a director of the Company, and certain trusts for the benefit of the
Chan's children beneficially owned, in the aggregate, 38% of the Company's
outstanding Common Stock. As a result, these shareholders, acting together,
possess significant voting power over the Company, giving them the ability among
other things to influence significantly the election of the Company's Board of
Directors and approve significant corporate transactions. Such control could
delay, defer or prevent a change in control of the Company, impede a merger,
consolidation, takeover or other business combination involving the Company, or
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company.

     Volatility of Stock Price. The price of the Company's Common Stock has in
the past and may continue in the future to fluctuate widely. Future
announcements concerning the Company, its competitors or its principal
customers, including quarterly operating results, changes in earnings estimates
by analysts, technological innovations, new product introductions, governmental
regulations or litigation may cause the market price of the Company's Common
Stock to continue to fluctuate substantially. Further, in recent years the stock
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated or disproportionate to
the operating performance of such companies. These fluctuations, as well as
general economic, political and market conditions such as recessions or
international currency fluctuations, may materially adversely affect the market
price of the Common Stock.

     Year 2000 Compliance. The Company has completed its Year 2000 Program and
generally believes that its products, IT systems and non-IT systems are Year
2000 compliant. At this time the Company has not experienced any Year 2000
compliance problems. However, due to the general uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-parties and the interconnectedness of global businesses, the
Company cannot ensure its ability to timely and cost-effectively resolve
problems associated with the Year 2000 issue that may affect the Company's
operations and business, or expose it to third-party liability. See Part II,
Item 7. "Year 2000 Issues."

     Euro Conversion. The Company is in the process of addressing the issues
raised by the introduction of the Single European Currency ("Euro"). The Company
does not expect the cost of any system modifications to be material or result in
any material increase in transaction costs. The Company will continue to
evaluate the impact of the Euro; however, based on currently available
information management does not believe that the introduction of the Euro will
have a material adverse impact on the Company's financial condition or the
overall trends in results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Foreign Exchange Risks: The Company funds its operations from cash
generated from its operations, the sale of marketable securities and short and
long-term debt. As the Company operates primarily in Asia, the Company is
exposed to market risk from changes in foreign exchange rates, which could
affect its results

                                       24
<PAGE>   25

of operations and financial condition. In order to reduce the risk from
fluctuation in foreign exchange rates, the Company's product sales and all of
its arrangements with its foundry and test and assembly vendors are denominated
in U.S. dollars. The Company has not entered into any currency hedging
activities.

     Interest Rate Risks: The Company also invests in short-term investments.
Consequently, the Company is 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, the Company invests 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 sales and at December 31,
1999, the fair market value of the Company's investments approximated their
costs.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

     (1) Financial Statements:

        Report of Independent Accountants

        Consolidated Balance Sheets as of December 31, 1998 and 1999

        Consolidated Statements of Operations for the years ended December 31,
        1997, 1998 and 1999

        Consolidated Statements of Shareholders' Equity for the years ended
        December 31, 1997, 1998 and 1999

        Consolidated Statements of Cash Flows for the years ended December 31,
        1997, 1998 and 1999

        Notes to Consolidated Financial Statements

     (2) Financial Statement Schedules:

          Financial Statement Schedules have been omitted because they are not
     required or applicable, or the information required to be set forth therein
     is included in the Financial Statements or notes thereto.

                                       25
<PAGE>   26

                       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 as at December 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 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 the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

San Jose, California
January 20, 2000, except as to Note 13, which is as of February 10, 2000.

                                       26
<PAGE>   27

                              ESS TECHNOLOGY, INC.

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1999
                             (AMOUNTS IN THOUSANDS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1998        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Cash and cash equivalents...................................  $ 65,752    $130,913
Short-term investments......................................    16,719      50,618
Accounts receivable, net....................................    37,830      34,362
Inventories.................................................    22,882      42,347
Deferred income taxes.......................................     6,372      10,758
Prepaid expenses and other assets...........................     4,142       2,199
                                                              --------    --------
          Total current assets..............................   153,697     271,197
Property and equipment, net.................................    38,000      40,564
Other assets................................................    22,948       9,266
                                                              --------    --------
          Total assets......................................  $214,645    $321,027
                                                              ========    ========

                       LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable and accrued expenses.......................  $ 57,930    $ 72,303
Income taxes payable and deferred income taxes..............    14,643      12,285
                                                              --------    --------
          Total current liabilities.........................    72,573      84,588
                                                              --------    --------
Commitments and Contingencies (Note 9)
Minority Interest in ViAlta.com (Note 12)...................        --      52,860
Shareholders' equity:
  Preferred stock, no par value, 10,000 shares authorized;
     none issued and outstanding............................        --          --
  Common stock, no par value, 100,000 shares authorized;
     40,849 and 41,372 shares issued and outstanding at
     December 31, 1998 and 1999, respectively...............   137,312     140,597
  Retained earnings.........................................     4,760      42,982
                                                              --------    --------
          Total shareholders' equity........................   142,072     183,579
                                                              --------    --------
          Total liabilities and shareholders' equity........  $214,645    $321,027
                                                              ========    ========
</TABLE>

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

                                       27
<PAGE>   28

                              ESS TECHNOLOGY, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
                (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1997       1998       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net revenues................................................  $249,517   $218,252   $310,651
Cost of revenues............................................   171,859    182,417    191,529
                                                              --------   --------   --------
  Gross profit..............................................    77,658     35,835    119,122
Operating expenses:
  Research and development..................................    29,471     30,529     37,383
  Research and development in-process.......................    22,200         --         --
  Selling, general and administrative.......................    25,198     36,289     39,735
                                                              --------   --------   --------
Operating income (loss).....................................       789    (30,983)    42,004
Nonoperating income, net....................................     2,183      1,478      5,178
                                                              --------   --------   --------
Income (loss) before provision for (benefit from) income
  taxes.....................................................     2,972    (29,505)    47,182
Provision for (benefit from) income taxes...................    13,838     (1,489)     7,077
                                                              --------   --------   --------
Net income (loss)...........................................  $(10,866)  $(28,016)  $ 40,105
                                                              ========   ========   ========
Net income (loss) per share:
  Basic.....................................................  $  (0.27)  $  (0.68)  $   0.99
                                                              ========   ========   ========
  Diluted...................................................  $  (0.27)  $  (0.68)  $   0.88
                                                              ========   ========   ========
Shares used in calculating net income (loss) per share:
  Basic.....................................................    39,593     40,955     40,640
                                                              ========   ========   ========
  Diluted...................................................    39,593     40,955     45,625
                                                              ========   ========   ========
</TABLE>

