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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,
    2002.       
|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

Vialta, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                     
|------------------------------------------------------------------ |  | ------------------------------------
|Delaware                                                           |  | 94-3337236                          
|(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.     o

The aggregate market value of the voting stock
held by non-affiliates of the registrant on June 28, 2002
(based on the average bid and ask price on the OTC Bulletin
Board as of such date) was approximately $43,886,911.

The number of outstanding shares of the
registrants common stock, par value $0.001 per share, on
March 7, 2003 was 82,083,640 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive
proxy statement relating to its 2003 annual meeting of
stockholders 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 8: Financial Statements and Supplementary Data                                                    
|              | 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 and Related Stockholder Matters
|              | Item 13: Certain Relationships and Related Transactions                                                
|              | Item 14: Controls and Procedures                                                                       
|PART IV      
|              | Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 23.3 
|EXHIBIT 99.1 



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##### Table of Contents



VIALTA, INC.

FORM 10-K

For the Fiscal Year Ended December 31,
2002

INDEX

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|Item 1.  |  | Business                                                                                           |  |      | 3  | 
|Item 2.  |  | Properties                                                                                         |  |      | 6  | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 6  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 6  | 
|PART II 
|Item 5.  |  | Market for the Registrants Common Equity
    and Related Shareholder Matters                      |  |      | 6  | 
|Item 6.  |  | Selected Financial Data                                                                            |  |      | 7  | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 8  | 
|Item 7a. |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |      | 24 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                        |  |      | 25 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |      | 47 | 
|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 and Related Stockholder Matters |  |      | 48 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 48 | 
|Item 14. |  | Controls and Procedures                                                                            |  |      | 48 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K Signatures                    |  |      | 49 | 

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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 2003 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, Inc. (Vialta or the
Company) develops, designs and markets consumer
electronics products designed to maximize the benefits of
digital technology in a more convenient and easy-to-use manner.
Our newest product, BeamerTM, is a personal
videophone. Beamer adds color video to phone calls, enabling
Beamer users to see the person they are calling. Beamers are
primarily sold in pairs, since the party receiving the video
call must also have a Beamer (or compatible videophone). Beamer
works with any home phone over any standard (analog) home phone
line, at no additional cost to a regular phone call. The first
product we developed was ViDVD, a multimedia DVD player that
offers enhanced features such as CD, MP3 and karaoke disc
playback, Internet connectivity and the ability to view digital
photographs.

We were incorporated in April 1999 in California
as a subsidiary of ESS Technology, Inc. (ESS). In
May 2001, we were reincorporated in Delaware and 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.

Products and Services

We have developed and introduced two distinct
products: Beamer and ViDVD, both designed to offer greater
convenience and ease-of-use to consumers.

The Beamer is compatible with any home phone and
does not require any additional equipment or wiring. Beamer
provides the consumer with three viewing options (the calling
party, the receiving party, or picture-in-picture) and the
ability to adjust the level of movement fluidity in relation to
detail. Beamer also has a snapshot feature that
temporarily pauses any new video transmission, resulting in a
higher resolution image on the LCD screen. A video
start feature gives users full control over initiating the
video transmission to another user, for complete video privacy
whenever desired. Beamer won a 2003 Best of
Innovations award in the telephone category from the
Consumer Electronics Association based on criteria consisting of
value to users, aesthetics, innovativeness, and contributions to
quality of life. Beamer also won a 2003 Good Buy
award from Good Housekeepingmagazine based on criteria
including ingenuity, value and exceptional performance.

The ViDVD player is a multimedia DVD player that
plays DVD, MP3, CD and karaoke discs, and other audio and video
formats. ViDVD also allows users to access the Internet and view
Kodak Picture CDs and JPEG format digital photos stored on
either CD-R or CD-R/ W discs. We marketed ViDVD in a limited,
18-store commercial launch in late 2001 and had lower than
anticipated sales activity. The DVD player market, which was
still maturing, was experiencing rapid and substantial changes,
including significant downward price pressure for DVD players in
the retail market with current pricing approaching commodity
levels. This adversely affected our ability to maintain prices
and develop the distribution channels necessary to successfully
launch ViDVD. As a result, we have chosen not to continue to
market ViDVD. We may, at some time in the future, introduce an
enhanced DVD player. However, there can be no assurance that we
will develop or be able to introduce an enhanced DVD player.

In addition to these two consumer products, we
developed ViMagazine, a proprietary, encrypted, magazine-style
DVDformat disc which is capable of delivering a wide
variety of entertainment, from feature films to childrens
programming, music and other programming content. ViMagazine was
developed exclusively for use with our ViDVD to provide
consumers with a convenient means of obtaining entertainment
content on demand. We have not introduced ViMagazine. We do not
presently anticipate introducing

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ViMagazine in the future since it would be
dependent on the introduction and acceptance of an enhanced DVD
player that is compatible with ViMagazine technology.


In connection with ViDVDs internet
capability, we intended to provide customers with the option of
utilizing our Internet Service Provider (ISP), known as ViZip,
as an alternative to other commercially available ISPs such as
Earthlink or AOL. The ISP market is dominated by a few large
companies and can be price sensitive. Based in part on our
decision not to continue marketing ViDVD, we discontinued all
activities related to ViZip during the fourth quarter of 2002.

Sales and Marketing

We are currently directing our sales and
marketing activities exclusively toward Beamer. This is due to
several factors including: a lack of significant competition for
Beamer from other companies in the videophone market; the
initial positive response and acceptance from retailers and
consumers; and the favorable product reviews from industry
analysts, trade reporters and the general consumer media.

We began nationwide retail distribution of Beamer
during the third quarter of 2002, and it is currently carried by
retailers such as Best Buy, Frys Electronics, The Good
Guys and The Sharper Image. We market Beamer to retailers and
distributors in the U.S. market through a combination of our
direct sales force and independent sales representatives. Beamer
may also be purchased directly by consumers from our on-line web
store. We believe that retail stores will be the primary
distribution channel for Beamer in the U.S. market, and we are
working to increase the number of retailers carrying Beamer. In
2003 we expect to expand distribution for Beamer in the
international consumer market through the use of distributors or
strategic partners in specific territories or countries.

To continue to build consumer demand and
acceptance for Beamer, we expect to expand our retail and
consumer initiatives, including targeted advertising and
consumer awareness programs. Whenever possible, we will combine
branding with product promotion opportunities. In addition, we
will continue to place an emphasis on generating favorable press
from industry analysts, trade reporters and the general consumer
media.

Product Development

Our product development efforts focus on bringing
innovative digital consumer electronics products to the retail
marketplace. Although much of the core development related to
Beamer and ViDVD has already been completed, our ongoing
development efforts focus on improvements to the operating
system software for Beamer as well as new product offerings to
the Beamer videophone product line. Our engineers are also
engaged in the development of new products and other
improvements and modifications to our existing products.

Intellectual Property

We rely on a combination of patent, trademark and
copyright law, trade secret protection and confidentiality or
license agreements with our employees, customers, partners and
others to protect proprietary rights. We have 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, we have filed similar
applications in Taiwan and under the Patent Cooperation Treaty.
To date, none of the patents have been issued.

We have filed trademark applications in the U.S.,
Brazil, Canada, China, the European Union, Hong Kong, Japan,
Singapore and Taiwan. The marks for which we have filed
applications include the Vialta logo, Beamer, Phone Video
Station, PVS, Viewphone, 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.

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At the time of our formation, we entered into
several intellectual property agreements with ESS. We 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. We 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, we entered into a purchase
agreement under which ESS agreed to provide us with
semiconductor products. See Note 9  Related
Party Transactions beginning on page 40.

Manufacturing

We have developed all of our products internally
and outsource manufacturing. Beamer is currently manufactured by
a contract manufacturer located in China. We believe that this
contract manufacturer will provide us with sufficient
manufacturing capacity to meet our current product demand. Our
quality assurance engineers are located in China to oversee the
contract manufacturer. We outsource import and export logistics,
including clearance of Chinese and U.S. customs and ocean
freight. We currently handle warehousing and all shipments to
retail distribution centers, individual retailers and individual
customers purchasing Beamer online.

Seasonality

We expect that our 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 our
sales will be significantly higher in the third and fourth
quarters than in the first and second quarters of each year.

Competition

Beamer competes directly with several other
companies in the videophone market which offer products
delivering features similar to Beamer. We believe none of these
companies has secured nationwide retail distribution
relationships. The majority are available primarily through
specialized retailers and websites. Furthermore, other
videophone models have been integrated with handsets and have a
significantly higher per unit retail price than Beamer. We
believe the key competitive factors for videophone products are
price, cost to use, quality of the video (especially moving
images), retail distribution, brand awareness and ease of
installation and use. We believe that among manufacturers of
videophones that use analog phone lines, we compete favorably on
the basis of price, video quality, product availability and ease
of installation and use. In addition, we face competition from
other video communication products utilizing Internet and
broadband connections and digital camera cellular telephones.
Internet and broadband products, which frequently are priced
less than Beamer, utilize a personal computer or television,
currently require subscription to an ISP and may require
additional subscription services. These products may also be
interoperable with users of competitive products, provide
multiple transmission and storage options, and act as a digital
camera. Digital camera cellular telephones are relatively new
and most only offer still picture transmission or reception and
require a digital cellular connection. Many of the current and
prospective competitors in this market are larger, better known
and have greater resources and experience than us.

If we were to introduce an enhanced DVD player,
we would still compete with established DVD player manufacturers
who have substantially greater brand recognition, market
presence, distribution channels, financial resources and
promotional and strategic partners than us.

Employees

As of February 28, 2003, we had 71
employees, including 23 in research and development, 14 in
marketing, sales and support, 19 in manufacturing and operations
and 15 in finance and administration.

5



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Item
2:     Properties

As of February 28, 2003, our corporate
headquarters and one of our 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 in Los Angeles, California and
a research and development center in Hong Kong. We still have
leased space in Toronto, Canada for our ViZip ISP which is
currently vacant. 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 the Company 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, we 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 the Company
on an ongoing basis, and prior to the suit being filed, in July
of 2001 we withheld payment to PSC on $92,095 of invoices
pending the results of an in-house audit. In October of 2002,
the parties negotiated and signed a comprehensive settlement
agreement and mutual release of all claims with prejudice.
Performance of the settlement agreement has been completed by
all parties, and dismissals to the complaint and cross-complaint
were filed on November 1, 2002.

We are not a party to any other litigation at the
present time.




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, 2002.




PART II




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

Our 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 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 | 
|Fiscal 2002: |                                        |      |   |      |  |  |   |     
|             | First Quarter ended March 31, 2002     |      | $ | 1.50 |  |  | $ | 1.01 | 
|             | Second Quarter ended June 30, 2002     |      | $ | 1.07 |  |  | $ | 0.45 | 
|             | Third Quarter ended September 30, 2002 |      | $ | 1.18 |  |  | $ | 0.59 | 
|             | Fourth Quarter ended December 31, 2002 |      | $ | 0.72 |  |  | $ | 0.26 | 

As of March 7, 2003, there were
approximately 430 record holders of the Companys common
stock.

We have never declared or paid any cash dividends
on our common stock. We currently anticipate that we will retain
any earnings for use in our business, and we do not anticipate
paying any cash dividends in the foreseeable future.

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Item
6:     Selected Consolidated
Financial Data

You should read the selected consolidated
financial data set forth below in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes included elsewhere in
this report. The selected consolidated statement of operations
data set forth below for the years ended December 31, 2002,
2001 and 2000, and for the period from April 20, 1999 (date
of inception) through December 31, 1999 and for the period
from April 20, 1999 (date of inception) through
December 31, 2002 and the selected consolidated balance
sheet data as of December 31, 2002, 2001, 2000 and 1999 are
derived from, our audited consolidated financial statements. The
information below is not necessarily indicative of the results
of operation to be expected for any future period.

|                                                                  |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |        |          |  
|----------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------- | ------- | ------------ | ------- | ---- | ------- | ------------------- | ------- | ---- | ------- | ------ | ------- | - | ------ | ----- | ------ | - | -------- | ------ | -------- | -
|                                                                  |                                                 |                                          |         |              |         |      |         |                    
|                                                                  |                                                 |                                          |         |              |         |      |         | Period from        
|                                                                  |                                                 |                                          |         |              |         |      |         | April 20, 1999     
|                                                                  |                                                 |                                          |         |              |         |      |         | (Date of Inception)
|                                                                  |                                                 |                                          |         | Through     
|                                                                  |                                                 | Years Ended December 31,                 |         | December 31,
|                                                                  |                                                 |                                          |         |             
|                                                                  |                                                 | 2002                                     |         | 2001         |         | 2000 |         | 1999                |         | 2002
|                                                                  |                                                 |                                          |         |              |         |      |         |                     |         |     
|                                                                  |                                                 |                                         
|                                                                  |                                                 | (In thousands, except per share amounts)
|Consolidated Statement of Operations
    Data:                    |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |       
|Operating expenses:                                               |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |       
|                                                                  | Product costs                                   |                                          | $       | 10,421       |         |      | $       |                    |         |      | $       |       |         |   | $      |      |        |   | $        | 10,421 |         
|                                                                  | Research and development                        |                                          |         | 13,264       |         |      |         | 25,250              |         |      |         | 19,558 |         |   |        | 1,369 |        |   |          | 59,441 |         
|                                                                  | Amortization and impairment of content licenses |                                          |         | 11,395       |         |      |         |                    |         |      |         |       |         |   |        |      |        |   |          | 11,395 |         
|                                                                  | Sales and marketing                             |                                          |         | 3,100        |         |      |         | 3,738               |         |      |         | 2,927  |         |   |        | 662   |        |   |          | 10,427 |         
|                                                                  | General and administrative                      |                                          |         | 5,643        |         |      |         | 9,301               |         |      |         | 6,699  |         |   |        | 510   |        |   |          | 22,153 |         
|                                                                  |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |       
|                                                                  |                                                 | Operating loss                           |         |              | (43,823 | )    |         |                     | (38,289 | )    |         |        | (29,184 | ) |        |       | (2,541 | ) |          |        | (113,837 | )
|Interest income, net                                              |                                                 |                                          | 1,244   |              |         |      | 3,606   |                     |         |      | 7,688   |        |         |   | 512    |       |        |   | 13,050   |       
|Other income (expense)                                            |                                                 |                                          |        |              |         |      | (1,266  | )                   |         |      | (1,682  | )      |         |   | 9      |       |        |   | (2,939   | )     
|                                                                  |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |       
|Loss before income tax benefit                                    |                                                 |                                          | (42,579 | )            |         |      | (35,949 | )                   |         |      | (23,178 | )      |         |   | (2,020 | )     |        |   | (103,726 | )     
|Income tax benefit                                                |                                                 |                                          |        |              |         |      |        |                     |         |      | 260     |        |         |   | 800    |       |        |   | 1,060    |       
|                                                                  |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |       
|Net loss                                                          |                                                 | $                                        | (42,579 | )            |         | $    | (35,949 | )                   |         | $    | (22,918 | )      |         | $ | (1,220 | )     |        | $ | (102,666 | )     
|                                                                  |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |       
|Net loss per share:                                               |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |       
|                                                                  | Basic and diluted                               |                                          | $       | (0.51        | )       |      | $       | (0.83               | )       |      | $       | (3.68  | )       |   | $      | (0.71 | )      |   | $        | (2.83  | )       
|                                                                  |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |       
|Weighted average common shares outstanding: Basic
    and diluted |                                                 |                                          | 83,578  |              |         |      | 43,248  |                     |         |      | 6,222   |        |         |   | 1,716  |       |        |   | 36,311   |       
|                                                                  |                                                 |                                          |         |              |         |      |         |                     |         |      |         |        |         |   |        |       |        |   |          |       

|                                                        |  |                |        |      |  |      |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                        |  |               
|                                                        |  | December 31,  
|                                                        |  |               
|                                                        |  | 2002           |        | 2001 |  | 2000 |        | 1999
|                                                        |  |                |        |      |  |      |        |     
|                                                        |  |               
|                                                        |  | (in thousands)
|Consolidated Balance Sheet Data:                        |  |                |        |      |  |      |        |      |  |   |         |   |  |   |         |  
|Cash and cash equivalent and short-term
    investments |  | $              | 32,701 |      |  | $    | 67,428 |      |  | $ | 136,490 |   |  | $ | 112,844 |  
|Working capital                                         |  |                | 30,201 |      |  |      | 66,830 |      |  |   | 109,870 |   |  |   | 111,920 |  
|Total assets                                            |  |                | 40,327 |      |  |      | 83,866 |      |  |   | 153,691 |   |  |   | 114,580 |  
|Receivable from (payable) to related party              |  |                | (33    | )    |  |      | 64     |      |  |   | 30,000  |   |  |   |        |  
|Other current liabilities                               |  |                | 7,916  |      |  |      | 3,587  |      |  |   | 3,594   |   |  |   | 940     |  
|Redeemable convertible preferred stock                  |  |                |       |      |  |      |       |      |  |   | 142,600 |   |  |   | 114,780 |  
|Total stockholders equity (deficit)                    |  |                | 32,378 |      |  |      | 80,279 |      |  |   | (22,503 | ) |  |   | (1,140  | )

