Ess Technology Inc - Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Ess Tech (DE) Comm (MM)	NASDAQ:ESST	NASDAQ	Common Stock

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2008.


o		Transitional 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 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of May 12, 2008 the registrant had 35,563,908 shares of common stock outstanding.

ESS TECHNOLOGY, INC.

TABLE OF CONTENTS


	Page

PART I FINANCIAL INFORMATION		3
Item 1. Financial Statements (unaudited):		3
Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007		3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007		4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		24
PART II OTHER INFORMATION		25
Item 1. Legal Proceedings		25
Item 1A. Risk Factors		25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 5. Other Information		38
Item 6. Exhibits		38
SIGNATURES		39
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ESS TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	March 31,			December 31,
	2008			2007
	(In thousands)
ASSETS
Cash and cash equivalents	$	41,089		$	43,110
Short-term investments		8,047			6,837
Accounts receivable, net		7,676			5,403
Other receivables		428			482
Inventory		6,833			7,210
Prepaid expenses and other assets		899			823

Total current assets		64,972			63,865
Property, plant and equipment, net		12,015			12,609
Non-current deferred tax asset		5,874			5,874
Other assets		7,992			9,025

Total assets	$	90,853		$	91,373

LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	10,592		$	7,928
Income tax payable		53			19

Total current liabilities		10,645			7,947
Non-current income tax liabilities		36,167			35,661

Total liabilities		46,812			43,608

Commitments and contingencies (Note 12)
Shareholders’ equity:
Common stock		176,529			176,459
Accumulated other comprehensive income (loss)		(151	)		845
Accumulated deficit		(132,337	)		(129,539	)

Total shareholders’ equity		44,041			47,765

Total liabilities and shareholders’ equity	$	90,853		$	91,373

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

ESS TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Three Months Ended March 31,
	2008			2007
	(In thousands, except per share data)
Net revenues	$	14,371		$	17,772
Cost of revenues		9,143			10,400

Gross profit		5,228			7,372
Operating expenses:
Research and development		3,023			4,591
Selling, general and administrative		4,941			4,940
Impairment of property, plant and equipment		—			859
Gain on sale of technology and tangible assets		—			(8,481	)

Operating income (loss)		(2,736	)		5,463
Non-operating income (loss), net		477			(86	)

Income (loss) before income taxes		(2,259	)		5,377
Provision for income taxes		539			774

Net income (loss)	$	(2,798	)	$	4,603

Net income (loss) per share — basic and diluted	$	(0.08	)	$	0.13

Shares used in per share calculation — basic and diluted		35,545			35,508

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

ESS TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Three months Ended
	March 31,
	2008			2007
	(In thousands)
Net income (loss)	$	(2,798	)	$	4,603
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		753			1,014
Gain on sale of technology and tangible assets		—			(8,481	)
Impairment of property, plant and equipment		—			859
(Gain) loss on disposal of property, plant and equipment		(95	)		22
Loss on equity investments		—			500
Stock-based compensation		69			330
Changes in assets and liabilities:
Accounts receivable, net		(2,272	)		(1,607	)
Other receivables		53			(3,546	)
Inventory		377			1,779
Prepaid expenses and other assets		(72	)		135
Accounts payable and accrued expenses		2,664			(419	)
Income tax payable		540			491

Net cash used in operating activities		(781	)		(4,320	)

Cash flows from investing activities:
Purchase of property, plant and equipment		(167	)		(15	)
Sale of property, plant and equipment		103			—
Purchase of short-term investments		(2,174	)		(514	)
Maturities and sales of short-term investments		997			5,500
Purchase of long-term investments		—			(500	)
Sale of technology and tangible assets		—			9,351

Net cash provided by (used in) investing activities		(1,241	)		13,822

Cash flows from financing activities:
Issuance of common stock under employee stock purchase plan and stock option plans		1			—

Net cash provided by financing activities		1			—

Net increase (decrease) in cash and cash equivalents		(2,021	)		9,502
Cash and cash equivalents at beginning of period		43,110			33,731

Cash and cash equivalents at end of period	$	41,089		$	43,233

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

ESS TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. NATURE OF BUSINESS

We were incorporated in California in 1984 and became a public company in 1995. We have historically operated in two primary business segments, Video and Digital Imaging, both in the semiconductor industry and serving the consumer electronics and digital media marketplace. During the first quarter of 2007 we substantially terminated the production and sale of our camera phone image sensors, which were the only remaining products of our Digital Imaging segment. We plan to license our image sensor patents in exchange for royalties, but we will no longer sell imaging sensor semiconductor chips. We continue to design, develop and market highly integrated analog and digital processor chips and digital amplifiers, including chips for standard definition DVD players primarily for the Korean market, and chips for digital audio players and digital media players for all markets. We are now concentrating on our standard definition DVD chip business and evaluating opportunities to develop profitable operations.

On February 21, 2008, we (“ESS California”), Echo Technology (Delaware), Inc., a Delaware corporation and a wholly owned subsidiary of ESS California (“Delaware Merger Subsidiary”), Semiconductor Holding Corporation, a Delaware corporation and wholly owned subsidiary of Imperium Master Fund, Ltd. (“Parent”), and Echo Mergerco, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Subsidiary”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which (i) ESS California will, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, merge with and into Delaware Merger Subsidiary (the “Reincorporation Merger”), the separate corporate existence of ESS California shall cease and Delaware Merger Subsidiary shall be the successor or surviving corporation of the merger (“ESS Delaware”), and (ii) following the Reincorporation Merger, Merger Subsidiary will, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, including the consummation of the Reincorporation Merger, merge with and into ESS Delaware (the “Merger”), the separate corporate existence of Merger Subsidiary shall cease and ESS Delaware shall be the successor or surviving corporation of the merger and wholly owned subsidiary of the Parent. In connection with the merger, we have incurred and expensed approximately $1.6 million of professional and other transaction related fees during the three months ended March 31, 2008.

Upon the consummation of the Reincorporation Merger, ESS California will become a Delaware corporation, each share of ESS California common stock will be converted into one share of ESS Delaware common stock and each option to acquire ESS California common stock granted pursuant to ESS California’s stock plans and outstanding immediately prior to the consummation of the Reincorporation Merger, whether vested or unvested, exercisable or unexercisable, will be automatically converted into the right to receive an option to acquire one share of ESS Delaware common stock for each share of ESS California common stock subject to such option, on the same terms and conditions applicable to the option to purchase ESS California common stock (each, an “ESS Delaware Option”).

Upon the consummation of the Merger, (i) ESS Delaware will become a wholly owned subsidiary of Parent and (ii) each share of ESS Delaware common stock will be converted into the right to receive $1.64 in cash, unless the stockholder properly exercises appraisal rights. In addition, each ESS Delaware Option, whether vested or unvested, exercisable or unexercisable, will be converted into the right to receive an amount in cash equal to the product obtained by multiplying (x) the aggregate number of shares of ESS Delaware common stock subject to such ESS Delaware Option and (y) the excess, if any, of the Merger Consideration less the exercise price per share of ESS Delaware common stock subject to such ESS Delaware Option, after which it shall be cancelled and extinguished.

The parties to the Merger Agreement intend to consummate the Merger as soon as practicable after the Reincorporation Merger and ESS California will not consummate the Reincorporation Merger unless the parties are in a position to consummate the Merger. ESS California and Delaware Merger Subsidiary have made customary representations and warranties in the Merger Agreement and agreed to certain customary covenants, including covenants regarding operation of the business of ESS California and its subsidiaries, including Delaware Merger Subsidiary, prior to the closing and covenants prohibiting ESS California from soliciting, or providing information or entering into discussions regarding, proposals relating to alternative business combination transactions, except in limited circumstances to permit the board of directors of ESS California to comply with its fiduciary duties under applicable law.

The transactions contemplated by the Merger Agreement are subject to ESS California shareholder approval and other customary closing conditions. The Merger Agreement contains certain termination rights for both ESS California and Parent and further provides that, upon termination of the Merger Agreement under certain circumstances, ESS California may be obligated to pay Parent a termination fee of $1,981,000 plus reimbursement of Parent’s and its affiliates’ reasonable expenses incurred in connection with the transactions contemplated by the Merger Agreement up to, but not in excess of, $500,000.

On April 23, 2008, we entered into the ESS-Silan Audio and Video Technology License Agreement (the “License Agreement”) with Hangzhou Silan Microelectronics, Co., Ltd., (“Silan”) to amend and restate the ESS-Silan DVD Technology License Agreement, between the Company and Silan, as amended, dated November 3, 2006. The Company entered into the License Agreement in order to license to Silan certain of ESS’s audio and video technology for the purpose of developing, designing, manufacturing, distributing and selling products incorporating such technology for which we will be owed royalties. Silan no longer has a license to incorporate our technology in standard-definition DVD products.

NOTE 2. BASIS OF PRESENTATION

Our interim condensed consolidated financial statements included herein have been prepared by us, 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 principles 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 the audited consolidated financial statements and notes thereto, as well as the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2007 included in our Annual Report on Form 10-K. Interim financial results are not necessarily indicative of the results that may be expected for a full year.

NOTE 3. STOCK-BASED COMPENSATION

Stock-based compensation for the three months ended March 31, 2008 and 2007 was as follows:


	Three Months Ended March 31,
	2008		2007
	(In thousands)
Stock-based compensation expense by type of award:
Employee stock options:
Cost of revenues	$	5	$	7
Research and development		26		125
Selling, general and administrative		34		182
Employee stock purchase plan:
Selling, general and administrative		4		16

Tax effect on stock-based compensations		—		—

Total stock-based compensation	$	69	$	330

During the three months ended March 31, 2008 , we granted approximately 4,000 stock options with an estimated total grant-date fair value of $2,000. During the three months ended March 31, 2007, we granted approximately 84,000 stock options with an estimated total grant-date fair value of $46,000. As of March 31, 2008, unrecognized stock-based compensation cost related to stock options was $218,000, which will be recorded as compensation expense over an estimated weighted average period of one year.

No stock-based compensation was capitalized as inventory at March 31, 2008 and 2007 because the amounts were not material.

Valuation Assumptions

We estimate the fair value of stock options using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123(R) and, Staff Accounting Bulletin No. 107 (“SAB 107”). The Black-Scholes valuation model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, valuation models require the input of subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The Black-Scholes valuation model for stock compensation expense requires us to make several assumptions and judgments

about the variables to be assumed in the calculation including expected life of the stock option, historical volatility of the underlying security, an assumed risk-free interest rate and estimated forfeitures over the expected life of the option. The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns; expected volatilities are based on historical volatilities of our common stock; the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option; and we consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the following assumptions:


	Three Months Ended March 31,
	2008			2007
Stock option plans:
Expected life (in years)		3.2			3.2
Expected stock price volatility		57	%		67	%
Risk-free interest rate		2.0	%		4.8	%
Expected dividend yield		0	%		0	%

We have several equity incentive plans that are intended to attract and retain qualified management, technical and other employees, and to align stockholder and employee interests. These equity incentive plans provide that non-employee directors, officers, key employees, consultants and all other employees may be granted options to purchase shares of our stock, restricted stock units and other types of equity awards. Through March 31, 2008, we have only granted stock options under our various plans. These stock options generally have a vesting period of four years, are exercisable for a period not to exceed ten years from the date of issuance and are granted at prices not less than the fair market value of our common stock at the grant date.

