##### Table of Contents



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 September 30, 2003.

OR

o
    
    Transitional Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.


For the transition period from: ___________ to: __________ .

Commission file number 0-32809

VIALTA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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


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

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

Indicate by check 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 November 5, 2003 was 82,519,685 shares.





---

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 6: Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 10.1                 
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



---



##### Table of Contents



VIALTA, INC.
FORM 10-Q: QUARTER ENDED JUNE 30, 2003

TABLE OF CONTENTS

PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets  September 30, 2003 and December 31, 2002
    
    
    3Condensed Consolidated Statements of Operations  three and nine months ended
    
    
    4September 30, 2003 and 2002Condensed Consolidated Statements of Cash Flows  nine months ended September 30,
    
    
    52003 and 2002Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    16PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    16SIGNATURES
    
    
    17EXHIBIT
INDEX
    
    
    18


2



---



##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1: Financial Statements




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

September 30, 2003
    
    December 31, 2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    15,030
    
    
    $
    21,863Short-term investments
    
    
    9,577
    
    
    
    10,838Accounts receivable, net
    
    
    1,266
    
    
    
    1,362Inventories
    
    
    4,897
    
    
    
    2,834Prepaid expenses and other
    
    
    2,250
    
    
    
    1,253Total current assets
    
    
    33,020
    
    
    
    38,150Property and equipment, net
    
    
    1,010
    
    
    
    2,132Long-term investments
    
    
    1,997
    
    
    
    Other assets
    
    
    29
    
    
    
    45Total assets
    
    $
    36,056
    
    
    $
    40,327Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    1,922
    
    
    $
    1,164Accrued liabilities and other
    
    
    2,258
    
    
    
    3,555Deferred profit
    
    
    2,039
    
    
    
    3,230Total current liabilities
    
    
    6,219
    
    
    
    7,949Stockholders equity:Common stock
    
    
    94
    
    
    
    94Additional paid-in capital
    
    
    144,112
    
    
    
    144,105Treasury stock
    
    
    (9,458
    )
    
    
    (9,163
    )Accumulated deficit
    
    
    (104,929
    )
    
    
    (102,666
    )Accumulated other comprehensive income
    
    
    18
    
    
    
    8Total stockholders equity
    
    
    29,837
    
    
    
    32,378Total liabilities and stockholders equity
    
    $
    36,056
    
    
    $
    40,327


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

3



---



##### Table of Contents






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

Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net revenue
    
    $
    1,284
    
    
    $
    
    
    
    $
    7,647
    
    
    $
    Cost of goods sold
    
    
    517
    
    
    
    
    
    
    
    1,950
    
    
    
    Gross profit
    
    
    767
    
    
    
    
    
    
    
    5,697
    
    
    
    Operating expenses:Product costs
    
    
    
    
    
    
    9,284
    
    
    
    
    
    
    
    10,421Engineering and development
    
    
    480
    
    
    
    2,928
    
    
    
    2,069
    
    
    
    11,143Sales and marketing
    
    
    547
    
    
    
    777
    
    
    
    1,630
    
    
    
    2,123General and administrative
    
    
    1,091
    
    
    
    1,216
    
    
    
    4,795
    
    
    
    4,455Amortization and impairment of
content licenses
    
    
    
    
    
    
    948
    
    
    
    
    
    
    
    2,148Total operating expenses
    
    
    2,118
    
    
    
    15,153
    
    
    
    8,494
    
    
    
    30,290Operating loss
    
    
    (1,351
    )
    
    
    (15,153
    )
    
    
    (2,797
    )
    
    
    (30,290
    )Interest income and other, net
    
    
    168
    
    
    
    330
    
    
    
    534
    
    
    
    1,064Net loss
    
    $
    (1,183
    )
    
    $
    (14,823
    )
    
    $
    (2,263
    )
    
    $
    (29,226
    )Net loss per share:Basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.18
    )
    
    $
    (0.03
    )
    
    $
    (0.35
    )Weighted average common shares
outstanding:Basic and diluted
    
    
    82,227
    
    
    
    82,908
    
    
    
    82,205
    
    
    
    83,959


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

4



---



##### Table of Contents






VIALTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Nine months endedSeptember 30,2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (2,263
    )
    
