##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended December 31, 2005                                                 
|or        
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to           .                                 

Commission File Number 0-26660





ESS Technology, Inc.


(Exact name of Registrant as specified in its charter)


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

Registrants telephone number, including area code:


(510) 492-1088


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


None


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


Common Stock, no par value


(Title of Class)


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


o þ o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE












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##### 










ESS TECHNOLOGY, INC.


2005
FORM 10-K


TABLE OF CONTENTS


|             |  |                                                                                                                          |    |      |    |  |  | 
|------------ |  | ------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- |  |  | 
|             |  |                                                                                                                          |    | Page |   
|             |  |                                                                                                                          |    |      |   
|PART I      
|Item 1.      |  | Business                                                                                                                 |    |      | 3  | 
|Item 1A.     |  | Risk Factors                                                                                                             |    |      | 14 | 
|Item 1B.     |  | Unresolved Staff Comments                                                                                                |    |      | 24 | 
|Item 2.      |  | Properties                                                                                                               |    |      | 24 | 
|Item 3.      |  | Legal Proceedings                                                                                                        |    |      | 24 | 
|Item 4.      |  | Submission of Matters to a Vote of Security
    Holders                                                                  |    |      | 25 | 
|            
|PART II     
|Item 5.      |  | Market for the Registrants Common
    Equity, Related Shareholder Matters and Issuer Purchases of
    Equity Securities |    |      | 26 | 
|Item 6.      |  | Selected Financial Data                                                                                                  |    |      | 27 | 
|Item 7.      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                |    |      | 28 | 
|Item 7A.     |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                           |    |      | 41 | 
|Item 8.      |  | Financial Statements and Supplementary
    Data                                                                          |    |      | 42 | 
|Item 9.      |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                 |    |      | 80 | 
|Item 9A.     |  | Controls and Procedures                                                                                                  |    |      | 80 | 
|Item 9B.     |  | Other Information                                                                                                        |    |      | 80 | 
|            
|PART III    
|Item 10.     |  | Directors and Executive Officers of the
    Registrant                                                                   |    |      | 80 | 
|Item 11.     |  | Executive Compensation                                                                                                   |    |      | 81 | 
|Item 12.     |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters                       |    |      | 81 | 
|Item 13.     |  | Certain Relationships and Related
    Transactions                                                                       |    |      | 82 | 
|Item 14.     |  | Principal Accountant Fees and Services                                                                                   |    |      | 82 | 
|            
|PART IV     
|Item 15.     |  | Exhibits and Financial Statement
    Schedules                                                                           |    |      | 82 | 
|Signatures   |  |                                                                                                                          | 83 |     
|EXHIBIT 21  
|EXHIBIT 23  
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



Certain information contained in or incorporated by reference
in this Report contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Report
that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding
our expectations, beliefs, intentions or strategies regarding
the future. All forward-looking statements included in this
Report are based on information available to us on the date
hereof, and we assume no obligation to update any such
forward-looking statements. Our actual results could differ
materially from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited
to, those discussed in Item 1A, Risk Factors, and elsewhere
in this Report. References herein to ESS, the
Company, we, our, us
and similar words or phrases are references to ESS Technology,
Inc. and its subsidiaries, unless the context otherwise
requires. Unless otherwise provided in this Report, trademarks
identified by-Registered Trademark- and -TM-are registered
trademarks or trademarks, respectively, of ESS Technology, Inc.
or its subsidiaries. All other trademarks are the properties of
their respective owners.


2



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PART I







|        |         
|------- | --------
|Item 1. | Business





system-on






Industry Background






3



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | DVD Players. DVD players provide significantly higher
    quality playback than is possible with VCR or VCD technology
    through the use of Motion Picture Experts Group
    (MPEG) 2 and MPEG4 video decoding and high quality
    digital audio technologies.                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Video CD (VCD) Players. VCD players are music
    CD players that have been modified to display video on a
    television and typically sell for less than a low end VCR. VCD
    offers quality comparable to VCR, but is limited to
    approximately 73 minutes of video information, using an MPEG1
    format standard for compression.                                                                                                                                                                                                                                                                               
|
| |  | Digital Set-Top Boxes (STBs). Digital STBs
    enable subscriber-based television through cable, terrestrial
    broadcast, digital subscriber line, or DSL, and satellite
    transmissions.                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Digital Video Recorders (DVRs). DVRs provide
    local hard disk memory storage and enable storage and playback
    of live video streams on a real-time basis. DVRs can be in the
    form of standalone players or be incorporated into digital STBs
    to enhance their functionality.                                                                                                                                                                                                                                                                                                                                 
|
| |  | Recordable DVD Players. Recordable DVD players add high
    quality video and audio recording capabilities to the DVD disc
    through the addition of a writable optical drive.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Consumer Digital Audio Players. Consumer digital audio
    players include multi-channel surround sound products with movie
    theater quality sound systems. Our chips incorporate this
    digital audio processor as components of a home entertainment
    system.                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Digital Amplifiers. Consumer video and audio players
    require an amplifier to boost the sound signal to drive
    loudspeakers in automobiles, homes and mobile devices. Our chips
    convert the digital sound into Pulse Width Modulation
    (PWM) digital pulses enabling them to be directly
    and digitally amplified without sacrificing sound quality while
    drastically reducing size and power requirements. Our digital
    amplifier chips interface directly with digital audio sources
    such as DVD and CD players, surround sound systems, audio
    receivers, boom boxes and televisions sets.
|
| |  | Camera Enabled Cellular Phones. Camera enabled cellular
    phones use a lens module made up of a lens, CMOS image sensor,
    housing and flex cable to enable cellular phones to have image
    capture and processor capabilities and display those images on
    the cell phone display or transmit them to someone else. Camera
    enabled cell phones may use either a stand-alone image processor
    chip or a broadband processor chip to process the image.                                                                                                                                                       



Our Solution




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| |   |                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our large workforce of engineers (over 50% of our employees),
    together with our team of over 100 sales and support personnel
    worldwide, is continually developing sophisticated solutions and
    enhancing feature sets custom tailored to our customers
    evolving needs;
|
| |  | We work closely with our customers to develop cost-effective
    design solutions incorporating our high-functionality chips that
    enable our customers to lower their total manufacturing cost;                                                                                   
|
| |  | We work closely with our suppliers to improve yields, ensure
    capacity and strengthen supply chain reliability, thereby
    continuously reducing the manufacturing cost of our products and
    improving the quality and reliability of our products; and                        
|
| |  | Our longstanding strategic relationships in Asia position us to
    capture additional business as consumer electronics
    manufacturing continues to grow in Asia.                                                                                                                  





| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our highly programmable chips offer a flexible architecture,
    allowing us to efficiently add new capabilities that address
    advances in entertainment technologies and enable our customers
    to accelerate their time to market;
|
| |  | Our digital processor chips offer a broad array of advanced
    features and functionality;                                                                                                                                              
|
| |  | Our MPEG2 and MPEG4 encoder chips offer very high video and
    audio recording quality for DVR, recordable DVD, and SD
    camcorder products;                                                                                          



Our Strategy






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Leverage Expertise Across Multiple Mass Market
    Applications. We intend to continue to focus on the Video
    and Digital Imaging market applications. We believe additional
    markets and applications will emerge as digital media technology
    and products converge. We plan to share and leverage our
    expertise in these technologies to strengthen and broaden our
    product offerings in existing markets, to expand into other
    digital consumer markets and to introduce new products into new
    markets that emerge. Past examples of such expansion include,
    digital media players, MP3 players, VCDs, boom boxes, audio
    receivers, digital television products, and cellular camera
    phones.

5



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Offer a Low-Cost Total Solution. Our engineers have
    significant system design expertise at the consumer product
    level. We design our chips to either work with lower-cost
    components or to decrease the number of components in our
    customers products to lower their total manufacturing
    cost. We also work in close collaboration with our customers in
    their product development processes to reduce the cost of our
    semiconductor products. By helping our customers design their
    products using our chips, we can lower their total bill of
    material. We believe this approach enables us to provide our
    customers with a low-cost total solution and drive up total
    demand by reducing the cost to consumer.
|
| | Leverage Our Relationships with Low-Cost OEMs and ODMs to
    Capture Additional Worldwide Market Share. We believe that
    consumer electronics companies will continue to move contract
    manufacturing to lower-cost manufacturers located in Asia. We
    are a leading supplier of video processor chips to OEMs and to
    ODMs located in Asia. Our customers in Asia manufacture and sell
    DVD and VCD players both as contract manufacturers for
    well-known brand labels and under their own brands.                                                                                                                                                                                                                                        
|
| | Expand Relationships with Leading Consumer Electronics
    Companies. We are increasing our sales efforts to, and
    actively pursuing key design wins with, leading consumer
    electronics companies located in Asia, Europe and South America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Employ Our Software Expertise to Develop New
    Technologies. More than 50% of our employees are engineers,
    a significant number of whom are software engineers. We have a
    diversified base of technologies and a strong track record for
    developing new technologies in-house. We intend to leverage our
    software expertise to continue to develop new technologies and
    add features to our products.                                                                                                                                                                                                                                                                                                                                    
|
| | Leverage Our Relationships with Large Suppliers to Be One of
    the Low-Cost Providers. We believe consumer electronics
    markets are so competitive and rapidly changing that a
    manufacturer of fabless semiconductor products must focus on
    being one of the low-cost providers of digital media chips in
    the world. To do so, our products must have a relatively small
    die size and achieve high yields throughout the manufacturing
    process. We utilize long-standing and close relationships with
    some of the largest third party fabrication companies and
    assemblers in the world. We are one of the larger customers of
    many of these companies.                                                                   
|
| | Pursue Acquisitions of Complementary and Advanced
    Technologies. We have in the past acquired and will continue
    to consider acquiring complementary technologies or product
    lines to enhance our own product offerings and to accelerate our
    time to market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Pursue Licenses of Complementary Technologies. We have in
    the past licensed and will continue to consider licensing
    complementary technologies or product lines to enhance our own
    product offerings and to accelerate our time to market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Leverage Our Proprietary Technology. Our chips are based
    on a programmable architecture that uses multiple processors
    working independently, which provides us with several advantages:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Multiple Processors. We believe our design approach of
    using multiple processors allows us to provide efficient,
    cost-effective solutions for our customers. We believe this
    design approach will allow us to develop digital entertainment
    processors that integrate multiple functions on a single chip in
    order to reduce cost and
    time-to-market while
    producing smaller products with reduced power consumptions.
|
| |  | Highly Programmable Chips. Our highly programmable chips
    enable us to add or modify features more quickly than
    competitors whose chips are less programmable. This
    programmability also enables us to tailor our chips to meet our
    customers specific needs by making minor modifications
    that allow our customers to enhance features and improve
    time-to-market with new
    products.                                 
|
| |  | Continuously Introduce New Products and Features To Drive
    Growth. We focus our research and development efforts on
    products and features we believe are going to drive demand in
    the marketplace for consumer electronic entertainment products.
    We work closely with our various                                                                                                                                                 

6



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| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |   | Original Design Manufacturers (ODMs) and Original
    Equipment Manufacturers (OEMs) customers to identify
    those products and features.
|
| |  | Specifically, in our Video business, we leverage the following
    technologies:                                                               



| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Single Chip DVD Decoder Solution. We are continuing to
    integrate DVD functionality, enhance the feature set and reduce
    the cost of our single-chip DVD player solution that integrates
    the front-end servo capability with the high performance
    back-end DVD processor. These chips target the low cost DVD
    player market and are intended to entice large volume
    manufacturers with an attractive selling price.



| |   |                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MPEG4 DVD Decoder Solutions. Our MPEG4 playback chips for
    the DVD market take advantage of MPEG4s greater
    compression rates, deliver multimedia content over broadband
    connectivity and increase the amount of multimedia content
    archived on a given amount of optical or magnetic storage.                                                                 
|
| |  | Codec Solutions for the Recordable DVD. We integrated our
    DVD encoder and decoder (codec) into a single chip
    for both DVR and recordable DVD players.                                                                                                                                                                                                               
|
| |  | Digital Amplifier Solution. We recently introduced our
    class-D multi-channel digital amplifier chip for home theater
    applications. The chip provides eight channels of high
    performance processing for digital audio amplification and is
    specifically designed to work with our video chips to provide a
    low-cost, totally digital DVD receiver solution.



Products




DVD Decoder Chips.


Video CD Chips.


7



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DVD Encoder Chips.


Image Sensor and Processor Chips.


Consumer Digital Audio Chips.


Communication Chips.


PC Audio Chips.


8



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|                         |            |                      |     |    |      |   |     |      |    |   |     |    |    |  
|------------------------ | ---------- | -------------------- | --- | -- | ---- | - | --- | ---- | -- | - | --- | -- | -- | -
|                         |            | Percentage of Net    |    
|                         |            | Revenues for Years   |    
|                         |            | Ended December 31,   |    
|                         |            |                      |    
|                         |            | 2005                 |     |    | 2004 |   |     | 2003 |   
|                         |            |                      |     |    |      |   |     |      |   
|Video business:          |            |                      |     |    |      |   |     |      |    |   |     |   
|                         | DVD        |                      |     | 55 | %    |   |     | 54   | %  |   |     | 40 | % 
|                         | VCD        |                      |     | 17 | %    |   |     | 27   | %  |   |     | 38 | % 
|                         | Recordable |                      |     | 2  | %    |   |     | 3    | %  |   |     | 6  | % 
|                         | Royalty    |                      |     | 11 | %    |   |     | 8    | %  |   |     | 3  | % 
|                         | Other      |                      |     | 3  | %    |   |     | 2    | %  |   |     | 5  | % 
|                         |            |                      |     |    |      |   |     |      |   
|                         |            | Total Video business |     |    | 88   | % |     |      | 94 | % |     |    | 92 | %
|Digital Imaging business |            |                      | 12  | %  |      |   | 6   | %    |    |   | 8   | % 
|                         |            |                      |     |    |      |   |     |      |   
|Total                    |            |                      | 100 | %  |      |   | 100 | %    |    |   | 100 | % 
|                         |            |                      |     |    |      |   |     |      |   



Technology and Research and Development












9



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Customers








Sales and Distribution










10



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Manufacturing






Competition










11



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Proprietary Technology








Backlog




Employees




12



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Available Information




Executive Officers of the Registrant




|                |  |     |    |  |          |                                                                           
|--------------- |  | --- | -- |  | -------- | --------------------------------------------------------------------------
|Name            |  | Age |    |  | Position
|                |  |     |    |  |         
|Fred S.L. Chan  |  |     | 59 |  |          | Chairman of the Board of Directors                                        
|Robert L. Blair |  |     | 58 |  |          | President, Chief Executive Officer and Director                           
|James B. Boyd   |  |     | 53 |  |          | Chief Financial Officer, Senior Vice President and Assistant
    Secretary

Fred S.L. Chan


Robert L. Blair


James B. Boyd




13



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|         |             
|-------- | ------------
|Item 1A. | Risk Factors



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









| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The timing and success of our new product introductions and
    those of our customers and competitors;                                                                                                        
|
| |  | The timely shipment of new products of our Video business,
    including the new Phoenix line of DVD products, an integrated
    servo DVD product and an integrated RF DVD product;                           
|
| |  | The timely shipment of new products of our Digital Imaging
    business, including our new 4T SOC 1.3 Megapixel sensor
    chip, our new 4T SOC 2.0 Megapixel sensor chip, and our new VGA
    SOC sensor chip;
|
| |  | The ability to obtain adequate foundry capacity and sources of
    raw materials;                                                                                                                              
|
| |  | The price, quality and performance of our products and the
    products of our competitors;                                                                                                                    
|
| |  | The emergence of new multimedia standards;                                                                                                                                                                     
|
| |  | The development of technical innovations;                                                                                                                                                                      
|
| |  | The rate at which our customers integrate our products into
    their products;                                                                                                                                
|
| |  | The number and nature of our competitors in a given
    market; and                                                                                                                                            
|
| |  | The protection of our intellectual property rights.                                                                                                                                                            



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



14



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





| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Charges related to the net realizable value of inventories
    and/or excess inventories;                                                                                           
|
| |  | Changes in demand or sales forecast for our products;                                                                                                                               
|
| |  | Changes in the mix of products sold and our revenue mix;                                                                                                                            
|
| |  | The timely implementation of customer-specific hardware and
    software requirements for specific design wins;                                                                     
|
| |  | Increasing pricing pressures and resulting reduction in the ASP
    of any or all of our products;                                                                                  
|
| |  | Availability and cost of foundry capacity;                                                                                                                                          
|
| |  | Gain or loss of significant customers;                                                                                                                                              
|
| |  | Seasonal customer demand;                                                                                                                                                           
|
| |  | The cyclical nature of the semiconductor industry;                                                                                                                                  
|
| |  | The timing of our and our competitors new product
    announcements and introductions and the market acceptance of new
    or enhanced versions of our and our customers products;
|
| |  | The timing of significant customer orders;                                                                                                                                          
|
| |  | Charges related to the impairment of other intangible assets;                                                                                                                       
|
| |  | Loss of key employees which could impact sales or the pace of
    product development;                                                                                              
|
| |  | The turns basis of most of our orders, which makes
    backlog a poor indicator of the next quarters revenue;                                                                    
|
| |  | The potential for large adjustments due to resolution of
    multi-year tax examinations;                                                                                           
|
| |  | The lead time we normally receive for our orders, which makes it
    difficult to predict sales until the end of the quarter;                                                       
|
| |  | Availability and cost of raw materials;                                                                                                                                             
|
| |  | Significant increases in expenses associated with the expansion
    of operations; and                                                                                              
|
| |  | A shift in manufacturing of consumer electronic products away
    from Asia.                                                                                                        



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



15



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





| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The failure of the acquired products or technology to attain
    market acceptance, which may result from our inability to
    leverage such products and technology successfully;
|
| |  | The failure to integrate acquired products and business with
    existing products and corporate culture;                                                                         
|
| |  | The inability to retain key employees from the acquired company;                                                                                                                  
|
| |  | Diversion of management attention from other business concerns;                                                                                                                   
|
| |  | The potential for large write-offs of intangible assets;                                                                                                                          
|
| |  | Issuances of equity securities dilutive to our existing
    shareholders;                                                                                                         
|
| |  | The incurrence of substantial debt and assumption of unknown
    liabilities; and                                                                                                 
|
| |  | Our ability to properly access and maintain an effective
    internal control environment over an acquired company in order
    to comply with public reporting requirements.     



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





16



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| |                                                                               
| | ------------------------------------------------------------------------------
| | Our sales may fluctuate due to seasonality and changes in
    customer demand.





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





| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | Anticipation of market trends;                                                                                               
|
| |  | Timely completion of design, development, and testing of both
    the hardware and software for each product;                
|
| |  | Timely completion of customer specific design, development and
    testing of both hardware and software for each design win;
|
| |  | Market acceptance of our products and the products of our
    customers;                                                     
|
| |  | Offering new products at competitive prices;                                                                                 
|
| |  | Meeting performance, quality and functionality requirements of
    customers and OEMs; and                                   
|
| |  | Meeting the timing, volume and price requirements of customers
    and OEMs.                                                 



17



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| |                                                              
| | -------------------------------------------------------------
| | Our products are subject to increasing pricing
    pressures.





