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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

|           |                                               |                                                                                             | 
|---------- | --------------------------------------------- | ------------------------------------------------------------------------------------------- | 
|(Mark One) |                                               |                                                                                            
|          
|[X]        |                                               | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.   
|          
|           | For the quarterly period ended June 30, 2002.
|          
|           | OR                                           
|          
|[   ]      |                                               | 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) |  | 94-3337326
(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 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 [   ]      No [X]

The number of outstanding shares of the registrants common stock, par
value $0.001 per share, on August 5, 2002 was 83,179,930 shares.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                          |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1: FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                   
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS         
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS         
|                              |                                                                                               | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|PART II. OTHER INFORMATION   
|                              | ITEM 1: Legal Proceedings                                                                    
|                              | ITEM 4: Submission of Matters to a Vote of Security Holders                                  
|                              | ITEM 5: Other Matters                                                                        
|                              | ITEM 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   



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##### Table of Contents



VIALTA, INC.

TABLE OF CONTENTS

|           |    |                                                                                                                                                                                      |      |  |  | 
|---------- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- |  |  | 
|           |    |                                                                                                                                                                                      | Page
|           |    |                                                                                                                                                                                      |     
|PART I.    |    | FINANCIAL INFORMATION                                                                                                                                                                | 3   
|          
|Item 1.    |    | Financial Statements (unaudited):                                                                                                                                                    | 3   
|          
|           |    | Condensed Consolidated Balance Sheets  June 30, 2002 and December 31, 2001                                                                                                          | 3   
|          
|           |    | Condensed Consolidated Statements of Operations  three months and six months ended
June 30, 2002 and 2001, and period from April 20, 1999 (date of inception) through
June 30, 2002 | 4   
|          
|           |    | Condensed Consolidated Statements of Cash Flows  six months ended June 30, 2002 and
2001, and period from April 20, 1999 (date of inception) through
June 30, 2002                  | 5   
|          
|           |    | Notes to Condensed Consolidated Financial Statements                                                                                                                                 | 6   
|          
|Item 2.    |    | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                | 11  
|          
|Item 3.    |    | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                           | 15  
|          
|PART II.   |    | OTHER INFORMATION                                                                                                                                                                    | 16  
|          
|Item 1.    |    | Legal Proceedings                                                                                                                                                                    | 16  
|          
|Item 4.    |    | Submission of Matters to a Vote of Security Holders                                                                                                                                  | 16  
|          
|Item 5.    |    | Other Matters                                                                                                                                                                        | 16  
|          
|Item 6.    |    | Exhibits and Reports on Form 8-K                                                                                                                                                     | 16  
|          
|SIGNATURES | 17

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PART I. FINANCIAL INFORMATION




ITEM 1: FINANCIAL STATEMENTS




VIALTA, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(amounts in thousands)

|                                     |                                                  |                                            |   |               |        |                   |   |         |        | 
|------------------------------------ | ------------------------------------------------ | ------------------------------------------ | - | ------------- | ------ | ----------------- | - | ------- | ------ | 
|                                     |                                                  |                                            |   | June 30, 2002 |        | December 31, 2001
|                                     |                                                  |                                            |   |               |        |                  
|Assets                               |                                                  |                                            |   |               |        |                   |   |        
|Current assets:                      |                                                  |                                            |   |               |        |                   |   |        
|                                     | Cash and cash equivalents                        |                                            | $ | 40,183        |        |                   | $ | 61,886  |       
|                                     | Restricted cash                                  |                                            |   | 1,738         |        |                   |   |        |       
|                                     | Short-term investments                           |                                            |   | 7,019         |        |                   |   | 5,542   |       
|                                     | Prepaid expenses and other current assets        |                                            |   | 3,048         |        |                   |   | 2,989   |       
|                                     |                                                  |                                            |   |               |        |                   |   |        
|                                     |                                                  | Total current assets                       |   |               | 51,988 |                   |   |         | 70,417 | 
|                                     | Property and equipment, net                      |                                            |   | 4,630         |        |                   |   | 7,831   |       
|                                     | Long-term investments                            |                                            |   |              |        |                   |   | 4,064   |       
|                                     | Content licenses                                 |                                            |   | 10,185        |        |                   |   | 1,342   |       
|                                     | Other assets                                     |                                            |   | 45            |        |                   |   | 212     |       
|                                     |                                                  |                                            |   |               |        |                   |   |        
|                                     |                                                  | Total assets                               |   | $             | 66,848 |                   |   | $       | 83,866 | 
|                                     |                                                  |                                            |   |               |        |                   |   |        
|                                    
|Liabilities and Stockholders Equity |                                                  |                                            |   |               |        |                   |   |        
|Current liabilities:                 |                                                  |                                            |   |               |        |                   |   |        
|                                     | Accounts payable                                 |                                            | $ | 1,194         |        |                   | $ | 760     |       
|                                     | Accrued expenses and other current liabilities   |                                            |   | 3,426         |        |                   |   | 2,827   |       
|                                     |                                                  |                                            |   |               |        |                   |   |        
|                                     |                                                  | Total current liabilities                  |   |               | 4,620  |                   |   |         | 3,587  | 
|Stockholders equity:                |                                                  |                                            |   |               |        |                   |   |        
|                                     | Common stock, $0.001 par value                   |                                            |   | 94            |        |                   |   | 92      |       
|                                     | Additional paid-in capital                       |                                            |   | 144,099       |        |                   |   | 144,164 |       
|                                     | Deficit accumulated during the development stage |                                            |   | (74,490       | )      |                   |   | (60,087 | )     
|                                     | Accumulated other comprehensive income           |                                            |   | 52            |        |                   |   | 156     |       
|                                     | Treasury stock                                   |                                            |   | (7,527        | )      |                   |   | (4,046  | )     
|                                     |                                                  |                                            |   |               |        |                   |   |        
|                                     |                                                  | Total stockholders equity                 |   |               | 62,228 |                   |   |         | 80,279 | 
|                                     |                                                  |                                            |   |               |        |                   |   |        
|                                     |                                                  | Total liabilities and stockholders equity |   | $             | 66,848 |                   |   | $       | 83,866 | 
|                                     |                                                  |                                            |   |               |        |                   |   |        

See accompanying notes to the condensed consolidated financial statements.