    $
    (29,226
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation
    
    
    1,288
    
    
    
    4,778Amortization and impairment of content licenses
    
    
    
    
    
    
    2,148Write-down of long-term investment
    
    
    
    
    
    
    39Changes in operating assets and liabilities:Accounts receivable, net
    
    
    96
    
    
    
    Inventories
    
    
    (2,063
    )
    
    
    Prepaid expenses and other
    
    
    (981
    )
    
    
    (1,493
    )Deferred profit
    
    
    (1,191
    )
    
    
    Accounts payable and accrued liabilities and other
    
    
    (539
    )
    
    
    3,734Net cash used in operating activities
    
    
    (5,653
    )
    
    
    (20,020
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of short-term investments
    
    
    (12,393
    )
    
    
    (8,663
    )Proceeds from sales of short-term investments
    
    
    13,664
    
    
    
    7,333Purchases of long-term investments
    
    
    (4,099
    )
    
    
    Proceeds from sales of long-term investments
    
    
    2,102Purchase of content licenses
    
    
    
    
    
    
    (10,042
    )Acquisitions of property and equipment
    
    
    (166
    )
    
    
    (149
    )Net cash used in investing activities:
    
    
    (892
    )
    
    
    (11,521
    )CASH FLOWS FROM FINANCING ACTIVITIES:Issuance of shares of common stock
    
    
    7
    
    
    
    19Repurchases of shares of common stock
    
    
    (295
    )
    
    
    (5,110
    )Net cash used in financing activities:
    
    
    (288
    )
    
    
    (5,091
    )Net decrease in cash and cash equivalents
    
    
    (6,833
    )
    
    
    (36,632
    )Cash and cash equivalents, beginning of the period
    
    
    21,863
    
    
    
    61,886Cash and cash equivalents, end of the period
    
    $
    15,030
    
    
    $
    25,254


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

5



---



##### Table of Contents






VIALTA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1. THE COMPANY

We develop, design and market consumer electronics products designed to
maximize the advantages of digital technology in a convenient and easy-to-use
manner. Our primary products are the Beamer personal videophone line and the
VistaFrame digital picture frame. Our Beamer products add color video to
phone calls, enabling users to see the person they are calling. Since both
parties to a video call must have a Beamer product (or compatible videophone),
our products are primarily sold in pairs and are all compatible with each
other. Our Beamer products work with any home phone over any standard (analog)
home phone line, at no additional cost to a regular phone call. Our videophone
products include models which are standalone (such as our first
videophone product known as Beamer) or
connect through most televisions (the Beamer TV), and may include
picture-in-picture and taking and sending digital pictures, depending on the
model. Beamer began nationwide retail distribution during
the third quarter of 2002. You can find our Beamer products carried by such
retailers as Best Buy, Frys Electronics, The Good Guys, The Sharper Image and
Frontgate.

Our latest product, VistaFrame, is a digital picture frame which allows
users to display photographs directly from a digital camera memory card or
internal memory. VistaFrame is compatible with most standard card formats and
does not require a camera or computer connection, special wiring or web based
services. With VistaFrame, consumers can view digital pictures individually or
in a custom slideshow format with the user selecting the pictures, the display
sequence, display interval and the transition effect. VistaFrame is currently
available at retailers such as The Sharper Image, The Good Guys and Frontgate.

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
investments to fund our operations through September 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
continue to operate our business.

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 nine months ended September 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.

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.

6



---



##### Table of Contents



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.

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 nine months ended September 30, 2003 was $1.3
million and $7.6 million, respectively. There was no revenue for the three and
nine months ended September 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 nine months ended
September 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 nine months
ended September 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 nine months ended
September 30, 2003, comprehensive income (loss) approximated the net losses
reported. The difference between net loss and comprehensive loss for the three
months and nine months ended September 30, 2002 was approximately $24,000 and
$128,000, respectively, which related to unrealized losses on
available-for-sale investments. Comprehensive loss for the three months and
nine months ended September 30, 2002 was approximately $14.8 and $29.4

7



---



##### Table of Contents



million, respectively.