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



video-on




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





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





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





| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may continue to expand into new businesses and product
    lines in which there may be a concentrated customer base and for
    which we may be required to purchase custom inventories to meet
    our customers needs.





19



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| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we are dependent upon a limited number of
    suppliers, we could experience delivery disruptions or
    unexpected product cost increases.







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







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





| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | Unexpected changes in legislative or regulatory requirements and
    related compliance problems;
|
| |  | Political, social and economic instability;                                                      

20



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| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lack of adequate protection of our intellectual property rights;                                                                                                                           
|
| |  | Changes in diplomatic and trade relationships, including changes
    in most favored nations trading status;                                                                               
|
| |  | Tariffs, quotas and other trade barriers and restrictions;                                                                                                                                 
|
| |  | Longer payment cycles, greater difficulties in accounts
    receivable collection and greater difficulties in ascertaining
    the credit of our customers and potential business partners;
|
| |  | Potentially adverse tax consequences, including withholding in
    connection with the repatriation of earnings and restrictions on
    the repatriation of earnings;                      
|
| |  | Difficulties in obtaining export licenses for technologies;                                                                                                                                
|
| |  | Language and other cultural differences, which may inhibit our
    sales and marketing efforts and create internal communication
    problems among our U.S. and foreign counterparts; and 
|
| |  | Currency exchange risks.                                                                                                                                                                   



| |                                                                
| | ---------------------------------------------------------------
| | Our products are manufactured by independent third
    parties.





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







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





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



21



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





| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need additional funds to execute our business plan,
    and if we are unable to obtain such funds, we may not be able to
    expand our business, and if we do raise such funds, your
    ownership in ESS may be subject to dilution.





| |                                                                                  
| | ---------------------------------------------------------------------------------
| | The value of our common stock may be adversely affected by
    market volatility.





| |   |                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Future announcements concerning us, our competitors or our
    principal customers, such as quarterly operating results,
    changes in earnings estimates by analysts, technological
    innovations, new product introductions, governmental
    regulations, or litigation;
|
| |  | Changes in accounting rules, particularly those related to the
    expensing of stock options;                                                                                                                                                                                
|
| |  | The liquidity within the market for our common stock;                                                                                                                                                                                                                         
|
| |  | Sales by our officers, directors, other insiders and large
    shareholders;                                                                                                                                                                                                  
|
| |  | Investor perceptions concerning the prospects of our business
    and the semiconductor industry;                                                                                                                                                                             
|
| |  | Market conditions and investor sentiment affecting market prices
    of equity securities of high technology companies; and                                                                                                                                                   
|
| |  | General economic, political and market conditions, such as
    recessions or international currency fluctuations.                                                                                                                                                             



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are incurring additional costs and devoting more
    management resources to comply with increasing regulation of
    corporate governance and disclosure.



22



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##### Table of Contents







| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to maintain effective internal controls could have
    a material adverse effect on our business, operating results and
    stock price.

10-K.




| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in stock option accounting rules may adversely
    impact our reported operating results prepared in accordance
    with generally accepted accounting principles, our stock price
    and our competitiveness in the employee marketplace.



. , . s


23



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##### Table of Contents










|         |                         
|-------- | ------------------------
|Item 1B. | Unresolved Staff Comment








|        |           
|------- | ----------
|Item 2. | Properties

square-foot square-foot











|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





24



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



25



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##### Table of Contents






PART II







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



|             |                                        |      |   |       |     |  |   |       | 
|------------ | -------------------------------------- | ---- | - | ----- | --- |  | - | ----- | 
|             |                                        | High |   |       | Low | 
|             |                                        |      |   |       |     | 
|Fiscal 2005: |                                        |      |   |       |     |  |   |      
|             | First Quarter ended March 31, 2005     |      | $ | 6.85  |     |  | $ | 5.05  | 
|             | Second Quarter ended June 30, 2005     |      | $ | 5.26  |     |  | $ | 3.43  | 
|             | Third Quarter ended September 30, 2005 |      | $ | 4.83  |     |  | $ | 3.36  | 
|             | Fourth Quarter ended December 31, 2005 |      | $ | 3.73  |     |  | $ | 2.74  | 
|Fiscal 2004: |                                        |      |   |       |     |  |   |      
|             | First Quarter ended March 31, 2004     |      | $ | 19.23 |     |  | $ | 12.40 | 
|             | Second Quarter ended June 30, 2004     |      | $ | 15.90 |     |  | $ | 10.28 | 
|             | Third Quarter ended September 30, 2004 |      | $ | 9.88  |     |  | $ | 6.35  | 
|             | Fourth Quarter ended December 31, 2004 |      | $ | 7.75  |     |  | $ | 6.54  | 



ISSUER PURCHASES OF EQUITY SECURITIES


|                                     |  |                  |         |               |          |                     |                  |           |                    |                  |                |  |  |  |           | 
|------------------------------------ |  | ---------------- | ------- | ------------- | -------- | ------------------- | ---------------- | --------- | ------------------ | ---------------- | -------------- |  |  |  | --------- | 
|                                     |  |                  |         |               |          | Total Number of     |                  |           | Maximum Number     |                 
|                                     |  |                  |         |               |          | Shares Purchased as |                  |           | of Shares that may |                 
|                                     |  |                  |         | Average Price |          |                     | Part of Publicly |           |                    | yet be Purchased |               
|                                     |  | Total Number of  |         |               | Paid per |                     |                  | Announced |                    |                  | Under          | 
|Period                               |  | Shares Purchased |         |               | Share    |                     |                  | Programs  |                    |                  | Programs(1)(2) | 
|                                     |  |                  |         |               |          |                     |                  |           |                    |                  |                | 
|October 1, 2005  October 31, 2005   |  |                  |        |               |          |                     |                 |           |                    |                  |               |  |  |  | 5,202,000 | 
|November 1, 2005  November 30, 2005 |  |                  |        |               |          |                     |                 |           |                    |                  |               |  |  |  | 5,202,000 | 
|December 1, 2005  December 31, 2005 |  |                  | 329,300 |               |          |                     | 3.54             |           |                    |                  | 329,300        |  |  |  | 4,872,700 | 
|                                     |  |                  |         |               |          |                     |                  |           |                    |                  |                | 
|Total                                |  |                  | 329,300 |               |          |                     | 3.54             |           |                    |                  | 329,300        |  |  |  |           | 
|                                     |  |                  |         |               |          |                     |                  |           |                    |                  |                | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We announced on August 8, 2002 that our Board of Directors
    authorized us to repurchase up to 5.0 million shares of our
    common stock. During the quarter ended December 31, 2005,
    we purchased 202,000 shares under this program. As of
    December 31, 2005, no shares remain available for
    repurchase under this program.                                                                                     
|   
|(2) | We announced on April 16, 2003 that our Board of Directors
    authorized us to repurchase up to 5.0 million shares of our
    common stock. During the quarter ended December 31, 2005,
    we purchased 127,300 shares under this program. As of
    December 31, 2005, we had approximately 4.9 million
    shares remaining available for repurchase under this program.
    There is no stated expiration for this program.

Dividend Policy






26



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





|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |         |         |      |   |         |         |       |  
|--------------------------------------------------- | -------------------------------------------- | ------------------------------------- | ------- | ------- | ----- | - | ------- | ------- | ----- | - | ------- | ------- | ---- | ---- | ------- | ------- | ---- | - | ------- | ------- | ----- | -
|                                                    |                                              | Years Ended December 31,              |        
|                                                    |                                              |                                       |        
|                                                    |                                              | 2005                                  |         |         | 2004  |   |         | 2003    |       |   | 2002    |         |      | 2001 |        
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|                                                    |                                              | (In thousands, except per share data) |        
|Statement of Operations Data:                       |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |         |         |      |   |         |        
|Net revenues:                                       |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |         |         |      |   |         |        
|                                                    | Product                                      |                                       | $       | 161,921 |       |   | $       | 237,278 |       |   | $       | 190,273 |      |      | $       | 273,442 |      |   | $       | 271,380 |      
|                                                    | Royalty                                      |                                       |         | 20,000  |       |   |         | 20,000  |       |   |         | 5,000   |      |      |         |        |      |   |         |        |      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|Total net revenues                                  |                                              |                                       | 181,921 |         |       |   | 257,278 |         |       |   | 195,273 |         |      |      | 273,442 |         |      |   | 271,380 |        
|Cost of product revenues                            |                                              |                                       | 169,312 |         |       |   | 219,397 |         |       |   | 132,690 |         |      |      | 176,454 |         |      |   | 180,231 |        
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|                                                    | Gross profit                                 |                                       |         | 12,609  |       |   |         | 37,881  |       |   |         | 62,583  |      |      |         | 96,988  |      |   |         | 91,149  |      
|Operating expenses:                                 |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |         |         |      |   |         |        
|                                                    | Research and development                     |                                       |         | 33,983  |       |   |         | 37,467  |       |   |         | 33,184  |      |      |         | 26,964  |      |   |         | 27,957  |      
|                                                    | Selling, general and administrative          |                                       |         | 34,973  |       |   |         | 41,056  |       |   |         | 31,761  |      |      |         | 34,170  |      |   |         | 40,689  |      
|                                                    | In-process research and development(1)       |                                       |         |        |       |   |         |        |       |   |         | 2,690   |      |      |         |        |      |   |         |        |      
|                                                    | Impairment of goodwill and intangible assets |                                       |         | 42,743  |       |   |         |        |       |   |         |        |      |      |         |        |      |   |         |        |      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|Operating income (loss)                             |                                              |                                       | (99,090 | )       |       |   | (40,642 | )       |       |   | (5,052  | )       |      |      | 35,854  |         |      |   | 22,503  |        
|Non-operating income (loss), net                    |                                              |                                       | 1,316   |         |       |   | 3,360   |         |       |   | 45,946  |         |      |      | 2,407   |         |      |   | (18,780 | )      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|Income (loss) before income taxes                   |                                              |                                       | (97,774 | )       |       |   | (37,282 | )       |       |   | 40,894  |         |      |      | 38,261  |         |      |   | 3,723   |        
|Provision for (benefit from) income taxes           |                                              |                                       | 1,779   |         |       |   | (1,732  | )       |       |   | 15,603  |         |      |      | 984     |         |      |   | (7,262  | )      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|Net income (loss) from continuing operations        |                                              |                                       | (99,553 | )       |       |   | (35,550 | )       |       |   | 25,291  |         |      |      | 37,277  |         |      |   | 10,985  |        
|Discontinued operation, net of minority interest(2) |                                              |                                       |        |         |       |   |        |         |       |   |        |         |      |      |        |         |      |   | (12,802 | )      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|Net income (loss)                                   |                                              | $                                     | (99,553 | )       |       | $ | (35,550 | )       |       | $ | 25,291  |         |      | $    | 37,277  |         |      | $ | (1,817  | )      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|Net income (loss) per share:                        |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |         |         |      |   |         |        
|                                                    | Basic                                        |                                       |         |         |       |   |         |         |       |   |         |         |      |      |         |         |      |   |         |         |      
|                                                    |                                              | Continuing operations                 |         | $       | (2.50 | ) |         | $       | (0.90 | ) |         | $       | 0.64 |      |         | $       | 0.85 |   |         | $       | 0.26  |  
|                                                    |                                              | Discontinued operations               |         |         |      |   |         |         |      |   |         |         |     |      |         |         |     |   |         |         | (0.30 | )
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|                                                    |                                              | $                                     | (2.50   | )       |       | $ | (0.90   | )       |       | $ | 0.64    |         |      | $    | 0.85    |         |      | $ | (0.04   | )      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|                                                    | Diluted                                      |                                       |         |         |       |   |         |         |       |   |         |         |      |      |         |         |      |   |         |         |      
|                                                    |                                              | Continuing operations                 |         | $       | (2.50 | ) |         | $       | (0.90 | ) |         | $       | 0.61 |      |         | $       | 0.80 |   |         | $       | 0.24  |  
|                                                    |                                              | Discontinued operations               |         |         |      |   |         |         |      |   |         |         |     |      |         |         |     |   |         |         | (0.28 | )
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|                                                    |                                              | $                                     | (2.50   | )       |       | $ | (0.90   | )       |       | $ | 0.61    |         |      | $    | 0.80    |         |      | $ | (0.04   | )      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|Shares used in calculating net income per share:    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |         |         |      |   |         |        
|                                                    | Basic                                        |                                       |         | 39,781  |       |   |         | 39,476  |       |   |         | 39,517  |      |      |         | 44,044  |      |   |         | 42,274  |      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        
|                                                    | Diluted                                      |                                       |         | 39,781  |       |   |         | 39,476  |       |   |         | 41,238  |      |      |         | 46,731  |      |   |         | 45,262  |      
|                                                    |                                              |                                       |         |         |       |   |         |         |       |   |         |         |      |      |        

27



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|                                                                       |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|---------------------------------------------------------------------- |  | ------------------------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                                                       |  | Years Ended December 31,              |        
|                                                                       |  |                                       |        
|                                                                       |  | 2005                                  |         |  | 2004 |   |         | 2003 |  |   | 2002    |  |  | 2001 |        
|                                                                       |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                                                       |  | (In thousands, except per share data) |        
|Balance Sheet Data:                                                    |  |                                       |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|Cash, cash equivalents and short-term investments                      |  | $                                     | 99,722  |  |      | $ | 126,688 |      |  | $ | 164,846 |  |  | $    | 199,102 |  |  | $ | 129,034 | 
|Working capital excluding net assets of discontinued
    operations(2) |  | $                                     | 58,718  |  |      | $ | 107,305 |      |  | $ | 145,221 |  |  | $    | 210,001 |  |  | $ | 156,966 | 
|Total assets                                                           |  | $                                     | 171,841 |  |      | $ | 283,744 |      |  | $ | 352,593 |  |  | $    | 281,602 |  |  | $ | 237,965 | 
|Current liabilities                                                    |  | $                                     | 78,507  |  |      | $ | 90,384  |      |  | $ | 113,804 |  |  | $    | 44,558  |  |  | $ | 54,056  | 
|Total shareholders equity                                             |  | $                                     | 93,334  |  |      | $ | 192,912 |      |  | $ | 227,081 |  |  | $    | 229,368 |  |  | $ | 176,978 | 






|    |                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 3, Significant Business Combinations,
    to the consolidated financial statements in Item 8 of this
    Report.                                                                                                                               
|   
|(2) | Effective as of August 21, 2001, we spun off Vialta by
    distributing to our shareholders all the Vialta common stock
    then held by us. For the year ended 2001, Vialta is accounted
    for as a discontinued operation in our financial statements.






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



Executive Overview








28



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##### Table of Contents











Critical Accounting Policies and Estimates




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



29



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##### Table of Contents







| |   |                                     
| | - | ------------------------------------
| |  | Revenue Recognition                 
|
| |  | Inventories and Inventory Reserves  
|
| |  | Goodwill and Other Intangible Assets
|
| |  | Impairment of Long-lived Assets     
|
| |  | Income Taxes                        
|
| |  | Legal Contingencies                 





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









| |                                   
| | ----------------------------------
| | Inventories and Inventory Reserves

work-in first-in,






30



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##### Table of Contents







| |                                                                          
| | -------------------------------------------------------------------------
| | Impairment of Goodwill, Intangible Assets and Other
    Long-Lived Assets





| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Significant decrease in the market value of an asset.                                                                                                                                      
|
| |  | Significant changes in the extent or manner for which the asset
    is being used or in its physical condition.                                                                            
|
| |  | A significant change, delay or departure in our business
    strategy related to the asset.                                                                                                
|
| |  | Significant negative changes in the business climate, industry
    or economic conditions.                                                                                                 
|
| |  | Current period operating losses or negative cash flow combined
    with a history of similar losses or a forecast that indicates
    continuing losses associated with the use of an asset.





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







| |                    
| | -------------------
| | Legal Contingencies



31



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##### Table of Contents





Recent Accounting Pronouncements


, s












32



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##### Table of Contents







Comparison of Year ended December 31, 2005 and
December 31, 2004




| |                      
| | ---------------------
| | Results of Operations



|                                          |                                              |                                        |         |        |                |  |       |             |  |   |         |        |  |  |       |      |  |  |        |       |   
|----------------------------------------- | -------------------------------------------- | -------------------------------------- | ------- | ------ | -------------- |  | ----- | ----------- |  | - | ------- | ------ |  |  | ----- | ---- |  |  | ------ | ----- | --
|                                          |                                              | Year Ended December 31,                |         |        | 2005 Over 2004 | 
|                                          |                                              |                                        |         |        |                | 
|                                          |                                              | 2005                                   |         |        | 2004           |  |       | % of Change | 
|                                          |                                              |                                        |         |        |                |  |       |             | 
|                                          |                                              | (In thousands, except percentage data) |        
|Net revenues                              |                                              | $                                      | 181,921 |        |                |  | 100.0 | %           |  | $ | 257,278 |        |  |  | 100.0 | %    |  |  | (29.3  | )%   
|Cost of product revenues                  |                                              |                                        | 169,312 |        |                |  | 93.1  |             |  |   | 219,397 |        |  |  | 85.3  |      |  |  | (22.8  | )%   
|                                          |                                              |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      
|                                          | Gross profit                                 |                                        |         | 12,609 |                |  |       | 6.9         |  |   |         | 37,881 |  |  |       | 14.7 |  |  |        | (66.7 | )%
|Operating expenses:                       |                                              |                                        |         |        |                |  |       |             |  |   |         |        |  |  |       |      |  |  |        |      
|                                          | Research and development                     |                                        |         | 33,983 |                |  |       | 18.6        |  |   |         | 37,467 |  |  |       | 14.5 |  |  |        | (9.3  | )%
|                                          | Selling, general and administrative          |                                        |         | 34,973 |                |  |       | 19.2        |  |   |         | 41,056 |  |  |       | 16.0 |  |  |        | (14.8 | )%
|                                          | Impairment of goodwill and intangible assets |                                        |         | 42,743 |                |  |       | 23.5        |  |   |         |       |  |  |       |     |  |  |        | n/a   |   
|                                          |                                              |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      
|Operating loss                            |                                              |                                        | (99,090 | )      |                |  | (54.4 | )           |  |   | (40,642 | )      |  |  | (15.8 | )    |  |  | 143.8  | %    
|Non-operating income, net                 |                                              |                                        | 1,316   |        |                |  | 0.7   |             |  |   | 3,360   |        |  |  | 1.3   |      |  |  | (60.8  | )%   
|                                          |                                              |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      
|Loss before income taxes                  |                                              |                                        | (97,774 | )      |                |  | (53.7 | )           |  |   | (37,282 | )      |  |  | (14.5 | )    |  |  | 162.3  | %    
|Provision for (benefit from) income taxes |                                              |                                        | 1,779   |        |                |  | 1.0   |             |  |   | (1,732  | )      |  |  | (0.7  | )    |  |  | (202.7 | )%   
|                                          |                                              |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      
|Net loss                                  |                                              | $                                      | (99,553 | )      |                |  | (54.7 | )%          |  | $ | (35,550 | )      |  |  | (13.8 | )%   |  |  | 180.0  | %    
|                                          |                                              |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      





| |             
| | ------------
| | Net Revenues



33



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|                         |            |                      |     |    |                |   |     |             |    |   |       |       |       |   
|------------------------ | ---------- | -------------------- | --- | -- | -------------- | - | --- | ----------- | -- | - | ----- | ----- | ----- | --
|                         |            | Year Ended           |     |    |               
|                         |            | December 31,         |     |    | 2005 Over 2004 |  
|                         |            |                      |     |    |                |  
|                         |            | 2005                 |     |    | 2004           |   |     | % of Change |   
|                         |            |                      |     |    |                |   |     |             |   
|Video business:          |            |                      |     |    |                |   |     |             |    |   |       |      
|                         | DVD        |                      |     | 55 | %              |   |     | 54          | %  |   |       | (27.6 | )%   
|                         | VCD        |                      |     | 17 | %              |   |     | 27          | %  |   |       | (54.8 | )%   
|                         | Recordable |                      |     | 2  | %              |   |     | 3           | %  |   |       | (57.1 | )%   
|                         | Royalty    |                      |     | 11 | %              |   |     | 8           | %  |   |       |      |      
|                         | Other      |                      |     | 3  | %              |   |     | 2           | %  |   |       | (34.7 | )%   
|                         |            |                      |     |    |                |   |     |             |   
|                         |            | Total Video business |     |    | 88             | % |     |             | 94 | % |       |       | (34.2 | )%
|Digital Imaging business |            |                      | 12  | %  |                |   | 6   | %           |    |   | 50.3  | %    
|                         |            |                      |     |    |                |   |     |             |   
|Total                    |            |                      | 100 | %  |                |   | 100 | %           |    |   | (29.3 | )%   
|                         |            |                      |     |    |                |   |     |             |   