3



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VIALTA, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)

|                                           |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   |             |        |  
|------------------------------------------ | -------------------------------- | - | ------------------ | ----- | ---------------- | - | -------------- | ----- | -------- | - | ------------------ | ----- | - | - | ------- | ----- | - | - | ----------- | ------ | -
|                                           |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   | Period from
|                                           |                                  |   | Three months ended |       | Six months ended |   | April 20, 1999
|                                           |                                  |   |                    |       |                  |   | (Date of      
|                                           |                                  |   | June 30,           |       | June 30,         |   | June 30,       |       | June 30, |   | Inception) Through
|                                           |                                  |   | 2002               |       | 2001             |   | 2002           |       | 2001     |   | June 30, 2002     
|                                           |                                  |   |                    |       |                  |   |                |       |          |   |                   
|Operating expenses:                        |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   |             |       
|                                           | Research and development         |   | $                  | 5,118 |                  |   | $              | 5,363 |          |   | $                  | 9,341 |   |   | $       | 9,891 |   |   | $           | 55,518 |  
|                                           | Amortization of content licenses |   |                    | 947   |                  |   |                |      |          |   |                    | 1,200 |   |   |         |      |   |   |             | 1,200  |  
|                                           | Sales and marketing              |   |                    | 732   |                  |   |                | 1,163 |          |   |                    | 1,346 |   |   |         | 2,158 |   |   |             | 8,673  |  
|                                           | General and administrative       |   |                    | 1,427 |                  |   |                | 2,247 |          |   |                    | 3,239 |   |   |         | 4,604 |   |   |             | 19,749 |  
|                                           |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   |             |       
|                                           |                                  |   | (8,224             | )     |                  |   | (8,773         | )     |          |   | (15,126            | )     |   |   | (16,653 | )     |   |   | (85,140     | )     
|Interest income, net                       |                                  |   | 372                |       |                  |   | 1,055          |       |          |   | 735                |       |   |   | 2,285   |       |   |   | 12,541      |       
|Other expenses                             |                                  |   | (12                | )     |                  |   | 15             |       |          |   | (12                | )     |   |   | (4      | )     |   |   | (2,951      | )     
|                                           |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   |             |       
|Loss before income tax benefit             |                                  |   | (7,864             | )     |                  |   | (7,703         | )     |          |   | (14,403            | )     |   |   | (14,372 | )     |   |   | (75,550     | )     
|Income tax benefit                         |                                  |   |                   |       |                  |   |               |       |          |   |                   |       |   |   |        |       |   |   | 1,060       |       
|                                           |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   |             |       
|Net loss                                   |                                  | $ | (7,864             | )     |                  | $ | (7,703         | )     |          | $ | (14,403            | )     |   | $ | (14,372 | )     |   | $ | (74,490     | )     
|                                           |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   |             |       
|Net loss per share:                        |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   |             |       
|                                           | Basic and diluted                |   | $                  | (0.09 | )                |   | $              | (1.23 | )        |   | $                  | (0.17 | ) |   | $       | (2.31 | ) |   | $           | (2.57  | )
|                                           |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   |             |       
|Weighted average common
shares outstanding |                                  |   | 83,752             |       |                  |   | 6,240          |       |          |   | 84,492             |       |   |   | 6,235   |       |   |   | 29,012      |       
|                                           |                                  |   |                    |       |                  |   |                |       |          |   |                    |       |   |   |         |       |   |   |             |       

See accompanying notes to the condensed consolidated financial statements.

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VIALTA, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(amounts in thousands)

|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |   |          |                |        |  
|-------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ------------------------------------------- | -------------------------------------- | ------- | ---------------- | ------- | ------------------ | ------- | ------------- | ------- | - | -------- | -------------- | ------ | -
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |   |          | Period from   
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |   |          | April 20, 1999
|                                                                                 |  |                                                                             |                                             |                                        |         | Six Months Ended |         | (Date of          
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         | Inception) through
|                                                                                 |  |                                                                             |                                             |                                        |         | June 30, 2002    |         | June 30, 2001      |         | June 30, 2002
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |              
|CASH FLOWS FROM OPERATING ACTIVITIES:                                            |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|                                                                                 |  | Net loss                                                                    |                                             | $                                      | (14,403 | )                |         | $                  | (14,372 | )             |         | $ | (74,490  | )             
|                                                                                 |  | Adjustments to reconcile net loss to net cash used in operating activities: |                                             |                                        |         |                  |         |                    |         |               |         |   |          |               
|                                                                                 |  | Depreciation
and amortization                                               |                                             |                                        | 3,495   |                  |         |                    | 2,305   |               |         |   | 13,354   |               
|                                                                                 |  | Amortization
of content license fees                                        |                                             |                                        | 1,200   |                  |         |                    |        |               |         |   | 1,200    |               
|                                                                                 |  | Write-down
of long-term investments                                         |                                             |                                        | 39      |                  |         |                    |        |               |         |   | 2,789    |               
|                                                                                 |  | Changes in assets and liabilities:                                          |                                             |                                        |         |                  |         |                    |         |               |         |   |          |               
|                                                                                 |  |                                                                             |                                             | Prepaid
expense and other assets       |         |                  | (59     | )                  |         |               | (1,166  | ) |          |                | (3,048 | )
|                                                                                 |  |                                                                             |                                             | Restricted
cash deposit                |         |                  | (1,738  | )                  |         |               |        |   |          |                | (1,738 | )
|                                                                                 |  |                                                                             |                                             | Accounts
payable & accrued liabilities |         |                  | 956     |                    |         |               | 2,026   |   |          |                | 4,620  |  
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|Net cash flows used in operating activities                                      |  |                                                                             | (10,510                                     | )                                      |         |                  | (11,207 | )                  |         |               | (57,313 | )
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                            |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|                                                                                 |  | Purchase
of short-term investment                                           |                                             |                                        |        |                  |         |                    | (11,827 | )             |         |   | (136,471 | )             
|                                                                                 |  | Proceeds
from sales of short-term investment                                |                                             |                                        | 2,483   |                  |         |                    | 27,112  |               |         |   | 129,504  |               
|                                                                                 |  | Purchase
of long-term investment                                            |                                             |                                        |        |                  |         |                    | (2,100  | )             |         |   | (6,720   | )             
|                                                                                 |  | Purchase
of content licenses                                                |                                             |                                        | (10,043 | )                |         |                    | (871    | )             |         |   | (11,385  | )             
|                                                                                 |  | Acquisition
of property and equipment                                       |                                             |                                        | (166    | )                |         |                    | (2,411  | )             |         |   | (14,098  | )             
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|Net cash flows
provided by (used in) investing activities:                       |  |                                                                             | (7,726                                      | )                                      |         |                  | 9,903   |                    |         |               | (39,170 | )
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                            |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|                                                                                 |  |                                                                             | Repayment
of notes payable to related party |                                        |         |                 |         |                    |         | (30,000       | )       |   |          |               |       
|                                                                                 |  |                                                                             | Issuance
of preferred stock                 |                                        |         |                 |         |                    |         |              |         |   |          | 142,600        |       
|                                                                                 |  |                                                                             | Issuance
of common stock                    |                                        |         | 14               |         |                    |         | 4             |         |   |          | 1,593          |       
|                                                                                 |  |                                                                             | Repurchase
of common stock                  |                                        |         | (3,481           | )       |                    |         |              |         |   |          | (7,527         | )     
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|Net cash flows
provided by (used in) financing activities:                       |  |                                                                             | (3,467                                      | )                                      |         |                  | (29,996 | )                  |         |               | 136,666 |  
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|Net increase (decrease) in cash and cash equivalents                             |  |                                                                             | (21,703                                     | )                                      |         |                  | (31,300 | )                  |         |               | 40,183  |  
|Cash and cash equivalents, beginning of the period                               |  |                                                                             | 61,886                                      |                                        |         |                  | 109,378 |                    |         |               |        |  
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|Cash and cash equivalents, end of the period                                     |  | $                                                                           | 40,183                                      |                                        |         | $                | 78,078  |                    |         | $             | 40,183  |  
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
AND NONCASH FINANCING ACTIVITY: |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|                                                                                 |  | Cash paid for interest                                                      |                                             | $                                      |        |                  |         | $                  | 194     |               |         | $ | 194      |               
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  
|                                                                                 |  | Issuance of note receivable in connection with issuance of common stock     |                                             | $                                      |        |                  |         | $                  |        |               |         | $ | 1,475    |               
|                                                                                 |  |                                                                             |                                             |                                        |         |                  |         |                    |         |               |         |  