Stock-based compensation

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

The following table illustrates the effect on our net 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net loss, as reported
    
    $
    (1,183
    )
    
    $
    (14,823
    )
    
    $
    (2,263
    )
    
    $
    (29,226
    )Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (286
    )
    
    
    (664
    )
    
    
    (1,024
    )
    
    
    (2,611
    )Pro forma net loss
    
    $
    (1,469
    )
    
    $
    (15,487
    )
    
    $
    (3,287
    )
    
    $
    (31,837
    )Pro forma net loss per share:Basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.19
    )
    
    $
    (0.04
    )
    
    $
    (0.38
    )


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 September 30, 2003.

NOTE 3. RELATED PARTY TRANSACTIONS

The following is a summary of major transactions between us and ESS
Technology, Inc., which was our parent company prior to August 2001, for the
periods presented (in thousands):

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net receivables (payables) at beginning of period
    
    $
    (477
    )
    
    $
    (49
    )
    
    $
    (33
    )
    
    $
    64Charges by Vialta to ESS:Administrative & management service fees
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    223Other
    
    
    
    
    
    
    54
    
    
    
    2
    
    
    
    68Charges by ESS to Vialta:Administrative & management service fees
    
    
    (12
    )
    
    
    (32
    )
    
    
    (65
    )
    
    
    (168
    )Purchase of products
    
    
    (176
    )
    
    
    (1,335
    )
    
    
    (195
    )
    
    
    (1,404
    )Building lease
    
    
    (127
    )
    
    
    (463
    )
    
    
    (1054
    )
    
    
    (1,389
    )Cash receipts from ESS
    
    
    
    
    
    
    (11
    )
    
    
    (2
    )
    
    
    (350
    )Cash payments made to ESS
    
    
    580
    
    
    
    1,529
    
    
    
    1,135
    
    
    
    2,670Net receivables (payables) at end of period
    
    $
    (212
    )
    
    $
    (286
    )
    
    $
    (212
    )
    
    $
    (286
    )


8



---



##### Table of Contents



NOTE 4. INVENTORIES

The following table summarizes the activity in inventories and reserves
for the nine months ended September 30, 2003 (in thousands):

Gross
    
    Reserve
    
    NetAs of December 31, 2002
    
    $
    11,866
    
    
    $
    (9,032
    )
    
    $
    2,834Purchase of inventories
    
    
    553
    
    
    
    
    
    
    
    553Shipments, net
    
    
    (903
    )
    
    
    629
    
    
    
    (274
    )Use or disposal of inventories
    
    
    (311
    )
    
    
    143
    
    
    
    (168
    )As of March 31, 2003
    
    
    11,205
    
    
    
    (8,260
    )
    
    
    2,945Purchase of inventories
    
    
    1,020
    
    
    
    
    
    
    
    1,020Shipments, net
    
    
    (1,903
    )
    
    
    1,374
    
    
    
    (529
    )Use or disposal of inventories
    
    
    (152
    )
    
    
    (274
    )
    
    
    (426
    )As of June 30, 2003
    
    
    10,170
    
    
    
    (7,160
    )
    
    
    3,010Purchase of inventories
    
    
    3,170
    
    
    
    
    
    
    
    3,170Shipments, net
    
    
    (1,085
    )
    
    
    666
    
    
    
    (419
    )Use or disposal of inventories
    
    
    (1,004
    )
    
    
    140
    
    
    
    (864
    )As of September 30, 2003
    
    $
    11,251
    
    
    $
    (6,354
    )
    
    $
    4,897Raw material
    
    $
    6,939
    
    
    $
    (3,038
    )
    
    $
    3,901Finished goods
    
    
    4,312
    
    
    
    (3,316
    )
    
    
    996$
    11,251
    
    
    $
    (6,354
    )
    
    $
    4,897


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
nine months ended September 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
nine months ended September 30, 2003 would have been approximately $1.1 million
and $5.9 million, respectively.

