##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|           |  |                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                              
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934.      
|          
|           |  | For the Fiscal Year ended December 31,
	2001                                                 
|          
|or        
|          
|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 0-32809



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Vialta, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                        |  | 94-3337326                           
|(State or Other Jurisdiction of
	Incorporation or Organization) |  | (I.R.S. Employer
	Identification No.)

48461 Fremont Boulevard

Fremont, California 94538


(Address, including zip code, of
Registrants principal executive offices)


(510) 870-3088

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

The number of outstanding shares of the
registrants Class A common stock, par value $0.001
per share, on March 8, 2002 was 44,947,115 shares. The
number of outstanding shares of the registrants
Class B common stock, par value $0.001 per share, on
March 8, 2002 was 40,580,375 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Vialtas definitive proxy
statement relating to its 2002 annual meeting of stockholder to
be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year to which
this Report relates, are incorporated by reference into
Part III of this Form 10-K Report.



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TABLE OF CONTENTS



|              |                                                                                               |                                                                                                      |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I       
|              | Item 1: Business                                                                             
|              | Item 2: Properties                                                                           
|              | Item 3: Legal Proceedings                                                                    
|              | Item 4: Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5: Market for the Registrants Common Equity and Related Shareholder Matters            
|              | Item 6: Selected Consolidated Financial Data                                                 
|              | Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7a: Quantitative and Qualitative Disclosure About Market Risk                           
|              | Item 8: Financial Statements and Supplementary Data                                          
|              |                                                                                               | CONSOLIDATED BALANCE SHEETS                                                                         
|              |                                                                                               | VIALTA, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS                    
|              |                                                                                               | CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)
|              | Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10: Directors and Executive Officers of the Registrant                                  
|              | Item 11: Executive Compensation                                                              
|              | Item 12: Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13: Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES   
|EXHIBIT INDEX
|Exhibit 10.16
|EXHIBIT 23.1 



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##### Table of Contents



VIALTA, INC.

FORM 10-K

For the Fiscal Year Ended December 31,
2001


INDEX

|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|PART I  
|Item 1.  |  | Business                                                                               |  |      | 1  | 
|Item 2.  |  | Properties                                                                             |  |      | 5  | 
|Item 3.  |  | Legal Proceedings                                                                      |  |      | 5  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |      | 5  | 
|PART II 
|Item 5.  |  | Market for the Registrants Common Equity
	and Related Shareholder Matters             |  |      | 5  | 
|Item 6.  |  | Selected Financial Data                                                                |  |      | 5  | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 6  | 
|Item 7a. |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |  |      | 25 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                            |  |      | 26 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |      | 48 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                     |  |      | 48 | 
|Item 11. |  | Executive Compensation                                                                 |  |      | 48 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 48 | 
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |      | 48 | 
|PART IV 
|Item 14. |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  |      | 48 | 
|         |  | Signatures                                                                             |  |      | 50 | 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS

This report contains forward-looking statements
that involve risks and uncertainties. All statements contained
in this report that are not purely historical could be deemed
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. When used in this report, words such as
may, might, will,
should, expects, plans,
anticipates, believes,
estimates, predicts,
potential, intend, continue,
and similar expressions, are intended to identify
forward-looking statements. These forward-looking statements
might include, without limitation, projections of our future
financial performance, our anticipated growth and anticipated
trends in our businesses; the features, benefits and advantages
of our products; the development of new products, enhancements
or technologies; business and sales strategies; developments in
our target markets; matters relating to distribution channels,
proprietary rights, facilities needs, competition and
litigation; future gross margins and operating expense levels;
and capital needs. These statements reflect the current views of
Vialta or its management with respect to future events and are
subject to risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialize, or should
underlying assumptions proved incorrect, our actual results,
performance or achievements in fiscal 2002 and beyond could
differ materially from those expressed in, or implied by, these
forward-looking statements. Factors that could cause or
contribute to material differences include, but are not limited
to, those discussed below in Item 7 under the heading
Other Factors That May Affect Our Business and Future
Results and the risks discussed in our other filings with
the Securities and Exchange Commission. We encourage you to read
that section carefully. You should not regard the inclusion of
forward-looking information as a representation by us or any
other person that the future events, plans or expectations
contemplated by us will be achieved. Vialta undertakes no
obligation to release publicly any updates or revisions to any
forward-looking statements to reflect events or circumstances
occurring after the date of this report.

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PART I




Item
1:     Business

Vialta develops and markets consumer electronics
products designed to maximize the advantages of digital
technology in a convenient, affordable and easy-to-use manner.
Over the last 3 years, we have witnessed the advance of
digital technology in consumer electronics  from
music CDs to MP3 discs, from DVDs to digital photo CDs, and of
course the Internet. Vialta is positioning itself to take
advantage of this evolutionary transition from analog to
digital, by providing products and services that combine good
value with high performance and convenience.

Vialtas ViDVD is a multimedia DVD player
capable of playing disc content in a variety of audio and video
formats, as well as providing Internet access through an
easy-to-use interface. The ViDVD player is the first product
offering to utilize Vialtas digital home entertainment
platform, which consists of Vialtas proprietary operating
system and related software. We anticipate that this platform
will grow to support a family of Vialta-branded products as well
as other brands licensed to use the platform architecture and
technology. We expect that this digital home entertainment
platform will also serve as the backbone of a new, more
convenient entertainment-on-demand home delivery system that is
scheduled to be launched in 2002 with ViMagazine. Furthermore,
to help facilitate the Internet aspect of the platform, Vialta
has established ViZip, its own Internet service provider
(ISP) and made it available to all ViDVD users.

Vialta is also developing, as part of its
consumer electronics focus, a sleek, high-profile, plug
and play personal video station, known as BEAMER. BEAMER
allows consumers to transform their standard phone into a
videophone, delivering a live motion color video picture over
regular phone lines at no additional cost to a regular call.

Vialtas goals are to make ViDVD the primary
component in the digital home entertainment system utilized by
consumers, to provide consumers with entertainment content
through ViMagazine, and to continue developing and marketing
additional digital consumer electronics products for consumers,
such as BEAMER.

Vialta was incorporated in April 1999 as a
subsidiary of ESS Technology, Inc. In May 2001, Vialta was
reincorporated in Delaware and was subsequently spun off by ESS
as a distribution to its shareholders in August 2001.

See Item 8 Financial Statements and
Supplementary Data for additional financial information
regarding our business.

Recent Developments

Vialta has made significant acquisitions of
content for ViMagazine, having announced two major agreements in
the first quarter of 2002. In January, Vialta signed a licensing
deal with Artisan Home Entertainment, a leading independent
producer and distributor of theatrical, television and home
entertainment product. This agreement allows Vialta to include
content from Artisans library of more than 7,000 titles on
ViMagazine. These titles encompass a wide range of genres, from
award-winning movies like The Piano and On
Golden Pond, to action adventure blockbusters like
Terminator 2: Judgment Day and Basic
Instinct, to popular ones like Dirty Dancing.
In March, Vialta announced an agreement with EMI-Capitol Music,
a division of EMI Recorded Music, the worlds third largest
record company to license 200 tracks to be included in future
ViMagazine releases. ViMagazine is scheduled to launch in summer
2002.

Products and Services

The ViDVD player is a multimedia player that
enables consumers to play DVDs, MP3s and music CDs, and other
audio and video formats including ViMagazine, which uses
Vialtas proprietary ViMedia technology. All ViDVDs allow
users to access the Internet, play music CD-R and CD-R/ W discs,
and support ID3 tags. They also are full-featured karaoke
players with vocal assist, pitch and echo controls, and are able
to

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support DVD, VCD and CD+G karaoke disc formats.
ViDVDs digital photo feature enables consumers to view
JPEG format files stored on a CD-R and CD-R/ W disc, in addition
to Kodak Picture CDs. Both the Vi220 model (launched in the fall
of 2001) and the Vi330 model (scheduled to launch in the summer
of 2002) offer a choice of two sets of accessories for each
model. One set is a wireless, full-size keyboard, separate
remote control and microphone. The other option is a compact,
combination keyboard/remote control and a microphone.


The Vi220 and the Vi330 support both Dolby
Digital® and DTS® Surround Sound, and are loaded with
features including optical and coaxial audio outputs, and
composite, S-video and component video outputs. The Vi330 model
is designed to add progressive scan to all the other features
included in the Vi220.

In addition, we expect that the new Vi330 model
will come equipped with a CompactFlash card reader, so users can
take the CompactFlash card directly from their digital camera
and insert it into the ViDVD player for viewing, bypassing the
PC and the need to create a CD-R or CD-RW disc.

Consumers can access the Internet via their
television screen with ViDVDs built-in dial-up modem. To
further expedite the entire Internet search process, Vialta
created a Web Guide to over 1500 popular sites, making many of
the most frequently utilized sites only a few clicks away. ViDVD
uses a proprietary browser, coupled with a user-friendly
interface to provide easy access to various functions including
basic e-mail applications. Another Internet-related customer
benefit is the ability to download Vialta software upgrades
directly to the ViDVD player.

While ViDVDs Internet capability works with
most standard, non-proprietary Internet service providers (ISPs)
including Earthlink and MSN, ViDVD owners can choose to utilize
ViZip, Vialtas own ISP. ViDVD does not support AOL since
it is a proprietary ISP. ViZips pricing is believed to be
competitive with all the major ISP players, and offers two
service options  as an ISP for the ViDVD player or
the ViDVD and a PC.

The BEAMER Personal Video Station is expected to
transform a regular phone into a videophone using a fixed-focus
camera that will deliver a live motion color video over an
existing phone line at no additional cost. It is being designed
with an LCD screen that we anticipate will offer three viewing
options (the calling party, the receiving party, or
picture-in-picture), a variable hinge for an optimum viewing
angle, an anti-glare frame and a weighted skid-proof base.

Sales and Marketing

Vialta relies on combination of a direct sales
force and independent sales representatives to market its
product to retailers throughout the U.S. Vialta anticipates
that retail stores will be the dominant distribution channel for
the ViDVD and is working to increase the number of retail
partners carrying the Vialta product line. In addition, in
January 2002, Vialta announced an agreement with Apex Digital,
the No. 2 seller of DVD players in the U.S. If Apex
manufactures and sells Apex-branded ViDVD players pursuant to
the agreement, we could significantly increase the number of
locations carrying the Vialta product line. Vialta products may
also be purchased directly by consumers through an on-line store
available on Vialtas web site.

To build retailer demand and acceptance, Vialta
is concentrating on a three-pronged publicity campaign. Vialta
will put equal emphasis on generating press from industry
analysts, trade reporters and the general consumer media in
addition to pursuing speaking opportunities and product reviews.
Whenever possible, Vialta will combine branding with product
promotion opportunities.

Customer Service and Support

Vialta is committed to an intensive System
Quality Assurance program as an integral part of product
development and customer satisfaction. Vialta believes that
customer service and technical support play a crucial role in
developing long-term customer satisfaction and establish brand
loyalty. Building brand loyalty also directly impacts product
development, since it helps to facilitate honest customer
feedback and positive criticism. Vialta intends to work closely
with end users to improve existing products and develop new
products that address their digital home entertainment needs.
Vialta has established call centers in Toronto,

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Canada and at its worldwide corporate
headquarters in Fremont, California. Vialta employs
8 people in service and support functions.


Product Development

Vialtas development efforts focus on
bringing affordable digital technology products to the consumer.
This means designing and developing with key input resulting
from market research. Vialta believes these efforts will allow
it to introduce new and improved products in a timely manner at
competitive prices, and may help to establish and grow its
market share in the consumer electronics industry.

Vialtas engineers are currently developing
improvements to the operating system software that supports its
digital home entertainment platform. Vialta is also focusing
efforts on developing communication frameworks, payment
architecture, content delivery architecture, digital rights
management, and additional features and performance enhancements
for the ViDVD. Vialtas engineers are also engaged in the
development of new digital home entertainment products as well
as future generations of the ViDVD.

Vialtas has 85 employees in research and
development as of December 31, 2001. Research and
development expenses were approximately $25.3 million,
$19.6 million and $1.4 million for the years ended
December 31, 2001, December 31, 2000 and for the
period from April 20, 1999 (Date of Inception) through
December 31, 1999.

In August 1999, Vialta entered into two research
and development agreements with ESS Technology, which specify
the terms under which Vialta and ESS will provide each other
with product development services. These agreements provide that
Vialta will own any technology developed under these agreements
with respect to its videophone and web browser businesses. The
terms of the research and development agreements will be
superceded by the master technology ownership and license
agreement to be entered into by ESS and Vialta prior to the
distribution.

Intellectual Property

Vialta relies on a combination of patent,
trademark and copyright law, trade secret protection and
confidentiality or license agreements with Vialtas
employees, customers, partners and others to protect its
proprietary rights. Vialta has filed two patent applications,
one to cover ViDVD proprietary functions and digital encoder and
decoder solutions and another to cover audio compression
technology. In addition, Vialta has filed similar applications
in Taiwan and with the patent cooperation treaty, which reserves
the right to file in foreign countries. To date, none of the
patents have been issued.

Vialta has filed trademark applications in the
U.S., Brazil, Canada, China, the European Union, Hong Kong,
Japan, Singapore and Taiwan. The marks for which Vialta has
filed applications include the Vialta logo, ViDVD, ViMedia,
ViMag, ViMagazine, ViAudio, ViOS and ViZip.

In connection with the spin-off of Vialta by ESS,
ESS and Vialta entered into a master technology ownership and
license agreement, pursuant to which ESS and Vialta acknowledged
the specific technology and trademarks related to Vialtas
business that are owned by Vialta. At the time of its formation,
Vialta entered into several intellectual property agreements
with ESS. It purchased from ESS all of ESS proprietary
rights and benefits conferred under U.S. laws with respect to
its videophone business and web browser business. Vialta also
entered into two research and development agreements, under
which Vialta and ESS provide each other with product development
services. The master technology ownership and license agreement
supercedes prior intellectual property and research and
development agreements between ESS and Vialta. In addition,
Vialta entered into a purchase agreement under which ESS agreed
to provide Vialta with semiconductor products. See Related
Party Transactions  Separation Agreements between ESS
and Vialta beginning on page 37.

Manufacturing

Vialta develops all of its products internally
and outsources manufacturing. Vialtas self-branded ViDVDs
are currently manufactured by two manufacturing vendors located
in China. We believe that these vendors

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will provide us with sufficient manufacturing
capacity. Vialtas quality assurance engineers are on-site
at the manufacturing locations. Vialta outsources import and
export logistics, including clearance of Chinese and
U.S. customs, ocean freight, warehousing and all shipments
to retail distribution centers, individual retailers and
individual customers purchasing ViDVDs online.


Seasonality

We expect that Vialtas operating results
will be subject to seasonality and to quarterly and annual
fluctuations. Domestic consumer electronic product sales have
traditionally been much higher during the holiday shopping
season than during other times of the year. As a result, we
anticipate that Vialtas sales will be higher in the third
and fourth quarters than in the first and second of each year.

Competition

Vialta competes in the consumer electronics
market with its ViDVD product, which is intensely competitive
and rapidly evolving. The ViDVD competes directly with several
other currently available or soon to be introduced home
entertainment products from major consumer electronics
manufacturers, such as Apex, Mintek, Toshiba and Samsung, and
with products developed by smaller companies, including the
i2DVD, Neon, nReady and TVPC products. Like the ViDVD, nearly
all of these products accommodate media in DVD, CD and MP3
format, many offer Internet access capabilities, and some
include a karaoke feature.

Most of these products are already widely
available through retail distribution channels, and many of
these products are already familiar to and accepted by
consumers. Although these products generally lack the expanded
functionality of the ViDVD and other competing multimedia
appliances, most of the manufacturers and distributors of these
competing home entertainment products have substantially greater
brand recognition, market presence, distribution channels,
advertising and marketing budgets and promotional and other
strategic partners than Vialta.

In addition, we expect that the ViDVD will
compete with:



| |   |                                                       
| | - | ------------------------------------------------------
| |  | standard DVD and CD players;                          
|
| |  | personal computers;                                   
|
| |  | WebTV and other television-based Internet
	appliances;
|
| |  | Web-enabled wireless telephones and PDAs;             
|
| |  | video-on-demand services;                             
|
| |  | karaoke machines; and                                 
|
| |  | video cassette recorders and laser disc players.      

We believe one of the keys to Vialta establishing
long-term success with the ViDVD in the consumer electronics
digital home entertainment marketplace will be its ability to
favorable distinguish itself from its existing competition. We
believe that ViMagazine could be a key distinction and that
there are potentially significant hurdles for competitors to
produce a similar product.

There are several existing competitors in the
videophone market, including Aiptek, 8x8, Leadtek and Innomedia,
all of whom have current products offered. In addition,
videophones face competition from PC-based Internet video,
future offerings from mobile phone manufacturers and current
telephone manufacturers. We expect to introduce the BEAMER at a
lower price than current videophone offerings. However, we may
not be able to offer the BEAMER at a lower price, if at all, and
consumers may not perceive videophones as a desirable new
product offering.

Employees

As of February 28, 2002, Vialta had
152 employees, including 85 in research and development, 18
in marketing, sales and support, 20 in manufacturing and
operations and 29 in finance and administration.

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Item
2:     Properties

Vialtas corporate headquarters and one of
its research and development centers occupy a 78,000 square foot
facility located in Fremont, California, under a lease from ESS
that expires in December 2003. We also lease office space for
content operations in Los Angeles, California, a manufacturing
engineering center in Hong Kong, a software development center
and call center in Toronto, Canada and a facility to house some
of its Internet service provider functions in Honolulu, Hawaii.
We believe that our existing facilities are adequate for our
current needs.




Item 3:     Legal
Proceedings

In August 2001, Professional Staffing Corporation
(PSC) filed a lawsuit against Vialta in The Superior
Court of California, County of Alameda, Case No. 2001-22331,
alleging causes of action for breach of contract and fraud. In
December 2001, Vialta answered and filed a cross-complaint
alleging cause of action for breach of contract, breach of the
covenant of good faith and fair dealing, fraud, unfair
competition, and abuse of process. In the past, PSC had provided
temporary information technology workers to Vialta on an ongoing
basis, and prior to the suit being filed, Vialta in July
voluntarily withheld payment to PSC on $92,095 of outstanding
invoices pending the results of an in-house audit. Vialta
believes that PSC has in fact breached the contract and that we
may have been substantially overcharged for services provided by
PSC. This matter is in pre-trial discovery, and currently there
is no date set for trial. Vialta will vigorously defend the
litigation, and is engaging in settlement negotiations.




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

There were no matters submitted to a vote of
security holders during the fourth quarter of the fiscal year
ended December 31, 2001.




PART II




Item 5:     Market
for the Registrants Common Equity and Related Shareholder
Matters

Vialtas Class A common stock has been
quoted on the OTC Bulletin Board under the symbol
VLTA since August 21, 2001. The following table
sets forth the high and low bid prices for the Class A
common stock as reported by the OTC Bulletin Board during the
periods indicated. Such prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

|             |                                        |      |   |      |  |  |   |      | 
|------------ | -------------------------------------- | ---- | - | ---- |  |  | - | ---- | 
|             |                                        | High |   | Low 
|             |                                        |      |   |     
|Fiscal 2001: |                                        |      |   |      |  |  |   |     
|             | Third Quarter ended September 30, 2001 |      | $ | 0.68 |  |  | $ | 0.22 | 
|             | Fourth Quarter ended December 31, 2001 |      | $ | 1.85 |  |  | $ | 0.30 | 

As of March 8, 2002, there were
approximately 225 record holders of the Companys
Class A common stock.

Vialta has never declared or paid any cash
dividends on its common stock. The Company currently anticipates
that it will retain any future earnings for use in its business
and does not anticipate paying any cash dividends in the
foreseeable future.