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

                                       28
<PAGE>   29

                              ESS TECHNOLOGY, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          COMMON STOCK
                                                        -----------------   RETAINED
                                                        SHARES    AMOUNT    EARNINGS    TOTAL
                                                        ------   --------   --------   --------
<S>                                                     <C>      <C>        <C>        <C>
Balance at December 31, 1996..........................  38,127   $ 98,655   $ 44,521   $143,176
  Issuance of common stock upon exercise of options...     886      2,294         --      2,294
  Issuance of common stock for acquisition............   1,586     32,703         --     32,703
  Issuance of common stock for employee stock purchase
     plan.............................................      75        817         --        817
  Income tax benefit on disqualifying disposition of
     common stock options.............................      --      2,983         --      2,983
  Net loss............................................      --         --    (10,866)   (10,866)
                                                        ------   --------   --------   --------
Balance at December 31, 1997..........................  40,674    137,452     33,655    171,107
  Issuance of common stock upon exercise of options...     612        618         --        618
  Compensation expense related to common stock options
     issued to consultants............................      --        535         --        535
  Issuance of common stock for employee stock purchase
     plan.............................................      86        395         --        395
  Income tax benefit on disqualifying disposition of
     common stock options.............................      --        202         --        202
  Repurchase of common stock..........................    (523)    (1,890)      (879)    (2,769)
  Net loss............................................      --         --    (28,016)   (28,016)
                                                        ------   --------   --------   --------
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
                                                        ======   ========   ========   ========
</TABLE>

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

                                       29
<PAGE>   30

                              ESS TECHNOLOGY, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1997       1998       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...........................................  $(10,866)  $(28,016)  $ 40,105
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization..........................     7,865     12,446     15,112
     Charges for in-process research and development........    22,200         --         --
     Deemed compensation expense and compensation related to
       stock options........................................        --        535         --
     Change in assets and liabilities
       Accounts receivable..................................   (14,197)    (1,565)     3,468
       Inventories..........................................   (14,038)    24,403    (19,465)
       Prepaid expenses and other assets....................    22,329     13,307     12,023
       Accounts payable and accrued expenses................    (8,359)     7,072     14,373
       Income taxes payable and deferred income taxes.......    (7,520)     3,480     (6,744)
                                                              --------   --------   --------
          Net cash provided by (used in) operating
            activities......................................    (2,586)    31,662     58,872
                                                              --------   --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment, net...................   (15,207)   (12,336)   (13,277)
  Sale of short-term investments............................    24,916     21,775     46,782
  Purchase of short-term investments........................   (19,291)   (23,970)   (80,681)
  Sale (purchase) of joint venture investment...............   (17,750)    22,415      2,183
  Purchase of long-term investments.........................        --         --     (3,000)
  Other.....................................................     2,529         --         --
                                                              --------   --------   --------
          Net cash provided by (used in) investing
            activities......................................   (24,803)     7,884    (47,993)
                                                              --------   --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash received for Minority Interest.......................        --         --     52,860
  Repurchase of common stock................................        --     (2,769)    (4,229)
  Issuance of common stock under employee stock plans.......     3,111      1,013      3,193
  Income tax benefit on disqualifying disposition of common
     stock options..........................................     2,983        202      2,438
                                                              --------   --------   --------
          Net cash provided by (used in) financing
            activities......................................     6,094     (1,554)    54,282
                                                              --------   --------   --------
Net increase (decrease) in cash and cash equivalents........   (21,295)    37,992     65,161
Cash and cash equivalents at beginning of year..............    49,055     27,760     65,752
                                                              --------   --------   --------
Cash and cash equivalents at end of year....................  $ 27,760   $ 65,752   $130,913
                                                              ========   ========   ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Common stock issued for acquisitions......................  $ 32,703   $     --   $     --
                                                              ========   ========   ========
  Cash paid for income taxes................................  $ 18,300   $     --   $ 11,763
                                                              ========   ========   ========
</TABLE>

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

                                       30
<PAGE>   31

                              ESS TECHNOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

     ESS Technology, Inc. (the "Company") was incorporated in California in
February 1984. The Company and its subsidiaries design, develop and market
highly integrated mixed signal semiconductor products for sale to the Internet,
PC and consumer marketplaces. In April 1999, the Company formed ViAlta.com, a
subsidiary, to develop and market advanced, user friendly products and content
for the Internet.

  Use of Estimates

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

  Principles of Consolidation

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

  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 have
been classified as available for sale. Management determines the appropriate
classification of securities at the time of purchase and reevaluates the
classification at each reporting date. At December 31, 1999, the fair value of
the Company's investments approximated their cost.

  Inventories

     Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out (FIFO) method.

  Property and Equipment

     Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over estimated useful lives
that range from 3 to 5 years for machinery and equipment and furniture and
fixtures and 4 to 30 years for buildings and building improvements.

  Accounting Policy for Minority Interest

     Minority interest in subsidiaries represents the minority stockholders'
proportionate share of the net assets and results of operations of the Company's
majority-owned subsidiaries. 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 additional paid-in-capital.

  Technical Infrastructure and Covenants not to Compete

     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 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

                                       31
<PAGE>   32
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. During 1998 the Company
recorded $3.1 million in write-down of impaired assets related to technical
infrastructure, covenants not to compete and certain prepaid license fees.

  Revenue Recognition

     Revenue from product sales is recognized at the time of shipment except for
certain shipments to distributors with rights of return and allowances, in which
case revenue is deferred until the distributor resells the product. For sales
recognized at the time of shipment, reserves for estimated returns and price
adjustments are provided at the time of shipment.

  Research and Development

     Research and development costs are expensed 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 unremitted earnings of the Company's foreign subsidiaries as
such earning are not considered permanently invested.

  Stock Based Compensation

     The Company accounts for stock-based compensation, including stock options
granted and shares issued under the Employee Stock Purchase Plan, using the
intrinsic value method prescribed in APR No. 25, "Accounting for Stock Issued to
Employee," 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."

  Comprehensive Income

     Financial Accounting Standard No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income" establishes standards for the reporting and display of
comprehensive income and its components. As the Company has no components of
other Comprehensive Income, there are no disclosures requirements.

  Industry Segments

     In 1998, the Company adopted Statement of Financial Accounting Standard No.
131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related
Information." 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 operates in two reportable segments: the semiconductor segment and the
Internet segment. In the semiconductor segment, the Company designs, develops,
supports and manufactures highly integrated mixed signal semiconductor,
hardware, software and system solutions for multimedia applications in the
internet, personal computer and the consumer marketplace. The semiconductor
segment offers comprehensive solutions for audio, video and modern applications.
In the Internet segment, the Company plans to develop and market advanced, user
friendly products and applications and content for the Internet.