Combined Activity

The following table summarizes the combined activity under the equity incentive plans for the indicated periods:


						Weighted
				Weighted		Average
	Options			Average		Contractual
	Outstanding			Exercise Price		Term
	(In thousands)
Balances at December 31, 2007		3,359		$	5.53
Granted		4			1.27
Forfeited		(1	)		4.08
Expired		(395	)		4.89

Balances at March 31, 2008		2,967		$	5.63		6.00

Fully vested and exercisable at March 31, 2008		2,642		$	6.04		5.70
Expected at March 31, 2008 to vest in the future		301		$	2.31		8.46

At March 31, 2008, we had an aggregate of 2,080,000 options available to grant. The aggregate intrinsic value of options vested and expected at March 31, 2008 to vest in the future, based on our closing stock price of $1.50 as of March 31, 2008, was approximately $76,813.

The weighted average grant date fair values of options, as determined under SFAS No. 123(R), granted during the three months ended March 31, 2008 and 2007 were $0.52 and $0.55 per share, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2008 and 2007 was insignificant and there were no tax benefits realized.

We settle employee stock option exercises with newly issued common shares.

NOTE 4. BALANCE SHEET COMPONENTS


	March 31,			December 31,
	2008			2007
	(In thousands)
Accounts receivable, net:
Accounts receivable	$	7,890		$	5,526
Less: Allowance for doubtful accounts		(214	)		(123	)

	$	7,676		$	5,403


Other receivables:
Insurance		358		$	362
Other		70			120

	$	428		$	482


Inventory:
Raw materials	$	1,191		$	1,531
Work-in-process		2,441			957
Finished goods		3,201			4,722

	$	6,833		$	7,210

During the three months ended March 31, 2008 and 2007, we recognized approximately $0.6 million and $2.4 million, respectively, of net revenue on products for which the inventory costs were written off in a prior period. Further, during the three months ended March 31, 2007, we recorded inventory write-offs of approximately by $2.5 million on other unsold products in inventory. As of December 31, 2006, we had accrued approximately $3.1 million as non-cancelable, adverse purchases order commitments. Of this amount, $1.5 million was reversed as a reduction of cost of revenues in the first quarter of 2007 when it was determined that payment would not be required.


	March 31,			December 31,
	2008			2007
	(In thousands)
Prepaid expenses and other assets:
Prepaid insurance	$	290		$	419
Prepaid maintenance		222			215
Prepaid royalty		115			84
Other		272			105

	$	899		$	823

Property, plant and equipment, net:
Land	$	2,860		$	2,860
Building and building improvements		23,719			23,865
Machinery and equipment		35,400			35,341
Furniture and fixtures		20,750			20,661

		82,729			82,727
Less: Accumulated depreciation and amortization		(70,714	)		(70,118	)

	$	12,015		$	12,609

Other assets:
Investments — Best Elite	$	6,857		$	6,857
Investments — Marketable security		1,042			2,071
Other		93			97

	$	7,992		$	9,025

Accounts payable and accrued expenses:
Accounts payable	$	4,779		$	3,194
Accrued compensation costs		2,456			2,272
Accrued legal and professional fees		1,601			835
Accrued commission and royalties		525			282
Deferred revenue related to distributor sales, net of deferred cost of goods sold		98			250
Non-cancelable, adverse purchase order commitments		48			39
Other accrued liabilities		1,085			1,056

	$	10,592		$	7,928

NOTE 5. WARRANTY

We include warranty in other accrued liabilities. We provide standard warranty coverage for twelve months. We account for the general warranty cost as a charge to cost of product revenues when revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. In addition to the general warranty accrual, we also provide specific warranty amounts for certain parts if there are potential warranty issues. The following table summarizes the activity in the product warranty accrual for the three months ended March 31, 2008 and 2007:


	Three Months Ended
	March 31,
	2008			2007
	(In thousands)
Beginning balance	$	160		$	254
Release for expired warranties		(30	)		(15	)
Settlements made during the period		—			(2	)

Ending balance	$	130		$	237

NOTE 6. MARKETABLE SECURITIES


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
March 31, 2008	Cost		Gains		(Loss)			Value
	(In thousands)
Money market funds	$	9,171	$	—	$	—		$	9,171
Time deposit		3,298		—		—			3,298
Corporate debt securities		8,004		43		—			8,047
Corporate equity security		1,233		—		(191	)		1,042
Government agency bonds		17,984		2		—			17,986

Total available-for-sale	$	39,690	$	45	$	(191	)	$	39,544

Classified as:
Cash equivalents								$	30,455
Short-term marketable securities									8,047
Long-term marketable securities									1,042

								$	39,544


			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2007	Cost		Gains		(Loss)			Fair Value
	(In thousands)
Money market funds	$	100	$	—	$	—		$	100
Time deposit		3,200		—		—			3,200
Corporate debt securities		23,775		11		(7	)		23,779
Corporate equity security		1,233		838		—			2,071
Government agency bonds		10,958		3		—			10,961

Total available-for-sale	$	39,266	$	852	$	(7	)	$	40,111

Classified as:
Cash equivalents								$	31,203
Short-term marketable securities									6,837
Long-term marketable securities									2,071

								$	40,111

The contractual maturities of debt securities classified as available-for-sale as of March 31, 2008, are as follows:


March 31, 2008	Estimated Fair Value
	(In thousands)
Maturing in 90 days or less	$	23,296
Maturing between 90 days and one year		5,513
Maturing in more than one year		522

Total available-for-sale debt securities	$	29,331

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, and we may need to sell the investment to meet our cash needs.

As of March 31, 2008, the fair value of our equity investment in MosChip Semiconductor Technology Limited (“MosChip”) of $1,042,000 was $191,000 less than our cost. The decline in value is considered temporary and no impairment loss was recognized in the statement of operations in the three months ended March 31, 2008. In reaching this conclusion, management considered the volatility of MosChip common stock and that the fair value of our invesment has exceeded our cost subsequent to March 31, 2008.

NOTE 7. OTHER COMPREHENSIVE INCOME (LOSS)

The following table reconciles net income (loss) to total comprehensive loss for the three months ended March 31, 2008 and 2007:


	Three Months Ended March 31,
	2008			2007
	(In thousands)
Net income (loss)	$	(2,798	)	$	4,603
Change in unrealized gain (loss) on marketable securities and long-term investments		(996	)		31

Total comprehensive income (loss)	$	(3,794	)	$	4,634

NOTE 8. NON-OPERATING INCOME, NET

The following table lists the major components of non-operating income, net, for the three months ended March 31, 2008 and 2007:


	Three Months Ended March 31,
	2008		2007
	(In thousands)
Interest income	$	412	$	431
Impairment of investments		—		(500	)
Other		65		(17	)

Non-operating income (loss), net	$	477	$	(86	)

NOTE 9. INCOME TAXES

We recorded income tax expense of $0.5 million and $0.8 million for the three months ended March 31, 2008 and 2007, respectively. The tax expenses for three months ended March 31, 2008 were higher than the pre-tax income at the federal statutory rate of 35% primarily due to foreign taxes and interest accrued on uncertain tax balances.

NOTE 10. NET INCOME (LOSS) PER SHARE

Because we incurred a net loss for the three months ended March 31, 2008, options for approximately 3,003,900 shares were excluded from the calculation of net loss per share. For the three months ended March 31, 2007, options for approximately 6,958,000 shares were exluded from the earnings per share calculation as they were anti-dilutive.

NOTE 11. BUSINESS SEGMENT INFORMATION AND CONCENTRATION OF CERTAIN RISKS

Business Segment

We have historically operated in two reportable business segments: the Video segment and the Digital Imaging segment. In the Video segment, we primarily develop and market digital processor chips which are the primary processors driving digital video and audio devices, including DVD, VCD, consumer digital audio players, and digital media players. The Video segment markets encoding processors for digital video recorders and recordable DVD players and continues to sell certain legacy products we have in inventory including chips for use in modems, other communication devices, and PC audio products. Our Digital Imaging segment has historically developed and marketed imaging sensor chips for cellular camera phone applications. The method for determining what information to report is based on the way that management organized the operating segments within the Company for making operational decision and assessments of financial performance. Our chief operating decision maker is considered to be the Chief Executive Officer.

The following table summarizes the percentages of revenues by major product category for the three months ended March 31, 2008 and 2007:


	Three Months Ended March 31,
	2008			2007
Video Business:
DVD		79	%		78	%
VCD		9	%		6	%
License & royalty		(2	%)		4	%
Other		14	%		11	%

Total Video Business		100	%		99	%
Digital Imaging Business		—			1	%

Total		100	%		100	%

DVD revenue includes revenue from sales of DVD decoder chips, integrated encoder and decoder chips and non-integrated encoder and decoder chipsets. VCD revenue includes revenue from sales of VCD chips. License and royalty revenue primarily consists of royalty payable to Silan for using licensed DVD technology and from license of TV audio technology to NEC. Digital Imaging revenue includes revenue from sales of image sensor chips and image processor chips.

We evaluate operating segment performance based on net revenues and operating income (loss) of our segments. The accounting policies of the operating segments are the same as those described in the summary of accounting policies in our Annual Report on Form 10-K. Information about reported segments follows:


	Three Months Ended March 31,
	2008			2007
	(In thousands)
Segment net revenues:
Video	$	14,371		$	17,670
Digital Imaging		—			102

Total net revenues	$	14,371		$	17,772

Segment operating income (loss):
Video	$	754		$	10,431
Digital Imaging		—			(2,066	)

Total segment operating income (loss)		754			8,365
Unallocated corporate expenses		(3,490	)		(2,902	)

Operating income (loss)	$	(2,736	)	$	5,463

Significant Customers and Distributor

We sell to both direct customers and distributors. We use both a direct sales force as well as sales representatives to help us sell to our direct customers. FE Global (China) Limited (“FE Global”) was our largest distributor. On August 31, 2007, our distribution agreement with FE Global was terminated. On August 31, 2007, we signed a new distribution agreement with CKD (Hong Kong) High Tech Company Limited (“CKD”) who will perform similar functions as those previously provided by FE Global. In addition to CKD, Weikeng Industrial Company, Ltd (“Weikeng”) is also one of our largest distributors. We work directly with many of our customers in Hong Kong and China on product design and development. Whenever one of these customers buys our products; however, the order is processed through our distributor, which functions much like a trading company. Our distributor manages the order processing, arranges shipment into China and Hong Kong, manages the letters of credit, and provides credit and collection expertise and services. The title and risk of loss for the inventory are transferred to the distributor upon shipment of inventory and the distributor is legally responsible to pay our invoices regardless of when the inventories are sold to end-customers.

