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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, 2003.                                              
|      |  |                                                                                            
|      |  | 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                                                       |  | 94-3337236                          
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

48461 Fremont Boulevard
Fremont, California 94538
(Address, including zip code, of Registrants principal executive offices)

(510) 870-3088
(Registrants telephone number, including area code)

Indicate by check 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 [X]      No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [   ]      No [X]

The number of outstanding shares of the registrants common stock, par
value $0.001 per share, on August 7, 2003 was 82,193,391 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                            
|                              | ITEM 4: Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | ITEM 4: Submission of Matters to a Vote of Security Holders                                  
|                              | ITEM 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



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VIALTA, INC.

FORM 10-Q: QUARTER ENDED JUNE 30, 2003

TABLE OF CONTENTS

|               |  |                                                                                                     |  |     
|-------------- |  | --------------------------------------------------------------------------------------------------- |  | ----
|               |  |                                                                                                     |  | Page
|               |  |                                                                                                     |  |     
|PART I.        |  | FINANCIAL INFORMATION                                                                               |  |     
|Item 1.        |  | Financial Statements:                                                                               |  |     
|               |  | Condensed Consolidated Balance Sheets  June 30, 2003 and December 31, 2002                         |  | 3   
|               |  | Condensed Consolidated Statements of Operations  three and six months ended June
30, 2003 and 2002 |  | 4   
|               |  | Condensed Consolidated Statements of Cash Flows  six months ended June 30, 2003 and
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  
|Item 4.        |  | Controls and Procedures                                                                             |  | 15  
|PART II.       |  | OTHER INFORMATION                                                                                   |  |     
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                 |  | 16  
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                    |  | 17  
|SIGNATURES     |  | 17                                                                                                 
|CERTIFICATIONS |  | 18                                                                                                 

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PART I. FINANCIAL INFORMATION




ITEM 1: Financial Statements




VIALTA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

|                                     |                                        |                                            |       |               |        |                   |       |          |        | 
|------------------------------------ | -------------------------------------- | ------------------------------------------ | ----- | ------------- | ------ | ----------------- | ----- | -------- | ------ | 
|                                     |                                        |                                            |       | June 30, 2003 |        | December 31, 2002
|                                     |                                        |                                            |       |               |        |                  
|Assets                               |                                        |                                            |       |               |        |                   |       |         
|Current assets:                      |                                        |                                            |       |               |        |                   |       |         
|                                     | Cash and cash equivalents              |                                            | $     | 22,752        |        |                   | $     | 21,863   |       
|                                     | Short-term investments                 |                                            |       | 7,509         |        |                   |       | 10,838   |       
|                                     | Accounts receivable, net               |                                            |       | 618           |        |                   |       | 1,362    |       
|                                     | Inventories                            |                                            |       | 3,010         |        |                   |       | 2,834    |       
|                                     | Prepaid expenses and other             |                                            |       | 653           |        |                   |       | 1,253    |       
|                                     |                                        |                                            |       |               |        |                   |       |         
|                                     |                                        | Total current assets                       |       |               | 34,542 |                   |       |          | 38,150 | 
|Property and equipment, net          |                                        |                                            | 1,322 |               |        |                   | 2,132 |         
|Other assets                         |                                        |                                            | 29    |               |        |                   | 45    |         
|                                     |                                        |                                            |       |               |        |                   |       |         
|                                     |                                        | Total assets                               |       | $             | 35,893 |                   |       | $        | 40,327 | 
|                                     |                                        |                                            |       |               |        |                   |       |         
|Liabilities and stockholders equity |                                        |                                            |       |               |        |                   |       |         
|Current liabilities:                 |                                        |                                            |       |               |        |                   |       |         
|                                     | Accounts payable                       |                                            | $     | 929           |        |                   | $     | 1,164    |       
|                                     | Accrued liabilities and other          |                                            |       | 2,327         |        |                   |       | 3,555    |       
|                                     | Deferred profit                        |                                            |       | 1,627         |        |                   |       | 3,230    |       
|                                     |                                        |                                            |       |               |        |                   |       |         
|                                     |                                        | Total current liabilities                  |       |               | 4,883  |                   |       |          | 7,949  | 
|                                    
|Stockholders equity:                |                                        |                                            |       |               |        |                   |       |         
|                                     | Common stock                           |                                            |       | 94            |        |                   |       | 94       |       
|                                     | Additional paid-in capital             |                                            |       | 144,112       |        |                   |       | 144,105  |       
|                                     | Treasury stock                         |                                            |       | (9,458        | )      |                   |       | (9,163   | )     
|                                     | Accumulated deficit                    |                                            |       | (103,744      | )      |                   |       | (102,666 | )     
|                                     | Accumulated other comprehensive income |                                            |       | 6             |        |                   |       | 8        |       
|                                     |                                        |                                            |       |               |        |                   |       |         
|                                     |                                        | Total stockholders equity                 |       |               | 31,010 |                   |       |          | 32,378 | 
|                                     |                                        |                                            |       |               |        |                   |       |         
|                                     |                                        | Total liabilities and stockholders equity |       | $             | 35,893 |                   |       | $        | 40,327 | 
|                                     |                                        |                                            |       |               |        |                   |       |         

