##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended March 31, 2005. 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
(State or Other Jurisdiction of Incorporation or Organization)
    
    94-3337236
(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 whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ The number of outstanding shares of the registrants common stock, par value $0.001 per
share, on May 9, 2005 was 83,088,185 shares.




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VIALTA, INC.
FORM 10-Q: QUARTER ENDED MARCH 31, 2005 TABLE OF CONTENTS PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited):
    
    
    3Condensed Consolidated Balance Sheets  March 31, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations  three months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows  three months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4.
    
    Controls and Procedures
    
    
    14PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    15SIGNATURES
    
    
    16EXHIBIT INDEXEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1: Financial Statements VIALTA, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands)
 (unaudited)
 March 31, 2005
    
    
    December 31, 2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    14,101
    
    
    $
    7,296Restricted cash
    
    
    3,066
    
    
    
    3,057Short-term investments
    
    
    4,278
    
    
    
    11,106Accounts receivable, net
    
    
    518
    
    
    
    2,761Inventories
    
    
    4,497
    
    
    
    4,500Prepaid expenses and other current assets
    
    
    262
    
    
    
    351Total current assets
    
    
    26,722
    
    
    
    29,071Property and equipment, net
    
    
    265
    
    
    
    302Other assets
    
    
    29
    
    
    
    29Total assets
    
    $
    27,016
    
    
    $
    29,402Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    221
    
    
    $
    373Accrued expenses and other liabilities
    
    
    1,837
    
    
    
    2,070Deferred profit
    
    
    376
    
    
    
    1,310Total current liabilities
    
    
    2,434
    
    
    
    3,753Stockholders equity:Common stock
    
    
    95
    
    
    
    95Additional paid-in capital
    
    
    144,122
    
    
    
    144,122Treasury stock
    
    
    (9,458
    )
    
    
    (9,458
    )Accumulated deficit
    
    
    (110,169
    )
    
    
    (109,098
    )Accumulated other comprehensive loss
    
    
    (8
    )
    
    
    (12
    )Total stockholders equity
    
    
    24,582
    
    
    
    25,649Total liabilities and stockholders equity
    
    $
    27,016
    
    
    $
    29,402
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3




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VIALTA, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 (unaudited)
 Three months endedMarch 31,2005
    
    
    2004Net revenue
    
    $
    2,958
    
    
    $
    4,974Cost of goods sold
    
    
    2,170
    
    
    
    1,396Gross profit
    
    
    788
    
    
    
    3,578Operating expenses:Engineering and development
    
    
    292
    
    
    
    336Sales and marketing
    
    
    292
    
    
    
    605General and administrative
    
    
    1,478
    
    
    
    1,360Total operating expenses
    
    
    2,062
    
    
    
    2,301Operating income (loss)
    
    
    (1,274
    )
    
    
    1,277Interest income and other, net
    
    
    203
    
    
    
    209Net income (loss)
    
    $
    (1,071
    )
    
    $
    1,486Net income (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    0.02Diluted
    
    $
    (0.01
    )
    
    $
    0.02Weighted average common shares outstanding:Basic
    
    
    83,077
    
    
    
    82,803Diluted
    
    
    83,077
    
    
    
    88,552
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4




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VIALTA, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Three months endedMarch 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (1,071
    )
    
    $
    1,486Adjustments to reconcile net income (loss) to net cash
used in operating activities:Depreciation
    
    
    37
    
    
    
    197Changes in operating assets and liabilities:Accounts receivable, net
    
    
    2,243
    
    
    
    2,061Inventories
    
    
    3
    
    
    
    (914
    )Prepaid expenses and other
    
    
    89
    
    
    
    234Restricted cash deposit
    
    
    (9
    )
    
    
    (807
    )Deferred profit
    
    
    (934
    )
    
    
    (2,042
    )Accounts payable and accrued liabilities and other
    
    
    (385
    )
    