7



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##### Table of Contents






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. This 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 Technology, Inc. On
August 21, 2001, we spun off from ESS Technology, Inc. and
operate as a stand-alone entity. We develop, design and market
consumer electronics products designed to maximize the
advantages of digital technology in a convenient and easy-to-use
manner. Our newest product, BeamerTM, is a personal
videophone. Beamer adds color video to phone calls, enabling
Beamer users to see the person they are calling. Beamers are
primarily sold in pairs, since the party receiving the video
call must also have a Beamer (or compatible videophone). Beamer
works with any home phone over any standard (analog) home phone
line, at no additional cost to a regular phone call. We began
nationwide retailer distribution of Beamer during the third
quarter of 2002, and it is currently carried by retailers such
as Best Buy, Frys Electronics, The Good Guys and The
Sharper Image. The first product we developed was ViDVD, a
multimedia DVD player that offers enhanced features such as CD,
MP3 and karaoke disc playback, Internet connectivity and the
ability to view digital photographs. We are currently not
marketing the ViDVD. We also developed ViMagazine, a
proprietary, encrypted, magazine-style DVD-format disc, which is
capable of delivering a wide variety of entertainment, from
feature films to childrens programming, music and other
programming content to be used exclusively in conjunction with
our ViDVD. As a result of our decision not to continue marketing
ViDVD, we have not introduced ViMagazine.

We have financed our development stage activities
to date primarily from funds raised in private offerings of
convertible preferred stock and common stock and through vendor
credit. For the fiscal years ended December 31, 2002, 2001
and 2000, we had net losses of $42.6 million,
$35.9 million and $22.9 million, respectively, and expect
to continue to incur losses in 2003. From our inception through
December 31, 2002, we had an accumulated deficit of
$102.7 million.

Through December 31, 2002, we have
recognized no revenues. We began shipments of Beamer during the
third quarter of 2002 and these shipments became more
significant in the fourth quarter of 2002. As a result, we
experienced a significant increase in working capital
requirements due to channel inventory requirements, which were
partially offset by cash receipts from our customers. For most
of the shipments, the standard warranty period had not been
completed as of December 31, 2002. Due to a limited history
of warranty and sales returns for Beamer, we did not recognize
revenues through December 31, 2002. We deferred revenue on
Beamer of $3.2 million (the costs for which were expensed in
prior periods) as of December 31, 2002, the majority of
which is expected to be recognized during the quarter ending
March 31, 2003. We anticipate that we will begin
recognizing revenues, net of estimated warranty claims and
returns, during the first quarter of 2003. We expect the company
to come out of development stage in 2003.

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##### Table of Contents



Results of Operations



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | For the year ended December 31, 2002
    compared with the year ended December 31,
    2001

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

|                    |                                                 |                          |      |      |       |   |      |      |       |  
|------------------- | ----------------------------------------------- | ------------------------ | ---- | ---- | ----- | - | ---- | ---- | ----- | -
|                    |                                                 |                         
|                    |                                                 | Years Ended December 31,
|                    |                                                 |                         
|                    |                                                 | 2002                     |      | 2001
|                    |                                                 |                          |      |     
|Operating expenses: |                                                 |                          |      |      |       |   |      |     
|                    | Product costs                                   |                          |      | 23.8 | %     |   |      |     |      
|                    | Research and development                        |                          |      | 30.3 | %     |   |      | 65.9 | %    
|                    | Amortization and impairment of content licenses |                          |      | 26.0 | %     |   |      |     |      
|                    | Sales and marketing                             |                          |      | 7.1  | %     |   |      | 9.8  | %    
|                    | General and administrative                      |                          |      | 12.8 | %     |   |      | 24.3 | %    
|                    |                                                 |                          |      |      |       |   |      |     
|                    |                                                 | Operating loss           |      |      | 100.0 | % |      |      | 100.0 | %
|Other income, net   |                                                 |                          | 2.8  | %    |       |   | 6.1  | %   
|                    |                                                 |                          |      |      |       |   |      |     
|Net loss            |                                                 |                          | 97.2 | %    |       |   | 93.9 | %   
|                    |                                                 |                          |      |      |       |   |      |     

Product Costs.Product costs were $10.4 million or 23.8% of operating
expenses for the year ended December 31, 2002. Product
costs represent inventory expenditures for raw materials and
finished goods related to Beamer. Because Beamer is a new
product that was only recently introduced, we expensed inventory
costs as incurred through the third quarter of 2002. Following
the nationwide commercial launch of Beamer, we began to
capitalize the additional value of inventory costs associated
with Beamer in the fourth quarter of 2002. We believe our
inventory levels as of December 31, 2002 will be sufficient
to meet our anticipated Beamer distribution commitments at least
through June 30, 2003. All costs related to ViDVD products
during the year ended December 31, 2001 were included in
research and development; there were no similar ViDVD costs in
2002.

Research and Development.Research and development expenses were
$13.3 million for the year ended December 31, 2002, or
30.3% of operating expenses, compared to $25.3 million, or
65.9% of operating expenses for the year ended December 31,
2001. The decrease in research and development expenses was due
to significant reductions in personnel expenses as we shifted
our focus to sales and marketing efforts from core development
activities and the fact that product costs for Beamer were
presented as a separate category in 2002. All costs related to
ViDVD products in development during the year ended
December 31, 2001 were included in research and
development. During the fourth quarter of 2002, we discontinued
our Internet Service Provider (ISP) business, ViZip, and
recorded a charge of $0.9 million related to the exit of
this business. As a result of the decision to stop marketing
ViDVD, we also reduced our research and development expense
relating to both ViDVD and ViMagazine. We expect research and
development expenses will continue at current dollar levels.

Amortization and Impairment of Content
Licenses.Amortization and impairment
of content licenses for ViMagazine was $11.4 million in the
year ended December 31, 2002, or 26% of operating expenses.
During January 2002, we licensed feature film content from
Artisan Entertainment for $10.0 million to use as part of
our ViMagazine. Starting in the first quarter of 2002, we began
to expense our content licenses, based on the greater of the
royalty amounts due or amortization on a straight-line basis
over an estimated life of three years. During the fourth quarter
of 2002, we concluded that the content licenses had suffered a
permanent decline in value, as a result of our decision not to
market ViMagazine, and the remaining unamortized balance of
$8.3 million was written down to zero. The
$10.0 million license fee to Artisan Entertainment included
a $5.0 million note that matures in January 2005 and would
convert to a license fee if certain events occurred. We continue
to receive current interest payments on the note and, since
conversion is unlikely, we may receive the principal at
maturity. If we were to be paid at maturity we would recognize a
gain at that time.

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Sales and Marketing.Sales and marketing expenses were
$3.1 million for the year ended December 31, 2002, or
7.1% of operating expenses, compared to $3.7 million, or
9.8% of operating expenses, for the year ended December 31,
2001. The decrease in sales and marketing expenses was primarily
due to reductions in personnel expenses as a result of the
suspension of ViDVD sales and marketing activities and improved
organizational efficiencies. We expect sales and marketing
spending to increase in future periods to support expansion of
retail and consumer marketing initiatives, including advertising
and consumer awareness programs, for Beamer and other new
product introductions.

General and Administrative.General and administrative expenses
were $5.6 million for the year ended December 31, 2002, or
12.8% of operating expenses, compared to $9.3 million, or
24.3% of operating expenses, for the year ended
December 31, 2001. The decrease in general and
administrative expenses was primarily due to significant
reductions in personnel and other corporate expenses and lower
reimbursements to ESS for administrative and management
services. We expect general and administrative expenses to be
relatively constant as a percentage of total operating expenses
in future periods.

Other Income, Net.Interest income was $1.2 million
for the year ended December 31, 2002 compared to
$3.6 million for the year ended December 31, 2001. The
decrease in interest income was primarily due to lower cash
balances and lower yields on available-for-sale securities
during the year ended December 31, 2002 as compared to the
year ended December 31, 2001. During the year ended
December 31, 2001, we recorded other expenses of
$1.3 million related to investment write-offs. The
investments were written off because we concluded that the
investments had suffered a permanent decline in value based on
our assessment of the financial condition of the companies in
which we had invested and the markets that they serve. There
were no investment write-offs for the year ended
December 31, 2002.

Net Loss.We
incurred a net loss of $42.6 million for the year ended
December 31, 2002 compared to $35.9 million for the
year ended December 31, 2001. The increase in net loss was
primarily due to increased amortization and write-downs
associated with content licenses of $11.4 million, net
inventory expenditures of $5.1 million and lower interest
income of $2.4 million. These increases were partially
offset by lower operating expenditures of $10.6 million for
research and development, sales and marketing and general and
administrative expenses, and the absence of investment
write-offs in fiscal year 2002.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | 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                     |      | 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 | %
|Other 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 year ended December 31, 2001, or
65.9% of operating expenses, compared to $19.6 million, or
67.0% of operating expenses for the year ended December 31,
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

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development efforts. The increase was partially
offset by a nonrecurring purchase of technology from ESS, then
our parent, in the amount of $2.0 million in the first
quarter of 2000.


Sales and Marketing.Sales and marketing expenses were
$3.7 million for the year ended December 31, 2001, or
9.8% of operating expenses, compared to $2.9 million, or
10.0% of operating expenses, for the year ended
December 31, 2000. The increase was primarily due to
increases in payroll and marketing expenses due to increased
headcount and introduction of ViDVD.

General and
Administrative.General and
administrative expenses were $9.3 million for the year ended
December 31, 2001, or 24.3% of operating expenses, compared
to $6.7 million, or 23.0% of operating expenses, for the
year ended December 31, 2000. The increase was primarily
due to increases in payroll and other expenses due to increased
headcount, as we expanded development efforts and infrastructure
and fees in connection with the spinoff and being a public
company.

Other Income, Net.Net other income was $2.3 million for the year ended
December 31, 2001 compared to $6.0 million for the
year ended December 31, 2000. Net other income consists
primarily of net interest income. Net interest income fell to
$3.6 million for the year ended December 31, 2001 from
$7.7 million for the year ended December 31, 2000. The
decrease in net interest income was primarily due to lower cash
balances during 2001. Partially offsetting interest income were
equity investment write offs in an amount of $1.1 million
for the year ended December 31, 2001 and $1.7 million
for the year ended December 31, 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 year ended
December 31, 2001 compared to recording an income tax
benefit of $260,000 for the year ended December 31, 2000.
The income tax benefit for the year ended December 31, 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 for 2000. No
tax benefit was recognized during the year ended
December 31, 2001 since ESS did not expect to benefit
during 2001 from our net operating losses as a result of the
spin-off.

Net Loss.We
incurred a net loss of $35.9 million for the year ended
December 31, 2001, compared to $22.9 million for the
year ended December 31, 2000. The $13.0 million
increase in net loss was due to increased operating expenses
associated with our anticipated growth and development coupled
with lower net interest income resulting from lower cash
balances during 2001.

Liquidity and Capital Resources

As of December 31, 2002, we had
$32.7 million in cash, cash equivalents and short-term
investments compared to $67.4 million as of
December 31, 2001, representing a decrease of
$34.7 million. As of December 31, 2002, we had no
long-term investments compared to $4.1 million as of
December 31, 2001.

Our principal sources of liquidity are cash, cash
equivalents and short-term investments. Net cash used in
operating activities was approximately $23.3 million and
$25.0 million for the years 2002 and 2001, respectively,
representing a decrease of approximately $1.7 million. Our
cash used in operating activities during the year ended
December 31, 2002 was primarily attributable to product
costs and normal operating expenses. Accounts receivable
increased $1.4 million as a result of Beamer product
shipments, primarily in the fourth quarter of 2002. We believe
our inventory levels as of December 31, 2002 will be
sufficient to meet our anticipated Beamer distribution
commitments through June 30, 2003. The decrease in cash
used in operating activities for 2002 compared to 2001 was
primarily due to decreased operating expenses incurred by us as
a result of the completion of our core development activities
and significant reductions in personnel, partially offset by
higher product costs. For the years ended December 31, 2002
and December 31, 2001, we had a net loss of
$42.6 million and $35.9 million, respectively, and we
expect to continue to incur losses in the fiscal year 2003.

Net cash used in investing activities for the
year ended December 31, 2002 was $11.6 million
compared to $11.5 million of cash provided by investing
activities for the year ended December 31, 2001. Net cash
used in investing activities for the year ended
December 31, 2002 was primarily related to purchases of
content licenses of

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$10.1 million for ViMagazine. Net cash
provided by investing activities for the year ended
December 31, 2001 was primarily related to the sales of
short-term investments, net of purchases. This was partially
offset by cash used for the purchase of content licenses,
long-term investments and property and equipment.


Net cash used by financing activities was
$5.1 million for the year ended December 31, 2002 and
$34.0 million for the year ended December 31, 2001.
Net cash used in financing activities for the year ended
December 31, 2002 was primarily related to repurchases of
our common stock in the open market. Net cash used in financing
activities for the year ended December 31, 2001 was for the
repayment of a $30.0 million loan from a party controlled
by Annie M.H. Chan, the spouse of Fred S.L. Chan, our Chairman,
and repurchases of our common stock in the open market.

Capital expenditures for the 12-month period
ending December 31, 2003 are anticipated to be
approximately $0.3 million, primarily budgeted to acquire
capital equipment. Net inventory build requirements are expected
to be approximately $5.3 million during the 12-month period
ending December 31, 2003, primarily in the second half of
2003. We may also utilize cash to acquire or invest in
complementary businesses or products or to obtain the right to
use complementary technologies. Such acquisition or investment
may significantly increase our planned requirements for capital.
From time to time, in the ordinary course of our 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. In June
2002, the Board of Directors authorized the existing stock
repurchase program be extended to include the repurchase of up
to an additional 10,000,000 shares of common stock. For the year
ended December 31, 2001 we repurchased approximately
6,236,000 shares of common stock at an aggregate cost of
$4.0 million. For the year ended December 31, 2002, we
repurchased approximately 4,969,000 shares of common stock at an
aggregate cost of $5.1 million. From January 1, 2003
through February 21, 2003, we repurchased approximately
716,000 shares at an aggregate cost of approximately $278,000.
As of February 21, 2003 approximately 8,079,000 shares
remain authorized for repurchase.