                                       32
<PAGE>   33
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 2. BALANCE SHEET COMPONENTS (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1998        1999
                                                              --------    --------
<S>                                                           <C>         <C>
Cash and cash equivalents:
  Cash and money market accounts -- ESS.....................  $ 23,082    $ 25,867
  Cash and money market accounts -- ViAlta.com..............        --         992
  U.S. government notes and bonds -- ESS....................    42,570      14,419
  U.S. government notes and bonds -- ViAlta.com.............        --      89,508
  Certificates of deposit -- ESS............................       100         127
                                                              --------    --------
                                                              $ 65,752    $130,913
                                                              ========    ========
Short-term investments:
  U.S. government notes and bonds -- ESS....................  $ 16,719    $ 28,274
  U.S. government notes and bonds -- ViAlta.com.............        --      22,344
                                                              --------    --------
                                                              $ 16,719    $ 50,618
                                                              ========    ========
Accounts receivable:
  Accounts receivable.......................................  $ 41,758    $ 36,821
  Less: allowance for doubtful accounts.....................    (3,928)     (2,459)
                                                              --------    --------
                                                              $ 37,830    $ 34,362
                                                              ========    ========
Inventories:
  Raw materials.............................................  $  6,307    $ 10,697
  Work-in-process...........................................     4,429      10,208
  Finished goods............................................    12,146      21,442
                                                              --------    --------
                                                              $ 22,882    $ 42,347
                                                              ========    ========
Property and equipment:
  Land......................................................  $  3,899    $  3,895
  Buildings and building improvements.......................    22,033      22,461
  Machinery and equipment...................................    27,790      30,615
  Furniture and fixtures....................................     1,255      11,295
                                                              --------    --------
  Cost of property and equipment............................    54,977      68,266
  Less: accumulated depreciation and amortization...........   (16,977)    (27,702)
                                                              --------    --------
                                                              $ 38,000    $ 40,564
                                                              ========    ========
Other assets:
  Foundry prepayments and investments.......................  $ 12,406    $  2,239
  Covenants not to compete..................................     5,651       2,689
  Technical infrastructure..................................     3,897       2,372
  Other.....................................................       994       1,966
                                                              --------    --------
                                                              $ 22,948    $  9,266
                                                              ========    ========
Accounts payable and accrued expenses:
  Accounts payable..........................................  $ 44,414    $ 44,909
  Accrued compensation costs................................     4,578       7,808
  Accrued commission and royalties..........................     2,739       5,695
  Other accrued liabilities.................................     6,199      13,891
                                                              --------    --------
                                                              $ 57,930    $ 72,303
                                                              ========    ========
</TABLE>

                                       33
<PAGE>   34
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 3. DEBT

     The Company has a secured line of credit agreement with a foreign bank of
$15 million, which expires on October 1, 2001. As of December 31, 1999, the line
was secured by the building and land of the Company with a net book value of
$23.0 million. Under the terms of the agreement, the Company 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. At December 31, 1999, the Company was in
compliance with its borrowing criteria. There were no borrowings under the line
of credit as of December 31, 1999.

 4. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                                1997        1998       1999
                                                              --------    --------    -------
                                                                      (IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
Domestic..................................................    $ 13,947    $(11,014)   $14,704
Foreign...................................................     (10,975)    (18,491)    32,478
                                                              --------    --------    -------
                                                              $  2,972    $(29,505)   $47,182
                                                              ========    ========    =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                                -----------------------------
                                                                 1997       1998       1999
                                                                -------    -------    -------
                                                                       (IN THOUSANDS)
<S>                                                             <C>        <C>        <C>
Current:
  Federal...................................................    $15,011    $ 1,432    $11,143
  State.....................................................      1,769        280      2,031
  Foreign...................................................         38         34         49
                                                                -------    -------    -------
                                                                 16,818      1,746     13,223
                                                                -------    -------    -------
Deferred:
  Federal...................................................     (2,550)    (2,767)    (4,818)
  State.....................................................       (430)      (468)    (1,328)
                                                                -------    -------    -------
                                                                 (2,980)    (3,235)    (6,146)
                                                                -------    -------    -------
          Total.............................................    $13,838    $(1,489)   $ 7,077
                                                                =======    =======    =======
</TABLE>

                                       34
<PAGE>   35
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     A reconciliation between the provision for (benefit from) income taxes
computed at the federal statutory rate of 35% for the years ended December 31,
1997, 1998 and 1999 and the provision for (benefit from) income taxes is as
follows:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                               1997        1998        1999
                                                              -------    --------    --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>         <C>
Provision (benefit) at statutory rate.....................    $ 1,040    $(10,327)   $ 16,514
Tax cost (benefit) related to foreign jurisdictions.......      4,275       7,293     (12,204)
State income taxes, net of federal tax benefit............         94         101         941
Tax-exempt interest income................................       (333)        (53)         --
General business credit...................................       (643)         --          --
Nondeductible research and development costs..............      8,480       1,497       1,826
Other.....................................................        925          --          --
                                                              -------    --------    --------
Provision for (benefit from) income taxes.................    $13,838    $ (1,489)   $  7,077
                                                              =======    ========    ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1998       1999
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
State income taxes..........................................  $    55    $   507
Accounts receivable and inventory reserves..................    4,891      5,003
Accrued expenses............................................    1,069      1,827
Legal reserves and other....................................      357      3,421
                                                              -------    -------
          Total deferred tax assets.........................    6,372     10,758
Unremitted earnings of foreign subsidiary...................   (9,139)    (9,139)
Covenants not to compete and technical infrastructure.......   (3,674)    (1,914)
                                                              -------    -------
Net deferred tax liabilities................................  $(6,441)   $  (295)
                                                              =======    =======
</TABLE>

 5. SHAREHOLDERS' EQUITY

  Common Stock

     On April 29, 1997, the Company's Board of Directors authorized repurchase
at management's discretion of up to 2 million shares of the Company's Common
Stock over the subsequent 12 months at market prices and as the market and
business conditions warrant. There were no repurchases under this program.

     On November 5, 1998, the Company's Board of Directors authorized repurchase
at managements' discretion of up to $7 million of the Company's Common Stock
over the subsequent 12 months at market prices and as market and business
conditions warrant. As of December 31, 1999 the Company had repurchased
1,226,300 shares at market prices ranging from $3.17 to $9.93 per share.

  1992 Stock Option Plan

     In January 1992, the Company adopted the 1992 Stock Option Plan (the "1992
Plan"). The 1992 Plan authorized 6,966,000 shares to be reserved for issuance.
In December 1999, the Company modified the vesting schedule for options 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.

                                       35
<PAGE>   36
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     In February 1998, the Company canceled 165,000 options under the 1992 Plan
with exercise prices greater than $7.69 and reissued the options with an
exercise price of $7.69.

     In August 1998, the Company canceled 230,000 options under the 1992 Plan
with exercise prices greater than $2.69 and reissued the options with an
exercise price of $2.69.

  Executive Plan

     In January 1990 and March 1991, the Company granted 5,400,000 and 1,080,000
options, respectively, outside of the 1986 Plan to officers of the Company under
the Executive Plan. The options were granted at the then fair value of $0.083
per share, as determined by the Board of Directors. The options generally vested
over periods of one to four years.

  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
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.

     In May 1997, the Company canceled 720,000 options under the Incentive Plan
with exercise prices greater than $13.94 and reissued the options with an
exercise price of $13.94.

     In February 1998, the Company canceled 1,612,000 options under the
Incentive Plan with exercise prices greater than $7.69 and reissued the options
with an exercise price of $7.69.