Item
6:     Selected Consolidated
Financial Data

You should read the following selected
consolidated financial data set forth below in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Vialtas
consolidated financial statements and related notes included
elsewhere in this report. Vialta is a development stage company
and the selected consolidated statement of operations data set
forth below for the years ended December 31, 2001 and 2000,
and for the period from Vialtas inception to
December 31, 1999 and the

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selected consolidated balance sheet data as of
December 31, 2001, 2000 and 1999 are derived from, and are
qualified by reference to, Vialtas audited consolidated
financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The
information below is not necessarily indicative of the results
of operations to be expected for any future period.


|                                                                      |                            |                                       |         |                    |         |                       |         |        |         |   |        |       |        |   |         |        |         |  
|--------------------------------------------------------------------- | -------------------------- | ------------------------------------- | ------- | ------------------ | ------- | --------------------- | ------- | ------ | ------- | - | ------ | ----- | ------ | - | ------- | ------ | ------- | -
|                                                                      |                            |                                       |         |                    |         |                      
|                                                                      |                            |                                       |         |                    |         | Period from April 20,
|                                                                      |                            |                                       |         | 1999 (Date of     
|                                                                      |                            | Years Ended                           |         | Inception) Through
|                                                                      |                            | December 31,                          |         | December 31,      
|                                                                      |                            |                                       |         |                   
|                                                                      |                            | 2001                                  |         | 2000               |         | 1999                  |         | 2001  
|                                                                      |                            |                                       |         |                    |         |                       |         |       
|                                                                      |                            |                                      
|                                                                      |                            | (In thousands, except per share data)
|Operating expenses:                                                   |                            |                                       |         |                    |         |                       |         |        |         |   |        |       |        |   |         |       
|                                                                      | Research and development   |                                       | $       | 25,250             |         |                       | $       | 19,558 |         |   | $      | 1,369 |        |   | $       | 46,177 |        
|                                                                      | Selling and marketing      |                                       |         | 3,738              |         |                       |         | 2,927  |         |   |        | 662   |        |   |         | 7,327  |        
|                                                                      | General and administrative |                                       |         | 9,301              |         |                       |         | 6,699  |         |   |        | 510   |        |   |         | 16,510 |        
|                                                                      |                            |                                       |         |                    |         |                       |         |        |         |   |        |       |        |   |         |       
|                                                                      |                            | Operating loss                        |         |                    | (38,289 | )                     |         |        | (29,184 | ) |        |       | (2,541 | ) |         |        | (70,014 | )
|Interest income, net                                                  |                            |                                       | 3,606   |                    |         |                       | 7,688   |        |         |   | 512    |       |        |   | 11,806  |       
|Other income (expense), net                                           |                            |                                       | (1,266  | )                  |         |                       | (1,682  | )      |         |   | 9      |       |        |   | (2,939  | )     
|                                                                      |                            |                                       |         |                    |         |                       |         |        |         |   |        |       |        |   |         |       
|Loss before income tax benefit                                        |                            |                                       | (35,949 | )                  |         |                       | (23,178 | )      |         |   | (2,020 | )     |        |   | (61,147 | )     
|Income tax benefit                                                    |                            |                                       |        |                    |         |                       | 260     |        |         |   | 800    |       |        |   | 1,060   |       
|                                                                      |                            |                                       |         |                    |         |                       |         |        |         |   |        |       |        |   |         |       
|Net loss                                                              |                            | $                                     | (35,949 | )                  |         | $                     | (22,918 | )      |         | $ | (1,220 | )     |        | $ | (60,087 | )     
|                                                                      |                            |                                       |         |                    |         |                       |         |        |         |   |        |       |        |   |         |       
|Net loss per share attributable to common
	shares  basic and diluted |                            | $                                     | (0.83   | )                  |         | $                     | (3.68   | )      |         | $ | (0.71  | )     |        | $ | (3.20   | )     
|                                                                      |                            |                                       |         |                    |         |                       |         |        |         |   |        |       |        |   |         |       
|Weighted average common shares outstanding                            |                            |                                       | 43,248  |                    |         |                       | 6,222   |        |         |   | 1,716  |       |        |   | 18,758  |       
|                                                                      |                            |                                       |         |                    |         |                       |         |        |         |   |        |       |        |   |         |       

|                                                  |  |              |        |              |  |              |         |   |  |   |         |  
|------------------------------------------------- |  | ------------ | ------ | ------------ |  | ------------ | ------- | - |  | - | ------- | -
|                                                  |  | December 31, |        | December 31, |  | December 31,
|                                                  |  | 2001         |        | 2000         |  | 1999        
|                                                  |  |              |        |              |  |             
|Selected Balance Sheet Data                       |  |              |        |              |  |              |         |   |  |   |         |  
|Cash and cash equivalents, short-term investments |  | $            | 67,175 |              |  | $            | 136,490 |   |  | $ | 112,844 |  
|Working capital                                   |  |              | 68,172 |              |  |              | 109,870 |   |  |   | 111,920 |  
|Total assets                                      |  |              | 83,913 |              |  |              | 153,691 |   |  |   | 114,580 |  
|Payable to related party                          |  |              | 47     |              |  |              | 30,000  |   |  |   |        |  
|Other current liabilities                         |  |              | 3,587  |              |  |              | 3,594   |   |  |   | 940     |  
|Redeemable convertible preferred stock            |  |              |       |              |  |              | 142,600 |   |  |   | 114,780 |  
|Total stockholders equity (deficit)              |  |              | 80,279 |              |  |              | (22,503 | ) |  |   | (1,140  | )






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7: | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

The following discussion includes
forward-looking statements with respect to our future financial
performance. Actual results may differ materially from those
currently anticipated depending on a variety of factors,
including those described below under the sub-heading,
Cautionary Statement Regarding Forward-Looking
Statements as well as Other Factors That May Affect
Our Business and Future Results and the risks discussed in
our most recent filing with the Securities and Exchange
Commission. The following discussion should be read in
conjunction with the Selected Consolidated Financial Data and
the Consolidated Financial Statements and notes thereto that
appear elsewhere in this report.

Overview

We were incorporated on April 20, 1999 as a
wholly owned subsidiary of ESS. We develop and market consumer
electronics products designed to maximize the advantages of
digital technology in a convenient, affordable and easy-to-use
manner. We have developed a multi-media DVD player that offers
Internet access

6



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##### Table of Contents



and other features that differentiate it from
most DVD players currently available in the U.S. consumer
market. Our ViDVD player is the first product offering to
utilize our digital home entertainment platform, which we
anticipate will grow to support a family of products, as well as
a complementary system for the delivery of home entertainment
content. The ViDVD is a multi-purpose home entertainment device
that enables consumers to play DVD, CD, MP3, karaoke and other
audio and video formats and to browse the Internet through their
television. We also expect to introduce our proprietary,
encrypted ViMagazine discs, which will provide consumers with
the opportunity to select and purchase one or more selections
from a variety of videos, karaoke titles and other home
entertainment content. Our goal is to make the ViDVD the
centerpiece of consumers home entertainment systems,
combining Internet access with the features of several current
consumer electronics devices into a single affordable product.


We are also developing, as part of our consumer
electronics focus, a videophone, known as BEAMER, that will
allow consumers to transform their standard phone into a
videophone, delivering a live motion color video picture over
regular phone lines at no additional cost to a regular call.

Through December 31, 2001, we have had no
revenues from operations and have historically used vendor
credit and private offerings of convertible preferred stock and
common stock to fund our operations and provide for capital
requirements during our development stage. For the fiscal years
ended December 31, 2001 and 2000 and for the period from
April 20, 1999 (Date of Inception) through
December 31, 1999, we had net losses of $35.9 million,
$22.9 million and $1.2 million, respectively, and
expect to continue to incur losses in the fiscal year 2002. The
losses reflect our cash burn rate for the periods indicated.
From inception through December 31, 2001, we had a net loss
of $60.1 million. We commenced shipments of the ViDVD
during the third quarter of 2001 and, as a result, experienced a
significant increase in working capital requirements due to
internal and channel inventory requirements, which were
partially offset by extended credit terms from suppliers.

Results of Operations



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | For the year ended December 31, 2001
	compared with the year ended December 31,
	2000

The following table discloses key elements of the
statements of operations, expressed as a percentage of total
operating expenses.

|                               |                            |                   |      |                   |       |   |      |      |       |  
|------------------------------ | -------------------------- | ----------------- | ---- | ----------------- | ----- | - | ---- | ---- | ----- | -
|                               |                            |                  
|                               |                            | Years Ended      
|                               |                            |                  
|                               |                            | December 31, 2001 |      | December 31, 2000
|                               |                            |                   |      |                  
|Operating expenses:            |                            |                   |      |                   |       |   |      |     
|                               | Research and development   |                   |      | 65.9              | %     |   |      | 67.0 | %    
|                               | Sales and marketing        |                   |      | 9.8               |       |   |      | 10.0 |      
|                               | General and administrative |                   |      | 24.3              |       |   |      | 23.0 |      
|                               |                            |                   |      |                   |       |   |      |     
|                               |                            | Operating loss    |      |                   | 100.0 | % |      |      | 100.0 | %
|Non-operating income, net      |                            |                   | 6.1  |                   |       |   | 20.6 |     
|Loss before income tax benefit |                            |                   | 93.9 |                   |       |   | 79.4 |     
|                               |                            |                   |      |                   |       |   |      |     
|Income tax benefit             |                            |                   |     |                   |       |   | 0.9  |     
|Net loss                       |                            |                   | 93.9 | %                 |       |   | 78.5 | %   
|                               |                            |                   |      |                   |       |   |      |     

Research and Development.Research and development expenses were
$25.3 million for the fiscal year 2001, or 65.9% of
operating expenses, compared to $19.6 million, or 67.0% of
operating expenses for the fiscal year 2000. The increase was
primarily due to increases in payroll and payroll related
expenses due to increased headcount and operating supplies
necessitated by our expanded development efforts. The increase
was partially offset by a nonrecurring purchase of technology
from ESS, then a related party, in the amount of
$2.0 million in the first quarter of 2000. We expect
research and development spending to be lower in future periods
since we have completed the core development of our first series
of products.

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##### Table of Contents



Sales and Marketing.Sales and marketing expenses were
$3.7 million for the fiscal year 2001, or 9.8% of operating
expenses, compared to $2.9 million, or 10.0% of operating
expenses, for the fiscal year 2000. The increase was primarily
due to increases in payroll and marketing expenses due to
increased headcount and product introduction. We expect sales
and marketing spending to increase in future periods due to the
marketing of the ViDVD and the scheduled introduction of
additional products in 2002 and 2003.

General and Administrative.General and administrative expenses
were $9.3 million for the fiscal year 2001, or 24.3% of
operating expenses, compared to $6.7 million, or 23.0% of
operating expenses, for the fiscal year 2000. The increase was
primarily due to increases in payroll and other expenses due to
increased headcount, as we have supported expanded development
efforts and infrastructure, and administrative fees, in
connection with becoming a public company. We expect general and
administrative expense spending to increase in future periods as
we continue to build our infrastructure to meet our
administrative and operational needs as a stand-alone company.

Nonoperating Income.Net nonoperating income was
$2.3 million for the fiscal year 2001 compared to
$6.0 million for the fiscal year 2000. Net nonoperating
income consists primarily of net interest income. Net interest
income fell to $3.6 million for the fiscal year 2001 from
$7.7 million for the fiscal year 2000. The decrease in net
interest income was primarily due to lower cash balances during
fiscal year 2001. Partially offsetting interest income were
equity investment write-offs in an amount of $1.1 million
for the fiscal year 2001 and $1.7 million for the fiscal
year 2000. We wrote these equity investments off because we
concluded that the equity investments had suffered a permanent
decline in value, based on the financial condition of the
companies in which we had invested.

Income Tax Benefit.We did not make a provision for income
taxes for the fiscal year 2001 compared to recording an income
tax benefit of $260,000 for the fiscal year 2000. The income tax
benefit for the fiscal year 2000 was a reimbursement of $260,000
from ESS pursuant to tax arrangements between ESS and us as a
result of ESS realizing a tax benefit for utilizing our net
operating losses in the fiscal year 2000. No tax benefit has
been recognized during the fiscal year 2001 since ESS does not
expect to benefit during 2001 from our net operating losses.
Also, we do not expect any tax expense during 2001 because we do
not anticipate any net taxable income during this year.

Net Loss.We
incurred a net loss of $36.0 million for the fiscal year
2001, compared to $22.9 million for the fiscal year 2000.
The $13.1 million increase in net loss was primarily due to
increased operating expenses associated with our growth and
development coupled with lower interest income associated with
lower cash balances for the fiscal year 2001.

8



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| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | For the year ended December 31, 2000
	compared with the period from April 20, 1999 (Date of
	Inception) through December 31, 1999

The following table discloses key elements of the
statements of operations, expressed as a percentage of total
operating expenses.

|                               |                            |                   |      |                   |       |   |      |      |       |  
|------------------------------ | -------------------------- | ----------------- | ---- | ----------------- | ----- | - | ---- | ---- | ----- | -
|                               |                            |                   |      | Period from      
|                               |                            |                   |      | April 20, 1999   
|                               |                            |                   |      | (Date of         
|                               |                            |                   |      | Inception)       
|                               |                            | Year Ended        |      | Through          
|                               |                            | December 31, 2000 |      | December 31, 1999
|                               |                            |                   |      |                  
|Operating expenses:            |                            |                   |      |                   |       |   |      |     
|                               | Research and development   |                   |      | 67.0              | %     |   |      | 53.9 | %    
|                               | Sales and marketing        |                   |      | 10.0              |       |   |      | 26.0 |      
|                               | General and administrative |                   |      | 23.0              |       |   |      | 20.1 |      
|                               |                            |                   |      |                   |       |   |      |     
|                               |                            | Operating loss    |      |                   | 100.0 | % |      |      | 100.0 | %
|Non-operating income, net      |                            |                   | 20.6 |                   |       |   | 20.5 |     
|                               |                            |                   |      |                   |       |   |      |     
|Loss before income tax benefit |                            |                   | 79.4 |                   |       |   | 79.5 |     
|Income tax benefit             |                            |                   | 0.9  |                   |       |   | 31.5 |     
|Net loss                       |                            |                   | 78.5 | %                 |       |   | 48.0 | %   
|                               |                            |                   |      |                   |       |   |      |     

Research and Development.Research and development expenses were
$19.6 million for the year ended December 31, 2000, or
67.0% of operating expenses, compared to $1.4 million, or
53.9% of operating expenses for the period from inception
through December 31, 1999. The increase was primarily due
to increases in staffing and employee-related expenses, as
Vialta ramped up development efforts and expenses relating to
the business completing a full year of operations. Vialta also
purchased ViPhone and web browser technology from ESS, a related
party, in the amount of $2.0 million in the first quarter
of 2000.

Sales and Marketing.Sales and marketing expenses were
$2.9 million for the year ended December 31, 2000, or
10.0% of operating expenses, compared to $662,000, or 26.0% of
operating expenses, for the period from inception through
December 31, 1999. The increase was primarily due to
increases in payroll and marketing expenses due to increased
headcount, in anticipation of our future product introduction.
We expect sales and marketing spending to increase in future
periods, especially in periods immediately prior to the intended
introduction of new products.

General and Administrative.General and administrative expenses
were $6.7 million for the year ended December 31,
2000, or 23.0% of operating expenses, compared to $510,000, or
20.1% of operating expenses, for the period from inception
through December 31, 1999. The increase was primarily due
to increases in payroll and other employee-related expenses as a
result of increased headcount and expenses relating to
completing a full year of operations and other activities.

Nonoperating Income.Net nonoperating income was $6.0 million for the year ended
December 31, 2000, or 20.6% of net expenses, compared to
$521,000, or 20.5% of net expenses for the period from inception
through December 31, 1999. The increase in net nonoperating
income was due to an increase in net interest income from cash
received in a private placement of redeemable convertible
preferred stock, which increase was partially offset by a write
off of an equity investment in the amount of $1.7 million
in the third quarter of 2000. Vialta wrote this equity
investment off because it concluded that the equity investment
had suffered an other than temporary decline in value, based on
the financial condition of the company in which it had invested.
The increase in net interest income in 2000 was due to higher
average cash balances.

Income Tax Benefit.Vialta recorded an income tax benefit
of $260,000 for the year ended December 31, 2000, compared
to an income tax benefit of $800,000 for the period from
inception to December 31, 1999. Pursuant to a tax
arrangement between ESS and Vialta, the income tax benefit for
the year ended

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December 31, 2000 and the period from
inception to December 31, 1999 results from ESS realizing a
tax benefit for utilizing Vialtas net operating losses.


Net Loss.The net
loss was $22.9 million for the year ended December 31,
2000, or 78.5% of net expenses, compared to $1.2 million
for the period from inception through December 31, 1999, or
48.0% of operating expenses. The increase in net loss was
primarily due to increased operating expenses associated with
Vialtas growth and development.

Liquidity and Capital Resources

As of December 31, 2001, we had
$71.2 million in cash, cash equivalents and marketable
securities compared to $136.5 million as of
December 31, 2000, representing a decrease of
$65.3 million. The December 31, 2000 figure includes
funds from a $30.0 million loan from a related party
controlled by Annie M.H. Chan, the spouse of Fred S.L.
Chan, our Chairman. The $30.0 million short-term loan along
with $194,000 in accrued interest was repaid in January 2001.

Our principal sources of liquidity are cash, cash
equivalents and short-term investments. Net cash used in
operating activities was approximately $26.5 million and
$21.6 million for the fiscal years 2001 and 2000,
respectively, representing an increase of approximately
$4.9 million. The increase was primarily due to increased
operating expenses incurred by us in our efforts to complete
development of our first commercial products and prepare for a
product launched in September 2001. For the fiscal years ended
December 31, 2001 and 2000, we had a net loss of
$36.0 million and $22.9 million, respectively, and we
expect to continue to incur losses in the fiscal year 2002. The
losses reflect our cash burn rate for the periods indicated. We
began shipment of our first product during the third quarter of
2001 and, as a result, we experienced a significant increase in
working capital requirements due to internal and channel
inventory requirements, which increases were partially offset by
extended credit terms from suppliers.

Capital expenditures for the 12-month period
ending December 31, 2002 are anticipated to be
approximately $11.5 million, primarily budgeted to acquire
content licenses for ViMagazine and capital equipment. Net
inventory build requirements are expected to be approximately
$33.5 million during the 12-month period ending
December 31, 2002. We may also utilize cash to acquire or
invest in complementary businesses or products or to obtain the
right to use complementary technologies and media content which
may significantly increase our planned requirements for capital.
In addition, from time to time, in the ordinary course of
business, we may evaluate potential acquisitions of, or
investments in, such businesses, products or technologies owned
by third parties.

In September 2001, the Board of Directors
authorized the repurchase of up to 10,000,000 shares of its
common stock in the open market over a 12 month period.
During fiscal 2001, Vialta repurchased a total of 6,236,000
shares of common stock for an aggregate cost of
$4.0 million. As of December 31, 2001, 3,764,000
shares remained authorized for repurchase.

In January 2000, Vialta entered into a
non-cancelable lease agreement for its headquarters that will
expire in 2003. Under the terms of this and other leases, with
various expiration dates through 2006, Vialtas future
minimum rental payments are as follows:

|                              |      |              |   |       | 
|----------------------------- | ---- | ------------ | - | ----- | 
|                              |      | Amounts     
|                              |      | in thousands
|                              |      |             
|Year ending December 31, 2001 |      |              |   |      
|                              | 2002 |              | $ | 2,308 | 
|                              | 2003 |              |   | 2,265 | 
|                              | 2004 |              |   | 349   | 
|                              | 2005 |              |   | 147   | 
|                              | 2006 |              |   | 110   | 

We believe that our existing cash and cash
equivalents, and short and long-term investments will be
sufficient to fund planned acquisitions of inventory, property
and equipment and to provide adequate working

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capital through at least the 12-month period
ending December 31, 2002. However, to achieve our
longer-term goals of introducing additional products and
services to consumers, we believe we will need to raise
additional capital, which may not be available on acceptable
terms, if at all. We have historically used vendor credit as
well as private offerings of convertible preferred stock and
common stock to fund operations and provide for capital
requirements. However, the price per share of any future
equity-related financing will be determined at about the time
the offering is made and cannot be anticipated at this time. If
additional funds are raised through the issuance of equity
securities, the percentage ownership of current stockholders are
likely to or will be reduced and such equity securities may have
rights, preferences or privileges better than those of current
stockholders. We cannot assure you that any additional financing
will be available or that, if available, it will be sufficient
or it can be obtained on terms favorable to us or our
stockholders. If adequate funds are not available if and when
needed, we would be required to delay, limit or eliminate some
or all of our proposed operations.


Critical Accounting Policies

Our critical accounting policies are as follows:



| |   |                                    
| | - | -----------------------------------
| |  | use of estimates                   
|
| |  | inventories                        
|
| |  | valuation of long-lived assets; and
|
| |  | certain risks and concentrations.  



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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.



| |            
| | -----------
| | Inventories

We stated our inventories at the lower of cost or
market, with cost being determined by the first-in, first-out
method. We establish provisions for excess and obsolete
inventories after periodic evaluation of historical sales,
current economic trends, forecasted sales, predicted lifecycle
and current inventory levels. Actual demand and market
conditions may be different from those projected by us.



| |                  
| | -----------------
| | Long-Lived Assets

Pursuant to Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS No. 121), we review long-lived
assets based upon a gross cash flow basis and will record an
impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be fully recoverable.
If an asset is considered impaired, the asset is written down to
carrying value, which is determined based either on discounted
cash flows or appraised values, depending on the nature of the
asset.



| |                                  
| | ---------------------------------
| | Certain Risks and
	Concentrations

Cash and cash equivalents are deposited in large
domestic financial institutions that management believes are
creditworthy.

Certain of our products contain critical
components supplied by a single or a limited number of third
parties. We have been required to purchase and inventory certain
of the platforms around which we design our products to ensure
an available supply of the product for customers. Any
significant shortage of the platforms

11



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##### Table of Contents



or other components or the failure of the third
party suppliers to maintain or enhance these products could
materially adversely our results of operations.


We rely on a limited number of third parties to
manufacture some of our hardware-based products. Reliance on
third-party manufacturers involves a number of risks, including
the lack of control over the manufacturing process and the
potential absence or unavailability of adequate capacity. If any
of our third party manufacturers cannot or will not manufacture
its products in required volumes, on a cost-effective basis, in
a timely manner, or at all, we will have to secure additional
manufacturing capacity. Even if the additional capacity is
available at commercially acceptable terms, the qualification
process could be lengthy and could cause interruptions in
product shipments.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 141, Business
Combinations (SFAS 141). SFAS 141
requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates
the pooling-of-interests method. The adoption of SFAS 141
does not have a significant impact on the financial statements.

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS 142), which
is effective for fiscal years beginning after December 15,
2001. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the
standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the testing for
impairment of existing goodwill and other intangibles. The
adoption of SFAS 142 will not have a significant impact on our
financial position and results of operations.

On October 3, 2001, the FASB issued
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144). SFAS 144
supercedes SFAS 121. SFAS 144 applies to all long-lived
assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30.
SFAS 144 develops one accounting model for long-lived
assets that are to be disposed of by sale. SFAS 144
requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity
with operations that (1) can be distinguished from the rest
of the entity and (2) will be eliminated from the ongoing
operations of the entity in a disposal transaction.
SFAS 144 is effective for the Company for all financial
statements issued in fiscal 2002. The Company is currently
assessing the impact of SFAS 144 on its financial position
and results of operations.