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

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VIALTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

|                                            |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |        |        | 
|------------------------------------------- | ----------------------------------------------- | ------------------------ | ------ | ------------------ | ----- | ---------------- | ------ | ------ | ----- | ---- | ------ | ------ | ----- | - | ------- | ------ | ------ | 
|                                            |                                                 |                          |        | Three months ended |       | Six months ended
|                                            |                                                 |                          |        | June 30,           |       | June 30,        
|                                            |                                                 |                          |        |                    |       |                 
|                                            |                                                 |                          |        | 2003               |       | 2002             |        | 2003   |       | 2002
|                                            |                                                 |                          |        |                    |       |                  |        |        |       |     
|Net revenue                                 |                                                 | $                        | 2,520  |                    |       | $                |       |        |       | $    | 6,363  |        |       | $ |        |       
|Cost of goods sold                          |                                                 |                          | 570    |                    |       |                  |       |        |       |      | 1,433  |        |       |   |        |       
|                                            |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|Gross profit                                |                                                 |                          | 1,950  |                    |       |                  |       |        |       |      | 4,930  |        |       |   |        |       
|                                            |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|Operating expenses:                         |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|                                            | Product costs                                   |                          |        |                   |       |                  |        | 1,137  |       |      |        |       |       |   |         | 1,137  |       
|                                            | Engineering and development                     |                          |        | 621                |       |                  |        | 3,981  |       |      |        | 1,589  |       |   |         | 8,204  |       
|                                            | Sales and marketing                             |                          |        | 641                |       |                  |        | 732    |       |      |        | 1,083  |       |   |         | 1,346  |       
|                                            | General and administrative                      |                          |        | 1,974              |       |                  |        | 1,427  |       |      |        | 3,704  |       |   |         | 3,239  |       
|                                            | Amortization and impairment of
content licenses |                          |        |                   |       |                  |        | 947    |       |      |        |       |       |   |         | 1,200  |       
|                                            |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|                                            |                                                 | Total operating expenses |        |                    | 3,236 |                  |        |        | 8,224 |      |        |        | 6,376 |   |         |        | 15,126 | 
|                                            |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|Operating loss                              |                                                 |                          | (1,286 | )                  |       |                  | (8,224 | )      |       |      | (1,446 | )      |       |   | (15,126 | )     
|                                           
|Interest income and other, net              |                                                 |                          | 178    |                    |       |                  | 360    |        |       |      | 366    |        |       |   | 723     |       
|                                            |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|Net loss                                    |                                                 | $                        | (1,108 | )                  |       | $                | (7,864 | )      |       | $    | (1,080 | )      |       | $ | (14,403 | )     
|                                            |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|Net loss per share:                         |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|                                            | Basic and diluted                               |                          | $      | (0.01              | )     |                  | $      | (0.09  | )     |      | $      | (0.01  | )     |   | $       | (0.17  | )     
|                                            |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|Weighted average common shares
outstanding: |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       
|                                            | Basic and diluted                               |                          |        | 82,151             |       |                  |        | 83,752 |       |      |        | 82,194 |       |   |         | 84,492 |       
|                                            |                                                 |                          |        |                    |       |                  |        |        |       |      |        |        |       |   |         |       

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |         |        |        |         |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------- | -------------------------------------------------- | ---------------------------------------------------- | ----- | ---------------- | ------- | ------- | ------ | ------ | ------- | -
|                                                     |                                                                             |                                                 |                                                    |                                                      |       | Six months ended
|                                                     |                                                                             |                                                 |                                                    |                                                      |       | June 30,        
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                 
|                                                     |                                                                             |                                                 |                                                    |                                                      |       | 2003             |         | 2002   
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|                                                     | Net loss                                                                    |                                                 | $                                                  | (1,080                                               | )     |                  | $       | (14,403 | )     
|                                                     | Adjustments to reconcile net loss to net cash used in operating
activities: |                                                 |                                                    |                                                      |       |                  |         |         |       
|                                                     |                                                                             | Depreciation                                    |                                                    |                                                      | 1,016 |                  |         |         | 3,495  |       
|                                                     |                                                                             | Amortization and impairment of content licenses |                                                    |                                                      |      |                  |         |         | 1,200  |       
|                                                     |                                                                             | Write-down of long-term investment              |                                                    |                                                      |      |                  |         |         | 39     |       
|                                                     |                                                                             | Changes in operating assets and liabilities:    |                                                    |                                                      |       |                  |         |         |        |       
|                                                     |                                                                             |                                                 | Accounts receivable, net                           |                                                      |       | 744              |         |         |        |       |        
|                                                     |                                                                             |                                                 | Related party receivable/payables, net             |                                                      |       | 443              |         |         |        | 113    |        
|                                                     |                                                                             |                                                 | Inventories                                        |                                                      |       | (176             | )       |         |        |       |        
|                                                     |                                                                             |                                                 | Prepaid expenses and other                         |                                                      |       | 616              |         |         |        | (59    | )      
|                                                     |                                                                             |                                                 | Restricted cash                                    |                                                      |       |                 |         |         |        | (1,738 | )      
|                                                     |                                                                             |                                                 | Deferred profit                                    |                                                      |       | (1,603           | )       |         |        |       |        
|                                                     |                                                                             |                                                 | Accounts payable and accrued liabilities and other |                                                      |       | (1,906           | )       |         |        | 843    |        
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|                                                     |                                                                             |                                                 |                                                    | Net cash used in operating activities                |       |                  | (1,946  | )       |        |        | (10,510 | )
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|                                                     | Purchases of short-term investments                                         |                                                 |                                                    | (7,478                                               | )     |                  |         | 2,483   |       
|                                                     | Proceeds from sales of short-term investments                               |                                                 |                                                    | 10,807                                               |       |                  |         |        |       
|                                                     | Purchase of content licenses                                                |                                                 |                                                    |                                                     |       |                  |         | (10,043 | )     
|                                                     | Acquisitions of property and equipment                                      |                                                 |                                                    | (206                                                 | )     |                  |         | (166    | )     
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|                                                     |                                                                             |                                                 |                                                    | Net cash provided by (used in) investing activities: |       |                  | 3,123   |         |        |        | (7,726  | )
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|                                                     | Issuance of shares of common stock                                          |                                                 |                                                    | 7                                                    |       |                  |         | 14      |       
|                                                     | Repurchases of shares of common stock                                       |                                                 |                                                    | (295                                                 | )     |                  |         | (3,481  | )     
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|                                                     |                                                                             | Net cash used in financing activities:          |                                                    |                                                      | (288  | )                |         |         | (3,467 | )     
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                 | 889                                                |                                                      |       |                  | (21,703 | )      
|Cash and cash equivalents, beginning of the period   |                                                                             |                                                 | 21,863                                             |                                                      |       |                  | 61,886  |        
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        
|Cash and cash equivalents, end of the period         |                                                                             | $                                               | 22,752                                             |                                                      |       | $                | 40,183  |        
|                                                     |                                                                             |                                                 |                                                    |                                                      |       |                  |         |        

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

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VIALTA, INC.




NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1. THE COMPANY

We were incorporated in California in April 1999 and reincorporated in the
State of Delaware in May 2001.

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

Since our inception, we have incurred substantial losses and negative cash
flows from operations. We expect operating losses and negative cash
flows from operations to
continue for the foreseeable future and anticipate that losses may increase
from current levels because of additional costs and expenses related to sales
and marketing activities, continued expansion of operations, expansion of
product offerings and development of relationships with other businesses. We
believe that we have sufficient cash and cash equivalents and short-term
investments to fund our operations through June 30, 2004. However, in the
longer term, failure to generate sufficient revenues, raise additional capital
or reduce spending could have a material adverse effect on our ability to
achieve our intended business objectives.

From our inception through December 31, 2002, we were a
development stage enterprise. During the first quarter of 2003, we commenced
principal operations and are no longer classified as a development stage company.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements
have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles in the United States of America
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the accompanying unaudited condensed interim financial
statements contain all adjustments, all of which are normal and recurring in
nature, necessary to fairly present our financial position, operating results
and cash flows. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 2002, included in
our Annual Report on Form 10-K filed on March 28, 2003. The results of
operations for the three and six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for any other period or for the
fiscal year ending December 31, 2003.

Reclassifications

Certain prior year amounts in the condensed consolidated financial
statements and the notes hereto have been reclassified where necessary to
conform to the quarter ended June 30, 2003.

Principles of consolidation

The consolidated financial statements include the accounts of Vialta and
our subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.

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Cash equivalents and investments

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

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

Revenue recognition

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

Products sold to retailers and distributors are subject to rights of
return. We defer recognition of revenue on products sold to retailers and
distributors until the retailers and distributors sell the products to their
customers. We recognize revenue from retailers and distributors according to
information on shipments to their customers as provided by those retailers and
distributors. If information on shipments to their customers is not
provided in
a timely and accurate manner, there may be a material impact on our reported
results of operations and financial condition. Revenue is also deferred for the
initial thirty-day period during which our direct customers, retailers and
distributors have the unconditional right to return products.

Revenue for the three and six months ended June 30, 2003 was $2.5 million
and $6.4 million, respectively. There was no revenue for the three and six
months ended June 30, 2002. During the first quarter of 2003, we began to
recognize revenue on sales of Beamer, net of estimated warranty claims and
returns. We began nationwide distribution of Beamer during the third quarter of
2002 and experienced more significant shipments during the fourth quarter of
2002. For most of these shipments, the standard warranty period had not been
completed as of December 31, 2002. Due to a limited history of warranty and
sales returns for Beamer, we did not recognize revenue from sales through
December 31, 2002. As a result, revenue for the six months ended June 30, 2003
includes the recognition of deferred revenue of approximately $2.8 million
related to shipments of Beamer which were made during the third and fourth
quarters of 2002.

Allowances for sales returns

Allowances are provided for estimated returns. Provision for return
allowances are recorded at the time when revenue is recognized based on
historical returns, current economic trends and changes in customer demand.
Such allowances are adjusted periodically to reflect actual
experience and anticipated
returns.

Warranty

We provide a limited warranty on our products for periods ranging from 90
days to 12 months from the date of sale to the end customers. We estimate
warranty costs based on historical experience and accrue for estimated costs as
a charge to cost of sales when revenue is recognized. During the six months
ended June 30, 2003, warranty costs did not have a material impact on our
reported results of operations and financial condition. In the future, actual
warranty costs may be higher than our estimates.

Comprehensive income (loss)

Comprehensive income (loss) is defined to include all changes in equity
during a period from non-owner sources. For the three and six months ended June
30, 2003, comprehensive income (loss) approximated the net losses reported. 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 $7.9 and $14.5 million, respectively.

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Stock-based compensation

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

The following table illustrates the effect on our net loss and net loss
per share if we had recorded compensation costs based on the estimated grant
date fair value as defined by SFAS No. 123 for all granted stock-based awards
(in thousands, except per share amounts).

|                                                                                                                                            |                   |   |                    |       |                  |   |        |       |      |   |        |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------- | ----- | -
|                                                                                                                                            |                   |   | Three Months Ended |       | Six Months Ended
|                                                                                                                                            |                   |   | June 30,           |       | June 30,        
|                                                                                                                                            |                   |   |                    |       |                 
|                                                                                                                                            |                   |   | 2003               |       | 2002             |   | 2003   |       | 2002
|                                                                                                                                            |                   |   |                    |       |                  |   |        |       |     
|Net loss, as reported                                                                                                                       |                   | $ | (1,108             | )     |                  | $ | (7,864 | )     |      | $ | (1,080 | )     |   | $ | (14,403 | )    
|Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects |                   |   | (390               | )     |                  |   | (897   | )     |      |   | (739   | )     |   |   | (1,947  | )    
|                                                                                                                                            |                   |   |                    |       |                  |   |        |       |      |   |        |       |   |   |         |      
|Pro forma net loss                                                                                                                          |                   | $ | (1,498             | )     |                  | $ | (8,761 | )     |      | $ | (1,819 | )     |   | $ | (16,350 | )    
|                                                                                                                                            |                   |   |                    |       |                  |   |        |       |      |   |        |       |   |   |         |      
|Pro forma net loss per share:                                                                                                               |                   |   |                    |       |                  |   |        |       |      |   |        |       |   |   |         |      
|                                                                                                                                            | Basic and diluted |   | $                  | (0.02 | )                |   | $      | (0.10 | )    |   | $      | (0.02 | ) |   | $       | (0.19 | )