The following table sets forth distributors representing greater than 10% of net revenues:


	Three Months Ended March 31,
	2008			2007
FE Global (China) Limited		—			37	%
CKD (Hong Kong) High Tech Company Limited		15	%		—
Weiking Industrial Company, Ltd.		15	%		—

Revenues on sales to FE Global, CKD and Weikeng are deferred until the products are subsequently sold to end-customers.

The following table sets forth direct and end-customers representing greater than 10% of net revenues:


	Three Months Ended March 31,
	2008			2007
Samsung Electronics Company		45	%		18	%
LG International Corporation		13	%		15	%
Xing Qiu		—			24	%

Customers representing greater than 10% of gross accounts receivable were:


	March 31,			December 31,
	2008			2007
Samsung Electronics Company		61	%		32	%
LG International Corporation		23	%		34	%
Weiking Industrial Company, Ltd.		—			12	%

NOTE 12. COMMITMENTS AND CONTINGENCIES

The following table sets forth the amounts of payments due under specified contractual obligations, aggregated by category of contractual obligations, as of March 31, 2008:


	Payment Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
	(In thousands)
Operating lease obligations	$	663	$	643	$	20	$	—	$	—
Purchase obligations		12,098		12,098		—		—		—

Total	$	12,761	$	12,741	$	20	$	—	$	—

As of March 31, 2008, our commitments to purchase inventory from the third-party contractors aggregated approximately $7.0 million of which approximately $48,000 was non-cancelable purchase order commitments that we have recorded as accrued expenses. Additionally, as of March 31, 2008, commitments for services, license and other operating supplies totaled $5.1 million.

The total rent expense under all operating leases was approximately $90,000 and $294,000 for the three months ended March 31, 2008 and 2007, respectively.

We enter into various agreements in the ordinary course of business. Pursuant to these agreements, we may agree to indemnify our customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claims by any third party with respect to our products. These indemnification obligations may have perpetual terms. Our normal business practice is to limit the maximum amount of indemnification to the license fees received. On occasion, the maximum amount of indemnification we may be required to make may exceed our normal business practices. We estimate the fair value of our indemnification obligations as insignificant, based upon our history of litigation concerning product and patent infringement claims. Accordingly, we have no liabilities recorded for indemnification under these agreements as of March 31, 2008.

We have agreements whereby our officers and directors are indemnified for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. We have, however, a directors and officers’ insurance policy that may reduce our exposure and enable us to recover a portion of any future amounts paid. As a result of this insurance coverage, we believe the estimated fair value of these indemnification agreements is minimal.

Legal Proceedings

federal action. The parties reached an agreement in principle to settle the litigation in exchange for certain minor modifications of the Company’s internal policies and payment of plaintiffs’ attorneys fees not to exceed $200,000 (to be paid by defendants’ insurance carriers). The agreement in principle to settle the litigation was then documented and finalized by the parties and submitted to the Court for approval. On October 1, 2007, the Stipulation and Agreement of Settlement became binding upon the Court’s entry of a final Judgment of Dismissal with prejudice as to all defendants in the action, subject to appeal as required by applicable state law. The time for appeal of the final Judgement of Dismissal has now passed. While defendants have denied and continue to deny any and all allegations of wrongdoing in connection with this matter, we believe that given the uncertainties and cost associated with litigation, the settlement is in the best interests of the Company and its stockholders. We recorded a $200,000 loss for the proposed settlement in 2007, as management determined this amount probable of payment and reasonably estimable. In addition, because recovery from the insurance carriers was probable, a receivable was also recorded for the same amount. Accordingly, there was no impact to the statement of operations because the amount of the settlement and the insurance recovery offset each other. The settlement transactions have been completed.

NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS AND ADOPTION OF NEW ACCOUNTING PRONOUCEMENTS

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). In February 2008, the Financial Accounting Standard Board (“FASB”) issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities

	•		Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The adoption of this statement did not have a material impact on the Company’s consolidated results of operations and financial condition.

Effective January 1, 2008, the Company adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option under this Statement.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development (IPR&D) is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS No. 141(R) will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. SFAS No. 160 is effective for us on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal year 2009. As of December 29, 2007, we did not have any minority interests. The adoption of SFAS No. 160 is not expected to impact our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS No. 161”). The standard requires additional quantitative disclosures (provided in tabular form) and qualitative disclosures for derivative instruments. The required disclosures include how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows; relative volume of derivative activity; the objectives and strategies for using derivative instruments; the accounting treatment for those derivative instruments formally designated as the hedging instrument in a hedge relationship; and the existence and nature of credit-related contingent features for derivatives. SFAS No. 161 does not change the accounting treatment for derivative instruments. SFAS No. 161 is effective for us in the first quarter of fiscal year 2009.

NOTE 14. FAIR VALUE MEASUREMENTS

In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and marketable securities) measured at fair value on a recurring basis as of March 31, 2008:


	Level 1		Level 2		Level 3		Total
	(In thousands)
Money market funds	$	9,171	$	—	$	—	$	9,171
Time deposit		—		3,298		—		3,298
Corporate debt securities				8,047		—		8,047
Corporate equity security		1,042		—		—		1,042
Government agency bonds		—		17,986		—		17,986

Total	$	10,213	$	29,331	$	—	$	39,544

NOTE 15. GAIN ON SALE OF TECHNOLOGY AND TANGIBLE ASSETS

On February 16, 2007, we entered into asset purchase agreements with Silicon Integrated Systems Corporation and its affiliates (“SiS”), pursuant to which we transferred employees, sold certain tangible assets, and sold and licensed intellectual property related to our HD-DVD and Blu-ray DVD technologies for aggregate proceeds of approximately $13.5 million. Of this amount, $9.5 million was received during the first quarter of 2007, and $2.0 million was received during the second quarter of 2007. The remaining $2.0 million is to be paid on or about August 16, 2008 subject to adjustment upon settlement of any escrow claims by SiS. The gain recognized during the year ended December 31, 2007 includes the proceeds received, net of the book value of assets sold of $870,000 and certain transaction expenses related to the sale to SiS amounting to $149,000. We have not recognized any revenue related to HD-DVD or Blu-ray DVD products in any period.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain information contained in or incorporated by reference in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Item 1A, Risk Factors, and elsewhere in this Report, contain “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. Forward-looking statements include statements concerning the future of our industry, our product development, our business strategy, our future acquisitions, the continued acceptance and growth of our products, and our dependence on significant customers. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors

including those discussed in Item 1A, Risk Factors, and elsewhere in this Report. In some cases, these statements can be identified by terminologies such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,” other similar terms or the negative of these terms. Although we believe that the assumptions underlying the forward-looking statements contained in this Report are reasonable, they may be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such statements should not be regarded as a representation by us or any other person that the results or conditions described in such statements will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The terms “Company,” “we,” “us,” “our,” and similar terms refer to ESS Technology, Inc. and its subsidiaries, unless the context otherwise requires.

This information should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Report and the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2007.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Use of Estimates

Our interim condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions that affect the amounts reported in our financial statements and accompanying notes. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical in understanding and evaluating our reported financial results include the following:

	•		Revenue Recognition

	•		Inventories and Inventory Reserves

	•		Impairment of Long-lived Assets

	•		Income Tax and Reserves

	•		Legal Contingencies

	•		Stock-based Compensation

For further discussion of our critical accounting policies and estimates, see Management’s Discussion and Analysis of Financial Condition and the Results of Operation in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007.

Recent Accounting Pronouncements

See Note 13, “Recent Accounting Pronouncements and Adoption of New Accounting Pronoucements,” to our condensed consolidated financial statements for disclosure of the recently issued accounting pronouncements that may impact our financial statements in the future.

EXECUTIVE OVERVIEW

royalties, but we will no longer sell imaging sensor semiconductor chips. We continue to design, develop and market highly integrated analog and digital processor chips and digital amplifiers, including chips for standard definition DVD players primarily for the Korean market, and chips for digital audio players and digital media players for all markets. We are now concentrating on our standard definition DVD chip business and evaluating opportunities to develop profitable operations.

The Merger Agreement contains representations and warranties by ESS California and Delaware Merger Subsidiary, on the one hand, and by Parent and Merger Subsidiary, on the other hand, made solely for the benefit of the other. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that the parties have exchanged in connection with signing the Merger Agreement. The disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Merger Agreement. Moreover, certain representations and warranties in the Merger Agreement were made as of a specified date, may be subject to a contractual standard of materiality different from what

might be viewed as material to shareholders, or may have been used for the purpose of allocating risk between ESS California and Delaware Merger Subsidiary, on the one hand, and Parent and Merger Subsidiary, on the other hand. Accordingly, the representations and warranties and other disclosures in the Merger Agreement should not be relied on by any persons as characterizations of the actual state of facts about ESS California, Delaware Merger Subsidiary, Parent or Merger Subsidiary at the time they were made or otherwise.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2008 AND MARCH 31, 2007

The following table sets forth certain operating data as a percentage of net revenues:


				Three Months Ended March 31,
	2008						2007
				(In thousands, except percentage data)
Net revenues	$	14,371			100.0	%	$	17,772		100.0	%
Cost of revenues		9,143			63.6			10,400		58.5

Gross profit		5,228			36.4			7,372		41.5
Operating expenses:
Research and development		3,023			21.0			4,591		25.8
Selling, general and administrative		4,941			34.4			4,940		27.8
Impairment of property, plant and equipment		—			n/a			859		4.8
Gain on sale of technology and tangible assets		—			n/a			(8,481	)	(47.7	)

Operating income (loss)		(2,736	)		(19.0	)		5,463		30.8
Non-operating income (loss), net		477			3.3			(86	)	(0.5	)

Income (loss) before income taxes		(2,259	)		(15.7	)		5,377		30.3
Provision for income taxes		539			3.8			774		4.4

Net income ( loss)	$	(2,798	)		(19.5	)%	$	4,603		25.9	%

Net Revenues

Net revenues were $14.4 million for the three months ended March 31, 2008, a decrease of $3.4 million, or 19.1%, compared to $17.8 million for the three months ended March 31, 2007, primarily due to decreased revenues from DVD products.

The following table summarizes percentage of net revenues by our two business segments and their major product categories:


	Three Months Ended March 31,
	2008			2007
Video Business:
DVD		79	%		78	%
VCD		9	%		6	%
License & royalty		(2	%)		4	%
Other		14	%		11	%

Total Video Business		100	%		99	%
Digital Imaging Business		—			1	%

Total		100	%		100	%

Video business revenues included revenues from DVD, VCD, Recordable products, license and royalty payments for DVD technology, and others.

DVD revenue consists of revenue from sales of DVD player chip and recordable chips, which includes integrated encoder and decoder. DVD revenue was $11.4 million for the three months ended March 31, 2008, a decrease of $2.5 million, or 18.0%, from revenue of $13.9 million for the three months ended March 31, 2007, primarily due to lower sales volume, and partially offset by the increase in average selling price (“ASP”). Sales volume decreased by 28.9% while ASP increased by 15.2%. We sold approximately 3.2 million units and 4.5 million units for the three months ended March 31, 2008 and 2007, respectively. We plan to continue sales in certain niche markets of the larger DVD market but do not intend to compete for a very large portion of the overall DVD market; therefore, our market share has decreased from the first quarter of 2007 and we anticipate relatively flat revenue in 2008.