34



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| |             
| | ------------
| | Gross Profit







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





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





| |                                             
| | --------------------------------------------
| | Impairment of Goodwill and Intangible Assets



35



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| |                          
| | -------------------------
| | Non-operating Income, Net





| |                                          
| | -----------------------------------------
| | Provision for (Benefit from) Income Taxes







Comparison of Twelve Months ended December 31, 2004 and
December 31, 2003




| |                      
| | ---------------------
| | Results of Operations



|                                             |                                     |                                        |         |        |                |  |       |             |  |   |         |        |  |  |       |      |  |  |        |       |   
|-------------------------------------------- | ----------------------------------- | -------------------------------------- | ------- | ------ | -------------- |  | ----- | ----------- |  | - | ------- | ------ |  |  | ----- | ---- |  |  | ------ | ----- | --
|                                             |                                     | Year Ended December 31,                |         |        | 2004 Over 2003 | 
|                                             |                                     |                                        |         |        |                | 
|                                             |                                     | 2004                                   |         |        | 2003           |  |       | % of Change | 
|                                             |                                     |                                        |         |        |                |  |       |             | 
|                                             |                                     | (In thousands, except percentage data) |        
|Net revenues                                 |                                     | $                                      | 257,278 |        |                |  | 100.0 | %           |  | $ | 195,273 |        |  |  | 100.0 | %    |  |  | 31.8   | %    
|Cost of product revenues                     |                                     |                                        | 219,397 |        |                |  | 85.3  |             |  |   | 132,690 |        |  |  | 68.0  |      |  |  | 65.3   | %    
|                                             |                                     |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      
|                                             | Gross profit                        |                                        |         | 37,881 |                |  |       | 14.7        |  |   |         | 62,583 |  |  |       | 32.0 |  |  |        | (39.5 | )%
|Operating expenses:                          |                                     |                                        |         |        |                |  |       |             |  |   |         |        |  |  |       |      |  |  |        |      
|                                             | Research and development            |                                        |         | 37,467 |                |  |       | 14.5        |  |   |         | 33,184 |  |  |       | 17.0 |  |  |        | 12.9  | % 
|                                             | In-process research and development |                                        |         |       |                |  |       |            |  |   |         | 2,690  |  |  |       | 1.4  |  |  |        | n/a   |   
|                                             | Selling, general and administrative |                                        |         | 41,056 |                |  |       | 16.0        |  |   |         | 31,761 |  |  |       | 16.2 |  |  |        | 29.3  | % 
|                                             |                                     |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      
|Operating loss                               |                                     |                                        | (40,642 | )      |                |  | (15.8 | )           |  |   | (5,052  | )      |  |  | (2.6  | )    |  |  | 704.5  | %    
|Non-operating income, net                    |                                     |                                        | 3,360   |        |                |  | 1.3   |             |  |   | 45,946  |        |  |  | 23.5  |      |  |  | (92.7  | )%   
|                                             |                                     |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      
|Income (loss) before income taxes            |                                     |                                        | (37,282 | )      |                |  | (14.5 | )           |  |   | 40,894  |        |  |  | 20.9  |      |  |  | (191.2 | )%   
|Provision for (benefit from) income taxes    |                                     |                                        | (1,732  | )      |                |  | (0.7  | )           |  |   | 15,603  |        |  |  | 8.0   |      |  |  | (111.1 | )%   
|                                             |                                     |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      
|Net income (loss) from continuing operations |                                     | $                                      | (35,550 | )      |                |  | (13.8 | )%          |  | $ | 25,291  |        |  |  | 12.9  | %    |  |  | (240.6 | )%   
|                                             |                                     |                                        |         |        |                |  |       |             |  |   |         |        |  |  |      



36



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| |             
| | ------------
| | Net Revenues





|                         |            |                      |     |    |           |   |     |             |    |   |      |       |      |  
|------------------------ | ---------- | -------------------- | --- | -- | --------- | - | --- | ----------- | -- | - | ---- | ----- | ---- | -
|                         |            | Year Ended           |     |    | 2004 Over |  
|                         |            | December 31,         |     |    | 2003      |  
|                         |            |                      |     |    |           |  
|                         |            | 2004                 |     |    | 2003      |   |     | % of Change |   
|                         |            |                      |     |    |           |   |     |             |   
|Video business:          |            |                      |     |    |           |   |     |             |    |   |      |      
|                         | DVD        |                      |     | 54 | %         |   |     | 40          | %  |   |      | 76.8  | %   
|                         | VCD        |                      |     | 27 | %         |   |     | 38          | %  |   |      | (6.8  | )%  
|                         | Recordable |                      |     | 3  | %         |   |     | 6           | %  |   |      | (41.7 | )%  
|                         | Royalty    |                      |     | 8  | %         |   |     | 3           | %  |   |      | 300.0 | %   
|                         | Other      |                      |     | 2  | %         |   |     | 5           | %  |   |      | (31.4 | )%  
|                         |            |                      |     |    |           |   |     |             |   
|                         |            | Total Video business |     |    | 94        | % |     |             | 92 | % |      |       | 34.1 | %
|Digital Imaging business |            |                      | 6   | %  |           |   | 8   | %           |    |   | 2.1  | %    
|                         |            |                      |     |    |           |   |     |             |   
|Total                    |            |                      | 100 | %  |           |   | 100 | %           |    |   | 31.8 | %    
|                         |            |                      |     |    |           |   |     |             |   















37



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##### Table of Contents









| |             
| | ------------
| | Gross Profit





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





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





| |                                    
| | -----------------------------------
| | In-Process Research and Development





| |                          
| | -------------------------
| | Non-operating Income, Net



38



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| |                                          
| | -----------------------------------------
| | Provision for (Benefit from) Income Taxes







| |                                
| | -------------------------------
| | Liquidity and Capital Resources









39



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| |                                                           
| | ----------------------------------------------------------
| | Contractual Obligations, Commitments and
    Contingencies



|                            |  |                        |        |           |        |   |        |           |           |   |           |  |  |         |    |  |  |  |   | 
|--------------------------- |  | ---------------------- | ------ | --------- | ------ | - | ------ | --------- | --------- | - | --------- |  |  | ------- | -- |  |  |  | - | 
|                            |  | Payment Due by Periods |       
|                            |  |                        |       
|                            |  |                        |        | Less than |        |   |        |           | More than |  
|Contractual Obligations     |  | Total                  |        |           | 1 Year |   |        | 1-3 Years |           |   | 3-5 Years |  |  | 5 Years |   
|                            |  |                        |        |           |        |   |        |           |           |   |           |  |  |         |   
|                            |  | (In thousands)         |       
|Operating lease obligations |  | $                      | 3,286  |           |        | $ | 2,795  |           |           | $ | 475       |  |  | $       | 16 |  |  |  |  | 
|Purchase order commitments  |  |                        | 24,886 |           |        |   | 24,886 |           |           |   |          |  |  |         |   |  |  |  |  | 
|                            |  |                        |        |           |        |   |        |           |           |   |           |  |  |         |   
|Total                       |  | $                      | 28,172 |           |        | $ | 27,681 |           |           | $ | 475       |  |  | $       | 16 |  |  |  |  | 
|                            |  |                        |        |           |        |   |        |           |           |   |           |  |  |         |   





40



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| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk



Foreign Exchange Risks




Interest Rate Risks




Investment Risk




start-up


41



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data



| |    |  |  |                                                                                                              |  |  |    | 
| | -- |  |  | ------------------------------------------------------------------------------------------------------------ |  |  | -- | 
| |    |  |  | Managements Report on Internal
    Control over Financial Reporting                                         |  |  | 43 | 
| |    |  |  | Report of Independent Registered Public
    Accounting Firm                                                  |  |  | 44 | 
| | 1. |  |  | Financial Statements:                                                                                        |  |  |    | 
| |    |  |  | Consolidated Balance Sheets as of
    December 31, 2005 and 2004                                             |  |  | 46 | 
| |    |  |  | Consolidated Statements of Operations for
    the years ended December 31, 2005, 2004 and 2003               |  |  | 47 | 
| |    |  |  | Consolidated Statements of
    Shareholders Equity for the years ended December 31,
    2005, 2004 and 2003 |  |  | 48 | 
| |    |  |  | Consolidated Statements of Cash Flows for
    the years ended December 31, 2005, 2004 and 2003               |  |  | 49 | 
| |    |  |  | Notes to Consolidated Financial
    Statements                                                               |  |  | 50 | 
| | 2. |  |  | Supplementary Data:                                                                                          |  |  |    | 
| |    |  |  | Selected Quarterly Financial Data                                                                            |  |  | 78 | 
| | 3. |  |  | Financial statement schedule:                                                                                |  |  |    | 
| |    |  |  | Valuation and Qualifying Accounts for each
    of the three years ended December 31, 2005, 2004 and
    2003 |  |  | 79 | 

42



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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING


13a-15(f)


Internal Control  Integrated
Framework




|    |  |                                       |  |     |  |                                                      
|--- |  | ------------------------------------- |  | --- |  | -----------------------------------------------------
|By: |  | /s/ ROBERT L. BLAIR                   |  | By: |  | /s/ JAMES B. BOYD                                    
|    |  |                                       |  |     |  |                                                      
|    |  | ROBERT L. BLAIR                       |  |     |  | JAMES B. BOYD                                        
|    |  | President and Chief Executive Officer |  |     |  | Senior Vice President and
    Chief Financial Officer



43



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Consolidated financial statements and financial statement
schedule




Internal control over financial reporting


Internal Control  Integrated Framework Internal Control 
Integrated Framework




44



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45



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|   |                      
|-- | ---------------------
|1. | Financial Statements:

ESS TECHNOLOGY, INC.





CONSOLIDATED BALANCE SHEETS


|                                              |                                                                                                                                                            |                                            |         |         |         |   |        |         |         | 
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                              |                                                                                                                                                            | December 31,                               |        
|                                              |                                                                                                                                                            |                                            |        
|                                              |                                                                                                                                                            | 2005                                       |         |         | 2004    |  
|                                              |                                                                                                                                                            |                                            |         |         |         |  
|                                              |                                                                                                                                                            | (In thousands)                             |        
|ASSETS                                       
|Cash and cash equivalents                     |                                                                                                                                                            | $                                          | 68,630  |         |         | $ | 41,527 |        
|Short-term investments                        |                                                                                                                                                            |                                            | 31,092  |         |         |   | 85,161 |        
|Accounts receivable, net                      |                                                                                                                                                            |                                            | 14,990  |         |         |   | 21,094 |        
|Other receivables                             |                                                                                                                                                            |                                            | 5,795   |         |         |   | 362    |        
|Inventory                                     |                                                                                                                                                            |                                            | 12,477  |         |         |   | 45,669 |        
|Prepaid expenses and other assets             |                                                                                                                                                            |                                            | 4,241   |         |         |   | 3,876  |        
|                                              |                                                                                                                                                            |                                            |         |         |         |  
|                                              |                                                                                                                                                            | Total current assets                       |         |         | 137,225 |   |        |         | 197,689 | 
|Property, plant and equipment, net            |                                                                                                                                                            |                                            | 21,133  |         |         |   | 23,009 |        
|Goodwill                                      |                                                                                                                                                            |                                            |        |         |         |   | 43,391 |        
|Other intangible assets, net                  |                                                                                                                                                            |                                            | 795     |         |         |   | 6,414  |        
|Other assets                                  |                                                                                                                                                            |                                            | 12,688  |         |         |   | 13,241 |        
|                                              |                                                                                                                                                            |                                            |         |         |         |  
|                                              |                                                                                                                                                            | Total assets                               |         | $       | 171,841 |   |        | $       | 283,744 | 
|                                              |                                                                                                                                                            |                                            |         |         |         |  
|                                             
|LIABILITIES AND SHAREHOLDERS EQUITY         
|Accounts payable and accrued expenses         |                                                                                                                                                            | $                                          | 35,916  |         |         | $ | 50,646 |        
|Income tax payable and deferred income taxes  |                                                                                                                                                            |                                            | 42,591  |         |         |   | 39,738 |        
|                                              |                                                                                                                                                            |                                            |         |         |         |  
|                                              |                                                                                                                                                            | Total current liabilities                  |         |         | 78,507  |   |        |         | 90,384  | 
|Non-current deferred tax liability            |                                                                                                                                                            |                                            |        |         |         |   | 448    |        
|                                              |                                                                                                                                                            |                                            |         |         |         |  
|                                              |                                                                                                                                                            | Total liabilities                          |         |         | 78,507  |   |        |         | 90,832  | 
|                                              |                                                                                                                                                            |                                            |         |         |         |  
|Commitments and contingencies (Note 14)       |                                                                                                                                                            |                                            |         |         |         |   |        |        
|Shareholders equity:                         |                                                                                                                                                            |                                            |         |         |         |   |        |        
|                                              | Preferred stock, no par value, 10,000 shares authorized;
    none issued and outstanding                                                                   |                                            |         |        |         |   |        |        |        
|                                              | Common stock, no par value, 100,000 shares authorized;
    39,564 and 39,681 shares issued and outstanding at
    December 31, 2005 and 2004, respectively |                                            |         | 177,545 |         |   |        | 178,030 |        
|Accumulated other comprehensive income (loss) |                                                                                                                                                            |                                            | 286     |         |         |   | (174   | )      
|Retained earnings (accumulated deficit)       |                                                                                                                                                            |                                            | (84,497 | )       |         |   | 15,056 |        
|                                              |                                                                                                                                                            |                                            |         |         |         |  
|                                              |                                                                                                                                                            | Total shareholders equity                 |         |         | 93,334  |   |        |         | 192,912 | 
|                                              |                                                                                                                                                            |                                            |         |         |         |  
|                                              |                                                                                                                                                            | Total liabilities and shareholders equity |         | $       | 171,841 |   |        | $       | 283,744 | 
|                                              |                                                                                                                                                            |                                            |         |         |         |  



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ESS TECHNOLOGY, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                        |                                              |                                       |         |         |      |   |         |         |   |   |         |         | 
|------------------------------------------------------- | -------------------------------------------- | ------------------------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | 
|                                                        |                                              | Years Ended December 31,              |        
|                                                        |                                              |                                       |        
|                                                        |                                              | 2005                                  |         |         | 2004 |   |         | 2003    |  
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|                                                        |                                              | (In thousands, except per share data) |        
|Net revenues:                                           |                                              |                                       |         |         |      |   |         |         |   |   |         |        
|                                                        | Product                                      |                                       | $       | 161,921 |      |   | $       | 237,278 |   |   | $       | 190,273 | 
|                                                        | Royalty                                      |                                       |         | 20,000  |      |   |         | 20,000  |   |   |         | 5,000   | 
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|Total net revenues                                      |                                              |                                       | 181,921 |         |      |   | 257,278 |         |   |   | 195,273 |        
|Cost of product revenues                                |                                              |                                       | 169,312 |         |      |   | 219,397 |         |   |   | 132,690 |        
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|                                                        | Gross profit                                 |                                       |         | 12,609  |      |   |         | 37,881  |   |   |         | 62,583  | 
|Operating expenses:                                     |                                              |                                       |         |         |      |   |         |         |   |   |         |        
|                                                        | Research and development                     |                                       |         | 33,983  |      |   |         | 37,467  |   |   |         | 33,184  | 
|                                                        | Selling, general and administrative          |                                       |         | 34,973  |      |   |         | 41,056  |   |   |         | 31,761  | 
|                                                        | In-process research and development          |                                       |         |        |      |   |         |        |   |   |         | 2,690   | 
|                                                        | Impairment of goodwill and intangible assets |                                       |         | 42,743  |      |   |         |        |   |   |         |        | 
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|Operating loss                                          |                                              |                                       | (99,090 | )       |      |   | (40,642 | )       |   |   | (5,052  | )      
|Non-operating income, net                               |                                              |                                       | 1,316   |         |      |   | 3,360   |         |   |   | 45,946  |        
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|Income (loss) before income taxes                       |                                              |                                       | (97,774 | )       |      |   | (37,282 | )       |   |   | 40,894  |        
|Provision for (benefit from) income taxes               |                                              |                                       | 1,779   |         |      |   | (1,732  | )       |   |   | 15,603  |        
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|Net income (loss)                                       |                                              | $                                     | (99,553 | )       |      | $ | (35,550 | )       |   | $ | 25,291  |        
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|Net income (loss) per share:                            |                                              |                                       |         |         |      |   |         |         |   |   |         |        
|                                                        | Basic                                        |                                       | $       | (2.50   | )    |   | $       | (0.90   | ) |   | $       | 0.64    | 
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|                                                        | Diluted                                      |                                       | $       | (2.50   | )    |   | $       | (0.90   | ) |   | $       | 0.61    | 
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|Shares used in calculating net income (loss) per share: |                                              |                                       |         |         |      |   |         |         |   |   |         |        
|                                                        | Basic                                        |                                       |         | 39,781  |      |   |         | 39,476  |   |   |         | 39,517  | 
|                                                        |                                              |                                       |         |         |      |   |         |         |  
|                                                        | Diluted                                      |                                       |         | 39,781  |      |   |         | 39,476  |   |   |         | 41,238  | 
|                                                        |                                              |                                       |         |         |      |   |         |         |  



47



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ESS TECHNOLOGY, INC.