See accompanying notes to the condensed consolidated financial statements.

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VIALTA, INC.
(A Development Stage Company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. THE COMPANY

Vialta, Inc. (Vialta or the Company) was incorporated in California in
April 20, 1999 as a subsidiary of ESS Technology, Inc. (ESS) and reincorporated in the
State of Delaware on April 20, 2001. In August 2001, Vialta was spun off by ESS as a distribution to its
stockholders.
Vialta has developed a multi-media DVD player (ViDVD) that offers Internet
access and other features, such as CD, MP3, karaoke, and support for other
audio and video formats. Vialta has also developed a phone video
station, known as
Beamer®, which will allow consumers to add video to their
phone calls, delivering a live motion color video picture using a
standard phone.

Since its inception, Vialta has been in the development stage, and has
incurred substantial losses and negative cash flows from operations in every
fiscal period since inception. For the cumulative period ended June 30, 2002,
Vialta incurred losses of approximately $74.5 million and negative cash flows
from operations of $57.3 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, continued expansion of operations,
continued development of Vialtas web site and information technology
infrastructure, expansion of product offerings and development of relationships
with other businesses. Management believes that Vialta has sufficient cash,
cash equivalents, and short-term investments to fund its development and growth
through June 30, 2003. However, in the longer term, failure to generate
sufficient revenues, raise additional capital or reduce certain discretionary
spending could have a material adverse effect on Vialtas ability to achieve
its intended business objectives.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company 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
(GAAP) have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim financial statements
reflect only those normal recurring adjustments necessary for a fair statement
of the financial position, operating results and cash flows of the Company for
the periods presented. 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, 2001 and
the period from April 20, 1999 (date of inception) through December 31, 2001,
included in the Companys Annual Report on Form 10-K filed on March 27, 2002.
The results of operation for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for any other period
or for the fiscal year ending December 31, 2002.

Interim unaudited information

Preparing the Companys financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the close of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates. Certain reclassifications have been made to
present the financial statements on a consistent basis.

Reclassifications

Certain prior year balances have been reclassified to conform to the
current financial statement presentation.

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Cash and cash equivalents and restricted cash

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

During June 2002, the Company established a Letter of Credit for
approximately $1,738,000 in favor of a third-party contract manufacturer. The
Letter of Credit is secured by a Certificate of Deposit in the amount of
approximately $1,738,000 and is disclosed as restricted cash. During July 2002,
the Company established an additional Letter of Credit for approximately
$2,420,000 in favor of the same third-party contract manufacturer. The Letter
of Credit is secured by a Certificate of Deposit in the amount of approximately
$2,420,000.

Revenue Recognition

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

The Company has not
recognized revenues on shipments of products to date. Accounts
receivable and deferred revenues have been recorded to reflect these
shipment transactions.

Comprehensive Income (Loss)

Comprehensive income is defined to include all changes in equity during a
period from non-owner sources. The difference between net loss and
comprehensive loss for the three months and six months ended June 30, 2002 was
approximately $14,000 and $104,000, respectively, which related to unrealized
losses on available-for-sale investments. Comprehensive loss for the three
months and six months ended June 30, 2002 was approximately $7,878,000 and
$14,507,000 respectively. For the three months and six months ended June 30,
2001, comprehensive loss approximated net loss.

NOTE 3. RELATED PARTY TRANSACTIONS

The following is a summary of major transactions that resulted in charges
by Vialta to ESS, which used to be the parent of Vialta, and
by ESS to Vialta for the periods presented:

|                                                                                  |  |                        |      |                  |  |      |        |      |  |   |       |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ---- | ---------------- |  | ---- | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                  |  | Three Months Ended     |      | Six Months Ended
|                                                                                  |  | June 30,               |      | June 30,        
|                                                                                  |  |                        |      |                 
|                                                                                  |  | 2002                   |      | 2001             |  | 2002 |        | 2001
|                                                                                  |  |                        |      |                  |  |      |        |     
|                                                                                  |  | (amounts in thousands)
|Net receivables (payables) at beginning of period                                 |  | $                      | 99   |                  |  | $    | (332   | )    |  | $ | 64    |   |  | $ | 650    |  
|Charges by Vialta to ESS:                                                         |  |                        |      |                  |  |      |        |      |  |   |       |   |  |   |        |  
|Administrative & management service agreement                                     |  |                        | 99   |                  |  |      |       |      |  |   | 202   |   |  |   |       |  
|Spin-off related charges                                                          |  |                        | (125 | )                |  |      |       |      |  |   |      |   |  |   |       |  
|Payments made by Vialta on behalf of ESS                                          |  |                        | (65  | )                |  |      |       |      |  |   | 14    |   |  |   |       |  
|Charges by ESS to Vialta:                                                         |  |                        |      |                  |  |      |        |      |  |   |       |   |  |   |        |  
|Research & development service fees                                               |  |                        |     |                  |  |      | (667   | )    |  |   |      |   |  |   | (1,269 | )
|Administrative & management service fees                                          |  |                        | (49  | )                |  |      | (1,077 | )    |  |   | (136  | ) |  |   | (2,152 | )
|Purchase of products                                                              |  |                        | (53  | )                |  |      | (490   | )    |  |   | (69   | ) |  |   | (1,127 | )
|Building lease                                                                    |  |                        | (463 | )                |  |      |       |      |  |   | (926  | ) |  |   |       |  
|Cash receipts from ESS                                                            |  |                        | (153 | )                |  |      | (4     | )    |  |   | (338  | ) |  |   | (654   | )
|Cash payments made to ESS                                                         |  |                        | 661  |                  |  |      | 2,425  |      |  |   | 1,141 |   |  |   | 4,407  |  
|                                                                                  |  |                        |      |                  |  |      |        |      |  |   |       |   |  |   |        |  
|Net payables at end of period, included in
accrued expenses and other liabilities |  | $                      | (49  | )                |  | $    | (145   | )    |  | $ | (49   | ) |  | $ | (145   | )
|                                                                                  |  |                        |      |                  |  |      |        |      |  |   |       |   |  |   |        |  

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NOTE 4. BALANCE SHEET COMPONENTS

|                                                                   |  |                        |        |              |  |   |        |  
|------------------------------------------------------------------ |  | ---------------------- | ------ | ------------ |  | - | ------ | -
|                                                                   |  | June 30,               |        | December 31,
|                                                                   |  | 2002                   |        | 2001        
|                                                                   |  |                        |        |             
|                                                                   |  | (amounts in thousands)
|Cash and Cash Equivalents                                          |  |                        |        |              |  |   |        |  
|Cash and money market funds, at cost which approximates fair value |  | $                      | 40,183 |              |  | $ | 61,886 |  
|                                                                   |  |                        |        |              |  |   |        |  
|Restricted Cash                                                    |  |                        |        |              |  |   |        |  
|Certificate of deposit                                             |  | $                      | 1,738  |              |  | $ |       |  
|                                                                   |  |                        |        |              |  |   |        |  
|Short-term and Long-term Investments                               |  |                        |        |              |  |   |        |  
|Certificate of deposit                                             |  | $                      | 2,419  |              |  | $ |       |  
|U. S. Government debt securities                                   |  |                        | 1,555  |              |  |   | 4,274  |  
|Corporate debt securities                                          |  |                        | 3,045  |              |  |   | 5,332  |  
|                                                                   |  |                        |        |              |  |   |        |  
|                                                                   |  |                        | 7,019  |              |  |   | 9,606  |  
|Due between one and two years                                      |  |                        |       |              |  |   | 4,064  |  
|                                                                   |  |                        |        |              |  |   |        |  
|Due within one year                                                |  | $                      | 7,019  |              |  | $ | 5,542  |  
|                                                                   |  |                        |        |              |  |   |        |  
|Prepaid Expenses and Other Current Assets                          |  |                        |        |              |  |   |        |  
|Miscellaneous receivables                                          |  | $                      | 124    |              |  | $ |       |  
|Advances to subcontractors and other                               |  |                        | 2,924  |              |  |   | 2,989  |  
|                                                                   |  |                        |        |              |  |   |        |  
|                                                                   |  | $                      | 3,048  |              |  | $ | 2,989  |  
|                                                                   |  |                        |        |              |  |   |        |  
|Property and Equipment                                             |  |                        |        |              |  |   |        |  
|Machinery and equipment                                            |  | $                      | 7,288  |              |  | $ | 7,149  |  
|Furniture and fixtures                                             |  |                        | 592    |              |  |   | 607    |  
|Software and web site development cost                             |  |                        | 5,173  |              |  |   | 6,663  |  
|                                                                   |  |                        |        |              |  |   |        |  
|                                                                   |  |                        | 13,053 |              |  |   | 14,419 |  
|Less: Accumulated depreciation                                     |  |                        | (8,423 | )            |  |   | (6,588 | )
|                                                                   |  |                        |        |              |  |   |        |  
|                                                                   |  | $                      | 4,630  |              |  | $ | 7,831  |  
|                                                                   |  |                        |        |              |  |   |        |  
|Accrued Expenses and Other Current Liabilities                     |  |                        |        |              |  |   |        |  
|Accrued compensation costs                                         |  | $                      | 2,254  |              |  | $ | 2,441  |  
|Deferred revenue                                                   |  |                        | 709    |              |  |   | 195    |  
|Other                                                              |  |                        | 463    |              |  |   | 191    |  
|                                                                   |  |                        |        |              |  |   |        |  
|                                                                   |  | $                      | 3,426  |              |  | $ | 2,827  |  
|                                                                   |  |                        |        |              |  |   |        |  

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NOTE 5. NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted net
loss per share for the periods presented:

|                                                                       |                             |   |                            |                                          |                          |   |                     |        |         |   |                  |        |  |   |         |        |  |   |                     |        | 
|---------------------------------------------------------------------- | --------------------------- | - | -------------------------- | ---------------------------------------- | ------------------------ | - | ------------------- | ------ | ------- | - | ---------------- | ------ |  | - | ------- | ------ |  | - | ------------------- | ------ | 
|                                                                       |                             |   |                            |                                          |                          |   |                     |        |         |   |                  |        |  |   |         |        |  |   | For the Period from
|                                                                       |                             |   | For the three months ended |                                          | For the six months ended |   | April 20, 1999     
|                                                                       |                             |   | June 30,                   |                                          | June 30,                 |   | (Date of Inception)
|                                                                       |                             |   |                            |                                          |                          |   | Through            
|                                                                       |                             |   | 2002                       |                                          | 2001(1)                  |   | 2002                |        | 2001(1) |   | June 30, 2002(1)
|                                                                       |                             |   |                            |                                          |                          |   |                     |        |         |   |                 
|                                                                       |                             |   |                            | (in thousands, except per share amounts)
|Net loss                                                               |                             | $ | (7,864                     | )                                        |                          | $ | (7,703              | )      |         | $ | (14,403          | )      |  | $ | (14,372 | )      |  | $ | (74,490             | )     
|Basic and diluted weighted average
common shares outstanding           |                             |   | 83,752                     |                                          |                          |   | 6,240               |        |         |   | 84,492           |        |  |   | 6,235   |        |  |   | 29,012              |       
|Basic and diluted net loss per share                                   |                             | $ | (0.09                      | )                                        |                          | $ | (1.23               | )      |         | $ | (0.17            | )      |  | $ | (2.31   | )      |  | $ | (2.57               | )     
|                                                                       |                             |   |                            |                                          |                          |   |                     |        |         |   |                  |        |  |   |         |        |  |   |                     |       
|Anti-dilutive securities excluded from
earnings per share calculation: |                             |   |                            |                                          |                          |   |                     |        |         |   |                  |        |  |   |         |        |  |   |                     |       
|                                                                       | Options outstanding         |   |                            | 11,619                                   |                          |   |                     | 2,908  |         |   |                  | 11,619 |  |   |         | 2,908  |  |   |                     | 11,619 | 
|                                                                       | Preferred stock outstanding |   |                            |                                         |                          |   |                     | 91,000 |         |   |                  |       |  |   |         | 91,000 |  |   |                     | 91,000 | 
|                                                                       |                             |   |                            |                                          |                          |   |                     |        |         |   |                  |        |  |   |         |        |  |   |                     |       
|Total common stock equivalents excluded                                |                             |   | 11,619                     |                                          |                          |   | 93,908              |        |         |   | 11,619           |        |  |   | 93,908  |        |  |   | 102,619             |       
|                                                                       |                             |   |                            |                                          |                          |   |                     |        |         |   |                  |        |  |   |         |        |  |   |                     |       



---

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

NOTE 6. COMMON STOCK REPURCHASES

During the quarter ended June 30, 2002, Vialta repurchased approximately
1,697,000 shares of common stock for an aggregate cost of $1.4 million. For the
six month period ended June 30, 2002, Vialta repurchased approximately
3,322,000 shares of common stock at an aggregate cost of $3.5 million. From
July 1, 2002 through July 31, 2002 Vialta repurchased
approximately 330,000
shares of common stock for an aggregate cost of $0.3 million, and approximately
10,188,000 remaining shares are authorized for repurchase.

NOTE 7. SEGMENT AND GEOGRAPHIC INFORMATION

Vialta operates as one segment. Information about property and equipment
is as follows:

|                             |  |                        |       |              |  |   |       | 
|---------------------------- |  | ---------------------- | ----- | ------------ |  | - | ----- | 
|                             |  | June 30,               |       | December 31,
|                             |  | 2002                   |       | 2001        
|                             |  |                        |       |             
|                             |  | (amounts in thousands)
|United States                |  | $                      | 3,876 |              |  | $ | 6,896 | 
|Hong Kong                    |  |                        | 36    |              |  |   | 40    | 
|Canada                       |  |                        | 718   |              |  |   | 895   | 
|                             |  |                        |       |              |  |   |       | 
|Total property and equipment |  | $                      | 4,630 |              |  | $ | 7,831 | 
|                             |  |                        |       |              |  |   |       | 

NOTE 8. CONTENT LICENSES

On January 17,
2002, Vialta entered into a licensing agreement with an
entertainment company under which Vialta was granted a non-exclusive license to
reproduce and distribute motion picture titles from the entertainment companys
library over a five year period. Under this agreement, Vialta agreed to pay the
entertainment company $10 million, of which $5 million was paid in March 2002
in exchange for content licenses and $5 million was paid in April 2002 in
exchange for a promissory note bearing interest of 7.5% and due at the end of
three years. If Vialta makes certain elections, the promissory note will be
cancelled in exchange for additional content licenses. The total $10 million

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payment has been accounted for as the costs of acquiring content licenses. Such
costs are to be expensed based on the greater of the royalty amounts due to the
entertainment company based on actual usage or amortization on a straight-line
basis over the estimated life of three years.

NOTE 9. LEGAL MATTERS

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

NOTE 10. SUBSEQUENT EVENTS

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 42,972,000 shares of Class A Common Stock and
approximately 40,580,000 shares of Class B Common Stock were converted into
approximately 83,552,000 shares of the non-classified Common Stock. Holders of
the non-classified Common Stock are entitled to one vote per share on all
matters.

NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (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. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002. Vialta believes that SFAS No. 146 will not have a material impact on
our financial position or results of operations.

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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 Other Factors That May Affect Our
Business and Future Results and the risks discussed in our most
recent filings
with the Securities and Exchange Commission. The following discussion should be
read in conjunction with the Selected Consolidated Financial Data and the
Consolidated Financial Statements and notes thereto that appear elsewhere in
this report. References herein to we, our, us, and similar words or
phrases are references collectively to Vialta, Inc. and its subsidiaries.

Overview

We were incorporated on April 20, 1999 as a wholly owned subsidiary of ESS
Technology, Inc. We develop and market consumer electronics products designed
to maximize the advantages of digital technology in a convenient, affordable
and easy-to-use manner. We have developed a multi-media DVD player that offers
Internet access and other features that differentiate it from most DVD players
currently available in the U.S. consumer market. Our ViDVD player is the first
product offering to utilize our digital home entertainment platform, which we
anticipate will grow to support a family of products, as well as a
complementary system for the delivery of home entertainment content. The ViDVD
is a multi-purpose home entertainment device that enables consumers to play
DVD, CD, MP3, karaoke and other audio and video formats and to browse the
Internet through their television. We also expect to introduce our proprietary,
encrypted ViMagazine discs, which will provide consumers with the opportunity
to select and purchase one or more selections from a variety of videos, karaoke
titles and other home entertainment content. Our goal is to make the ViDVD the
centerpiece of consumers home entertainment systems, combining Internet access
with the features of several current consumer electronics devices into a single
affordable product.

We have also
developed, as part of our consumer electronics focus, Beamer®,
that will allow consumers to add video to their phone calls, delivering a live motion color video picture
over regular phone lines at no additional cost to a regular call. We will begin
distributing Beamer® during the third quarter of 2002.