NOTE 3. RELATED PARTY TRANSACTIONS

The following is a summary of major transactions between us and ESS
Technology, Inc., which was formerly our parent company, for the periods
presented (in thousands):

|                                                  |                                          |   |                    |      |                  |   |      |      |      |   |      |      |   |   |       |      |  
|------------------------------------------------- | ---------------------------------------- | - | ------------------ | ---- | ---------------- | - | ---- | ---- | ---- | - | ---- | ---- | - | - | ----- | ---- | -
|                                                  |                                          |   | Three Months Ended |      | Six Months Ended
|                                                  |                                          |   | June 30,           |      | June 30,        
|                                                  |                                          |   |                    |      |                 
|                                                  |                                          |   | 2003               |      | 2002             |   | 2003 |      | 2002
|                                                  |                                          |   |                    |      |                  |   |      |      |     
|Net receivables (payables) at beginning of period |                                          | $ | (12                | )    |                  | $ | 99   |      |      | $ | (33  | )    |   | $ | 64    |     
|Charges by Vialta to ESS:                         |                                          |   |                    |      |                  |   |      |      |      |   |      |      |   |   |       |     
|                                                  | Administrative & management service fees |   |                    |     |                  |   |      | 99   |      |   |      |     |   |   |       | 202  |  
|                                                  | Other                                    |   |                    |     |                  |   |      | (190 | )    |   |      | 2    |   |   |       | 14   |  
|Charges by ESS to Vialta:                         |                                          |   |                    |      |                  |   |      |      |      |   |      |      |   |   |       |     
|                                                  | Administrative & management service fees |   |                    | (20  | )                |   |      | (49  | )    |   |      | (52  | ) |   |       | (137 | )
|                                                  | Purchase of products                     |   |                    | (15  | )                |   |      | (53  | )    |   |      | (19  | ) |   |       | (69  | )
|                                                  | Building lease                           |   |                    | (464 | )                |   |      | (463 | )    |   |      | (927 | ) |   |       | (926 | )
|Cash receipts from ESS                            |                                          |   | (1                 | )    |                  |   | (153 | )    |      |   | (2   | )    |   |   | (338  | )   
|Cash payments made to ESS                         |                                          |   | 36                 |      |                  |   | 661  |      |      |   | 555  |      |   |   | 1,141 |     
|                                                  |                                          |   |                    |      |                  |   |      |      |      |   |      |      |   |   |       |     
|Net receivables (payables) at end of period       |                                          | $ | (476               | )    |                  | $ | (49  | )    |      | $ | (476 | )    |   | $ | (49   | )   
|                                                  |                                          |   |                    |      |                  |   |      |      |      |   |      |      |   |   |       |     

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NOTE 4. INVENTORIES

The following table summarizes the activity in Beamer related inventories
and reserves for the six months ended June 30, 2003 (in thousands):

|                        |                                |   |        |        |         |   |        |        |   |   |       |       |  
|----------------------- | ------------------------------ | - | ------ | ------ | ------- | - | ------ | ------ | - | - | ----- | ----- | -
|                        |                                |   | Beamer
|                        |                                |   |       
|                        |                                |   | Gross  |        | Reserve |   | Net   
|                        |                                |   |        |        |         |   |       
|As of December 31, 2002 |                                | $ | 11,866 |        |         | $ | (9,032 | )      |   | $ | 2,834 |      
|                        | Purchase of inventories        |   |        | 553    |         |   |        |       |   |   |       | 553   |  
|                        | Shipments, net                 |   |        | (903   | )       |   |        | 629    |   |   |       | (274  | )
|                        | Use or Disposal of inventories |   |        | (311   | )       |   |        | 143    |   |   |       | (168  | )
|                        |                                |   |        |        |         |   |        |        |   |   |       |      
|As of March 31, 2003    |                                |   | 11,205 |        |         |   | (8,260 | )      |   |   | 2,945 |      
|                        |                                |   |        |        |         |   |        |        |   |   |       |      
|                        | Purchase of inventories        |   |        | 1,020  |         |   |        |       |   |   |       | 1,020 |  
|                        | Shipments, net                 |   |        | (1,903 | )       |   |        | 1,374  |   |   |       | (529  | )
|                        | Use or Disposal of inventories |   |        | (152   | )       |   |        | (274   | ) |   |       | (426  | )
|                        |                                |   |        |        |         |   |        |        |   |   |       |      
|As of June 30, 2003     |                                | $ | 10,170 |        |         | $ | (7,160 | )      |   | $ | 3,010 |      
|                        |                                |   |        |        |         |   |        |        |   |   |       |      
|                        | Raw material                   |   | $      | 6,038  |         |   | $      | (3,174 | ) |   | $     | 2,864 |  
|                        | Finished goods                 |   |        | 4,132  |         |   |        | (3,986 | ) |   |       | 146   |  
|                        |                                |   |        |        |         |   |        |        |   |   |       |      
|                        |                                | $ | 10,170 |        |         | $ | (7,160 | )      |   | $ | 3,010 |      
|                        |                                |   |        |        |         |   |        |        |   |   |       |      

As of June 30, 2003 and December 31, 2002, we had gross ViDVD and other
inventories of $4.3 million. These inventories are fully reserved in all
periods presented.

Because a significant portion of our inventory expenditures for raw
materials and finished goods for Beamer were expensed in prior periods, the
cost of goods sold related to Beamer revenue recognized during the three and
six months ended June 30, 2003 was lower than what would have been recorded had
inventory costs not been previously reserved. If we had not previously expensed
inventory costs, our cost of goods sold for the three and six months ended June
30, 2003 would have been approximately $2.1 million and $4.9 million,
respectively.

