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

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2002.

OR

For the transition period from: ___________ to: __________

Commission file number 0-26660

ESS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)

48401 FREMONT BOULEVARD
FREMONT, CALIFORNIA 94538
(Address of principal executive offices, including zip code)

(510) 492-1088
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]   No [   ]

     As of August 3, 2002, the registrant had 43,564,938 shares of Common Stock outstanding.

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ESS TECHNOLOGY, INC.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

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

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ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

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

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ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

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

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ESS TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. NATURE OF BUSINESS

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

     The Company was incorporated in California in 1984 and became a public company in 1995. In April 1999, the Company established a subsidiary, Vialta, Inc. (“Vialta”), through which ESS planned to introduce various internet related products, including a multi-featured DVD player with internet connectivity and other advanced features. Vialta was reincorporated in Delaware and headquartered in Fremont, California. As of December 31, 2000, ESS had a 62.1% ownership and voting interest in Vialta. On April 21, 2001, ESS’s Board of Directors adopted a plan to distribute all of ESS’s Vialta shares to ESS shareholders within twelve months thereafter. Effective as of August 21, 2001, ESS spun off Vialta by distributing to ESS’s shareholders all 50.6 million shares of Vialta class A common stock then held by ESS. As such Vialta is reported separately as a discontinued operation for all periods presented within ESS’s financial statements. See Notes 5 and 6, Discontinued Operation and Transactions with Vialta, Inc.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

     The interim condensed consolidated financial statements of the Company included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principals in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented. These interim condensed consolidated financial statements should be read in conjunction with (i) the audited consolidated financial statements and notes thereto, as well as the accompanying Management’s Discussion and Analysis of Results of Operations, for the years ended December 31, 2001 and 2000 included in our annual reports on Form 10-K, (ii) the pro forma consolidated financial statements and notes thereto, as well as the accompanying Management’s Discussion and Analysis of Results of Operations, included in our report on Form 8-K filed on September 5, 2001 and (iii) the restated consolidated financial statements and notes thereto showing Vialta as a discontinued operation, as well as the accompanying Management’s Discussion and Analysis of Results of Operations, included in our report on Form 8-K filed on November 6, 2001. Interim financial results are not necessarily indicative of the results that may be expected for a full year.

Reclassification

     Certain reclassifications are made to prior year financial data to conform with current year presentations.

Use of estimates

     The preparation of the financial statements and accompanying notes in accordance with GAAP requires management to make estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

     See Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies for additional information regarding the estimates and assumptions the Company makes that affect its financial statements.

Revenue recognition

     Revenue is primarily generated by product sales, which is generally recognized at the time of shipment when persuasive evidence of an arrangement exists, the price is fixed or determined and collection of resulting receivable is reasonably assured, except for products sold to certain distributors with certain rights of return and allowance, in which case, revenue is deferred until the distributor resells the products to a third party.

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

Inventory

     The Company’s inventory is valued at the lower of cost (determined on a first-in, first-out cost method) or market. Inventories are comprised of raw materials, work-in-process and finished goods, all of which are manufactured by third party contractors. The Company provides for obsolete, slow moving or excess inventories, based on forecasts prepared by management, in the period when obsolescence or inventory in excess of expected demand is first identified. Reserves are established to reduce the cost basis of inventory for excess and obsolete inventory. For the three and six months ended June 30, 2002, the write-down in excess inventory was approximately $1.6 million.

     ESS is subject to technological change, new product development, and product obsolescence. Actual demand may differ from forecasted demand and such differences may have a material effect on the Company’s financial position and results of operations.

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Goodwill and other intangible assets

     Effective January 1, 2002, the Company adopted the Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which addresses the accounting that must be applied to goodwill and intangible assets subsequent to their initial recognition. SFAS 142 requires that goodwill no longer be amortized, and instead, be tested for impairment at the reporting unit level at least annually.

     The Company has goodwill and other intangible assets related to its previous acquisitions of NetRidium and SAS. In accordance with SFAS 142, the Company reclassified acquired workforce intangible assets, which were previously recognized apart from goodwill, as goodwill and ceased amortization of goodwill as of January 1, 2002. This Change in accounting treatment reduced operating expenses by $172,000 and $344,000 during the three and six months ended June 30, 2002, respectively. In addition to goodwill associated with NetRidium and SAS, the Company had amortization of goodwill associated with acquisition of Platform Technologies, Inc. during the three and six months ended June 30, 2001 of approximately $834,000 and $1,668,000, respectively.

     The provisions of SFAS 142 also require the Company to complete a transitional impairment test of goodwill within six months of adoption. During the six months ended June 30, 2002, the Company completed its transitional impairment test of goodwill and determined that goodwill was not impaired.

     A reconciliation of previously reported net income and loss per share for the three months and six months ended June 30, 2001 to the amounts adjusted for the exclusion of goodwill and workforce amortization, net of the related income tax effect, is as follows (in thousands, except per share amounts):