Through June 30,
2002, we have been a development stage company and have had no
revenues from operations. We have
historically used vendor credit and private offerings of convertible preferred
stock and common stock to fund our operations and provide for capital
requirements during our development stage. For the three months ended June 30,
2002 and 2001, we had net losses of $7.9 million and $7.7 million,
respectively, and expect to continue to incur losses in the third and fourth
quarters of fiscal year 2002. The losses reflect our cash burn rate and
amortization of licenses and investments for the periods indicated. From
inception through June 30, 2002, we had a net loss of $74.5 million.

In accordance with Section 10A(i)(2) of the Securities Exchange Act of
1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the Act), we
are required to disclose the non-audit services approved by our Audit Committee
to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit
services are defined in the Act as services other than those provided in
connection with an audit or a review of the financial statements of a company.
The Audit Committee is expected to approve the engagement of
PricewaterhouseCoopers LLP for the following non-audit services: (1) tax matter
consultations concerning state taxes; and (2) the preparation of federal and
state income tax returns.

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Results of Operations

For the three months ended June 30, 2002 compared with three months ended June
30, 2001

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

|                     |                                  |                |    |                            |     |      |    |    |     |  
|-------------------- | -------------------------------- | -------------- | -- | -------------------------- | --- | ---- | -- | -- | --- | -
|                     |                                  |                |    | Three months ended June 30
|                     |                                  |                |    |                           
|                     |                                  |                |    | 2002                       |     | 2001
|                     |                                  |                |    |                            |     |     
|Operating expenses:  |                                  |                |    |                            |     |      |    |   
|                     | Research and development         |                |    | 62                         | %   |      |    | 61 | %  
|                     | Amortization of content licenses |                |    | 12                         | %   |      |    | 0  | %  
|                     | Sales and marketing              |                |    | 9                          | %   |      |    | 13 | %  
|                     | General and administrative       |                |    | 17                         | %   |      |    | 26 | %  
|                     |                                  |                |    |                            |     |      |    |   
|                     |                                  | Operating loss |    |                            | 100 | %    |    |    | 100 | %
|                     |                                  |                |    |                            |     |      |    |   
|Interest income, net |                                  |                | 5  | %                          |     |      | 12 | % 
|Other expenses       |                                  |                | 0  | %                          |     |      | 0  | % 
|                     |                                  |                |    |                            |     |      |    |   
|Net loss             |                                  |                | 95 | %                          |     |      | 88 | % 
|                     |                                  |                |    |                            |     |      |    |   

Research and Development.Research and development expenses were $5.1
million for the three months ended June 30, 2002, or 62% of operating expenses,
compared to $5.4 million, or 61% of operating expenses for the three months
ended June 30, 2001. Included in research and development
expenses are costs of materials to build products which have not yet
been sold in significant quantities. Such costs amounted to $1.1 million for the three month
period ended June 30, 2002. No such costs were incurred during
the three month period ended June 30, 2001. The decrease in absolute dollars was primarily due to
reductions in payroll and payroll related expenses as a result of
organizational restructuring initiated in August 2001 as we completed
our core R & D development. Further reductions
were realized in our ISP business due to operating cost reductions. We expect
research and development spending to remain flat in future periods since we
have completed the core development of our first series of products.

Amortization of Content Licenses.Amortization of content licenses was
$0.9 million in the three months ended June 30, 2002, or 12% of operating
expenses. Starting in the first fiscal quarter, we began to amortize our
content licenses, over a three-year period in anticipation of the launch of
ViMagazine to registered users of our ViDVD. We expense content license fees
based on the greater of the royalty amounts due or amortization on a
straight-line basis over the estimated life of three years.

Sales and Marketing.Sales and marketing expenses were $0.7 million for
the three months ended June 30, 2002, or 9% of operating expenses, compared to
$1.2 million, or 13% of operating expenses, for the three months ended June 30,
2001. The decrease was primarily due to reductions in payroll and payroll
related expenses as a result of organizational restructuring initiated in
August 2001 and lower marketing expenses due to improvements in our marketing
infrastructure. We expect sales and marketing spending to increase in future
periods due to the marketing of the ViDVD, Beamer® and any additional products
in 2003.

General and Administrative.General and administrative expenses were $1.4
million for the three months ended June 30, 2002, or 17% of operating expenses,
compared to $2.2 million, or 26% of operating expenses, for the three months
ended June 30, 2001. The decrease was primarily due to reductions in payroll
and other expenses as a result of headcount reductions, having developed our
general and administrative infrastructure, and lower reimbursements to ESS for
administrative and management services. We expect general and administrative
expense spending to be relatively constant in future periods as our build out
of infrastructure moderates.

Non-operating Income.Net non-operating income was $0.4 million for the
three months ended June 30, 2002 compared to $1.1 million for the three months
ended June 30, 2001. Net non-operating income consists primarily of net
interest income. The decrease in net interest income was primarily due to lower
cash balances and lower yields on available-for-sale securities during the
second quarter of fiscal year 2002 as compared to the same quarter of fiscal
year 2001.

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Net Loss.We incurred a net loss of $7.9 million for the three months
ended June 30, 2002, compared to $7.7 million for the three months ended June
30, 2001. The $0.2 million increase in net loss was primarily due to
amortization of content licenses of $0.9 million and lower interest income
associated with lower cash balances and lower yields on available-for-sale
securities during the second quarter of fiscal year 2002. These increases were
partially offset by lower payroll and other expenses associated with
productivity gains through the build out of our infrastructure to meet our
administrative and operational needs as a stand-alone company.