     In August 1998, the Company canceled 1,298,000 options under the Incentive
Plan with exercise prices greater than $2.69 and reissued the options with an
exercise price of $2.69.

  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 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. As of December 31, 1999, 295,490 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 Directors Plan allows for granting of
stock options to members of the Board of Directors of the Company.

  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 terms of the 1997 Incentive Plan are generally similar to those of the
1992 Plan outlined above.

                                       36
<PAGE>   37
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     In February 1998, the Company canceled 1,602,000 options under the 1997
Incentive Plan with exercise prices greater than $7.69 and reissued the options
with an exercise price of $7.69.

     In August 1998, the Company canceled 2,037,000 options under the 1997
Incentive Plan with exercise prices greater than $2.69 and reissued the options
with an exercise price of $2.69 except for 100,000 options issued to Mr. Fred
Chan, Chairman of the Board of Directors which were reissued at $2.96 in
accordance with the 1997 Incentive Plan..

  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.

  Stock Based Compensation:

     Transactions under the Company's various Stock Option Plans are summarized
as follows (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                         AVAILABLE
                                                            FOR         OPTIONS      WEIGHTED AVERAGE
                                                           GRANT      OUTSTANDING     EXERCISE PRICE
                                                         ---------    -----------    ----------------
<S>                                                      <C>          <C>            <C>
Balance at December 31, 1996...........................    2,139         4,833            $ 8.30
  Authorized...........................................    3,000            --                --
  Reserved for Platform acquisition....................      954            --                --
  Granted..............................................   (4,129)        4,129             11.78
  Exercised............................................       --          (886)             2.59
  Canceled.............................................    1,426        (1,426)            17.70
                                                          ------        ------
Balance at December 31, 1997...........................    3,390         6,650              9.20
  Authorized...........................................    2,000            --                --
  Granted..............................................   (9,478)        9,478              4.87
  Exercised............................................       --          (612)             1.01
  Canceled.............................................    8,286        (8,286)            10.48
                                                          ------        ------
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
                                                          ======        ======
</TABLE>

     The weighted average grant date fair value of options granted during the
years ended December 31, 1997, 1998 and 1999 were $8.91, $3.16 and $11.51,
respectively.

                                       37
<PAGE>   38
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
                       --------------------------------------------------------   ------------------------------------
                            NUMBER                                                     NUMBER
                        OUTSTANDING AT     AVERAGE REMAINING                       EXERCISABLE AT
      RANGE OF         DECEMBER 31, 1999   CONTRACTUAL LIFE    WEIGHTED AVERAGE   DECEMBER 31, 1999   WEIGHTED AVERAGE
   EXERCISE PRICES      (IN THOUSANDS)          (YEARS)         EXERCISE PRICE     (IN THOUSANDS)      EXERCISE PRICE
   ---------------     -----------------   -----------------   ----------------   -----------------   ----------------
<S>                    <C>                 <C>                 <C>                <C>                 <C>
$0.03 -  1.40........          946               5.48               $ 0.36                914              $ 0.37
$2.12 -  2.69........        3,507               5.43               $ 2.65              1,695              $ 2.67
$2.75 -  5.00........          839               6.66               $ 4.11                168              $ 4.12
$5.06 -  7.81........          590               6.25               $ 6.68                177              $ 6.93
$7.84 - 29.25........        1,647               7.47               $13.14                158              $13.99
                             -----                                                      -----
                             7,529               6.08               $ 5.14              3,112              $ 2.89
                             =====                                                      =====
</TABLE>

     At December 31, 1999, 3,111,686 options were exercisable. At December 31,
1999, shares available for grant for all plans was 1,454,863.

  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
since 1995 under the Company's option plans been determined based on the fair
value at the grant dates, as prescribed in SFAS 123, (in thousands except per
share amounts):

<TABLE>
<CAPTION>
                                                                        YEAR ENDED
                                                                       DECEMBER 31,
                                                              -------------------------------
                                                                1997        1998       1999
                                                              --------    --------    -------
<S>                                                           <C>         <C>         <C>
Net income (loss):
  As reported.............................................    $(10,866)   $(28,016)   $40,105
  Pro forma...............................................    $(17,278)   $(35,069)   $31,990
Net income (loss) per share -- basic:
  As reported.............................................    $  (0.27)   $  (0.68)   $  0.99
  Pro forma...............................................    $  (0.44)   $  (0.86)   $  0.79
Net income (loss) per share -- diluted:
  As reported.............................................    $  (0.27)   $  (0.68)   $  0.88
  Pro forma...............................................    $  (0.44)   $  (0.86)   $  0.70
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following assumptions used for grants during
the years ended December 31, 1997, 1998 and 1999: dividend yield of 0.0% for
these periods; expected volatility of 70% for the year ended December 31, 1997,
85% for year ended December 31, 1998; and 80% for year ended December 31, 1999;
risk-free interest rates of 6.23%, 5.50% and 5.75% for the years ended December
31, 1997, 1998 and 1999 respectively; and a weighted average expected option
term of 5 years for the years ended December 31, 1997 and 1999 and 4 years for
the year ended December 31, 1998.

     Sales under the Purchase Plan in 1997, 1998 and 1999 were approximately
75,000 shares, 86,000 shares and 88,000 shares respectively, at an average price
per share of $10.89, $4.60 and $5.78 respectively. Pro forma compensation
expense for the grant date fair value, as defined by SFAS 123, of the purchase
rights granted under the Purchase Plan was calculated using the Black-Scholes
model with the following assumptions for 1997, 1998 and 1999: an expected life
of six months for these periods; expected volatility of 70%, 85% and 80%
respectively; expected dividend yield of 0% for these periods and risk-free
interest rates of 6.00%, 5.00% and 5.745% respectively. The weighted average
estimated grant date fair value, as defined by SFAS 123, of rights

                                       38
<PAGE>   39
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to purchase stock under the Purchase Plan in 1997, 1998 and 1999 were $5.00,
$3.57 and $2.58 per share, respectively.

     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.

 6. EARNINGS PER SHARE

     Earnings per share are calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128 -- "Earnings per Share"
(SFAS No. 128). SFAS No. 128 requires the Company to report both basic earnings
per share, 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.