NOTE 5. BALANCE SHEET COMPONENTS (in thousands)

September 30,
    
    December 31,2003
    
    2002Cash and cash equivalentsCash
and money market funds, at cost which
approximates fair value
    
    $
    15,030
    
    
    $
    21,863Short-term investmentsUS Government debt securities
    
    $
    3,508
    
    
    $
    1,509Corporate debt securities
    
    
    6,069
    
    
    
    9,329$
    9,577
    
    
    $
    10,838Accounts receivable, netAccounts receivable
    
    $
    1,504
    
    
    $
    1,392Less: Allowance for doubtful accounts
    
    
    (238
    )
    
    
    (30
    )$
    1,266
    
    
    $
    1,362Prepaid expenses and otherPrepaid inventory
    
    $
    1,756
    
    
    $
    429Other current assets
    
    
    494
    
    
    
    824$
    2,250
    
    
    $
    1,253


9



---



##### Table of Contents



September 30,
    
    December 31,2003
    
    2002Property and equipment, netMachinery and equipment
    
    $
    5,918
    
    
    $
    7,155Furniture and fixtures
    
    
    561
    
    
    
    569Software and web site development cost
    
    
    5,298
    
    
    
    5,17311,777
    
    
    
    12,897Less: Accumulated depreciation
    
    
    (10,767
    )
    
    
    (10,765
    )$
    1,010
    
    
    $
    2,132Long-term investmentsUS Government debt securities
    
    $
    1,997
    
    
    $
    Accrued liabilities and otherAccrued compensation costs
    
    $
    1,144
    
    
    $
    1,613Customer deposits
    
    
    760
    
    
    
    893Accrued facility charges, non-related party
    
    
    
    
    
    
    402Payables to related party
    
    
    212
    
    
    
    33Other current liabilities
    
    
    142
    
    
    
    614$
    2,258
    
    
    $
    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 (in
thousands, except per share amounts).

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net loss
    
    $
    (1,183
    )
    
    $
    (14,823
    )
    
    $
    (2,263
    )
    
    $
    (29,226
    )Weighted average common shares outstanding
    
    
    82,227
    
    
    
    82,908
    
    
    
    82,205
    
    
    
    83,959Net loss per share
    
    $
    (0.01
    )
    
    $
    (0.18
    )
    
    $
    (0.03
    )
    
    $
    (0.35
    )


NOTE 7. COMMON STOCK REPURCHASE

During the three months ended September 30, 2003, we did not repurchase
any shares of common stock. For the nine months ended September 30, 2003, we
repurchased approximately 759,000 shares of common stock for an aggregate cost
of approximately $295,000. As of September 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. Adoption of EITF Issue
No. 00-21 did not have a material impact 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

10



---



##### Table of Contents



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.




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 in April 1999 as a wholly owned subsidiary of ESS
Technology, Inc. In August 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 primary products are the Beamer
personal videophone line and the VistaFrame digital picture frame. Our Beamer
products add color video to phone calls, enabling users to see the person they
are calling. Since both parties to a video call must have a Beamer product (or
compatible videophone), our products are primarily sold in pairs and are all
compatible with each other. Our Beamer products work with any home phone over
any standard (analog) home phone line, at no additional cost to a regular phone
call. Our videophone products include models which are standalone
(such as our first videophone product known as Beamer) or connect through most televisions (the Beamer TV), and may
include picture-in-picture and taking and sending digital pictures, depending
on the model. Beamer began nationwide retail distribution
during the third quarter of 2002. You can find our Beamer products carried by
such retailers as Best Buy, Frys Electronics, The Good Guys, The Sharper Image
and Frontgate.

Our latest product, VistaFrame, is a digital picture frame which allows
users to display photographs directly from a digital camera memory card or
internal memory. VistaFrame is compatible with most standard card formats and
does not require a camera or computer connection, special wiring or web based
services. With VistaFrame consumers can view digital pictures individually or
in a custom slideshow format with the user selecting the pictures, the display
sequence, display interval and the transition effect. VistaFrame is currently
available at retailers such as The Sharper Image, The Good Guys and Frontgate.

