Safe Harbor Statement The matters discussed in this presentation include certain forward-looking statements that involve risks and uncertainties, including, but not limited to, the impact of competitive products and pricing, the possible reduction of consumer spending occasioned by general economic conditions, the timely availability and acceptance of ESS‘s new products, the dependence on continued growth in demand for consumer multimedia products, the uncertainty of the outcome of any litigation proceedings, and the other risks detailed from time to time in the SEC reports of ESS, including the reports on Form 10-K, Form 10-Q and Form 8-K. Actual results could differ materially from those projected in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. May 2002 The Leader in Consumer Digital Entertainment Electronics August 2003 May 2002 ESS Overview • ESS is a fabless consumer digital entertainment chip supplier • ESS has a long history of being a market leader • 1989 - #1 Supplier - Sound chips for toy industry • 1995 - #1 Supplier - Audio accelerator chips for PCs • 1998 - #1 Supplier - VCD video chips • 2001 - #1 Supplier - DVD video chips • 2002 - #1 Supplier - Digital video chips - #1 Supplier – Videophone chips • Currently #1 supplier of Digital Video chips worldwide (InStat, June 2003) May 2002 The Digital World • The World is going digital - Audio (music and voice) Video (TV, playback and recording) Imaging (camera and camcorder) Communications (phone and internet) • Digital Technology enables new applications • New applications are changing our lifestyle May 2002 ESS Opportunities • ESS is the leader in Digital Video Playback - VCD & DVD (MPEG 1 & 2) - MPEG4, DivX (new) • Expanding into Digital Video Recording - Recordable DVD (MPEG2) Digital Video Recorder (DVR) Acquired Divio - MPEG4 encoding - DV Codec • Expanding into Digital photography - Acquired Pictos - Sensor and image processor for Digital Still Camera (DSC) - Sensor and image processor for camera phone - Image processor for Camcorder May 2002 VCD has a New Life • VCD Playback • VCD is growing worldwide • Low cost content • $30 street price • BOM cost lower than DVD • Royalty free • > 65 million players in 2003 and growing • Popular in most populous countries: • China, India and Indonesia • Popular in emerging countries: • Russia, South America, Africa • ESS has 65% market share and growing May 2002 VCD has a New Life • VCD-MPEG4 is the new upcoming standard • • • • • Same video and audio quality as DVD Only one CD disk per movie Street price between VCD and DVD player Lower BOM cost than DVD (uses CD loader) Large amount of low cost content available from Internet • VCD market is migrating to VCD-MPEG4 • ESS’s VCD-MPEG4 revenue and margins are much greater than DVD and VCD May 2002 DVD • DVD Playback • Basic DVD Player • Emerging Applications • MPEG4 and DivX • Combo • Automotive • Portable • 90 million players in 2003 and growing May 2002 Digital Audio and Video Applications • Home Theatre In-a-Box - Audio Decoder - Digital Amplifier • Digital Media Player May 2002 Recordable Applications • Video Disk Recorder - Recordable DVD • Digital Video Recorder (DVR) - Hard-disk based - Record TV programs (Tivo-like) - Archive • • • TV Programs Home Videos Digital photos • Video Disk Recorder and Hard Disk Recorder combo May 2002 Digital Photography Applications • Digital Still Camera • CameraPhone • Digital Camcorder • Digital Photo Viewer and Printer • Digital Photo Pictureframe May 2002 Videophone Applications • Analog Phone • IP Phone – high speed • Cellular videophone • Cameraphone to videophone May 2002 Digital Home System (DHS) • Digital Home System (DHS) A central digital entertainment home-media system - Playback and Record • Audio and Video - Recordable DVD - Hard Disk - Jukebox and