VCD revenue includes revenue from sales of VCD chips. VCD revenue was $1.3 million for the three months ended March 31, 2008, an increase of $0.2 million, or 18.2%, from revenue of $1.1million for the three months ended March 31, 2007, primarily due to the slight increases in both sales volume and ASP. In September 2005, we licensed to Silan the right to manufacture and market our VCD technology to customers in China and India. In 2007, Silan started shipping a new integrated version, utilizing Silan’s front-end optical controller and our back-end video processor VCD chip for which they pay us a royalty . Royalty revenue from this agreement has to date been insignificant. We expect VCD revenues, including licence revenue will decrease in 2008 as the VCD market continues to be replaced with lower end DVD units.

License and royalty revenue was $0.8 million for the three months ended March 31, 2007. License and royalty revenue consists of payments from Silan to whom we had licensed the right to produce and distribute our next-generation standard definition DVD chips. Under this agreement, we accrued $0.3 million in royalty obligations to Silan as a reduction in license and royalty revenue during the three months ended March 31, 2008. On April 23, 2008, this license was replaced by the ESS-Silan Audio and Video Technology License Agreement. Silan no longer has a license to incorporate our technology in standard-definition DVD products and we are not obligated to pay Silan any further royalty.

Other revenue includes revenue from legacy products which includes sales of PC Audio chips, communication, consumer digital media and miscellaneous chips. Other revenue was $1.9 million for each of the three months ended March 31, 2008 and 2007.

Digital Imaging revenue includes revenue from sales of image sensor chips and image processor chips. There were no shipments of Digital Imaging products for the three months ended March 31, 2008. For the three months ended March 31, 2007, Digital Imaging revenue was $0.1 million. As part of our reorganization plan previously discussed, on February 16, 2007, we reduced operation of our camera phone image sensor business. We plan to pursue licensing of our patents for image sensor technology but we will no longer design, develop and market imaging sensor chips. We do not expect any revenue from this segment in 2008.

International revenue accounted for almost all of net revenues for the three months ended March 31, 2008 and 2007. Our international sales are denominated in U.S. dollars.

Gross Profit

Gross profit was $5.2 million or 36.4% of net revenue for the three months ended March 31, 2008 compared to a gross profit of $7.4 million or 41.5% of net revenue for the three months ended March 31, 2007. Gross profit for the first quarter of 2007 includes license and royalty income of $0.8 million. License and royalty revenues have no related cost of sales. During the three months ended March 31, 2008 and 2007, we recognized approximately $0.6 million and $2.4 million, respectively, of revenue on products for which the inventory costs were written off in a prior period. Further, during the three months ended March 31, 2007, we provided new or increased inventory write-offs of approximately $2.5 million on other unsold products in inventory. Accrued adverse purchase commitments of approximately $1.5 million as of December 31, 2006 were reversed in the first quarter of 2007 when it was determined that payment of these amounts would not be required. Excluding license and royalty revenue and adjustments to inventory and related purchase commitments reserves, gross profit as a percentage of product revenue has increased in the first quarter of 2008 as compared to the same period last year. Contributing to the increase in gross margin were overall increased ASPs and a decrease in average cost per unit. ASPs increased due to the decision to substantially reduce shipments to customers in China due to competitiveness and due to increased shipments of the newer Phoenix I and Phoenix II DVD products.

Research and Development Expenses

Research and development expenses were $3.0 million, or 21.0% of net revenues, for the three months ended March 31, 2008 compared to $4.6 million, or 25.8% of net revenues, for the three months ended March 31, 2007. The $1.6 million, or 34.8%, decrease in research and development was primarily due to $1.7 million decrease in salaries and fringe benefits due to lower headcount, $0.6 million decrease in depreciation, $0.1 million decrease in rent expenses, and partially offset by $0.5 million increase in mask and engineering test materials expenses. We expect research and development expenses to remain relatively flat in 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $4.9 million, or 34.4% of net revenues, for the three months ended March 31, 2008 compared to $4.9 million, or 27.8% of net revenues, for the three months ended March 31, 2007. Legal and professional fees increased by $1.4 million primarily due to expenses related to the proposed merger with Imperium Master Fund, Ltd. This increase was offset by the $0.8 million decrease in salaries and fringe benefits due to lower headcount, $0.5 million decrease in depreciation and other administrative expenses, and $0.2 million decrease in consulting and ourside services.

Impairment of Property, Plant and Equipment

In connection with the substantial termination of the production and sale of our camera phone image sensors in the first quarter of 2007, we recognized a $0.9 million impairment charge on property, plant and equipment related to these products.

Gain on Sale of Technology and Tangible Assets

On February 16, 2007, we entered into asset purchase agreements with SiS, pursuant to which we transferred employees, sold certain tangible assets, and sold and licensed intellectual property related to our HD-DVD and Blu-ray DVD technologies for aggregate proceeds of approximately $13.5 million. Of this amount, $9.5 million was received during the first quarter of 2007. The gain of $8.5 million recognized in the first quarter 2007 includes the proceeds received, net of the book value of assets sold and certain transaction expenses related to the sale. We have not recognized any revenue related to HD-DVD or Blu-ray DVD products in any period.

Non-operating Income (Loss), Net

Net non-operating income was $0.5 million for the three months ended March 31, 2008 compared to net non-operating loss of $0.1 million for the three months ended March 31, 2007. Net non-operating income for the three months ended March 31, 2008 mainly consisted of interest income and foreign currency exchange gain. For the three months ended March 31, 2007, non-operating loss consisted primarily of interest income and a $0.5 million impairment charge on a long-term investment.

Provision for (Benefit from) Income Taxes

Our income tax expense was $0.5 million for the three months ended March 31, 2008 compared to $0.8 million for the three months ended March 31, 2007. The tax expense for the current quarter was primarily the result of foreign taxes and interest accrued on uncertain tax balances. The tax provision for the three months ended March 31, 2008 includes interest of $0.5 million on income tax liabilities.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our cash requirements from cash generated by operations, the sale of equity securities, and short-term and long-term debt. At March 31, 2008, we had cash, cash equivalents and short-term investments of $49.1 million and working capital of $54.0 million.

Net cash used in operating activities was $0.8 million and $4.3 million for the three months ended March 31, 2008 and 2007, respectively. The net cash used in operating activities for the three months ended March 31, 2008 was primarily attributable to a net loss of $2.8 million, and the increase in accounts receivable of $2.3 million, and partially offset by the increases in accounts payable

and accrued expenses of $2.7 million, depreciation of $0.8 million, income tax payable and deferred income taxes of $0.5 million, and inventory $0.4 million. After adjusting for the net gain of $8.5 million relating to the sale of technology and tangible assets to SiS and the $0.9 million impairment of property, plant and equipment, the net cash used in operating activities for the three months ended March 31, 2007 was primarily attributable to an increase in other receivables of $3.5 million related to an insurance receivable on the securities litigation settlement and an increase in accounts receivable of $1.6 million, and partially offset by net income of $4.6 million, depreciation of $1.0 million and a decrease in net inventory of $1.8 million.

Net cash used in investing activities for the three months ended March 31, 2008 was $1.2 million and the net cash provided by investing activities for the three months ended March 31, 2007 was $13.8 million. The net cash used by investing activities for the three months ended March 31, 2008 was primarily attributable to the purchase of short-term investments of $2.2 million, offset by the proceeds from sales of short-term investments of $1.0 million. The net cash provided by investing activities for the three months ended March 31, 2007 was primarily attributable to the proceeds from sales of short-term investments of $5.5 million and the proceeds from sale of technology and tangible assets of $9.4 million, partially offset by the purchase of short-term and long-term investments each of $0.5 million.

There were no significant financing activities in the three months ended March 31, 2008 and 2007. To date, we have not declared or paid cash dividends to our shareholders and do not anticipate paying any dividend in the foreseeable future due to a number of factors, including the volatile nature of the semiconductor industry and the potential requirement to finance working capital in the event of a significant upturn in business. We reevaluate this practice from time to time but are not currently contemplating the payment of a cash dividend.

We have no long-term debt. Our capital expenditures for the next twelve months are anticipated to be less than $1.0 million. We may also use cash to acquire or invest in other businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of, or investment in, such businesses, products or technologies owned by third parties. Also, from time to time the Board of Directors may approve the expenditure of cash resources to repurchase our common stock as market conditions warrant. Based on past performance and current expectations, we believe that our existing cash and short-term investments as of March 31, 2008, together with funds expected to be generated by future operations, sales of assets and other financing options, will be sufficient to satisfy our working capital needs, capital expenditures, mergers and acquisitions, strategic investment requirements, acquisitions of property and equipment, stock repurchases and other potential needs for the next twelve months.

Our cash, cash equivalents and short-term investment portfolio as of March 31, 2008 consists of money market funds, time deposits, federal government agency obligations, and foreign and public corporate debt securities. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer. As a result of current adverse financial market conditions, some financial instruments, such as structured investment vehicles, sub-prime mortgage-backed securities and collateralized debt obligations, may pose risks arising from liquidity and credit concerns. As of March 31, 2008, we had no direct holdings in these categories of investments and our exposure to these financial instruments through our indirect holdings in money market mutual funds was not material to total cash, cash equivalents and short-term investments. As of March 31, 2008, we had no recorded impairment charges associated with our short-term investment portfolio. While we cannot predict future market conditions or market liquidity, we have taken steps, including regularly reviewing our investments and associated risk profiles, which we believe will allow us to effectively manage the risks of our investment portfolio.

Contractual Obligations, Commitments and Contingencies

The following table sets forth the amounts of payments due under specified contractual obligations, aggregated by category of contractual obligations, as of March 31, 2008:


	Payment Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
	(In thousands)
Operating lease obligations	$	663	$	643	$	20	$	—	$	—
Purchase obligations		12,098		12,098		—		—		—

Total	$	12,761	$	12,741	$	20	$	—	$	—

Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at March 31, 2008, we are unable to make reasonably reliable estimates of the period of cash settlement with respective taxing authorities. Therefore, $36.2 million of unrecognized tax benefits that may result in a cash payment have been excluded from the contractual obligations table above. See Note 9 “Income Taxes,” to the condensed consolidated financial statements for a discussion on income taxes.

From time to time, we are subject to various claims and legal proceedings. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we would record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based upon consultation with the outside counsel handling our defense in the legal proceedings listed in Part II, Item 1, Legal Proceedings, and an analysis of potential results, we have accrued sufficient amounts for potential losses related to these proceedings. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on our financial position, cash flows or overall trends in results of operations. Litigation, however, is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction prohibiting us from selling one or more products. If an unfavorable ruling were to occur, a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods, could result.