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

|                          |      |         |       |       | 
|------------------------- | ---- | ------- | ----- | ----- | 
|                          |      | Amounts
|                          |      |        
|Years Ending December 31, |      |         |       |      
|                          | 2003 |         | $     | 2,265 | 
|                          | 2004 |         |       | 349   | 
|                          | 2005 |         |       | 147   | 
|                          | 2006 |         |       | 110   | 
|                          |      |         |       |      
|                          |      | $       | 2,871 |      
|                          |      |         |       |      

We believe that our existing cash and cash
equivalents, and short-term investments will be sufficient to
fund our operations through December 31, 2003. However, to
continue our operations beyond 2003 or to achieve our
longer-term goals of introducing additional products 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 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

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available if and when needed, we would be
required to delay, limit or eliminate some or all of our
proposed operations.


Critical Accounting Policies

The preparation of financial statements and the
related disclosures in conformity with accounting principles
generally accepted in the United States requires management to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. On an ongoing basis, we evaluate our estimates to
ensure that our estimates remain reasonable under current
conditions. Actual results may differ from these estimates,
which may have a material impact on our results of operations
and financial condition.

Critical accounting policies that require
significant judgments and estimates for the preparation of our
consolidated financial statements are as follows:



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

We generally recognize revenue on products sold
to end customers upon shipment provided that we have no
post-sale obligations, can reliably estimate and accrue warranty
and sales returns, the price is fixed or determinable and
collection of the resulting receivable is reasonably assured.
For sales to end customers that do not meet the above criteria,
revenue is deferred until such criteria are met. Due to our
limited history of warranty and sales returns, we have not
recognized revenues on sales of Beamer pending the expiration of
the warranty period.

Products sold to retailers and distributors are
subject to rights of return. Subject to our warranty reserves,
we defer recognition of revenue on products sold to retailers
and distributors until the retailers and distributors sell the
products to their customers. We recognize revenues from
retailers and distributors according to information on shipments
to their customers as provided by those retailers and
distributors. If information on shipments to their customers is
not provided to us on a timely and accurate manner, there may be
a material impact on our reported results of operations and
financial condition.



| |                            
| | ---------------------------
| | Allowances for Sales Return

Allowances are provided for estimated returns.
Provision for return allowances will be recorded at the time
when revenue is recognized based on our historical returns,
current economic trends and changes in customer demand. Such
allowances will be adjusted periodically to reflect actual and
anticipated experience. Material differences may result in the
amount and timing of our revenue for any period if management
were to make different judgments or utilize different estimates.
As of December 31, 2002, we did not have sufficient history
and experience with respect to sales returns. As a result, we
did not recognize any revenues on sales of Beamer pending the
expiration of the warranty period.



| |         
| | --------
| | Warranty

We provide a limited warranty on our products for
periods ranging from 90 days to 12 months from the date of
sale to the end customers. Through December 31, 2002, we
did not recognize any revenue. A key factor in the decision not
to recognize revenue is that as of December 31, 2002, we
did not have sufficient history to reasonably estimate warranty
costs, and the warranty period had not lapsed from our first
significant shipments. We will estimate warranty costs based on
historical experience and will accrue for estimated costs as a
charge to cost of sales when revenue is recognized. In the
future, actual warranty costs may be higher than our estimates.



| |                         
| | ------------------------
| | Valuation of Inventories

Inventories are stated at the lower of cost or
market, with cost being determined by the first-in, first-out
method. We record our inventory reserve for estimated losses
based on assumptions about future demand and

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market conditions. If actual demand or market
conditions are less favorable than those projected by
management, additional inventory reserves may be required.


Since our inception through December 31,
2001, we expensed inventory costs related to ViDVD of
$9.0 million, as commercial shipments of ViDVD were
limited. No additional ViDVD inventories were purchased during
the year ended December 31, 2002, and we had discontinued
marketing ViDVD.

We expensed $10.4 million inventory costs on
our new product Beamer through September 30, 2002. We began
capitalizing our inventory costs in the fourth quarter of 2002
because we experienced an increase in shipments since Beamer was
commercially introduced nationwide in the third quarter of 2002.
Additional inventory reserves may be needed if actual demand or
market conditions are less favorable than managements
projection.



| |                                   
| | ----------------------------------
| | Valuation of Long-Lived
    Assets

We review long-lived assets based upon an
undiscounted 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 based on undiscounted cash flows. During the
fourth quarter of 2002, we wrote the remaining unamortized
balance of $8.3 million of content licenses down to zero. Future
cash flows could be different from those estimated by our
management.

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards
Board, or FASB, issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS
No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires that a liability
for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the
liability is incurred. SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002.
Our adoption of FAS 146 did not have a material effect on our
consolidated financial statements.

In November 2002, the FASB issued Interpretation
No. 45 (FIN No.45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN No. 45
requires that a liability be recorded in the guarantors
balance sheet upon issuance of a guarantee. In addition, FIN
No. 45 requires disclosures about the guarantees that an
entity has issued, including a reconciliation of changes in the
entitys product warranty liabilities. The initial
recognition and initial measurement provisions of FIN
No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year-end. The disclosure
requirements of FIN No. 45 are effective for financial
statements of interim or annual periods ending after
December 15, 2002. We do not expect our adoption of FIN
No. 45 to have a material impact on our consolidated
financial statements.

In January 2003, the FASB issued Interpretation
No. 46 (FIN No. 46) Consolidation of
Variable Interest Entities. Until this interpretation, a
company generally included another entity in its consolidated
financial statements only if it controlled the entity through
voting interests. FIN No. 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of
the entitys residual returns. We do not expect our
adoption of FIN No. 46 to have material impact on our
consolidated financial statements.

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.

14



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| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | If Beamer does not achieve broad market
    acceptance, we may not be able to continue operating our
    business.

We are currently marketing only one product. As a
result, our success is highly dependent upon consumer acceptance
of Beamer, which began shipping in the third quarter of 2002.
Consumer acceptance requires, among other things, that we:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | educate consumers on the advantages of Beamer;                                                                
|
| |  | commit a substantial amount of human and
    financial resources to support the retail distribution of Beamer;
|
| |  | continue to develop our sales, marketing and
    support activities to consumers and retailers; and           
|
| |  | expand the number and location of retailers
    carrying Beamer.                                              

We may not achieve any or all of these
objectives. As a result, despite our initial national retail
launch, consumers may not be aware of Beamer. This could delay
or prevent our ability to achieve broad market acceptance of
Beamer. The failure of Beamer to achieve sufficient consumer and
retailer acceptance would impair our ability to continue
operating our business.



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

We are a development stage company with a limited
commercial operating history. We have not recognized any
revenue, have incurred significant losses and have had
substantial negative cash flow. As of December 31, 2002, we
had $32.7 million in cash, cash equivalents and short-term
investments. For the fiscal year ended December 31, 2002,
we had a net loss of $42.6 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 launches, any growth in sales of our products and
the rate of increase in our expenses. As a result, we will need
to generate significant revenues to achieve profitability.
Several factors, including consumer acceptance, retailer
arrangements and competitive factors 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 Beamer, and
    we cannot be sure that these efforts will generate the level of
    broad market acceptance of Beamer necessary to generate
    sufficient revenues to sustain our business.

The current videophone end-user market is
relatively small and primarily focused on business-to-business
video conferencing applications. Although videophones have been
commercially available for many years, previous videophone
models have had high retail prices, limited retail distribution,
limited functionality, poor video quality and have been
integrated with a handset. Even though we believe Beamer has
addressed many of the limitations associated with videophones
and videophone technology, consumer demand remains low and may
not increase. Even after educating consumers on the features of
Beamer, consumers may still perceive little or no benefit from
Beamer or may already own other products that provide similar
benefits or functionality, such as PC-based Internet video or
digital camera cellular telephones. As a result, consumers may
not value, or be unwilling to purchase Beamer at profitable
prices. We also do not have an established brand image, and the
expense of a national advertising campaign to build and sustain
brand awareness is not within our reach. Accordingly, to develop
market acceptance of Beamer and any future products, we will
need to devote a substantial amount of resources to educate
consumers about the features and benefits of Beamer via
alternative means including targeted public relations and
extensive retail distribution. However, 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 will be in doubt.

15



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

To emerge from the development stage, introduce
follow-on products and sustain and grow our business, we must
continue to make significant investments to develop, enhance and
market our products. 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, 2003,
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. 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. If
we cannot raise necessary additional capital on acceptable
terms, we may not be able to develop or enhance our products,
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 have a
limited operating history. 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 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. Beamer and any other future
products represent new products 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 Beamer or other new
products we may develop. 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 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 the consumer electronics market, which may
    impair our revenues and ability to generate
    customers.

The consumer electronics market is intensely
competitive and rapidly evolving. Existing participants and new
entrants in this market currently offer and may develop and
offer additional products that will compete directly with Beamer
or future products that we may develop.

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. Beamer competes directly with
several other companies in the videophone market. All of these
companies currently offer videophone products to consumers that
operate over standard (analog) phone lines with no additional
cost to the user, similar to Beamer. In addition to these
companies we face competition from a competitively priced
videophone product that utilizes a consumers broadband
connection (as opposed to a standard phone line) to deliver a
video image over a consumers television during a phone
call. Beamer also faces competition from PC-based Internet video
and from digital camera cellular telephones manufacturers and
potential future offerings from current telephone manufacturers.

16



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If we choose to market the ViDVD or another
enhanced DVD player, we would compete directly with several
other currently available or soon to be introduced DVD players
from major consumer electronics manufacturers, specialized
manufacturers, and with products developed by smaller companies.
Like the ViDVD, nearly all of these products accommodate media
in DVD, CD, MP3 and JPEG formats, many offer Internet
connectivity, and some include karaoke playback.

In addition, many of the manufacturers and
distributors of these competing products have substantially
greater brand recognition, market presence, distribution
channels, financial resources and promotional and other
strategic partners than us.



| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to create consumer demand and
    consumer acceptance of Beamer, as the standard for the
    videophone category, we may not be able to generate sufficient
    revenues to sustain our business.

The success of Beamer, as well as product line
extensions to develop and define an entire videophone product
category 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 products. Most of our planned product and feature
introductions are still in various stages of development and
will require engineering and technical resources to bring to
market. The success of some of our planned products may also
require industry acceptance of new proprietary 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 depend on a single contract manufacturer
    and a limited number of other third parties, including ESS, to
    manufacture and supply critical components for Beamer, and we
    may be unable to operate our business if those parties do not
    perform their obligations.

We rely on a single contract manufacturer located
in China to meet our current product demand. We also rely on ESS
and a limited number of other third party suppliers for a number
of key components for Beamer, including modem chips, video chips
and LCD screens. We do not have long-term agreements in place
with our suppliers. We do not control the time and resources
that these suppliers devote to our business. We cannot be sure
that these suppliers 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 Beamer 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 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. Because our relationships
with these parties are non-exclusive, they may also support
products 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.
This outcome would harm our ability to compete effectively and
quickly achieve market acceptance and brand recognition.

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| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 entered into agreements with ESS that
    govern our business relationship after the distribution of our
    stock to ESS shareholders, ESS has no obligation to extend the
    terms of those agreements to us beyond the stated duration of
    those agreements;
|
| |  | ESS may supply semiconductors to competitors,
    which may affect ESS capacity to supply semiconductors to
    us;                                                                                                                                                           
|
| |  | 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 maintain satisfactory
    relationships with, or increase the number of, retailers and
    distributors that sell our products, our business will
    suffer.

In order to maintain our relationships with
retailers and distributors we may be required to accept
arrangements and terms, which may not be favorable to us. Such
terms may include consignment arrangements, pricing concessions,
marketing incentives, aggressive return allowances, commissions
and other requirements, which could adversely affect the
profitability of our products. In addition, we expect that our
retailers and distributors will sell products offered by our
competitors. If our competitors offer retailers and distributors
more favorable terms or have more products available to meet
their needs, those retailers and distributors may decline to
carry or may not adequately promote our products. Although we
are aggressively attempting to increase the number of retailers
that market Beamer to consumers, there can be no assurance that
we will be able to do so. If we are unable to maintain
successful relationships with distributors and retailers or to
expand our distribution channels, our business may fail.



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need to expand our operations for
    future growth, and our failure to manage any such growth could
    disrupt business and impair our ability to generate
    revenues.

We may need to expand our headcount, facilities
and infrastructure to support potential sales growth and to
allow us to pursue market opportunities. This potential
expansion could place a significant strain on our management,
operational and financial resources and systems. Specific risks
we face as our business expands include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We may 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. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | We may 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 support when using Beamer. We also
    anticipate that purchasers of any future products will require
    support in their use of such products. We do not have experience
    with widespread deployment of Beamer 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 products 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.
|
| |  | We may 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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

Beamer is currently manufactured, assembled and
tested by a single contract manufacturer located in China. In
addition, most of our suppliers are located in China, Hong Kong
and Taiwan. We also anticipate that, starting in 2003, revenue
from international sales could represent a significant portion
of our total revenue. 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;                                                                                                          
|
| |  | 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.

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| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | 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 and
technologies complementary to our own. 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 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 products are expected to provide our
customers with access to a variety of 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;

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| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our stock may be subject to the
    requirements for penny stocks, which could adversely affect your
    ability to sell and the market price of our
    shares.

Our stock may fit 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:



| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | consumer awareness and demand for Beamer;                                                                                                                                   
|
| |  | ongoing demand and supply for Beamer;                                                                                                                                       
|
| |  | 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
    consumer electronics 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;                                                                 
|
| |  | 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;

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| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | the market price generally for consumer
    electronics and retail industry stocks;       
|
| |  | market conditions affecting the consumer
    electronics industry;                        
|
| |  | additions or departures of key personnel;                                                 
|
| |  | demand for and consumer acceptance of other
    anticipated future products 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 Beamer and any future products will be very
difficult, we believe that sales of Beamer will be higher during
the holiday shopping season when compared to other times of the
year. We believe we have adequate capital to continue to operate
for the 12-month period ending December 31, 2003. However,
if we are unable to generate sufficient revenues during the 2003
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.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

Even if ESS distribution of our stock to
its shareholders is otherwise a tax-free distribution, 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. 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

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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.




| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ESS submitted a request to the Internal
    Revenue Service (IRS) to rule that its distribution of our
    shares to ESS shareholders was tax-free. The IRS determined that
    it would not provide such a ruling.

The IRS decision not to provide a ruling on the
distribution does not mean that the distribution is taxable. We
believe that the distribution is 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 will qualify 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 will qualify 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 is taxable to them, the value
of the shares they received will be treated as taxable ordinary
income, return of cost or as taxable capital gain up to the
value of the stock distributed. If the distribution is taxable,
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 IRS. If holders of a significant percentage our stock are
also forced to sell in order to pay their taxes, or if there is
for any other reason, a decline in the trading price of our
shares following the distribution, recipients of our stock in
the distribution may have to sell their shares of our stock at a
lower price than they might otherwise have obtained.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

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Item
7a:     Quantitative and Qualitative
Disclosure About Market Risk

Interest Rate Risks.We invest in short-term investments.
Consequently, we are exposed to fluctuation in interest rates on
these investments. Increases or decreases in interest rates
generally translate into decreases and increases in the fair
value of these investments. 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, 2002, 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 our results of
operations and financial condition. In order to reduce the risk
from fluctuation in foreign exchange rates, our product sales
and all of our arrangements with our third party manufacturers
and component vendors are denominated in U.S. dollars. We do not
engage in any currency hedging activities.