For the six months ended June 30, 2002 compared with six months ended June 30,
2001

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

|                     |                                  |                |    |                  |     |               |    |    |     |  
|-------------------- | -------------------------------- | -------------- | -- | ---------------- | --- | ------------- | -- | -- | --- | -
|                     |                                  |                |    | Six months ended
|                     |                                  |                |    |                 
|                     |                                  |                |    | June 30, 2002    |     | June 30, 2001
|                     |                                  |                |    |                  |     |              
|Operating expenses:  |                                  |                |    |                  |     |               |    |   
|                     | Research and development         |                |    | 62               | %   |               |    | 59 | %  
|                     | Amortization of content licenses |                |    | 8                | %   |               |    | 0  | %  
|                     | Sales and marketing              |                |    | 9                | %   |               |    | 13 | %  
|                     | General and administrative       |                |    | 21               | %   |               |    | 28 | %  
|                     |                                  |                |    |                  |     |               |    |   
|                     |                                  | Operating loss |    |                  | 100 | %             |    |    | 100 | %
|                     |                                  |                |    |                  |     |               |    |   
|Interest income, net |                                  |                | 5  | %                |     |               | 14 | % 
|Other expenses       |                                  |                | 0  | %                |     |               | 0  | % 
|                     |                                  |                |    |                  |     |               |    |   
|Net loss             |                                  |                | 95 | %                |     |               | 86 | % 
|                     |                                  |                |    |                  |     |               |    |   

Research and Development.Research and development expenses were $9.3
million for the six months ended June 30, 2002, or 62% of operating expenses,
compared to $9.9 million, or 59% of operating expenses for the six months ended
June 30, 2001. Included in research and development expenses are
costs of materials to build products which have not yet been sold in
significant quantities. Such costs amounted to $1.3 million
for the six month period ended June 30, 2002. No such costs were
incurred during the six month period ended June 30, 2001. The decrease in absolute dollars was primarily due to reductions
in payroll and payroll related expenses as a result of organizational
restructuring initiated in August 2001 as we shifted our focus to sales and
marketing efforts from core R & D development. Further reductions were realized
in our ISP business due to operating cost reductions. We expect research and
development spending to remain flat in future periods since we have completed
the core development of our first series of products.

Amortization of Content Licenses.Amortization of content licenses was
$1.2 million in the six months ended June 30, 2002, or 8% of operating
expenses. Starting in the first fiscal quarter, we began to amortize our
content licenses, over a three-year period in anticipation of the launch of
ViMagazine to registered users of our ViDVD. We expense content license fees
based on the greater of the royalty amounts due or amortization on a
straight-line basis over the estimated life of three years.

Sales and Marketing.Sales and marketing expenses were $1.3 million for
the six months ended June 30, 2002, or 9% of operating expenses, compared to
$2.2 million, or 13% of operating expenses, for the six months ended June 30,
2001. The decrease was primarily due to reductions in payroll and payroll
related expenses as a result of organizational restructuring initiated in
August 2001 and lower marketing expenses due to improvements in our marketing
infrastructure. We expect sales and marketing spending to increase in future
periods due to the marketing of the ViDVD, Beamer® and any additional products
in 2003.

General and Administrative.General and administrative expenses were $3.2
million for the six months ended June 30, 2002, or 21% of operating expenses,
compared to $4.6 million, or 28% of operating expenses, for the six months
ended June 30, 2001. The decrease was primarily due to reductions in payroll
and other expenses as a result of headcount reductions, having built out our
general and administrative infrastructure, and lower reimbursements to ESS for
administrative and management services. We expect general and administrative
expense spending to be relatively constant in future periods as our build of
infrastructure moderates.

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Non-operating Income.Net non-operating income was $0.7 million for the
six months ended June 30, 2002 compared to $2.3 million for the six months
ended June 30, 2001. Net non-operating income consists primarily of net
interest income. The decrease in net interest income was primarily due to lower
cash balances and lower yields on available-for-sale securities during the
first half of fiscal year 2002 as compared to the same period of fiscal year
2001.

Net Loss.We incurred a net loss of $14.4 million for both the six months
ended June 30, 2002 and 2001. We were able to reduce net loss as a result of
lower payroll and other expenses associated with having built out our
infrastructure to meet administrative and operational needs as a stand-alone
company. These cost reductions were offset by increases in amortization of
content licenses of $1.2 million and lower interest income associated with
lower cash balances and lower yields on available-for-sales securities during
the first half quarter of fiscal year 2002.

Liquidity and Capital Resources

As of June 30, 2002, we had $47.2 million in cash, cash equivalents and
available-for-sale investments compared to $71.5 million as of December 31,
2001, representing a decrease of $24.3 million.

Our principal sources of liquidity are cash, cash equivalents and
available-for-sale investments. Net cash used in operating activities was
approximately $10.5 million and $11.2 million for the six months ended June 30,
2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001,
we had a net loss of $14.4 million and $14.4 million, respectively, and we
expect to continue to incur losses in each of the remaining quarters of fiscal
year 2002. Our cash burn rate reflects primarily our operating
expenses adjusted for depreciation and amortization.

Net cash used in investing activities in the six
months ended June 30, 2002 was $7.7 million compared to
$9.9 million of cash provided by investing activities in the six
months ended June 30, 2001. Net cash used in investing
activities in the six months ended June 30, 2002 primarily
related to purchases of content licenses and partially offset by the
sale of available-for-sale investments. Net cash provided by investing
activities in the six months ended June 30, 2001 primarily
related to the sale of available-for-sale investments, net of
purchases, and the purchase of property and equipment.

Net cash used by financing activities was $3.5 in
the six months ended June 30, 2002 and $30.0 million in the
six months ended June 30, 2001. Net cash used in financing
activities in the six months ended June 30, 2002 primarily
related to repurchases of common stock. Net cash used in financing
activities in the six months ended June 30, 2001 related to the
repayment of notes payable to ESS.

Capital expenditures for the 12-month period ending June 30, 2003 are
anticipated to be approximately $0.7 million, primarily budgeted to acquire
capital equipment and content licenses for ViMagazine. We may also utilize cash to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies and media content which may significantly increase
our planned requirements for capital. In addition, from time to time, in the
ordinary course of business, we may evaluate potential acquisitions of, or
investments in, such businesses, products or technologies owned by third
parties.

In September 2001, the Board of Directors authorized the repurchase of up
to 10,000,000 shares of its common stock in the open market over a 12-month
period. 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. During the three months ended June 30, 2002,
Vialta repurchased a total of 1,695,779 shares of common stock for an aggregate
cost of $1.4 million. As of June 30, 2002, 10,443,026 shares remained
authorized for repurchase.