The first product we developed was ViDVD, a multimedia DVD player that
offered enhanced features such as CD, MP3 and karaoke disc playback, Internet
connectivity and the ability to view digital photographs. We are not currently
marketing the ViDVD. We also developed ViMagazine, a proprietary, encrypted,
magazine-style DVD-format disc, 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 September 30, 2003 and 2002,
we had net losses of $1.2 million and $14.8 million, respectively. For the nine
months ended September 30, 2003 and 2002, we had net losses of $2.3 million and
$29.2 million, respectively. We expect we will incur losses for at least the
remainder of fiscal 2003. As of September 30, 2003, we had an accumulated
deficit of $104.9 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 September 30, 2003 compared with three months ended
September 30, 2002

Net revenue.Net revenue for the three months ended September 30, 2003 was
$1.3 million. There was no revenue for the three months ended September 30,
2002. During the first quarter of 2003, we began to recognize revenue on sales
of Beamer, net

11



---



##### Table of Contents



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
September 30, 2003 was $517,000. There was no similar expense for the three
months ended September 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 third 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
September 30, 2003 would have been $1.1 million.

Gross profit. Gross profit for the three months ended September 30, 2003
was $767,000. If we had not previously expensed inventory costs, our gross
profit for the third quarter of 2003 would have been approximately $215,000.

Product costs.Product costs were $9.3 million for the three months ending
September 30, 2002. Product costs represent inventory expenditures for raw
materials and finished goods related to Beamer. At September 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 September 30, 2003.

Engineering and development.Engineering and development expenses were
$480,000 for the three months ended September 30, 2003, compared to $2.9
million for the three months ended September 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 September 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 September 30, 2003. We
expect engineering and development expenses to be relatively constant in future
periods.

Sales and marketing.Sales and marketing expenses were $547,000 for the
three months ended September 30, 2003, compared to $777,000 for the three
months ended September 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, VistaFrame and other potential new product introductions.

General and administrative.General and administrative expenses were $1.1
million for the three months ended September 30, 2003 compared to $1.2 million
for the three months ended September 30, 2002. The decrease was primarily due
to a decrease in legal expenses. 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 September 30, 2002,
amortization of content licenses was $948,000. There is no comparable expense
for the three months ended September 30, 2003.

Interest income and other, net.Interest income and other, net, was
$168,000 for the three months ended September 30, 2003, compared to $330,000
for the three months ended September 30, 2002. The decrease in interest income
was primarily due to lower cash balances and lower yields on available-for-sale
securities during the third quarter of 2003 compared to the same quarter of
2002.

For the nine months ended September 30, 2003 compared with nine months ended
September 30, 2002

Net revenue.Net revenue for the nine months ended September 30, 2003 was
$7.6 million. There was no revenue for the nine months ended September 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

12



---



##### Table of Contents



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 nine months
ended September 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 nine months ended September
30, 2003 was $2.0 million. There was no similar expense for the nine months
ended September 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 nine months ended September 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 nine
months ended September 30, 2003 would have been $5.9 million.

Gross profit. Gross profit for the nine months ended September 30, 2003
was $5.7 million. If we had not previously expensed inventory costs, our gross
profit for the nine months ended September 30, 2003 would have been $1.7
million.

Product costs.Product costs were $10.4 million for the nine months ending
September 30, 2002. Product costs represent inventory expenditures for raw
materials and finished goods related to Beamer. At September 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 nine
months ended September 30, 2003.

Engineering and development.Engineering and development expenses were
$2.1 million for the nine months ended September 30, 2003, compared to $11.1
million for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2003. We expect
engineering and development expenses to be relatively constant in future
periods.

Sales and marketing.Sales and marketing expenses were $1.6 million for
the nine months ended September 30, 2003, compared to $2.1 million for the nine
months ended September 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, VistaFrame and other potential new product introductions.

General and administrative.General and administrative expenses were $4.8
million for the nine months ended September 30, 2003, compared to $4.5 million
for the nine months ended September 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 nine months ended September 30, 2002,
amortization of content licenses was $2.1 million. There is no comparable
expense for the nine months ended September 30, 2003.

Interest income and other, net.Interest income and other, net, was
$534,000 for the nine months ended September 30, 2003, compared to $1.1 million
for the nine months ended September 30, 2002. The decrease in interest income
was primarily due to lower cash balances and lower yields on available-for-sale
securities during the nine months ended September 30, 2003 compared to the nine
months ended September 30, 2002.

Liquidity and Capital Resources

At September 30, 2003, we had $26.6 million in cash and cash equivalents
and investments compared to $32.7 million at December 31, 2002, representing a
decrease of $6.1 million.