In November 2001, the Emerging Issues Task Force
(EITF) reached a consensus on EITF No. 01-09,
Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendors Products
(EITF 01-09). EITF 01-09 requires the us
to record certain consideration paid to distributors of our
products as a reduction of revenue. We do not expect the
implementation of EITF 01-09 to have a material effect on
its results of operations or financial position.

Other Factors That May Affect Our Business and
Future Results

Our future business, operating results and
financial condition are subject to various risks and
uncertainties, including those described below.

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##### Table of Contents



If the ViDVD does not achieve broad market
acceptance, we may not be able to continue operating our
business.

Our success is highly dependent upon achieving
broad market acceptance of our initial product, the ViDVD, which
began shipping in the third quarter of 2001 and which has not
produced any revenues. Market acceptance requires, among other
things, that we:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | educate consumers on the benefits of the ViDVD;                                                                                                                                                              
|
| |  | commit a substantial amount of human and
	financial resources to secure strategic partnerships and
	otherwise support the retail distribution of the ViDVD and our
	related ViMedia content delivery service;
|
| |  | develop our own sales, marketing and support
	activities to consumers and retailers;                                                                                                                         
|
| |  | develop consumer acceptance of the ViDVD and our
	related ViMedia content delivery service; and                                                                                                              
|
| |  | expand the number and location of retailers
	carrying the ViDVD.                                                                                                                                             

We may not achieve any or all of these
objectives. Moreover, the ViDVD is currently being sold through
a limited number of regional consumer electronics retail stores,
and not through mass merchant and national consumer electronics
retail stores. As a result, despite our retail launch, consumers
are likely to be less aware of the ViDVD than the product
offerings of our competitors. This could delay or prevent our
ability to achieve broad market acceptance of the ViDVD. The
failure of the ViDVD to achieve sufficient consumer and retailer
acceptance would impair our ability to continue operating our
business.

We are a development stage company, have not
recognized any revenue, have incurred significant net losses and
may never achieve significant revenues or
profitability.

We are a development stage company that is still
in the process of introducing our first product and developing
other products. We have not recognized any revenue, have
incurred significant losses and have had substantial negative
cash flow. As of December 31, 2001, we had an accumulated
deficit of $60.1 million. We expect to continue to incur
significant operating and non-operating expenses over the next
several years as part of the continued development and potential
expansion of our business. As a result, we expect to continue to
lose money for the foreseeable future. The size of these net
losses will depend in part on our recent and any future product
launch, any growth in sales of our products and services and the
rate of increase in our expenses. With increased expenses, we
need to generate significant revenues to achieve profitability.
Several factors, including consumer acceptance, retailer
arrangements, competitive factors and our ability to
successfully develop and market our ViMedia content delivery
service, make it impossible to predict when or whether we will
generate significant revenues or attain profitability.
Consequently, we may never achieve significant revenues or
profitability, and even if we do, we may not sustain or increase
profitability on a quarterly or annual basis in the future.

It may take a substantial amount of time and
resources to achieve broad market acceptance of our products and
services, and we cannot be sure that these efforts will generate
the level of broad market acceptance of our products and
services necessary to generate sufficient revenues to sustain
our business.

Although many consumers are familiar with
standard DVD players, our ViDVD player is one of only a few DVD
products currently to include Internet access and MP3 and
karaoke player capability. Consumers may perceive little or no
benefit from combining these functions in one unit or may
already own other products that provide one or more of these
functions. As a result, consumers may not value, and may be
unwilling to pay for the ViDVD. In addition, the ViMedia content
delivery service is expected to be the first home entertainment
content provider to enable consumers to purchase the specific
content that interests them from a variety of content made
available to the consumer on a previously distributed disc. We
expect that, because of the encryption-technology used,
ViMagazine discs will produce less than DVD-quality images,
which may be perceived to be a disadvantage by consumers.
Potential customers may not perceive a benefit in purchasing
content in this manner and may already subscribe to or otherwise
have access to similar content from other

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sources. We also do not have an established brand
image, nor do we expect to spend significant marketing expenses
to build and promote a brand image. Accordingly, to develop
market acceptance of the ViDVD player, the ViMedia content
delivery service and any future digital home entertainment
products and services, we will need to devote a substantial
amount of resources to educate consumers about the features and
benefits of our products and services, and we cannot assure you
that this commitment of resources will be successful in
generating the revenues required to sustain our business. If we
are unsuccessful, the future of our Company may be in doubt.


If we are unable to raise additional capital
on acceptable terms, our ability to develop and market our
products and services and grow and operate our business could be
harmed.

To emerge from the development stage, introduce
follow-on products and services and sustain and grow our
business, we must continue to make significant investments in
research and development to develop, enhance and market our
products and services. We will also need significant working
capital to take advantage of future opportunities and to respond
to competitive pressures or unanticipated requirements. We
expect that our existing capital resources will be sufficient to
meet our cash requirements through December 31, 2002,
although our current resources could be exhausted more quickly
depending on the payment terms that we are able to negotiate
with our vendors and suppliers and our success in generating and
collecting on accounts receivable, if any. The magnitude of our
future capital requirements will depend on many factors,
including, among others, product development expense levels,
investments in working capital, and the amount of income, if
any, generated by operations.

When we do need to raise additional capital, that
capital may not be available on acceptable terms, or at all.
Historically, we relied on our parent, ESS, to provide the
majority of our capital funding. Following the distribution, ESS
ceased being a majority stockholder of us and may choose not to
provide any additional funding to us. Even if ESS were to
provide additional funding to us in the future, ESS may not
provide such funding on terms favorable to us and our
stockholders. If we cannot raise necessary additional capital on
acceptable terms, we may not be able to develop or enhance our
products and services, take advantage of future opportunities,
respond to competitive pressures or unanticipated requirements
or even continue operating our business.

If additional capital is raised through the
issuance of equity securities, the percentage ownership of our
existing stockholders will decline. Also, if any securities are
issued, our stockholders may experience dilution in net book
value per share, and these securities may have rights,
preferences or privileges superior to those of the holders of
our common stock. Any debt financing, if available, may also
require limitations or restrictions on our operations or future
opportunities.

Our limited operating history may make it
difficult for us or investors to evaluate trends and other
factors that affect our business.

We were incorporated in April 1999 and our
operations to date have consisted primarily of product
development efforts. To date, we have only manufactured and
shipped a limited number of commercial ViDVD units to two
retailers. In addition, we have only entered into a limited
number of agreements to acquire the content proposed to be
delivered as part of our ViMedia content delivery service.
ViMagazine discs are not scheduled for distribution until late
in 2002. As a result of our limited operations, our historical
financial and operating information is of limited value in
evaluating our future potential operating results. In addition,
any evaluation of our business and prospects must be made in
light of the risks and difficulties encountered by start-up
companies developing products or services in new and rapidly
evolving markets. For example, it may be difficult to accurately
predict our future revenues, costs of revenues, expenses or
results of operations. The ViDVD, the ViMedia content delivery
service and our other anticipated digital home entertainment
products and services represent new product and service
offerings for most consumers. It may be difficult to predict the
creation of any market or the growth rate, if any, or size of
the market for those products and services. We may be unable to
accurately forecast customer needs or behavior or recognize or
respond to emerging trends, changing preferences or competitive
factors facing us. As a result, we may be unable to make
accurate financial forecasts or adjust our spending in a timely
manner to compensate for any

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unexpected changes or revenue shortfall. This
inability could cause our results of operations in a given
quarter to be worse than expected, and could cause the price of
our stock to decline.


We face intense competition from participants
in both the consumer electronics and the home entertainment
markets, which may impair our revenues and ability to generate
customers.

The consumer electronics and home entertainment
markets are intensely competitive and rapidly evolving. In
addition, there are few barriers to entry into our segment of
the consumer electronics and home entertainment markets.
Existing participants and new entrants in these markets
currently offer and may develop and offer additional products
that will compete directly with one or more of our products or
services.

The consumer electronics industry in particular
is characterized by rapid technological innovation and intense
price competition. The competition for consumer spending and
acceptance is also intense. The ViDVD will compete directly with
several other currently available or soon to be introduced
multimedia appliance offerings from major consumer electronics
manufacturers, such as Sony, Compaq, Hewlett Packard and
Samsung, specialized manufacturers like APEX, Mintek and
Phillips, and with products developed by smaller companies,
including the Neon, nReady and TVPC products. Like the ViDVD,
nearly all of these products accommodate media in DVD, CD and
MP3 format, many offer Internet access capabilities, and some
include a karaoke feature.

In addition, as a home entertainment product, we
expect that the ViDVD will also compete with:



| |   |                                                       
| | - | ------------------------------------------------------
| |  | DVD and CD players;                                   
|
| |  | personal computers;                                   
|
| |  | WebTV and other television-based Internet
	appliances;
|
| |  | Web-enabled wireless telephones and PDAs;             
|
| |  | karaoke machines; and                                 
|
| |  | video cassette recorders and laser disc players.      

As a home entertainment content delivery medium,
we also expect that our ViMedia content delivery service will
compete with:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | video-on-demand services;                                                     
|
| |  | traditional broadcast, cable or satellite
	television programming; and        
|
| |  | video cassette, DVD and video game cartridge
	rental stores and retailers; and
|
| |  | Internet and mail order retailers.                                            

As a videophone, we expect that the BEAMER will
compete with:



| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | existing videophones;                                               
|
| |  | PC-based Internet video;                                            
|
| |  | future generation mobile phones; and                                
|
| |  | current and future offerings from existing
	telephone manufacturers.

Most of these products and services are already
widely available through established retail distribution
channels, and many of these products are already familiar to and
accepted by consumers. In addition, most of the manufacturers
and distributors of these competing home entertainment products
and services have substantially greater brand recognition,
market presence, distribution channels, advertising and
marketing budgets and promotional and other strategic partners
than us.

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We have not obtained all of the licenses of
intellectual property required for our anticipated products in
development and any failure to obtain required licenses on
acceptable terms could adversely affect our operating
results.

We rely on licenses of intellectual property from
third parties for use in our business and we will have to
negotiate to acquire any licenses required for the development,
manufacture and sale of our future digital home entertainment
products and services. In addition, although we have already
licensed selected audio and video content expected to be
distributed as part of the ViMagazine content delivery service,
we will need to obtain licenses to a substantially greater
amount and type of content for the ViMagazine service to be
successful. Any failure to obtain the licenses of intellectual
property required for the operation of our business on
acceptable terms could adversely affect our operating results.

We expect the average selling prices of our
digital home entertainment products to decrease, which may
reduce our gross margins and/or revenue.

The prices of multimedia entertainment products
are subject intensive pricing pressure. In particular, we
significantly reduced prices and increased sales discounts
commencing in the fourth quarter of 2001 in response to pricing
cuts by competitors attempting to increase their market share
during the holiday selling season. We expect that the average
selling prices of our ViDVD and any other digital home
entertainment products will continue to decrease in response to
these competitive pricing pressures as well as in response to
new product introductions by us or our competitors and
increasing availability of relatively inexpensive products that
can perform most of our products functions. If we are
unable to sufficiently reduce costs and increase sales volume,
this decline in average selling prices will reduce our gross
margins and revenues.

If we fail to overcome technical challenges
associated with the full development and implementation of our
ViMedia content delivery service or obtain sufficient content to
attract customers, the ViMedia content delivery service may not
achieve market acceptance or generate sufficient revenue to
sustain its operation.

The success of the ViMedia content delivery
service depends in part on our ability to acquire and deliver
content that interests our customers. Most of the major
producers of audio and video content in the entertainment
industry will only permit their content to be distributed if it
is protected using approved encryption technologies. Our own
proprietary encryption system has not yet been adopted by the
entertainment industry as an approved encryption technology,
and, unless or until that occurs, we may not be able to
distribute content licensed from major entertainment companies
in our proprietary ViMedia format. Although discs that include
content in DVD and CD format may be played on a ViDVD player,
content that is encoded in those conventional formats takes
significantly more disc space, and we are still in the process
of conducting research and development to enable certain aspects
of our encryption technology to work with those other formats.
Unless we are able to either obtain entertainment industry
acceptance of our proprietary encryption system or overcome the
technical challenges associated with using our encryption with
conventional formats, the ViMedia content delivery service is
not likely to achieve market acceptance or generate sufficient
revenue to sustain its operation.

If we fail to develop and market new digital
home system products or to add features to our existing digital
home entertainment product, we may not be able to generate
sufficient revenues to sustain our business.

Our success is highly dependent upon the
continued successful development and timely introduction of new
products and new models of our existing products containing
additional features. The success of new products and new
features depends on a number of factors, including, but not
limited to, strategic allocation of our limited financial and
technical resources, accurate forecasting of consumer demand,
timely completion of product development and introduction to
market, and market and industry acceptance of our future and
existing digital home entertainment products. Most of our
planned product and feature introductions are still in the early
stages of development and will require substantial engineering
and technical resources to bring to market. The success of some
of our planned products may also require industry acceptance of
our proprietary

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technologies or the adaptation of our products
and technologies to accommodate the use of existing
industry-accepted technologies. If we fail to develop and market
new products and features, we may not be able to sustain our
business.


We may not be able to generate sufficient
revenue from the ViMedia content delivery service to support its
continued operation, and any termination of the ViMedia service
could reduce demand for the ViDVD player.

We expect to charge customers content access fees
for access to portions of the content distributed via our
ViMedia content delivery service. Many potential ViMedia end
users already pay monthly fees for cable or satellite television
services, and we will have to convince these consumers to pay
additional fees to gain access to the content delivered on our
ViMedia discs. The availability of competing services that do
not require subscription or other access fees will harm our
ability to effectively attract paying end users. In addition,
the ViDVD player that enables the consumer to access the content
provided by our ViMedia service can be used to view or listen to
other DVDs and CDs or to access material on the Internet without
payment for any of our ViMedia content. If a significant number
of purchasers of our ViDVD players use these devices without
purchasing ViMedia content, the ViMedia service may not generate
sufficient revenue to support its continued operation, which
could reduce demand for the ViDVD player.

We expect to depend on ESS and a limited
number of other third parties to manufacture and supply critical
components for our digital home entertainment products and
services, and we may be unable to operate our business if those
parties do not perform their obligations.

We rely on ESS and a limited number of other
third party suppliers for a number of key components of our
ViDVD player, including DRAM chips and flash memory chips. We do
not have long-term agreements in place with our suppliers. We
also expect to rely on a limited number of third party content
providers to supply the content to be distributed as part of the
ViMedia content delivery service. We do not control the time and
resources that these third parties devote to our business. We
cannot be sure that these parties will perform their obligations
as expected or that any revenue, cost savings or other benefits
will be derived from the efforts of these parties. Our need for
semiconductors as a key component of our digital home
entertainment products indirectly subjects us to a number of
risks relating to ESS and any other future semiconductor
suppliers reliance on independent foundries to produce
those semiconductors, including the absence of adequate
capacity, the unavailability of, or interruption in access to,
certain process technologies and reduced control over delivery
schedules, manufacturing yields and costs, and risks related to
the international location of most major foundries. If any of
our third party suppliers or content providers breaches or
terminates its agreement with us or otherwise fails to perform
its obligations in a timely manner, we may be delayed or
prevented from launching or marketing our products and services.
Because our relationships with these parties are non-exclusive,
they may also support products or services that compete directly
with ours, or offer similar or greater support to our
competitors. Any of these events could require us to undertake
unforeseen additional responsibilities or devote additional
resources to commercialize our products and services. This
outcome would harm our ability to compete effectively and
quickly achieve market acceptance and brand recognition.

We may have potential business conflicts of
interest with ESS with respect to the companies ongoing
relationships, and we may not be able to resolve these conflicts
on terms favorable to us.

Conflicts of interest may arise between ESS and
us in a number of areas relating to ongoing relationships
between the companies, including:



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Although we have entered into agreements with ESS
	that govern our business relationship, ESS will have no
	obligation to extend the terms of those agreements to us beyond
	the stated duration of those agreements;
|
| |  | ESS will be supplying semiconductors to our
	competitors, which may affect ESS capacity to supply
	semiconductors to us;                                                                                            
|
| |  | we will be competing with ESS in employee
	recruiting; and                                                                                                                                                           

17



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| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may compete with ESS with respect to business
	opportunities that are attractive to both companies, and ESS is
	not restricted from competing with our business.

If we are unable to establish and maintain
satisfactory relationships with the distributors and retailers
that we expect to sell our products and services, our business
will suffer.

We have not yet entered into significant
agreements with any distributors or retailers that want to sell
our products, and we may not be able to obtain a sufficient
number of qualified distributors and retailers. In establishing
relationships with distributors and retailers, we have been and
may in the future be forced to accept arrangements under which
we will not receive payment for our products until these
products are sold to consumers. Even though product shipments
began in the third quarter of 2001, under Staff Accounting
Bulletin No. 101 issued by the Securities and Exchange
Commission, the recording of any revenues will be delayed
depending on the terms of such shipments and our ability to
estimate potential returns and future price adjustments. We may
also have to enter into revenue sharing or other arrangements
with these distributors and retailers in order to provide
additional incentives for such entities to actively market our
products. In addition, we expect that our distributors and
retailers will sell products and services offered by our
competitors. If our competitors offer distributors and retailers
more favorable terms or have more products available to meet
their needs, those distributors and retailers may decline to
carry or may not adequately promote our products. Other
retailers may decline to carry our ViDVD player because they
believe the potential complementary ViMedia content delivery
service will decrease their sales of content such as DVDs and
CDs. Further, even if they do carry our products, distributors
and retailers may not recommend, or continue to recommend, those
products. If we are unable to maintain successful relationships
with distributors and retailers or to expand our distribution
channels, our business may fail.

We plan to expand our business, and our
failure to manage growth could disrupt business and impair our
ability to generate revenues.

Since we began our business in April 1999, we
have significantly expanded our headcount, facilities and
infrastructure. We anticipate continued expansion in these areas
to support potential sales growth and to allow us to pursue
market opportunities. This expansion has placed, and will
continue to place, a significant strain on our management,
operational and financial resources and systems. Specific risks
we face as our business expands include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We will need to attract and retain qualified
	personnel, and any failure to do so may impair our ability to
	offer new products or grow our business. Our success will depend
	on our ability to attract, retain and motivate managerial,
	technical, marketing, administrative and customer support
	personnel. Competition for such employees is intense, and we may
	be unable to successfully attract, integrate or retain
	sufficiently qualified personnel. If we are unable to hire,
	train, retain or manage the necessary personnel, we may be
	unable to successfully introduce new products or otherwise
	implement our business strategy.
|
| |  | If our ViMedia content delivery service is
	successful, our systems may not be able to accommodate the
	number of users, resulting in service interruptions. We have
	developed the systems that will be used to run the ViMedia
	content delivery service and perform other processing functions.
	However, we will have to continually improve these systems to
	accommodate growth as we add new subscribers. Any inability by
	us to add additional software and hardware or to upgrade our
	technology, systems or network infrastructure in response to
	subscriber growth could adversely affect our business or cause
	service interruptions.
|
| |  | We will need to provide acceptable customer
	support, and any inability to do so will impair our ability to
	develop consumer acceptance of our products. We expect that some
	of our customers will require significant support when
	installing the ViDVD player and becoming acquainted with the
	features and functionality of the ViDVD and its interface. In
	addition, our customers who elect to use us as their Internet
	service provider may require frequent support when accessing the
	Internet. We also anticipate that purchasers of future digital
	home entertainment products and services will require support in
	their         

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | use of such products and services. We do not have
	experience with widespread deployment of our products and
	services to a diverse customer base, and we may not have
	adequate personnel to provide the levels of support that our
	customers will require. Our failure to provide adequate customer
	support for our digital home entertainment products or services
	will damage our reputation in the consumer electronics
	marketplace and strain our relationships with customers and
	strategic partners. This could prevent us from gaining new or
	retaining existing customers and could harm our reputation and
	brand.
|
| |  | If our Internet sales significantly increased, we
	will need to modify our current infrastructure to include
	enhanced operational systems and controls for transaction
	processing, inventory management and payment processing
	functions. Any failure by us to maintain and modify this
	infrastructure could hurt our ability to successfully conduct
	sales over the Internet, which could prevent us from
	establishing and maintaining customer relationships and
	increasing our sales volume.                                                                                                                             
|
| |  | We will need to improve our operational and
	financial systems, procedures and controls to support our
	expected growth, and any inability to do so will adversely
	impact our ability to grow our business. Our current and planned
	systems, procedures and controls may not be adequate to support
	our future operations and expected growth. Delays or problems
	associated with any improvement or expansion of our operational
	systems and controls could adversely impact our relationships
	with customers and harm our reputation and brand.                                                                            

Product defects, system failures or
interruptions may have a negative impact on our revenues, damage
our reputation and decrease our ability to attract new
customers.

Errors and product defects can result in
significant warranty and repair problems, which could cause
customer relations problems. Correcting product defects requires
significant time and resources, which could delay product
releases and affect market acceptance of our products. Any
delivery by us of products with undetected material product
defects could harm our credibility and market acceptance of our
products.

Our ability to process purchases of content from
our ViMedia content delivery service and to provide
uninterrupted access to the Internet will depend on the
efficient and uninterrupted operation of our computer and
communications systems. Our computer hardware and other
operating systems are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication
failures and similar events. They are also subject to break-ins,
sabotage, intentional acts of vandalism and similar misconduct.
Although we are taking precautions against such damage,
including installing backup servers as part of our network
infrastructure, a natural disaster or other unanticipated
problems at one or more of our facilities could result in
interruptions in our business. These types of interruptions may
reduce our revenues and profits. Our business also will be
harmed if consumers believe our ViMedia content delivery service
or our Internet service is unreliable. In addition to placing
increased burdens on our technical staff, service outages may
create a large number of customer questions and complaints that
must be responded to by our customer support personnel. Any
damage to, or failure of, our systems could result in reductions
in, or terminations of, services supplied to our customers,
which could have a material adverse effect on our business and
irreparably damage our reputation and ability to attract new
customers.