NOTE 5. BALANCE SHEET COMPONENTS (in thousands)

|                                                                   |  |          |        |              |  |   |        |  
|------------------------------------------------------------------ |  | -------- | ------ | ------------ |  | - | ------ | -
|                                                                   |  | June 30, |        | December 31,
|                                                                   |  | 2003     |        | 2002        
|                                                                   |  |          |        |             
|Cash and cash equivalents                                          |  |          |        |              |  |   |        |  
|Cash and money market funds, at cost which
approximates fair value |  | $        | 22,752 |              |  | $ | 21,863 |  
|                                                                   |  |          |        |              |  |   |        |  
|Short-term investments                                             |  |          |        |              |  |   |        |  
|US Government debt securities                                      |  | $        |       |              |  | $ | 1,509  |  
|Corporate debt securities                                          |  |          | 7,509  |              |  |   | 9,329  |  
|                                                                   |  |          |        |              |  |   |        |  
|                                                                   |  | $        | 7,509  |              |  | $ | 10,838 |  
|                                                                   |  |          |        |              |  |   |        |  
|Accounts receivable, net                                           |  |          |        |              |  |   |        |  
|Accounts receivable                                                |  | $        | 663    |              |  | $ | 1,392  |  
|Less: Allowance for doubtful accounts                              |  |          | (45    | )            |  |   | (30    | )
|                                                                   |  |          |        |              |  |   |        |  
|                                                                   |  | $        | 618    |              |  | $ | 1,362  |  
|                                                                   |  |          |        |              |  |   |        |  
|Prepaid expenses and other                                         |  |          |        |              |  |   |        |  
|Advances to subcontractors                                         |  | $        | 429    |              |  | $ | 429    |  
|Other current assets                                               |  |          | 224    |              |  |   | 824    |  
|                                                                   |  |          |        |              |  |   |        |  
|                                                                   |  | $        | 653    |              |  | $ | 1,253  |  
|                                                                   |  |          |        |              |  |   |        |  

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|                                            |  |          |         |              |  |   |         |  
|------------------------------------------- |  | -------- | ------- | ------------ |  | - | ------- | -
|                                            |  | June 30, |         | December 31,
|                                            |  | 2003     |         | 2002        
|                                            |  |          |         |             
|Property and equipment, net                 |  |          |         |              |  |   |         |  
|Machinery and equipment                     |  | $        | 5,929   |              |  | $ | 7,155   |  
|Furniture and fixtures                      |  |          | 561     |              |  |   | 569     |  
|Software and web site development cost      |  |          | 5,254   |              |  |   | 5,173   |  
|                                            |  |          |         |              |  |   |         |  
|                                            |  |          | 11,744  |              |  |   | 12,897  |  
|Less: Accumulated depreciation              |  |          | (10,422 | )            |  |   | (10,765 | )
|                                            |  |          |         |              |  |   |         |  
|                                            |  | $        | 1,322   |              |  | $ | 2,132   |  
|                                            |  |          |         |              |  |   |         |  
|Accrued liabilities and other               |  |          |         |              |  |   |         |  
|Accrued compensation costs                  |  | $        | 1,146   |              |  | $ | 1,613   |  
|Customer deposits                           |  |          | 85      |              |  |   | 893     |  
|Accrued
facility charges, non-related party |  |          |        |              |  |   | 402     |  
|Payables to related party                   |  |          | 476     |              |  |   | 33      |  
|Other current liabilities                   |  |          | 620     |              |  |   | 614     |  
|                                            |  |          |         |              |  |   |         |  
|                                            |  | $        | 2,327   |              |  | $ | 3,555   |  
|                                            |  |          |         |              |  |   |         |  

NOTE 6. COMPUTATION OF NET LOSS PER SHARE

Basic and diluted net loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding for the periods.

|                                           |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  
|------------------------------------------ |  | -------------------------- | ------ | ------------------------ |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                           |  | For the three months ended |        | For the six months ended
|                                           |  | June 30,                   |        | June 30,                
|                                           |  |                            |        |                         
|                                           |  | 2003                       |        | 2002                     |  | 2003 |        | 2002
|                                           |  |                            |        |                          |  |      |        |     
|Net loss                                   |  | $                          | (1,108 | )                        |  | $    | (7,864 | )    |  | $ | (1,080 | ) |  | $ | (14,403 | )
|                                           |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  
|Weighted average common shares outstanding |  |                            | 82,151 |                          |  |      | 83,752 |      |  |   | 82,194 |   |  |   | 84,492  |  
|                                           |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  
|Net loss per share                         |  | $                          | (0.01  | )                        |  | $    | (0.09  | )    |  | $ | (0.01  | ) |  | $ | (0.17   | )
|                                           |  |                            |        |                          |  |      |        |      |  |   |        |   |  |   |         |  

NOTE 7. COMMON STOCK REPURCHASE

During the three months ended June 30, 2003, we did not repurchase any
shares of common stock. For the six months ended June 30, 2003, we repurchased
approximately 759,000 shares of common stock for an aggregate cost of
approximately $295,000. As of June 30, 2003, approximately 8,036,000 shares
remain authorized for repurchase.

NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables (EITF Issue No. 00-21). EITF Issue No. 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. We are currently
assessing the impact of EITF Issue No. 00-21 on our consolidated financial
statements.

In May 2003, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first fiscal period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of SFAS
No.

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150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. We believe that the adoption of this standard
will not have a material impact on our consolidated financial statements.




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

Since our inception we have financed our operations primarily from funds
raised in private offerings of convertible preferred stock and common stock and
through vendor credit. For the three months ended June 30, 2003 and 2002, we
had net losses of $1.1 million and $7.9 million, respectively. For the six
months ended June 30, 2003 and 2002, we had net losses of $1.1 million and
$14.4 million, respectively. We expect we will incur losses for at least the
remainder of fiscal 2003. As of June 30, 2003 we had an accumulated deficit of
$103.7 million.