    
    (1,820
    )Net cash used in operating activities
    
    
    (27
    )
    
    
    (1,605
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of short-term investments
    
    
    (516
    )
    
    
    (5,064
    )Proceeds from sales of short-term investments
    
    
    7,348
    
    
    
    6,111Acquisitions of property and equipment
    
    
    
    
    
    
    (6
    )Net cash provided by investing activities:
    
    
    6,832
    
    
    
    1,041Net increase (decrease) in cash and cash equivalents
    
    
    6,805
    
    
    
    (564
    )Cash and cash equivalents, beginning of the period
    
    
    7,296
    
    
    
    9,356Cash and cash equivalents, end of the period
    
    $
    14,101
    
    
    $
    8,792
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5




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VIALTA, INC. 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 NOTE 1. THE COMPANY 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 primary products are
the Beamerä personal videophone line and the VistaFrameä digital picture frame. Our
Beamer videophone products add color video to phone calls, enabling users to see the person they
are calling. Since both parties to a video call must have a Beamer videophone product (or
compatible videophone), our videophone products are primarily sold in pairs. Our Beamer videophone
products work with any home phone over any standard (analog) home phone line, at no additional cost
to a regular phone call. Our Beamer videophone products include models that are standalone (such as
our first videophone product known as Beamer) or connect through most televisions (the Beamer TV),
and may include the ability to send and receive digital pictures (the Beamer FX). Beamer videophone
products are carried by such retailers as Best Buy, Frys Electronics, The Good Guys, The Discovery
Channel, The Sharper Image and Cinmar (The Frontgate Catalog), among others. Our VistaFrame product is a digital picture frame that allows users to display photographs
directly from a digital camera memory card or from VistaFrames internal memory. VistaFrame is
compatible with most standard card formats and does not require a camera or computer connection,
special wiring or web based services to display digital photographs. With VistaFrame, consumers
can view digital pictures individually or in a custom slideshow format with the user selecting the
pictures, the display sequence, display interval and the transition effect. VistaFrame is currently
available through retailers such as The Discovery Channel, The Sharper Image, The Good Guys and
Cinmar, among others. Since our inception, we have incurred substantial losses and negative cash flows from operations.
We expect operating losses and negative cash flows from operations to continue for the foreseeable
future and anticipate that losses may increase from current levels because of additional costs and
expenses related to sales and marketing activities, expansion of operations, expansion of product
offerings and development of relationships with other businesses. We believe that we have
sufficient cash and cash equivalents, restricted cash and investments to fund our existing
operations through December 31, 2005. However, in the longer term, failure to generate sufficient
revenues, raise additional capital or reduce spending could have a material adverse effect on our
ability to continue to operate our business On March 28, 2005, we announced entering into a definitive merger agreement with Victory
Acquisition Corp., a newly formed entity established by Fred S.L. Chan, Chairman of the Company,
and certain of his family members. Victory will acquire the approximately 60% of our stock not
owned by it for $0.36 per share in cash. The proposed merger is expected to be completed in the
third quarter of 2005 and is subject to Vialta shareholder and customary approvals. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The accompanying unaudited condensed consolidated financial statements have been prepared by
us pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of management, the
accompanying unaudited condensed interim financial statements contain all adjustments, all of which
are normal and recurring in nature, necessary to fairly present our financial position, operating
results and cash flows. These unaudited condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes thereto for the year
ended December 31, 2004, included in our Annual Report on Form 10-K filed on March 31, 2005. The
results of operations for the three months ended March 31, 2005 are not necessarily indicative of
the results that may be expected for any other period or for the fiscal year ending December 31,
2005. Principles of consolidation The consolidated financial statements include the accounts of Vialta, Inc. and our
subsidiaries. All material intercompany accounts and transactions have been eliminated in
consolidation. 6