<TABLE>
<CAPTION>
                                                                                    PER SHARE
                                                               INCOME     SHARES     AMOUNT
                                                              --------    ------    ---------
<S>                                                           <C>         <C>       <C>
YEAR ENDED DECEMBER 31, 1997
Loss per share of common stock -- basic.....................  $(10,866)   39,593     $(0.27)
Effect of dilutive securities:
  Stock options.............................................        --        --
                                                              --------    ------
Loss per share of common stock -- assuming dilution.........  $(10,866)   39,593     $(0.27)
                                                              --------    ------
YEAR ENDED DECEMBER 31, 1998
Loss per share of common stock -- basic.....................  $(28,016)   40,995     $(0.68)
Effect of dilutive securities:
  Stock options.............................................        --        --
                                                              --------    ------
Loss per share of common stock -- assuming dilution.........  $(28,016)   40,955     $(0.68)
                                                              --------    ------
YEAR ENDED DECEMBER 31, 1999
Income per share of common stock -- basic...................  $ 40,105    40,640     $ 0.99
Effect of dilutive securities:
  Stock options.............................................        --     4,985
                                                              --------    ------     ------
Income per share of common stock -- assuming dilution.......  $ 40,105    45,625     $ 0.88
                                                              ========    ======     ======
</TABLE>

 7. FOREIGN OPERATIONS AND INDUSTRY SEGMENT

     The Company and its wholly-owned subsidiaries are engaged in the design,
manufacture and marketing of semiconductor products for the Internet, PC and
consumer marketplaces. Sales and purchase transactions are generally denominated
in U.S. dollars. Most of the Company's revenues outside the U.S. are made in the
Far East. The geographic location of the Company's revenue is based upon
destination of the shipment. Most of the identified assets located outside the
U.S. are in the Far East.

                                       39
<PAGE>   40
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following is a summary of the Company's geographic operations:

<TABLE>
<CAPTION>
                                                                                       HONG                TOTAL
                                           U.S.      TAIWAN     JAPAN    SINGAPORE     KONG       ROW     FOREIGN     TOTAL
                                         --------   --------   -------   ---------   --------   -------   --------   --------
                                                                            (IN THOUSANDS)
<S>                                      <C>        <C>        <C>       <C>         <C>        <C>       <C>        <C>
Year ended December 31, 1997:
  Net revenues.........................  $ 26,793   $ 20,388   $19,670    $19,804    $102,900   $59,962   $222,724   $249,517
  Income (loss) from operations........    10,025         --        --         --          --        --     (9,236)       789
  Identifiable assets..................   194,053         --        --         --          --        --     37,601    231,654
Year ended December 31, 1998:
  Net revenues.........................    17,363     73,566    16,546     19,812      80,717    10,248    200,889    218,252
  Loss from operations.................   (13,250)        --        --         --          --        --    (17,733)   (30,983)
  Identifiable assets..................   167,203         --        --         --          --        --     47,442    214,645
Year ended December 31, 1999:
  Net revenues.........................    14,812     98,342    24,480     14,547     124,427    34,043    295,839    310,651
  Income from operations...............     9,924         --        --         --          --        --     32,080     42,004
  Identifiable assets..................  $237,478         --        --         --          --        --   $ 83,549   $321,027
</TABLE>

     In October 1997, the Company established a wholly owned subsidiary in the
Cayman Island, British West Indies. The Cayman Island subsidiary and its branch
offices are responsible for the manufacturing and for the international sales of
the Company's products.

     Prior to 1999, the Company operated in a single segment: semiconductors. In
April 1999, the Company established a subsidiary, ViAlta.com to address products
and applications for the Internet. The following is a summary of the Company's
business segments:

<TABLE>
<CAPTION>
              YEAR ENDED DECEMBER 31, 1999                SEMICONDUCTORS    INTERNET     TOTAL
--------------------------------------------------------  --------------    --------    --------
<S>                                                       <C>               <C>         <C>
Net revenues............................................     $310,651             --    $310,651
Income (loss) from operations...........................       44,536         (2,532)     42,004
Indentifiable assets....................................     $207,456       $113,571    $321,027
</TABLE>

 8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK

     Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash equivalents, short-term investments and
trade accounts receivable. Cash equivalents and short-term investments, which
primarily comprised of investments in money market funds and municipal debt
instruments, are maintained with high quality institutions and the composition
and maturities are regularly monitored by management.

     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.

<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                  DECEMBER 31,
                                                              --------------------
                                                              1997    1998    1999
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Dynax.......................................................   13%     16%     22%
Eastbase....................................................   13%     --      --
Shinco......................................................   --      15%     13%
</TABLE>

     A majority of the Company's trade receivables are derived from sales to
manufacturers of computer systems. 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 collectibility of all accounts

                                       40
<PAGE>   41
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

receivable. At December 31, 1998 and 1999, approximately 36% and 39%,
respectively, of trade accounts receivable represent amounts due from two
customers.

 9. COMMITMENTS AND CONTINGENCIES

     In November 1995, the Company entered into agreements with two wafer
foundries, TSMC and UMC, in which the Company secured access to additional
manufacturing capacity and to certain technology.

     Under the TSMC Agreement, in exchange for TSMC's increased wafer capacity
commitments, the Company committed to pay approximately $32 million during 1996
and 1997 as deposits for wafers through 1999. The cash requirements associated
with this agreement were two $16 million payments due June 30, 1996 and 1997.
The Company issued two promissory notes totaling $32 million securing these
payments which were cancelled subsequent to the payments in 1996 and 1997. The
payments were applied in full to offset wafers purchased from 1996 to 1999.

     Under the UMC agreement, the Company entered into a joint venture
arrangement with UMC, together with other US semiconductor companies, to build a
separate semiconductor manufacturing facility located in Taiwan at an estimated
cost of $1 billion. The Company invested approximately $24.6 million in the
joint venture. Under the terms of the agreement, the Company received a 5%
equity ownership in the joint venture company and certain capacity rights. On
October 17, 1998, the Company entered into an agreement with UMC to sell UMC
approximately 63.8 million shares of the joint venture for a purchase price of
$22.4 million which approximated net book value. On April 8, 1999, the Company
sold its remaining 6 million shares of stock of the joint venture at book value
for a purchase price of $2.2 million. The Company received the cash on April 30,
1999.

     The Company is involved in litigation in the normal course of operations.
Management believes that the outcome of the litigation will not have a material
adverse effect on the Company's financial position or results of operations.

10. ACQUISITIONS AND RELATED CHARGES

     On June 11, 1997, the Company acquired Platform Technologies, Inc.
("Platform"), a California based company, for approximately 2.54 million shares
of the Company's Common Stock including approximately 954,000 options with a
value of $32.7 million. Platform, a wholly owned subsidiary of the Company, is
developing integrated circuits for the PC audio market incorporating the PCI
standard.

     The purchase price was allocated to assets acquired and liabilities assumed
based upon the book value of Platform's current assets, equipment and
liabilities, which management believes approximates their fair value, and
independent appraisal for all other identifiable assets as follows:

<TABLE>
<CAPTION>
                                                                 PLATFORM
                                                              --------------
                                                              (IN THOUSANDS)
<S>                                                           <C>
In-process research and development.........................     $22,200
Technical infrastructure....................................       7,245
Covenants not to compete....................................       6,100
Current assets..............................................       3,209
Property and equipment......................................         222
Current liabilities assumed.................................        (369)
Other liabilities assumed...................................      (5,204)
                                                                 -------
                                                                  33,403
Acquisition costs...........................................        (700)
                                                                 -------
Value of consideration for acquisition......................     $32,703
                                                                 =======
</TABLE>

                                       41
<PAGE>   42
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     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 $22.2 million for the Platform acquisition was charged
to operations in the second quarter of 1997. The pro forma effect of the
Platform acquisition was not significant on the Company's reported operating
results for 1997.