From our inception through December 31, 2002, we were a
development stage enterprise. During the first quarter of 2003, we commenced
principal operations and are no longer classified as a development stage
company.

Results of Operations

For the three months ended June 30, 2003 compared with three months ended June 30, 2002

Net revenue.Net revenue for the three months ended June 30, 2003 was $2.5
million. There was no revenue for the three months ended June 30, 2002. During
the first quarter of 2003, we began to recognize revenue on sales of Beamer,
net of estimated warranty claims and returns. We began nationwide distribution
of Beamer during the third quarter of 2002 and experienced more significant
shipments during the fourth quarter of 2002. For most of these shipments, the
standard warranty period had not been completed as of December 31, 2002. Due to
a limited history of warranty and sales returns for Beamer, we did not
recognize revenue for sales through December 31, 2002.

Cost of goods sold. Cost of goods sold for the three months ended June 30,
2003 was $570,000. There was no similar expense for the three months ended June
30, 2002. Because in prior periods we expensed inventory expenditures for raw
materials and finished goods related to Beamer revenue, cost of goods sold for the second quarter of 2003 was lower than what
would have been recorded had inventory costs not been expensed. If we had not
previously expensed inventory costs, our cost of goods sold for the three
months ended June 30, 2003 would have been approximately $2.1 million.

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Gross profit. Gross profit for the three months ended June 30, 2003 was
$1.9 million. If we had not previously expensed inventory costs, our gross
profit for the second quarter of 2003 would have been approximately $467,000.

Product costs.Product costs were $1.1 million for the three months ending
June 30, 2002. Product costs represent inventory expenditures for raw materials
and finished goods related to Beamer. At June 30, 2002 we had no historical
experience selling Beamer and there was significant uncertainty regarding our
ability to recover costs incurred in building inventories related to Beamer. As
a result, we expensed Beamer inventory costs as incurred through the third
quarter of 2002. Following the nationwide commercial launch of Beamer, we began
to capitalize the additional value of Beamer inventory costs in the fourth
quarter of 2002. There is no comparable expense for the three months ended June
30, 2003.

Engineering and development.Engineering and development expenses were
$621,000 for the three months ended June 30, 2003, compared to $4.0 million for
the three months ended June 30, 2002. The decrease was primarily due to
reductions in engineering and development personnel and other development
expenditures as we shifted our focus to sales and marketing efforts from core
development activities. Included in engineering and development expenses for
the three months ended June 30, 2002 were development expenses related to ViDVD
and ViMagazine as well as expenses related to our Internet Service Provider,
known as ViZip. Since all development activities related to ViDVD, ViMagazine
and ViZip were discontinued during 2002, there were no comparable expenses for
the three months ended June 30, 2003. We expect engineering and development
expenses to be relatively constant in future periods.

Sales and marketing.Sales and marketing expenses were $641,000 for the
three months ended June 30, 2003 compared to $732,000 for the three months
ended June 30, 2002. The decrease was primarily due to reductions in personnel
expenses and improved organizational efficiencies. We expect sales and
marketing spending to increase in future periods to support expansion of retail
and consumer marketing initiatives, including advertising and consumer
awareness programs, for Beamer and other potential new product introductions.

General and administrative.General and administrative expenses were $2.0
million for the three months ended June 30, 2003 compared to $1.4 million for
the three months ended June 30, 2002. The increase was primarily due to the
discontinuation of allocating various overhead expenses, such as
rent, to other departments in the Company. We expect general and administrative expenses to be
relatively constant in future periods.

Amortization
and impairment of content licenses.During the fourth quarter of 2002, we
determined that our content licenses had suffered a permanent decline in value
and the remaining unamortized balance was written down to zero as of December
31, 2002. For the three months ended June 30, 2002, amortization of content
licenses was $947,000.

Interest income and other, net.Interest income and other, net was
$178,000 for the three months ended June 30, 2003, compared to $360,000 for the
three months ended June 30, 2002. The decrease in interest income was primarily
due to lower cash balances and lower yields on available-for-sale securities
during the second quarter of 2003 compared to the same quarter of 2002.

For the six months ended June 30, 2003 compared with six months ended June 30, 2002

Net revenue.Net revenue for the six months ended June 30, 2003 was $6.4
million. There was no revenue for the six months ended June 30, 2002. During
the first quarter of 2003, we began to recognize revenue on sales of Beamer,
net of estimated warranty claims and returns. We began nationwide distribution
of Beamer during the third quarter of 2002 and experienced more significant
shipments during the fourth quarter of 2002. For most of these shipments, the
standard warranty period had not been completed as of December 31, 2002. Due to
a limited history of warranty and sales returns for Beamer, we did not
recognize revenue for sales through December 31, 2002. As a result, revenue for
the six months ended June 30, 2003 includes the recognition of deferred revenue
of approximately $2.8 million related to shipments of Beamer, made during the
third and fourth quarters of 2002.

Cost of goods sold. Cost of goods sold for the six months ended June 30,
2003 was $1.4 million. There was no similar expense for the six months ended
June 30, 2002. Because in prior periods we expensed inventory expenditures for
raw materials and finished goods related to Beamer revenue, cost of goods sold
for the six months ended June 30, 2003 was lower than what would have been
recorded had inventory costs not been expensed. If we had not previously
expensed inventory costs, our cost of goods sold for the six months ended June
30, 2003 would have been approximately $4.9 million.

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Gross profit. Gross profit for the six months ended June 30, 2003 was $4.9
million. If we had not previously expensed inventory costs, our gross profit
for the six months ended June 30, 2003 would have been $1.5 million.

Product costs.Product costs were $1.1 million for the six months ending
June 30, 2002. Product costs represent inventory expenditures for raw materials
and finished goods related to Beamer. At June 30, 2002 we had no historical
experience selling Beamer and there was significant uncertainty regarding our
ability to recover costs incurred in building inventories related to Beamer. As
a result, we expensed Beamer inventory costs as incurred through the third
quarter of 2002. Following the nationwide commercial launch of Beamer, we began
to capitalize the additional value of Beamer inventory costs in the fourth
quarter of 2002. There is no comparable expense for the six months ended June
30, 2003.