Our future results could be harmed by
economic, political, regulatory and other risks associated with
our reliance on international sales and operations.

Substantially all of our products are anticipated
to be manufactured, assembled and tested by independent third
parties in China. In addition, most of our suppliers are located
in China, Hong Kong and Taiwan. We also anticipate that revenue
from international sales will represent a significant portion of
our total revenue, as one of our strategic partners is also
located in China. Because of our international operations and
relationships, and our reliance on foreign third-party
manufacturing, assembly and testing operations, we are subject
to the risks of conducting business outside of the United
States, including:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | changes in political and strategic relations
	between China, Taiwan and the U.S.;
|
| |  | changes in foreign currency exchange rates;                                      

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| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in a specific countrys or
	regions political or economic conditions, particularly in
	China, Taiwan and other emerging Asian markets;
|
| |  | trade protection measures and import or export
	licensing requirements;                                                                        
|
| |  | potentially negative consequences from changes in
	tax laws;                                                                                   
|
| |  | difficulty in managing widespread sales and
	manufacturing operations; and                                                                     
|
| |  | less effective protection of intellectual
	property.                                                                                           

Our success partly depends on our ability to
secure and protect our proprietary rights.

Our success and ability to compete are partly
dependent upon our internally developed technology. We rely on
patent, trademark and copyright law, trade secret protection and
confidentiality or license agreements with our employees,
customers, partners and others to protect our proprietary
rights. However, the steps we take to protect our proprietary
rights may be inadequate. We have filed two U.S. patent
applications, one to cover ViDVD proprietary functions and
digital encoder and decoder solutions and another to cover
digital audio signal compression and processing. In addition, we
have filed corresponding applications in Taiwan and with the
patent cooperation treaty, which reserves the right to file in
foreign countries. To date, no patents have been issued, and we
cannot assure you that any patents will ever be issued, that any
issued patents will protect our intellectual property or that
third parties will not challenge any issued patents. Moreover,
other parties may independently develop similar or competing
technologies designed around any patents that may be issued to
us.

The laws of certain foreign countries in which
our products are or may be designed, manufactured or sold,
including various countries in Asia, may not protect our
products or intellectual property rights to the same extent as
do the laws of the U.S., and thus make the possibility of piracy
of our technology more likely. We cannot assure you that the
steps taken by us to protect our proprietary information will be
adequate to prevent misappropriation of our technology or that
our competitors will not independently develop technologies that
are substantially equivalent or superior to our technology. Our
failure to protect our proprietary rights could harm our
business.

We may be subject to claims that our
intellectual property infringes upon the proprietary rights of
others, and a successful claim could harm our ability to sell
and develop our products.

If other parties claim that our products infringe
upon their intellectual property, we could be forced to defend
ourselves or our customers, manufacturers or suppliers against
those claims. We could incur substantial costs to prosecute or
defend those claims. A successful claim of infringement against
us, or any failure or inability of us to develop non-infringing
technology or license the infringed technology on acceptable
terms and on a timely basis, could harm our business, financial
condition and results of operations.

If we lose key management personnel, we may
not be able to successfully operate our business.

Our future performance will be substantially
dependent on the continued services of our senior management,
especially our Chairman, Fred S.L. Chan, our President and Chief
Executive Officer, Didier Pietri, and other key personnel. The
loss of any members of our executive management team and our
inability to hire additional executive management could harm our
business and results of operations. We employ our key personnel
on an at-will basis. We have obtained key person insurance for
Mr. Chan, but we do not maintain key person insurance
policies on any of the other members of our executive management
team.

If we are unable to attract and retain the
qualified personnel required to timely and cost-effectively
implement new administrative systems to replace the portions of
ESS administrative infrastructure on which we currently
rely, our business could be harmed.

We currently rely on ESS systems to support
our operations, including systems to manage accounting and
internal computing operations. These services are provided by
ESS pursuant to a transition services

20



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agreement between us and ESS. These interim
services include, among others, information technology systems,
human resources, administration, product order administration,
customer service, buildings and facilities, and legal, finance
and accounting services.


We are implementing new systems to replace
ESS systems, and we expect to have fully independent
systems in place by the end of 2002. The implementation of these
new information systems will require the services of employees
with extensive knowledge of these information systems and the
business environment in which we operate. In order to
successfully implement and operate our systems, we must be able
to attract and retain a significant number of qualified
employees. If we fail to attract and retain the qualified
personnel required to implement, maintain and operate our
information systems, our business could suffer. Even if we are
able to attract and retain the required personnel, we may not be
successful in implementing the new systems and transitioning
data from the ESS systems to our new systems. Any failure
or significant downtime in ESS or our own information
systems could harm our business.

Any future business acquisitions may disrupt
our business, dilute stockholder value or distract management
attention.

As part of our ongoing business strategy, we may
consider acquisitions of, or significant investments in,
additional businesses that offer or develop products, services
and technologies complementary to our own. In particular, we may
pursue acquisitions and strategic alliances as a means of
acquiring content to be included on our ViMedia discs. Such
acquisitions could materially adversely affect our operating
results and/or the price of our stock. Acquisitions also entail
numerous risks, including:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulty of integrating the operations,
	products and personnel of the acquired businesses;                                         
|
| |  | potential disruption of our ongoing business;                                                                                         
|
| |  | unanticipated costs associated with the
	acquisition;                                                                                 
|
| |  | inability of management to manage the financial
	and strategic position of acquired or developed products,
	services and technologies;
|
| |  | inability to maintain uniform standards,
	controls, policies and procedures; and                                                      
|
| |  | impairment of relationships with employees and
	customers that may occur as a result of integration of the
	acquired business.        

To the extent that shares of our stock or other
rights to purchase stock are issued in connection with any
future acquisitions, dilution to our existing stockholders may
result and our earnings per share may suffer. Any future
acquisitions or strategic investments may not generate
additional revenue or provide any benefit to our business, and
we may not achieve a satisfactory return on our investment in
any acquired businesses.

Laws or regulations that govern the consumer
electronics industry, the telecommunications industry,
copyrighted works or the internet could expose us to legal
action if we fail to comply or could require us to change our
business.

Because our digital home entertainment products
and services are expected to provide our customers with access
to a variety of entertainment media and methods of electronic
communication, it is difficult to predict what laws or
regulations will be applicable to our business. Therefore, it is
difficult to anticipate the impact of current or future laws and
regulations on our business. Among the many regulations that may
be applicable to our business are the following:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | Federal Communications Commission regulations
	relating to the electronic emissions of consumer products;                  
|
| |  | Federal Communications Commission regulations
	relating to consumer products that connect to the public
	telephone network;

21



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| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | regulations relating to the access and use of the
	Internet issued by various federal and state governmental
	agencies, legislative bodies and courts, including the Federal
	Communications Commission and the Federal Trade Commission;
|
| |  | copyright laws relating to the use of copyrighted
	audio and video media; and                                                                                                                                                            
|
| |  | federal export regulations relating to the export
	of sensitive computer technologies such as encryption and
	authentication software.                                                                                                   

Changes in the regulatory climate or the
enforcement or interpretation of existing laws could expose us
to legal action if we fail to comply. In addition, any of these
regulatory bodies could promulgate new regulations or interpret
existing regulations in a manner that would cause us to incur
significant compliance costs or force us to alter the features
or functionality of our products and services.

Our stock is subject to the requirements for
penny stocks, which could adversely affect your ability to sell
and the market price of your shares.

Our stock fits the definition of a penny stock.
The Securities and Exchange Act of 1934 defines a penny stock as
any equity security that is not traded on a national securities
exchange or authorized for quotation on The NASDAQ National
Market and that has a market price of less than $5.00 per share,
with certain exceptions. Penny stocks are subject to
Rule 15g under the Securities and Exchange Act of 1934,
which imposes additional sales practice requirements on
broker-dealers who sell such securities. In general, a
broker-dealer, prior to a transaction in a penny stock, must
deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock
market. The broker-dealer must provide the customer with current
bid and offer quotations for the penny stock, information about
the commission payable to the broker-dealer and its salesperson
in the transaction and monthly statements that disclose recent
price information for each penny stock in the customers
account. Finally, prior to any transaction in a penny stock, the
broker-dealer must make a special written suitability
determination for the purchaser and receive the purchasers
written consent to the transaction prior to sale. All of these
requirements may restrict your ability to sell our stock and
could limit the trading volume of our stock and adversely affect
the price investors are willing to pay for our stock.

Our quarterly operating results may fluctuate
significantly, which may adversely affect the market prices of
our stock and could lead to us becoming the target of costly
securities class action litigation.

We expect our operating results, including any
revenues we may generate, to fluctuate significantly due to a
number of factors, many of which are outside of our control.
Therefore, you should not rely on period-to-period comparisons
of results of operations as an indication of our future
performance. It is possible that in some future periods our
operating results may fall below the expectations of market
analysts and investors. In this event, the market prices of our
stock would likely fall. Factors that may affect our quarterly
operating results include:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | unsuccessful launch of the ViDVD;                                                                                                        
|
| |  | ongoing demand and supply for ViDVD players or
	enhancements;                                                                            
|
| |  | seasonality and other consumer and advertising
	trends;                                                                                  
|
| |  | changes in the economic terms of our
	relationships with our strategic partners;                                                         
|
| |  | shortfalls in the supply of components necessary
	for the manufacture of our products;                                                   
|
| |  | changes in our pricing policies, the pricing
	policies of our competitors and general pricing trends in the
	multimedia appliance market;
|
| |  | unanticipated shortfalls in revenue due to the
	fact that our expenses precede associated revenues;                                      
|
| |  | changes in estimates of our financial performance
	or changes in recommendations by securities analysts;                                 

22



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| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | release of new or enhanced products or services
	or introduction of new marketing initiatives by us or our
	competitors;                                              
|
| |  | announcements by us or our competitors of the
	creation or termination of significant strategic partnerships,
	joint ventures, significant contracts, or acquisitions;
|
| |  | the market price generally for consumer
	electronics and home entertainment industry stocks;                                                                          
|
| |  | market conditions affecting the home
	entertainment industry;                                                                                                         
|
| |  | additions or departures of key personnel;                                                                                                                             
|
| |  | demand for and consumer acceptance of other
	anticipated future Digital Home System product and services
	offerings; and                                              
|
| |  | general economic conditions.                                                                                                                                          

In the past, securities class action litigation
has often been brought against a company following stock price
declines. We may be the target of similar litigation in the
future if the price of our common stock declines. Securities
litigation could result in substantial costs and diversion of
management attention and resources, all of which could
materially harm our business, financial condition and results of
operations.

Seasonal trends may cause our quarterly
operating results to fluctuate, which may adversely affect the
market price of our stock.

Domestic consumer electronic product sales have
traditionally been much higher during the holiday shopping
season than during other times of the year. Although predicting
consumer demand for our current and future products will be very
difficult, we believe that sales of ViDVD players will be
disproportionately high during the holiday shopping season when
compared to other times of the year. We did not generate any
revenues during the fourth quarter of 2001 and, while we believe
we have adequate capital to continue to operate for the
12 month period ending December 31, 2002, if we are
unable to generate sufficient revenues during the 2002 holiday
shopping season, or any future season, we may not be able to
continue our business.

Our historical financial information may not
be representative of our future operating results as a separate
company.

Our historical financial information does not
necessarily reflect what our financial position, operating
results and cash flows would have been had we been a stand-alone
entity during the periods presented. In addition, our historical
information is not necessarily indicative of what our operating
results, financial position and cash flows will be in the
future. We have made significant changes to our cost structure
and operations as a result of our no longer being a
majority-owned subsidiary of ESS, including increased general
and administrative expenses due to increases in payroll and
headcount, costs associated with reduced economies of scale,
costs associated with being a stand-alone company, and costs
associated with being a public company.

Conflicts of interest may arise because our
Chairman is also the Chairman of ESS and both he and another
director own securities of both companies.

Fred S.L. Chan, our Chairman, owns a
significant amount of ESS stock and our stock and options to
purchase ESS stock and our stock. In addition, Matthew K.
Fong, a member of our board of directors, owns ESS stock and
options to purchase ESS stock. Mr. Chan is the Chairman
ESS. These factors could create, or appear to create, potential
conflicts of interest when these directors are faced with
decisions that could have different implications for ESS and us.

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Our agreement to indemnify ESS for tax
liabilities under certain circumstances may affect our cash
flow, discourage potential acquisition proposals or delay or
prevent a change in control of us, and limit the size of any
future offerings of our stock.

ESS may, under certain circumstances, recognize
gain for U.S. federal and state income tax purposes with respect
to the distribution if a 50% or greater interest in us is
acquired during the two-year period following the distribution
by ESS of our shares to its stockholders. Certain sales of
shares by us that occurred during the two years immediately
prior to the distribution may be counted towards the 50%
threshold. The amount of such gain would be the difference
between the fair market value of the stock distributed, on the
date of distribution, and ESS adjusted tax basis in the
stock. Under a tax sharing and indemnity agreement, we have
agreed in certain circumstances to indemnify ESS for ESS
U.S. federal and state income tax liability which results as a
direct consequence of any acquisition of a 50% or greater
interest in us after the distribution. This indemnity
obligation, if triggered, could have a substantial effect on our
available cash. In addition, the existence of the indemnity
obligation may discourage potential acquisition proposals and
could delay or prevent an acquisition of a 50% or greater
interest in us. Because future sales of stock could be deemed to
be part of a related transaction that results in an acquisition
of a 50% or greater interest in us, our desire to avoid
triggering the indemnity obligation could limit the size of any
offerings of stock by us during the two-year period following
the distribution.

The Internal Revenue Service (IRS) has
determined that it will not provide a ruling on whether the
distribution of our shares to ESS shareholders was
tax-free.

The IRS decision not to provide a ruling on the
distribution does not mean that the distribution is taxable. We
believe that the distribution was tax-free. ESS has advised us
that they intend to report the distribution as tax-free in its
federal income tax filings. ESS has also advised us that it is
seeking an opinion from its tax advisors that the distribution
is tax-free. No assurance can be given that such an opinion will
be obtained or the level of assurance such opinion will provide.

Even if such an opinion is obtained, no assurance
can be given that the IRS will not determine at a later date
that the distribution is taxable. If the IRS determines that the
distribution is taxable, recipients of our stock in distribution
may be required to pay income taxes as a result of the
distribution, with the amount of ordinary income and gain
dependent upon the value of the stock they received and their
share of ESS earnings and profits. Determining whether or
not the distribution qualified for tax-free status requires a
complex analysis of many factors, including, among others, the
business purpose for the distribution, the nature of the
business to be engaged in by ESS and us following the
distribution, and the extent to which ESS remains in control of
us following the distribution. Because of the fact-intensive
nature of this analysis, there will be substantial uncertainty
as to whether the distribution qualified for tax-free treatment.

ACCORDINGLY, WE CANNOT ASSURE RECIPIENTS OF OUR
STOCK IN THE DISTRIBUTION THAT THE IRS WILL NOT SUCCESSFULLY
ASSERT THAT THE DISTRIBUTION IS TAXABLE. IN ADDITION, SUCH
RECIPIENTS MAY BE TAXED BY THE STATE, LOCAL OR FOREIGN
JURISDICTION IN WHICH THEY RESIDE. ACCORDINGLY, ALL RECIPIENTS
OF OUR STOCK IN THE DISTRIBUTION ARE STRONGLY URGED TO CONSULT
WITH THEIR OWN FINANCIAL ADVISORS REGARDING THE POTENTIAL TAX
IMPACT TO THEM OF THE DISTRIBUTION AND TO PREPARE FOR THE
SIGNIFICANT POSSIBILITY THAT THE TRANSACTION WILL BE TAXABLE TO
THEM.

If the distribution was taxable, the value of the
shares received by ESS shareholders will be treated as taxable
ordinary income, return of cost or as taxable capital gain up to
the value of the stock distributed and they will incur this tax
whether or not they decide to sell the shares they receive in
the distribution. Unless a recipient of shares in the
distribution is required to make quarterly estimated tax
payments to the IRS, this tax would generally have to be paid on
or before the April 15, 2002 due date for the 2001 tax
return. If such recipients do not have the cash available to pay
the tax at or before the time it is due, they may have to sell
all or a portion of their shares of our stock to pay the tax or
risk incurring interest and penalties imposed by the

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IRS. If holders of a significant percentage our
stock sell in order to pay their taxes, our stock price may be
adversely affected.


Provisions in our charter documents and
Delaware law may delay or prevent acquisition of us, which could
decrease the value of our shares.

Our amended and restated certificate of
incorporation, amended and restated bylaws and Delaware law
contain provisions that could make it more difficult for a third
party to acquire us without the consent of our board of
directors. Delaware law also imposes some restrictions on
mergers and other business combinations between us and any
holder of 15% or more of our outstanding shares. Although we
believe these provisions provide for an opportunity to receive a
higher bid by requiring potential acquirers to negotiate with
our board of directors, these provisions apply even if the offer
may be considered beneficial by some stockholders.




Item
7a:     Quantitative and Qualitative
Disclosure About Market Risk

Interest Rate Risks.We invest in short-term and long 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. 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 governmental
notes and bonds with contractual maturities of less than two
years. All of the investments have been classified as available
for sale, and at December 31, 2001, are recorded at market
values.

Foreign Exchange Risks.Because our products are manufactured
primarily in Asia, we are exposed to market risk from changes in
foreign exchange rates, which could affect its 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 third party manufacturers
and component vendors are denominated in U.S. dollars. We do not
engage in any currency hedging activities.

25



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

VIALTA, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                |                                                                                                        |      |  |    | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---- |  | -- | 
|                                                |                                                                                                        | Page
|                                                |                                                                                                        |     
|Vialta, Inc. Consolidated Financial
	Statements |                                                                                                        |      |  |   
|                                                | Report of Independent Accountants                                                                      |      |  | 27 | 
|                                                | Consolidated Balance Sheets                                                                            |      |  | 28 | 
|                                                | Consolidated Statements of Operations                                                                  |      |  | 29 | 
|                                                | Consolidated Statements of Redeemable Convertible
	Preferred Stock and
	Stockholders Equity (Deficit) |      |  | 30 | 
|                                                | Consolidated Statements of Cash Flows                                                                  |      |  | 31 | 
|                                                | Notes to the Consolidated Financial Statements                                                         |      |  | 32 | 

26



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Vialta, Inc.:

In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, of redeemable convertible preferred stock and
stockholders equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of
Vialta, Inc. (a development stage company) and its subsidiaries
at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years ended
December 31, 2001 and 2000, and for the period from
April 20, 1999 (Date of Inception) to December 31,
2001 and 1999, in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

/s/  PricewaterhouseCoopers LLP

San Jose, CA

January 28, 2002


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##### Table of Contents



VIALTA, INC.

(A Development Stage Company)







CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |         |        |  |         |         |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ----- | ------- | ------ |  | ------- | ------- | ------- | -
|                                                                                                                                                                                                 |                                                                                                                                 |                                     
|                                                                                                                                                                                                 |                                                                                                                                 | December 31,                        
|                                                                                                                                                                                                 |                                                                                                                                 |                                     
|                                                                                                                                                                                                 |                                                                                                                                 | 2001                                 |       | 2000   
|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |        
|                                                                                                                                                                                                 |                                                                                                                                 |                                     
|                                                                                                                                                                                                 |                                                                                                                                 | (In thousands, except per           
|                                                                                                                                                                                                 |                                                                                                                                 | share amounts)                      
|ASSETS                                                                                                                                                                                          
|Current assets:                                                                                                                                                                                  |                                                                                                                                 |                                      |       |         |        |  |         |        
|                                                                                                                                                                                                 | Cash and cash equivalents                                                                                                       |                                      | $     | 61,886  |        |  | $       | 109,378 |        
|                                                                                                                                                                                                 | Short-term investments                                                                                                          |                                      |       | 5,289   |        |  |         | 27,112  |        
|                                                                                                                                                                                                 | Receivables from related party                                                                                                  |                                      |       | 111     |        |  |         | 710     |        
|                                                                                                                                                                                                 | Inventories, net                                                                                                                |                                      |       |        |        |  |         | 2,057   |        
|                                                                                                                                                                                                 | Prepaid expenses and other current assets                                                                                       |                                      |       | 4,520   |        |  |         | 4,207   |        
|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |         |        |  |         |        
|                                                                                                                                                                                                 |                                                                                                                                 | Total current assets                 |       |         | 71,806 |  |         |         | 143,464 |  
|Property and equipment, net                                                                                                                                                                      |                                                                                                                                 |                                      | 7,831 |         |        |  | 9,230   |        
|Long term investments                                                                                                                                                                            |                                                                                                                                 |                                      | 4,064 |         |        |  |        |        
|Other assets                                                                                                                                                                                     |                                                                                                                                 |                                      | 212   |         |        |  | 997     |        
|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |         |        |  |         |        
|                                                                                                                                                                                                 |                                                                                                                                 | Total assets                         |       | $       | 83,913 |  |         | $       | 153,691 |  
|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |         |        |  |         |        
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
	STOCK
	AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                        
|Current liabilities:                                                                                                                                                                             |                                                                                                                                 |                                      |       |         |        |  |         |        
|                                                                                                                                                                                                 | Accounts payable                                                                                                                |                                      | $     | 760     |        |  | $       | 1,376   |        
|                                                                                                                                                                                                 | Accrued expenses and other current liabilities                                                                                  |                                      |       | 2,827   |        |  |         | 2,218   |        
|                                                                                                                                                                                                 | Payable to related party                                                                                                        |                                      |       | 47      |        |  |         | 30,000  |        
|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |         |        |  |         |        
|                                                                                                                                                                                                 |                                                                                                                                 | Total current liabilities            |       |         | 3,634  |  |         |         | 33,594  |  
|Commitments (Notes 11, 12 and 13)                                                                                                                                                                |                                                                                                                                 |                                      |       |         |        |  |         |        
|Redeemable convertible preferred stock, $0.001
	par value; 30,000 shares authorized, 0 and 91,000 shares issued
	and outstanding (aggregate liquidation value at
	December 31, 2000 of $142,600) |                                                                                                                                 |                                      |      |         |        |  | 142,600 |        
|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |         |        |  |         |        
|Stockholders equity (deficit):                                                                                                                                                                  |                                                                                                                                 |                                      |       |         |        |  |         |        
|                                                                                                                                                                                                 | Common stock $0.001 par value, 400,000 shares
	authorized, 92,473 and 6,231 shares issued, 85,625 and 6,231
	shares outstanding |                                      |       | 92      |        |  |         | 6       |        
|                                                                                                                                                                                                 | Additional paid in capital                                                                                                      |                                      |       | 144,164 |        |  |         | 1,629   |        
|                                                                                                                                                                                                 | Deficit accumulated during the development stage                                                                                |                                      |       | (60,087 | )      |  |         | (24,138 | )      
|                                                                                                                                                                                                 | Accumulated other comprehensive income                                                                                          |                                      |       | 156     |        |  |         |        |        
|                                                                                                                                                                                                 | Treasury stock                                                                                                                  |                                      |       | (4,046  | )      |  |         |        |        
|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |         |        |  |         |        
|                                                                                                                                                                                                 |                                                                                                                                 | Total stockholders equity (deficit) |       |         | 80,279 |  |         |         | (22,503 | )
|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |         |        |  |         |        
|                                                                                                                                                                                                 | Total liabilities, redeemable convertible
	preferred stock and stockholders equity (deficit)                                   |                                      | $     | 83,913  |        |  | $       | 153,691 |        
|                                                                                                                                                                                                 |                                                                                                                                 |                                      |       |         |        |  |         |        

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

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##### Table of Contents






VIALTA, INC.