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


|                             |                                                                              |              |        |        |               |                |          |              |   |   |               |        |   |               |         |         |              |   |         |         |   |   |         |         |  
|---------------------------- | ---------------------------------------------------------------------------- | ------------ | ------ | ------ | ------------- | -------------- | -------- | ------------ | - | - | ------------- | ------ | - | ------------- | ------- | ------- | ------------ | - | ------- | ------- | - | - | ------- | ------- | -
|                             |                                                                              |              |        |        |               | Accumulated    |          |              |   |   |               |        |  
|                             |                                                                              |              |        | Other  |               |                | Retained |              |   |   |               |       
|                             |                                                                              | Common Stock |        |        | Comprehensive |                |          | Earnings     |   |   | Total         |        |   | Total         |        
|                             |                                                                              |              |        |        | Income        |                |          | (Accumulated |   |   | Shareholders |        |   | Comprehensive |        
|                             |                                                                              | Shares       |        |        | Amount        |                |          | (Loss)       |   |   | Deficit)      |        |   | Equity        |         |         | Income(Loss) |  
|                             |                                                                              |              |        |        |               |                |          |              |   |   |               |        |   |               |         |         |              |  
|                             |                                                                              |              |        |        |               | (In thousands) |          |              |   |   |              
|Balance at December 31, 2002 |                                                                              |              | 43,305 |        |               | $              | 196,344  |              |   | $ | 504           |        |   | $             | 32,520  |         |              | $ | 229,368 |         |   |   |         |        
|                             | Issuance of common stock upon exercise of options                            |              |        | 642    |               |                |          | 3,872        |   |   |               |       |   |               |         |        |              |   |         | 3,872   |   |   |         |         |  
|                             | Issuance of common stock for employee stock purchase plan                    |              |        | 159    |               |                |          | 750          |   |   |               |       |   |               |         |        |              |   |         | 750     |   |   |         |         |  
|                             | Income tax reversal on disqualifying disposition of common stock
    options |              |        |       |               |                |          | (3,324       | ) |   |               |       |   |               |         |        |              |   |         | (3,324  | ) |   |         |         |  
|                             | Repurchase of common stock                                                   |              |        | (4,860 | )             |                |          | (22,096      | ) |   |               |       |   |               |         | (7,205  | )            |   |         | (29,301 | ) |   |         |         |  
|                             | Unrealized gain on marketable securities, net of tax                         |              |        |       |               |                |          |             |   |   |               | 425    |   |               |         |        |              |   |         | 425     |   |   | $       | 425     |  
|                             | Net income                                                                   |              |        |       |               |                |          |             |   |   |               |       |   |               |         | 25,291  |              |   |         | 25,291  |   |   |         | 25,291  |  
|Total comprehensive income   |                                                                              |              |       |        |               |                |         |              |   |   |              |        |   |               |        |         |              |   |        |         |   |   |        |        
|                             |                                                                              |              |        |        |               |                |          |              |   |   |               |        |   |               |         |         |              |  
|Balance at December 31, 2003 |                                                                              |              | 39,246 |        |               |                | 175,546  |              |   |   | 929           |        |   |               | 50,606  |         |              |   | 227,081 |         |   | $ | 25,716  |        
|                             |                                                                              |              |        |        |               |                |          |              |   |   |               |        |   |               |         |         |              |  
|                             | Issuance of common stock upon exercise of options                            |              |        | 275    |               |                |          | 1,582        |   |   |               |       |   |               |         |        |              |   |         | 1,582   |   |   |         |         |  
|                             | Issuance of common stock for employee stock purchase plan                    |              |        | 160    |               |                |          | 880          |   |   |               |       |   |               |         |        |              |   |         | 880     |   |   |         |         |  
|                             | Income tax reversal on disqualifying disposition of common stock
    options |              |        |       |               |                |          | (117         | ) |   |               |       |   |               |         |        |              |   |         | (117    | ) |   |         |         |  
|                             | Stock-based compensation charge                                              |              |        |       |               |                |          | 139          |   |   |               |       |   |               |         |        |              |   |         | 139     |   |   |         |         |  
|                             | Unrealized loss on marketable securities, net of tax                         |              |        |       |               |                |          |             |   |   |               | (1,103 | ) |               |         |        |              |   |         | (1,103  | ) |   | $       | (1,103  | )
|                             | Net loss                                                                     |              |        |       |               |                |          |             |   |   |               |       |   |               |         | (35,550 | )            |   |         | (35,550 | ) |   |         | (35,550 | )
|Total comprehensive loss     |                                                                              |              |       |        |               |                |         |              |   |   |              |        |   |               |        |         |              |   |        |         |   |   |        |        
|                             |                                                                              |              |        |        |               |                |          |              |   |   |               |        |   |               |         |         |              |  
|Balance at December 31, 2004 |                                                                              |              | 39,681 |        |               |                | 178,030  |              |   |   | (174          | )      |   |               | 15,056  |         |              |   | 192,912 |         |   | $ | (36,653 | )      
|                             |                                                                              |              |        |        |               |                |          |              |   |   |               |        |   |               |         |         |              |  
|                             | Issuance of common stock upon exercise of options                            |              |        | 52     |               |                |          | 203          |   |   |               |       |   |               |         |        |              |   |         | 203     |   |   |         |         |  
|                             | Issuance of common stock for employee stock purchase plan                    |              |        | 160    |               |                |          | 457          |   |   |               |       |   |               |         |        |              |   |         | 457     |   |   |         |         |  
|                             | Repurchase of common stock                                                   |              |        | (329   | )             |                |          | (1,165       | ) |   |               |       |   |               |         |        |              |   |         | (1,165  | ) |   |         |         |  
|                             | Stock-based compensation charge                                              |              |        |       |               |                |          | 20           |   |   |               |       |   |               |         |        |              |   |         | 20      |   |   |         |         |  
|                             | Unrealized gain on marketable securities, net of tax                         |              |        |       |               |                |          |             |   |   |               | 460    |   |               |         |        |              |   |         | 460     |   |   | $       | 460     |  
|                             | Net loss                                                                     |              |        |       |               |                |          |             |   |   |               |       |   |               |         | (99,553 | )            |   |         | (99,553 | ) |   |         | (99,553 | )
|Total comprehensive loss     |                                                                              |              |       |        |               |                |         |              |   |   |              |        |   |               |        |         |              |   |        |         |   |   |        |        
|                             |                                                                              |              |        |        |               |                |          |              |   |   |               |        |   |               |         |         |              |  
|Balance at December 31, 2005 |                                                                              |              | 39,564 |        |               | $              | 177,545  |              |   | $ | 286           |        |   | $             | (84,497 | )       |              | $ | 93,334  |         |   | $ | (99,093 | )      
|                             |                                                                              |              |        |        |               |                |          |              |   |   |               |        |   |               |         |         |              |  



48



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ESS TECHNOLOGY, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |        |         |         |          |       |         |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------- | ------ | ------- | ------- | -------- | ------ | ------- | ------- | -------- | ----- | ------- | ------- | -
|                                                     |                                                                                                        | Years Ended December 31,                                                               |                                             
|                                                     |                                                                                                        |                                                                                        |                                             
|                                                     |                                                                                                        | 2005                                                                                   |                                              |                                                     | 2004   |         |         | 2003     |       
|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |       
|                                                     |                                                                                                        | (In thousands)                                                                         |                                             
|Cash flows from operating activities:                |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |        |         |         |         
|Net income (loss)                                    |                                                                                                        | $                                                                                      | (99,553                                      | )                                                   |        | $       | (35,550 | )        |        | $       | 25,291  |         
|                                                     | Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities: |                                                                                        |                                              |                                                     |        |         |         |          |        |         |         |          |      
|                                                     |                                                                                                        | Depreciation                                                                           |                                              |                                                     | 6,022  |         |         |          | 5,489  |         |         |          | 3,948 |        
|                                                     |                                                                                                        | Amortization                                                                           |                                              |                                                     | 4,321  |         |         |          | 4,796  |         |         |          | 2,899 |        
|                                                     |                                                                                                        | Provision for inventory reserve                                                        |                                              |                                                     | 36,067 |         |         |          | 37,289 |         |         |          |      |        
|                                                     |                                                                                                        | Write-down of goodwill and intangible assets                                           |                                              |                                                     | 42,743 |         |         |          | 698    |         |         |          |      |        
|                                                     |                                                                                                        | (Gain) loss on sale of property, plant and equipment                                   |                                              |                                                     | (628   | )       |         |          | 12     |         |         |          | 54    |        
|                                                     |                                                                                                        | Charges for purchased in-process research and development                              |                                              |                                                     |       |         |         |          |       |         |         |          | 2,690 |        
|                                                     |                                                                                                        | (Gain) loss on equity investments                                                      |                                              |                                                     | 1,316  |         |         |          |       |         |         |          | 1,801 |        
|                                                     |                                                                                                        | Stock-based compensation                                                               |                                              |                                                     | 20     |         |         |          | 139    |         |         |          |      |        
|                                                     |                                                                                                        | Income tax benefit (reversal) on disqualifying disposition
    of common stock options |                                              |                                                     |       |         |         |          | (117   | )       |         |          | 331   |        
|                                                     |                                                                                                        | Changes in assets and liabilities, net of effect of business
    combinations:         |                                              |                                                     |        |         |         |          |        |         |         |          |       |        
|                                                     |                                                                                                        |                                                                                        | Accounts receivables, net                    |                                                     |        | 6,104   |         |          |        | 36,065  |         |          |       | (27,421 | )      
|                                                     |                                                                                                        |                                                                                        | Other receivables                            |                                                     |        | (5,433  | )       |          |        | 153     |         |          |       | (248    | )      
|                                                     |                                                                                                        |                                                                                        | Inventory                                    |                                                     |        | (2,875  | )       |          |        | (49,412 | )       |          |       | (6,381  | )      
|                                                     |                                                                                                        |                                                                                        | Prepaid expenses and other assets            |                                                     |        | (453    | )       |          |        | 3,435   |         |          |       | (1,786  | )      
|                                                     |                                                                                                        |                                                                                        | Accounts payable and accrued expenses        |                                                     |        | (14,730 | )       |          |        | (33,768 | )       |          |       | 40,958  |        
|                                                     |                                                                                                        |                                                                                        | Income tax payable and deferred income taxes |                                                     |        | 2,103   |         |          |        | (236    | )       |          |       | 14,071  |        
|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |       
|                                                     |                                                                                                        |                                                                                        |                                              | Net cash provided by (used in) operating activities |        |         | (24,976 | )        |        |         | (31,007 | )        |       |         | 56,207  |  
|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |       
|Cash flows from investing activities:                |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |        |         |         |         
|                                                     | Purchase of property, plant and equipment                                                              |                                                                                        |                                              | (4,708                                              | )      |         |         | (3,914   | )      |         |         | (7,962   | )    
|                                                     | Sale of property, plant and equipment                                                                  |                                                                                        |                                              | 1,190                                               |        |         |         | 34       |        |         |         |         |      
|                                                     | Purchase of short-term investments                                                                     |                                                                                        |                                              | (44,135                                             | )      |         |         | (129,758 | )      |         |         | (161,188 | )    
|                                                     | Sale of short-term investments                                                                         |                                                                                        |                                              | 98,573                                              |        |         |         | 152,369  |        |         |         | 236,989  |      
|                                                     | Purchase of long-term investments                                                                      |                                                                                        |                                              | (282                                                | )      |         |         | (5,176   | )      |         |         | (5,298   | )    
|                                                     | Refund of acquisition consideration under escrow                                                       |                                                                                        |                                              | 1,946                                               |        |         |         |         |        |         |         |         |      
|                                                     | Cash paid for acquisitions, net of cash acquired                                                       |                                                                                        |                                              |                                                    |        |         |         |         |        |         |         | (52,052  | )    
|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |       
|                                                     |                                                                                                        |                                                                                        |                                              | Net cash provided by investing activities           |        |         | 52,584  |          |        |         | 13,555  |          |       |         | 10,489  |  
|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |       
|Cash flows from financing activities:                |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |        |         |         |         
|                                                     | Repurchase of common stock                                                                             |                                                                                        |                                              | (1,165                                              | )      |         |         |         |        |         |         | (29,301  | )    
|                                                     | Issuance of common stock under employee stock purchase plan and
    stock option plans                 |                                                                                        |                                              | 660                                                 |        |         |         | 2,462    |        |         |         | 4,622    |      
|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |       
|                                                     |                                                                                                        |                                                                                        |                                              | Net cash provided by (used in) financing activities |        |         | (505    | )        |        |         | 2,462   |          |       |         | (24,679 | )
|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |       
|Net increase (decrease) in cash and cash equivalents |                                                                                                        |                                                                                        | 27,103                                       |                                                     |        |         | (14,990 | )        |        |         | 42,017  |         
|Cash and cash equivalents at beginning of year       |                                                                                                        |                                                                                        | 41,527                                       |                                                     |        |         | 56,517  |          |        |         | 14,500  |         
|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |       
|Cash and cash equivalents at end of year             |                                                                                                        | $                                                                                      | 68,630                                       |                                                     |        | $       | 41,527  |          |        | $       | 56,517  |         
|                                                     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |       
|Supplemental disclosure of cash flow information     |                                                                                                        |                                                                                        |                                              |                                                     |        |         |         |          |        |         |         |         
|                                                     | Cash paid for income taxes                                                                             |                                                                                        | $                                            |                                                    |        |         | $       | (460     | )      |         | $       | (2,926   | )    
|                                                     | Cash refund for income taxes                                                                           |                                                                                        | $                                            | 491                                                 |        |         | $       | 1,872    |        |         | $       | 1,566    |      



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ESS TECHNOLOGY, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|        |            
|------- | -----------
|Note 1. | The Company









|        |                                           
|------- | ------------------------------------------
|Note 2. | Summary of Significant Accounting Policies



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





| |                      
| | ---------------------
| | Basis of Presentation









| |                             
| | ----------------------------
| | Foreign Currency Translation



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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









| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |          
| | ---------
| | Inventory

work-in first-in,




| |                              
| | -----------------------------
| | Property, Plant and Equipment



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



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                   
| | ------------------
| | Equity Investments





| |         
| | --------
| | Goodwill





| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a significant adverse change in legal factors or in the business
    climate;                                                                       
|
| |  | an adverse action or assessment by a regulator;                                                                                                     
|
| |  | unanticipated competition;                                                                                                                          
|
| |  | a loss of key personnel;                                                                                                                            
|
| |  | a more-likely-than-not expectation that a reporting unit or a
    significant portion of a reporting unit will be sold or
    otherwise disposed of;
|
| |  | the testing for recoverability of a significant asset group
    within a reporting unit; and                                                        
|
| |  | recognition of goodwill impairment loss in the financial
    statements of a subsidiary that is a component of a reporting
    unit.                





| |                                      
| | -------------------------------------
| | Acquisition-Related Intangible Assets





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



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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









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





| |                                    
| | -----------------------------------
| | In-Process Research and Development





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







| |                            
| | ---------------------------
| | Net Income (Loss) Per Share



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



24-month




|                                       |                                                                                         |                                       |   |          |      |  |   |         |   |  |   |         |  
|-------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------- | - | -------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                       |                                                                                         | Years Ended December 31,              |  
|                                       |                                                                                         |                                       |  
|                                       |                                                                                         | 2005                                  |   |          | 2004 |  |   | 2003    |  
|                                       |                                                                                         |                                       |   |          |      |  |   |         |  
|                                       |                                                                                         | (In thousands, except per share data) |  
|Net income (loss):                     |                                                                                         |                                       |   |          |      |  |   |         |   |  |   |        
|                                       | As reported                                                                             |                                       | $ | (99,553  | )    |  | $ | (35,550 | ) |  | $ | 25,291  |  
|                                       | Stock-based employee compensation expense included in reported
    net income (loss)    |                                       |   | 20       |      |  |   | 39      |   |  |   |        |  
|                                       | Amortization of stock compensation expense determined under
    fair-value-based method |                                       |   | (8,593   | )    |  |   | (3,787  | ) |  |   | (10,142 | )
|                                       |                                                                                         |                                       |   |          |      |  |   |         |  
|                                       | Pro forma net income (loss)                                                             |                                       | $ | (108,126 | )    |  | $ | (39,298 | ) |  | $ | 15,149  |  
|                                       |                                                                                         |                                       |   |          |      |  |   |         |  
|Net income (loss) per share  basic:   |                                                                                         |                                       |   |          |      |  |   |         |   |  |   |        
|                                       | As reported                                                                             |                                       | $ | (2.50    | )    |  | $ | (0.90   | ) |  | $ | 0.64    |  
|                                       | Pro forma                                                                               |                                       | $ | (2.72    | )    |  | $ | (1.00   | ) |  | $ | 0.38    |  
|Net income (loss) per share  diluted: |                                                                                         |                                       |   |          |      |  |   |         |   |  |   |        
|                                       | As reported                                                                             |                                       | $ | (2.50    | )    |  | $ | (0.90   | ) |  | $ | 0.61    |  
|                                       | Pro forma                                                                               |                                       | $ | (2.72    | )    |  | $ | (1.00   | ) |  | $ | 0.37    |  

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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                          |  |                        |      |   |      |   |      |      |  |   |      |  
|----------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                          |  | Employee Stock Options |     
|                                          |  |                        |     
|                                          |  | 2005                   |      |   | 2004 |   |      | 2003 | 
|                                          |  |                        |      |   |      |   |      |      | 
|Expected dividend yield                   |  |                        | 0.0  | % |      |   | 0.0  | %    |  |   | 0.0  | %
|Weighted average risk-free interest rate  |  |                        | 4.05 | % |      |   | 3.43 | %    |  |   | 2.13 | %
|Expected volatility                       |  |                        | 76   | % |      |   | 82   | %    |  |   | 94   | %
|Weighted average expected life (in years) |  |                        | 4    |   |      |   | 4    |      |  |   | 4    |  
|Weighted average grant date fair value    |  | $                      | 1.91 |   |      | $ | 7.58 |      |  | $ | 5.79 |  



|                                       |  |                     |      |   |      |   |      |      |  |   |      |  
|-------------------------------------- |  | ------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                       |  | 1995 Employee Stock |     
|                                       |  | Purchase Plan       |     
|                                       |  |                     |     
|                                       |  | 2005                |      |   | 2004 |   |      | 2003 | 
|                                       |  |                     |      |   |      |   |      |      | 
|Expected dividend yield                |  |                     | 0.0  | % |      |   | 0.0  | %    |  |   | 0.0  | %
|Risk-free interest rate                |  |                     | 3.50 | % |      |   | 1.61 | %    |  |   | 0.97 | %
|Expected volatility                    |  |                     | 76   | % |      |   | 82   | %    |  |   | 60   | %
|Expected life (in months)              |  |                     | 6    |   |      |   | 6    |      |  |   | 6    |  
|Weighted average grant date fair value |  | $                   | 1.71 |   |      | $ | 3.32 |      |  | $ | 2.01 |  



| |         
| | --------
| | Warranty



|                                               |  |                         |      |   |      |   |      |      |  |   |      |  
|---------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                               |  | Year-Ended December 31, |     
|                                               |  |                         |     
|                                               |  | 2005                    |      |   | 2004 |   |      | 2003 | 
|                                               |  |                         |      |   |      |   |      |      | 
|                                               |  | (In thousands)          |     
|Beginning balance                              |  | $                       | 324  |   |      | $ | 800  |      |  | $ | 550  |  
|Accruals for warranties issued during the year |  |                         | 406  |   |      |   | 152  |      |  |   | 628  |  
|Settlements made during the year               |  |                         | (224 | ) |      |   | (416 | )    |  |   | (378 | )
|Adjustments                                    |  |                         |     |   |      |   | (212 | )    |  |   |     |  
|                                               |  |                         |      |   |      |   |      |      | 
|Ending balance                                 |  | $                       | 506  |   |      | $ | 324  |      |  | $ | 800  |  
|                                               |  |                         |      |   |      |   |      |      | 