Engineering and development.Engineering and development expenses were
$1.6 million for the six months ended June 30, 2003, compared to $8.2 million
for the six months ended June 30, 2002. The decrease was primarily due to
reductions in engineering and development personnel and other development
expenditures as we shifted our focus to sales and marketing efforts from core
development activities. Included in engineering and development expenses for
the six months ended June 30, 2002 were development expenses related to ViDVD
and ViMagazine as well as expenses related to our Internet Service Provider,
known as ViZip. Since all development activities related to ViDVD, ViMagazine
and ViZip were discontinued during 2002, there were no comparable expenses for
the six months ended June 30, 2003. We expect engineering and development
expenses to be relatively constant in future periods.

Sales and marketing.Sales and marketing expenses were $1.1 million for
the six months ended June 30, 2003 compared to $1.3 million for the six months
ended June 30, 2002. The decrease was primarily due to reductions in personnel
expenses and improved organizational efficiencies. We expect sales and
marketing spending to increase in future periods to support expansion of retail
and consumer marketing initiatives, including advertising and consumer
awareness programs, for Beamer and other potential new product introductions.

General and administrative.General and administrative expenses were $3.7
million for the six months ended June 30, 2003 compared to $3.2 million for the
six months ended June 30, 2002. The increase was primarily due to the
discontinuation of allocating various overhead expenses, such as rent, to other
departments in the Company. We expect general and administrative expenses to be
relatively constant in future periods.

Amortization
and impairment of content licenses.During the fourth quarter of 2002, we
determined that our content licenses had suffered a permanent decline in value
and the remaining unamortized balance was written down to zero as of December
31, 2002. For the six months ended June 30, 2002, amortization of content
licenses was $1.2 million.

Interest income and other, net.Interest income and other, net was
$366,000 for the six months ended June 30, 2003, compared to $723,000 for the
six months ended June 30, 2002. The decrease in interest income was primarily
due to lower cash balances and lower yields on available-for-sale securities
during the six months ended June 30, 2003 compared to the six months ended June
30, 2002.

Liquidity and Capital Resources

At June 30, 2003, we had $30.3 million in cash and cash equivalents and
investments compared to $32.7 million at December 31, 2002, representing a
decrease of $2.4 million.

Our principal sources of liquidity are cash and cash equivalents and
investments. Net cash used in operating activities was approximately $1.9
million and $10.5 million for the six months ended June 30, 2003 and 2002,
respectively, representing a decrease of approximately $8.6 million. The
decrease in cash used in operating activities during the six months ended June
30, 2003 compared to the six months ending June 30, 2002 was primarily due to
revenue from sales of Beamer and decreased operating expenses.

Net cash provided by investing activities for the six months ended June
30, 2003 was $3.1 million compared to $7.7 million of cash used in investing
activities for the six months ended June 30, 2002. Net cash provided by
investing activities for the six months ended June 30, 2003 was primarily
related to the sales of short-term investments. Net cash used in investing
activities for the six months ended June 30, 2002 was primarily related to the
purchases of content licenses.

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Net cash used in financing activities was $288,000 for the six months
ended June 30, 2003 and $3.5 million for the six months ended June 30, 2002,
primarily related to repurchases of our common stock.

Net inventory expenditures during the six months ended June 30, 2003 were
approximately $800,000 and we expect to spend an additional $3.5 million for
inventory and inventory components during the second half of 2003. We may also
utilize cash to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. Any such acquisition or
investment may significantly increase our planned requirements for capital.
From time to time, in the ordinary course of our business, we may evaluate
potential acquisitions of or investments in such businesses, products or
technologies owned by third parties.

In September 2001, the Board of Directors authorized the repurchase of up
to 10,000,000 shares of our common stock in open market or private transactions
over a twelve-month period. In June 2002, the Board of Directors authorized the
existing stock repurchase program be extended to include the repurchase of up
to an additional 10,000,000 shares of common stock. Through December 31, 2002
we repurchased approximately 11,205,000 shares of common stock at an aggregate
cost of $9.1 million. During the three months ended June 30, 2003, we had not
repurchased any shares of common stock. For the six months ended June 30, 2003,
we repurchased approximately 759,000 shares for an aggregate cost of
approximately $295,000. As of June 30, 2003, approximately 8,036,000 shares
remain authorized for repurchase.

In January 2000, we entered into a non-cancelable lease agreement for our
headquarters that will expire in 2003. We are currently in negotiations with
ESS, our landlord, to amend and extend our headquarters building lease. We
expect to finalize our lease agreement by the end of the third quarter of 2003.
Under the terms of this and other leases, with various expiration dates through
2006, our future minimum rental payments as of June 30, 2003 are as follows (in
thousands):

|             |      |   |         |       | 
|------------ | ---- | - | ------- | ----- | 
|             |      |   | Amounts
|             |      |   |        
|Remainder
of | 2003 |   | $       | 1,072 | 
|             | 2004 |   |         | 229   | 
|             | 2005 |   |         | 164   | 
|             | 2006 |   |         | 126   | 
|             |      |   |         |      
|             |      | $ | 1,591   |      
|             |      |   |         |      

We believe that our existing cash and cash equivalents and investments
will be sufficient to fund our operations through June 30, 2004. However, to
continue our operations beyond that date, or if our current level of operations
change, or to achieve our longer-term goals of introducing additional products
to consumers, we believe we will need to raise additional capital, which may
not be available on acceptable terms, if at all. We have historically used
vendor credit as well as private offerings of convertible preferred stock and
common stock to fund operations and provide for capital requirements. However,
the price per share of any future equity-related financing will be determined
at the time the offering is made and cannot be anticipated at this time. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of current stockholders 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, 2002. 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.