(A Development Stage Company)


CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                      |                            |                                       |         |                        |         |             |         |        |         |   |        |       |        |   |         |        |         |  
|--------------------------------------------------------------------- | -------------------------- | ------------------------------------- | ------- | ---------------------- | ------- | ----------- | ------- | ------ | ------- | - | ------ | ----- | ------ | - | ------- | ------ | ------- | -
|                                                                      |                            |                                       |         |                        |         |            
|                                                                      |                            |                                       |         |                        |         | Period from
|                                                                      |                            |                                       |         | April 20,1999 (Date of
|                                                                      |                            | Years Ended                           |         | Inception) Through    
|                                                                      |                            | December 31,                          |         | December 31,          
|                                                                      |                            |                                       |         |                       
|                                                                      |                            | 2001                                  |         | 2000                   |         | 1999        |         | 2001  
|                                                                      |                            |                                       |         |                        |         |             |         |       
|                                                                      |                            |                                      
|                                                                      |                            | (In thousands, except per share data)
|Operating expenses:                                                   |                            |                                       |         |                        |         |             |         |        |         |   |        |       |        |   |         |       
|                                                                      | Research and development   |                                       | $       | 25,250                 |         |             | $       | 19,558 |         |   | $      | 1,369 |        |   | $       | 46,177 |        
|                                                                      | Selling and marketing      |                                       |         | 3,738                  |         |             |         | 2,927  |         |   |        | 662   |        |   |         | 7,327  |        
|                                                                      | General and administrative |                                       |         | 9,301                  |         |             |         | 6,699  |         |   |        | 510   |        |   |         | 16,510 |        
|                                                                      |                            |                                       |         |                        |         |             |         |        |         |   |        |       |        |   |         |       
|                                                                      |                            | Operating loss                        |         |                        | (38,289 | )           |         |        | (29,184 | ) |        |       | (2,541 | ) |         |        | (70,014 | )
|Interest income, net                                                  |                            |                                       | 3,606   |                        |         |             | 7,688   |        |         |   | 512    |       |        |   | 11,806  |       
|Other income (expense), net                                           |                            |                                       | (1,266  | )                      |         |             | (1,682  | )      |         |   | 9      |       |        |   | (2,939  | )     
|                                                                      |                            |                                       |         |                        |         |             |         |        |         |   |        |       |        |   |         |       
|Loss before income tax benefit                                        |                            |                                       | (35,949 | )                      |         |             | (23,178 | )      |         |   | (2,020 | )     |        |   | (61,147 | )     
|Income tax benefit                                                    |                            |                                       |        |                        |         |             | 260     |        |         |   | 800    |       |        |   | 1,060   |       
|                                                                      |                            |                                       |         |                        |         |             |         |        |         |   |        |       |        |   |         |       
|Net loss                                                              |                            | $                                     | (35,949 | )                      |         | $           | (22,918 | )      |         | $ | (1,220 | )     |        | $ | (60,087 | )     
|                                                                      |                            |                                       |         |                        |         |             |         |        |         |   |        |       |        |   |         |       
|Net loss per share attributable to common
	shares  basic and diluted |                            | $                                     | (0.83   | )                      |         | $           | (3.68   | )      |         | $ | (0.71  | )     |        | $ | (3.20   | )     
|                                                                      |                            |                                       |         |                        |         |             |         |        |         |   |        |       |        |   |         |       
|Weighted average common shares outstanding                            |                            |                                       | 43,248  |                        |         |             | 6,222   |        |         |   | 1,716  |       |        |   | 18,758  |       
|                                                                      |                            |                                       |         |                        |         |             |         |        |         |   |        |       |        |   |         |       

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

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VIALTA, INC.

(A Development Stage Company)





CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
(DEFICIT)

Years Ended December 31, 2001, 2000 and
1999


|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |               |    |        |  |         |        |       |  |        |     |   |  |  |        |   |  |   |    |   |  |   |         |   |  |   |         |         |   |   |     |     | 
|---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------ | ------- | ------------ |  | ------- | ------- | ------------ |  | ---------- | ------ | ----------- |  | ------------- | -- | ------ |  | ------- | ------ | ----- |  | ------ | --- | - |  |  | ------ | - |  | - | -- | - |  | - | ------- | - |  | - | ------- | ------- | - | - | --- | --- | 
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |               |    |       
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |              
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        | Deficit     |  |              
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         | Common Stock |  |            |        |             |  |              
|                                                                                                                       |                                                   | Redeemable                                       |         |              |  |         |         |              |  |            |        |             |  |              
|                                                                                                                       |                                                   | Convertible                                      |         |              |  |         |         |              |  |            |        | Accumulated |  | Accumulated  
|                                                                                                                       |                                                   | Preferred Stock                                  |         | Common Stock |  | Class A |         | Class B      |  | Additional |        | During      |  | Other        
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  | Paid In    |        | Development |  | Comprehensive
|                                                                                                                       |                                                   | Shares                                           |         | Amount       |  | Shares  |         | Amount       |  | Shares     |        | Amount      |  | Shares        |    | Amount |  | Capital |        | Stage |  | Income
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |               |    |        |  |         |        |       |  |       
|                                                                                                                       |                                                   |                                                 
|                                                                                                                       |                                                   | (Amounts in thousands, except per share amounts)
|Net loss                                                                                                               |                                                   |                                                  |        |              |  | $       |        |              |  |            |       |             |  | $             |   |        |  |         |       |       |  | $      |    |   |  |  |       |   |  | $ |   |   |  | $ |        |   |  | $ | (1,220  | )       |   | $ |    |    
|Issuance of common stock, at $0.25 per share                                                                           |                                                   |                                                  |        |              |  |         |        |              |  |            | 6,220  |             |  |               | 6  |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   | 1,549   |   |  |   |        |         |   |   |    |    
|Issuance of Series A redeemable convertible
	preferred stock, at $0.25 per share in September, 1999                    |                                                   |                                                  | 40,000  |              |  |         | 10,000  |              |  |            |       |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   |        |         |   |   |    |    
|Issuance of Series B redeemable convertible
	preferred stock, at $2.60 per share in December, 1999                     |                                                   |                                                  | 40,300  |              |  |         | 104,780 |              |  |            |       |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   |        |         |   |   |    |    
|Issuance of note receivable in connection with
	issuance of common stock                                               |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   |        |         |   |   |    |    
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |               |    |        |  |         |        |       |  |        |     |   |  |  |        |   |  |   |    |   |  |   |         |   |  |   |         |         |   |   |     |    
|Balance at December 31, 1999                                                                                           |                                                   |                                                  | 80,300  |              |  |         | 114,780 |              |  |            | 6,220  |             |  |               | 6  |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   | 1,549   |   |  |   | (1,220  | )       |   |   |    |    
|Net loss                                                                                                               |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   | (22,918 | )       |   |   |    |    
|Issuance of Series B redeemable convertible
	preferred stock, at $2.60 per share in January, February and
	March, 2000 |                                                   |                                                  | 10,700  |              |  |         | 27,820  |              |  |            |       |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   |        |         |   |   |    |    
|Exercise of stock options                                                                                              |                                                   |                                                  |        |              |  |         |        |              |  |            | 11     |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   | 3       |   |  |   |        |         |   |   |    |    
|Income tax benefit on disqualified disposition of
	stock options                                                       |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   | 77      |   |  |   |        |         |   |   |    |    
|Repayment of note receivable from shareholder                                                                          |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   |        |         |   |   |    |    
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |               |    |        |  |         |        |       |  |        |     |   |  |  |        |   |  |   |    |   |  |   |         |   |  |   |         |         |   |   |     |    
|Balance at December 31, 2000                                                                                           |                                                   |                                                  | 91,000  |              |  |         | 142,600 |              |  |            | 6,231  |             |  |               | 6  |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   | 1,629   |   |  |   | (24,138 | )       |   |   |    |    
|Components of comprehensive loss:                                                                                      |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |               |    |        |  |         |        |       |  |        |     |   |  |  |        |   |  |   |    |   |  |   |         |   |  |   |         |         |   |   |     |    
|                                                                                                                       | Net loss                                          |                                                  |         |             |  |         |         |             |  |            |        |            |  |               |    |       |  |         |        |      |  |        |     |  |  |  |        |  |  |   |    |  |  |   |         |  |  |   |         | (35,949 | ) |   |     |    | 
|                                                                                                                       | Unrealized gain on available-for-sale investments |                                                  |         |             |  |         |         |             |  |            |        |            |  |               |    |       |  |         |        |      |  |        |     |  |  |  |        |  |  |   |    |  |  |   |         |  |  |   |         |        |   |   |     | 156 | 
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |               |    |        |  |         |        |       |  |        |     |   |  |  |        |   |  |   |    |   |  |   |         |   |  |   |         |         |   |   |     |    
|Total comprehensive loss                                                                                               |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   |        |         |   |   |    |    
|Exercise of stock options before re-capitalization                                                                     |                                                   |                                                  |        |              |  |         |        |              |  |            | 61     |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   | 16      |   |  |   |        |         |   |   |    |    
|Conversion of preferred stock to Class A
	common stock                                                                 |                                                   |                                                  | (60,000 | )            |  |         | (62,000 | )            |  |            |       |             |  |               |   |        |  |         | 60,000 |       |  |        | 60  |   |  |  |       |   |  |   |   |   |  |   | 61,940  |   |  |   |        |         |   |   |    |    
|Conversion of preferred stock to Class B
	common stock, at a 1 to 1.1 ratio                                            |                                                   |                                                  | (31,000 | )            |  |         | (80,600 | )            |  |            |       |             |  |               |   |        |  |         |       |       |  |        |    |   |  |  | 34,100 |   |  |   | 34 |   |  |   | 80,566  |   |  |   |        |         |   |   |    |    
|Conversion of common stock to Class A common
	stock                                                                    |                                                   |                                                  |        |              |  |         |        |              |  |            | (400   | )           |  |               |   |        |  |         | 400    |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   |        |         |   |   |    |    
|Conversion of common stock to Class B common
	stock, at a 1 to 1.1 ratio                                               |                                                   |                                                  |        |              |  |         |        |              |  |            | (5,892 | )           |  |               | (6 | )      |  |         |       |       |  |        |    |   |  |  | 6,481  |   |  |   | 7  |   |  |   | (1      | ) |  |   |        |         |   |   |    |    
|Shares returned by ESS Technology, Inc. at
	spin-off                                                                   |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         | (612   | )     |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   |        |         |   |   |    |    
|Return of common stock reserved for issuance upon
	exercise of stapled options                                         |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         | (9,840 | )     |  |        | (10 | ) |  |  |       |   |  |   |   |   |  |   | 10      |   |  |   |        |         |   |   |    |    
|Exercise of stapled stock options                                                                                      |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         | 1,312  |       |  |        | 1   |   |  |  |       |   |  |   |   |   |  |   | (1      | ) |  |   |        |         |   |   |    |    
|Exercise of stock options                                                                                              |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         | 20     |       |  |        |    |   |  |  |       |   |  |   |   |   |  |   | 5       |   |  |   |        |         |   |   |    |    
|Repurchase of common stock                                                                                             |                                                   |                                                  |        |              |  |         |        |              |  |            |       |             |  |               |   |        |  |         | (6,236 | )     |  |        |    |   |  |  |       |   |  |   |   |   |  |   |        |   |  |   |        |         |   |   |    |    
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |               |    |        |  |         |        |       |  |        |     |   |  |  |        |   |  |   |    |   |  |   |         |   |  |   |         |         |   |   |     |    
|Balance at December 31, 2001                                                                                           |                                                   |                                                  |        |              |  | $       |        |              |  |            |       |             |  | $             |   |        |  |         | 45,044 |       |  | $      | 51  |   |  |  | 40,581 |   |  | $ | 41 |   |  | $ | 144,164 |   |  | $ | (60,087 | )       |   | $ | 156 |    
|                                                                                                                       |                                                   |                                                  |         |              |  |         |         |              |  |            |        |             |  |               |    |        |  |         |        |       |  |        |     |   |  |  |        |   |  |   |    |   |  |   |         |   |  |   |         |         |   |   |     |    

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                       |                                                   |                                                  |        |          |  |               |        |   |  |   |         |         |  
|---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------ | ------ | -------- |  | ------------- | ------ | - |  | - | ------- | ------- | -
|                                                                                                                       |                                                   |                                                  |        |          |  | Total        
|                                                                                                                       |                                                   | Receivable                                       |        |          |  | Stockholders
|                                                                                                                       |                                                   | from                                             |        | Treasury |  | Equity       
|                                                                                                                       |                                                   | Stockholders                                     |        | Stock    |  | (Deficit)    
|                                                                                                                       |                                                   |                                                  |        |          |  |              
|                                                                                                                       |                                                   |                                                 
|                                                                                                                       |                                                   | (Amounts in thousands, except per share amounts)
|Net loss                                                                                                               |                                                   | $                                                |       |          |  | $             |       |   |  | $ | (1,220  | )      
|Issuance of common stock, at $0.25 per share                                                                           |                                                   |                                                  |       |          |  |               |       |   |  |   | 1,555   |        
|Issuance of Series A redeemable convertible
	preferred stock, at $0.25 per share in September, 1999                    |                                                   |                                                  |       |          |  |               |       |   |  |   |        |        
|Issuance of Series B redeemable convertible
	preferred stock, at $2.60 per share in December, 1999                     |                                                   |                                                  |       |          |  |               |       |   |  |   |        |        
|Issuance of note receivable in connection with
	issuance of common stock                                               |                                                   |                                                  | (1,475 | )        |  |               |       |   |  |   | (1,475  | )      
|                                                                                                                       |                                                   |                                                  |        |          |  |               |        |   |  |   |         |        
|Balance at December 31, 1999                                                                                           |                                                   |                                                  | (1,475 | )        |  |               |       |   |  |   | (1,140  | )      
|Net loss                                                                                                               |                                                   |                                                  |       |          |  |               |       |   |  |   | (22,918 | )      
|Issuance of Series B redeemable convertible
	preferred stock, at $2.60 per share in January, February and
	March, 2000 |                                                   |                                                  |       |          |  |               |       |   |  |   |        |        
|Exercise of stock options                                                                                              |                                                   |                                                  |       |          |  |               |       |   |  |   | 3       |        
|Income tax benefit on disqualified disposition of
	stock options                                                       |                                                   |                                                  |       |          |  |               |       |   |  |   | 77      |        
|Repayment of note receivable from shareholder                                                                          |                                                   |                                                  | 1,475  |          |  |               |       |   |  |   | 1,475   |        
|                                                                                                                       |                                                   |                                                  |        |          |  |               |        |   |  |   |         |        
|Balance at December 31, 2000                                                                                           |                                                   |                                                  |       |          |  |               |       |   |  |   | (22,503 | )      
|Components of comprehensive loss:                                                                                      |                                                   |                                                  |        |          |  |               |        |   |  |   |         |        
|                                                                                                                       | Net loss                                          |                                                  |        |         |  |               |        |  |  |   |         | (35,949 | )
|                                                                                                                       | Unrealized gain on available-for-sale investments |                                                  |        |         |  |               |        |  |  |   |         | 156     |  
|                                                                                                                       |                                                   |                                                  |        |          |  |               |        |   |  |   |         |        
|Total comprehensive loss                                                                                               |                                                   |                                                  |       |          |  |               |       |   |  |   | (35,793 | )      
|Exercise of stock options before re-capitalization                                                                     |                                                   |                                                  |       |          |  |               |       |   |  |   | 16      |        
|Conversion of preferred stock to Class A
	common stock                                                                 |                                                   |                                                  |       |          |  |               |       |   |  |   | 62,000  |        
|Conversion of preferred stock to Class B
	common stock, at a 1 to 1.1 ratio                                            |                                                   |                                                  |       |          |  |               |       |   |  |   | 80,600  |        
|Conversion of common stock to Class A common
	stock                                                                    |                                                   |                                                  |       |          |  |               |       |   |  |   |        |        
|Conversion of common stock to Class B common
	stock, at a 1 to 1.1 ratio                                               |                                                   |                                                  |       |          |  |               |       |   |  |   |        |        
|Shares returned by ESS Technology, Inc. at
	spin-off                                                                   |                                                   |                                                  |       |          |  |               |       |   |  |   |        |        
|Return of common stock reserved for issuance upon
	exercise of stapled options                                         |                                                   |                                                  |       |          |  |               |       |   |  |   |        |        
|Exercise of stapled stock options                                                                                      |                                                   |                                                  |       |          |  |               |       |   |  |   |        |        
|Exercise of stock options                                                                                              |                                                   |                                                  |       |          |  |               |       |   |  |   | 5       |        
|Repurchase of common stock                                                                                             |                                                   |                                                  |       |          |  |               | (4,046 | ) |  |   | (4,046  | )      
|                                                                                                                       |                                                   |                                                  |        |          |  |               |        |   |  |   |         |        
|Balance at December 31, 2001                                                                                           |                                                   | $                                                |       |          |  | $             | (4,046 | ) |  | $ | 80,279  |        
|                                                                                                                       |                                                   |                                                  |        |          |  |               |        |   |  |   |         |        

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

30



---



##### Table of Contents



VIALTA, INC.