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Cash equivalents and investments We consider all highly liquid investments with an initial maturity of 90 days or less to be
cash equivalents. Cash equivalents primarily represent money market accounts, recorded at cost,
which approximate their fair value. 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 using 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. Investments with maturity dates of 90 days or more at the date of purchase are classified as
short-term investments since we have the ability to redeem them within the year. Approximately $3.1 million of cash at March 31, 2005 and 2004 is restricted as collateral for
letters of credit to a contract manufacturer and raw materials supplier. Revenue recognition Products sold to retailers and distributors are subject to rights of return. We defer
recognition of revenue on products sold to retailers and distributors until the retailers and
distributors sell the products to their customers. Revenue is also deferred for the initial
thirty-day period during which our end customers, retailers and distributors have the unconditional
right to return products. For products sold to end customers we generally recognize revenue upon shipment provided that
we have no post-sale obligations, we can reliably estimate and accrue warranty costs and sales
returns, the price is fixed or determinable and collection of the resulting receivable is
reasonably assured. For sales to international distributors we generally recognize revenue based on
the above criteria and upon receipt of payment in full. For sales to end customers that do not meet
the above criteria, revenue is deferred until such criteria are met. Allowances for sales returns and Doubtful Accounts Sales return allowances are recorded at the time when revenue is recognized based on
historical returns, current economic trends and changes in customer demand. Such allowances are
adjusted periodically to reflect actual experience and anticipated returns. Allowance for doubtful accounts is our best estimate of the amount of probable credit losses
in our existing accounts receivable. We determine the allowance based on historical write-off
experience. We review our allowance for doubtful accounts monthly. Past due balances over 90 days
are reviewed individually for collectibility. Account balances are charged off against the
allowance when we feel it is probable that the receivable will not be recovered. 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 customer. We estimate warranty costs based on historical
experience and accrue for estimated costs as a charge to cost of sales when revenue is recognized.
The following table shows the details of the product warranty accrual, as required by FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, for the three months ended March 31, 2005
and 2004 (in thousands): March 31,
    
    
    March 31,2005
    
    
    2004Beginning balance
    
    $
    399
    
    
    $
    484Accruals for warranties issued during the period
    
    
    159
    
    
    
    460Settlements made during the period
    
    
    (210
    )
    
    
    (285
    )Ending balance
    
    $
    348
    
    
    $
    659
 Comprehensive gain Comprehensive gain is defined to include all changes in equity during a period from non-owner
sources. Other comprehensive 7




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gain for the three months ended March 31, 2005 and 2004 was comprised of unrealized gains on
available-for-sale investments and amounted to $4,000 and $2,000, respectively. Stock-based compensation We account 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. We
provide 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. The following table illustrates the effect on our net income and net income per share if we
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). Three Months EndedMarch 31,2005
    
    
    2004Net income (loss), as reported
    
    $
    (1,071
    )
    
    $
    1,486Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (69
    )
    
    
    (234
    )Pro forma net income (loss)
    
    $
    (1,140
    )
    
    $
    1,252Pro forma net income (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    0.02Diluted
    
    $
    (0.01
    )
    
    $
    0.01
 Revision in Classification of Certain Securities In connection with preparation of these financial statements, we concluded that it was
appropriate to classify our auction rate securities as current investments at December 31, 2004.
Previously, such investments had been classified as cash and cash equivalents. Accordingly, we have
revised the classification to exclude $5.8 million from cash and cash equivalents at March 31,
2004, and to include such amounts as short-term investments. In addition, we have made
corresponding revisions to the accompanying statements of cash flows to reflect the purchases and
proceeds form sale of the auction rate securities as investing activities. These revisions resulted
in a net decrease in cash provided by investing activities of $1.4 million for the three months
ending March 31, 2004. NOTE 3. RELATED PARTY TRANSACTIONS The following is a summary of major transactions between us and ESS Technology, Inc., which
was our parent company prior to August 2001, for the periods presented (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net payables at beginning of period
    
    $
    (127
    )
    
    $
    (281
    )Charges by Vialta to ESS
    
    
    208
    
    
    