Recent Accounting Pronouncements

In November 2002, the EITF reached a consensus on Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables (EITF Issue
No. 00-21). EITF Issue No. 00-21 provides guidance on how to account for
arrangements that

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involve the delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF Issue No. 00-21 will apply to
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. We are currently assessing the impact of EITF Issue No. 00-21 on our
consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first fiscal period
beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting
the cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of SFAS No. 150 and still existing
at the beginning of the interim period of adoption. Restatement is not
permitted. We believe that the adoption of this standard will not have a
material impact on our consolidated financial statements.

Other Factors That May Affect Our Business and Future Results

Factors that could impact our future business, consolidated financial
position, results of operations or cash flows and cause future results to
differ from our expectations include the following: the ability to achieve
revenues and profitability; the ability to raise additional capital;
competition; pricing pressures; the dependence on a limited number of products
and the need to develop new products and features; the success of Beamer and
other consumer products we may develop; component supply shortages; potential
conflicts with ESS Technology, Inc., our former parent; the success of current
distribution and retail relationships and the ability to enter into additional
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 risks identified in the
our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 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 fluctuations in interest rates on these
investments. Increases or decreases in interest rates generally translate into
decreases and increases in the fair value of these investments. In addition,
the credit worthiness of the issuer, relative values of alternative
investments, the liquidity of the instrument, and other general market
conditions may affect the fair values of interest rate sensitive investments.
In order to reduce the risk from fluctuation in rates, we invest in highly
liquid governmental notes and bonds with contractual maturities of less than
two years. At June 30, 2003, all of our short-term investments are classified
as available for sale and are recorded at market values.

Foreign Exchange Risks.Because our products are manufactured primarily in
Asia, we are exposed to market risk from changes in foreign exchange rates,
which could affect our results of operations and financial condition. In order
to reduce the risk from fluctuations in foreign exchange rates, our product
sales and most of our arrangements with our third party manufacturers and
component vendors are denominated in U.S. dollars. We do not engage in any
currency hedging activities.




ITEM 4: Controls and Procedures

Within ninety days prior to the filing of this report, an evaluation was
performed of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. This evaluation was conducted under the
supervision and with the participation of the Companys Chief Executive Officer
and its Chief Financial Officer. Based on that evaluation, the Companys Chief
Executive Officer and its Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective. There have been no
significant changes in the Companys internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.

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PART II. OTHER INFORMATION




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

The annual meeting of Stockholders of Vialta, Inc. was held on June 17,
2003. Of the 82,140,557 shares of common stock outstanding and entitled to vote
at the meeting as of the record date for the meeting, 70,616,674 shares of
common stock were represented in person or by proxy. At the meeting,
stockholders elected six directors of the Company, approved the amended and
restated 2000 Directors Stock Option Plan and ratified the appointment of
PricewaterhouseCoopers LLP as independent auditors for 2003. The results of
stockholder voting are as follows:

Election of Directors

|                    |  |           |            |          |  |  |           | 
|------------------- |  | --------- | ---------- | -------- |  |  | --------- | 
|                    |  | Votes for |            | Withheld
|                    |  |           |            |         
|Fred S. L. Chan     |  |           | 70,063,795 |          |  |  | 552,879   | 
|Didier Pietri       |  |           | 70,425,601 |          |  |  | 191,073   | 
|George M. Cain      |  |           | 70,510,998 |          |  |  | 105,676   | 
|Herbert Chang       |  |           | 70,130,979 |          |  |  | 485,695   | 
|Michael S. Dubester |  |           | 70,509,852 |          |  |  | 106,822   | 
|Matthew K. Fong     |  |           | 62,002,976 |          |  |  | 8,613,698 | 

Approval of Amended and Restated 2000 Directors Stock Option Plan

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 62,188,115 | 
|Against |  |  | 8,387,328  | 
|Abstain |  |  | 27,318     | 

Ratify the appointment of PricewaterhouseCoopers LLP as the Companys independent auditors

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 70,165,106 | 
|Against |  |  | 424,250    | 
|Abstain |  |  | 27,318     | 

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ITEM 6: Exhibits and Reports on Form 8-K



|(a) |  | Exhibits. We incorporate by reference all exhibits filed in connection
with our annual report on Form 10K for the year ended December 31, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| | 31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002
| | ---- |  | --------------------------------------------------------------------------------------------------
|
| | 31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act of 2002
|
| | 32.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of the SarbanesOxley Act of 2002
|
| | 32.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of the SarbanesOxley Act of 2002

(b)  Reports on Form 8-K. No reports were filed on Form 8-K for the quarter
ended June 30, 2003.




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 13, 2003 |  | By:                       |  | /s/ Didier Pietri                    
|                      |  |                           |  |                                      
|                      |  |                           |  | Didier Pietri                        
|                      |  |                           |  | President and Chief Executive Officer
|                      |  |                           |  |                                      
|                      |  | By:                       |  | /s/ William M. Scharninghausen       
|                      |  |                           |  |                                      
|                      |  |                           |  | William M. Scharninghausen           
|                      |  |                           |  | Chief Financial Officer              

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EXHIBIT INDEX

|        |  |                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                   
|Number  |  | Description                                                                                       
|        |  |                                                                                                   
|31.1    |  | Certification of Chief Executive Officer pursuant to Section 302 of the SarbanesOxley Act of 2002
|        |  |                                                                                                   
|31.2    |  | Certification of Chief Financial Officer pursuant to Section 302 of the SarbanesOxley Act of 2002
|        |  |                                                                                                   
|32.1    |  | Certification of Chief Executive Officer pursuant to Section 906 of the SarbanesOxley Act of 2002
|        |  |                                                                                                   
|32.2    |  | Certification of Chief Financial Officer pursuant to Section 906 of the SarbanesOxley Act of 2002

18