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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2002.

OR

For the transition period from:                      to:                     .

Commission file number 0-32809

VIALTA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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 [   ]

     The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, on November 5, 2002 was 82,125,202 shares.

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VIALTA, INC.

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PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements

VIALTA, INC.
(A Development Stage Company)

See accompanying notes to the condensed consolidated financial statements.

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VIALTA, INC.
(A Development Stage Company)

See accompanying notes to the condensed consolidated financial statements.

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VIALTA, INC.
(A Development Stage Company)

See accompanying notes to the condensed consolidated financial statements.

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VIALTA, INC.
(A Development Stage Company)

NOTE 1. THE COMPANY

     Vialta, Inc. (“Vialta” or the “Company”) was incorporated in California in April 20, 1999 and reincorporated in the State of Delaware on April 20, 2001.

     Vialta develops, designs and markets consumer electronics products designed to maximize the advantages of digital technology in a convenient, affordable and easy-to-use manner. The Company has recently developed and introduced a personal phone video station, known as Beamer®. Beamer® connects to a consumer’s existing phone (including cordless phones) and allows customers to add video to their phone calls, delivering a live motion color video picture over standard (analog) phone lines. In addition to Beamer®, the Company has developed a multi-media DVD player (ViDVD) that offers additional features such as CD, MP3, karaoke and Internet access. The Company is also developing ViMagazine®, a proprietary, encrypted, magazine-style DVD-format disc which is expected to contain a wide variety of entertainment, from feature films to children’s programming, music and other programming content.

     Since its inception, Vialta has been in the development stage and has incurred substantial losses and negative cash flows from operations in every fiscal period. Since the Company’s inception through September 30, 2002, Vialta has incurred losses of approximately $89.3 million and cumulative negative cash flows from operations of $67.0 million. Management expects operating losses and negative cash flows to continue for the foreseeable future and anticipates that losses may increase from current levels because of additional costs and expenses related to marketing activities, continued expansion of operations, expansion of product offerings and development of relationships with other businesses. Management believes that Vialta has sufficient cash, cash equivalents and short-term investments to fund its development and growth through September 30, 2003. However, in the longer term, failure to generate sufficient revenues, raise additional capital or reduce spending could have a material adverse effect on Vialta’s ability to achieve its intended business objectives.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited interim financial statements reflect only those normal recurring adjustments necessary for a fair statement of the financial position, operating results and cash flows of the Company for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2001 and the period from April 20, 1999 (date of inception) through December 31, 2001, included in the Company’s Annual Report on Form 10-K filed on March 27, 2002. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for any other period or for the fiscal year ending December 31, 2002.

Interim unaudited information

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

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Reclassifications

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

Cash and cash equivalents

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

Product costs and inventories

     Through September 30, 2002, the Company has not recognized any revenue. As of September 30, 2002, the Company had recently introduced Beamer®. Because the Company has no historical experience in selling Beamer® or similar products, there is significant uncertainty regarding the Company’s ability to recover the costs incurred in building inventories. As a result, the Company has charged the cost of building inventories to expense as incurred. During the quarters ended June 30 and September 30, 2002, such costs charged to expense as product costs were $1.1 million and $9.3 million, respectively, totaling $10.4 million for the nine months ending September 30, 2002. Of this total, $10.3 million represents inventories held by the Company and held by retailers on a consigned basis and $0.1 million represents inventories billed to retailers for which revenue has been deferred. If these inventories are sold in future periods then the fact that the costs were previously charged to expense will have a positive effect on gross margin and that effect will be disclosed in the Company’s financial statements.

Comprehensive income (loss)

     Comprehensive income is defined to include all changes in equity during a period from non-owner sources. The difference between net loss and comprehensive loss for the three months and nine months ended September 30, 2002 was approximately $24,000 and $128,000, respectively, in connection with unrealized losses on available-for-sale investments. As a result, comprehensive loss for the three months and nine months ended September 30, 2002 was approximately $14,847,000 and $29,354,000, respectively. For the three months and nine months ended September 30, 2001, comprehensive loss approximated net loss.

NOTE 3. RELATED PARTY TRANSACTIONS

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