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Item
8:     Financial Statements and
Supplementary Data

The following documents are filed as part of this
Report:

|                                                                                               |                                                                                                                                                                             |      |    |  | 
|---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -- |  | 
|                                                                                               |                                                                                                                                                                             | Page
|                                                                                               |                                                                                                                                                                             |     
|REPORT OF INDEPENDENT ACCOUNTANTS                                                              |                                                                                                                                                                             |      | 26 | 
|CONSOLIDATED BALANCE SHEETS                                                                    |                                                                                                                                                                             |      | 27 | 
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                          |                                                                                                                                                                             |      | 28 | 
|CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE
    PREFERRED STOCK AND STOCKHOLDERS EQUITY |                                                                                                                                                                             |      | 29 | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                          |                                                                                                                                                                             |      | 31 | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                     |                                                                                                                                                                             |      | 32 | 
|Financial Statements Schedules                                                                 |                                                                                                                                                                             |      |    | 
|                                                                                               | All schedules have been omitted because they are
    not applicable, not required, or the information required is
    included in the financial statements or notes thereto |      |    |  | 
|SUPPLEMENTARY FINANCIAL DATA                                                                   |                                                                                                                                                                             |      | 47 | 

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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 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2002 and for the period from
April 20, 1999 (date of inception) through
December 31, 2002, 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.

PricewaterhouseCoopers LLP

San Jose, California


February 21, 2003


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##### Table of Contents



VIALTA, INC.

(A Development Stage Company)


CONSOLIDATED BALANCE SHEETS

|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |          |        |        |       |         |        |        | 
|---------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------------------------------------------------------------------- | -------- | ------ | ------ | ----- | ------- | ------ | ------ | 
|                                                                                                                             |                                                                                                                                          |                           
|                                                                                                                             |                                                                                                                                          | December 31,              
|                                                                                                                             |                                                                                                                                          |                           
|                                                                                                                             |                                                                                                                                          | 2002                       |                                                                                        | 2001    
|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |         
|                                                                                                                             |                                                                                                                                          |                           
|                                                                                                                             |                                                                                                                                          | (In thousands, except     
|                                                                                                                             |                                                                                                                                          | per share amounts)        
|ASSETS                                                                                                                      
|Current assets:                                                                                                              |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|                                                                                                                             | Cash and cash equivalents                                                                                                                |                            | $                                                                                      | 21,863   |        |        | $     | 61,886  |       
|                                                                                                                             | Short-term investments                                                                                                                   |                            |                                                                                        | 10,838   |        |        |       | 5,542   |       
|                                                                                                                             | Accounts receivable, net                                                                                                                 |                            |                                                                                        | 1,362    |        |        |       |        |       
|                                                                                                                             | Inventories                                                                                                                              |                            |                                                                                        | 2,834    |        |        |       |        |       
|                                                                                                                             | Prepaid expenses and other current assets                                                                                                |                            |                                                                                        | 1,253    |        |        |       | 2,989   |       
|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|                                                                                                                             |                                                                                                                                          | Total current assets       |                                                                                        |          | 38,150 |        |       |         | 70,417 |       
|Property and equipment, net                                                                                                  |                                                                                                                                          |                            | 2,132                                                                                  |          |        |        | 7,831 |        
|Long term investments                                                                                                        |                                                                                                                                          |                            |                                                                                       |          |        |        | 4,064 |        
|Content licenses                                                                                                             |                                                                                                                                          |                            |                                                                                       |          |        |        | 1,342 |        
|Other assets                                                                                                                 |                                                                                                                                          |                            | 45                                                                                     |          |        |        | 212   |        
|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|                                                                                                                             |                                                                                                                                          | Total assets               |                                                                                        | $        | 40,327 |        |       | $       | 83,866 |       
|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
    STOCK
    AND STOCKHOLDERS EQUITY                                        
|Current liabilities:                                                                                                         |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|                                                                                                                             | Accounts payable                                                                                                                         |                            | $                                                                                      | 1,164    |        |        | $     | 760     |       
|                                                                                                                             | Accrued expenses and other current liabilities                                                                                           |                            |                                                                                        | 3,555    |        |        |       | 2,712   |       
|                                                                                                                             | Deferred profit                                                                                                                          |                            |                                                                                        | 3,230    |        |        |       | 115     |       
|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|                                                                                                                             |                                                                                                                                          | Total current liabilities  |                                                                                        |          | 7,949  |        |       |         | 3,587  |       
|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|Commitments (Notes 15 and 16)                                                                                                |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|Redeemable convertible preferred stock, $0.001
    par value; 30,000 shares authorized, no shares issued and
    outstanding |                                                                                                                                          |                            |                                                                                       |          |        |        |      |        
|Stockholders equity:                                                                                                        |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|                                                                                                                             | Common stock, $0.001 par value, 400,000 shares
    authorized, 93,961 and 92,473 shares issued, 82,756 and 85,625
    shares outstanding |                            |                                                                                        | 94       |        |        |       | 92      |       
|                                                                                                                             | Additional paid-in capital                                                                                                               |                            |                                                                                        | 144,105  |        |        |       | 144,164 |       
|                                                                                                                             | Treasury stock                                                                                                                           |                            |                                                                                        | (9,163   | )      |        |       | (4,046  | )     
|                                                                                                                             | Deficit accumulated during the development stage                                                                                         |                            |                                                                                        | (102,666 | )      |        |       | (60,087 | )     
|                                                                                                                             | Accumulated other comprehensive income                                                                                                   |                            |                                                                                        | 8        |        |        |       | 156     |       
|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|                                                                                                                             |                                                                                                                                          | Total stockholders equity |                                                                                        |          | 32,378 |        |       |         | 80,279 |       
|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        
|                                                                                                                             |                                                                                                                                          |                            | Total liabilities, redeemable convertible
    preferred stock and stockholders equity |          | $      | 40,327 |       |         | $      | 83,866 | 
|                                                                                                                             |                                                                                                                                          |                            |                                                                                        |          |        |        |       |        

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

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VIALTA, INC.

(A Development Stage Company)


CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                  |                                                 |                                          |         |              |         |      |         |               |         |   |         |        |         |   |          |        |          |  
|----------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------- | ------- | ------------ | ------- | ---- | ------- | ------------- | ------- | - | ------- | ------ | ------- | - | -------- | ------ | -------- | -
|                                                                  |                                                 |                                          |         |              |         |      |         | Period from  
|                                                                  |                                                 |                                          |         |              |         |      |         | April 20,    
|                                                                  |                                                 |                                          |         |              |         |      |         | 1999 (Date of
|                                                                  |                                                 |                                          |         | Inception)  
|                                                                  |                                                 | Years Ended December 31,                 |         | through     
|                                                                  |                                                 |                                          |         | December 31,
|                                                                  |                                                 | 2002                                     |         | 2001         |         | 2000 |         | 2002         
|                                                                  |                                                 |                                          |         |              |         |      |         |              
|                                                                  |                                                 |                                         
|                                                                  |                                                 | (In thousands, except per share amounts)
|Operating expenses:                                               |                                                 |                                          |         |              |         |      |         |               |         |   |         |        |         |   |          |       
|                                                                  | Product costs                                   |                                          | $       | 10,421       |         |      | $       |              |         |   | $       |       |         |   | $        | 10,421 |         
|                                                                  | Research and development                        |                                          |         | 13,264       |         |      |         | 25,250        |         |   |         | 19,558 |         |   |          | 59,441 |         
|                                                                  | Amortization and impairment of content licenses |                                          |         | 11,395       |         |      |         |              |         |   |         |       |         |   |          | 11,395 |         
|                                                                  | Sales and marketing                             |                                          |         | 3,100        |         |      |         | 3,738         |         |   |         | 2,927  |         |   |          | 10,427 |         
|                                                                  | General and administrative                      |                                          |         | 5,643        |         |      |         | 9,301         |         |   |         | 6,699  |         |   |          | 22,153 |         
|                                                                  |                                                 |                                          |         |              |         |      |         |               |         |   |         |        |         |   |          |       
|                                                                  |                                                 | Operating loss                           |         |              | (43,823 | )    |         |               | (38,289 | ) |         |        | (29,184 | ) |          |        | (113,837 | )
|Interest income, net                                              |                                                 |                                          | 1,244   |              |         |      | 3,606   |               |         |   | 7,688   |        |         |   | 13,050   |       
|Other expense                                                     |                                                 |                                          |        |              |         |      | (1,266  | )             |         |   | (1,682  | )      |         |   | (2,939   | )     
|                                                                  |                                                 |                                          |         |              |         |      |         |               |         |   |         |        |         |   |          |       
|Loss before income tax benefit                                    |                                                 |                                          | (42,579 | )            |         |      | (35,949 | )             |         |   | (23,178 | )      |         |   | (103,726 | )     
|Income tax benefit                                                |                                                 |                                          |        |              |         |      |        |               |         |   | 260     |        |         |   | 1,060    |       
|                                                                  |                                                 |                                          |         |              |         |      |         |               |         |   |         |        |         |   |          |       
|Net loss                                                          |                                                 | $                                        | (42,579 | )            |         | $    | (35,949 | )             |         | $ | (22,918 | )      |         | $ | (102,666 | )     
|                                                                  |                                                 |                                          |         |              |         |      |         |               |         |   |         |        |         |   |          |       
|Net loss per share:                                               |                                                 |                                          |         |              |         |      |         |               |         |   |         |        |         |   |          |       
|                                                                  | Basic and diluted                               |                                          | $       | (0.51        | )       |      | $       | (0.83         | )       |   | $       | (3.68  | )       |   | $        | (2.83  | )       
|                                                                  |                                                 |                                          |         |              |         |      |         |               |         |   |         |        |         |   |          |       
|Weighted average common shares outstanding:
    Basic and diluted |                                                 |                                          | 83,578  |              |         |      | 43,248  |               |         |   | 6,222   |        |         |   | 36,311   |       
|                                                                  |                                                 |                                          |         |              |         |      |         |               |         |   |         |        |         |   |          |       

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

|                                                                                                      |  |                 |         |              |  |            |         |            |  |          |        |              |  |               |     |               |  |               |        |           |  |      |        |   |  |   |        |   |  |   |         |   |  |   |   |  |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------------ |  | ---------- | ------- | ---------- |  | -------- | ------ | ------------ |  | ------------- | --- | ------------- |  | ------------- | ------ | --------- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------- | - |  | - | - |  |  | - | ------- | - |  | - | ------- | -
|                                                                                                      |  |                 |         |              |  |            |         |            |  |          |        |              |  |               |     |               |  |               |        |          
|                                                                                                      |  | Redeemable      |         |              |  |            |         |            |  |          |        | Deficit      |  |               |     |               |  |              
|                                                                                                      |  | Convertible     |         | Common Stock |  |            |         |            |  |          |        | Accumulated  |  | Accumulated   |     | Total         |  |              
|                                                                                                      |  | Preferred Stock |         | (See Note 8) |  | Additional |         | Receivable |  |          |        | During the   |  | Other         |     | Stockholders |  |              
|                                                                                                      |  |                 |         |              |  | Paid in    |         | from       |  | Treasury |        | Development  |  | Comprehensive |     | Equity        |  | Comprehensive
|                                                                                                      |  | Shares          |         | Amount       |  | Shares     |         | Amount     |  | Capital  |        | Stockholders |  | Stock         |     | Stage         |  | Income        |        | (Deficit) |  | Loss
|                                                                                                      |  |                 |         |              |  |            |         |            |  |          |        |              |  |               |     |               |  |               |        |           |  |     
|                                                                                                      |  |                
|                                                                                                      |  | (In thousands) 
|Issuance of common stock, at $0.25 per share                                                          |  |                 |        |              |  | $          |        |            |  |          | 6,220  |              |  | $             | 6   |               |  | $             | 1,549  |           |  | $    |       |   |  | $ |       |   |  | $ |        |   |  | $ |  |  |  | $ | 1,555   |   |  |   |         |  
|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                           |  |                 |        |              |  |            |        |            |  |          |       |              |  |               |    |               |  |               |       |           |  |      | (1,475 | ) |  |   |       |   |  |   |        |   |  |   |  |  |  |   | (1,475  | ) |  |   |         |  
|Net loss                                                                                              |  |                 |        |              |  |            |        |            |  |          |       |              |  |               |    |               |  |               |       |           |  |      |       |   |  |   |       |   |  |   | (1,220  | ) |  |   |  |  |  |   | (1,220  | ) |  | $ | (1,220  | )
|                                                                                                      |  |                 |         |              |  |            |         |            |  |          |        |              |  |               |     |               |  |               |        |           |  |      |        |   |  |   |        |   |  |   |         |   |  |   |   |  |  |   |         |   |  |   |         |  
|Balance at December 31, 1999                                                                          |  |                 | 80,300  |              |  |            | 114,780 |            |  |          | 6,220  |              |  |               | 6   |               |  |               | 1,549  |           |  |      | (1,475 | ) |  |   |       |   |  |   | (1,220  | ) |  |   |  |  |  |   | (1,140  | ) |  |   |         |  
|Issuance of Series B redeemable convertible
    preferred stock, at $2.60 per share                   |  |                 | 10,700  |              |  |            | 27,820  |            |  |          |       |              |  |               |    |               |  |               |       |           |  |      |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   |        |   |  |   |         |  
|Exercise of stock options                                                                             |  |                 |        |              |  |            |        |            |  |          | 11     |              |  |               |    |               |  |               | 3      |           |  |      |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 3       |   |  |   |         |  
|Income tax benefit on disqualified disposition of
    stock options                                   |  |                 |        |              |  |            |        |            |  |          |       |              |  |               |    |               |  |               | 77     |           |  |      |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 77      |   |  |   |         |  
|Repayment of note receivable from stockholder                                                         |  |                 |         |              |  |            |         |            |  |          |        |              |  |               |     |               |  |               |        |           |  |      | 1,475  |   |  |   |        |   |  |   |        |   |  |   |  |  |  |   | 1,475   |   |  |   |         |  
|Net loss                                                                                              |  |                 |        |              |  |            |        |            |  |          |       |              |  |               |    |               |  |               |       |           |  |      |       |   |  |   |       |   |  |   | (22,918 | ) |  |   |  |  |  |   | (22,918 | ) |  | $ | (22,918 | )
|                                                                                                      |  |                 |         |              |  |            |         |            |  |          |        |              |  |               |     |               |  |               |        |           |  |      |        |   |  |   |        |   |  |   |         |   |  |   |   |  |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                                                          |  |                 | 91,000  |              |  |            | 142,600 |            |  |          | 6,231  |              |  |               | 6   |               |  |               | 1,629  |           |  |      |       |   |  |   |       |   |  |   | (24,138 | ) |  |   |  |  |  |   | (22,503 | ) |  |   |         |  
|Exercise of stock options before recapitalization                                                     |  |                 |        |              |  |            |        |            |  |          | 61     |              |  |               |    |               |  |               | 16     |           |  |      |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 16      |   |  |   |         |  
|Conversion of preferred stock to common stock A                                                       |  |                 | (60,000 | )            |  |            | (62,000 | )          |  |          | 60,000 |              |  |               | 60  |               |  |               | 61,940 |           |  |      |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 62,000  |   |  |   |         |  
|Conversion of preferred stock to common stock B                                                       |  |                 | (31,000 | )            |  |            | (80,600 | )          |  |          | 34,100 |              |  |               | 34  |               |  |               | 80,566 |           |  |      |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 80,600  |   |  |   |         |  
|Conversion of common stock to Common B                                                                |  |                 |        |              |  |            |        |            |  |          | 589    |              |  |               | 1   |               |  |               | (1     | )         |  |      |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   |        |   |  |   |         |  
|Shares transferred 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      |           |  |      |       |   |  |   |       |   |  |   |        |   |  |   |  |  |  |   | 5       |   |  |   |         |  
|Repurchase of common stock                                                                            |  |                 |        |              |  |            |        |            |  |          | (6,236 | )            |  |               |    |               |  |               |       |           |  |      |       |   |  |   | (4,046 | ) |  |   |        |   |  |   |  |  |  |   | (4,046  | ) |  |   |         |  

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

29



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##### Table of Contents



VIALTA, INC.