Archive • Movies • Music • Digital photos - Entertainment Distribution • Home Network - Wireless - Ethernet - Internet Connectivity May 2002 • Download Entertainment Content Product Line and Revenue growth • New products for emerging markets - MPEG4, R-DVD, DVR, Digital Amplifier • New products for large complementary markets - DSC Image Processor - CMOS Image Sensor • ESS will leverage - Existing technologies and products Existing customer base Existing infrastructure in Asia Mass production efficiency and costs May 2002 Margin and Profit Growth • Expand technologies and product lines • Introduce new products with higher margins • Increase mature product margin: - Integration - Feature enhancement - Cost reduction • Maximize the benefits of high volume production • Keep expenses low May 2002 ESS’s Total Available Market (Units) Market TAM in Units 400 350 CameraPhone Units (Millions) 300 Digital Still Camera 250 DVD Recordable 200 DVD 150 VCD 100 50 0 2002 May 2002 2003 2004 2005 2002-2005: ESS’s Units TAM: 2.6 X ESS Estimate ESS’s Total Available Market ($) Market TAM in $ 3,000 CameraPhone $ (Millions) 2,500 2,000 Digital Still Camera 1,500 DVD Recorder DVD 1,000 VCD 500 0 2002 May 2002 2003 2004 2005 2002-2005: ESS’s Revenue ($) TAM: 2.6 X ESS Estimate Key Customers • USA – Apex Digital, Audiovox, Creative Lab, GE, Motorola, Polaroid • China - BBK, Chang Hong, Malata, Shinco, Skyworth, TCL, Tonic • Japan - Alpine, Clarion, Denon, Fujitsu-Ten, JVC, Panasonic, Sanyo, Sharp, Sony • Korea - Anam, BlueTek, Daewoo, DMT, LG, RMC, Samsung, Taeyoung • Taiwan May 2002 - Carry, GBM, Mustek, Premier, Quanta, Sampo, Ya-Shin DVD/VCD Roadmap Vibratto™II Servo + Decoder DVD Vibratto™ DVD decoder Vibratto™ IV Vibratto™ III HD-DVD decoder Single Chip Advanced Decoder + Servo + RF Amp Vibratto™S Advanced DVD decoder Visa 2 ™ Visa ™ MPEG4-CD MPEG4-CD Recording Visa 3 ™ MPEG4-CD Advanced Features VCD Visba 3™ VCD decoder Visba 4™ Servo Controller May 2002 H2/03 H1/04 H2/04 H1/05 Recordable Vantage IV Performance / Integration Servo integration Vantage III Servo integration VibrattoS Vantage II Encoder + Decoder Decoder Falcon DV/1394 Video Decoder Encoder Vantage I Time H2/02 May 2002 H1/03 H2/03 H1/04 H2/04 Sensors Image Processors CameraPhone Roadmap Dorado Processor Dorado II Dorado LC Processor Processor 1.1M Pixel CMOS Sensor VGA CMOS Sensor 1.3M Pixel CMOS Sensor 2.2 M Pixel CMOS Sensor 4T CMOS Sensor Time H1/03 May 2002 H2/03 H1/04 H2/04 H1/05 DSC Roadmap Image Processors Sensor 3.3 M Pixel 4T CMOS Sensor Low Cost Low Light Performance Raptor III Raptor II Processor Processor 2M – 3M Pixel Low Power 2M – 3M Pixel Raptor IIILC Processor Low Cost 2M – 4M Pixel Time H1/03 May 2002 H2/03 H1/04 H2/04 H1/05 DHS Roadmap DHS with MPEG2/MPEG4 Encoding Networked Home Entertainment Center DHS II with Falcon Integration DHS III DHS II Vantage I ES8008 DHS Processor Falcon DV/1394 Video Decoder Companion chip H2/03 May 2002 H1/04 Time H2/04 H1/05 H2/05 Financial Overview May 2002 Revenue and Gross Margin Revenue Gross Margin 40% $300 $250 30% $200 20% $150 $100 10% $50 0% $0 2001 DVD May 2002 2002 VCD PC 2001 2002 Proforma EPS and Cash Cash Proforma EPS $1.00 $0.87 $0.90 $0.80 $0.70 ($ Millions) $240 $199 $200 $0.64 $160 $0.60 $129 $0.50 $120 $0.40 $80 $0.30 $0.20 $40 $0.10 $0.00 $0 2001 May 2002 2002 2001 2002 Summary • New Products and additional markets – – – – – New life for VCD DVD/DivX/MPEG4 Recordables: R-DVD, DVR Digital Photography: DSC, Camera Phone, Digital Camcorder Digital Home System • Revenue Growth - Target markets more than double by 2005 • Margin Growth - New Products for higher margin Integration and added features to increase margin Target margin above 40% • Customer Base Expansion Success in China, Japan, Korea and Europe May -2002 • Strong Balance Sheet May 2002