(A Development Stage Company)


CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |          |         |  
|---------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------------------------ | ------- | -------------------------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | -------- | ------- | -
|                                                                             |                                                                          |                                                                          |         |                            |         |     
|                                                                             |                                                                          |                                                                          |         | Period from April 20, 1999
|                                                                             |                                                                          | Years Ended                                                              |         | (Date of Inception)       
|                                                                             |                                                                          | December 31,                                                             |         | Through December 31,      
|                                                                             |                                                                          |                                                                          |         |                           
|                                                                             |                                                                          | 2001                                                                     |         | 2000                       |         | 1999 |         | 2001   
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |        
|                                                                             |                                                                          |                                                                         
|                                                                             |                                                                          | (Amounts in thousands)                                                  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                        |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|Net loss                                                                     |                                                                          | $                                                                        | (35,949 | )                          |         | $    | (22,918 | )       |         | $ | (1,220  | )       |         | $ | (60,087 | )       
|Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|                                                                             |                                                                          | Depreciation and amortization                                            |         |                            | 5,967   |      |         |         | 3,887   |   |         |         | 5       |   |         |          | 9,859   |  
|                                                                             |                                                                          | Write-down of long-term investment                                       |         |                            | 1,083   |      |         |         | 1,667   |   |         |         |        |   |         |          | 2,750   |  
|                                                                             |                                                                          | Income tax benefit on disqualifying disposition
	of common stock options |         |                            |        |      |         |         | (77     | ) |         |         |        |   |         |          | (77     | )
|Changes in assets and liabilities:                                           |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|                                                                             |                                                                          | Prepaid expenses and other assets                                        |         |                            | (260    | )    |         |         | (4,244  | ) |         |         | (16     | ) |         |          | (4,520  | )
|                                                                             |                                                                          | Related party receivables                                                |         |                            | 646     |      |         |         | (842    | ) |         |         | 209     |   |         |          | 13      |  
|                                                                             |                                                                          | Inventories                                                              |         |                            | 2,057   |      |         |         | (2,057  | ) |         |         |        |   |         |          |        |  
|                                                                             |                                                                          | Accounts payable and accrued liabilities                                 |         |                            | (7      | )    |         |         | 2,940   |   |         |         | 731     |   |         |          | 3,664   |  
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|                                                                             |                                                                          | Net cash used in operating activities                                    |         |                            | (26,463 | )    |         |         | (21,644 | ) |         |         | (291    | ) |         |          | (48,398 | )
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                        |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|                                                                             | Acquisition of property and equipment                                    |                                                                          |         | (2,199                     | )       |      |         | (10,008 | )       |   |         | (1,725  | )       |   |         | (13,932  | )      
|                                                                             | Purchase of available-for-sale investments                               |                                                                          |         | (15,735                    | )       |      |         | (98,444 | )       |   |         | (22,344 | )       |   |         | (136,523 | )      
|                                                                             | Proceeds from sale of available-for-sale
	investments                    |                                                                          |         | 33,650                     |         |      |         | 93,676  |         |   |         |        |         |   |         | 127,326  |        
|                                                                             | Purchase of other long-term investments                                  |                                                                          |         | (2,720                     | )       |      |         | (4,000  | )       |   |         |        |         |   |         | (6,720   | )      
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|                                                                             |                                                                          | Net cash provided by (used in) investing
	activities                     |         |                            | 12,996  |      |         |         | (18,776 | ) |         |         | (24,069 | ) |         |          | (29,849 | )
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                        |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|Proceeds from (repayment of) notes payable to
	related party                 |                                                                          |                                                                          | (30,000 | )                          |         |      | 30,000  |         |         |   |        |         |         |   |        |         
|Proceeds from issuance of redeemable convertible
	preferred stock            |                                                                          |                                                                          |        |                            |         |      | 27,820  |         |         |   | 114,780 |         |         |   | 142,600 |         
|Proceeds from issuance of common stock                                       |                                                                          |                                                                          | 21      |                            |         |      | 1,478   |         |         |   | 80      |         |         |   | 1,579   |         
|Repurchase of common stock                                                   |                                                                          |                                                                          | (4,046  | )                          |         |      |        |         |         |   |        |         |         |   | (4,046  | )       
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|                                                                             |                                                                          | Net cash provided by (used in) financing
	activities                     |         |                            | (34,025 | )    |         |         | 59,298  |   |         |         | 114,860 |   |         |          | 140,133 |  
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|Net increase (decrease) in cash and cash
	equivalents                        |                                                                          |                                                                          | (47,492 | )                          |         |      | 18,878  |         |         |   | 90,500  |         |         |   | 61,886  |         
|Cash and cash equivalents at beginning of period                             |                                                                          |                                                                          | 109,378 |                            |         |      | 90,500  |         |         |   |        |         |         |   |        |         
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|Cash and cash equivalents at end of period                                   |                                                                          | $                                                                        | 61,886  |                            |         | $    | 109,378 |         |         | $ | 90,500  |         |         | $ | 61,886  |         
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
	AND NONCASH                |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|FINANCING ACTIVITY:                                                          |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|                                                                             | Cash paid for interest                                                   |                                                                          | $       | 194                        |         |      | $       |        |         |   | $       |        |         |   | $       | 194      |        
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         
|                                                                             | Issuance of note receivable in connection with
	issuance of common stock |                                                                          | $       |                           |         |      | $       | 1,475   |         |   | $       |        |         |   | $       | 1,475    |        
|                                                                             |                                                                          |                                                                          |         |                            |         |      |         |         |         |   |         |         |         |   |         |         

The accompanying notes are an integral part of
these Consolidated Financial Statements.

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VIALTA, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1.     The
Company

Vialta, Inc. (Vialta or the
Company) was incorporated in California in April
1999. Vialta has developed a multi-purpose DVD player
(ViDVD) that offers Internet access and other
features, such as CD, MP3, karaoke, and support for other audio
and video formats. These features differentiate it from most DVD
players currently available in the U.S. consumer market. This
ViDVD player is the first product offering to utilize
Vialtas digital home entertainment platform, which the
Company anticipates will grow to support a family of consumer
electronics products. Vialta commenced shipments of the ViDVD
through retail distribution channels in the third quarter of
2001, but no revenue will be recognized until contractual
obligations under sales agreements have been satisfied.

On April 21, 2001, the board of directors of
ESS Technology, Inc. (ESS) approved the spin-off of
ESS interest in Vialta to ESS shareholders. The
transaction was completed on August 21, 2001 when ESS
distributed approximately 50,560,328 shares of Class A
common stock of Vialta, Inc., resulting in Vialta operating as a
stand alone business, independent from ESS.

On May 25, 2001, Vialta was reincorporated
in the State of Delaware. As part of the re-incorporation,
Vialta was authorized to issue 180,000,000 shares of preferred
stock, $0.001 par value per share, and 300,000,000 shares of
common stock, $0.001 par value per share. All common stock and
preferred stock amounts in the accompanying consolidated
financial statements have been restated to give effect to the
re-incorporation.

Since its inception, Vialta has been in the
development stage. Vialta has been successful in completing its
private equity financing with its last round totaling
approximately $132.6 million. However, Vialta has incurred
substantial losses and negative cash flows from operations in
every fiscal period since inception. For the cumulative period
ended December 31, 2001, Vialta incurred a loss from
operations of approximately $70.0 million and negative cash
flows from operations of $48.4 million . Management expects
operating losses and negative cash flows to continue for the
foreseeable future and anticipates that losses will increase
significantly from current levels because of additional costs
and expenses related to marketing activities, continued
expansion of operations, continued development of Vialtas
web site and information technology infrastructure, expansion of
product offerings, and development of relationships with other
businesses. Management believes that Vialta has sufficient cash,
cash equivalents, and short-term investments to fund its
development and growth through December 31, 2002. However,
in the longer term, failure to generate sufficient revenues,
raise additional capital or reduce certain discretionary
spending could have a material adverse effect on Vialtas
ability to achieve its intended business objectives.

Note 2.     Summary
of Significant Accounting Policies



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

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.



| |                            
| | ---------------------------
| | Principles of Consolidation

The accounts of Vialta and its consolidated
subsidiaries are included in the consolidated financial
statements after elimination of significant intercompany
accounts and transactions.

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##### Table of Contents



VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Cash Equivalents and
	Investments

Vialta considers all highly liquid investments
with an initial maturity of 90 days or less to be cash
equivalents.

Short-term and long-term investments are
comprised primarily of debt instruments that have been
classified as available-for-sale. Management determines the
appropriate classification of securities at the time of purchase
and re-evaluates the classification at each reporting date.
Marketable equity and debt securities are carried at their fair
market value based on quoted market prices as of the balance
sheet date. Realized gains or losses are determined on the
specific identification method and are reflected in income. Net
unrealized gains or losses are recorded directly in
stockholders equity except those unrealized losses that
are deemed to be other than temporary, which are reflected in
investment losses.



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

The reported amounts of certain of Vialtas
financial instruments, including cash and cash equivalents,
short and long-term investments, receivables from related
parties and stockholders, accounts payable, accrued expenses and
other current liabilities approximated fair value due to their
short maturities. The carrying amounts of the note payable to
related party approximated fair value because the contractual
interest rate approximates the interest rate Vialta could obtain
on similar financing transactions.



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

Vialta operates in a single business segment that
is characterized by rapid technological advances, changes in
customer requirements and evolving industry standards. Any
failure by Vialta to anticipate or respond to changes in demand
could have a material adverse effect on its business and
operating results.

Certain of the Companys products contain
critical components supplied by a single or a limited number of
third parties. The Company has been required to purchase and
inventory certain of the platforms around which it designs its
products to ensure an available supply of the product for
customers. Any significant shortage of the platforms or other
components or the failure of the third party suppliers to
maintain or enhance these products could materially adversely
affect the Companys results of operations.

The Company relies on a limited number of third
parties to manufacture some of its hardware-based products.
Reliance on third-party manufacturers involves a number of
risks, including the lack of control over the manufacturing
process and the potential absence or unavailability of adequate
capacity. If any of the Companys third party manufacturers
cannot or will not manufacture its products in required volumes,
on a cost-effective basis, in a timely manner, or at all, the
Company will have to secure additional manufacturing capacity.
Even if the additional capacity is available at commercially
acceptable terms, the qualification process could be lengthy and
could cause interruptions in product shipments.



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

The functional currencies of the Companys
foreign subsidiaries are the local currencies. Accordingly, all
assets and liabilities of the foreign operations are translated
to U.S. dollars at current period end exchange rates, and
revenues and expenses are translated to U.S. dollars using
average exchange rates in effect during the period. Currency
transaction and translation gains and losses have not been
significant.



| |                           
| | --------------------------
| | Web Site Development Costs

Web site development costs are accounted for in
accordance with Statement of Position (SOP) 98-1,
Development Costs Associated with Internal Use
Software, and Emerging Issues Task Force
(EITF) 00-02, which require these costs to be
charged to operations until certain capitalization criteria are
met. For

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VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the years ended December 31, 2001 and 2000,
and for the period from April 20, 1999 (Date of Inception)
through December 31, 1999, web site development costs of
approximately $0.7 million, $2.7 million and
$0.0 million, respectively, were capitalized and are being
amortized over a 12-month period beginning when the web site was
put into service. As of December 31, 2001, approximately
$2.1 million remains to be amortized.



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

Research and development costs are expensed as
incurred.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market, with cost being determined by the first-in, first-out
method.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is
generally computed using the straight-line method over the
estimated useful lives of the assets.

|                                        |  |  |             | 
|--------------------------------------- |  |  | ----------- | 
|Computer equipment                      |  |  | 3 - 5 years | 
|Furniture and fixtures                  |  |  | 5 years     | 
|Software and web site development costs |  |  | 1 - 3 years | 

Repairs and maintenance costs are expensed as
incurred.



| |                  
| | -----------------
| | Long-Lived Assets

Pursuant to Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of (SFAS No. 121), Vialta reviews
long-lived assets based upon a gross cash flow basis and will
record an impairment whenever events or changes in circumstances
indicate the carrying amount of the assets may not be fully
recoverable. If an asset is considered impaired, the asset is
written down to carrying value, which is determined based either
on discounted cash flows or appraised values, depending on the
nature of the asset.



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

Vialta generally recognizes revenues upon
shipment of products provided that persuasive evidence of an
arrangement exists, the price is fixed, title has transferred,
collection of resulting receivables is reasonably assured, there
are no customer acceptance requirements, there are no remaining
significant obligations and allowance for returns can be
reliably estimated. For transactions that do not meet the above
criteria, revenue will be deferred until such criteria are met.
The Company defers revenue on sales to distributors who have
rights of returns and credits until products are resold by the
distributors.



| |                  
| | -----------------
| | Advertising Costs

Advertising production costs are expensed as
incurred. Print placement costs and market development funds are
expensed in the period the advertising appears. Total
advertising and promotional expenses were not material for the
years ended December 31, 2001 and 2000, and for the period
from April 20, 1999 (Date of Inception) through
December 31, 1999.

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VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

Vialta accounts for stock-based employee
compensation in accordance with provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25), and
complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS
No. 123). Vialtas policy is to grant options
with an exercise price equal to the fair market value of
Vialtas stock on the grant date.



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

Vialta accounts for income taxes under an asset
and liability approach that requires the recognition of deferred
tax liabilities and assets for the expected future tax
consequences of timing differences between the carrying amounts
and the tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax
assets to amounts expected to be realized.



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

Statement Financial Accounting Standards
No. 130, Reporting Comprehensive Income
(SFAS No. 130), establishes standards for the
reporting and display of comprehensive income and its components
in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner
sources. In 2001, Vialta recorded approximately a $156,000
difference between net loss and comprehensive loss due to an
unrealized gain in available-for-sales investments. In 2000 and
1999, comprehensive loss approximated net loss.



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

Basic net income (loss) per share excludes
dilution and is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the
period. Diluted net income per share reflects the potential
dilution that would occur if securities or other contracts to
issue common stock were exercised or converted into common stock.



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 141, Business
Combinations (SFAS 141). SFAS 141
requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates
the pooling-of-interests method. The adoption of SFAS 141
does not have a significant impact on the financial statements.

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS 142), which
is effective for fiscal years beginning after December 15,
2001. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the
standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the testing for
impairment of existing goodwill and other intangibles. The
adoption of SFAS 142 will not have a significant impact on our
financial position and results of operations.

On October 3, 2001, the FASB issued
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144). SFAS 144
supercedes SFAS 121. SFAS 144 applies to all long-lived
assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30.
SFAS 144 develops one accounting model for long-lived
assets that are to be disposed of by sale. SFAS 144
requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS

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VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

144 expands the scope of discontinued operations
to include all components of an entity with operations that
(1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the
entity in a disposal transaction. SFAS 144 is effective for
the Company for all financial statements issued in fiscal 2002.
The Company is currently assessing the impact of SFAS 144
on its financial position and results of operations.

In November 2001, the Emerging Issues Task Force
(EITF) reached a consensus on EITF No. 01-09,
Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendors Products
(EITF 01-09). EITF 01-09 requires the
Company to record certain consideration paid to distributors of
its products as a reduction of revenue. The Company does not
expect the implementation of EITF 01-09 to have a material
effect on its results of operations or financial position.

Note
3:     Recapitalization of
Equity

On July 24, 2001, Vialta was re-capitalized,
pursuant to which it separated its common stock into
Class A common stock with 3.8 votes per share and
Class B common stock with one vote per share. Upon exchange
of 5,892,000 shares of common stock for Class B common
stock, Vialta issued 589,000 additional shares of Class B
common stock to non-ESS common stockholders. Except for the
voting power, Class A and Class B stockholders have
the same rights. Vialta authorized 30,000,000 shares of
preferred stock and 400,000,000 shares of common stock,
100,000,000 shares of which are designated Class A common
stock, 50,000,000 of which are designated Class B common
stock and 250,000,000 of which are designated non-classified
common stock.

As part of the spin-off transaction, all
preferred stock owned by ESS converted to Class A common
stock based on a conversion ratio of 1 to 1. All other
preferred stock converted to Class B common stock at a
ratio of 1 to 1.1. As a result, 91,000,000 shares of
preferred stock were converted to 60,000,000 shares of
Class A common stock and 34,100,000 shares of Class B
common stock.

As part of the spin-off transaction, ESS returned
approximately 9,840,000 shares of Class A common stock to
Vialta at no cost. These shares are reserved by Vialta for
issuance upon exercise of stapled options that were granted by
Vialta to ESS optionees as part of the spin-off transaction. In
accordance with FIN 44, no compensation expense has been or will
be recorded in conjunction with these stock option grants.

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VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The table below summarizes the effect of these
conversions of common stock outstanding at December 31,
2001 (in thousands):

|                                                                                                             |  |           |        |            |  |         |          |         |  |             |        |   |  |  |        |  |  |  |        |  
|------------------------------------------------------------------------------------------------------------ |  | --------- | ------ | ---------- |  | ------- | -------- | ------- |  | ----------- | ------ | - |  |  | ------ |  |  |  | ------ | -
|                                                                                                             |  |           |        |            |  | Class A |          | Class B |  |            
|                                                                                                             |  | Preferred |        | Conversion |  | Common  |          | Common  |  | Outstanding
|Capital Stock                                                                                                |  | Shares    |        | Ratio      |  | Stock   |          | Stock   |  | Total      
|                                                                                                             |  |           |        |            |  |         |          |         |  |            
|Series A  ESS owned                                                                                         |  |           | 40,000 |            |  |         | 1 to 1   |         |  |             | 40,000 |   |  |  |       |  |  |  | 40,000 |  
|Series B  ESS owned                                                                                         |  |           | 20,000 |            |  |         | 1 to 1   |         |  |             | 20,000 |   |  |  |       |  |  |  | 20,000 |  
|Series B  third party owned                                                                                 |  |           | 31,000 |            |  |         | 1.1 to 1 |         |  |             |       |   |  |  | 34,100 |  |  |  | 34,100 |  
|                                                                                                             |  |           |        |            |  |         |          |         |  |             |        |   |  |  |        |  |  |  |        |  
|                                                                                                             |  |           | 91,000 |            |  |         |          |         |  |             | 60,000 |   |  |  | 34,100 |  |  |  | 94,100 |  
|Shares returned to Vialta by ESS, reserved for
	issuance upon exercise of stapled options                    |  |           |        |            |  |         |          |         |  |             | (9,840 | ) |  |  |       |  |  |  | (9,840 | )
|Additional shares returned by ESS as part of the
	spin-off transaction                                       |  |           |        |            |  |         |          |         |  |             | (612   | ) |  |  |       |  |  |  | (612   | )
|Issuance of common stock upon exchange of third
	party owned common stock for Class B common stock           |  |           |        |            |  |         |          |         |  |             |       |   |  |  | 589    |  |  |  | 589    |  
|Conversion of original common stock to
	Class A and Class B common stock                                     |  |           |        |            |  |         |          |         |  |             | 400    |   |  |  | 5,892  |  |  |  | 6,292  |  
|                                                                                                             |  |           |        |            |  |         |          |         |  |             |        |   |  |  |        |  |  |  |        |  
|Total effect of re-capitalization and spin-off
	transaction on Class A and Class B common stock
	outstanding |  |           |        |            |  |         |          |         |  |             | 49,948 |   |  |  | 40,581 |  |  |  | 90,529 |  
|                                                                                                             |  |           |        |            |  |         |          |         |  |             |        |   |  |  |        |  |  |  |        |  

Note 4.     Related
Party Transactions

Effective August 1, 1999, the Company
entered into a Research and Development Service Agreement with
ESS whereby ESS provides certain research and development
services to the Company in exchange for a service fee. In
addition, the Company signed a reciprocal agreement with ESS
whereby Vialta provides certain non-recurring expense services
for the design and development of Internet related products and
technologies to ESS in exchange for a service fee. In the
periods presented, the Company did not provide such services to
ESS.

Effective August 1, 1999, the Company
entered into an Administrative and Management Service Agreement
with ESS whereby ESS provides certain administrative and
managerial services to Vialta including, without limitation,
sales support, marketing support, production and logistical
support, financial oversight, accounting assistance, contract
review, personnel services (including training of employees) and
such other general and administrative services as Vialta
requires. ESS performs these services in consideration for a
service fee. In addition, Vialta signed a reciprocal agreement
whereby Vialta provides the services mentioned above to ESS in
exchange for a service fee.

Effective August 1, 1999, the Company
entered into a Purchase Agreement with ESS whereby Vialta will
purchase certain products from ESS.

In January 2000, Vialta entered into an
Assignment of Intellectual Property Agreement with ESS whereby
Vialta paid ESS $2.0 million for the transfer of the
Videophone and EnReach-based web browser technologies. Such
transfer was done based on actual costs incurred.

In April 2000, Vialta loaned to an officer of
Vialta $60,000, which, together with accrued interest at the
annual rate of 6%, was due and payable on April 20, 2001.
The loan, along with accrued interest, was repaid in August 2001.

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VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On December 18, 2000, Vialta received a
$30.0 million loan from a related party controlled by
Annie M.H. Chan, a director of ESS and the spouse of
Fred S.L. Chan, Chairman of ESS and Chairman and Chief
Executive Officer of Vialta. The short-term loan along with
approximately $194,000 accrued interest at 5.25% was repaid on
January 31, 2001.

On August 20, 2001, Vialta re-executed the
aforementioned existing agreements with ESS as a result of the
spin-off of Vialta from ESS. Under the re-executed
Administrative and Management Service Agreement, Vialta provided
services to ESS in the amount of $98,400 for the period ended
December 31, 2001.

On August 20, 2001, Vialta entered into a
Commercial Lease Agreement with ESS whereby ESS will lease a
freestanding building in Fremont, California to Vialta for a
fixed monthly fee. The lease expires on December 31, 2003.

On August 20, 2001, Vialta entered into an
Employee Matters Agreement with ESS whereby Vialta will continue
to provide employment and employee benefits to all active
employees and former employees subject to certain limitations.