(A Development Stage Company)


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

|                                                                    |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   |         |         |         |  
|------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ------------------------ | ------------ |  | ---------- | - | ---------- |  | -------- | ------ | ------------ |  | ------------- | -- | ------------- |  | ------------- | ------- | --------- |  | ---- | - | - |  | - | ------ | - |  | - | -------- | ------- | - | - | --- | ---- | - | - | ------ | ------- | - |  | - | ------- | ------- | ------- | -
|                                                                    |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |          
|                                                                    |                                                          | Redeemable               |                          |              |  |            |   |            |  |          |        | Deficit      |  |               |    |               |  |              
|                                                                    |                                                          | Convertible              |                          | Common Stock |  |            |   |            |  |          |        | Accumulated  |  | Accumulated   |    | Total         |  |              
|                                                                    |                                                          | Preferred Stock          |                          | (See Note 8) |  | Additional |   | Receivable |  |          |        | During the   |  | Other         |    | Stockholders |  |              
|                                                                    |                                                          |                          |                          |              |  | Paid in    |   | from       |  | Treasury |        | Development  |  | Comprehensive |    | Equity        |  | Comprehensive
|                                                                    |                                                          | Shares                   |                          | Amount       |  | Shares     |   | Amount     |  | Capital  |        | Stockholders |  | Stock         |    | Stage         |  | Income        |         | (Deficit) |  | Loss
|                                                                    |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |     
|                                                                    |                                                          |                         
|                                                                    |                                                          | (In thousands)          
|Components of comprehensive loss:                                   |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   |        
|                                                                    | Net loss                                                 |                          |                          |             |  |            | $ |           |  |          |        |             |  |               | $  |              |  |               | $       |          |  |      | $ |  |  |   | $      |  |  |   | $        | (35,949 | ) |   | $   |     |   |   | $      | (35,949 | ) |  | $ | (35,949 | )      
|                                                                    | Unrealized gains on available-for- sale
    investments  |                          |                          |             |  |            |   |           |  |          |        |             |  |               |    |              |  |               |         |          |  |      |   |  |  |   |        |  |  |   |          |        |   |   |     | 156  |   |   |        | 156     |   |  |   | 156     |        
|                                                                    |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   |        
|                                                                    |                                                          |                          | Total comprehensive loss |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   |         | $       | (35,793 | )
|                                                                    |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   |        
|Balance at December 31, 2001                                        |                                                          |                          |                         |              |  |            |  |            |  |          | 85,625 |              |  |               | 92 |               |  |               | 144,164 |           |  |      |  |   |  |   | (4,046 | ) |  |   | (60,087  | )       |   |   | 156 |      |   |   | 80,279 |         |   |  |   |        
|Shares transferred to ESS Technology, Inc.                          |                                                          |                          |                         |              |  |            |  |            |  |          | 612    |              |  |               |   |               |  |               |        |           |  |      |  |   |  |   |       |   |  |   |         |         |   |   |    |      |   |   |       |         |   |  |   |        
|Exercise of stapled stock options                                   |                                                          |                          |                         |              |  |            |  |            |  |          | 1,419  |              |  |               | 1  |               |  |               | (1      | )         |  |      |  |   |  |   |       |   |  |   |         |         |   |   |    |      |   |   |       |         |   |  |   |        
|Exercise of stock options                                           |                                                          |                          |                         |              |  |            |  |            |  |          | 69     |              |  |               | 1  |               |  |               | 19      |           |  |      |  |   |  |   |       |   |  |   |         |         |   |   |    |      |   |   | 20     |         |   |  |   |        
|Repurchase of common stock                                          |                                                          |                          |                         |              |  |            |  |            |  |          | (4,969 | )            |  |               |   |               |  |               |        |           |  |      |  |   |  |   | (5,117 | ) |  |   |         |         |   |   |    |      |   |   | (5,117 | )       |   |  |   |        
|Income tax benefit on disqualified disposition of
    stock options |                                                          |                          |                         |              |  |            |  |            |  |          |       |              |  |               |   |               |  |               | (77     | )         |  |      |  |   |  |   |       |   |  |   |         |         |   |   |    |      |   |   | (77    | )       |   |  |   |        
|Components of comprehensive loss:                                   |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   |        
|                                                                    | Net loss                                                 |                          |                          |             |  |            |   |           |  |          |        |             |  |               |    |              |  |               |         |          |  |      |   |  |  |   |        |  |  |   |          | (42,579 | ) |   |     |     |   |   |        | (42,579 | ) |  | $ | (42,579 | )      
|                                                                    | Unrealized losses on available-for- sale
    investments |                          |                          |             |  |            |   |           |  |          |        |             |  |               |    |              |  |               |         |          |  |      |   |  |  |   |        |  |  |   |          |        |   |   |     | (148 | ) |   |        | (148    | ) |  |   | (148    | )      
|                                                                    |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   |        
|                                                                    |                                                          | Total comprehensive loss |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   | $       | (42,727 | )      
|                                                                    |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   |        
|Balance at December 31, 2002                                        |                                                          |                          |                         |              |  | $          |  |            |  |          | 82,756 |              |  | $             | 94 |               |  | $             | 144,105 |           |  | $    |  |   |  | $ | (9,163 | ) |  | $ | (102,666 | )       |   | $ | 8   |      |   | $ | 32,378 |         |   |  |   |        
|                                                                    |                                                          |                          |                          |              |  |            |   |            |  |          |        |              |  |               |    |               |  |               |         |           |  |      |   |   |  |   |        |   |  |   |          |         |   |   |     |      |   |   |        |         |   |  |   |        

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

30



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##### Table of Contents



VIALTA, INC.

(A Development Stage Company)


CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |          |        |        |         |  
|---------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------- | -------------------------------------------------------------- | ------ | ------ | ------- | ------------- | ----- | ----- | ------- | ------- | ----- | ------ | ------- | -------- | ------ | ------ | ------- | -
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         | Period from  
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         | April 20,    
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         | 1999 (Date of
|                                                           |                                                                                 |                                                         |                                          | Inception)                                                    
|                                                           |                                                                                 | Years Ended December 31,                                |                                          | through                                                       
|                                                           |                                                                                 |                                                         |                                          | December 31,                                                  
|                                                           |                                                                                 | 2002                                                    |                                          | 2001                                                           |        | 2000   |         | 2002         
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |              
|                                                           |                                                                                 |                                                        
|                                                           |                                                                                 | (In thousands)                                         
|Cash flows from operating activities:                      |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|                                                           | Net loss                                                                        |                                                         | $                                        | (42,579                                                        | )      |        | $       | (35,949       | )     |       | $       | (22,918 | )     |        | $       | (102,666 | )     
|                                                           | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |          |       
|                                                           |                                                                                 | Depreciation and amortization                           |                                          |                                                                | 6,036  |        |         |               | 5,834 |       |         |         | 3,887 |        |         |          | 15,695 |       
|                                                           |                                                                                 | Amortization and impairment of content license
    fees |                                          |                                                                | 11,395 |        |         |               |      |       |         |         |      |        |         |          | 11,395 |       
|                                                           |                                                                                 | Write-down of investments                               |                                          |                                                                |       |        |         |               | 1,083 |       |         |         | 1,667 |        |         |          | 2,750  |       
|                                                           |                                                                                 | Changes in assets and liabilities:                      |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |          |        |       
|                                                           |                                                                                 |                                                         | Accounts receivables, net                |                                                                |        | (1,362 | )       |               |       |      |         |         |       |       |         |          |        | (1,362 | )      
|                                                           |                                                                                 |                                                         | Related party receivables/payables, net  |                                                                |        | 97     |         |               |       | 646   |         |         |       | (919   | )       |          |        | 33     |        
|                                                           |                                                                                 |                                                         | Inventories                              |                                                                |        | (2,834 | )       |               |       | 2,057 |         |         |       | (2,057 | )       |          |        | (2,834 | )      
|                                                           |                                                                                 |                                                         | Prepaid expense and other assets         |                                                                |        | 1,672  |         |               |       | 1,335 |         |         |       | (4,244 | )       |          |        | (1,298 | )      
|                                                           |                                                                                 |                                                         | Deferred profit                          |                                                                |        | 3,115  |         |               |       | 115   |         |         |       |       |         |          |        | 3,230  |        
|                                                           |                                                                                 |                                                         | Accounts payable and accrued liabilities |                                                                |        | 1,137  |         |               |       | (122  | )       |         |       | 2,940  |         |          |        | 4,686  |        
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|                                                           |                                                                                 |                                                         |                                          | Net cash flows used in operating activities                    |        |        | (23,323 | )             |       |       | (25,001 | )       |       |        | (21,644 | )        |        |        | (70,371 | )
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|Cash flows from investing activities:                      |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|                                                           | Purchase of short-term investments                                              |                                                         |                                          | (32,277                                                        | )      |        |         | (15,988       | )     |       |         | (98,444 | )     |        |         | (169,053 | )     
|                                                           | Proceeds from sales of short-term investments                                   |                                                         |                                          | 30,897                                                         |        |        |         | 33,650        |       |       |         | 93,676  |       |        |         | 158,223  |       
|                                                           | Purchase of other long-term investment                                          |                                                         |                                          |                                                               |        |        |         | (2,100        | )     |       |         | (4,000  | )     |        |         | (6,100   | )     
|                                                           | Purchase of content licenses                                                    |                                                         |                                          | (10,053                                                        | )      |        |         | (1,342        | )     |       |         |        |       |        |         | (11,395  | )     
|                                                           | Acquisition of property and equipment                                           |                                                         |                                          | (170                                                           | )      |        |         | (2,686        | )     |       |         | (10,008 | )     |        |         | (14,477  | )     
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|                                                           |                                                                                 |                                                         |                                          | Net cash flows provided by (used in) investing
    activities: |        |        | (11,603 | )             |       |       | 11,534  |         |       |        | (18,776 | )        |        |        | (42,802 | )
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|Cash flows from financing activities:                      |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|                                                           | Proceeds from (repayment) of notes payable
    to related party                 |                                                         |                                          |                                                               |        |        |         | (30,000       | )     |       |         | 30,000  |       |        |         |         |       
|                                                           | Issuance of preferred stock                                                     |                                                         |                                          |                                                               |        |        |         |              |       |       |         | 27,820  |       |        |         | 142,600  |       
|                                                           | Issuance of common stock                                                        |                                                         |                                          | 20                                                             |        |        |         | 21            |       |       |         | 1,478   |       |        |         | 1,599    |       
|                                                           | Repurchase of common stock                                                      |                                                         |                                          | (5,117                                                         | )      |        |         | (4,046        | )     |       |         |        |       |        |         | (9,163   | )     
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|                                                           |                                                                                 |                                                         |                                          | Net cash flows provided by (used in) financing
    activities: |        |        | (5,097  | )             |       |       | (34,025 | )       |       |        | 59,298  |          |        |        | 135,036 |  
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|Net increase (decrease) in cash and cash
    equivalents   |                                                                                 |                                                         | (40,023                                  | )                                                              |        |        | (47,492 | )             |       |       | 18,878  |         |       |        | 21,863  |         
|Cash and cash equivalents, beginning of the period         |                                                                                 |                                                         | 61,886                                   |                                                                |        |        | 109,378 |               |       |       | 90,500  |         |       |        |        |         
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|Cash and cash equivalents, end of the period               |                                                                                 | $                                                       | 21,863                                   |                                                                |        | $      | 61,886  |               |       | $     | 109,378 |         |       | $      | 21,863  |         
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|Supplemental disclosure of cash flow information:          |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|                                                           | Unrealized gains (losses) on
    available-for-sale investments                 |                                                         | $                                        | (148                                                           | )      |        | $       | 156           |       |       | $       |        |       |        | $       | 8        |       
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|                                                           | Cash paid for interest                                                          |                                                         | $                                        |                                                               |        |        | $       | 194           |       |       | $       |        |       |        | $       | 194      |       
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|Supplemental disclosure of noncash financing
    activity: |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         
|                                                           | Issuance of notes receivable in connection with
    issuance of common stock    |                                                         | $                                        |                                                               |        |        | $       |              |       |       | $       | 1,475   |       |        | $       | 1,475    |       
|                                                           |                                                                                 |                                                         |                                          |                                                                |        |        |         |               |       |       |         |         |       |        |         |         

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

31



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##### Table of Contents



VIALTA, INC.

Notes To Consolidated Financial
Statements

Note 1  The Company

Vialta, Inc. was incorporated in California in
April 1999 and reincorporated in the State of Delaware in May
2001.

Vialta designs, develops and markets consumer
electronics products. The Company has recently developed and
introduced a personal videophone, known as Beamer. Beamer
adds color video to phone calls, enabling Beamer users to see
the person they are calling. Beamer works with any home phone
over any standard (analog) home phone line, and at no additional
cost to a regular phone call. Beamers are primarily sold in
pairs, since the party receiving the video call must also have a
Beamer (or compatible videophone). In addition to Beamer, the
Company has developed a multimedia DVD player (ViDVD) that
offers additional features such as CD, MP3 and karaoke disc
playback, Internet connectivity and the ability to view digital
photographs. The Company is not marketing ViDVD.

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 consolidated financial statements include the
accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation.



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

Vialta considers all highly liquid investments
with an initial maturity of 90 days or less to be cash
equivalents. Cash equivalents primarily represent money market
funds.

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, accounts receivable, and
accounts payable approximated fair value due to their short
maturities.



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

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

32



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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)



| |                       
| | ----------------------
| | 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

Vialta reviews long-lived assets based upon an
undiscounted 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 based on undiscounted cash flows.



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

Comprehensive income (loss), as defined, includes
all changes in equity during a period from non-owner sources.
Comprehensive loss is disclosed in the consolidated statements
of redeemable preferred stock and stockholders equity.



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

Vialta generally recognizes revenue on products
sold to end customers upon shipment provided that Vialta has no
post-sale obligations, can reliably estimate and accrue warranty
and sales returns, the price is fixed or determinable and
collection of the resulting receivable is reasonably assured.
For sales to end customers that do not meet the above criteria,
revenue is deferred until such criteria are met.

Products sold to retailers and distributors are
subject to rights of return. Subject to the Companys
warranty reserve, it defers recognition of revenue on products
sold to retailers and distributors until the products are sold
by the retailers and distributors to their customers.



| |                            
| | ---------------------------
| | Allowances for Sales Return

Allowances are provided for estimated returns.
Provision for return allowances will be recorded at the time
when revenue is recognized based on historical returns, current
economic trends and changes in customer demand. Such allowances
will be adjusted periodically to reflect actual and anticipated
experience. As of December 31, 2002, Vialta did not have
sufficient history and experience with respect to sales returns.
As a result, the Company did not recognize any revenues on sales
of Beamer pending the expiration of the warranty period.



| |         
| | --------
| | Warranty

Vialta provides a limited warranty on its
products for periods ranging from 90 days to 12 months
from the date of sale to the end customers. The Company will
estimate warranty costs based on historical experience and will
accrue for estimated costs as a charge to cost of sales when
revenue is recognized. Through December 31, 2002, the
Company did not recognize revenue. A key factor in the decision
not to recognize revenue is that as of December 31, 2002, the
Company did not have sufficient history to reasonably estimate
warranty costs as the warranty period has not lapsed from the
Companys first significant shipments.

