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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-26660

ESS Technology, Inc.

Registrant’s telephone number, including area code:

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

      The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing price of the Common Stock on March 5, 2002 of $23.01 as reported on the NASDAQ National Market, was approximately $747,298,945. Shares of Common Stock held by each officer and director and by each person who owned 5% or more of the registrant’s outstanding Common Stock on that date have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

      As of March 5, 2002, registrant had outstanding 45,363,776 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

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

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ESS TECHNOLOGY, INC.

2001 FORM 10-K

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

PART I

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

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

Industry Background

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

      Some of the more significant digital home entertainment products include:

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

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

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

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

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

Our Solution

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

      We believe we have the following competitive advantages:

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

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

Our Strategy

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

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

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

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

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

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

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

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

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

Products

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

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

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

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

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

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

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Technology and Research and Development

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

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

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

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

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

Customers

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

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

Sales and Distribution

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

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

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

Manufacturing

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

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

Competition

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

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

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

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

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

Proprietary Technology

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

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

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

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

Employees

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

Backlog

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

Item 2.     Properties

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

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Item 3.     Legal Proceedings

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

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

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

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

Executive Officers of the Registrant

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

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

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

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

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

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

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PART II

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

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

Dividend Policy

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

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

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

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