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



55



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##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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









Recent Accounting Pronouncements


, s




56



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##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















|        |                                  
|------- | ---------------------------------
|Note 3. | Significant Business Combinations



| |      
| | -----
| | Divio



57



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                    |                       |                |        |        | 
|----------------------------------- | --------------------- | -------------- | ------ | ------ | 
|Purchase Price Allocation           |                       | Amounts        |       
|                                    |                       |                |       
|                                    |                       | (In thousands) |       
|Tangible assets                     |                       | $              | 1,661  |       
|Identifiable intangible assets      |                       |                | 6,310  |       
|Goodwill                            |                       |                | 23,535 |       
|                                    |                       |                |       
|                                    | Total assets acquired |                |        | 31,506 | 
|Deferred tax liabilities            |                       |                | (2,587 | )     
|                                    |                       |                |       
|                                    | Net assets acquired   |                |        | 28,919 | 
|In-process research and development |                       |                | 1,270  |       
|                                    |                       |                |       
|Total consideration                 |                       | $              | 30,189 |       
|                                    |                       |                |       



|                                             |                                      |                |       |       |           |  |          |  | 
|-------------------------------------------- | ------------------------------------ | -------------- | ----- | ----- | --------- |  | -------- |  | 
|                                             |                                      | Estimated      |       |       | Estimated | 
|Identifiable Intangible Assets               |                                      | Fair Value     |       |       | Life      | 
|                                             |                                      |                |       |       |           | 
|                                             |                                      | (In thousands) |      
|Existing technology                          |                                      | $              | 4,790 |       |           |  | 3 years  | 
|Patents and core technology                  |                                      |                | 820   |       |           |  | 3 years  | 
|Customer contacts and related relationships  |                                      |                | 510   |       |           |  | 3 years  | 
|Partner agreements and related relationships |                                      |                | 110   |       |           |  | 3 years  | 
|Order backlog                                |                                      |                | 80    |       |           |  | 3 months | 
|                                             |                                      |                |       |       |           | 
|                                             | Total identifiable intangible assets |                | $     | 6,310 |           |  |          |  | 
|                                             |                                      |                |       |       |           | 



| |       
| | ------
| | Pictos



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                    |                       |                |        |        | 
|----------------------------------- | --------------------- | -------------- | ------ | ------ | 
|Purchase Price Allocation           |                       | Amounts        |       
|                                    |                       |                |       
|                                    |                       | (In thousands) |       
|Tangible assets                     |                       | $              | 8,160  |       
|Identifiable intangible assets      |                       |                | 7,850  |       
|Goodwill                            |                       |                | 18,180 |       
|                                    |                       |                |       
|                                    | Total assets acquired |                |        | 34,190 | 
|Liabilities assumed                 |                       |                | (4,938 | )     
|Deferred tax liabilities            |                       |                | (3,219 | )     
|                                    |                       |                |       
|                                    | Net assets acquired   |                |        | 26,033 | 
|In-process research and development |                       |                | 1,420  |       
|                                    |                       |                |       
|Total consideration                 |                       | $              | 27,453 |       
|                                    |                       |                |       



|                               |                                      |                |       |       |           |  |          |  | 
|------------------------------ | ------------------------------------ | -------------- | ----- | ----- | --------- |  | -------- |  | 
|                               |                                      | Estimated      |       |       | Estimated | 
|Identifiable Intangible Assets |                                      | Fair Value     |       |       | Life      | 
|                               |                                      |                |       |       |           | 
|                               |                                      | (In thousands) |      
|Existing technology            |                                      | $              | 3,600 |       |           |  | 3 years  | 
|Patents and core technology    |                                      |                | 1,800 |       |           |  | 3 years  | 
|Customer relationships         |                                      |                | 1,080 |       |           |  | 3 years  | 
|Distributor relationships      |                                      |                | 90    |       |           |  | 2 years  | 
|Foundry agreement              |                                      |                | 930   |       |           |  | 2 years  | 
|Order backlog                  |                                      |                | 350   |       |           |  | 6 months | 
|                               |                                      |                |       |       |           | 
|                               | Total identifiable intangible assets |                | $     | 7,850 |           |  |          |  | 
|                               |                                      |                |       |       |           | 



| |                                
| | -------------------------------
| | Pro forma Financial Information



|                      |         |                      |         |      | 
|--------------------- | ------- | -------------------- | ------- | ---- | 
|                      |         | Year-Ended           |        
|                      |         | December 31, 2003    |        
|                      |         |                      |        
|                      |         | (In thousand, except |        
|                      |         | per share data)      |        
|                      |         | (Unaudited)          |        
|Total revenues        |         | $                    | 198,997 |     
|Operating loss        |         | $                    | (20,844 | )   
|Net income            |         | $                    | 8,610   |     
|Net income per share: |         |                      |         |     
|                      | Basic   |                      | $       | 0.22 | 
|                      | Diluted |                      | $       | 0.21 | 

59



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                 | 
|------------------------------------------------ | 
|Note 4.     Goodwill and Other Intangible Assets | 



|                        |  |                |        |  |              |  |        |            |  |  |              |   |  |      |         |   |  |   |     | 
|----------------------- |  | -------------- | ------ |  | ------------ |  | ------ | ---------- |  |  | ------------ | - |  | ---- | ------- | - |  | - | --- | 
|                        |  | December 31,   |        |  |              |  |        |            |  |  | December 31, |  
|                        |  | 2004           |        |  | Amortization |  |        | Adjustment |  |  | Impairment   |   |  | 2005 |        
|                        |  |                |        |  |              |  |        |            |  |  |              |   |  |      |        
|                        |  | (In thousands) |       
|Goodwill                |  | $              | 43,391 |  |              |  |       |            |  |  | (1,946       | ) |  |      | (41,445 | ) |  | $ |    | 
|Other intangible assets |  | $              | 6,414  |  |              |  | (4,321 | )          |  |  |              |   |  |      | (1,298  | ) |  | $ | 795 | 
|                        |  |                |        |  |              |  |        |            |  |  |              |   |  |      |        
|                        |  | $              | 49,805 |  |              |  | (4,321 | )          |  |  | (1,946       | ) |  |      | (42,743 | ) |  | $ | 795 | 



|                                       |  |                |     |  |      |   |       | 
|-------------------------------------- |  | -------------- | --- |  | ---- | - | ----- | 
|                                       |  | December 31,   |    
|                                       |  |                |    
|                                       |  | 2005           |     |  | 2004 |  
|                                       |  |                |     |  |      |  
|                                       |  | (In thousands) |    
|Acquired other intangible assets, net: |  |                |     |  |      |   |       | 
|Pictos                                 |  | $              | 795 |  |      | $ | 3,039 | 
|Divio                                  |  |                |    |  |      |   | 3,375 | 
|                                       |  |                |     |  |      |  
|Total intangible assets, net           |  | $              | 795 |  |      | $ | 6,414 | 
|                                       |  |                |     |  |      |  

60



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                   |                                             |                                      |   |       |                   |  |       |          |       |  |              |       |        |  |   |       |       | 
|---------------------------------- | ------------------------------------------- | ------------------------------------ | - | ----- | ----------------- |  | ----- | -------- | ----- |  | ------------ | ----- | ------ |  | - | ----- | ----- | 
|                                   |                                             | December 31, 2005                    |   |       | December 31, 2004 | 
|                                   |                                             |                                      |   |       |                   | 
|                                   |                                             | Gross                                |   |       |                   |  | Gross |          |       | 
|                                   |                                             | Carrying                             |   |       | Accumulated       |  |       | Carrying |       |  | Accumulated  |      
|                                   |                                             | Amounts                              |   |       | Amortization      |  |       | Amounts  |       |  | Amortization |      
|                                   |                                             |                                      |   |       |                   |  |       |          |       |  |              |      
|                                   |                                             | (In thousands)                       |  
|Amortized other intangible assets: |                                             |                                      |   |       |                   |  |       |          |       |  |              |       |        |  |   |      
|                                   | Existing technology                         |                                      | $ | 3,600 |                   |  | $     | 3,070    |       |  | $            | 8,390 |        |  | $ | 4,065 |      
|                                   | Patents and core technology                 |                                      |   | 1,800 |                   |  |       | 1,535    |       |  |              | 2,620 |        |  |   | 1,311 |      
|                                   | Customer relationships                      |                                      |   | 1,080 |                   |  |       | 1,080    |       |  |              | 1,590 |        |  |   | 1,095 |      
|                                   | Distributor relationships                   |                                      |   | 90    |                   |  |       | 90       |       |  |              | 90    |        |  |   | 70    |      
|                                   | Partner agreement and related relationships |                                      |   |      |                   |  |       |         |       |  |              | 110   |        |  |   | 50    |      
|                                   | Foundry agreement                           |                                      |   | 930   |                   |  |       | 930      |       |  |              | 930   |        |  |   | 725   |      
|                                   | Order backlog                               |                                      |   | 350   |                   |  |       | 350      |       |  |              | 430   |        |  |   | 430   |      
|                                   | Technical infrastructure                    |                                      |   |      |                   |  |       |         |       |  |              | 797   |        |  |   | 797   |      
|                                   |                                             |                                      |   |       |                   |  |       |          |       |  |              |      
|                                   |                                             | Total identifiable intangible assets |   | $     | 7,850             |  |       | $        | 7,055 |  |              | $     | 14,957 |  |   | $     | 8,543 | 
|                                   |                                             |                                      |   |       |                   |  |       |          |       |  |              |      





|        |                         
|------- | ------------------------
|Note 5. | Balance Sheet Components

|                           |                                               |                |        |        |      |   |        |        |  
|-------------------------- | --------------------------------------------- | -------------- | ------ | ------ | ---- | - | ------ | ------ | -
|                           |                                               | December 31,   |       
|                           |                                               |                |       
|                           |                                               | 2005           |        |        | 2004 |  
|                           |                                               |                |        |        |      |  
|                           |                                               | (In thousands) |       
|Cash and cash equivalents: |                                               |                |        |        |      |   |        |       
|                           | Cash and money market accounts                |                | $      | 39,706 |      |   | $      | 40,140 |  
|                           | U.S. government and corporate debt securities |                |        | 28,924 |      |   |        | 1,387  |  
|                           |                                               |                |        |        |      |  
|                           |                                               | $              | 68,630 |        |      | $ | 41,527 |       
|                           |                                               |                |        |        |      |  
|Short-term investments:    |                                               |                |        |        |      |   |        |       
|                           | U.S. government and corporate debt securities |                | $      | 31,231 |      |   | $      | 85,668 |  
|                           | Unrealized loss on marketable securities, net |                |        | (139   | )    |   |        | (507   | )
|                           |                                               |                |        |        |      |  
|                           |                                               | $              | 31,092 |        |      | $ | 85,161 |       
|                           |                                               |                |        |        |      |  
|Accounts receivable, net:  |                                               |                |        |        |      |   |        |       
|                           | Accounts receivable                           |                | $      | 15,439 |      |   | $      | 21,881 |  
|                           | Less: Allowance for doubtful accounts         |                |        | (449   | )    |   |        | (787   | )
|                           |                                               |                |        |        |      |  
|                           |                                               | $              | 14,990 |        |      | $ | 21,094 |       
|                           |                                               |                |        |        |      |  
|Other receivables:         |                                               |                |        |        |      |   |        |       
|                           | Receivable from vendor                        |                | $      | 4,993  |      |   | $      |       |  
|                           | Receivable from Vialta                        |                |        | 20     |      |   |        | 128    |  
|                           | Other                                         |                |        | 782    |      |   |        | 234    |  
|                           |                                               |                |        |        |      |  
|                           |                                               | $              | 5,795  |        |      | $ | 362    |       
|                           |                                               |                |        |        |      |  

61



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                       |                                                                                       |                |        |         |      |   |        |         |  
|-------------------------------------- | ------------------------------------------------------------------------------------- | -------------- | ------ | ------- | ---- | - | ------ | ------- | -
|                                       |                                                                                       | December 31,   |       
|                                       |                                                                                       |                |       
|                                       |                                                                                       | 2005           |        |         | 2004 |  
|                                       |                                                                                       |                |        |         |      |  
|                                       |                                                                                       | (In thousands) |       
|Inventory:                             |                                                                                       |                |        |         |      |   |        |        
|                                       | Raw materials                                                                         |                | $      | 3,048   |      |   | $      | 15,857  |  
|                                       | Work-in-process                                                                       |                |        | 2,527   |      |   |        | 7,286   |  
|                                       | Finished goods                                                                        |                |        | 6,902   |      |   |        | 22,526  |  
|                                       |                                                                                       |                |        |         |      |  
|                                       |                                                                                       | $              | 12,477 |         |      | $ | 45,669 |        
|                                       |                                                                                       |                |        |         |      |  
|Prepaid expenses and other assets:     |                                                                                       |                |        |         |      |   |        |        
|                                       | Insurance                                                                             |                | $      | 724     |      |   | $      | 961     |  
|                                       | Maintenance                                                                           |                |        | 813     |      |   |        | 759     |  
|                                       | Advanced payments                                                                     |                |        |        |      |   |        | 1,200   |  
|                                       | Prepaid inventory                                                                     |                |        | 1,012   |      |   |        |        |  
|                                       | Prepaid royalty                                                                       |                |        | 904     |      |   |        | 115     |  
|                                       | Other                                                                                 |                |        | 788     |      |   |        | 841     |  
|                                       |                                                                                       |                |        |         |      |  
|                                       |                                                                                       | $              | 4,241  |         |      | $ | 3,876  |        
|                                       |                                                                                       |                |        |         |      |  
|Property, plant and equipment, net:    |                                                                                       |                |        |         |      |   |        |        
|                                       | Land                                                                                  |                | $      | 2,860   |      |   | $      | 2,860   |  
|                                       | Building and building improvements                                                    |                |        | 24,640  |      |   |        | 24,734  |  
|                                       | Machinery and equipment                                                               |                |        | 36,776  |      |   |        | 36,189  |  
|                                       | Furniture and fixtures                                                                |                |        | 23,295  |      |   |        | 20,233  |  
|                                       |                                                                                       |                |        |         |      |  
|                                       |                                                                                       |                | 87,571 |         |      |   | 84,016 |        
|                                       | Less: Accumulated depreciation and amortization                                       |                |        | (66,438 | )    |   |        | (61,007 | )
|                                       |                                                                                       |                |        |         |      |  
|                                       |                                                                                       | $              | 21,133 |         |      | $ | 23,009 |        
|                                       |                                                                                       |                |        |         |      |  
|Other assets:                          |                                                                                       |                |        |         |      |   |        |        
|                                       | Investments  Best Elite (Note 7)                                                     |                | $      | 10,000  |      |   | $      | 10,000  |  
|                                       | Investments  other                                                                   |                |        | 2,388   |      |   |        | 3,029   |  
|                                       | Other                                                                                 |                |        | 300     |      |   |        | 212     |  
|                                       |                                                                                       |                |        |         |      |  
|                                       |                                                                                       | $              | 12,688 |         |      | $ | 13,241 |        
|                                       |                                                                                       |                |        |         |      |  
|Accounts payable and accrued expenses: |                                                                                       |                |        |         |      |   |        |        
|                                       | Accounts payable                                                                      |                | $      | 16,116  |      |   | $      | 18,124  |  
|                                       | Accrued compensation costs                                                            |                |        | 5,667   |      |   |        | 6,323   |  
|                                       | Accrued commission and royalties                                                      |                |        | 1,740   |      |   |        | 9,212   |  
|                                       | Deferred revenue related to distributor sales, net of deferred
    cost of goods sold |                |        | 552     |      |   |        | 8,041   |  
|                                       | Adverse purchase order commitments                                                    |                |        | 8,468   |      |   |        | 4,960   |  
|                                       | Other accrued liabilities                                                             |                |        | 3,373   |      |   |        | 3,986   |  
|                                       |                                                                                       |                |        |         |      |  
|                                       |                                                                                       | $              | 35,916 |         |      | $ | 50,646 |        
|                                       |                                                                                       |                |        |         |      |  