    2Charges by ESS to Vialta:Purchase of products
    
    
    (12
    )
    
    
    (339
    )Building lease
    
    
    (125
    )
    
    
    (124
    )Other
    
    
    (2
    )
    
    
    (6
    )Cash receipts from ESS
    
    
    (208
    )
    
    
    (2
    )Cash payments made to ESS
    
    
    169
    
    
    
    436Net payables at end of period
    
    $
    (97
    )
    
    $
    (314
    )
 8




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NOTE 4. MARKETABLE SECURITIES Our portfolio of marketable securities at March 31, consisted of the following (in thousands): March 31, 2005
    
    
    December 31, 2004Available-for-Sale Securities
    
    
    Available-for-Sale SecuritiesGross
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    
    
    
    
    
    
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    11
    
    
    $
    
    
    
    $
    
    
    
    $
    11
    
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    4Commercial paper
    
    
    9,442
    
    
    
    
    
    
    
    (1
    )
    
    
    9,441
    
    
    
    2,542
    
    
    
    
    
    
    
    
    
    
    
    2,542Cash
    
    
    4,649
    
    
    
    
    
    
    
    
    
    
    
    4,649
    
    
    
    4,750
    
    
    
    
    
    
    
    
    
    
    
    4,750Total cash and cash equivalents
    
    $
    14,102
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    14,101
    
    
    $
    7,296
    
    
    $
    
    
    
    $
    
    
    
    $
    7,296Market auction preferred securities
    
    $
    500
    
    
    $
    
    
    
    $
    
    
    
    $
    500
    
    
    $
    5,300
    
    
    $
    
    
    
    $
    
    
    
    $
    5,300U.S. government debt securities
    
    
    3,267
    
    
    
    
    
    
    
    (5
    )
    
    
    3,262
    
    
    
    4,741
    
    
    
    
    
    
    
    (10
    )
    
    
    4,731Corporate debt securities
    
    
    518
    
    
    
    
    
    
    
    (2
    )
    
    
    516
    
    
    
    1,077
    
    
    
    
    
    
    
    (2
    )
    
    
    1,075Total short-term investments
    
    $
    4,285
    
    
    $
    
    
    
    $
    (7
    )
    
    $
    4,278
    
    
    
    11,118
    
    
    $
    
    
    
    $
    (12
    )
    
    $
    11,106
 NOTE 5. INVENTORIES The following table summarizes the activity in inventories and reserves for the three months
ended March 31, 2005 (in thousands): Gross
    
    
    Reserve
    
    
    NetAs of December 31, 2004
    
    $
    9,540
    
    
    $
    (5,040
    )
    
    $
    4,500Purchase of inventories
    
    
    751
    
    
    
    
    
    
    
    751Shipments and Returns
    
    
    (751
    )
    
    
    
    
    
    
    (751
    )Use or Disposal of inventories
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )As of March 31, 2005
    
    $
    9,537
    
    
    $
    (5,040
    )
    
    $
    4,497Raw Material
    
    $
    2,708
    
    
    $
    (1,615
    )
    
    $
    1,093Finished Goods
    
    
    6,829
    
    
    
    (3,425
    )
    
    
    3,404$
    9,537
    
    
    $
    (5,040
    )
    
    $
    4,497
 NOTE 6. BALANCE SHEET COMPONENTS (in thousands) March 31,
    
    
    December 31,2005
    
    
    2004Short-term investmentsUS Government debt securities
    
    $
    3,262
    
    
    $
    4,731Market auction preferred securities
    
    
    500
    
    
    
    5,300Corporate debt securities
    
    
    516
    
    
    
    1,075$
    4,278
    
    
    $
    11,106Due after one year
    
    $
    1,370
    
    
    $
    3,385Due within one year
    
    
    2,908
    
    
    