13



---



##### Table of Contents



Our principal sources of liquidity are cash and cash equivalents and
investments. Net cash used in operating activities was approximately $5.7
million and $20.0 million for the nine months ended September 30, 2003 and
2002, respectively, representing a decrease of approximately $14.3 million. The
decrease in cash used in operating activities during the nine months ended
September 30, 2003 compared to the nine months ending September 30, 2002 was
primarily due to revenue from sales of Beamer and decreased operating expenses.

Net cash used in investing activities for the nine months ended September
30, 2003 was $892,000 compared to $11.5 million of cash used in investing
activities for the nine months ended September 30, 2002. Net cash used in
investing activities for the nine months ended September 30, 2003 was primarily
related to the purchases of long-term investments. Net cash used in investing
activities for the nine months ended September 30, 2002 was primarily related
to the purchases of content licenses.

Net cash used in financing activities was $288,000 for the nine months
ended September 30, 2003 and $5.1 million for the nine months ended September
30, 2002, primarily related to repurchases of our common stock.

Net inventory expenditures during the nine months ended September 30, 2003
were approximately $3.1 million and we expect to spend an additional $1.0
million for inventory and inventory components during the fourth quarter 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 September 30, 2003, we did
not repurchase any shares of common stock. For the nine months ended September
30, 2003, we repurchased approximately 759,000 shares for an aggregate cost of
approximately $295,000. As of September 30, 2003, approximately 8,036,000
shares remain authorized for repurchase.

In January 2000, we entered
into a three year non-cancelable lease agreement for our
headquarters with ESS. In July 2003, we amended the
lease. The terms of the amendment
include a 60% reduction in the amount of square footage leased, a reduction in the monthly rent to current market rates and an extension of
the term from December 31, 2003 to June 30, 2005. Under the terms of
this and other leases, with various expiration dates through 2006, our future
minimum rental payments as of September 30, 2003 are as follows (in thousands):

Remainder of
    
    
    2003
    
    
    $
    1512004
    
    
    
    5422005
    
    
    
    3202006
    
    
    
    126$
    1,139


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

14



---



##### Table of Contents



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 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. Adoption of EITF issue No. 00-21 did not have a material
impact 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 our existing
products and other consumer products we may develop; component supply
shortages; potential conflicts with ESS Technology, Inc., our former parent;
the success of current distribution and retail relationships and the ability to
enter into additional distribution agreements; risks associated with the
expansion of our business, including increased costs and the strain on
management and other resources; the risk of product defects, system failures or
interruptions; general economic, political and regulatory changes including in
Asia; claims by third parties of intellectual property infringement; dependence
on key management personnel and the need to attract and retain additional
qualified personnel; risks associated with possible business acquisitions;
regulatory changes that affect consumer electronics, telecommunications,
copyrights or the internet; quarterly fluctuations in operating results; risks
of class action lawsuits based on fluctuations in our stock price; seasonal
trends; 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 September 30, 2003, all of our 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

15



---



##### Table of Contents



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

Based on an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures conducted under the supervision and
with the participation of our Chief Executive Officer and Chief Financial
Officer, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective for gathering, analyzing
and disclosing the information we are required to disclose in the reports we
file or submit under the Exchange Act. There have been no significant changes
in our internal controls or in other factors during the last fiscal quarter
that could significantly affect these controls subsequent to the date of their
most recent evaluation.




PART II. OTHER INFORMATION




ITEM 6: Exhibits and Reports on Form 8-K



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



| | 10.1 |  | First Amendment to Lease Agreement, dated July 1, 2003
| | ---- |  | ------------------------------------------------------



| | 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 September 30, 2003.
|--- |  | ------------------------------------------------------------------------------------------------

16



---



##### Table of Contents






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: November 13, 2003
    
    By:
    
    /s/ Didier PietriDidier PietriPresident and Chief Executive OfficerBy:
    
    /s/ William M. ScharninghausenWilliam M. ScharninghausenChief Financial Officer


17



---



##### Table of Contents






EXHIBIT INDEX

ExhibitNumber
    
    Description10.1
    
    First Amendment to Lease Agreement, dated July 1, 200331.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


18