The Company anticipates that it will continue to
receive such services from ESS under the terms of the
agreements. The following is a summary of major transactions
that resulted in charges by ESS to Vialta for the periods
presented (amounts in thousands):

|                                                |  |                        |       |              |  |                |       |      |  |   |     |  |  |   |        | 
|----------------------------------------------- |  | ---------------------- | ----- | ------------ |  | -------------- | ----- | ---- |  | - | --- |  |  | - | ------ | 
|                                                |  |                        |       |              |  |               
|                                                |  |                        |       |              |  | Period from   
|                                                |  |                        |       |              |  | April 20, 1999
|                                                |  |                        |       |              |  | (Date of      
|                                                |  |                        |       | Inception)  
|                                                |  | Years Ended            |       | through     
|                                                |  | December 31,           |       | December 31,
|                                                |  |                        |       |             
|Transactions with Affiliates                    |  | 2001                   |       | 2000         |  | 1999           |       | 2001
|                                                |  |                        |       |              |  |                |       |     
|                                                |  |                       
|                                                |  | (Amounts in thousands)
|Research and Development Service Agreement      |  | $                      | 1,895 |              |  | $              | 3,077 |      |  | $ | 233 |  |  | $ | 5,205  | 
|Administrative and Management Service Agreement |  |                        | 3,108 |              |  |                | 3,361 |      |  |   | 302 |  |  |   | 6,802  | 
|Employee Matters Agreement                      |  |                        | 32    |              |  |                |      |      |  |   |    |  |  |   | 32     | 
|Assignment of Intellectual Property Agreement   |  |                        |      |              |  |                | 2,000 |      |  |   |    |  |  |   | 2,000  | 
|Purchase Agreement                              |  |                        | 1,127 |              |  |                | 1,004 |      |  |   |    |  |  |   | 2,131  | 
|Commercial Lease Agreement                      |  |                        | 640   |              |  |                |      |      |  |   |    |  |  |   | 640    | 
|                                                |  |                        |       |              |  |                |       |      |  |   |     |  |  |   |        | 
|Total                                           |  | $                      | 6,802 |              |  | $              | 9,442 |      |  | $ | 535 |  |  | $ | 16,810 | 
|                                                |  |                        |       |              |  |                |       |      |  |   |     |  |  |   |        | 

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VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 5.     Balance
Sheet Components

|                                                                    |  |                        |        |      |  |   |         | 
|------------------------------------------------------------------- |  | ---------------------- | ------ | ---- |  | - | ------- | 
|                                                                    |  |                       
|                                                                    |  | December 31,          
|                                                                    |  |                       
|                                                                    |  | 2001                   |        | 2000
|                                                                    |  |                        |        |     
|                                                                    |  |                       
|                                                                    |  | (Amounts in thousands)
|CASH AND CASH EQUIVALENTS                                           |  |                        |        |      |  |   |         | 
|Cash and money market funds, at cost which
	approximates fair value |  | $                      | 61,886 |      |  | $ | 100,989 | 
|Corporate debt securities                                           |  |                        |       |      |  |   | 8,389   | 
|                                                                    |  |                        |        |      |  |   |         | 
|                                                                    |  | $                      | 61,886 |      |  | $ | 109,378 | 
|                                                                    |  |                        |        |      |  |   |         | 

|                                |  |   |       |  |  |   |        | 
|------------------------------- |  | - | ----- |  |  | - | ------ | 
|MARKETABLE SECURITIES           |  |   |       |  |  |   |        | 
|U.S. Government debt securities |  | $ | 4,274 |  |  | $ |       | 
|Corporate debt securities       |  |   | 5,079 |  |  |   | 27,112 | 
|                                |  |   |       |  |  |   |        | 
|                                |  |   | 9,353 |  |  |   | 27,112 | 
|Due between one and two years   |  |   | 4,064 |  |  |   |       | 
|                                |  |   |       |  |  |   |        | 
|Due within one year             |  | $ | 5,289 |  |  | $ | 27,112 | 
|                                |  |   |       |  |  |   |        | 

|               |  |   |   |  |  |   |       | 
|-------------- |  | - | - |  |  | - | ----- | 
|INVENTORIES    |  |   |   |  |  |   |       | 
|Raw Materials  |  | $ |  |  |  | $ | 1,853 | 
|Finished Goods |  |   |  |  |  |   | 204   | 
|               |  |   |   |  |  |   |       | 
|               |  | $ |  |  |  | $ | 2,057 | 
|               |  |   |   |  |  |   |       | 

As of December 31, 2000, Vialta had
capitalized costs of $2,057,000 as inventories based on expected
sales during 2001. Vialta did not have sales in 2001 and the
inventory components required to build products that Vialta now
expects to sell have changed. Accordingly, the costs previously
capitalized were expensed as of December 31, 2001.

|                                       |  |                        |        |      |  |   |        |  
|-------------------------------------- |  | ---------------------- | ------ | ---- |  | - | ------ | -
|                                       |  |                       
|                                       |  | December 31,          
|                                       |  |                       
|                                       |  | 2001                   |        | 2000
|                                       |  |                        |        |     
|                                       |  |                       
|                                       |  | (Amounts in thousands)
|PROPERTY AND EQUIPMENT                 |  |                        |        |      |  |   |        |  
|Machinery and equipment                |  | $                      | 7,149  |      |  | $ | 6,275  |  
|Furniture and fixtures                 |  |                        | 1,823  |      |  |   | 1,212  |  
|Software and web site development cost |  |                        | 4,960  |      |  |   | 4,246  |  
|                                       |  |                        |        |      |  |   |        |  
|                                       |  |                        | 13,932 |      |  |   | 11,733 |  
|Less: Accumulated depreciation         |  |                        | (6,101 | )    |  |   | (2,503 | )
|                                       |  |                        |        |      |  |   |        |  
|                                       |  | $                      | 7,831  |      |  | $ | 9,230  |  
|                                       |  |                        |        |      |  |   |        |  

Depreciation expense was approximately
$3,598,000, $3,887,000 and $5,000 for the years ended
December 31, 2001, December 31, 2000 and for the
period from April 20,1999 (Date of Inception) through
December 31, 1999, respectively.

39



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##### Table of Contents



VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                |  |              |       |      |  |   |       | 
|----------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                                |  |             
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2001         |       | 2000
|                                                |  |              |       |     
|                                                |  |             
|                                                |  | (Amounts in 
|                                                |  | thousands)  
|OTHER ASSETS                                    |  |              |       |      |  |   |       | 
|Investment                                      |  | $            | 166   |      |  | $ | 997   | 
|Deposit                                         |  |              | 46    |      |  |   |      | 
|                                                |  |              |       |      |  |   |       | 
|                                                |  | $            | 212   |      |  | $ | 997   | 
|                                                |  |              |       |      |  |   |       | 
|ACCRUED EXPENSES AND OTHER CURRENT
	LIABILITIES |  |              |       |      |  |   |       | 
|Accrued compensation costs                      |  | $            | 2,441 |      |  | $ | 2,178 | 
|Other                                           |  |              | 386   |      |  |   | 40    | 
|                                                |  |              |       |      |  |   |       | 
|                                                |  | $            | 2,827 |      |  | $ | 2,218 | 
|                                                |  |              |       |      |  |   |       | 

Note 6.     Net
Income (Loss) Per Share

Net income (loss) per share are calculated
in accordance with the provisions of Statement of Financial
Accounting Standards No. 128 Earnings per Share
(SFAS No. 128). SFAS No. 128, requires the
Company to report both basic net income (loss) per share,
which are based on the weighted-average number of common shares
outstanding, and diluted net income per share, which are based
on the weighted average number of common shares outstanding and
all dilutive potential common shares outstanding. Diluted net
income per share reflects the potential dilution that would
occur if securities or other contracts to issue common stock
were exercised or converted into common stock.

|                                                              |  |                                                  |         |                        |  |                     |         |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------- |  | ------------------------------------------------ | ------- | ---------------------- |  | ------------------- | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                              |  |                                                  |         |                        |  |                    
|                                                              |  |                                                  |         |                        |  | For the Period from
|                                                              |  |                                                  |         | April 20, 1999        
|                                                              |  | For the Years Ended                              |         | (Date of Inception) to
|                                                              |  | December 31,                                     |         | December 31,          
|                                                              |  |                                                  |         |                       
|                                                              |  | 2001                                             |         | 2000                   |  | 1999                |         | 2001
|                                                              |  |                                                  |         |                        |  |                     |         |     
|                                                              |  |                                                 
|                                                              |  | (Amounts in thousands, except per share amounts)
|Net Loss                                                      |  | $                                                | (35,949 | )                      |  | $                   | (22,918 | )    |  | $ | (1,220 | ) |  | $ | (60,087 | )
|Basic and Diluted Weighted Average Common Shares
	Outstanding |  |                                                  | 43,248  |                        |  |                     | 6,222   |      |  |   | 1,716  |   |  |   | 18,758  |  
|Basic and Diluted Net Loss Per Share                          |  | $                                                | (0.83   | )                      |  | $                   | (3.68   | )    |  | $ | (0.71  | ) |  | $ | (3.20   | )

The following table sets forth potential shares
of common stock that are not included in the diluted net loss
per share calculation above because to do so would be
anti-dilutive for the periods indicated:

|                                        |                             |                        |         |                        |  |                     |        |         |  |  |        |        |  |  |         |        | 
|--------------------------------------- | --------------------------- | ---------------------- | ------- | ---------------------- |  | ------------------- | ------ | ------- |  |  | ------ | ------ |  |  | ------- | ------ | 
|                                        |                             |                        |         |                        |  |                    
|                                        |                             |                        |         |                        |  | For the Period from
|                                        |                             |                        |         | April 20, 1999        
|                                        |                             | For the Years Ended    |         | (Date of Inception) to
|                                        |                             | December 31,           |         | December 31,          
|                                        |                             |                        |         |                       
|                                        |                             | 2001(1)                |         | 2000                   |  | 1999                |        | 2001(1)
|                                        |                             |                        |         |                        |  |                     |        |        
|                                        |                             |                       
|                                        |                             | (Amounts in thousands)
|Effect of common stock equivalents:     |                             |                        |         |                        |  |                     |        |         |  |  |        |        |  |  |         |       
|                                        | Options outstanding         |                        |         | 13,107                 |  |                     |        | 2,156   |  |  |        | 1,633  |  |  |         | 13,107 | 
|                                        | Preferred stock outstanding |                        |         | 91,000                 |  |                     |        | 91,000  |  |  |        | 80,300 |  |  |         | 91,000 | 
|                                        |                             |                        |         |                        |  |                     |        |         |  |  |        |        |  |  |         |       
|Total common stock equivalents excluded |                             |                        | 104,107 |                        |  |                     | 93,156 |         |  |  | 81,933 |        |  |  | 104,107 |       
|                                        |                             |                        |         |                        |  |                     |        |         |  |  |        |        |  |  |         |       



---



|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The dilutive net loss per share calculation
	excludes the effect of the preferred stock outstanding through
	July 24, 2001, the date of the re-capitalization.
	Subsequent to this date, these stocks were included within the
	weighted basic shares outstanding calculation.

40



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##### Table of Contents



VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 7:     Common
Stock and Stock Options



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

In September 2001, the Board of Directors
authorized Vialta to systematically repurchase shares of its
common stock in the open market. 10 million shares were
authorized for repurchase. During fiscal 2001, Vialta
repurchased a total of 6,236,000 shares of common stock for an
aggregate cost of $4.0 million. As of December 31,
2001, 3,764,000 shares are authorized for repurchase.

From January 1, 2002 through
January 28,2002, Vialta repurchased 492,000 shares of
common stock for an aggregate cost of $0.6 million and
3,272,000 remaining shares are authorized for repurchase.



| |                          
| | -------------------------
| | 1999 Stock Incentive Plan

In August 1999, the Company adopted the 1999
stock incentive plan (the 1999 Plan). Under the 1999
Plan, the Companys incentive stock options
(ISO) may be granted to its employees, directors,
non-employee directors and consultants. The aggregate number of
shares reserved for awards under the Plan shall not exceed
10,000,000 shares. The exercise price of an ISO shall not be
less than 100% of the fair market value (110% for
10 percent shareholders); the exercise price of a
non-incentive stock option (NSO) shall not be less
than 85% of the fair market value (110% for 10 percent
shareholders). Options shall generally vest over a four-year
period.



| |                                  
| | ---------------------------------
| | 2000 Directors Stock Option
	Plan

In February 2000, the Company adopted the 2000
Directors Stock Option Plan (the 2000 Director
Plan). Under the 2000 Director Plan, the Companys
nonqualified stock options (NSO) may be granted to
nonemployee members of the board of directors of the Company.
The aggregate number of shares reserved for issuance is 300,000
shares subject to adjustment as provided in this 2000 Director
Plan. Each optionee who becomes a member of the board of
directors will automatically be granted an option for 32,000
shares. The exercise price of the option shall be the fair
market value at the time the option is granted. Options shall
generally vest over a four-year period.



| |                                      
| | -------------------------------------
| | 2001 Non-Statutory Stock Option
	Plan

In August 2001, the Company adopted the 2001
non-statutory option plan (the 2001 Plan). Under the
2001 Plan, the Companys non-statutory stock options may be
granted to its employees, directors, non-employee directors and
consultants. The aggregate number of shares reserved for awards
under the Plan shall not exceed 10,000,000 shares. The exercise
price of a non-statutory stock option shall not be less than 85%
of the fair market value (110% for 10 percent shareholders).
Options shall generally vest over a four-year period.

41



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##### Table of Contents



VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the activities in the 1999 Plan, the
2000 Director Plan and 2001 Plan is as follows:

|                                   |  |           |             |                     |  |                |            |   |  |   |      | 
|---------------------------------- |  | --------- | ----------- | ------------------- |  | -------------- | ---------- | - |  | - | ---- | 
|                                   |  |           |             |                    
|                                   |  |           |             | Options Outstanding
|                                   |  |           |             |                    
|                                   |  |           |             |                     |  | Weighted      
|                                   |  | Available |             | Numbers             |  | Average       
|                                   |  | for Grant |             | of Options          |  | Exercise Price
|                                   |  |           |             |                     |  |               
|Adoption of the 1999 Plan          |  |           | 10,000,000  |                     |  |                |            |   |  | $ |     | 
|Granted                            |  |           | (1,693,000  | )                   |  |                | 1,693,000  |   |  |   | 0.26 | 
|Cancelled                          |  |           | 60,000      |                     |  |                | (60,000    | ) |  |   | 0.25 | 
|                                   |  |           |             |                     |  |                |            |   |  |   |      | 
|Balance at December 31, 1999       |  |           | 8,367,000   |                     |  |                | 1,633,000  |   |  |   | 0.26 | 
|Adoption of the 2000 Director Plan |  |           | 300,000     |                     |  |                |            |   |  |   |      | 
|Granted                            |  |           | (903,200    | )                   |  |                | 903,200    |   |  |   | 1.98 | 
|Cancelled                          |  |           | 369,500     |                     |  |                | (369,500   | ) |  |   | 0.92 | 
|Exercised                          |  |           |            |                     |  |                | (10,500    | ) |  |   | 0.25 | 
|                                   |  |           |             |                     |  |                |            |   |  |   |      | 
|Balance at December 31, 2000       |  |           | 8,133,300   |                     |  |                | 2,156,200  |   |  |   | 0.87 | 
|Adoption of the 2001 Plan          |  |           | 10,000,000  |                     |  |                |            |   |  |   |      | 
|Granted                            |  |           | (13,640,137 | )                   |  |                | 13,640,137 |   |  |   | 0.25 | 
|Cancelled                          |  |           | 1,296,832   |                     |  |                | (1,296,832 | ) |  |   | 1.22 | 
|Exercised                          |  |           |             |                     |  |                | (1,392,899 | ) |  |   | 0.02 | 
|                                   |  |           |             |                     |  |                |            |   |  |   |      | 
|Balance at December 31, 2001       |  |           | 5,789,995   |                     |  |                | 13,106,606 |   |  | $ | 0.29 | 

The options outstanding and currently exercisable
at December 31, 2001 are detailed as follows

|               |  |                     |            |                 |  |          |      |             |  |          |      |  |  |  |           |  |  |   |      | 
|-------------- |  | ------------------- | ---------- | --------------- |  | -------- | ---- | ----------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|               |  |                     |            |                
|               |  | Options Outstanding |            | Options Current
|               |  |                     |            | Exercisable    
|               |  |                     |            | Weighted        |  |          |      |            
|               |  |                     |            | Average         |  | Weighted |      |             |  | Weighted
|               |  |                     |            | Remaining       |  | Average  |      |             |  | Average 
|               |  | Number              |            | Contractual     |  | Exercise |      | Number      |  | Exercise
|Exercise Price |  | Outstanding         |            | Life (Years)    |  | Price    |      | Exercisable |  | Price   
|               |  |                     |            |                 |  |          |      |             |  |         
|$0.00          |  |                     | 8,164,306  |                 |  |          | 6.28 |             |  | $        | 0.00 |  |  |  | 1,964,260 |  |  | $ | 0.00 | 
|$0.25 - $0.28  |  |                     | 1,241,000  |                 |  |          | 7.68 |             |  | $        | 0.27 |  |  |  | 136,707   |  |  | $ | 0.25 | 
|$0.34 - $0.62  |  |                     | 1,722,100  |                 |  |          | 9.65 |             |  | $        | 0.41 |  |  |  | 1,875     |  |  | $ | 0.41 | 
|$1.18          |  |                     | 1,509,700  |                 |  |          | 9.45 |             |  | $        | 1.18 |  |  |  | 79,300    |  |  | $ | 1.18 | 
|$1.62 - $2.01  |  |                     | 469,500    |                 |  |          | 7.78 |             |  | $        | 1.94 |  |  |  | 119,500   |  |  | $ | 1.94 | 
|               |  |                     |            |                 |  |          |      |             |  |          |      |  |  |  |           |  |  |   |      | 
|               |  |                     | 13,106,606 |                 |  |          |      |             |  |          |      |  |  |  | 2,301,642 |  |  |   |      | 

The weighted average fair value of options
granted in fiscal years 2001 and 2000 and for period from
April 20, 1999 (Date of Inception) through
December 31, 1999 was $0.90, $0.34 and $0.05, respectively.
Options exercisable were 2,301,642, 150,250 and 0 as of
December 31, 2001, 2000 and 1999, respectively.



| |                       
| | ----------------------
| | Fair value disclosures

Had compensation cost for the Companys
stock-based compensation plan been determined based on the fair
value at the grant dates for the awards under the method
prescribed by SFAS No. 123, the Companys net

42



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##### Table of Contents



VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

loss would have been increased to the pro forma
amounts indicated below (amounts in thousands, except per share
amounts):

|                                       |             |              |   |                      |   |             |   |         |   |  |   |        |   |  |   |         |  
|-------------------------------------- | ----------- | ------------ | - | -------------------- | - | ----------- | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                       |             |              |   |                      |   |            
|                                       |             |              |   |                      |   | Period from
|                                       |             |              |   | April 20, 1999      
|                                       |             | Year Ended   |   | (Date of Inception) 
|                                       |             | December 31, |   | Through December 31,
|                                       |             |              |   |                     
|                                       |             | 2001         |   | 2000                 |   | 1999        |   | 2001   
|                                       |             |              |   |                      |   |             |   |        
|Net loss:                              |             |              |   |                      |   |             |   |         |   |  |   |        |   |  |   |        
|                                       | As reported |              | $ | (35,949              | ) |             | $ | (22,918 | ) |  | $ | (1,220 | ) |  | $ | (60,087 | )
|                                       | Pro forma   |              | $ | (42,284              | ) |             | $ | (23,076 | ) |  | $ | (1,225 | ) |  | $ | (66,585 | )
|Net loss per share  basic and diluted |             |              |   |                      |   |             |   |         |   |  |   |        |   |  |   |        
|                                       | As reported |              | $ | (0.83                | ) |             | $ | (3.68   | ) |  | $ | (0.71  | ) |  | $ | (3.20   | )
|                                       | Pro forma   |              | $ | (0.98                | ) |             | $ | (3.71   | ) |  | $ | (0.71  | ) |  | $ | (3.55   | )

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

|                         |  |                        |      |      |  |      |      |   |  |  |      |  
|------------------------ |  | ---------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                         |  |                       
|                         |  | Employee Stock Options
|                         |  |                       
|                         |  | 2001                   |      | 2000 |  | 1999
|                         |  |                        |      |      |  |     
|Expected dividend yield  |  |                        | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %
|Risk-free interest rate  |  |                        | 4.45 | %    |  |      | 6.25 | % |  |  | 6.25 | %
|Expected volatility      |  |                        | 90   | %    |  |      | 0    | % |  |  | 0    | %
|Expected life (in years) |  |                        | 4    |      |  |      | 4    |   |  |  | 4    |  

For the fiscal year ended December 31, 2001,
the Company calculated all option grants previous to
August 21, 2001 using a 0% volatility and a 90% volatility
thereafter, in order to give effect to the spin off transaction.

The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the
input of highly subjective assumptions, including expected stock
price volatility. Because the Companys employee stock
options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.

Note 8:     Income
Taxes

Benefits from (provision for) income taxes
consisted of the following:

|                                                |  |                        |   |                     |  |                |     |      |  |   |     |  |  |   |       | 
|----------------------------------------------- |  | ---------------------- | - | ------------------- |  | -------------- | --- | ---- |  | - | --- |  |  | - | ----- | 
|                                                |  |                        |   |                     |  |               
|                                                |  |                        |   |                     |  | Period from   
|                                                |  |                        |   |                     |  | April 20, 1999
|                                                |  |                        |   | (Date of Inception)
|                                                |  | December 31,           |   | to December 31,    
|                                                |  |                        |   |                    
|                                                |  | 2001                   |   | 2000                |  | 1999           |     | 2001
|                                                |  |                        |   |                     |  |                |     |     
|                                                |  |                       
|                                                |  | (Amounts in thousands)
|Current:                                        |  |                        |   |                     |  |                |     |      |  |   |     |  |  |   |       | 
|Federal                                         |  | $                      |  |                     |  | $              |    |      |  | $ | 707 |  |  | $ | 707   | 
|State                                           |  |                        |  |                     |  |                | 260 |      |  |   | 93  |  |  |   | 353   | 
|                                                |  |                        |   |                     |  |                |     |      |  |   |     |  |  |   |       | 
|Total benefit from (provision for) income taxes |  | $                      |  |                     |  | $              | 260 |      |  | $ | 800 |  |  | $ | 1,060 | 
|                                                |  |                        |   |                     |  |                |     |      |  |   |     |  |  |   |       | 

43



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##### Table of Contents



VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

There was no federal income tax provision in 2001
and 2000 and no state income tax provision in 2001 because the
Companys operations resulted in pre-tax losses. The
Company filed a consolidated federal tax return with ESS in 1999
and a consolidated state tax return with ESS in 2000 and 1999.
As a result, ESS realized a tax benefit of $0, $260,000 and
$800,000 for utilizing the Companys net operating losses
in 2001, 2000 and 1999, respectively. ESS reimbursed the Company
for this tax benefit in accordance with the tax sharing
arrangements between ESS and the Company.