    7,721$
    4,278
    
    
    $
    11,106
 9




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March 31,
    
    
    December 31,2005
    
    
    2004Accounts receivable, netAccounts receivable
    
    $
    681
    
    
    $
    2,838Less: Allowance for doubtful accounts
    
    
    (163
    )
    
    
    (77
    )$
    518
    
    
    $
    2,761Prepaid expenses and otherPrepaid insurance
    
    $
    129
    
    
    $
    207Other current assets
    
    
    133
    
    
    
    144$
    262
    
    
    $
    351Property and equipment, netMachinery and equipment
    
    $
    1,037
    
    
    $
    1,037Furniture and fixtures
    
    
    551
    
    
    
    551Software and web site development cost
    
    
    259
    
    
    
    2591,847
    
    
    
    1,847Less: Accumulated depreciation
    
    
    (1,582
    )
    
    
    (1,545
    )$
    265
    
    
    $
    302Accrued liabilities and otherAccrued compensation costs
    
    $
    620
    
    
    $
    880Professional fees
    
    
    394
    
    
    
    274Other current liabilities
    
    
    378
    
    
    
    390Product return/warranty liability
    
    
    348
    
    
    
    399Accrued charges, related party
    
    
    97
    
    
    
    127$
    1,837
    
    
    $
    2,070Deferred profitDeferred revenue
    
    $
    1,032
    
    
    $
    3,086Deferred costs
    
    
    (656
    )
    
    
    (1,776
    )Deferred profit
    
    $
    376
    
    
    $
    1,310
 NOTE 6. COMPUTATION OF NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing the net income for the three months
ended March 31, 2005 and March 31, 2004 by the weighted average number of shares of common stock
outstanding during the periods. Diluted net income (loss) per share is calculated by using the weighted average number of
common shares outstanding for the three months ended March 31, 2005 and March 31, 2004 and gives
effect to all dilutive potential common shares outstanding for the three months ended March 31,
2005 and March 31, 2004. The reconciling difference between the computation of basic and diluted
net income (loss) per share for the three months ended March 31, 2005 and March 31, 2004 presented
is the inclusion of the dilutive effect of stock options issued to employees under employee stock
option plans. Diluted net income (loss) per share excludes out-of-the-money stock options totaling 6.7
million and 2.6 million shares for the three months ended March 31, 2005 and March 31, 2004,
respectively. While these options are currently anti-dilutive, they could be dilutive in the
future. A reconciliation of basic and diluted income (loss) per share is presented below (in
thousands, except per share amounts): 10




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For the three months endedMarch 31,2005
    
    
    2004Basic:Net income (loss)
    
    $
    (1,071
    )
    
    $
    1,486Weighted shares outstanding
    
    
    83,077
    
    
    
    82,803Net income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.02Diluted:Net income (loss)
    
    $
    (1,071
    )
    
    $
    1,486Weighted shares outstanding
    
    
    83,077
    
    
    
    82,803Effects of dilutive securities: stock options
    
    
    
    
    
    
    5,749Diluted weighted shares outstanding
    
    
    83,077
    
    
    
    88,552Net income (loss) per share
    
    $
    (0.01
    )
    