62



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                      
|------- | ---------------------
|Note 6. | Marketable Securities



|                                 |                          |                |        |        |            |   |       |            |  |   |            |      |   |   |        |        | 
|-------------------------------- | ------------------------ | -------------- | ------ | ------ | ---------- | - | ----- | ---------- |  | - | ---------- | ---- | - | - | ------ | ------ | 
|                                 |                          |                |        | Gross  |            |   | Gross |            |  |  
|                                 |                          | Amortized      |        |        | Unrealized |   |       | Unrealized |  |   |           
|December 31, 2005                |                          | Cost           |        |        | Gains      |   |       | (Loss)     |  |   | Fair Value |     
|                                 |                          |                |        |        |            |   |       |            |  |   |            |     
|                                 |                          | (In thousands) |       
|Money market accounts            |                          | $              | 24,016 |        |            | $ |      |            |  | $ |           |      |   | $ | 24,016 |       
|Municipal bonds                  |                          |                | 21,159 |        |            |   |      |            |  |   |           |      |   |   | 21,159 |       
|Corporate debt securities        |                          |                | 28,917 |        |            |   | 7     |            |  |   |           |      |   |   | 28,924 |       
|Corporate equity securities      |                          |                | 1,486  |        |            |   | 621   |            |  |   |           |      |   |   | 2,107  |       
|Government agency bonds          |                          |                | 10,079 |        |            |   |      |            |  |   | (146       | )    |   |   | 9,933  |       
|                                 |                          |                |        |        |            |   |       |            |  |   |            |     
|                                 | Total available-for-sale |                | $      | 85,657 |            |   | $     | 628        |  |   | $          | (146 | ) |   | $      | 86,139 | 
|                                 |                          |                |        |        |            |   |       |            |  |   |            |     
|Classified as:                   |                          |                |        |        |            |   |       |            |  |   |            |      |   |   |        |       
|Cash equivalents                 |                          |                |        |        |            |   |       |            |  |   |            |      |   | $ | 52,940 |       
|Short-term marketable securities |                          |                |        |        |            |   |       |            |  |   |            |      |   |   | 31,092 |       
|Long-term marketable securities  |                          |                |        |        |            |   |       |            |  |   |            |      |   |   | 2,107  |       
|                                 |                          |                |        |        |            |   |       |            |  |   |            |     
|                                 |                          |                |        |        |            |   |       |            |  |   |            |      |   | $ | 86,139 |       
|                                 |                          |                |        |        |            |   |       |            |  |   |            |     

|                                 |                          |                |        |        |            |   |       |            |  |   |            |        |   |   |        |        | 
|-------------------------------- | ------------------------ | -------------- | ------ | ------ | ---------- | - | ----- | ---------- |  | - | ---------- | ------ | - | - | ------ | ------ | 
|                                 |                          |                |        | Gross  |            |   | Gross |            |  |  
|                                 |                          | Amortized      |        |        | Unrealized |   |       | Unrealized |  |   |           
|December 31, 2004                |                          | Cost           |        |        | Gains      |   |       | (Loss)     |  |   | Fair Value |       
|                                 |                          |                |        |        |            |   |       |            |  |   |            |       
|                                 |                          | (In thousands) |       
|Money market accounts            |                          | $              | 2,780  |        |            | $ |      |            |  | $ |           |        |   | $ | 2,780  |       
|Municipal bonds                  |                          |                | 47,560 |        |            |   |      |            |  |   | (31        | )      |   |   | 47,529 |       
|Corporate debt securities        |                          |                | 14,876 |        |            |   |      |            |  |   | (298       | )      |   |   | 14,578 |       
|Corporate equity securities      |                          |                | 2,802  |        |            |   | 814   |            |  |   | (587       | )      |   |   | 3,029  |       
|Government agency bonds          |                          |                | 24,619 |        |            |   |      |            |  |   | (178       | )      |   |   | 24,441 |       
|                                 |                          |                |        |        |            |   |       |            |  |   |            |       
|                                 | Total available-for-sale |                | $      | 92,637 |            |   | $     | 814        |  |   | $          | (1,094 | ) |   | $      | 92,357 | 
|                                 |                          |                |        |        |            |   |       |            |  |   |            |       
|Classified as:                   |                          |                |        |        |            |   |       |            |  |   |            |        |   |   |        |       
|Cash equivalents                 |                          |                |        |        |            |   |       |            |  |   |            |        |   | $ | 4,167  |       
|Short-term marketable securities |                          |                |        |        |            |   |       |            |  |   |            |        |   |   | 85,161 |       
|Long-term marketable securities  |                          |                |        |        |            |   |       |            |  |   |            |        |   |   | 3,029  |       
|                                 |                          |                |        |        |            |   |       |            |  |   |            |       
|                                 |                          |                |        |        |            |   |       |            |  |   |            |        |   | $ | 92,357 |       
|                                 |                          |                |        |        |            |   |       |            |  |   |            |       

63



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##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                    |  |                |        | 
|--------------------------------------------------- |  | -------------- | ------ | 
|                                                    |  | Estimated Fair |       
|December 31, 2005                                   |  | Value          |       
|                                                    |  |                |       
|                                                    |  | (In thousands) |       
|Maturing 90 days or less from purchase              |  | $              | 28,924 | 
|Maturing between 90 days and one year from purchase |  |                | 21,159 | 
|Maturing more than one year from purchase           |  |                | 9,933  | 
|                                                    |  |                |       
|Total available-for-sale debt securities            |  | $              | 60,016 | 
|                                                    |  |                |       





|                        |  |                           |   |            |                      |   |            |       |            |        |       |  |            |            |     |        |  |   |       |  |  |   |     | 
|----------------------- |  | ------------------------- | - | ---------- | -------------------- | - | ---------- | ----- | ---------- | ------ | ----- |  | ---------- | ---------- | --- | ------ |  | - | ----- |  |  | - | --- | 
|                        |  | In Loss Position for Less |   |            | In Loss Position for |   |            |      
|                        |  | than 12 Months            |   |            | More Than 12 Months  |   |            | Total |           
|                        |  |                           |   |            |                      |   |            |       |           
|                        |  |                           |   | Gross      |                      |   |            |       | Gross      |        |       |  |            | Gross      |    
|                        |  |                           |   | Unrealized |                      |   |            |       | Unrealized |        |       |  |            | Unrealized |    
|                        |  | Fair Value                |   | Losses     |                      |   | Fair Value |       |            | Losses |       |  | Fair Value |            |     | Losses | 
|                        |  |                           |   |            |                      |   |            |       |            |        |       |  |            |            |     |        | 
|                        |  | (In thousands)            |  
|Government agency bonds |  | $                         |  |            |                      | $ |           |       |            | $      | 9,933 |  |            | $          | 146 |        |  | $ | 9,933 |  |  | $ | 146 | 







| |                                         
| | ----------------------------------------
| | MosChip Semiconductor Technology Limited





| |                  
| | -----------------
| | C-Com Corporation

C-Com


64



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##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|        |                                                 
|------- | ------------------------------------------------
|Note 7. | Investments in Equity Securities Carried at Cost





| |                                 
| | --------------------------------
| | Best Elite International Limited





| |                   
| | ------------------
| | Raymedia Co., Ltd.





|        |                          
|------- | -------------------------
|Note 8. | Non-Operating Income, Net



|                                          |  |                          |        |   |      |   |       |      |  |   |        |  
|----------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                          |  | Years Ended December 31, |       
|                                          |  |                          |       
|                                          |  | 2005                     |        |   | 2004 |   |       | 2003 | 
|                                          |  |                          |        |   |      |   |       |      | 
|                                          |  | (In thousands)           |       
|Licensing fee from MediaTek settlement    |  | $                        |       |   |      | $ |      |      |  | $ | 45,000 |  
|Legal fee related to MediaTek settlement  |  |                          |       |   |      |   |      |      |  |   | (515   | )
|Consulting fees  Taiwanese tax exemption |  |                          |       |   |      |   |      |      |  |   | (1,500 | )
|Interest income                           |  |                          | 2,212  |   |      |   | 1,971 |      |  |   | 2,486  |  
|Income on other investments               |  |                          | 102    |   |      |   |      |      |  |   | 774    |  
|Impairment of investments (Note 6)        |  |                          | (1,316 | ) |      |   |      |      |  |   | (1,986 | )
|Vialta rental income                      |  |                          | 345    |   |      |   | 503   |      |  |   | 1,182  |  
|Other                                     |  |                          | (27    | ) |      |   | 886   |      |  |   | 505    |  
|                                          |  |                          |        |   |      |   |       |      | 
|Total non-operating income                |  | $                        | 1,316  |   |      | $ | 3,360 |      |  | $ | 45,946 |  
|                                          |  |                          |        |   |      |   |       |      | 



| |                    
| | -------------------
| | MediaTek Settlement



65



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##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|        |             
|------- | ------------
|Note 9. | Income Taxes



|         |  |                          |         |   |      |   |         |      |  |   |        |  
|-------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|         |  | Years Ended December 31, |        
|         |  |                          |        
|         |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|         |  |                          |         |   |      |   |         |      | 
|         |  | (In thousands)           |        
|Domestic |  | $                        | (51,289 | ) |      | $ | (12,561 | )    |  | $ | (5,211 | )
|Foreign  |  |                          | (46,485 | ) |      |   | (24,721 | )    |  |   | 46,105 |  
|         |  |                          |         |   |      |   |         |      | 
|         |  | $                        | (97,774 | ) |      | $ | (37,282 | )    |  | $ | 40,894 |  
|         |  |                          |         |   |      |   |         |      | 



|         |         |                          |       |       |       |  |      |        |        |   |        |        |        | 
|-------- | ------- | ------------------------ | ----- | ----- | ----- |  | ---- | ------ | ------ | - | ------ | ------ | ------ | 
|         |         | Years Ended December 31, |      
|         |         |                          |      
|         |         | 2005                     |       |       | 2004  |  |      | 2003   |       
|         |         |                          |       |       |       |  |      |        |       
|         |         | (In thousands)           |      
|Current: |         |                          |       |       |       |  |      |        |        |   |        |       
|         | Federal |                          | $     | 1,859 |       |  | $    | (1,349 | )      |   | $      | 13,815 |       
|         | State   |                          |       | (369  | )     |  |      |       |        |   |        | 2,749  |       
|         | Foreign |                          |       | 540   |       |  |      | 551    |        |   |        | 140    |       
|         |         |                          |       |       |       |  |      |        |       
|         |         |                          | 2,030 |       |       |  | (798 | )      |        |   | 16,704 |       
|         |         |                          |       |       |       |  |      |        |       
|Deferred |         |                          |       |       |       |  |      |        |        |   |        |       
|         | Federal |                          |       | (708  | )     |  |      | (923   | )      |   |        | (980   | )     
|         | State   |                          |       | 457   |       |  |      | (11    | )      |   |        | (121   | )     
|         |         |                          |       |       |       |  |      |        |       
|         |         |                          | (251  | )     |       |  | (934 | )      |        |   | (1,101 | )     
|         |         |                          |       |       |       |  |      |        |       
|         |         | Total                    |       | $     | 1,779 |  |      | $      | (1,732 | ) |        | $      | 15,603 | 
|         |         |                          |       |       |       |  |      |        |       



|                                               |  |                          |         |   |      |   |         |      |  |   |        |  
|---------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                               |  | Years Ended December 31, |        
|                                               |  |                          |        
|                                               |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                               |  |                          |         |   |      |   |         |      | 
|                                               |  | (In thousands)           |        
|Provision (benefit) at statutory rate          |  | $                        | (34,221 | ) |      | $ | (13,049 | )    |  | $ | 14,313 |  
|Foreign income taxed at different rates        |  |                          | 25,935  |   |      |   | 14,976  |      |  |   | 581    |  
|State income taxes, net of federal tax benefit |  |                          | (5,299  | ) |      |   | (2,089  | )    |  |   | 2,351  |  
|General business credit                        |  |                          | (1,882  | ) |      |   | (1,670  | )    |  |   | (423   | )
|Impairment of goodwill                         |  |                          | 16,745  |   |      |   |        |      |  |   |       |  
|Nondeductible research and development costs   |  |                          |        |   |      |   |        |      |  |   | 1,096  |  
|Other                                          |  |                          | 501     |   |      |   | 100     |      |  |   | (2,315 | )
|                                               |  |                          |         |   |      |   |         |      | 
|Provision for (benefit from) income taxes      |  | $                        | 1,779   |   |      | $ | (1,732  | )    |  | $ | 15,603 |  
|                                               |  |                          |         |   |      |   |         |      | 

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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                               |                                 |                |        |         |      |   |        |         |  
|-------------------------------------------------------------- | ------------------------------- | -------------- | ------ | ------- | ---- | - | ------ | ------- | -
|                                                               |                                 | December 31,   |       
|                                                               |                                 |                |       
|                                                               |                                 | 2005           |        |         | 2004 |  
|                                                               |                                 |                |        |         |      |  
|                                                               |                                 | (In thousands) |       
|Current:                                                       |                                 |                |        |         |      |   |        |        
|Accrued liabilities and reserves                               |                                 | $              | 1,343  |         |      | $ | 1,484  |        
|Deferred tax asset arising from unrealized loss on investments |                                 |                | 336    |         |      |   | 107    |        
|                                                               |                                 |                |        |         |      |  
|                                                               | Current deferred tax assets     |                | $      | 1,679   |      |   | $      | 1,591   |  
|                                                               |                                 |                |        |         |      |  
|Non-current:                                                   |                                 |                |        |         |      |   |        |        
|Depreciation and amortization                                  |                                 | $              | 4,513  |         |      | $ | 4,054  |        
|Acquired intangible assets                                     |                                 |                | (321   | )       |      |   | (2,604 | )      
|Net operating loss carryforwards                               |                                 |                | 24,193 |         |      |   | 24,304 |        
|Credit carryforwards                                           |                                 |                | 6,405  |         |      |   | 6,293  |        
|                                                               |                                 |                |        |         |      |  
|                                                               | Non-current deferred tax assets |                |        | 34,790  |      |   |        | 32,047  |  
|                                                               |                                 |                |        |         |      |  
|                                                               | Total deferred tax assets       |                |        | 36,469  |      |   |        | 33,638  |  
|                                                               | Valuation allowance             |                |        | (35,377 | )    |   |        | (32,495 | )
|                                                               |                                 |                |        |         |      |  
|Net deferred tax assets                                        |                                 | $              | 1,092  |         |      | $ | 1,143  |        
|                                                               |                                 |                |        |         |      |  





non-U.S.




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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                            
|-------- | ---------------------------
|Note 10. | Net Income (Loss) Per Share



|                                              |  |                                       |         |          |         |  |        |           |  |   |       |  
|--------------------------------------------- |  | ------------------------------------- | ------- | -------- | ------- |  | ------ | --------- |  | - | ----- | -
|                                              |  |                                       |         | Weighted |         |  |       
|                                              |  | Net Income                            |         |          | Average |  |        | Per Share | 
|                                              |  | (Loss)                                |         |          | Shares  |  |        | Amount    | 
|                                              |  |                                       |         |          |         |  |        |           | 
|                                              |  | (In thousands, except per share data) |        
|Year Ended December 31, 2005                  |  |                                       |         |          |         |  |        |           |  |   |       |  
|Basic net loss per share                      |  | $                                     | (99,553 | )        |         |  | 39,781 |           |  | $ | (2.50 | )
|Effects of dilutive securities: Stock options |  |                                       |        |          |         |  |       |           |  |   |      |  
|                                              |  |                                       |         |          |         |  |        |           | 
|Diluted net loss per share                    |  | $                                     | (99,553 | )        |         |  | 39,781 |           |  | $ | (2.50 | )
|                                              |  |                                       |         |          |         |  |        |           | 
|Year Ended December 31, 2004                  |  |                                       |         |          |         |  |        |           |  |   |       |  
|Basic net loss per share                      |  | $                                     | (35,550 | )        |         |  | 39,476 |           |  | $ | (0.90 | )
|Effects of dilutive securities: Stock options |  |                                       |        |          |         |  |       |           |  |   |      |  
|                                              |  |                                       |         |          |         |  |        |           | 
|Diluted net loss per share                    |  | $                                     | (35,550 | )        |         |  | 39,476 |           |  | $ | (0.90 | )
|                                              |  |                                       |         |          |         |  |        |           | 
|Year Ended December 31, 2003                  |  |                                       |         |          |         |  |        |           |  |   |       |  
|Basic net income per share                    |  | $                                     | 25,291  |          |         |  | 39,517 |           |  | $ | 0.64  |  
|Effects of dilutive securities: Stock options |  |                                       |        |          |         |  | 1,721  |           |  |   | (0.03 | )
|                                              |  |                                       |         |          |         |  |        |           | 
|Diluted net income per share                  |  | $                                     | 25,291  |          |         |  | 41,238 |           |  | $ | 0.61  |  
|                                              |  |                                       |         |          |         |  |        |           | 





|         |                     
|-------- | --------------------
|Note 11. | Shareholders Equity



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



| |                 
| | ----------------
| | Stock Repurchase

time-to


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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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







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

24-month




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

3-year




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





| |                                     
| | ------------------------------------
| | 2002 Non-executive Stock Option Plan





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



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                            
| | ---------------------------
| | Stock Option Exchange Offer





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



|                             |            |                |       |        |             |  |          |                |   |   |      |       | 
|---------------------------- | ---------- | -------------- | ----- | ------ | ----------- |  | -------- | -------------- | - | - | ---- | ----- | 
|                             |            | Available      |       |        |             |  | Weighted |               
|                             |            | for            |       |        | Options     |  |          | Average        |  
|                             |            | Grant          |       |        | Outstanding |  |          | Exercise Price |  
|                             |            |                |       |        |             |  |          |                |  
|                             |            | (In thousands) |      
|Balance at December 31, 2002 |            |                | 5,286 |        |             |  | 7,363    |                |   | $ | 9.64 |      
|                             | Authorized |                |       | 1,000  |             |  |          |               |   |   | $    |      | 
|                             | Granted    |                |       | (2,602 | )           |  |          | 2,602          |   |   | $    | 8.96  | 
|                             | Exercised  |                |       |       |             |  |          | (642           | ) |   | $    | 6.04  | 
|                             | Canceled   |                |       | 757    |             |  |          | (757           | ) |   | $    | 10.99 | 
|                             |            |                |       |        |             |  |          |                |  
|Balance at December 31, 2003 |            |                | 4,441 |        |             |  | 8,566    |                |   | $ | 9.58 |      
|                             | Authorized |                |       | 400    |             |  |          |               |   |   | $    |      | 
|                             | Granted    |                |       | (2,055 | )           |  |          | 2,055          |   |   | $    | 12.03 | 
|                             | Exercised  |                |       |       |             |  |          | (275           | ) |   | $    | 5.76  | 
|                             | Canceled   |                |       | 4,784  |             |  |          | (4,784         | ) |   | $    | 13.53 | 
|                             |            |                |       |        |             |  |          |                |  
|Balance at December 31, 2004 |            |                | 7,570 |        |             |  | 5,562    |                |   | $ | 7.29 |      
|                             | Granted    |                |       | (5,284 | )           |  |          | 5,284          |   |   | $    | 4.06  | 
|                             | Exercised  |                |       |       |             |  |          | (52            | ) |   | $    | 3.86  | 
|                             | Canceled   |                |       | 1,041  |             |  |          | (1,041         | ) |   | $    | 7.73  | 
|                             | Expired    |                |       | (84    | )           |  |          |               |   |   | $    |      | 
|                             |            |                |       |        |             |  |          |                |  
|Balance at December 31, 2005 |            |                | 3,243 |        |             |  | 9,753    |                |   | $ | 5.51 |      
|                             |            |                |       |        |             |  |          |                |  