A reconciliation between the benefit from
(provision for) income taxes computed at the federal statutory
rate of 35% for the years ended December 31, 2001 and 2000
and for the period from April 20, 1999 (Date of Inception)
to December 31, 1999 and December 31, 2001 and the
benefit from (provision for) income taxes is as follows (amounts
in thousands):

|                                              |                                           |                        |         |                     |  |                |        |      |  |   |     |     |  |   |         |       | 
|--------------------------------------------- | ----------------------------------------- | ---------------------- | ------- | ------------------- |  | -------------- | ------ | ---- |  | - | --- | --- |  | - | ------- | ----- | 
|                                              |                                           |                        |         |                     |  |               
|                                              |                                           |                        |         |                     |  | Period from   
|                                              |                                           |                        |         |                     |  | April 20, 1999
|                                              |                                           |                        |         | (Date of Inception)
|                                              |                                           | December 31,           |         | to December 31,    
|                                              |                                           |                        |         |                    
|                                              |                                           | 2001                   |         | 2000                |  | 1999           |        | 2001
|                                              |                                           |                        |         |                     |  |                |        |     
|                                              |                                           |                       
|                                              |                                           | (Amounts in thousands)
|Benefit from income taxes at statutory rate   |                                           | $                      | 12,584  |                     |  | $              | 7,830  |      |  | $ | 707 |     |  | $ | 21,121  |      
|State income taxes net of federal tax benefit |                                           |                        | 2,066   |                     |  |                | 1,032  |      |  |   | 93  |     |  |   | 3,191   |      
|Other                                         |                                           |                        | 391     |                     |  |                | 883    |      |  |   | 3   |     |  |   | 1,277   |      
|Valuation allowance                           |                                           |                        | (15,041 | )                   |  |                | (9,485 | )    |  |   | (3  | )   |  |   | (24,529 | )    
|                                              |                                           |                        |         |                     |  |                |        |      |  |   |     |     |  |   |         |      
|                                              | Benefit from (provision for) income taxes |                        | $       |                    |  |                | $      | 260  |  |   | $   | 800 |  |   | $       | 1,060 | 
|                                              |                                           |                        |         |                     |  |                |        |      |  |   |     |     |  |   |         |      

Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and those used for
federal and state income tax purposes. Significant components of
deferred tax assets for federal and state income taxes are as
follows (amounts in thousands):

|                                    |                         |                        |         |      |  |   |         |   | 
|----------------------------------- | ----------------------- | ---------------------- | ------- | ---- |  | - | ------- | - | 
|                                    |                         |                       
|                                    |                         | December 31,          
|                                    |                         |                       
|                                    |                         | 2001                   |         | 2000
|                                    |                         |                        |         |     
|                                    |                         |                       
|                                    |                         | (Amounts in thousands)
|Net operating loss carryforwards    |                         | $                      | 15,506  |      |  | $ | 5,454   |  
|Depreciation & amortization         |                         |                        | 3,271   |      |  |   | 1,368   |  
|Accruals & reserves                 |                         |                        | 4,563   |      |  |   | 2,350   |  
|Federal/ State credits carryforward |                         |                        | 1,607   |      |  |   | 748     |  
|Other                               |                         |                        | 751     |      |  |   | 737     |  
|                                    |                         |                        |         |      |  |   |         |  
|Gross deferred tax assets           |                         |                        | 25,698  |      |  |   | 10,657  |  
|Valuation allowance                 |                         |                        | (25,698 | )    |  |   | (10,657 | )
|                                    |                         |                        |         |      |  |   |         |  
|                                    | Net deferred tax assets |                        | $       |     |  |   | $       |  | 
|                                    |                         |                        |         |      |  |   |         |  

Deferred tax assets at December 31, 2001 and
2000 primarily relate to net operating losses, depreciation and
amortization, and accruals. A valuation allowance has been
provided in an amount equal to these assets due to the
uncertainty of their realization.

As at December 31, 2001, the Company had
approximately $41.9 million and $ 14.6 million of
federal and state net operating loss carryforward, respectively.
These losses will begin expiring in 2020 and 2007, respectively.

44



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##### Table of Contents



VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has credit carryforwards of
approximately $784,000 and $1,266,000 or federal and state
income tax purposes, respectively. If not utilized, the federal
carryforwards will expire in various amounts beginning in 2020.
The California credits can be carried forward indefinitely.

Under the Tax Reform Act of 1986, the amounts of
benefits from net operating loss carryforwards may be impaired
or limited in certain circumstances. Events which cause
limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50%, as defined,
over a three-year period. If the Company should have an
ownership change, as defined by tax law, utilization of the
carryforwards could be restricted.

Note 9:     Employee
Benefit Plans

In August 2001, the Vialta, Inc. 401(k) Plan was
adopted. The plan is intended to be a tax-qualified defined
contribution plan under Section 401(k) of the Internal
Revenue Code of 1986, as amended. Under the terms of the 401(k)
plan, eligible employees may elect to contribute a portion of
their compensation as salary deferral contributions to the
401(k) plan, subject to certain statutorily prescribed limits.
The 401(k) plan also permits, but does not require, Vialta to
make discretionary matching contributions and discretionary
profit-sharing contributions. As a tax-qualified plan,
contributions to the 401(k) plan are generally deductible by
Vialta when made, and are not taxable to participants until
distributed from the 401(k) plan. Under the 401(k) plan,
participants may direct the trustees to invest their accounts in
selected investment options. Vialta did not make any matching
contributions or discretionary profit-sharing contributions in
the years ended December 31, 2001 and 2000 and in the
period from April 20, 1999 (Date of Inception) through
December 31, 1999.

Note 10.     Segment
and Geographic Information

Vialta operates as one segment. Information about
long-lived assets is as follows (amounts in thousands):

|                                                          |  |              |       |      |  |   |        | 
|--------------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ------ | 
|                                                          |  |             
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2001         |       | 2000
|                                                          |  |              |       |     
|United States                                             |  | $            | 7,108 |      |  | $ | 9,362  | 
|Hong Kong                                                 |  |              | 40    |      |  |   | 32     | 
|Canada                                                    |  |              | 895   |      |  |   | 833    | 
|                                                          |  |              |       |      |  |   |        | 
|Total long-lived assets, excluding long-term
	investments |  | $            | 8.043 |      |  | $ | 10,227 | 
|                                                          |  |              |       |      |  |   |        | 

Note
11:     Licensing Agreements

On January 17, 2002 Vialta entered into a
licensing agreement with Artisan Home Entertainment whereby
Vialta was granted a non-exclusive license to reproduce and
distribute motion picture titles from Artisans library
over a five year period. Vialta agreed to provide up to
$10 million to the entertainment company in a combination
of license fee payments and investment in subordinate notes.
Interest on the note is accrued at a rate of 7.5%, and repayment
of the note is due on the third anniversary of the note. License
fees payable under the license agreement will be applied first
to interest payments due and then to principal.

45



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##### Table of Contents



VIALTA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
12:     Commitments

In January 2000, Vialta entered into
non-cancelable lease agreements for its office in various
locations and with various expiration dates through 2006. Under
the terms of these leases, future minimum rental payments are as
follows:

|                              |      |                      |   |       | 
|----------------------------- | ---- | -------------------- | - | ----- | 
|                              |      | Amounts In thousands
|                              |      |                     
|Year ending December 31, 2001 |      |                      |   |      
|                              | 2002 |                      | $ | 2,308 | 
|                              | 2003 |                      |   | 2,265 | 
|                              | 2004 |                      |   | 349   | 
|                              | 2005 |                      |   | 147   | 
|                              | 2006 |                      |   | 110   | 

Rent expense was approximately $2,121,000,
$93,000 and $13,000 for the years ended December 31, 2001
and 2000, and for the period from April 20, 1999 (Date of
Inception) through December 31, 1999, respectively.

Note 13:     Legal
Matters

From time to time, Vialta is involved in
litigation in the normal course of business. The outcome of
matters to date will not have a material adverse effect on
Vialtas consolidated financial position, results of
operations or cash flows.

46



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##### Table of Contents



Selected Quarterly Operation Results
(un-audited)

The following table presents un-audited quarterly
financial information for each of the Companys last eight
quarters. This information has been derived from the
Companys un-audited financial statements and has been
prepared on the same basis as the audited Consolidated Financial
Statements appearing elsewhere in this Form 10-K. In the
opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, have been included to
present fairly the quarterly results.

|                                                                    |                            |                                               |        |          |        |           |        |          |        |          |        |          |        |           |         |          |         |   |        |       |        |   |        |       |        |   |        |       |        |   |        |       |        |  
|------------------------------------------------------------------- | -------------------------- | --------------------------------------------- | ------ | -------- | ------ | --------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | --------- | ------- | -------- | ------- | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | -
|                                                                    |                            |                                              
|                                                                    |                            | For the Three Months Ended                   
|                                                                    |                            |                                              
|                                                                    |                            | Mar. 31,                                      |        | June 30, |        | Sept. 30, |        | Dec. 31, |        | Mar. 31, |        | June 30, |        | Sept. 30, |         | Dec. 31,
|                                                                    |                            | 2001                                          |        | 2001     |        | 2001      |        | 2001     |        | 2000     |        | 2000     |        | 2000      |         | 2000    
|                                                                    |                            |                                               |        |          |        |           |        |          |        |          |        |          |        |           |         |         
|                                                                    |                            |                                              
|                                                                    |                            | (Amounts in thousands, except per share data)
|Operating expenses:                                                 |                            |                                               |        |          |        |           |        |          |        |          |        |          |        |           |         |          |         |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|                                                                    | Research and development   |                                               | $      | 4,528    |        |           | $      | 5,363    |        |          | $      | 5,446    |        |           | $       | 9,913    |         |   | $      | 5,678 |        |   | $      | 4,028 |        |   | $      | 3,733 |        |   | $      | 6,119 |       
|                                                                    | Sales and marketing        |                                               |        | 995      |        |           |        | 1,163    |        |          |        | 838      |        |           |         | 743      |         |   |        | 600   |        |   |        | 565   |        |   |        | 816   |        |   |        | 946   |       
|                                                                    | General and administrative |                                               |        | 2,357    |        |           |        | 2,247    |        |          |        | 2,412    |        |           |         | 2,290    |         |   |        | 1,153 |        |   |        | 1,764 |        |   |        | 1,935 |        |   |        | 1,847 |       
|                                                                    |                            |                                               |        |          |        |           |        |          |        |          |        |          |        |           |         |          |         |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|                                                                    |                            | Operating loss                                |        |          | (7,880 | )         |        |          | (8,773 | )        |        |          | (8,696 | )         |         |          | (12,946 | ) |        |       | (7,431 | ) |        |       | (6,357 | ) |        |       | (6,484 | ) |        |       | (8,912 | )
|                                                                    |                            |                                               |        |          |        |           |        |          |        |          |        |          |        |           |         |          |         |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Interest income, net                                                |                            |                                               | 1,230  |          |        |           | 1,055  |          |        |          | 801    |          |        |           | 520     |          |         |   | 1,951  |       |        |   | 2,014  |       |        |   | 1,944  |       |        |   | 1,779  |      
|Other income (expenses)                                             |                            |                                               | (19    | )        |        |           | 15     |          |        |          | (1,097 | )        |        |           | (165    | )        |         |   | (1     | )     |        |   | 338    |       |        |   | (1,679 | )     |        |   | (340   | )    
|                                                                    |                            |                                               |        |          |        |           |        |          |        |          |        |          |        |           |         |          |         |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Loss before income tax benefit                                      |                            |                                               | (6,669 | )        |        |           | (7,703 | )        |        |          | (8,992 | )        |        |           | (12,591 | )        |         |   | (5,481 | )     |        |   | (4,005 | )     |        |   | (6,219 | )     |        |   | (7,473 | )    
|Income tax benefit                                                  |                            |                                               |       |          |        |           |       |          |        |          |       |          |        |           |        |          |         |   | 65     |       |        |   | 65     |       |        |   | 65     |       |        |   | 65     |      
|Net loss                                                            |                            | $                                             | (6,669 | )        |        | $         | (7,703 | )        |        | $        | (8,992 | )        |        | $         | (12,591 | )        |         | $ | (5,416 | )     |        | $ | (3,940 | )     |        | $ | (6,154 | )     |        | $ | (7,408 | )    
|                                                                    |                            |                                               |        |          |        |           |        |          |        |          |        |          |        |           |         |          |         |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Net loss per share attributable to common
	shares  basic & diluted |                            | $                                             | (1.07  | )        |        | $         | (1.23  | )        |        | $        | (0.13  | )        |        | $         | (0.15   | )        |         | $ | (0.87  | )     |        | $ | (0.63  | )     |        | $ | (0.99  | )     |        | $ | (1.19  | )    
|                                                                    |                            |                                               |        |          |        |           |        |          |        |          |        |          |        |           |         |          |         |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Weighted average common shares outstanding                          |                            |                                               | 6,231  |          |        |           | 6,240  |          |        |          | 70,945 |          |        |           | 86,780  |          |         |   | 6,220  |       |        |   | 6,220  |       |        |   | 6,220  |       |        |   | 6,227  |      
|                                                                    |                            |                                               |        |          |        |           |        |          |        |          |        |          |        |           |         |          |         |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      

47



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##### Table of Contents






Item
9:     Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure

None




PART III

Certain information required by Part III is
omitted from this Report since the Company plans to file with
the Securities and Exchange Commission the definitive proxy
statement for its 2001 Annual Meeting of Shareholders (the
Proxy Statement) not later than 120 days after
the end of the fiscal year covered by this Report, and certain
information included therein is incorporated herein by reference.




Item
10:     Directors and Executive
Officers of the Registrant

The information concerning the Companys
directors and certain information concerning the Companys
Executive Officers required by this Item is incorporated by
reference in the Companys Proxy Statement, which the
Company will file with the Commission not later than
120 days after its fiscal year-end. The notes concerning
the Companys executive officers required by this Item is
set forth at the end of Part I in a section captioned
Executive Officers of the Registrant, above.




Item
11:     Executive
Compensation

The information required by this Item is
incorporated by reference to the sections in the Companys
Proxy Statement entitled Executive Compensation,
which the Company will file with the Commission not later than
120 days after its fiscal year-end.




Item
12:     Security Ownership of
Certain Beneficial Owners and Management

The information required by this Item is
incorporated by reference in the Companys Proxy Statement,
which the Company will file with the Commission not later than
120 days after its fiscal year-end.




Item
13:     Certain Relationships and
Related Transactions

The information required by this Item is
incorporated by reference in the Companys Proxy Statement,
which the Company will file with the Commission not later than
120 days after its fiscal year-end.




PART IV




Item
14:     Exhibits, Financial
Statement Schedules, and Reports on Form 8-K

(a)(1) Financial Statements



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | See the Consolidated Financial Statements and
	Supplementary Data at Item 8 of this report.

(2) Financial Statement Schedules



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No schedules have been filed because the
	information required to be set forth therein is not applicable
	or is shown in the Consolidated Financial Statements and
	Supplementary Data or notes thereto at Item 8 of this
	report.

(3) Exhibits



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | See Exhibit Index for the exhibits filed as
	part of or incorporated by reference into this report.

48



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##### Table of Contents



(b) Reports on Form 8-K.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | The Company did not file any Reports on
	Form 8-K during the fourth quarter of 2001.

With the exception of the information
incorporated by reference to the Companys Proxy Statement
for the 2001 Annual Meeting of Shareholders in Items 10,
11, 12 and 13 of Part III, the Proxy Statement is not
deemed to be filed as part of this Report.

49



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.



| |             
| | ------------
| | VIALTA, INC.



| |     |                  
| | --- | -----------------
| | By: | /s/ DIDIER PIETRI

| |                                       
| | --------------------------------------
| |                                       
| | Didier Pietri                         
| | President and Chief Executive
	Officer

Date: March 27, 2002

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                   |  |                                                                       |  |               
|---------------------------------- |  | --------------------------------------------------------------------- |  | --------------
|Signature                          |  | Title                                                                 |  | Date          
|                                   |  |                                                                       |  |               
|/s/ DIDIER PIETRIDidier Pietri     |  | President and
	Chief Executive Officer
	(principal executive officer) |  | March 27, 2002
|                                  
|/s/ JAMES ALLISONJames Allison     |  | Controller
	(principal financial officer)                             |  | March 27, 2002
|                                  
|/s/ FRED S.L. CHANFred S.L. Chan   |  | Chairman of the Board                                                 |  | March 27, 2002
|                                  
|/s/ HERBERT CHANGHerbert Chang     |  | Director                                                              |  | March 27, 2002
|                                  
|/s/ MATTHEW K. FONGMatthew K. Fong |  | Director                                                              |  | March 27, 2002
|                                  
|/s/ MASAHARU SHINYAMasaharu Shinya |  | Director                                                              |  | March 27, 2002

50



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##### Table of Contents






EXHIBIT INDEX

|        |       |                        |  |                                                                                                                                                                                                                    
|------- | ----- | ---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                       
|Number  |       | Description of Exhibit
|        |       |                       
|        | 2.1   |                        |  | Form of Master Distribution Agreement between the
	Registrant and ESS Technology, Inc. (Exhibit No. 2.1
	to Form 10 File No. 000-32809)                                                                            
|        | 2.2   |                        |  | Form of Master Technology Ownership and License
	Agreement between the Registrant and ESS Technology, Inc.
	(Exhibit No. 2.2 to Form 10 File
	No. 000-32809)                                                       
|        | 2.3   |                        |  | Form of Employee Matters Agreement between the
	Registrant and ESS Technology, Inc. (Exhibit No. 2.3
	to Form 10 File No. 000-32809)                                                                               
|        | 2.4   |                        |  | Form of Tax Sharing and Indemnity Agreement
	between the Registrant and ESS Technology, Inc.
	(Exhibit No. 2.4 to Form 10 File
	No. 000-32809)                                                                     
|        | 2.5   |                        |  | Form of Real Estate Matters Agreement between the
	Registrant and ESS Technology, Inc. (Exhibit No. 2.5
	to Form 10 File No. 000-32809)                                                                            
|        | 2.6   |                        |  | Form of Master Confidential Disclosure Agreement
	between the Registrant and ESS Technology, Inc.
	(Exhibit No. 2.6 to Form 10 File
	No. 000-32809)                                                                
|        | 2.7   |                        |  | Form of Master Transitional Services Agreement
	between the Registrant and ESS Technology, Inc.
	(Exhibit No. 2.7 to Form 10 File
	No. 000-32809)                                                                  
|        | 3.1   |                        |  | Amended and Restated Certificate of Incorporation
	of the Registrant (Exhibit No. 4.1 to Form S-8
	File No. 333-65752)                                                                                             
|        | 3.2   |                        |  | Amended and Restated Bylaws of the Registrant
	(Exhibit No. 4.2 to Form S-8 File
	No. 333-65752)                                                                                                                   
|        | 4.1   |                        |  | Form of Class A Common Stock Certificate of
	the Registrant (Exhibit No. 4.1 to Form 10 File
	No. 000-32809)                                                                                                       
|        | 4.2   |                        |  | Form of Class B Common Stock Certificate of
	the Registrant (Exhibit No. 4.2 to Form 10 File
	No. 000-32809)                                                                                                       
|        | 10.1  |                        |  | 1999 Stock Incentive Plan
	(Exhibit No. 10.1 to Form 10 File
	No. 000-32809)*                                                                                                                                      
|        | 10.2  |                        |  | 2000 Directors Stock Option Plan
	(Exhibit No. 10.2 to Form 10 File
	No. 000-32809)*                                                                                                                               
|        | 10.3  |                        |  | 2001 Nonstatutory Stock Option Plan, as amended
	on August 1, 2001 (Exhibit No. 10.3 to
	Form 10 File No. 000-32809)*                                                                                              
|        | 10.4  |                        |  | 2001 Employee Stock Purchase Plan
	(Exhibit No. 10.4 to Form 10 File
	No. 000-32809)*                                                                                                                              
|        | 10.5  |                        |  | Lease Agreement between the Registrant and ESS
	Technology, Inc. for the premises located at 48461 Fremont
	Boulevard, Fremont, California (Exhibit No. 10.5 to
	Form 10 File No. 000-32809)                       
|        | 10.6  |                        |  | Purchase Agreement between the Registrant and ESS
	Technology, Inc. (Exhibit No. 10.6 to Form 10
	File No. 000-32809)                                                                                              
|        | 10.7  |                        |  | DVD Manufacturing License Agreement between the
	Registrant and Macrovision Corporation
	(Exhibit No. 10.7 to Form 10 File
	No. 000-32809)                                                                         
|        | 10.8  |                        |  | Offer Letter Agreement between the Registrant and
	Charles Root (Exhibit No. 10.8 to Form 10 File
	No. 000-32809) *                                                                                                
|        | 10.9  |                        |  | Lease Agreement between the Registrant and
	235 Investments Limited for the premises located at 235
	Yorkland Boulevard, Ontario, Canada (Exhibit No. 10.9 to
	Form 10 File No. 000-32809)                         
|        | 10.10 |                        |  | Lease Agreement between Vialta.com Hong Kong
	Company Limited and Upcentre Investments Limited for the
	premises located at 238 Nathan Road, Kowloon, Hong Kong
	(Exhibit No. 10.10 to Form 10 File
	No. 000-32809)
|        | 10.11 |                        |  | Trademark License Agreement between the
	Registrant and Digital Theater Systems, Inc.
	(Exhibit No. 10.11 to Form 10 File
	No. 000-32809)                                                                          
|        | 10.12 |                        |  | Software License Agreement between the Registrant
	and EnReach Technology, Inc. (Exhibit No. 10.12 to
	Form 10 File No. 000-32809)                                                                                 
|        | 10.13 |                        |  | Offer Letter Agreement between the Registrant and
	Didier Pietri (Exhibit No. 10.13 to Form 10 File
	No. 000-32809)*                                                                                               



---



##### Table of Contents



|        |       |                        |  |                                                                                                                  
|------- | ----- | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------
|Exhibit |       |                       
|Number  |       | Description of Exhibit
|        |       |                       
|        | 10.14 |                        |  | Offer Letter Agreement between the Registrant and
	Steve Charng (Exhibit No. 10.5 to Form 10 File
	No. 000-32809)
|        | 10.15 |                        |  | Offer Letter Agreement between the Registrant and
	Michael Wang (Exhibit No. 10.9 to Form 10 File
	No. 000-32809)
|        | 10.16 |                        |  | Promissory Note between the Registrant and
	Artisan Entertainment, Inc.                                          
|        | 21.1  |                        |  | Subsidiaries of the Registrant
	(Exhibit No. 21.1 to Form 10 File
	No. 000-32809)                                
|        | 23.1  |                        |  | Consent of PricewaterhouseCoopers LLP (filed
	herewith)                                                          



---



|  |                                                       
|- | ------------------------------------------------------
|* | Indicates a management contract or compensatory
	plan.