Off-Balance Sheet Arrangements

We are not a party to any agreements with, or commitments to, any special purpose entities that would constitute material off-balance sheet financing other than the operating lease obligations listed above.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to the impact of foreign currency fluctuations, interest rate changes and changes in the market values of our investments.

Foreign Exchange Risks

We fund our operations with cash generated by operations, the sale of marketable securities and short and long-term debt. Since most of our revenues are international, as we operate primarily in Asia, we are exposed to market risk from changes in foreign exchange rates, which could affect our results of operations and financial condition. In order to reduce the risk from fluctuation in foreign exchange rates, our product sales and all of our arrangements with our foundries and test and assembly vendors are denominated in U.S. dollars. We have operations in China, Taiwan, Hong Kong, Korea and Canada. Expenses of our international operations are denominated in each country’s local currency and therefore are subject to foreign currency exchange risk; however, through March 31, 2008 we have not experienced any significant negative impact on our operations as a result of fluctuations in foreign currency exchange rates. We performed a sensitivity analysis assuming a hypothetical 10% adverse movement over one quarter in foreign exchange rates to the foreign subsidiaries and the underlying exposures described above. As of March 31, 2008, the analysis indicated that these hypothetical market movements could impact our non-operating income (loss), net, by approximately $0.6 million. We have not entered into any currency hedging activities.

Interest Rate Risks

We also invest in short-term investments. Consequently, we are exposed to fluctuation in interest rates on these investments. Increases or decreases in interest rates generally translate into decreases and increases in the fair value of these investments. For instance, one percentage point decrease in interest rates would result in approximately a $0.5 million decrease in our annual interest income. In addition, the credit worthiness of the issuer, relative values of alternative investments, the liquidity of the instrument, and other general market conditions may affect the fair values of interest rate sensitive investments. In order to reduce the risk from

fluctuation in rates, we invest in highly liquid corporate and governmental notes and bonds with contractual maturities of less than two years. All of the investments in debt securities have been classified as available-for-sale, and on March 31, 2008, the fair market value of our investments approximated their costs.

Investment Risk

We are exposed to market risk as it relates to changes in the market value of our investment in a public company. We invest in equity instruments of public companies for business and strategic purposes and we have classified these securities as available-for-sale. These available-for-sale equity investments, primarily in technology companies, are subject to significant fluctuations in fair market value due to the volatility of the stock market and the industries in which these companies participate. Our objective in managing our exposure to stock market fluctuations is to minimize the impact of stock market declines to our earnings and cash flows. There are, however, a number of factors beyond our control. Continued market volatility, as well as mergers and acquisitions, have the potential to have a material impact on our results of operations in future periods.

We are also exposed to changes in the value of our investments in non-public companies, including start-up companies. These long-term equity investments in technology companies are subject to significant fluctuations in fair value due to the volatility of the industries in which these companies participate and other factors.

Item 4. Controls and Procedures

Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (i) our disclosure controls and procedures were effective as of March 31, 2008, and (ii) no change in internal control over financial reporting occurred during the quarter ended March 31, 2008 that has materially affected or is reasonably likely to materially affect, such internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On September 12, 2002, following our downward revision of revenue and earnings guidance for the third fiscal quarter of 2002, holders of our common stock, purporting to represent us, filed a series of derivative lawsuits in California state court, County of Alameda, against us as a nominal defendant and against certain of our present and former directors and officers as defendants. The lawsuits alleged certain violations of the federal securities laws, including breaches of fiduciary duty and insider trading. These actions were consolidated as a Consolidated Derivative Action with the caption “ESS Cases.” The derivative plaintiffs sought compensatory and other damages in an unspecified amount, disgorgement of profits, and other relief. On March 24, 2003, we filed a demurrer to the consolidated derivative complaint and moved to stay discovery in the action pending resolution of the initial pleadings in a related federal action. The Court denied the demurrer but stayed discovery. That stay was then lifted in light of the procedural progress of the federal action. The parties reached an agreement in principle to settle the litigation in exchange for certain minor modifications of the Company’s internal policies and payment of plaintiffs’ attorneys fees not to exceed $200,000 (to be paid by defendants’ insurance carriers). The agreement in principle to settle the litigation was then documented and finalized by the parties and submitted to the Court for approval. On October 1, 2007, the Stipulation and Agreement of Settlement became binding upon the Court’s entry of a final Judgment of Dismissal with prejudice as to all defendants in the action, subject to appeal as required by applicable state law. The time for appeal of the final Judgement of Dismissal has now passed. While defendants have denied and continue to deny any and all allegations of wrongdoing in connection with this matter, we believe that given the uncertainties and cost associated with litigation, the settlement is in the best interests of the Company and its stockholders. We recorded a $200,000 loss for the proposed settlement in 2007, as management determined this amount probable of payment and reasonably estimable. In addition, because recovery from the insurance carriers was probable, a receivable was also recorded for the same amount. Accordingly, there was no impact to the statement of operations because the amount of the settlement and the insurance recovery offset each other. The settlement transactions have been completed.

Item 1A. Risk Factors

We have updated the following risk factors which were previously disclosed in Part I Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.

Risks Related to the Mergers

There may be unexpected delays in the consummation of the mergers, which would delay receipt of merger consideration by ESS Delaware stockholders.

The mergers are expected to close in the second quarter of 2008. However, certain events may delay the consummation of the mergers, including difficulties in obtaining the approval of the principal terms of the reincorporation merger and the other transactions contemplated by the merger agreement by our shareholders or in obtaining sufficient advance proxies necessary to adopt the merger agreement, delays in satisfaction of the closing conditions to which the mergers are subject, delisting of our shares by the NASDAQ Global Market or a determination by the NASDAQ Stock Market Listing Qualifications Panel not to list the shares of ESS Delaware to be issued in the reincorporation merger, or a lengthy SEC review process. If one or more of these events occur, the receipt of cash by ESS Delaware stockholders may be delayed and the mergers and the sale to Imperium ultimately may not be completed.

If the mergers are not completed, ESS California’s stock price and future business operations could be harmed.

The mergers are subject to a number of customary conditions to closing, including the approval by the shareholders of ESS California of the principal terms of the reincorporation merger and the consent of the stockholders of ESS Delaware to the adoption of the merger agreement, the accuracy of our representations and warranties, compliance with covenants, and the absence of a material adverse change in our business. In order to approve the reincorporation merger, a majority of the outstanding shares of ESS California common stock entitled to vote at the annual meeting must vote to approve the principal terms of the reincorporation merger. In order to approve the cash-out merger, a majority of the outstanding shares of common stock of ESS Delaware entitled to vote must adopt the merger agreement. If the shareholders of ESS California fail to approve the reincorporation merger or fail to submit sufficient advance proxies to execute and deliver the written consent adopting the merger agreement, we will not be able to complete the mergers and you will not receive the merger consideration. As a result, there can be no assurance that the mergers will be completed in a timely manner or at all.

If the mergers are not completed for any reason, the stock price of ESS California may decline, particularly if the current market price of our common stock reflects a positive market assumption that the mergers will be completed. Additionally, if the merger agreement is terminated, ESS California may be unable to find a partner willing to engage in a similar transaction on terms as favorable as those set forth in the merger agreement, or at all. This could limit ESS California’s ability to pursue its strategic goals.

Uncertainty about the mergers and diversion of management could harm ESS California, whether or not the mergers are completed.

Uncertainty about the effect of our pending acquisition by Imperium could adversely affect our business. This uncertainty could lead to a loss of customers, a decline in revenues, impairment in our ability to make necessary operational improvements in our business, an inability to retain or motivate current employees or attract new employees, and deterioration in our results of operations. These adverse affects may be enhanced by the diversion of management time and attention toward completing the mergers.

We may be delisted from the NASDAQ Global Market and the shares of common stock of ESS Delaware may not be listed on the NASDAQ Global Market.

In January 2008, the NASDAQ Stock Market Listing Qualifications Panel staff notified us of its decision to delist our common stock from the NASDAQ Global Market as a result of our failure to hold our annual meeting of shareholders in 2007 in accordance with the NASDAQ Global Market’s continued listing requirements. Our hearing to appeal the NASDAQ Stock Market Listing Qualifications Panel’s decision was held in February 2008, and the hearing panel has initially extended our deadline for holding our next annual meeting to May 30, 2008. The panel may decide not to grant us any extension of time to hold the annual meeting, or may not grant us sufficient time to hold our annual meeting and may delist our common stock regardless of whether our shareholders elect directors or approve the sale to Imperium. Our next shareholder meeting will be the annual meeting for approval of the mergers, which we expect to hold in the second quarter of 2008. We do not expect to hold the annual meeting prior to June 2008 in light of the fact that the joint proxy statement/prospectus we need to deliver in connection with the mergers, which may be reviewed by the SEC, must be cleared by the SEC and mailed to our shareholders prior to the annual meeting and that it may take a significant amount of time to solicit a sufficient number of proxies to approve the principal terms of the reincorporation merger and a sufficient number of advance proxies to adopt the merger agreement.

In addition, we intend to apply for listing of the shares of common stock of ESS Delaware to be issued in the reincorporation merger on the NASDAQ Global Market. If our stock is delisted from the NASDAQ Global Market or the NASDAQ Stock Market Listing Qualifications Panel determines not to list the shares of common stock of ESS Delaware issued in the reincorporation merger, the mergers and our sale to Imperium may be substantially delayed or may not be completed at all. If our stock is no longer listed for trading on a national stock exchange, the reincorporation merger, which must be completed prior to closing of the cash-out merger, will require compliance with the individual securities laws, or “blue sky” laws, of each of the 50 states. Any blue sky law compliance would be time consuming and expensive, may not be possible, and could result in delay in the completion of the cash-out merger or termination of the merger agreement. In addition, if our stock is delisted from the NASDAQ Global Market or we are unable to list the shares of common stock of ESS Delaware on the NASDAQ Global Market following the reincorporation merger, and if the long-arm provision of Section 2115 of the California Corporations Code is held to apply to ESS Delaware, ESS Delaware may be subject to certain limitations on distributions to stockholders that could apply to the cash-out merger and may restrict or prevent consummation of the cash-out merger.

Following the reincorporation merger, your rights as a shareholder will be governed by Delaware law instead of California law and you should note the differences.

Your right to dissent from the cash-out merger and seek an appraisal of your shares will be governed by Delaware law instead of California law. In general, under both Delaware law and California law, the process of dissenting and exercising appraisal rights requires strict compliance with technical prerequisites. ESS Delaware stockholders wishing to dissent should consult with their own legal counsel in connection with compliance with Section 262 of the Delaware General Corporation Law or Chapter 13 of the California Corporations Code. There are several differences between the laws of Delaware and California with respect to dissenting stockholders’ appraisal rights.

Stockholders of ESS Delaware who are considering seeking appraisal of their shares of ESS Delaware common stock should consider that the fair value of their shares determined under Section 262 of the Delaware General Corporation Law or Chapter 13 of the California Corporations Code could be more than, the same as or less than the value of consideration to be issued and paid in the cash-out merger. Furthermore, ESS Delaware reserves the right to assert in any appraisal proceeding that, for purposes of the appraisal proceeding, the “fair value” of ESS Delaware common stock is less than the value of the consideration to be issued and paid in the cash-out merger.