33



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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)



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

Research and development costs are expensed as
incurred.



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

Advertising production costs are expensed as
incurred. Total advertising and promotional expenses were
approximately $430,000 for the year ended December 31, 2002
and were not material for the years ended December 31, 2001
and 2000.



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

Vialta accounts for income taxes under the 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.



| |                             
| | ----------------------------
| | 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.



| |                                
| | -------------------------------
| | 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.



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

Vialta accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, or APB No. 25,
Accounting for Stock Issued to Employees. Under APB
No. 25, compensation cost is measured as the excess, if
any, of the quoted market price of its stock at the date of
grant over the exercise price of the option granted.
Compensation cost for stock options, if any, is recognized
ratably over the vesting period. Vialta provides additional pro
forma disclosures as required under SFAS No. 123,
Accounting for Stock-Based Compensation and SFAS
No. 148, Accounting for Stock-Based Compensation,
Transition and Disclosure.

SFAS No. 148 amends SFAS No. 123 in
December 2002 to require that disclosures of the pro forma
effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently
and in a tabular format. The following table illustrates the
effect on Vialtas net loss and net loss

34



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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

per share if Vialta had recorded compensation
costs based on the estimated grant date fair value as defined by
SFAS No. 123 for all granted stock-based awards (in
thousands, except per share amounts).

|                                                                                                              |             |                          |         |              |   |      |         |                |   |   |         |       |   |   |          |       |  
|------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------ | ------- | ------------ | - | ---- | ------- | -------------- | - | - | ------- | ----- | - | - | -------- | ----- | -
|                                                                                                              |             |                          |         |              |   |      |         | Period from   
|                                                                                                              |             |                          |         |              |   |      |         | April 20, 1999
|                                                                                                              |             |                          |         |              |   |      |         | (Date of      
|                                                                                                              |             |                          |         | Inception)  
|                                                                                                              |             | Years Ended December 31, |         | through     
|                                                                                                              |             |                          |         | December 31,
|                                                                                                              |             | 2002                     |         | 2001         |   | 2000 |         | 2002          
|                                                                                                              |             |                          |         |              |   |      |         |               
|Net loss, as reported                                                                                         |             | $                        | (42,579 | )            |   | $    | (35,949 | )              |   | $ | (22,918 | )     |   | $ | (102,666 | )    
|Deduct: Stock-based employee compensation expense
    determined under fair value based method for all awards |             |                          | (3,208  | )            |   |      | (6,335  | )              |   |   | (158    | )     |   |   | (9,706   | )    
|                                                                                                              |             |                          |         |              |   |      |         |                |   |   |         |       |   |   |          |      
|Pro forma net loss                                                                                            |             | $                        | (45,787 | )            |   | $    | (42,284 | )              |   | $ | (23,076 | )     |   | $ | (112,372 | )    
|                                                                                                              |             |                          |         |              |   |      |         |                |   |   |         |       |   |   |          |      
|Net loss per share  basic and diluted:                                                                       |             |                          |         |              |   |      |         |                |   |   |         |       |   |   |          |      
|                                                                                                              | As reported |                          | $       | (0.51        | ) |      | $       | (0.83          | ) |   | $       | (3.68 | ) |   | $        | (2.83 | )
|                                                                                                              | Pro forma   |                          | $       | (0.55        | ) |      | $       | (0.98          | ) |   | $       | (3.71 | ) |   | $        | (3.10 | )



| |                 
| | ----------------
| | Reclassification

The Company has reclassified certain prior
years information to conform to the current financial
statement.



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

In June 2002, the Financial Accounting Standards
Board, or FASB, issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS
No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires that a liability
for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the
liability is incurred. SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002.
The Companys adoption of SFAS No. 146 did not have a
material effect on its consolidated financial statements.

In November 2002, the FASB issued Interpretation
No. 45, (FIN No. 45)
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 requires that a liability be
recorded in the guarantors balance sheet upon issuance of
a guarantee. In addition, FIN No. 45 requires disclosures
about the guarantees that an entity has issued, including a
reconciliation of changes in the entitys product warranty
liabilities. The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective
basis to guarantees issued or modified after December 31,
2002, irrespective of the guarantors fiscal year-end. The
disclosure requirements of FIN No. 45 are effective for
financial statements of interim or annual periods ending after
December 15, 2002. The Company does not expect its adoption
of FIN 45 to have a material impact on its consolidated
financial statements.

In January 2003, the FASB issued Interpretation
No. 46 (FIN No. 46) Consolidation of
Variable Interest Entities. Until this interpretation, a
company generally included another entity in its consolidated
financial statements only if it controlled the entity through
voting interests. FIN No. 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a
majority of the risk of loss from

35



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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

the variable interest entitys activities or
entitled to receive a majority of the entitys residual
returns. The Company does not expect its adoption of FIN 46 to
have a material impact on its consolidation financial statements.

Note 3  Risks and
Uncertainties

Since its inception, Vialta has been in the
development stage and has incurred losses of approximately
$102.7 million and cumulative negative cash flows from
operations of $70.4 million. Management expects operating
losses and negative cash flows to continue for the foreseeable
future and anticipates that losses may increase from current
levels because of additional costs and expenses related to
marketing activities, expansion of operations, 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
operations through December 31, 2003. However, in the
longer term, failure to generate sufficient revenues, raise
additional capital or reduce spending would have a material
adverse effect on Vialtas ability to achieve its intended
business objectives.

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 components around which it designs its
products to ensure an available supply of products for
customers. Any significant shortage of critical 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.

Currently, the Company relies on a single third
party to manufacture its 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 the Companys
third party manufacturer 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.

Four customers comprise 72% of Vialtas
gross accounts receivable balance of $1.4 million at
December 31, 2002. Each of these customers represents
between 11% and 26% of total accounts receivable.

Note 4  Revenue
Recognition



| |       
| | ------
| | Beamer

Vialta did not have significant shipments of
Beamer until the quarter ended December 31, 2002. For most
of the shipments, the standard warranty period had not been
completed as of December 31, 2002. Due to limited history
of warranty and sales returns, Vialta did not recognize revenues
through December 31, 2002. Vialta deferred revenue on
Beamer shipments of $3.2 million (the costs for which were
expensed in prior periods) as of December 31, 2002, the
majority of which is expected to be recognized during the
quarter ending March 31, 2003.

ViDVD

Starting in 2001, Vialta began to market ViDVD.
Through December 31, 2002, shipments on ViDVD products were
not significant. As of December 31, 2002, Vialta had
discontinued marketing ViDVD.

36



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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

Note 5  Content Licenses

During 2002 and 2001,Vialta entered into
licensing agreements with various entertainment content
providers in connection with ViMagazine, a proprietary,
encrypted, magazine-style DVD-format disk, which was designed to
contain a wide variety of entertainment that can be used
exclusively with ViDVD products. Starting in January 2002,
Vialta amortized prepaid content licenses based on the greater
of the royalty amounts due or amortization on a straight-line
basis over an estimated life of three years. In December 2002
the Company concluded that content licenses had suffered a
permanent decline in value, as a result of its decision not to
market ViMagazine, and the remaining unamortized balance was
written down to zero. The total amortization and impairment
charge on content licenses recognized by Vialta during the year
ended December 31, 2002 was $11.4 million.

Note 6  Inventories

Because of uncertainties regarding realization of
the costs, Vialta expensed $10.4 million of inventory costs
for Beamer through September 30, 2002. The Company began
capitalizing its inventory costs for Beamer in the fourth
quarter of 2002 because the Company experienced an increase in
shipments. The following table summarizes the activities of
inventories and the related reserves (in thousands):

|                                                                                              |  |                 |        |         |  |     |        |       |  |         |   |     |  |   |        |   |  |   |         |   |  |   |       | 
|--------------------------------------------------------------------------------------------- |  | --------------- | ------ | ------- |  | --- | ------ | ----- |  | ------- | - | --- |  | - | ------ | - |  | - | ------- | - |  | - | ----- | 
|                                                                                              |  |                 |        |        
|                                                                                              |  | ViDVD and Other |        | Beamer 
|                                                                                              |  |                 |        |        
|                                                                                              |  | Gross           |        | Reserve |  | Net |        | Gross |  | Reserve |   | Net
|                                                                                              |  |                 |        |         |  |     |        |       |  |         |   |    
|Purchase of inventories from April 20, 1999
    (date of inception) through December 31, 2001 |  | $               | 8,973  |         |  | $   | (8,973 | )     |  | $       |  |     |  | $ |       |   |  | $ |        |   |  | $ |      | 
|                                                                                              |  |                 |        |         |  |     |        |       |  |         |   |     |  |   |        |   |  |   |         |   |  |   |       | 
|As of December 31, 2001                                                                       |  |                 | 8,973  |         |  |     | (8,973 | )     |  |         |  |     |  |   |       |   |  |   |        |   |  |   |      | 
|Purchase of inventories                                                                       |  |                 |       |         |  |     |       |       |  |         |  |     |  |   | 10,421 |   |  |   | (10,421 | ) |  |   |      | 
|Use or disposal of inventories                                                                |  |                 | (2,089 | )       |  |     | 2,089  |       |  |         |  |     |  |   |       |   |  |   |        |   |  |   |      | 
|Shipments for which revenues were deferred                                                    |  |                 |       |         |  |     |       |       |  |         |  |     |  |   | (163   | ) |  |   | 163     |   |  |   |      | 
|                                                                                              |  |                 |        |         |  |     |        |       |  |         |   |     |  |   |        |   |  |   |         |   |  |   |       | 
|As of September 30, 2002                                                                      |  |                 | 6,884  |         |  |     | (6,884 | )     |  |         |  |     |  |   | 10,258 |   |  |   | (10,258 | ) |  |   |      | 
|Purchase of inventories                                                                       |  |                 |       |         |  |     |       |       |  |         |  |     |  |   | 2,834  |   |  |   |        |   |  |   | 2,834 | 
|Use or disposal of inventories                                                                |  |                 | (1,731 | )       |  |     | 1,731  |       |  |         |  |     |  |   | (408   | ) |  |   | 408     |   |  |   |      | 
|ViDVD parts transferred to Beamer inventories                                                 |  |                 | (835   | )       |  |     | 835    |       |  |         |  |     |  |   | 835    |   |  |   | (835    | ) |  |   |      | 
|Shipments for which revenues were deferred                                                    |  |                 |       |         |  |     |       |       |  |         |  |     |  |   | (1,653 | ) |  |   | 1,653   |   |  |   |      | 
|                                                                                              |  |                 |        |         |  |     |        |       |  |         |   |     |  |   |        |   |  |   |         |   |  |   |       | 
|As of December 31, 2002                                                                       |  | $               | 4,318  |         |  | $   | (4,318 | )     |  | $       |  |     |  | $ | 11,866 |   |  | $ | (9,032  | ) |  | $ | 2,834 | 
|                                                                                              |  |                 |        |         |  |     |        |       |  |         |   |     |  |   |        |   |  |   |         |   |  |   |       | 
|Raw materials                                                                                 |  | $               | 4,255  |         |  | $   | (4,255 | )     |  | $       |  |     |  | $ | 6,026  |   |  | $ | (3,791  | ) |  | $ | 2,235 | 
|Finished goods                                                                                |  |                 | 63     |         |  |     | (63    | )     |  |         |  |     |  |   | 5,840  |   |  |   | (5,241  | ) |  |   | 599   | 
|                                                                                              |  |                 |        |         |  |     |        |       |  |         |   |     |  |   |        |   |  |   |         |   |  |   |       | 
|                                                                                              |  | $               | 4,318  |         |  | $   | (4,318 | )     |  | $       |  |     |  | $ | 11,866 |   |  | $ | (9,032  | ) |  | $ | 2,834 | 
|                                                                                              |  |                 |        |         |  |     |        |       |  |         |   |     |  |   |        |   |  |   |         |   |  |   |       | 

37



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VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

Note 7  Other Balance Sheet
Components:

|                                               |                                        |                |        |         |   |   |        |        |  
|---------------------------------------------- | -------------------------------------- | -------------- | ------ | ------- | - | - | ------ | ------ | -
|                                               |                                        |               
|                                               |                                        | December 31,  
|                                               |                                        |               
|                                               |                                        | 2002           |        | 2001   
|                                               |                                        |                |        |        
|                                               |                                        |               
|                                               |                                        | (In thousands)
|Short-term and long-term
    investments:      |                                        |                |        |         |   |   |        |       
|                                               | U.S. Government debt securities        |                | $      | 1,509   |   |   | $      | 4,274  |  
|                                               | Corporate debt securities              |                |        | 9,329   |   |   |        | 5,332  |  
|                                               |                                        |                |        |         |   |   |        |       
|                                               |                                        |                | 10,838 |         |   |   | 9,606  |       
|Due between one and two years                  |                                        |                |       |         |   |   | 4,064  |       
|                                               |                                        |                |        |         |   |   |        |       
|Due within one year                            |                                        | $              | 10,838 |         |   | $ | 5,542  |       
|                                               |                                        |                |        |         |   |   |        |       
|Accounts receivable, net:                      |                                        |                |        |         |   |   |        |       
|                                               | Accounts receivable                    |                | $      | 1,392   |   |   | $      | 665    |  
|                                               | Less: Allowance for doubtful accounts  |                |        | (30     | ) |   |        | (665   | )
|                                               |                                        |                |        |         |   |   |        |       
|                                               |                                        | $              | 1,362  |         |   | $ |       |       
|                                               |                                        |                |        |         |   |   |        |       
|Prepaid expenses and other current
    assets: |                                        |                |        |         |   |   |        |       
|                                               | Advances to subcontractors             |                | $      | 429     |   |   | $      | 2,004  |  
|                                               | Receivables from a related party       |                |        |        |   |   |        | 64     |  
|                                               | Other current assets                   |                |        | 824     |   |   |        | 921    |  
|                                               |                                        |                |        |         |   |   |        |       
|                                               |                                        | $              | 1,253  |         |   | $ | 2,989  |       
|                                               |                                        |                |        |         |   |   |        |       
|Property and equipment, net:                   |                                        |                |        |         |   |   |        |       
|                                               | Machinery and equipment                |                | $      | 7,155   |   |   | $      | 7,149  |  
|                                               | Furniture and fixtures                 |                |        | 569     |   |   |        | 607    |  
|                                               | Software and web site development cost |                |        | 5,173   |   |   |        | 6,663  |  
|                                               |                                        |                |        |         |   |   |        |       
|                                               |                                        |                | 12,897 |         |   |   | 14,419 |       
|                                               | Less: Accumulated depreciation         |                |        | (10,765 | ) |   |        | (6,588 | )
|                                               |                                        |                |        |         |   |   |        |       
|                                               |                                        | $              | 2,132  |         |   | $ | 7,831  |       
|                                               |                                        |                |        |         |   |   |        |       

Depreciation expense was approximately
$5.9 million, $3.6 million and $3.9 million for the
years ended December 31, 2002, 2001 and 2000, respectively.

|                                                    |                             |   |       |       |  |   |       |       | 
|--------------------------------------------------- | --------------------------- | - | ----- | ----- |  | - | ----- | ----- | 
|Accrued expenses and other current
    liabilities: |                             |   |       |       |  |   |       |      
|                                                    | Accrued compensation costs  |   | $     | 1,613 |  |   | $     | 2,440 | 
|                                                    | Customer deposits           |   |       | 893   |  |   |       |      | 
|                                                    | Accrued facility charges    |   |       | 402   |  |   |       |      | 
|                                                    | Payables to a related party |   |       | 33    |  |   |       |      | 
|                                                    | Other current liabilities   |   |       | 614   |  |   |       | 272   | 
|                                                    |                             |   |       |       |  |   |       |      
|                                                    |                             | $ | 3,555 |       |  | $ | 2,712 |      
|                                                    |                             |   |       |       |  |   |       |      

38



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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

Note 8  Spin-Off and
Recapitalization of Equity

Prior to August 21, 2001, Vialta was a
subsidiary of ESS Technology, Inc. (ESS). 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 had 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 August 21, 2001 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 No. 44, no compensation expense has
been or will be recorded in conjunction with these stock option
grants.