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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |       |                     |       |          |                     |  |      |          |  |                |                |      |  |          |       |       |  |   |       |      | 
|------------------------ | ----- | ------------------- | ----- | -------- | ------------------- |  | ---- | -------- |  | -------------- | -------------- | ---- |  | -------- | ----- | ----- |  | - | ----- | ---- | 
|                         |       | Options Outstanding |       |          |                    
|                         |       |                     |       |          | Options Exercisable | 
|                         |       |                     |       | Weighted |                     |  |      |          |  |               
|                         |       | Number              |       |          | Average             |  |      | Weighted |  |                | Number         |      |  | Weighted |      
|                         |       | Outstanding at      |       |          | Remaining           |  |      | Average  |  |                | Exercisable at |      |  | Average  |      
|                         |       | December 31,        |       |          | Contractual         |  |      | Exercise |  |                | December 31,   |      |  | Exercise |      
|Range of Exercise Prices |       | 2005                |       |          | Life                |  |      | Price    |  |                | 2005           |      |  | Price    |      
|                         |       |                     |       |          |                     |  |      |          |  |                |                |      |  |          |      
|                         |       | (In thousands)      |       |          | (In years)          |  |      |          |  | (In thousands) |                |      | 
|$0.03 - $ 4.10           |       |                     | 1,169 |          |                     |  | 8.48 |          |  | $              | 3.14           |      |  |          | 247   |       |  | $ | 2.96  |     
|$4.11 - $ 4.12           |       |                     | 3,277 |          |                     |  | 9.49 |          |  | $              | 4.12           |      |  |          | 2,346 |       |  | $ | 4.12  |     
|$4.13 - $ 4.87           |       |                     | 2,078 |          |                     |  | 3.47 |          |  | $              | 4.80           |      |  |          | 1,847 |       |  | $ | 4.85  |     
|$4.88 - $ 7.62           |       |                     | 1,822 |          |                     |  | 7.54 |          |  | $              | 6.51           |      |  |          | 813   |       |  | $ | 6.68  |     
|$7.63 - $23.25           |       |                     | 1,407 |          |                     |  | 6.97 |          |  | $              | 10.47          |      |  |          | 965   |       |  | $ | 10.67 |     
|                         |       |                     |       |          |                     |  |      |          |  |                |                |      |  |          |      
|                         | Total |                     |       | 9,753    |                     |  |      | 7.36     |  |                | $              | 5.51 |  |          |       | 6,218 |  |   | $     | 5.64 | 
|                         |       |                     |       |          |                     |  |      |          |  |                |                |      |  |          |      





|         |                                                                    
|-------- | -------------------------------------------------------------------
|Note 12. | Business Segment Information and Concentration of Certain
    Risks



| |                  
| | -----------------
| | Business Segments





|                         |            |                      |     |    |      |   |     |      |    |   |     |    |    |  
|------------------------ | ---------- | -------------------- | --- | -- | ---- | - | --- | ---- | -- | - | --- | -- | -- | -
|                         |            | Percentage of Net    |    
|                         |            | Revenues for Years   |    
|                         |            | Ended                |    
|                         |            | December 31,         |    
|                         |            |                      |    
|                         |            | 2005                 |     |    | 2004 |   |     | 2003 |   
|                         |            |                      |     |    |      |   |     |      |   
|Video business:          |            |                      |     |    |      |   |     |      |    |   |     |   
|                         | DVD        |                      |     | 55 | %    |   |     | 54   | %  |   |     | 40 | % 
|                         | VCD        |                      |     | 17 | %    |   |     | 27   | %  |   |     | 38 | % 
|                         | Recordable |                      |     | 2  | %    |   |     | 3    | %  |   |     | 6  | % 
|                         | Royalty    |                      |     | 11 | %    |   |     | 8    | %  |   |     | 3  | % 
|                         | Other      |                      |     | 3  | %    |   |     | 2    | %  |   |     | 5  | % 
|                         |            |                      |     |    |      |   |     |      |   
|                         |            | Total Video business |     |    | 88   | % |     |      | 94 | % |     |    | 92 | %
|Digital Imaging business |            |                      | 12  | %  |      |   | 6   | %    |    |   | 8   | % 
|                         |            |                      |     |    |      |   |     |      |   
|Total                    |            |                      | 100 | %  |      |   | 100 | %    |    |   | 100 | % 
|                         |            |                      |     |    |      |   |     |      |   

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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                 |                 |                                       |   |         |         |   |   |         |         |   |   |         |         | 
|-------------------------------- | --------------- | ------------------------------------- | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | 
|                                 |                 | Years Ended December 31,              |  
|                                 |                 |                                       |  
|                                 |                 | 2005                                  |   |         | 2004    |   |   | 2003    |        
|                                 |                 |                                       |   |         |         |   |   |         |        
|                                 |                 | (In thousands)                        |  
|Net revenues:                    |                 |                                       |   |         |         |   |   |         |         |   |   |        
|                                 | Video           |                                       | $ | 159,522 |         |   | $ | 242,424 |         |   | $ | 180,674 |        
|                                 | Digital Imaging |                                       |   | 22,399  |         |   |   | 14,854  |         |   |   | 14,599  |        
|                                 |                 |                                       |   |         |         |   |   |         |        
|                                 |                 | Total net revenues                    |   | $       | 181,921 |   |   | $       | 257,278 |   |   | $       | 195,273 | 
|                                 |                 |                                       |   |         |         |   |   |         |        
|Segment operating income (loss): |                 |                                       |   |         |         |   |   |         |         |   |   |        
|                                 | Video           |                                       | $ | (15,176 | )       |   | $ | 1,640   |         |   | $ | 18,684  |        
|                                 | Digital Imaging |                                       |   | (25,159 | )       |   |   | (22,542 | )       |   |   | (6,890  | )      
|                                 |                 |                                       |   |         |         |   |   |         |        
|                                 |                 | Total segment operating income (loss) |   | $       | (40,335 | ) |   | $       | (20,902 | ) |   | $       | 11,794  | 
|                                 |                 |                                       |   |         |         |   |   |         |        



|                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                             |  | Years Ended December 31, |        
|                                             |  |                          |        
|                                             |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                             |  |                          |         |   |      |   |         |      | 
|                                             |  | (In thousands)           |        
|Segment operating income (loss)              |  | $                        | (40,335 | ) |      | $ | (20,902 | )    |  | $ | 11,794  |  
|Unallocated corporate expenses               |  |                          | (16,012 | ) |      |   | (19,740 | )    |  |   | (14,156 | )
|Impairment of goodwill and intangible assets |  |                          | (42,743 | ) |      |   |        |      |  |   |        |  
|In process research and development          |  |                          |        |   |      |   |        |      |  |   | (2,690  | )
|                                             |  |                          |         |   |      |   |         |      | 
|Operating loss                               |  | $                        | (99,090 | ) |      | $ | (40,642 | )    |  | $ | (5,052  | )
|                                             |  |                          |         |   |      |   |         |      | 

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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                       
| | ----------------------
| | Geographic Information



|                             |       |         |         |         |            |   |        |        | 
|---------------------------- | ----- | ------- | ------- | ------- | ---------- | - | ------ | ------ | 
|                             |       | Net     |         |         | Long-Lived |  
|                             |       | Revenue |         |         | Assets     |  
|                             |       |         |         |         |            |  
|Year Ended December 31, 2005 |       |         |         |         |            |   |        |       
|United States                |       | $       | 499     |         |            | $ | 19,990 |       
|                             |       |         |         |         |            |  
|Hong Kong                    |       |         | 72,220  |         |            |   | 52     |       
|Taiwan                       |       |         | 44,089  |         |            |   | 268    |       
|Japan                        |       |         | 16,297  |         |            |   |       |       
|China (excluding Hong Kong)  |       |         | 1,439   |         |            |   | 335    |       
|Korea                        |       |         | 29,659  |         |            |   | 156    |       
|Turkey                       |       |         | 8,337   |         |            |   |       |       
|Singapore                    |       |         | 2,221   |         |            |   |       |       
|Rest of the world            |       |         | 7,160   |         |            |   | 332    |       
|                             |       |         |         |         |            |  
|Total foreign                |       |         | 181,422 |         |            |   | 1,143  |       
|                             |       |         |         |         |            |  
|                             | Total |         | $       | 181,921 |            |   | $      | 21,133 | 
|                             |       |         |         |         |            |  
|Year Ended December 31, 2004 |       |         |         |         |            |   |        |       
|United States                |       | $       | 2,365   |         |            | $ | 21,369 |       
|                             |       |         |         |         |            |  
|Hong Kong                    |       |         | 135,954 |         |            |   | 630    |       
|Taiwan                       |       |         | 38,683  |         |            |   | 413    |       
|Japan                        |       |         | 22,489  |         |            |   |       |       
|China (excluding Hong Kong)  |       |         | 14,466  |         |            |   | 265    |       
|Korea                        |       |         | 11,730  |         |            |   | 180    |       
|Turkey                       |       |         | 10,398  |         |            |   |       |       
|Singapore                    |       |         | 9,409   |         |            |   |       |       
|Rest of the world            |       |         | 11,784  |         |            |   | 152    |       
|                             |       |         |         |         |            |  
|Total foreign                |       |         | 254,913 |         |            |   | 1,640  |       
|                             |       |         |         |         |            |  
|                             | Total |         | $       | 257,278 |            |   | $      | 23,009 | 
|                             |       |         |         |         |            |  

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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                             |       |         |         |         |            |   |        |        | 
|---------------------------- | ----- | ------- | ------- | ------- | ---------- | - | ------ | ------ | 
|                             |       | Net     |         |         | Long-Lived |  
|                             |       | Revenue |         |         | Assets     |  
|                             |       |         |         |         |            |  
|Year Ended December 31, 2003 |       |         |         |         |            |   |        |       
|United States                |       | $       | 1,111   |         |            | $ | 23,585 |       
|                             |       |         |         |         |            |  
|Hong Kong                    |       |         | 129,002 |         |            |   | 671    |       
|Taiwan                       |       |         | 17,836  |         |            |   | 8      |       
|China (excluding Hong Kong)  |       |         | 10,936  |         |            |   | 131    |       
|Korea                        |       |         | 8,787   |         |            |   | 69     |       
|Japan                        |       |         | 8,432   |         |            |   | 3      |       
|Czech Republic               |       |         | 7,936   |         |            |   |       |       
|Singapore                    |       |         | 4,156   |         |            |   |       |       
|Rest of the world            |       |         | 7,077   |         |            |   | 162    |       
|                             |       |         |         |         |            |  
|Total foreign                |       |         | 194,162 |         |            |   | 1,044  |       
|                             |       |         |         |         |            |  
|                             | Total |         | $       | 195,273 |            |   | $      | 24,629 | 
|                             |       |         |         |         |            |  





| |                                       
| | --------------------------------------
| | Significant Customers and Distributors









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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                                             
|-------- | --------------------------------------------
|Note 13. | Related Party Transactions with Vialta, Inc.



time-to


|                                                                                                       |  |                          |     |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------ | --- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                                       |  | Transactions Between     |    
|                                                                                                       |  | ESS and Vialta           |    
|                                                                                                       |  |                          |    
|                                                                                                       |  | Years Ended December 31, |    
|                                                                                                       |  |                          |    
|                                                                                                       |  | 2005                     |     |   | 2004 |   |       | 2003 | 
|                                                                                                       |  |                          |     |   |      |   |       |      | 
|                                                                                                       |  | (In thousands)           |    
|Lease charges to Vialta under Real Estate Matters Agreement                                            |  | $                        | 346 |   |      | $ | 503   |      |  | $ | 1,182 |  
|Products sold to Vialta                                                                                |  |                          | 12  |   |      |   | 782   |      |  |   | 458   |  
|Products purchased from Vialta                                                                         |  |                          | (31 | ) |      |   | (22   | )    |  |   | (2    | )
|Selling, general, administrative and other services provided to
    Vialta, net of charges from Vialta |  |                          | 4   |   |      |   | 10    |      |  |   | 70    |  
|                                                                                                       |  |                          |     |   |      |   |       |      | 
|Total charges to Vialta, net of charges from Vialta                                                    |  | $                        | 331 |   |      | $ | 1,273 |      |  | $ | 1,708 |  
|                                                                                                       |  |                          |     |   |      |   |       |      | 

|                       |  |              |    |  |      |   |     | 
|---------------------- |  | ------------ | -- |  | ---- | - | --- | 
|                       |  | As of        |   
|                       |  | December 31, |   
|                       |  |              |   
|                       |  | 2005         |    |  | 2004 |  
|                       |  |              |    |  |      |  
|Receivable from Vialta |  | $            | 20 |  |      | $ | 128 | 
|                       |  |              |    |  |      |  



|         |                              
|-------- | -----------------------------
|Note 14. | Commitments and Contingencies



|                            |  |                        |        |           |        |   |        |       |  |     |       |  |           |         |    |  |  |  |   | 
|--------------------------- |  | ---------------------- | ------ | --------- | ------ | - | ------ | ----- |  | --- | ----- |  | --------- | ------- | -- |  |  |  | - | 
|                            |  | Payment Due by Periods |       
|                            |  |                        |       
|                            |  |                        |        | Less than |        |   | 1-3    |       |  | 3-5 |       |  | More than |        
|Contractual Obligations     |  | Total                  |        |           | 1 Year |   |        | Years |  |     | Years |  |           | 5 Years |   
|                            |  |                        |        |           |        |   |        |       |  |     |       |  |           |         |   
|                            |  | (In thousands)         |       
|Operating lease obligations |  | $                      | 3,286  |           |        | $ | 2,795  |       |  | $   | 475   |  |           | $       | 16 |  |  |  |  | 
|Purchase order commitments  |  |                        | 24,886 |           |        |   | 24,886 |       |  |     |      |  |           |         |   |  |  |  |  | 
|                            |  |                        |        |           |        |   |        |       |  |     |       |  |           |         |   
|Total                       |  | $                      | 28,172 |           |        | $ | 27,681 |       |  | $   | 475   |  |           | $       | 16 |  |  |  |  | 
|                            |  |                        |        |           |        |   |        |       |  |     |       |  |           |         |   



75



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












Legal Proceedings






76



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##### Table of Contents



ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












77



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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                      
|-------- | ---------------------
|Note 15. | Employee Benefit Plan








|   |                    
|-- | -------------------
|2. | Supplementary Data:




Selected Quarterly Financial Data (unaudited)


10-K.


|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |        |   |   |         |        |   |   |         |        |  
|------------------------------------------------------- | -------------------------------------------- | ------------------------------------- | ------ | ------ | ------- | - | ------ | -------- |  | - | ------- | ------ | - | ------- | ------- | ------ | ------- | - | ------- | -------- | - | - | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                                        |                                              | 2004                                  |        |        | 2005    |  
|                                                        |                                              |                                       |        |        |         |  
|                                                        |                                              | Mar. 31                               |        |        | Jun. 30 |   |        | Sept. 30 |  |   | Dec. 31 |        |   | Mar. 31 |         |        | Jun. 30 |   |         | Sept. 30 |   |   | Dec. 31 |       
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|                                                        |                                              | (In thousands, except per share data) |       
|Statement of Operations Data:                           |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |        |   |   |         |        |   |   |         |       
|Net revenues:                                           |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |        |   |   |         |        |   |   |         |       
|                                                        | Product                                      |                                       | $      | 71,745 |         |   | $      | 71,813   |  |   | $       | 55,611 |   |         | $       | 38,109 |         |   | $       | 37,763   |   |   | $       | 41,491 |   |   | $       | 43,588 |   |   | $       | 39,079 |  
|                                                        | Royalty                                      |                                       |        | 5,000  |         |   |        | 5,000    |  |   |         | 5,000  |   |         |         | 5,000  |         |   |         | 5,000    |   |   |         | 5,000  |   |   |         | 5,000  |   |   |         | 5,000  |  
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|Total net revenues                                      |                                              |                                       | 76,745 |        |         |   | 76,813 |          |  |   | 60,611  |        |   |         | 43,109  |        |         |   | 42,763  |          |   |   | 46,491  |        |   |   | 48,588  |        |   |   | 44,079  |       
|Cost of product revenues(1)                             |                                              |                                       | 53,332 |        |         |   | 53,921 |          |  |   | 64,504  |        |   |         | 47,640  |        |         |   | 48,587  |          |   |   | 40,613  |        |   |   | 43,047  |        |   |   | 37,065  |       
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|                                                        | Gross profit (loss)                          |                                       |        | 23,413 |         |   |        | 22,892   |  |   |         | (3,893 | ) |         |         | (4,531 | )       |   |         | (5,824   | ) |   |         | 5,878  |   |   |         | 5,541  |   |   |         | 7,014  |  
|Operating expenses:                                     |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |        |   |   |         |        |   |   |         |       
|                                                        | Research and development                     |                                       |        | 9,293  |         |   |        | 10,537   |  |   |         | 9,017  |   |         |         | 8,620  |         |   |         | 7,753    |   |   |         | 8,844  |   |   |         | 8,738  |   |   |         | 8,648  |  
|                                                        | Selling, general and administrative          |                                       |        | 11,742 |         |   |        | 9,766    |  |   |         | 10,179 |   |         |         | 9,369  |         |   |         | 9,654    |   |   |         | 9,051  |   |   |         | 8,456  |   |   |         | 7,812  |  
|                                                        | Impairment of goodwill and intangible assets |                                       |        |       |         |   |        |         |  |   |         |       |   |         |         |       |         |   |         |         |   |   |         |       |   |   |         |       |   |   |         | 42,743 |  
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|Operating income (loss)                                 |                                              |                                       | 2,378  |        |         |   | 2,589  |          |  |   | (23,089 | )      |   |         | (22,520 | )      |         |   | (23,231 | )        |   |   | (12,017 | )      |   |   | (11,653 | )      |   |   | (52,189 | )     
|Non-operating income (loss), net                        |                                              |                                       | 1,162  |        |         |   | 812    |          |  |   | 724     |        |   |         | 662     |        |         |   | (112    | )        |   |   | 807     |        |   |   | 451     |        |   |   | 170     |       
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|Income (loss) before income taxes                       |                                              |                                       | 3,540  |        |         |   | 3,401  |          |  |   | (22,365 | )      |   |         | (21,858 | )      |         |   | (23,343 | )        |   |   | (11,210 | )      |   |   | (11,202 | )      |   |   | (52,019 | )     
|Provision for (benefit from) income taxes               |                                              |                                       | 233    |        |         |   | 224    |          |  |   | (1,189  | )      |   |         | (1,000  | )      |         |   | 667     |          |   |   | 413     |        |   |   | (106    | )      |   |   | 805     |       
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|Net income (loss)                                       |                                              | $                                     | 3,307  |        |         | $ | 3,177  |          |  | $ | (21,176 | )      |   | $       | (20,858 | )      |         | $ | (24,010 | )        |   | $ | (11,623 | )      |   | $ | (11,096 | )      |   | $ | (52,824 | )     
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|Net income (loss) per share:                            |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |        |   |   |         |        |   |   |         |       
|                                                        | Basic                                        |                                       | $      | 0.08   |         |   | $      | 0.08     |  |   | $       | (0.54  | ) |         | $       | (0.53  | )       |   | $       | (0.60    | ) |   | $       | (0.29  | ) |   | $       | (0.28  | ) |   | $       | (1.33  | )
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|                                                        | Diluted                                      |                                       | $      | 0.08   |         |   | $      | 0.08     |  |   | $       | (0.54  | ) |         | $       | (0.53  | )       |   | $       | (0.60    | ) |   | $       | (0.29  | ) |   | $       | (0.28  | ) |   | $       | (1.33  | )
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|Shares used in calculating net income (loss) per share: |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |        |   |   |         |        |   |   |         |       
|                                                        | Basic                                        |                                       |        | 39,305 |         |   |        | 39,439   |  |   |         | 39,529 |   |         |         | 39,629 |         |   |         | 39,706   |   |   |         | 39,772 |   |   |         | 39,806 |   |   |         | 39,839 |  
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       
|                                                        | Diluted                                      |                                       |        | 42,657 |         |   |        | 41,732   |  |   |         | 39,529 |   |         |         | 39,629 |         |   |         | 39,706   |   |   |         | 39,772 |   |   |         | 39,806 |   |   |         | 39,839 |  
|                                                        |                                              |                                       |        |        |         |   |        |          |  |   |         |        |   |         |         |        |         |   |         |          |   |   |         |       






|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Included inventory provisions of approximately
    $18.5 million, $4.6 million, $6.8 million and
    $6.2 million for the quarters ended March 31,
    June 30, September 30 and December 31, 2005,
    respectively. Included