    $
    0.02
 NOTE 7. SUBSEQUENT EVENTS In connection with the acquisition of certain content licenses in 2002, we received a note
receivable of $ 10.0 million of which $5.0 million remained outstanding as of March 31, 2005. This
note bears interest at 7.5% per annum, compounded quarterly. This note was fully reserved in 2002
due to uncertainties regarding its collection. On April 28, 2005, we collected the outstanding
balance of $5.0 million on this note. Accordingly, we will record the related gain of $5.0 million
in the quarter ending June 30, 2005. 
 ITEM 2: 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. There is no assurance that the proposed merger will
be consummated, that the diversion of management time necessary to complete the proposed merger or
the costs associated with the proposed merger will not effect our results of operations or that
actions we take in anticipation on the proposed merger may not be undone if the merger is not
consummated. Overview 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 primary products are
the Beamerä personal videophone line and the VistaFrameä digital picture frame. Our
Beamer videophone products add color video to phone calls, enabling users to see the person they
are calling. Since both parties to a video call must have a Beamer videophone product (or
compatible videophone), our videophone products are primarily sold in pairs. Our Beamer videophone
products work with any home phone over any standard (analog) home phone line, at no additional cost
to a regular phone call. Our Beamer videophone products include models that are standalone (such as
our first videophone product known as Beamer) or connect through most televisions (the Beamer TV),
and may include the ability to send and receive digital pictures (the Beamer FXä). Our Beamer
videophone products are currently carried by retailers such as Best Buy, Frys Electronics, The
Good Guys, The Discovery Channel, Cinmar (The Frontgate Catalog) and The Sharper Image, among
others. Our VistaFrame product is a digital picture frame that allows users to display photographs
directly from a digital camera memory card or from VistaFrames internal memory. VistaFrame is
compatible with most standard card formats and does not require a camera or computer connection,
special wiring or web based services to display digital photographs. With VistaFrame, consumers
can view digital pictures individually or in a custom slideshow format with the user selecting the
pictures, the display sequence, display interval and the transition effect. VistaFrame is currently
carried by retailers such as The Sharper Image, The Discovery Channel, Cinmar and The Good Guys. Since our inception, we have financed our operations primarily from funds raised in private
offerings of convertible preferred stock and common stock and through vendor credit. For the three
months ended March 31, 2005 we had a net loss of $1.0 million and expect to incur losses for at
least the remainder of fiscal 2005. As of March 31, 2005, we had an accumulated deficit of $110.2
million. 11




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On March 28, 2005, we announced entering into a definitive merger agreement with Victory
Acquisition Corp., a newly formed entity established by Fred S.L. Chan, Chairman of the Company,
and certain of his family members. Victory will acquire the approximately 60% of our stock not
owned by it for $0.36 per share in cash. The proposed merger is expected to be completed in the
third quarter of 2005 and is subject to Vialta shareholder and customary approvals. Results of Operations For the three months ended March 31, 2005 compared with three months ended March 31, 2004 Net revenue.Net revenue was $3.0 million for the three months ended March 31, 2005 compared
to $5.0 million for the three months ended March 31, 2004. Net revenue included $2.5 million and
$4.1 million in domestic sales for the three months ended March 31, 2005 and 2004, respectively,
and $494,000 and $887,000 in international sales for the three months ended March 31, 2005 and
2004, respectively. Revenue for the first quarter of 2005 includes the recognition of deferred
revenue of approximately $2.5 million, that was deferred at December 31, 2004. Revenue for the
first quarter of 2004 includes the recognition of deferred revenue of approximately $3.3 million,
that was deferred at December 31, 2003. The decrease in revenue is the result of lower unit sales
for our Beamer videophone in both the domestic and international market. For the three months ended
March 31, 2005, Best Buy and The Shaper Image accounted for approximately 34% and 14%,
respectively, of our net revenue. For the three months ended March 31, 2004, Frys and Best Buy
accounted for approximately 16% and 15%, respectively, of our net revenue. Cost of goods sold. Cost of goods sold was $2.2 million for the three months ended March 31,
2005 compared to $1.4 million for the three months ended March 31, 2004. This increase is primarily
due to during the first quarter of 2005 product costs were recorded at full cost as compared to the
first quarter of 2004 where our inventory costs for our Beamer videophone products were expensed in
prior periods. Because a significant portion of our inventory for raw materials and finished goods
for our Beamer videophone products was expensed in prior periods, cost of goods sold for the three
months ended March 31, 2004 was lower than what would otherwise have been recorded. Gross profit. Gross profit was $788,000 for the three months ended March 31, 2005 compared to
$3.6 million for the three months ended March 31, 2004. If we had not previously expensed inventory
costs, our gross profit for the first quarter of 2004 would have $1.6 million. Engineering and development.Engineering and development expenses were $292,000 for the three
months ended March 31, 2005, compared to $336,000 for the three months ended March 31, 2004. The
decrease was primarily due to reductions in engineering and development personnel. We expect
engineering and development expenses to be relatively constant in future periods. Sales and marketing.Sales and marketing expenses were $292,000 for the three months ended
March 31, 2005, compared to $605,000 for the three months ended March 31, 2004. The decrease was
primarily due to reductions in sales and marketing personnel and a decrease in certain marketing
initiatives such as e-marketing and direct mail. We expect sales and marketing expenses to be
relatively constant in future periods, and we currently do not have the resources to support a
significant and sustained national advertising and consumer awareness program which may be
necessary to maintain or significantly increase sales. General and administrative.General and administrative expenses were $1.4 million for the
three months ended March 31, 2005 compared to $1.4 million for the three months ended March 31,
2004. Although there was no significant variance in general and administrative expenses, the
composition between the three months ended March 31, 2005 and 2004 included reductions in general
and administrative personnel, decreases in depreciation due to assets becoming fully depreciated
and a credit to state income taxes resulting from a refund of previously paid taxes in California.
These decreases were offset by increases in legal expenses and outside services in connection with
the proposed merger with Victory Acquisition Corp. We expect to incur significant additional
expenses for legal and other professional services related to the proposed merger. Interest income and other, net.Interest income and other, net, was $203,000 for the three
months ended March 31, 2005, compared to $209,000 for the three months ended March 31, 2004. Liquidity and Capital Resources As of March 31, 2005, we had $21.4 million in cash and cash equivalents, restricted cash and
short-term investments compared to $25.8 million as of March 31, 2004, representing a decrease of
$4.4 million. As discussed in Note 7 of the Notes to the Condensed Consolidated Financial
Statements, on April 28, 2005 we received cash of
$5.0 million representing payment of a note receivable. 12