The table below summarizes the effect of the
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 transferred 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 |  
|                                                                                                               |  |           |        |            |  |         |          |         |  |             |        |   |  |  |        |  |  |  |        |  

In July 2002, each share of Vialtas
outstanding Class A and Class B common stock converted
into a single class of common stock in accordance with the
provisions of Vialtas Articles of Incorporation. As a
result of the above conversion, approximately 53,141,000 shares,
including 10,169,000 of shares held by the Company as treasury
stock, of issued Class A common stock and approximately
40,580,000 shares of issued Class B common stock were
converted into approximately 93,721,000 shares of the
non-classified common stock. Holders of the non-classified
common stock are entitled to one vote per share on all matters.

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VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

In November 2002, Vialta returned approximately
612,000 shares to ESS at no cost. These shares were originally
returned by ESS to Vialta as part of spin-off transaction in
August 2001.

Note 9  Related Party
Transactions

Prior to the August 21, 2001 spin-off
transaction, Vialta was a subsidiary of ESS. The Chairman of
Vialta is also the Chairman of ESS. The following is a summary
of major transactions between Vialta and ESS (in thousands):

|                                            |                                            |                          |       |              |   |      |       |               |   |   |       |        |   |   |        |        |  
|------------------------------------------- | ------------------------------------------ | ------------------------ | ----- | ------------ | - | ---- | ----- | ------------- | - | - | ----- | ------ | - | - | ------ | ------ | -
|                                            |                                            |                          |       |              |   |      |       | Period from  
|                                            |                                            |                          |       |              |   |      |       | April 20,    
|                                            |                                            |                          |       |              |   |      |       | 1999 (Date of
|                                            |                                            |                          |       | Inception)  
|                                            |                                            | Years Ended December 31, |       | through     
|                                            |                                            |                          |       | December 31,
|                                            |                                            | 2002                     |       | 2001         |   | 2000 |       | 2002         
|                                            |                                            |                          |       |              |   |      |       |              
|Net receivables at beginning of period      |                                            | $                        | 64    |              |   | $    | 650   |               |   | $ |      |        |   | $ |       |       
|Charges by Vialta to ESS:                   |                                            |                          |       |              |   |      |       |               |   |   |       |        |   |   |        |       
|                                            | Administrative and management service fees |                          |       | 223          |   |      |       | 98            |   |   |       |       |   |   |        | 321    |  
|                                            | Other                                      |                          |       | 77           |   |      |       | 74            |   |   |       | 650    |   |   |        | 801    |  
|Charges by ESS to Vialta:                   |                                            |                          |       |              |   |      |       |               |   |   |       |        |   |   |        |       
|                                            | Research and development service fees      |                          |       |             |   |      |       | (1,895        | ) |   |       | (3,077 | ) |   |        | (5,205 | )
|                                            | Administrative and management service fees |                          |       | (201         | ) |      |       | (3,140        | ) |   |       | (3,361 | ) |   |        | (7,004 | )
|                                            | Assignment of intellectual property        |                          |       |             |   |      |       |              |   |   |       | (2,000 | ) |   |        | (2,000 | )
|                                            | Purchase of products                       |                          |       | (1,403       | ) |      |       | (1,127        | ) |   |       | (1,004 | ) |   |        | (3,534 | )
|                                            | Building lease                             |                          |       | (1,852       | ) |      |       | (640          | ) |   |       |       |   |   |        | (2,492 | )
|Cash receipts from ESS                      |                                            |                          | (424  | )            |   |      | (700  | )             |   |   |      |        |   |   | (1,124 | )     
|Cash payments made to ESS                   |                                            |                          | 3,483 |              |   |      | 6,744 |               |   |   | 9,442 |        |   |   | 20,204 |       
|                                            |                                            |                          |       |              |   |      |       |               |   |   |       |        |   |   |        |       
|Net receivables (payables) at end of period |                                            | $                        | (33   | )            |   | $    | 64    |               |   | $ | 650   |        |   | $ | (33    | )     
|                                            |                                            |                          |       |              |   |      |       |               |   |   |       |        |   |   |        |       

Note 10  Net Income (Loss) Per
Share

Basic net loss per share is computed by dividing
the net loss for the period by the weighted average number of
shares of common stock outstanding during the period. Diluted
net loss per share is the same as the basic net loss per share
for the periods presented. Potential common equivalent shares
outstanding during the periods are excluded from the calculation
of diluted net loss as the effect is anti-dilutive.

|                                                                 |  |                                          |         |              |  |      |         |               |  |   |         |   |  |   |          |  
|---------------------------------------------------------------- |  | ---------------------------------------- | ------- | ------------ |  | ---- | ------- | ------------- |  | - | ------- | - |  | - | -------- | -
|                                                                 |  |                                          |         |              |  |      |         | Period from  
|                                                                 |  |                                          |         |              |  |      |         | April 20,    
|                                                                 |  |                                          |         |              |  |      |         | 1999 (Date of
|                                                                 |  |                                          |         | Inception)  
|                                                                 |  | Years Ended December 31,                 |         | through     
|                                                                 |  |                                          |         | December 31,
|                                                                 |  | 2002                                     |         | 2001         |  | 2000 |         | 2002         
|                                                                 |  |                                          |         |              |  |      |         |              
|                                                                 |  |                                         
|                                                                 |  | (In thousands, except per share amounts)
|Net loss                                                         |  | $                                        | (42,579 | )            |  | $    | (35,949 | )             |  | $ | (22,918 | ) |  | $ | (102,666 | )
|Basic and diluted weighted average common shares
    outstanding |  |                                          | 83,578  |              |  |      | 43,248  |               |  |   | 6,222   |   |  |   | 36,311   |  
|Basic and diluted net loss per share                             |  | $                                        | (0.51   | )            |  | $    | (0.83   | )             |  | $ | (3.68   | ) |  | $ | (2.83    | )

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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

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 (in thousands):

|                                        |                             |                          |        |              |  |      |         |               |  |  |        |        |  |  |        |        | 
|--------------------------------------- | --------------------------- | ------------------------ | ------ | ------------ |  | ---- | ------- | ------------- |  |  | ------ | ------ |  |  | ------ | ------ | 
|                                        |                             |                          |        |              |  |      |         | Period from  
|                                        |                             |                          |        |              |  |      |         | April 20,    
|                                        |                             |                          |        |              |  |      |         | 1999 (Date of
|                                        |                             |                          |        | Inception)  
|                                        |                             | Years Ended December 31, |        | through     
|                                        |                             |                          |        | December 31,
|                                        |                             | 2002                     |        | 2001(1)      |  | 2000 |         | 2002(1)      
|                                        |                             |                          |        |              |  |      |         |              
|Effect of common stock equivalents:     |                             |                          |        |              |  |      |         |               |  |  |        |        |  |  |        |       
|                                        | Options outstanding         |                          |        | 11,255       |  |      |         | 13,107        |  |  |        | 2,156  |  |  |        | 11,255 | 
|                                        | Preferred stock outstanding |                          |        |             |  |      |         | 91,000        |  |  |        | 91,000 |  |  |        |       | 
|                                        |                             |                          |        |              |  |      |         |               |  |  |        |        |  |  |        |       
|Total common stock equivalents excluded |                             |                          | 11,255 |              |  |      | 104,107 |               |  |  | 93,156 |        |  |  | 11,255 |       
|                                        |                             |                          |        |              |  |      |         |               |  |  |        |        |  |  |        |       



---



|    |                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

Note 11  Common Stock and Stock
Options



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

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

In June 2002, the Board of Directors authorized
an additional 10 million shares for repurchase. During
fiscal 2002, Vialta repurchased a total of 4,969,000 shares of
common stock for an aggregate cost of $5.1 million.

From January 1, 2003 through
February 21, 2003, Vialta repurchased 716,000 shares of
common stock for an aggregate cost of $0.3 million, and
8,079,000 remaining shares are authorized for repurchase.



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

In August 1999, the Company adopted the 1999
stock incentive plan. Under the 1999 Plan, the Companys
incentive stock options may be granted to its employees,
directors, non-employee directors and consultants. The aggregate
number of shares reserved for awards under the 1999 Plan shall
not exceed 10,000,000 shares. The exercise price of the 1999
Plan 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 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. Under the 2000 Director Plan, the
Companys nonqualified stock options 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

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VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

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. 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
2001 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.

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

|                                   |  |           |             |                     |  |          |            |   |  |   |      | 
|---------------------------------- |  | --------- | ----------- | ------------------- |  | -------- | ---------- | - |  | - | ---- | 
|                                   |  |           |             |                    
|                                   |  |           |             | Options Outstanding
|                                   |  |           |             |                    
|                                   |  |           |             |                     |  | Weighted
|                                   |  | Available |             | Numbers             |  | Average 
|                                   |  | for       |             | of                  |  | Exercise
|                                   |  | Grant     |             | Options             |  | 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 | 
|Granted                            |  |           | (913,957    | )                   |  |          | 913,957    |   |  |   | 0.85 | 
|Cancelled                          |  |           | 1,277,205   |                     |  |          | (1,277,205 | ) |  |   | 0.79 | 
|Exercised                          |  |           |            |                     |  |          | (1,488,670 | ) |  |   | 0.01 | 
|                                   |  |           |             |                     |  |          |            |   |  |   |      | 
|Balance at December 31, 2002       |  |           | 6,153,243   |                     |  |          | 11,254,688 |   |  | $ | 0.31 | 
|                                   |  |           |             |                     |  |          |            |   |  |   |      | 

42



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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

The options outstanding and currently exercisable
at December 31, 2002 are detailed as follows:

|              |  |                     |            |                     |  |          |      |             |  |          |      |  |  |  |           |  |  |   |      | 
|------------- |  | ------------------- | ---------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|              |  |                     |            |                     |  |         
|              |  | Options Outstanding |            |                    
|              |  |                     |            | Options Exercisable
|              |  |                     |            | Weighted            |  |          |      |            
|              |  |                     |            | Average             |  | Weighted |      |             |  | Weighted
|              |  |                     |            | Remaining           |  | Average  |      |             |  | Average 
|Exercise      |  | Number              |            | Contractual         |  | Exercise |      | Number      |  | Exercise
|Price         |  | Outstanding         |            | Life (Years)        |  | Price    |      | Exercisable |  | Price   
|              |  |                     |            |                     |  |          |      |             |  |         
|$0.00         |  |                     | 6,353,274  |                     |  |          | 5.54 |             |  | $        |     |  |  |  | 3,379,132 |  |  | $ |     | 
|$0.25  $0.42 |  |                     | 2,701,058  |                     |  |          | 7.86 |             |  |          | 0.35 |  |  |  | 530,857   |  |  |   | 0.37 | 
|$0.47  $1.62 |  |                     | 1,938,927  |                     |  |          | 8.93 |             |  |          | 1.04 |  |  |  | 382,698   |  |  |   | 1.23 | 
|$1.95         |  |                     | 46,731     |                     |  |          | 7.12 |             |  |          | 1.95 |  |  |  | 33,938    |  |  |   | 1.95 | 
|$2.01         |  |                     | 214,698    |                     |  |          | 6.71 |             |  |          | 2.01 |  |  |  | 144,209   |  |  |   | 2.01 | 
|              |  |                     |            |                     |  |          |      |             |  |          |      |  |  |  |           |  |  |   |      | 
|              |  |                     | 11,254,688 |                     |  |          | 6.71 |             |  | $        | 0.31 |  |  |  | 4,470,834 |  |  | $ | 0.23 | 
|              |  |                     |            |                     |  |          |      |             |  |          |      |  |  |  |           |  |  |   |      | 

The weighted average fair value of options
granted in fiscal years 2002, 2001, 2000, and for period from
April 20, 1999 (date of inception) through
December 31,1999 was $0.59, $0.90, $0.34 and $0.05,
respectively. Options exercisable were 4,470,834, 2,301,642,
150,250 and 0 as of December 31, 2002, 2001, 2000 and 1999,
respectively.



| |                       
| | ----------------------
| | Fair Value Disclosures

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

|                         |  |                          |      |      |  |      |      |      |  |  |      |   |  |  |      |  
|------------------------ |  | ------------------------ | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                         |  |                         
|                         |  | Years Ended December 31,
|                         |  |                         
|                         |  | 2002                     |      | 2001 |  | 2000 |      | 1999
|                         |  |                          |      |      |  |      |      |     
|Expected dividend yield  |  |                          | 0.00 | %    |  |      | 0.00 | %    |  |  | 0.00 | % |  |  | 0.00 | %
|Risk-free interest rate  |  |                          | 3.50 | %    |  |      | 4.45 | %    |  |  | 6.25 | % |  |  | 6.25 | %
|Expected volatility      |  |                          | 96   | %    |  |      | 90   | %    |  |  | 0    | % |  |  | 0    | %
|Expected life (in years) |  |                          | 4    |      |  |      | 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.