11. RELATED PARTY TRANSACTION

     Fred S.L. Chan, the Company's Chairman of the Board of Directors and his
spouse Annie M.H. Chan, a director of the Company, announced on April 28, 1998,
that they would be purchasing between $5 and $10 million of the Company's common
stock on the open market. As of December 31, 1999, such purchases had totaled
$1.4 million representing 241,000 shares at prices ranging from $5.15 to $6.56.

12. VIALTA.COM

     In April 1999, the Company incorporated ViAlta.com, a subsidiary, through
which ESS plans to introduce advanced, user-friendly products and applications
for the Internet. ViAlta.com is incorporated in California and headquartered in
Fremont.

     In September 1999, ViAlta.com issued 40,000,000 shares of Series A
Preferred Stock at $0.25 per share to the Company for $10 million in cash. In
October 1999, Mr. Fred Chan, Chairman of ESS and ViAlta.com, purchased 4 million
shares of common stock at $0.25 per share by issuing a full recourse promissory
note due to ViAlta.com which bears interest at market rates. Also in October,
ViAlta.com issued 400,000 and 1,820,000 common shares to the Company and
ViAlta.com consultants, respectively, for full recourse promissory notes in the
amount of $555,000. Such notes bear interest at 5.31% per annum compounded
quarterly. In December 1999, ViAlta.com issued 40.3 million shares of Series B
Preferred Stock at $2.60 per share; 20 million to the Company and 20.3 million
to third party investors for a total of $52,780,000 in cash. As of December 31,
1999, minority interest in the Company's consolidated balance sheet is comprised
of the ViAlta.com Series B Preferred Stock and Common Stock issued to third
parties and contractors of ViAlta.com, net of the promissory notes. The company
did not recognize any gain or loss on the sale of shares as ViAlta.com is a
development stage company.

     As of December 31, 1999, the Company has a 69.81% voting interest in
ViAlta.com.

     According to ViAlta.com's Amended and Restated Articles of Incorporation,
ViAlta.com is authorized to issue two classes of stock to be designated,
respectively, "Common Stock" and "Preferred Stock". The total number of shares
which ViAlta.com is authorized to issue is 160,000,000 shares, each with no par
value, of which 70,000,000 shares shall be Common Stock and 90,000,000 shares
shall be Preferred Stock.

CONVERTIBLE PREFERRED STOCK

     Convertible Preferred Stock at December 31, 1999 consists of the following:

<TABLE>
<CAPTION>
                                                                              PROCEEDS
                                                                               NET OF
                                                        SHARES                ISSUANCE
                   SERIES                      AUTHORIZED    OUTSTANDING       COSTS
                   ------                      ----------    -----------    ------------
<S>                                            <C>           <C>            <C>
A............................................  40,000,000    40,000,000     $ 10,000,000
B............................................  50,000,000    40,300,000      104,780,000
                                               ----------    ----------     ------------
                                               90,000,000    80,300,000     $114,780,000
</TABLE>

                                       42
<PAGE>   43
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Holders of Series A and Series B Convertible Preferred Stock have various
rights and preferences as follows:

VOTING RIGHTS

     The holder of each share of Series A and Series B Preferred Stock shall
have the right to one vote for each share of Common Stock into which such
Preferred Stock could then be converted.

CONVERSION

     Series A and B Preferred Stocks are convertible into common stock at the
option of the holder at any time at a one for one conversion rate.

     Each share of Preferred Stock shall be automatically converted into shares
of Common Stock at the conversion rate in effect at the time for such share
immediately upon the earlier of (i) ViAlta.com's sale of its Common Stock in a
firm commitment underwritten public offering pursuant to a registration
statement under the Securities Act of 1933, the public offering price of which
is not less than $7.50 per share and which results in aggregate cash proceeds to
ViAlta.com of $30,000,000 (net of underwriting discounts and commissions) or
(ii) the date specified by written consent or agreement of the holders of a
majority of the then outstanding shares of Preferred Stock, voting together as a
class.

DIVIDENDS

     Series A Preferred Stock and Series B Preferred Stock are entitled to
receive dividends at the rate of $0.10 per share per annum on each outstanding
share of Series A and Series B Preferred Stock payable quarterly when, as and if
declared by the Board of Directors. Such dividends shall not be cumulative.

LIQUIDATION

     In the event of liquidation, dissolution or winding up of ViAlta.com,
either voluntary or involuntary, the holders of the Series A and Series B
Preferred Stock shall be entitled to receive, prior to and in preference to any
distribution of any of the assets of ViAlta.com to the holders of Common Stock
an amount equal to $0.25 and $2.60 for each share of Series A and B Preferred
Stock, respectively, plus declared and unpaid dividends.

VIALTA.COM STOCK OPTION PLAN

     In August, 1999, ViAlta.com adopted a stock incentive plan (the "1999
Plan"). Under the 1999 Plan, ViAlta.com's incentive stock options may be granted
to its employees, directors, non-employee directors and consultants. The
aggregate number of shares reserved for awards under the Plan shall not exceed
10,000,000 shares. The exercise price of an ISO shall not be less than 100% of
the fair market value (110% for 10 percent shareholders); the exercise price of
an NSO shall not be less than 85% of the fair market value (110% for 10 percent
shareholders). Options shall vest at least as rapidly as 20% annually over a
five-year period.

     In 1999, 1,708,000 shares were granted at the price ranged from $0.25 to
$0.275 per share including 1,000,000 shares to Mr. Fred S.L. Chan, the Company's
founder and Chairman of the Board. Mr. Chan's option will vest 100% on September
1, 2004. Mr. Chan's vesting may be accelerated in full if ViAlta.com (a) is
acquired or (b) completes an initial public offering with a valuation of more
than $1.0 billion prior to December 31, 2001. Except for Mr. Chan vesting
schedule and one option grant having a two-year vesting schedule, all other
option grants will vest 25% on each of the first four anniversaries of the date
of grant.

                                       43
<PAGE>   44
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. SUBSEQUENT EVENTS:

     On January 4, 2000, ViAlta.com received $20.8 million in the form of a full
recourse promissory note from Mr. Chan for purchase of 8,000,000 shares of
Series B Preferred Stock at $2.60 per share. The note bears interest at 5.45%
per annum compounded quarterly. On February 10, 2000, ViAlta.com received $3.9
million in cash from a third party investor for subscription to its Series B
Preferred Stock.

     Subsequent to the above transactions, the Company's voting right in
ViAlta.com has been reduced to 62.9% as of February 10, 2000.