Your ability to sell or otherwise transfer your shares of ESS Delaware common stock between the closing of the reincorporation merger and the closing of the cash-out merger may be limited.

Each of ESS California and Delaware Merger Sub has agreed, to the extent reasonably practicable and subject to compliance with all applicable laws and rules and regulations of the NASDAQ Global Market, to use its commercially reasonable efforts to cause trading in shares of ESS Delaware common stock on the NASDAQ Global Market (subsequent to listing thereof, if any) to be suspended immediately following the effective time of the reincorporation merger and to close the stock transfer books of ESS Delaware immediately following the effective time of the reincorporation merger, preventing any transfers of shares of ESS Delaware common stock on the records of ESS Delaware between the time of the reincorporation merger and the time of the cash-out merger. ESS California and Delaware Merger Sub have agreed to halt trading and to close the transfer books of ESS Delaware in order to determine the shareholders of record of ESS California immediately prior to the reincorporation merger, and to ensure that a sufficient number of effective advance proxies have been received to authorize the adoption of the merger agreement following the reincorporation merger and to ensure that the shares of common stock of ESS Delaware that are the subject of such advance proxies are not transferred between the time of the consummation of the reincorporation merger and the consummation of the cash-out merger.

If we are able to cause trading in shares of ESS Delaware common stock on the NASDAQ Global Market to be suspended immediately following the effective time of the reincorporation merger and/or to close the stock transfer books of ESS Delaware immediately following the effective time of the reincorporation merger, your ability to sell or otherwise transfer shares of ESS Delaware common stock you would receive in the reincorporation merger will be limited and you may not be able to transfer any such shares of ESS Delaware common stock at all during the time period between the closing of the reincorporation merger and the closing of the cash-out merger. As a result, you may have significantly reduced or no liquidity in your investment in ESS Delaware between the time of the reincorporation merger and the cash-out merger and you may not be able to sell your shares of ESS Delaware in a timely manner or at all.

Certain directors and executive officers of ESS California may have potential conflicts of interest in recommending that you vote to approve the principal terms of the reincorporation merger and adopt the merger agreement.

ESS California’s directors and executive officers have interests in the mergers as individuals in addition to, and that may be different from, the interests of ESS California shareholders.

In certain instances, the merger agreement requires payment of a termination fee to Imperium and reimbursement of expenses of Imperium. Payment of these amounts could adversely affect ESS California’s financial condition or reduce the likelihood that another party proposes an alternative transaction to the mergers.

Under the terms of the merger agreement, ESS California may be required to pay Imperium a termination fee of $1,981,000 plus reimbursement of Imperium’s costs of up to $500,000 if the merger agreement is terminated under certain circumstances. The termination fee and expense reimbursement provisions could affect the structure, pricing and terms proposed by other parties seeking to acquire or merge with ESS California, including the possibility that any such other party might choose not to make an alternative transaction proposal to ESS California as a result of the termination fee and expense reimbursement provisions. In addition, should the merger agreement be terminated in circumstances under which such a termination fee and expense reimbursement is payable, the payment of such a fee would reduce the amount of cash available to ESS California going forward.

Risks Related to the Company’s Business

We have a history of losses and expect to continue to incur net losses in the near-term.

We have experienced operating losses in each quarterly and annual period since the quarter ended September 30, 2004. We incurred net income of $3.1 million for the fiscal year ended December 31, 2007 including the gain on sale of technology and tangible assets of $10.4 million and net losses of approximately $44.1 million, $99.6 million, and $35.6 million for the fiscal years ended December 31, 2006, 2005, and 2004, respectively. We had an accumulated deficit of approximately $132.3 million as of March 31, 2008. We will need to generate significant increases in our revenues and margins to achieve or maintain profitability or significantly reduce operating expenses or both. There can be no certainty that our efforts to restructure and reduce our operating expenses will reduce or eliminate these losses; indeed, the reductions and restructuring could increase losses due to reduced revenue levels. There can be no certainty that these operating losses will not continue and consume our working capital.

If our new business strategy is unsuccessful, it could significantly harm our business and operating results.

On September 18, 2006, we announced an ongoing review of our business strategy. In particular, we announced a business strategy to concentrate our standard DVD business activities on serving a few large customers and to look for business partners or acquirers for our high definition HD DVD and Blu-ray DVD business and our camera phone business. On November 3, 2006 we entered into a DVD Technology License Agreement with Silan for the exclusive license of certain standard definition DVD technologies and also granted Silan a non-exclusive license for our remaining standard definition DVD technology. On April 23, 2008, we entered into the ESS-Silan Audio and Video Technology License Agreement with Silan to amend and restate the DVD Technology License Agreement, between the Company and Silan, as amended, dated November 3, 2006. The Company entered into the License Agreement in order to license to Silan certain of ESS’s audio and video technology for the purpose of developing, designing, manufacturing, distributing and selling products incorporating such technology for which we will be owed royalties. However, as a result, we will not receive any license revenue from Silan with respect to our standard definition DVD technology previously licensed to Silan. On February 16, 2007, we entered into Asset Purchase Agreements with SiS to sell our HD-DVD and Blu-ray DVD assets and technologies and on the same date announced we were reducing operations of our camera phone business. In conjunction with this strategic review we are currently maintaining our remaining standard definition DVD business and entering into the business of designing, manufacturing and marketing analog processor chips. If the market for our licensed VCD and/or DVD businesses, our retained DVD standard definition businesses or the market for our new product offerings is smaller than we anticipated, our results of operations and business would be adversely affected. In addition, one of our new analog products for a new market we had hoped to enter in 2008 has been delayed beyond the key Christmas and Chinese New Years seasons and we do not expect to bring this new product to market until later in 2009. We expect this delay in bringing this new product to market, will delay our ability to derive revenues from such product. Selling and/or licensing of our standard definition DVD and high definition DVD businesses and shutting down our camera phone business may also reduce the scale of our business and income stream and result in our greater reliance on our remaining businesses. Our strategy to expand our digital audio and analog processor chip businesses is new, and unproven.

Our business strategy is currently going through significant evaluation and change.

We announced on September 18, 2006 that our business strategy has been going through a significant transition. This transition and our current strategy may fail to stop our operating losses, and we may take alternative measures. As part of this transition, we may not be able to make our current lines of business profitable and therefore may exit them. We may not be able to identify or acquire or transition to new lines of business that may be profitable, and we may not have enough resources to transition to certain alternative lines of business. We are also evaluating alternative business models, markets, products, industries and technologies. We may determine it is in the best interests of our shareholders to move us into alternative lines of business, industries and/or markets other than those in which we have historically operated.

Our business is highly dependent on the expansion of the consumer electronics market and our ability to respond to changes in such market.

Our focus has been developing products primarily for the consumer electronics market. Due to the short life-cycle of the products in this market, we must identify and capitalize on market opportunities in a timely manner to become a leader in these product areas. Historically, we have had to respond to market trends, identify key products and become the market leader for such products in order to succeed. Unfortunately, we have been unable to maintain our market position in recent periods. We have historically and we expect to continue to evaluate our strategies in our businesses to ensure that we focus on the technologies and markets that will provide us the best opportunities for the future. Nonetheless, our strategy in potential new markets may not be successful. If the markets for these products and applications decline or fail to develop as expected, or if we are not successful in our efforts to market and sell our products to manufacturers who incorporate our chip into their products, we could exit our historic lines of business and enter other lines of business outside of semiconductors, and it could have a material adverse effect on our business financial conditions and results of operations

We operate in highly competitive markets.

The markets in which we operate are intensely competitive and are characterized by rapid technological changes, rapid price reductions and short product life cycles. Competition typically occurs at the design stage, when customers evaluate alternative design approaches requiring integrated circuits. Because of short product life cycles, there are frequent design win competitions for next-generation systems.

We expect competition to increase in the future from existing competitors and from other companies that may enter our existing or future markets with products that may be provided at lower costs or provide higher levels of integration, higher performance or additional features. In some cases, our competitors have been acquired by even larger organizations, giving them access to even greater resources with which to compete. Advancements in technology can change the competitive environment in ways that may be adverse to us. Unless we are able to develop and deliver highly desirable products in a timely manner continuously and achieve market domination in one or more product lines, we will not be able to achieve long-term sustainable success in this fast consolidating industry. If we are only able to offer commodity products, our results of operations and long-term success will suffer and we will fall prey to stronger competitors. For example, today’s high-performance central processing units in PCs have enough excess computing capacity to perform many of the functions that formerly required a separate chip set, which has reduced demand for our PC audio chips, among other chips. Moreover, our VCD and standard definition DVD products have begun to experience commodity like pricing pressures as new technologies evolve. The announcements and commercial shipments of competitive products could adversely affect sales of our products and may result in increased price competition that would adversely affect the average selling price (“ASP”) and margins of our products.

The following factors may affect our ability to compete in our highly competitive markets:

	•		The timing and success of our new product introductions and those of our customers and competitors;

	•		The ability to control product cost and produce consistent yield of our products;

	•		The ability to obtain adequate foundry capacity and sources of raw materials;

	•		The price, quality and performance of our products and the products of our competitors;

	•		The emergence of new multimedia standards;

	•		The development of technical innovations;

	•		The rate at which our customers integrate our products into their products;

	•		The number and nature of our competitors in a given market; and

	•		The protection of our intellectual property rights.

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

We may be required to obtain substantial additional capital to finance our future growth, fund our ongoing research and development activities and acquire new technologies or companies. To the extent that our existing sources of liquidity and cash flow from operations are insufficient to fund our activities, we may need to seek additional equity or debt financing from time to time. Additional financing may not be available to us when needed or, if available, it may not be available on terms favorable to us. We may need to consummate a private placement or public offering of our capital stock at a lower price than you paid for your shares. If we raise additional capital through the issuance of new securities at a lower price than you paid for your shares, you will be subject to additional dilution. Further, such equity securities may have rights, preferences or privileges senior to those of our existing common stock.

To compete in our industry, we may need to acquire other companies and technologies and/or restructure our businesses, and we may not be successful acquiring key targets, integrating our acquisitions into our businesses or restructuring our businesses effectively.

We believe the semiconductor industry is experiencing a general industry consolidation. To remain competitive, a semiconductor company must be able to offer high-demand products and renew its product offerings in a timely manner. In order to meet such a high turn over in product offerings, in addition to our own research and development of new products, we regularly consider strategic additions or deletions of our product offerings to enhance our strategic position. To remain competitive in this rapidly changing market, we need to constantly update our product offering and realign our cost structure to bring to the market more sophisticated and cost-effective products. However, we may not be able to identify and consummate suitable acquisitions and investments effectively. Conversely, we may not be able to restructure and realign our businesses effectively. Strategic transactions carry risks that could have a material adverse effect on our business, financial condition and results of operations, including:

	•		The failure of the acquired products or technology to attain market acceptance, which may result from our inability to leverage such products and technology successfully;

	•		The failure to integrate acquired products and business with existing products and corporate culture;

	•		The inability to restructure or realign our businesses effectively and cost-efficiently;

	•		The inability to retain key employees from the acquired company;

	•		Diversion of management attention from other business concerns;

	•		The potential for large write-offs of intangible assets;

	•		Issuances of equity securities dilutive to our existing shareholders;

	•		The incurrence of substantial debt and assumption of unknown liabilities; and

	•		Our ability to properly access and maintain an effective internal control environment over an acquired company in order to comply with public reporting requirements.