43



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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

Note 12  Income Taxes

The components of the benefit from income taxes
are as follows (in thousands):

|                                |         |                          |   |              |  |      |   |               |  |   |     |     |  |   |       |     | 
|------------------------------- | ------- | ------------------------ | - | ------------ |  | ---- | - | ------------- |  | - | --- | --- |  | - | ----- | --- | 
|                                |         |                          |   |              |  |      |   | Period from  
|                                |         |                          |   |              |  |      |   | April 20,    
|                                |         |                          |   |              |  |      |   | 1999 (Date of
|                                |         |                          |   | Inception)  
|                                |         | Years Ended December 31, |   | through     
|                                |         |                          |   | December 31,
|                                |         | 2002                     |   | 2001         |  | 2000 |   | 2002         
|                                |         |                          |   |              |  |      |   |              
|Current:                        |         |                          |   |              |  |      |   |               |  |   |     |     |  |   |       |    
|                                | Federal |                          | $ |             |  |      | $ |              |  |   | $   |    |  |   | $     | 707 | 
|                                | State   |                          |   |             |  |      |   |              |  |   |     | 260 |  |   |       | 353 | 
|                                |         |                          |   |              |  |      |   |               |  |   |     |     |  |   |       |    
|Total benefit from income taxes |         | $                        |  |              |  | $    |  |               |  | $ | 260 |     |  | $ | 1,060 |    
|                                |         |                          |   |              |  |      |   |               |  |   |     |     |  |   |       |    

There was no federal or state income tax
provision in 2002, 2001 and 2000 because the Companys
operations resulted in pre-tax losses. The Company filed
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, $0 and $260,000 for
utilizing the Companys net operating losses in 2002, 2001
and 2000, 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 income
taxes computed at the federal statutory rate of 35% for the
years ended December 31, 2002, 2001 and 2000, and for the
period from April 20, 1999 (date of inception) through
December 31, 2002 and the benefit from income taxes is as
follows (in thousands):

|                                              |                           |                          |         |              |  |      |         |               |  |   |        |     |  |   |         |       | 
|--------------------------------------------- | ------------------------- | ------------------------ | ------- | ------------ |  | ---- | ------- | ------------- |  | - | ------ | --- |  | - | ------- | ----- | 
|                                              |                           |                          |         |              |  |      |         | Period from  
|                                              |                           |                          |         |              |  |      |         | April 20,    
|                                              |                           |                          |         |              |  |      |         | 1999 (Date of
|                                              |                           |                          |         | Inception)  
|                                              |                           | Years Ended December 31, |         | through     
|                                              |                           |                          |         | December 31,
|                                              |                           | 2002                     |         | 2001         |  | 2000 |         | 2002         
|                                              |                           |                          |         |              |  |      |         |              
|Benefit from income taxes at statutory rate   |                           | $                        | 14,903  |              |  | $    | 12,584  |               |  | $ | 7,830  |     |  | $ | 36,024  |      
|State income taxes net of federal tax benefit |                           |                          | 1,971   |              |  |      | 2,066   |               |  |   | 1,032  |     |  |   | 5,162   |      
|Other                                         |                           |                          | 359     |              |  |      | 391     |               |  |   | 883    |     |  |   | 1,636   |      
|Tax losses not benefited                      |                           |                          | (17,233 | )            |  |      | (15,041 | )             |  |   | (9,485 | )   |  |   | (41,762 | )    
|                                              |                           |                          |         |              |  |      |         |               |  |   |        |     |  |   |         |      
|                                              | Benefit from income taxes |                          | $       |             |  |      | $       |              |  |   | $      | 260 |  |   | $       | 1,060 | 
|                                              |                           |                          |         |              |  |      |         |               |  |   |        |     |  |   |         |      

44



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##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

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 (in thousands):

|                                       |                         |              |         |      |  |   |         |   | 
|-------------------------------------- | ----------------------- | ------------ | ------- | ---- |  | - | ------- | - | 
|                                       |                         |             
|                                       |                         | December 31,
|                                       |                         |             
|                                       |                         | 2002         |         | 2001
|                                       |                         |              |         |     
|Net operating loss carryforwards       |                         | $            | 26,068  |      |  | $ | 15,506  |  
|Depreciation and amortization          |                         |              | 7,663   |      |  |   | 3,271   |  
|Accruals and reserves                  |                         |              | 7,456   |      |  |   | 4,563   |  
|Federal and state credits carryforward |                         |              | 1,801   |      |  |   | 1,607   |  
|Other                                  |                         |              | (58     | )    |  |   | 751     |  
|                                       |                         |              |         |      |  |   |         |  
|Gross deferred tax assets              |                         |              | 42,930  |      |  |   | 25,698  |  
|Valuation allowance                    |                         |              | (42,930 | )    |  |   | (25,698 | )
|                                       |                         |              |         |      |  |   |         |  
|                                       | Net deferred tax assets |              | $       |     |  |   | $       |  | 
|                                       |                         |              |         |      |  |   |         |  

Deferred tax assets at December 31, 2002 and
2001 primarily relate to net operating losses, depreciation and
amortization, and accruals. Due to the uncertainly surrounding
the realization of the deferred tax asset in future tax returns,
the Company has established a full valuation allowance against
its deferred tax assets. Management evaluates on a periodic
basis the recoverability of deferred tax assets and the need for
a valuation allowance. At such time as it is determined that it
is more likely than not that the deferred tax assets are
realizable, the valuation allowance will be reduced.

As at December 31, 2002, Vialta had
approximately $69.1 million and $33.0 million of federal
and state net operating loss carryforward, respectively. These
losses will begin expiring in 2020 and 2007, respectively.

The Company has approximately $800,000 of federal
and $900,000 of state research and development tax credits
available to offset future tax, 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 and credit carryforwards may be
impaired or limited in certain circumstances. Events which cause
limitations in the amount of net operating losses and credits
that Vialta 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 Vialta should have an
ownership change, as defined by tax law, utilization of the
carryforwards could be restricted.

Note 13  Employee Benefit
Plans

In August 2001, the Vialta, Inc. 401(k) Plan was
adopted. 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, 2002, 2001 and 2000 .

45



---



##### Table of Contents



VIALTA, INC.


Notes To Consolidated Financial
Statements  (continued)

Note 14  Segment and Geographic
Information

Vialta operates as one segment since its
inception on April 20, 1999 through December 31, 2002.
As of December 31, 2002 and 2001, long-lived assets held
outside the United States of America were not material.

Note 15  Commitments

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 (in thousands):

|                          |  |         |       | 
|------------------------- |  | ------- | ----- | 
|Years Ending December 31, |  | Amounts
|                          |  |        
|2003                      |  | $       | 2,265 | 
|2004                      |  |         | 349   | 
|2005                      |  |         | 147   | 
|2006                      |  |         | 110   | 
|                          |  |         |       | 
|                          |  | $       | 2,871 | 
|                          |  |         |       | 

Rent expense was approximately $1.7 million,
$2.1 million and $0.1 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

Note 16  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 material adverse impact on
Vialtas consolidated financial position, results of
operations or cash flows.

46



---



##### Table of Contents



Selected Quarterly Operation Results
(unaudited):

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 (in thousands, except per
share amounts).

|                                                                       |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |              |   |   |        |        |   |   |        |        |   |   |        |        |   |   |         |         |  
|---------------------------------------------------------------------- | -------------- | -------------------------- | ------ | -------- | - | ------------- | ------ | ------------ | - | --------- | ------- | -------- | - | ------------- | ------- | ------------ | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------- | ------- | -
|                                                                       |                |                           
|                                                                       |                | For the Three Months Ended
|                                                                       |                |                           
|                                                                       |                | March 31,                  |        | June 30, |   | September 30, |        | December 31, |   | March 31, |         | June 30, |   | September 30, |         | December 31,
|                                                                       |                | 2002                       |        | 2002     |   | 2002          |        | 2002         |   | 2001      |         | 2001     |   | 2001          |         | 2001        
|                                                                       |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |             
|Operating expenses:                                                    |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |              |   |   |        |        |   |   |        |        |   |   |        |        |   |   |         |        
|Product costs                                                          |                | $                          |       |          |   | $             | 1,137  |              |   | $         | 9,284   |          |   | $             |        |              |   | $ |       |        |   | $ |       |        |   | $ |       |        |   | $ |        |        
|Research and development                                               |                |                            | 4,223  |          |   |               | 3,992  |              |   |           | 2,928   |          |   |               | 2,121   |              |   |   | 4,528  |        |   |   | 5,363  |        |   |   | 5,446  |        |   |   | 9,913   |        
|Amortization and impairment of content licenses                        |                |                            | 253    |          |   |               | 947    |              |   |           | 948     |          |   |               | 9,247   |              |   |   |       |        |   |   |       |        |   |   |       |        |   |   |        |        
|Sales and marketing                                                    |                |                            | 614    |          |   |               | 732    |              |   |           | 777     |          |   |               | 977     |              |   |   | 995    |        |   |   | 1,163  |        |   |   | 838    |        |   |   | 743     |        
|General and administrative                                             |                |                            | 1,812  |          |   |               | 1,427  |              |   |           | 1,216   |          |   |               | 1,188   |              |   |   | 2,357  |        |   |   | 2,247  |        |   |   | 2,412  |        |   |   | 2,290   |        
|                                                                       |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |              |   |   |        |        |   |   |        |        |   |   |        |        |   |   |         |        
|                                                                       | Operating loss |                            |        | (6,902   | ) |               |        | (8,235       | ) |           |         | (15,153  | ) |               |         | (13,533      | ) |   |        | (7,880 | ) |   |        | (8,773 | ) |   |        | (8,696 | ) |   |         | (12,946 | )
|                                                                       |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |              |   |   |        |        |   |   |        |        |   |   |        |        |   |   |         |        
|Interest income, net                                                   |                |                            | 363    |          |   |               | 372    |              |   |           | 330     |          |   |               | 179     |              |   |   | 1,230  |        |   |   | 1,055  |        |   |   | 801    |        |   |   | 520     |        
|Other income (expenses)                                                |                |                            |       |          |   |               | (1     | )            |   |           |        |          |   |               | 1       |              |   |   | (19    | )      |   |   | 15     |        |   |   | (1,097 | )      |   |   | (165    | )      
|                                                                       |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |              |   |   |        |        |   |   |        |        |   |   |        |        |   |   |         |        
|Loss before income tax benefit                                         |                |                            | (6,539 | )        |   |               | (7,864 | )            |   |           | (14,823 | )        |   |               | (13,353 | )            |   |   | (6,669 | )      |   |   | (7,703 | )      |   |   | (8,992 | )      |   |   | (12,591 | )      
|Income tax benefit                                                     |                |                            |       |          |   |               |       |              |   |           |        |          |   |               |        |              |   |   |       |        |   |   |       |        |   |   |       |        |   |   |        |        
|                                                                       |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |              |   |   |        |        |   |   |        |        |   |   |        |        |   |   |         |        
|Net loss                                                               |                | $                          | (6,539 | )        |   | $             | (7,864 | )            |   | $         | (14,823 | )        |   | $             | (13,353 | )            |   | $ | (6,669 | )      |   | $ | (7,703 | )      |   | $ | (8,992 | )      |   | $ | (12,591 | )      
|                                                                       |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |              |   |   |        |        |   |   |        |        |   |   |        |        |   |   |         |        
|Net loss per share attributable to common
    shares  basic & diluted |                | $                          | (0.08  | )        |   | $             | (0.09  | )            |   | $         | (0.18   | )        |   | $             | (0.16   | )            |   | $ | (1.07  | )      |   | $ | (1.23  | )      |   | $ | (0.13  | )      |   | $ | (0.15   | )      
|                                                                       |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |              |   |   |        |        |   |   |        |        |   |   |        |        |   |   |         |        
|Weighted average common shares outstanding                             |                |                            | 85,240 |          |   |               | 83,752 |              |   |           | 82,908  |          |   |               | 83,246  |              |   |   | 6,231  |        |   |   | 6,240  |        |   |   | 70,945 |        |   |   | 86,780  |        
|                                                                       |                |                            |        |          |   |               |        |              |   |           |         |          |   |               |         |              |   |   |        |        |   |   |        |        |   |   |        |        |   |   |         |        






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9: | Changes In and Disagreements with
    Accountants on Accounting and Financial Disclosure

None

47



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##### Table of Contents






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 2003 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 required by this Item is
incorporated by reference in our Proxy Statement, which we will
file with the Commission not later than 120 days after our
fiscal year-end.






|         |                       
|-------- | ----------------------
|Item 11: | Executive Compensation

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






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12: | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

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

The following table summarizes information with
respect to options under Vialtas equity compensation plans
at December 31, 2002:

|                                                               |  |                   |            |                   |  |                         |      |  |  |  |           | 
|-------------------------------------------------------------- |  | ----------------- | ---------- | ----------------- |  | ----------------------- | ---- |  |  |  | --------- | 
|                                                               |  | Number of         |            | Weighted          |  | Number of Securities   
|                                                               |  | Securities to be  |            | Average           |  | Remaining Available for
|                                                               |  | Issued Upon       |            | Exercise Price of |  | Future Issuance Under  
|                                                               |  | Exercise of       |            | Outstanding       |  | Equity Compensation    
|                                                               |  | Outstanding       |            | Options,          |  | Plans (Excluding       
|                                                               |  | Options, Warrants |            | Warrants          |  | Securities Reflected in
|                                                               |  | and Rights (1)    |            | and Rights        |  | Column (a))            
|                                                               |  |                   |            |                   |  |                        
|                                                               |  | (a)               |            | (b)               |  | (c)                    
|Equity compensation plans approved by security
    holders     |  |                   | 11,254,688 |                   |  | $                       | 0.31 |  |  |  | 6,153,243 | 
|Equity compensation plans not approved by
    security holders |  |                   |           |                   |  |                         |     |  |  |  |          | 
|                                                               |  |                   |            |                   |  |                         |      |  |  |  |           | 
|                                                               |  |                   | 11,254,688 |                   |  | $                       | 0.31 |  |  |  | 6,153,243 | 
|                                                               |  |                   |            |                   |  |                         |      |  |  |  |           | 



---



|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes only options outstanding under
    Vialtas stock option plans, as no stock warrants or rights
    were outstanding as of December 31, 2002.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13: | Certain Relationships and Related
    Transactions

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






|         |                        
|-------- | -----------------------
|Item 14: | Controls and Procedures

(a)     Evaluation of
disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) have
concluded, based on their evaluation as of a date within
90 days prior to the date of filing of the annual report,
that our disclosure controls and procedures are effective to
ensure that material information required to be disclosed by

48



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##### Table of Contents



us in report filed or submitted by us under the
Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time period
specified in the SECs rules and forms, and includes
controls and procedures designed to ensure that material
information required to be disclosed by us in such reports is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.


(b)     Changes in
internal controls.There have been no significant changes in
our internal controls or in other factors that could
significantly affect these controls subsequent to the date of
our evaluation.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15: | 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.

(b)     Reports on
Form 8-K.

The Company did not file any Reports on
Form 8-K during the fourth quarter of 2002.

With the exception of the information
incorporated by reference to the Companys Proxy Statement
for the 2003 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 28, 2003

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 28, 2003
|                                                        
|/s/ WILLIAM M. SCHARNINGHAUSENWilliam M. Scharninghausen |  | Chief Financial Officer
    (principal financial officer)               |  | March 28, 2003
|                                                        
|/s/ FRED S.L. CHANFred S.L. Chan                         |  | Chairman of the Board                                                   |  | March 28, 2003
|                                                        
|/s/ GEORGE M. CAINGeorge M. Cain                         |  | Director                                                                |  | March 28, 2003
|                                                        
|/s/ HERBERT CHANGHerbert Chang                           |  | Director                                                                |  | March 28, 2003
|                                                        
|/s/ MICHAEL S. DUBESTERMichael S. Dubester               |  | Director                                                                |  | March 28, 2003
|                                                        
|/s/ MATTHEW K. FONGMatthew K. Fong                       |  | Director                                                                |  | March 28, 2003

50



---



##### Table of Contents



CERTIFICATIONS

I, Didier Pietri, President and Chief Executive
Officer of Vialta, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Vialta, Inc. (the
    registrant);                                                                                                                                                                                                                                                     
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of the
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

|                     |  |                                                                                                                     
|-------------------- |  | --------------------------------------------------------------------------------------------------------------------
|Date: March 28, 2003 |  | /s/ DIDIER PIETRI
    ---------------------------------------
    Didier PietriPresident and Chief Executive Officer

51



---



##### Table of Contents



CERTIFICATIONS

I, William M. Scharninghausen, Chief Financial
Officer of Vialta, Inc., certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Vialta, Inc. (the
    registrant);                                                                                                                                                                                                                                                     
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of the
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.

|                     |  |                                                                                                                              
|-------------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Date: March 28, 2003 |  | /S/ William M. Scharninghausen
    ------------------------------------
    William M. ScharninghausenChief Financial Officer

52



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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) *                                                                                                

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##### 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)
|        | 21 | .1                     |  | Subsidiaries of the Registrant
    (Exhibit No. 21.1 to Form 10 File No. 000-32809)                                    
|        | 23 | .1                     |  | Consent of PricewaterhouseCoopers LLP                                                                                  
|        | 23 | .3                     |  | Consent of PricewaterhouseCoopers LLP (filed
    herewith)                                                             
|        | 99 | .1                     |  | Certification pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                            



---



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

54