     On February 3, 2000, the Company acquired all of the outstanding shares and
vested stock options of NetRidium Communications, Inc. for $5.3 million in cash,
of which 10% will be held in escrow for nine months pending the resolution of
certain contingencies. NetRidium is a development stage company which develops
advanced broadband communication products enabling high-speed networking over
existing phone lines in the home. NetRidium has assets, liabilities and expenses
which has no material effect on the Company. Goodwill and purchased technology
resulting form the acquisition will be amortized over four years. In connection
with the acquisition, the Company granted certain NetRidium employees stock
options to purchase 500 thousand 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 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.
Approximately 428 thousand of the options issued upon acquisition are subject to
this guarantee. Any amounts due under this guarantee will be accrued as
compensation expense over the four year vesting period of the options.

                                       44
<PAGE>   45
                              ESS TECHNOLOGY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)

     The following table presents unaudited quarterly financial information for
each of the Company's last eight quarters. This information has been derived
from the Company's unaudited 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.

<TABLE>
<CAPTION>
                                                               1998                                      1999
                                             ----------------------------------------   --------------------------------------
                                             MAR. 31    JUNE 30    SEPT. 30   DEC. 31   MAR. 31   JUNE 30   SEPT. 30   DEC. 31
                                             --------   --------   --------   -------   -------   -------   --------   -------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>        <C>        <C>        <C>       <C>       <C>       <C>        <C>
Net revenues...............................  $ 52,876     34,835    52,309    78,232    79,295    67,228     75,400    88,728
Cost of revenues...........................    49,146     33,262    43,683    56,326    48,047    40,873     46,949    55,660
                                             --------   --------   -------    -------   -------   ------     ------    ------
  Gross profit.............................     3,730      1,573     8,626    21,906    31,248    26,355     28,451    33,068
Operating expenses:
  Research and development.................     8,092      6,933     8,134     7,370     9,025     8,642      9,637    10,079
  Research and development in-process......        --         --        --        --        --        --         --        --
  Selling, general and administrative......     9,029      8,632     8,815     9,813     8,446     9,523     10,460    11,306
                                             --------   --------   -------    -------   -------   ------     ------    ------
Operating income (loss)....................   (13,391)   (13,992)   (8,323)    4,723    13,777     8,190      8,354    11,683
Nonoperating income, net...................       369        347       466       296     1,061     1,149      1,202     1,766
                                             --------   --------   -------    -------   -------   ------     ------    ------
Income (loss) before income taxes..........   (13,022)   (13,645)   (7,857)    5,019    14,838     9,339      9,556    13,449
Provision for (benefit from) income
  taxes....................................      (669)      (683)     (388)      251     2,226     1,401      1,433     2,017
                                             --------   --------   -------    -------   -------   ------     ------    ------
Net income (loss)..........................  $(12,353)  $(12,962)  $(7,469)   $4,768    $12,612    7,938      8,123    11,432
                                             ========   ========   =======    =======   =======   ======     ======    ======
Net income (loss) per share:
  Basic....................................  $  (0.30)  $  (0.32)  $ (0.18)   $ 0.12      0.31      0.20       0.20      0.28
                                             ========   ========   =======    =======   =======   ======     ======    ======
  Diluted..................................  $  (0.30)  $  (0.32)  $ (0.18)   $ 0.11      0.28      0.18       0.18      0.24
                                             ========   ========   =======    =======   =======   ======     ======    ======
Shares used in calculating net income
  (loss) per share:
  Basic....................................    40,776     40,967    41,094    40,991    40,579    40,294     40,545    41,143
                                             ========   ========   =======    =======   =======   ======     ======    ======
  Diluted..................................    40,776     40,967    41,094    44,566    44,669    45,133     46,021    46,677
                                             ========   ========   =======    =======   =======   ======     ======    ======
</TABLE>

     The following table sets forth the above quarterly financial information as
a percentage of net revenues:

<TABLE>
<CAPTION>
                                                        1998                                     1999
                                       --------------------------------------   --------------------------------------
                                       MAR. 31   JUNE 30   SEPT. 30   DEC. 31   MAR. 31   JUNE 30   SEPT. 30   DEC. 31
                                       -------   -------   --------   -------   -------   -------   --------   -------
<S>                                    <C>       <C>       <C>        <C>       <C>       <C>       <C>        <C>
Net revenues.........................   100.0%    100.0%    100.0%     100.0%    100.0%    100.0%    100.0%     100.0%
Cost of revenues.....................    92.9      95.5      83.5       72.0      60.6      60.8      62.3       62.7
                                        -----     -----     -----      -----     -----     -----     -----      -----
  Gross margin.......................     7.1       4.5      16.5       28.0      39.4      39.2      37.7       37.3
Operating expenses:
  Research and development...........    15.3      19.9      15.5        9.4      11.4      12.8      12.8       11.4
  Selling, general and
    administrative...................    17.1      24.8      16.9       12.6      10.6      14.2      13.8       12.7
                                        -----     -----     -----      -----     -----     -----     -----      -----
Operating income (loss)..............   (25.3)    (40.2)    (15.9)       6.0      17.4      12.2      11.1       13.2
Nonoperating income, net.............     0.7       1.0       0.9        0.4       1.3       1.7       1.6        2.0
                                        -----     -----     -----      -----     -----     -----     -----      -----
Income (loss) before income taxes....   (24.6)    (39.2)    (15.0)       6.4      18.7      13.9      12.7       15.2
Provision for (benefit from) income
  taxes..............................    (1.2)     (2.0)     (0.7)       0.3       2.8       2.1       1.9        2.3
                                        -----     -----     -----      -----     -----     -----     -----      -----
Net income (loss)....................   (23.4)%   (37.2)%   (14.3)%      6.1%     15.9%     11.8%     10.8%      12.9%
                                        =====     =====     =====      =====     =====     =====     =====      =====
</TABLE>

                                       45
<PAGE>   46

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
the Company plans to file with the Securities and Exchange Commission the
definitive proxy statement for its 2000 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 the Company's directors and certain information
concerning the Company's Executive Officers required by this Item is
incorporated by reference in the Company's Proxy Statement which the Company
will file with the Commission not later than 120 days after its 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 the Company's Proxy Statement entitled "Executive Compensation,"
which the Company will file with the Commission not later than 120 days after
its 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
Company's Proxy Statement which the Company will file with the Commission not
later than 120 days after its fiscal year-end.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                    PART IV

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

     (a)(1)(2) FINANCIAL STATEMENTS AND SCHEDULES.

     The financial statements and schedules filed as part of this report are
listed in Item 8 on page 25.