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

Historically, our quarterly operating results have fluctuated significantly. Our future quarterly operating results will likely fluctuate from time to time and may not meet the expectations of securities analysts and investors in a particular future period. The price of our common stock could decline due to such fluctuations. The following factors may cause significant fluctuations in our future quarterly operating results:

	•		Charges related to the net realizable value of inventories;

	•		Changes in demand or sales forecast for our products;

	•		Changes in the mix of products sold and our revenue mix;

	•		Changes in the cost of producing our products;

	•		The timely implementation of customer-specific hardware and software requirements for specific design wins;

	•		Increasing pricing pressures and resulting reduction in the ASP of any or all of our products;

	•		Availability and cost of foundry capacity;

	•		Gain or loss of significant customers;

	•		Seasonal customer demand;

	•		The cyclical nature of the semiconductor industry;

	•		The timing of our and our competitors’ new product announcements and introductions and the market acceptance of new or enhanced versions of our and our customers’ products;

	•		The timing of significant customer orders and/or design wins;

	•		Charges related to the impairment of other intangible assets;

	•		Loss of key employees which could impact sales or the pace of product development;

	•		The “turns” basis of most of our orders, which makes backlog a poor indicator of the next quarter’s revenue;

	•		The potential for large adjustments due to resolution of multi-year tax examinations;

	•		The lead time we normally receive for our orders, which makes it difficult to predict sales until the end of the quarter;

	•		Availability and cost of raw materials;

	•		Significant increases in expenses associated with the expansion of operations; and

	•		A shift in manufacturing of consumer electronic products away from Asia.

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

We currently place non-cancelable orders to purchase our products from independent foundries and other vendors on an approximately three-month rolling basis, while our customers generally place purchase orders (frequently with short lead times) with us that may be cancelled without significant penalty. Some of these customers may require us to demonstrate our ability to deliver in response to their short lead-time. In order to accommodate such customers, we have to commit to certain inventories before we have a firm commitment from our customers. If anticipated sales and shipments in any quarter are cancelled, do not occur as quickly as expected or become subject to declining ASPs, expense and inventory levels could be disproportionately high and we may be required to record significant inventory charges in our statement of operations in a particular period. In accordance with our accounting policy, we reduce the carrying value of our inventories for estimated slow-moving, excess, obsolete, damaged or otherwise unmarketable products by an amount based on forecasts of future demand and market conditions. As our business grows, we may increasingly rely on distributors, which may further impede our ability to accurately forecast product orders. Additionally, we may venture into new products with different supply chain and logistics requirements which may in turn cause excess or shortage of inventory.

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

We invest a significant amount of time and resources in our research and development activities to enhance and maintain our competitive position. Technical innovations are inherently complex and require long development cycles and the commitment of extensive engineering resources. We incur substantial research and development costs to confirm the technical feasibility and commercial viability of a product that in the end may not be successful. If we are not able to successfully complete our research and development projects on a timely basis, we may face competitive disadvantages. There is no assurance that we will recover the development costs associated with these projects or that we will be able to secure the financial resources necessary to fund future research and development efforts.

We have recently significantly reduced the size of our research and development workforce and the remaining personnel may not be adequate to enable us to successfully manage existing projects or enter new product markets. Our margins may decrease to a point where we will be unable to sustain the research and development resources necessary to remain competitive.

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

The semiconductor industry is characterized by rapid technological changes, evolving industry standards and product obsolescence. Our success is highly dependent upon the successful development and timely introduction of new products at competitive prices and performance levels. Recently our financial performance has suffered because we were late with product introductions compared to our competition and we expect this trend in our financial performance to continue until we deliver new product offerings that are competitive and accepted by the market. The success of new products depends on a number of factors, including:

	•		Anticipation of market trends;

	•		Timely completion of design, development, and testing of both the hardware and software for each product;

	•		Timely completion of customer specific design, development and testing of both hardware and software for each design win;

	•		Market acceptance of our products and the products of our customers;

	•		Offering new products at competitive prices;

	•		Meeting performance, quality and functionality requirements of customers and OEMs; and

	•		Meeting the timing, volume and price requirements of customers and OEMs.

Our products are designed to conform to current specific industry standards; however, we have no control over future modifications to these standards. Manufacturers may not continue to follow the current standards, which would make our products less desirable to manufacturers and reduce our sales. Our success is highly dependent upon our ability to develop new products in response to these changing industry standards.

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

Since we are primarily focused on the consumer electronics market, we are likely to be affected both by changes in consumer demand and by seasonality in the sales of our products. Historically, over half of consumer electronics products are sold during the holiday seasons. Consequently, our results during a period that covers a non-holiday season may vary dramatically from a period that covers a holiday season. Consumer electronics product sales have historically been much higher during the holiday shopping seasons than during other times of the year, although the manufacturers’ shipments vary from quarter to quarter depending on a number of factors, including retail levels and retail promotional activities. In addition, consumer demand often varies from one product to another in consecutive holiday seasons and is strongly influenced by the overall state of the economy. Because the consumer electronics market experiences substantial seasonal fluctuations, seasonal trends may cause our quarterly operating results to fluctuate significantly and our inability to forecast these trends may adversely affect the market price of our common stock. For instance, as ASPs for DVD products decline, customer demands for VCD products, from which we enjoy a good product margin, even under our recent arrangement to license our VCD products, may shift to DVD products and ultimately render our VCD products obsolete. In the future, if the market for our products is not as strong during the holiday seasons, whether as a result of changes in consumer tastes, changes in our mix of products or because of an overall reduction in consumer demand due to economic conditions, we may fail to meet expectations of securities analysts and investors which could cause our stock price to fall.

Our products are subject to increasing pricing pressures.

The markets for most of the applications for our chips are characterized by intense price competition. The willingness of OEMs to design our chips into their products depends, to a significant extent, upon our ability to sell our products at cost-effective prices. We

expect the ASP of our existing products (particularly our DVD decoder) to decline significantly over their product lives as the markets for our products mature, new products or technology emerge and competition increases. If we are unable to reduce our costs sufficiently to offset declines in product prices or are unable to introduce more advanced products with higher margins, our gross margins may decline in the future.

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

Our existing and potential competitors consist, in part, 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. These competitors may have more visibility into market trends, which is critically important in an industry characterized by rapid technological changes, evolving industry standards and product obsolescence. Our competitors also include a number of independent and emerging companies who may be able to better adapt to changing market conditions and customer demand. In addition, some of our current and potential competitors maintain their own semiconductor fabrication facilities and could benefit from certain capacity, cost and technical advantages. We expect that market experience to date and the predicted growth of the market will continue to attract and motivate more and stronger competitors.

In the Video business, DVD and VCD players face significant competition from video-on-demand, VCRs and other video formats. Further, VCD players, which tend to be viewed as a less expensive alternative, are being replaced by DVD players as DVD players come down in price. We expect that the DVD platform will face competition from other platforms including set-top-boxes, as well as multi-function game boxes being manufactured and sold by large companies. Some of our competitors may be more diversified than us and may supply chips for multiple platforms. Any of these competitive factors could reduce our sales and market share and may force us to lower our prices, adversely affecting our business, financial condition and results of operations.

As we focus on standard definition DVD technology and move away from HD-DVD and Blu-ray DVD technologies, demand may shift in such a way that we would no longer have the technology to address the market’s changing demand and be unable to remain competitive.

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

Our success depends to a significant degree upon the continued contributions of our top management including Robert L. Blair, our President and Chief Executive Officer (“CEO”). Fred S.L. Chan, our Chairman of the Board, and James B. Boyd, our Chief Financial Officer, recently resigned and Bruce J. Alexander, who took over as our Chairman of the Board, recently passed away. The loss of the services of Mr. Blair or any of our other key executives could adversely affect our business. We may not be able to retain our other key personnel and searching for key personnel replacements could divert the attention of other senior management and increase our operating expenses. We currently do not maintain any key person life insurance.

Additionally, to manage our future operations effectively, we will need to hire and retain additional management personnel, design personnel as well as hardware and software engineers. We may have difficulty recruiting these employees or integrating them into our business. The loss of services of any of our key personnel, the inability to attract and retain qualified personnel in the future, or delays in hiring required personnel, particularly design personnel and software engineers, could make it difficult to implement our key business strategies, such as timely and effective product introductions.

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.

Our success and competitiveness depend in large part on our ability to attract, retain and motivate key employees. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, changes in our management or leadership, the effectiveness of our compensation programs, including our equity-based programs, and competitors’ hiring practices. In addition, we began recording a charge to earnings for stock options and ESPP shares in our first fiscal quarter of 2006. This requirement reduces the attractiveness of certain equity-based compensation programs as the expense associated with the grants decreases our profitability. We may make certain adjustments to our broad-based equity compensation programs. These changes may reduce the effectiveness of compensation programs. If we do not successfully attract, retain and motivate key employees as a result of these or other factors, our ability to capitalize on our opportunities and our operating results and may be materially and adversely affected.

We rely on distributors for a significant portion of our revenues and if these relationships deteriorate our financial results could be adversely affected.

On August 31, 2007, our distribution agreement with FE Global, our former largest distributor, was terminated, and we signed a new distribution agreement with CKD (Hong Kong) High Tech Company Limited (“CKD”) who will perform similar functions as those previously provided by FE Global. In addition to CKD, Weiking Industrial Company, Ltd. (Weiking) is our other distributor. For the three months ended March 31, 2008, CKD and Weiking each accounted for 15% of our revenues. Our distributors are not subject to any minimum purchase requirements and can discontinue marketing any of our products at any time. In addition, our distributors have rights of return for unsold products and rights to pricing allowances to compensate for rapid, unexpected price changes. Therefore, we do not recognize revenue until sold through to our end-customers. If our relationship with our distributors deteriorates, our revenues could fluctuate significantly as we experience disruption to our sales and collection processes. We may increasingly rely on distributors, which may reduce our exposure to future sales opportunities. Although we believe that we could replace our distributors, there can be no assurance that we could replace them in a timely manner, or even if a replacement were found, that the new distributors would be as effective in generating revenue for us. The reduction, delay or cancellation of orders or the loss of a distributor could materially and adversely affect our business, financial condition and results of operations. In addition, any difficulty in collecting amounts due from our distributors could harm our financial condition.

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

A substantial portion of our net revenues has been derived from sales to a small number of our customers. During the three months ended March 31, 2008, sales to our top five end-customers across business segments (including end-customers that buy our products from our distributors) accounted for approximately 75% of our net revenues. We expect this concentration of sales to continue along with other changes in the composition of our customer base. The reduction, delay or cancellation of orders from one or more major customers or the loss of one or more major customers could materially and adversely affect our business, financial condition and results of operations. In addition, any difficulty in collecting amounts due from one or more key customers could harm our financial condition.