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Our principal sources of liquidity are cash and cash equivalents and investments. Net cash
used in operating activities was $27,000 for the three months ended March 31, 2005 compared to $1.6
million for the three months ended March 31, 2004, representing a decrease of approximately $1.6
million. The decrease in cash used in operating activities during the three months ended March 31,
2005 compared to the three months ended March 31, 2004, was primarily due to a significant increase
in cash collected from sales of our products offset by a decrease in deferred profit and accounts
payable. Net cash provided by investing activities for the three months ended March 31, 2005 was $6.8
million compared to $1.0 million for the three months ended March 31, 2004 representing an increase
of approximately $5.8 million. Net cash provided by investing activities for the three months ended
March 31, 2005 and 2004 was primarily due to a reduction in purchases and an increase in sales of
short-term investments. There was no net cash used in financing activities for the three months ended March 31, 2005
and 2004. Capital expenditures for the 12-month period ending December 31, 2005 are anticipated to be
approximately $100,000, primarily to acquire capital equipment. In September 2001, the Board of Directors authorized the repurchase of up to 10,000,000 shares
of our common stock in open market or private transactions over a twelve-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. Through December
31, 2003, we repurchased approximately 11,964,000 shares of common stock at an aggregate cost of
$9.4 million. There were no common stock repurchases during the year ended December 31, 2004 and
the three months ended March 31, 2005. As of March 31, 2005, approximately 8,036,000 shares remain
authorized for repurchase. In January 2000, we entered into a three-year non-cancelable lease agreement for our
headquarters with ESS. In July 2003, we amended the lease. The terms of the amendment include a 60%
reduction in the amount of square footage leased, a reduction in the monthly rent to current market
rates and an extension of the term from December 31, 2003 to June 30, 2005. Under the terms of this
and other leases, with various expiration dates through 2006, our future minimum rental payments as
of March 31, 2005 are as follows: $225,000 and $141,000 for the nine months ended 2005 and for the
year ended 2006. We believe that our existing cash and cash equivalents and investments will be sufficient to
fund our operations through March 31, 2006. However, to continue our operations beyond that date,
or if our current level of operations change, 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 is likely to or will be reduced and such equity securities may have rights,
preferences or privileges better than those of current stockholders. We cannot assure you that any
additional financing will be available or that, if available, it will be sufficient or it can be
obtained on terms favorable to us or our stockholders. If adequate funds are not available if and
when needed, we would be required to delay, limit or eliminate some or all of our proposed
operations. Revision in Classification of Certain Securities In connection with preparation of these financial statements, we concluded that it was
appropriate to classify our auction rate securities as current investments at December 31, 2004.
Previously, such investments had been classified as cash and cash equivalents. Accordingly, we have
revised the classification to exclude $5.8 million from cash and cash equivalents at March 31,
2004, and to include such amounts as short-term investments. In addition, we have made
corresponding revisions to the accompanying statements of cash flows to reflect the purchases and
proceeds form sale of the auction rate securities as investing activities. These revisions resulted
in a net decrease in cash provided by investing activities of $1.4 million for the three months
ended March 31, 2004. Critical Accounting Policies Our critical accounting policies were disclosed in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, of our Form 10-K for the year ended
December 31, 2004. On an ongoing basis, we re-evaluate our judgments 13