     (3) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            EXHIBIT TITLE
-------                           -------------
<C>        <S>
  2.01     Agreement and Plan of Reorganization dated December 12, 1995
           among Registrant, ESS Acquisition Corporation and VideoCore
           Technology, Inc. ("VideoCore") (Incorporated herein by
           reference to Exhibit 2.1 to the Registrant's Current Report
           on Form 8-K dated January 17, 1996 (the "Form 8-K")).
  2.02     Agreement of Merger dated as of January 3, 1996 among
           Registrant, ESS Acquisition Corporation and VideoCore.
           (Incorporated herein by reference to Exhibit 2.2 to the Form
           8-K).
  2.03     First Amended and Restated Agreement and Plan of
           Reorganization dated as of April 27, 1997 among Registrant,
           EP Acquisition Corporation and Platform Technologies, Inc.
           (Incorporated herein by reference to Exhibit 2.1 to the
           Registrant's Current Report on Form 8-K dated April 30,
           1997).
</TABLE>

                                       46
<PAGE>   47

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            EXHIBIT TITLE
-------                           -------------
<C>        <S>
  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 (Filed herewith).
  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).*
 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).*
 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).
 10.18     Foundry Agreement dated March 29, 1993 between Registrant
           and Integrated Circuit Works Incorporated (Incorporated
           herein by reference to Exhibit 10.18 to the Form S-1).**
 10.19     Purchase Agreement dated June 17, 1994 between Compaq
           Computer Corporation and Registrant (Incorporated herein by
           reference to Exhibit 10.19 to the Form S-1).**
 10.20     International Distributorship Agreement dated July 1, 1994
           between Registrant and Universe Electron Corporation
           (Incorporated herein by reference to Exhibit 10.20 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 (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).**
 10.24     FabVen Foundry Capacity Agreement among FabVen, UMC and
           Registrant dated November 28, 1995. (Incorporated herein by
           reference to Exhibit 10.24 to the 1995 Form 10-K).**
 10.25     Form of Employment and Non-Competition Agreement among the
           Registrant, VideoCore and Jan Fandrianto dated December 12,
           1995. (Incorporated herein by reference to Exhibit 2.1 to
           the Form 8-K).*
 10.26     Form of Employment and Non-Competition Agreement among the
           Registrant, VideoCore and Chi-Shin Wang dated December 12,
           1995. (Incorporated herein by reference to Exhibit 21 to the
           Form 8-K).*
</TABLE>

                                       47
<PAGE>   48

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            EXHIBIT TITLE
-------                           -------------
<C>        <S>
 10.27     Form of Employment Agreement and Promissory Note among the
           Registrant and John H. Barnet dated August 22 and September
           16, 1996, respectively. (Incorporated herein by reference to
           Exhibit 10.27 to the Registrant's Report on Form 10-Q, dated
           November 14, 1996.)*
 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).*
 11.01     Computation of Net Income Per Share.
 21.01     List of Registrant's subsidiaries.
 23.01     Consent of Independent Accountants.
 27.01     Financial Data Schedule.
</TABLE>

---------------
 * 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: The Company did not file a report on Form 8-K
during the quarter ended December 31, 1999.

     With the exception of the information incorporated by reference to the
Company's Proxy Statement for the 2000 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.

                                       48
<PAGE>   49

                                   SIGNATURES

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

                                          ESS TECHNOLOGY, INC.
                                          (Registrant)

Date: March 7, 2000                       By:      /s/ ROBERT L. BLAIR
                                            ------------------------------------
                                                      Robert L. Blair
                                            President, Chief Executive Officer,
                                               Chief Financial Officer, Chief
                                                      Accounting Officer
                                                       and Secretary

                               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 in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<S>                                                    <C>                              <C>
                 /s/ ROBERT L. BLAIR                     Director, President, Chief      March 7, 2000
-----------------------------------------------------     Executive Officer, Chief
                   Robert L. Blair                        Financial Officer, Chief
                                                           Accounting Officer and
                                                                  Secretary

                 /s/ FRED S. L. CHAN                      Chairman of the Board of       March 7, 2000
-----------------------------------------------------             Directors
                   Fred S.L. Chan

                 /s/ ANNIE M.H. CHAN                              Director               March 7, 2000
-----------------------------------------------------
                   Annie M.H. Chan

                   /s/ DOMINIC NG                                 Director               March 7, 2000
-----------------------------------------------------
                     Dominic Ng

                    /s/ ILBOK LEE                                 Director               March 7, 2000
-----------------------------------------------------
                      Ilbok Lee

                  /s/ PETER T. MOK                                Director               March 7, 2000
-----------------------------------------------------
                    Peter T. Mok
</TABLE>

                                       49
<PAGE>   50

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                          EXHIBIT TITLE
-------                         -------------
<C>      <S>
   2.01  Agreement and Plan of Reorganization dated December 12, 1995
         among Registrant, ESS Acquisition Corporation and VideoCore
         Technology, Inc. ("VideoCore") (Incorporated herein by
         reference to Exhibit 2.1 to the Registrant's Current Report
         on Form 8-K dated January 17, 1996 (the "Form 8-K")).
   2.02  Agreement of Merger dated as of January 3, 1996 among
         Registrant, ESS Acquisition Corporation and VideoCore.
         (Incorporated herein by reference to Exhibit 2.2 to the Form
         8-K).
   2.03  First Amended and Restated Agreement and Plan of
         Reorganization dated as of April 27, 1997 among Registrant,
         EP Acquisition Corporation and Platform Technologies, Inc.
         (Incorporated herein by reference to Exhibit 2.1 to the
         Registrant's Current Report on Form 8-K dated April 30,
         1997).
   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 (Filed herewith).
   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).*
  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).*
  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).
  10.18  Foundry Agreement dated March 29, 1993 between Registrant
         and Integrated Circuit Works Incorporated (Incorporated
         herein by reference to Exhibit 10.18 to the Form S-1).**
  10.19  Purchase Agreement dated June 17, 1994 between Compaq
         Computer Corporation and Registrant (Incorporated herein by
         reference to Exhibit 10.19 to the Form S-1).**
  10.20  International Distributorship Agreement dated July 1, 1994
         between Registrant and Universe Electron Corporation
         (Incorporated herein by reference to Exhibit 10.20 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 (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).**
</TABLE>

                                       50
<PAGE>   51

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                          EXHIBIT TITLE
-------                         -------------
<C>      <S>
  10.24  FabVen Foundry Capacity Agreement among FabVen, UMC and
         Registrant dated November 28, 1995. (Incorporated herein by
         reference to Exhibit 10.24 to the 1995 Form 10-K).**
  10.25  Form of Employment and Non-Competition Agreement among the
         Registrant, VideoCore and Jan Fandrianto dated December 12,
         1995. (Incorporated herein by reference to Exhibit 2.1 to
         the Form 8-K).*
  10.26  Form of Employment and Non-Competition Agreement among the
         Registrant, VideoCore and Chi-Shin Wang dated December 12,
         1995. (Incorporated herein by reference to Exhibit 21 to the
         Form 8-K).*
  10.27  Form of Employment Agreement and Promissory Note among the
         Registrant and John H. Barnet dated August 22 and September
         16, 1996, respectively. (Incorporated herein by reference to
         Exhibit 10.27 to the Registrant's Report on Form 10-Q, dated
         November 14, 1996.)*
  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).*
  11.01  Computation of Net Income Per Share.
  21.01  List of Registrant's subsidiaries.
  23.01  Consent of Independent Accountants.
  27.01  Financial Data Schedule.
</TABLE>

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

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

                                       51