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

We depend on a limited number of suppliers to obtain adequate supplies of quality raw materials on a timely basis. We do not generally have guaranteed supply arrangements with our suppliers. If we have difficulty in obtaining materials in the future, alternative suppliers may not be available, or if available, these suppliers may not provide materials in a timely manner or on favorable terms. If we cannot obtain adequate materials for the manufacture of our products, we may be forced to pay higher prices, experience delays and our relationships with our customers may suffer.

In addition, we license certain technology from third parties that is incorporated into many of our key products. If we are unable to obtain or license the technology on commercially reasonable terms and on a timely basis, we will not be able to deliver products to our customers on competitive terms and in a timely manner and our relationships with our customers may suffer.

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.

To protect our intellectual property rights we rely on a combination of patents, trademarks, copyrights and trade secret laws and confidentiality procedures. We have numerous patents granted in the United States with some corresponding foreign patents. These patents will expire at various times. We cannot assure you that patents will be issued from any of our pending applications or applications in preparation or that any claims allowed from pending applications or applications in preparation will be of sufficient scope or strength. We may not be able to obtain patent protection in all countries where our products may be sold. Also, our competitors may be able to design around our patents. The laws of some foreign countries may not protect our products or intellectual property rights to the same extent, as do the laws of the United States. We cannot assure you that the actions we have taken to protect our intellectual property will adequately prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions. Litigation by or against us could result in significant expense and divert the efforts of our technical and management personnel, whether or not such litigation results in a favorable determination for us. Any claim, even if without merit, may require us to spend significant resources to develop non-infringing technology or enter into royalty or cross-licensing arrangements, which may not be available to us on acceptable terms, or at all. We may be required to pay substantial damages or cease the use and sale of infringing products, or both. In general, a successful claim of infringement against us in connection with the use of our technologies could adversely affect our business and our results of operations could be significantly harmed. See Part I, Item 3, “Legal Proceedings.” We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. In the event of an adverse result in any such litigation our business could be materially harmed.

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

Substantially all of our sales are to customers (including distributors) in China, Hong Kong, Taiwan, Indonesia and Korea. During the three months ended March 31, 2008, sales to customers in China, Hong Kong, Taiwan, Indonesia and Korea were approximately 89% of our net revenues. If our sales in one of these countries or territories, such as Korea, were to fall, our financial condition could be materially impaired. We expect that international sales will continue to represent a significant portion of our net revenues. In addition, substantially all of our products are manufactured, assembled and tested by independent third parties in Asia. There are special risks associated with conducting business outside of the United States, including:

	•		Unexpected changes in legislative or regulatory requirements and related compliance problems;

	•		Political, social and economic instability;

	•		Lack of adequate protection of our intellectual property rights;

	•		Changes in diplomatic and trade relationships, including changes in most favored nations trading status;

	•		Tariffs, quotas and other trade barriers and restrictions;

	•		Longer payment cycles, greater difficulties in accounts receivable collection and greater difficulties in ascertaining the credit of our customers and potential business partners;

	•		Potentially adverse tax consequences, including withholding in connection with the repatriation of earnings and restrictions on the repatriation of earnings;

	•		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.

We rely on independent foundries to manufacture all of our products. Substantially all of our products are currently manufactured by TSMC, GSMC, and other independent Asian foundries in Asia. Our reliance on these or other independent foundries involves a number of risks, including:

	•		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.

Any failure of these third-party foundries to deliver products or otherwise perform as requested could damage our relationships with our customers and harm our sales and financial results.

To address potential foundry capacity constraints in the future, we may be required to enter into arrangements, including equity investments in or loans to independent wafer manufacturers in exchange for guaranteed production capacity, joint ventures to own and operate foundries, or “take or pay” contracts that commit us to purchase specified quantities of wafers over extended periods. These arrangements could require us to commit substantial capital or to grant licenses to our technology. If we need to commit substantial capital, we may need to obtain additional debt or equity financing, which could result in dilution to our shareholders.

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

Our potential customers often spend a significant amount of time to evaluate, test and integrate our products. Our sales cycles often last for several months and may last for up to a year or more. These longer sales cycles require us to invest significant resources prior to the generation of revenues and subject us to greater risk that customers may not order our products as anticipated. In addition, orders expected in one quarter could shift to another because of the timing of customers’ purchase decisions. Any cancellation or delay in ordering our products after a lengthy sales cycle could adversely affect our business.

Our products are subject to recall risks.

The greater integration of functions and complexity of our products increase the risk that our customers or end users could discover latent defects or subtle faults in our products. These discoveries could occur after substantial volumes of product have been shipped, which could result in material recalls and replacement costs. Product recalls could also divert the attention of our engineering personnel from our product development needs and could adversely impact our customer relationships. In addition, we could be subject to product liability claims that could distract management, increase costs and delay the introduction of new products.

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

The semiconductor industry is subject to cyclical variations in product supply and demand, the timing, length and volatility of which are difficult to predict. Downturns in the industry have been characterized by abrupt fluctuations in product demand, production over-capacity and accelerated decline of ASP. Upturns in the industry have been characterized by rising costs of goods sold and lack of production capacity at our suppliers. These cyclical changes in demand and capacity, upward and downward, could significantly harm our business. Our quarterly net revenues and gross margin performance could be significantly impacted by these cyclical variations. A prolonged downturn in the semiconductor industry could materially and adversely impact our business, financial condition and results of operations. We cannot assure you that the market will improve from a cyclical downturn or that cyclical performance will stabilize or improve.

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

The price of our common stock fluctuates significantly. Many factors influence the price of our common stock, including:

	•		Future announcements concerning us, our competitors or our principal customers, such as quarterly operating results, changes in earnings estimates by analysts, technological innovations, new product introductions, governmental regulations, or litigation;

	•		Changes in accounting rules, particularly those related to the expensing of stock options and accounting for uncertainty in income taxes;

	•		The liquidity within the market for our common stock;

	•		Sales or purchases by us or by our officers, directors, other insiders and large shareholders;

	•		Investor perceptions concerning the prospects of our business and the semiconductor industry;

	•		Market conditions and investor sentiment affecting market prices of equity securities of high technology companies; and

	•		General economic, political and market conditions, such as recessions or international currency fluctuations.

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

We are spending an increased amount of management time and external resources to analyze and comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and the NASDAQ Global Market rules and listing requirements. Devoting the necessary resources to comply with evolving corporate governance and public disclosure standards may result in increased general and administrative expenses and attention to these compliance activities and divert management’s attention from our on-going business operations.

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

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include a report of management’s assessment of the design and effectiveness of our internal controls as part of our Annual Report on Form 10-K. In order to issue our report, our management must document both the design for our internal control over financial reporting and the testing processes, including those related to new systems and programs, that support management’s evaluation and conclusion. During the course of testing our internal controls each year, we may identify deficiencies which we may not be able to remediate, document and retest in time, due to difficulties including those arising from turnover of qualified personnel, to meet the deadline for management to complete its report. Upon the completion of our testing and documentation, certain deficiencies may be discovered that will require remediation, the costs of which could have a material adverse effect on our results of operations. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time we may not be able to ensure that our management can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. In the future, if we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our stock price.

We are exposed to fluctuations in the market values of our investments and in interest rates.

At March 31, 2008, we had $49.1 million in cash, cash equivalents and short-term investments. These balances represented over 50% of our total assets. We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds, and highly liquid debt securities of corporations, and the United States government and its agencies. These investments are denominated in U.S. dollars. We do not have any investments in auction rate securities.

Investments in both fixed interest rate and floating interest rate instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity. In addition, the credit worthiness of the issuer, relative values of alternative investments, the liquidity of the instrument, and other general market conditions may affect the fair values of interest rate sensitive investments.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES


					Total Number of		Maximum Number
			Weighted		Shares Purchased as		of Shares That may
			Average Price		Part of Publicly		yet be Purchased
	Total Number of		Paid per		Announced		Under the
Period	Shares Purchased		Share		Programs		Programs(1)
January 1, 2008 — January 31, 2008		—	$	—		—		5,688,000
February 1, 2008 — February 29, 2008		—		—		—		5,688,000
March 1, 2008 — March 31, 2008		—		—		—		5,688,000

Total		—	$	—		—


(1)		We announced on April 16, 2003 that our Board of Directors authorized us to repurchase up to 5,000,000 shares of our common stock. As of March 31, 2008, we had approximately 688,000 shares remaining available for repurchase under this program, for which there is no stated expiration. In addition, we announced on February 16, 2007 that our Board of Directors authorized us to repurchase up to an additional 5,000,000 shares of our common stock with no stated expiration for this program

Items 3 and 4 are not applicable for the reporting period and have been omitted.

Item 5. Other Information

None.

Item 6. Exhibits

(a)

Exhibits:


EXHIBIT
NUMBER		DESCRIPTION
2.2		Agreement and Plan of Merger, dated as of February 21, 2008, among ESS Technology, Inc., Echo Technology (Delaware), Inc., Semiconductor Holding Corporation, and Echo Mergerco, Inc., incorporated herein by reference to Exhibit 2.1 to Form 8-K filed on February 22, 2008.

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 SEC 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, 2006, filed on March 16, 2007.

4.01		Registrant’s Registration Rights Agreement dated May 28, 1993 among the Registrant and certain security holders, incorporated herein by reference to Exhibit 10.07 to the Form S-1.

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		Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


	ESS TECHNOLOGY, INC. (Registrant)
Date: May 15, 2008	By:	/s/ Robert L. Blair
		Robert L. Blair
		President and Chief Executive Officer


Date: May 15, 2008	By:	/s/ John A. Marsh
		John A. Marsh
		Chief Financial Officer


EXHIBIT
NUMBER		DESCRIPTION
2.2		Agreement and Plan of Merger, dated as of February 21, 2008, among ESS Technology, Inc., Echo Technology (Delaware), Inc., Semiconductor Holding Corporation, and Echo Mergerco, Inc., incorporated herein by reference to Exhibit 2.1 to Form 8-K filed on February 22, 2008.

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 SEC 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, 2006, filed on March 16, 2007.

4.01		Registrant’s Registration Rights Agreement dated May 28, 1993 among the Registrant and certain security holders, incorporated herein by reference to Exhibit 10.07 to the Form S-1.

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		Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Trending Now

Toplists

Market Data

News

Trading Tools

Markets

Discover

Hot Features

Follow Feed

Options Flow

Monitor

Ess Tech (DE) Comm (MM) (ESST) News

ESST Ess Tech (DE) Comm (MM)

Ess Technology Inc - Quarterly Report (10-Q)

15/05/2008 10:14pm

Edgar (US Regulatory)

1 Year Ess Tech (DE) Comm (MM) Chart

1 Month Ess Tech (DE) Comm (MM) Chart

Your Recent History

Company

Business

Popular

Get The App