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and estimates including those related to valuation of inventories, valuation of long-lived
assets and certain risks and concentrations. We base our estimates and judgments on our historical
experience, knowledge of current conditions and our beliefs of what could occur in the future
considering available information. Actual results may differ from these estimates under different
assumptions or conditions. We apply our estimates and judgments consistently for all periods
presented. Other Factors That May Affect Our Business and Future Results Factors that could impact our future business, consolidated financial position, results of
operations or cash flows and cause future results to differ from our expectations include the
following: the ability to achieve revenues and profitability; the risks and expenses of the
proposed merger with Victory; the ability to raise additional capital; competition; pricing
pressures; the dependence on a limited number of products and the need to develop new products and
features; the success of our existing products and other consumer products we may develop;
component supply shortages; potential conflicts with ESS Technology, Inc., our former parent; the
success of current distribution and retail relationships and the ability to enter into additional
distribution agreements; risks associated with the expansion of our business, including increased
costs and the strain on management and other resources; the risk of product defects, system
failures or interruptions; general economic, political and regulatory changes including in Asia;
claims by third parties of intellectual property infringement; dependence on key management
personnel and the need to attract and retain additional qualified personnel; risks associated with
possible business acquisitions; regulatory changes that affect consumer electronics,
telecommunications, copyrights or the internet; quarterly fluctuations in operating results; risks
of class action lawsuits based on fluctuations in our stock price; seasonal trends identified in
the our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and other filings
with the Securities and Exchange Commission. 
 ITEM 3: Quantitative and Qualitative Disclosure About Market Risk Interest Rate Risks.We invest in short-term investments. Consequently, we are exposed to
fluctuations 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 March 31, 2005,
are recorded at market values. Fixed income securities are subject to interest rate risk. The fair value of our investment
portfolio would not be significantly impacted by either a 100 basis point increase or decrease in
interest rate due mainly to the short-term nature of the major portion of our investment 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. 
 ITEM 4: 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 the end
of the period covered by this quarterly report, that our disclosure controls and procedures are
effective to ensure that material information required to be disclosed by us in reports 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. 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. 14




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PART II. OTHER INFORMATION 
 ITEM 6: Exhibits and Reports on Form 8-K  (a)
    Exhibits. We incorporate by reference all exhibits filed in connection with our annual report
on Form 10K for the year ended December 31, 2004. 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 15




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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. (Registrant)Date: May 16, 2005
    
    By:
    
    /s/ Didier PietriDidier PietriPresident and Chief Executive OfficerBy:
    
    /s/ William M. ScharninghausenWilliam M. ScharninghausenChief Financial Officer
 16




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EXHIBIT INDEX ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002