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ESS TECHNOLOGY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | inventory provisions of approximately $19.6 million and
    $11.1 million for the quarters ended September 30 and
    December 31, 2004, respectively.






|   |                              
|-- | -----------------------------
|3. | Financial Statement Schedule:




VALUATION AND QUALIFYING ACCOUNTS


|                                                             |                                                  |                |     |           |            |   |     |            |  |            |        |       |  |   |     |       | 
|------------------------------------------------------------ | ------------------------------------------------ | -------------- | --- | --------- | ---------- | - | --- | ---------- |  | ---------- | ------ | ----- |  | - | --- | ----- | 
|                                                             |                                                  |                |     | Additions |            |   |     |            | 
|                                                             |                                                  | Balance at     |     |           | Charged to |   |     |            |  | Balance at |       
|                                                             |                                                  | Beginning      |     |           | Costs and  |   |     |            |  | Ending of  |       
|                                                             |                                                  | of Period      |     |           | Expenses   |   |     | Deductions |  |            | Period |      
|                                                             |                                                  |                |     |           |            |   |     |            |  |            |        |      
|                                                             |                                                  | (In thousands) |    
|Year Ended December 31, 2005                                 |                                                  |                |     |           |            |   |     |            |  |            |        |       |  |   |     |      
|                                                             | Allowance for doubtful accounts                  |                | $   | 787       |            |   |     |           |  |            | $      | 338   |  |   | $   | 449   | 
|                                                             | Allowance for sales returns and warranty reserve |                | $   | 757       |            |   | $   | 601        |  |            | $      | 616   |  |   | $   | 742   | 
|Year Ended December 31, 2004 Allowance for doubtful accounts |                                                  | $              | 990 |           |            | $ | 176 |            |  | $          | 379    |       |  | $ | 787 |      
|                                                             | Allowance for sales returns and warranty reserve |                | $   | 1,711     |            |   | $   | 653        |  |            | $      | 1,607 |  |   | $   | 757   | 
|Year Ended December 31, 2003 Allowance for doubtful accounts |                                                  | $              | 949 |           |            | $ | 369 |            |  | $          | 328    |       |  | $ | 990 |      
|                                                             | Allowance for sales returns and warranty reserve |                | $   | 1,048     |            |   | $   | 1,324      |  |            | $      | 661   |  |   | $   | 1,711 | 



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures


13a-15(e)




Managements Report on Internal Control over Financial
Reporting




Changes in Internal Control over Financial Reporting


13a-15(f)







|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III









|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



http://www.ESSTECH.com.


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8-K.







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Shareholder Matters





Equity Compensation Plan Information(1)


|                                                           |       |                         |           |           |                      |                      |      |                       |  |  |           |           | 
|---------------------------------------------------------- | ----- | ----------------------- | --------- | --------- | -------------------- | -------------------- | ---- | --------------------- |  |  | --------- | --------- | 
|                                                           |       |                         |           |           |                      | Number of Securities |     
|                                                           |       |                         |           |           |                      | Remaining Available  |     
|                                                           |       |                         |           |           |                      | for Future Issuance  |     
|                                                           |       | Number of Securities to |           |           | Weighted-Average     |                      |      | Under Equity          | 
|                                                           |       | be Issued Upon          |           |           | Exercise Price of    |                      |      | Compensation Plans    | 
|                                                           |       | Exercise of Outstanding |           |           | Outstanding Options, |                      |      | (Excluding Securities | 
|                                                           |       | Options, Warrants and   |           |           | Warrants and         |                      |      | Reflected in          | 
|Plan Category                                              |       | Rights(a)(3)            |           |           | Rights(b)            |                      |      | Column(a))(c)         | 
|                                                           |       |                         |           |           |                      |                      |      |                       | 
|Equity compensation plans approved by security holders     |       |                         | 7,934,703 |           |                      | $                    | 5.68 |                       |  |  | 3,322,368 | (2)      
|Equity compensation plans not approved by security holders |       |                         | 1,818,619 |           |                      | $                    | 4.75 |                       |  |  | 167,551   |          
|                                                           |       |                         |           |           |                      |                      |      |                       | 
|                                                           | Total |                         |           | 9,753,322 |                      |                      | $    | 5.51                  |  |  |           | 3,489,919 | 
|                                                           |       |                         |           |           |                      |                      |      |                       | 






|    |                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes only options outstanding under ESS stock option
    plans, as no stock warrants or rights were outstanding as of
    December 31, 2005.
|   
|(2) | Includes 292,010 shares of common stock reserved for future
    issuance under the ESS Technology, Inc. 1995 Employee Stock
    Purchase Plan.   
|   
|(3) | Includes outstanding options to purchase 26,146 shares
    of ESS common stock assumed through the acquisition of Platform
    Technologies, Inc.



81



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|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statements




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

Financial Statement Schedule




| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statement schedule of the registrant
    as set forth under Item 8 are filed as part of the
    Form 10-K.                                                                                   
|
| | The independent registered public accounting firms report
    with respect to the financial statement and financial statement
    schedule listed in Item 15(a)(1) and 15(a)(2) above is on
    page 41 of this Report.

Exhibits




| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The exhibits listed in the accompanying Index to Exhibits are
    filed or incorporated by reference as part of this Annual Report
    on Form 10-K.

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SIGNATURES


10-K




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



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

| | 
| | 
| | 



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



POWER OF ATTORNEY


attorneys-in 10-K, attorneys-in




|                                   |  |                                                                                                                                               |  |                |  | 
|---------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                          |  | Title                                                                                                                                         |  | Date          
|                                   |  |                                                                                                                                               |  |               
|                                  
|/s/ ROBERT L. BLAIRRobert L. Blair |  | President and Chief Executive Officer (principal executive
    officer)                                                                       |  | March 16, 2006
|                                  
|/s/ JAMES B. BOYDJames B. Boyd     |  | Chief Financial Officer, Senior Vice President and Assistant
    Secretary (principal financial officer and principal accounting
    officer) |  | March 16, 2006
|                                  
|/s/ FRED S.L. CHANFred S.L. Chan   |  | Chairman of the Board of Directors                                                                                                            |  | March 16, 2006
|                                  
|/s/ GARY L. FISCHERGary L. Fischer |  | Director                                                                                                                                      |  | March 16, 2006
|                                  
|/s/ DAVID S. LEEDavid S. Lee       |  | Director                                                                                                                                      |  | March 16, 2006
|                                  
|/s/ PETER T. MOKPeter T. Mok       |  | Director                                                                                                                                      |  | March 16, 2006
|                                  
|/s/ ALFRED J. STEINAlfred J. Stein |  | Director                                                                                                                                      |  | March 16, 2006

83



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INDEX TO EXHIBITS


|        |    |     |               |                                                                                                                                                                                                                                                                                                     
|------- | -- | --- | ------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |              
|Number  |    |     | Exhibit Title
|        |    |     |              
|        | 2  | .04 |               | Master Distribution Agreement between the Registrant and Vialta,
    Inc. dated August 20, 2001, incorporated herein by
    reference to Exhibit 2.04 to the Registrants Current
    Report on Form 8-K (file no. 000-26660) filed
    September 5, 2001.                                          
|        | 2  | .05 |               | Agreement and Plan of Merger dated June 9, 2003, by and
    among the Registrant, Pictos Technologies, Inc. and Pictos
    Acquisition Corporation, incorporated herein by reference to
    Exhibit 2.1 to the Registrants Current Report on
    From 8-K (file no. 000-26660) filed June 24, 2003.
|       
|        | 2  | .06 |               | Agreement and Plan of Merger dated August 15, 2003, by and
    among the Registrant, Divio, Inc. and Divio Acquisition
    Corporation, incorporated herein by reference to
    Exhibit 2.1 to the Registrants Current Report on
    Form 8-K (file no. 000-26660) filed September 2, 2003.        
|       
|        | 3  | .01 |               | Registrants Articles of Incorporation, incorporated herein
    by reference to Exhibit 3.01 to the Registrants
    Form S-1 registration statement (file no. 33-95388)
    declared effective by the Securities and Exchange Commission on
    October 5, 1995 (the Form S-1).                  
|       
|        | 3  | .02 |               | Registrants Bylaws as amended, incorporated herein by
    reference to Exhibit 3.02 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    1998 (file no. 000-26660) filed on March 31, 1999.                                                                      
|       
|        | 4  |     |               | Registrants Registration Rights Agreement dated
    May 28, 1993, by and among the Registrant and certain
    shareholders, incorporated herein by reference to
    Exhibit 10.07 to the Form S-1 (file no. 33-95388).                                                                             
|       
|        | 10 | .1  |               | Registrants Amended 401(k) Plan, incorporated herein by
    reference to Exhibit 10.06 to the Form S-1 (file no.
    33-95388).*                                                                                                                                                                   
|       
|        | 10 | .2  |               | Form of Indemnity Agreement entered into by Registrant with each
    of its directors and executive officers, incorporated herein by
    reference to Exhibit 10.11 to the Form S-1 (file no.
    33-95388).                                                                                        
|       
|        | 10 | .6  |               | 1995 Employee Stock Purchase Plan amended and restated as of
    April 26, 2003, incorporated herein by reference to
    Exhibit 10.49 to the Registrants Quarterly Report on
    Form 10-Q (file no. 000-26660) filed August 14, 2003.                                                            
|       
|        | 10 | .7  |               | Master Technology Ownership and License Agreement between the
    Registrant and Vialta, Inc. dated August 20, 2001,
    incorporated herein by reference to Exhibit 10.38 to the
    Registrants Current Report on Form 8-K (file no.
    000-26660) filed September 5, 2001.                     
|       
|        | 10 | .8  |               | Employee Matters Agreement between the Registrant and Vialta,
    Inc. dated August 20, 2001, incorporated herein by
    reference to Exhibit 10.39 to the Registrants Current
    Report on Form 8-K (file no. 000-26660) filed
    September 5, 2001.                                            
|       
|        | 10 | .9  |               | Tax Sharing and Indemnity Agreement between the Registrant and
    Vialta, Inc. dated August 20, 2001, incorporated herein by
    reference to Exhibit 10.40 to the Registrants Current
    Report on Form 8-K (file no. 000-26660) filed
    September 5, 2001.                                   
|       
|        | 10 | .10 |               | Real Estate Matters Agreement between the Registrant and Vialta,
    Inc. dated August 20, 2001, incorporated herein by
    reference to Exhibit 10.41 to the Registrants Current
    Report on Form 8-K (file no. 000-26660) filed
    September 5, 2001.                                         
|       
|        | 10 | .11 |               | Master Confidential Disclosure Agreement between the Registrant
    and Vialta, Inc. dated August 20, 2001, incorporated herein
    by reference to Exhibit 10.42 to the Registrants
    Current Report on Form 8-K (file no. 000-26660) filed
    September 5, 2001.                              
|       
|        | 10 | .12 |               | Master Transitional Services Agreement between the Registrant
    and Vialta, Inc, incorporated herein by reference to
    Exhibit 10.43 to the Registrants Current Report on
    Form 8-K (file no. 000-26660) filed with the SEC on
    September 5, 2001.                                       
|       
|        | 10 | .13 |               | Registrants 1997 Equity Incentive Plan, amended and
    restated as of April 26, 2003, incorporated herein by
    reference to Exhibit 10.50 to the Registrants
    Quarterly Report on Form 10-Q (file no. 000-26660)
    filed August 14, 2003.                                                 
|       
|        | 10 | .14 |               | Registrants 2002 Non-Executive Stock Option Plan dated
    May 22, 2002, incorporated herein by reference to
    Exhibits 99.1 to the Form S-8 (file no. 333-89942)
    filed on June 6, 2002.*                                                                                                    
|       
|        | 10 | .15 |               | Joint Development Agreement dated December 14, 2001,
    incorporated herein by reference to Exhibit 10.50 to the
    Registrants Annual Report on Form 10-K (file no.
    000-26660) filed March 31, 2003.**                                                                                      



---



##### Table of Contents



|        |    |     |               |                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | --- | ------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |              
|Number  |    |     | Exhibit Title
|        |    |     |              
|       
|        | 10 | .16 |               | Amendment to Joint Development Agreement dated January 18,
    2003, incorporated herein by reference to Exhibit 10.51 to
    the Registrants Annual Report on Form 10-K (file no.
    000-26660) filed March 31, 2003.**                                                                                                                       
|       
|        | 10 | .17 |               | License Agreement and Mutual Release dated June 11, 2003,
    by and among the Registrant, ESS Technology International, Inc.
    and MediaTek Incorporation, incorporated herein by reference to
    Exhibit 10.51 to the Registrants Quarterly Report on
    Form 10-Q (file no. 000-26660) filed August 14, 2003.**                          
|       
|        | 10 | .18 |               | Addendum to the License Agreement and Mutual Release dated
    July 8, 2003, by and among the Registrant, ESS Technology
    International, Inc. and MediaTek Incorporation, incorporated
    herein by reference to Exhibit 10.52 to the
    Registrants Quarterly Report on Form 10-Q (file no.
    000-26660) filed November 14, 2003.**     
|       
|        | 10 | .20 |               | Registrants 1995 Equity Incentive Plan amended and
    restated as of January 25, 2003, incorporated herein by
    reference to Exhibit 10.57 to the Quarterly Report on
    Form 10-Q (file no. 000-26660) filed on November 9,
    2004.*                                                                                                     
|       
|        | 10 | .21 |               | Form of Stock Option Agreement under Registrants 1995
    Equity Incentive Plan, incorporated herein by reference to
    Exhibit 10.58 to the Quarterly Report on Form 10-Q
    (file no. 000-26660) filed on November 9, 2004.*                                                                                                                
|       
|        | 10 | .22 |               | Form of Stock Option Agreement under Registrants 1997
    Equity Incentive Plan, incorporated herein by reference to
    Exhibit 10.59 to the Quarterly Report on Form 10-Q
    (file no. 000-26660) filed on November 9, 2004.*                                                                                                                
|       
|        | 10 | .23 |               | Form of Directors Nonqualified Initial Stock Option Grant
    Agreement under Registrants 1995 Directors
    Stock Option Plan, incorporated herein by reference to
    Exhibit 10.60 to the Quarterly Report on Form 10-Q
    (file no. 000-26660) filed on November 9, 2004.*                                                                
|       
|        | 10 | .24 |               | Form of Directors Nonqualified Succeeding Stock Option Grant
    Agreement under Registrants 1995 Directors
    Stock Option Plan, incorporated herein by reference to
    Exhibit 10.61 to the Quarterly Report on Form 10-Q
    (file no. 000-26660) filed on November 9, 2004.*                                                             
|       
|        | 10 | .25 |               | Registrants 1995 Directors Stock Option Plan,
    incorporated herein by reference to Exhibit 10.62 to the
    Current Report on Form 8-K (file no. 000-26660) filed on
    November 30, 2004.*                                                                                                                                                
|       
|        | 10 | .26 |               | Form of Directors Nonqualified Initial Stock Option Grant
    Agreement under Registrants 1995 Directors
    Stock Option Plan, amended effective November 23, 2004,
    incorporated herein by reference to Exhibit 10.63 to the
    Current Report on Form 8-K (file no. 000-26660) filed on
    November 30, 2004.*                         
|       
|        | 10 | .27 |               | Form of Directors Nonqualified Succeeding Stock Option Grant
    Agreement Registrants 1995 Directors Stock
    Option Plan, amended effective November 23, 2004,
    incorporated herein by reference to Exhibit 10.64 to the
    Current Report on Form 8-K (file no. 000-26660) filed on
    November 30, 2004.*                            
|       
|        | 10 | .28 |               | Form of Stock Option Agreement under Registrants 1995
    Equity Incentive Plan, 1997 Equity Incentive Plan and 2002
    Non-Executive Stock Option Plan, amended effective
    November 23, 2004, incorporated herein by reference to
    Exhibit 10.65 to the Current Report on Form 8-K (file
    no. 000-26660) filed on November 30, 2004.*
|        | 10 | .29 |               | Amended and Restated Stock Option Agreement for Audit Committee
    members, incorporated herein by reference to Exhibit 10.66
    of the Form 8-K filed on February 3, 2005.*                                                                                                                                                                   
|        | 10 | .30 |               | Form of Stock Option Agreement for Audit Committee members,
    incorporated herein by reference to Exhibit 10.67 of the
    Form 8-K filed on February 3, 2005.*                                                                                                                                                                                
|       
|        | 10 | .30 |               | Form of Acceleration Agreement for Directors, incorporated
    herein by reference to Exhibit 10.29 to the
    Registrants Form 10-K filed on March 16, 2005.*                                                                                                                                                                                  
|       
|        | 10 | .31 |               | Form of Acceleration Agreement for Officers, incorporated herein
    by reference to Exhibit 10.30 to the Registrants
    Form 10-K filed on March 16, 2005.*                                                                                                                                                                                   
|       
|        | 10 | .32 |               | Description of Performance Based Compensation Plan Bonus
    Criteria for Fiscal Year 2005, incorporated herein by reference
    to Exhibit 10.31 to the Registrants Form 8-K
    filed on April 6, 2005.*                                                                                                                                      
|       
|        | 10 | .34 |               | Description of Bonus Payment for Fiscal Year 2005 to James Boyd,
    incorporated herein by reference to text of the
    Registrants Form 8-K filed June 2, 2005.*                                                                                                                                                                              



---



##### Table of Contents



|        |    |     |               |                                                                                                                                                                                                                                                                               
|------- | -- | --- | ------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |              
|Number  |    |     | Exhibit Title
|        |    |     |              
|       
|        | 10 | .35 |               | Description of Amendment of Stock Option Grant to Robert Blair
    Dated June 30, 2005, incorporated herein by reference to
    Exhibit 10.31 to the Registrants Form 10-Q filed
    on August 9, 2005.*                                                                     
|       
|        | 10 | .36 |               | Silan-ESS Cooperation in VCD Agreement between the Registrant
    and Hangzhou Silan Microelectronics Joint-Stock Co. Ltd. dated
    September 14, 2005, incorporated herein by reference to
    Exhibit 10.33 to the Registrants Form 10-Q filed
    on November 9, 2005.***
|       
|        | 21 |     |               | List of Registrants subsidiaries.                                                                                                                                                                                                                                            
|       
|        | 23 |     |               | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                     
|       
|        | 24 |     |               | Power of Attorney (included on the signature page of this report
    on Form 10-K).                                                                                                                                                                                           
|       
|        | 31 | .1  |               | Certification of Chief Executive Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                       
|       
|        | 31 | .2  |               | Certification of Chief Financial Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                       
|        | 32 | .1  |               | Certification Pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                               
|        | 32 | .2  |               | Certification Pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                               






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



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