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

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

We believe that our existing cash and cash equivalents, and short and
long-term investments will be sufficient to fund planned acquisitions of
inventory, property and equipment and to provide adequate working capital
through at least the 12-month period ending June 30, 2003. However, to achieve
our longer-term goals of introducing additional products and services to
consumers, we believe we will need to raise additional capital, which may not
be available on acceptable terms, if at all. We have historically used vendor
credit as well as private offerings of convertible preferred stock and common
stock to fund operations and provide for capital requirements. However, the
price per share of any future equity-related financing will be determined at
about the time the offering is made and cannot be anticipated at

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this time. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of current stockholders are likely to or will be reduced
and such equity securities may have rights, preferences or privileges better
than those of current stockholders. We cannot assure you that any additional
financing will be available or that, if available, it will be sufficient or it
can be obtained on terms favorable to us or our stockholders. If adequate funds
are not available if and when needed, we would be required to delay, limit or
eliminate some or all of our proposed operations.

Critical Accounting Policies

Our critical accounting policies were disclosed in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, of
our Annual Report on Form 10-K for the year ended December 31, 2001. On an
ongoing basis, we re-evaluate our judgments 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 Vialtas future business, consolidated financial
position, results of operations or cash flows and cause future results to
differ from our expectations include the following: market acceptance of our
current and future product offerings; the ability to achieve revenues and
profitability; the ability to raise additional capital; competition; the
availability of intellectual property licenses; pricing pressures; the
dependence on a limited number of products and the need to develop new products
and features; the success of the ViMedia content delivery system and its impact
on the demand for the ViDVD player; the success of the Beamer® videophone;
component supply shortages; the availability of content licenses; potential
conflicts with ESS Technology, Inc., our previous parent; the success of
current distribution and retailing relationships and the ability to enter into
additional 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; and uncertainties raised by
the tax-free status of our spin-off from ESS, as well as risks identified in
the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2001 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 and long-term investments.
Consequently, we are exposed to fluctuation in interest rates on these
investments. Increases or decreases in interest rates generally translate into
decreases and increases in the fair value of these investments. In addition,
the credit worthiness of the issuer, relative values of alternative
investments, the liquidity of the instrument, and other general market
conditions may affect the fair values of interest rate sensitive investments.
In order to reduce the risk from fluctuation in rates, we invest in highly
liquid governmental notes and bonds with contractual maturities of less than
two years. All of the investments have been classified as available for sale,
and at June 30, 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 its results of operations and financial condition. In order
to reduce the risk from fluctuation in foreign exchange rates, our product
sales and all of our arrangements with our third party manufacturers and
component vendors are denominated in U.S. dollars. We do not engage in any
currency hedging activities.

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PART II. OTHER INFORMATION




ITEM 1: 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.
The Company believes that PSC has in fact breached the contract and that we may
have been substantially overcharged for services provided by PSC. This matter
is in pre-trial discovery, with a trial date scheduled for November 22, 2002.
The Company is vigorously defending the litigation, and is engaged in
settlement negotiations.




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

The Annual Meeting of Stockholders of Vialta, Inc. was held on June 20,
2002. Of the 163,441,644 shares of Class A common stock and 40,580,375 Class B
shares of common stock outstanding and entitled to vote at the meeting as of
the record date for the meeting, 172,995,799 shares of common stock were
represented in person or by proxy. At the meeting, stockholders elected four
directors of the Company and ratified the appointment of PricewaterhouseCoopers
LLP as independent accountants for 2002. The results of stockholder voting are
as follows:

|                      |                            |  |           |             |          |  |  |            | 
|--------------------- | -------------------------- |  | --------- | ----------- | -------- |  |  | ---------- | 
|                      |                            |  | Votes For |             | Withheld
|                      |                            |  |           |             |         
|Election of Directors |                            |  |           |             |          |  |  |           
|                      | Fred S.L. Chan (Class III) |  |           | 172,078,345 |          |  |  | 917,453    | 
|                      | Didier Pietri (Class II)   |  |           | 172,084,254 |          |  |  | 911,544    | 
|                      | Matthew K. Fong (Class II) |  |           | 119,253,504 |          |  |  | 53,742,294 | 
|                      | Herbert Chang (Class I)    |  |           | 171,519,713 |          |  |  | 1,765,085  | 
|                      | Masaharu Shinya (Class I)  |  |           | 171,242,961 |          |  |  | 1,752,837  | 

|                                                                      |  |     |             |         |  |         |           |  |  |  |        | 
|--------------------------------------------------------------------- |  | --- | ----------- | ------- |  | ------- | --------- |  |  |  | ------ | 
|                                                                      |  | For |             | Against |  | Abstain
|                                                                      |  |     |             |         |  |        
|Ratification of PricewaterhouseCoopers LLP
as Independent Accountants |  |     | 171,318,403 |         |  |         | 1,609,718 |  |  |  | 67,678 | 




ITEM 5: Other Matters

In accordance with Section 10A(i)(2) of the Securities Exchange Act of
1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the Act), we
are required to disclose the non-audit services to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit
services are defined in the Act as services other than those provided in
connection with an audit or a review of the financial statements of a
company. The Audit Committee is expected to approve the engagement of
PricewaterhouseCoopers LLP for the following non-audit services: (1) tax matter consultations concerning international and state
taxes; and (2)  the preparation of federal and state income tax
returns.




ITEM 6: Exhibits and Reports on Form 8-K

(a)  Exhibits. None.

(b)  Reports on Form 8-K. No reports were filed on Form 8-K for the quarter
ended June 30, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.

|                      |  |                           |  |                                                        
|--------------------- |  | ------------------------- |  | -------------------------------------------------------
|                      |  | VIALTA, INC. (Registrant)
|                     
|Date: August 14, 2002 |  | By:                       |  | /s/ Fred S.L. Chan                                     
|                      |  |                           |  |                                                        
|                      |  |                           |  | Fred S.L. Chan
Chairman of the Board of Directors      
|                     
|                      |  | By:                       |  | /s/ James Allison                                      
|                      |  |                           |  |                                                        
|                      |  |                           |  | James Allison
Controller
(principal accounting officer)

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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certification is made pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the
Quarterly Report on Form 10-Q of Vialta, Inc. for the period ending June 30,
2002.

We hereby certify that, to the best of our knowledge and belief, such Quarterly
Report on Form 10-Q complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and the information contained in such Form
10-Q fairly presents, in all material respects, the financial condition and
results of operations of Vialta, Inc.

|                                                      |  |                                                            | 
|----------------------------------------------------- |  | ---------------------------------------------------------- | 
|/s/ Didier Pietri                                     |  | /s/ James Allison                                         
|                                                      |  |                                                           
|Didier Pietri
Chief Executive Officer
August 14, 2002 |  | James Allison
Principal Accounting Officer
August 14, 2002

18