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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2003.

OR

For the transition period from: ___________ to: __________ .

Commission file number 0-32809

VIALTA, INC.

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 May 8, 2003 was 82,143,336 shares.

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VIALTA, INC.

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PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements

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

See accompanying notes to the condensed consolidated financial statements.

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

See accompanying notes to the condensed consolidated financial statements.

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

See accompanying notes to the condensed consolidated financial statements.

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

NOTE 1. THE COMPANY

     Vialta, Inc. was incorporated in California in April 1999 and reincorporated in the State of Delaware in May 2001.

     Vialta develops, designs and markets consumer electronics products designed to maximize the advantages of digital technology in a convenient and easy-to-use manner. The Company has recently developed and introduced a personal videophone, known as Beamer™. 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). The Company began nationwide retailer 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 and The Sharper Image. In addition to Beamer, the Company has developed a multimedia DVD player (ViDVD) that offers additional features such as CD, MP3 and karaoke disc playback, Internet connectivity and the ability to view digital photographs. The Company is not marketing ViDVD. The Company has 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 the Company’s decision not to continue marketing ViDVD, Vialta has not introduced ViMagazine.

     Since its inception, Vialta has incurred substantial losses and negative cash flows from operations. 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 sales and 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, short-term investments and long-term investments to fund its operations through March 31, 2004. 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.

     From its inception through December 31, 2002, the Company was classified as a development stage enterprise. As of March 31, 2003, the Company had commenced principal operations and is no longer considered to be 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 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, 2002, included in the Company’s Annual Report on Form 10-K filed on March 28, 2003. The results of operations for the three months ended March 31, 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.

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Use of Estimates

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

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

Cash Equivalents and Investments

     The Company considers 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 and long-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

     The Company generally recognizes revenue on products sold to end customers upon shipment provided that the Company has no post-sale obligations, the Company 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. Subject to the Company’s warranty reserves, the Company defers recognition of revenue on products sold to retailers and distributors until the retailers and distributors sell the products to their customers. The Company recognizes 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 on a timely and accurate manner, there may be a material impact on the Company’s reported results of operations and financial condition.

     Revenue for the three months ended March 31, 2003 was $3.8 million. There was no revenue for the three months ended March 31, 2002. During the first quarter of 2003, the Company began to recognize revenue on sales of Beamer, net of estimated warranty claims and returns. The Company 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, the Company did not recognize revenue from sales through December 31, 2002. As a result, revenue for the first quarter of 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 Return

     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 and anticipated experience.

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Warranty

     The Company provides a limited warranty on its products for periods ranging from 90 days to 12 months from the date of sale to the end customers. The Company estimates warranty costs based on historical experience and accrues for estimated costs as a charge to cost of sales when revenue is recognized. During the first quarter of 2003, warranty costs did not have a material impact on the Company’s reported results of operations and financial condition. In the future, actual warranty costs may be higher than the Company’s 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 months ended March 31, 2003 and 2002, comprehensive income (loss) approximated the net income and net loss reported.

Stock-Based Compensation

     The Company accounts 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. The Company provides 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 the Company’s net loss and net loss per share if it 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).

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):

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NOTE 4. INVENTORIES

     The following table summarizes the activity in Beamer related inventories and reserves for the three months ended March 31, 2003 (in thousands):

     As of March 31, 2003 and December 31, 2002, the Company had gross ViDVD and other inventories of $4.3 million. These inventories were fully expensed in prior periods.

     Because in prior periods we expensed inventory expenditures for raw materials and finished goods related to Beamer revenue recognized during the quarter, cost of goods sold for the first 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 March 31, 2003 would have been approximately $2.8 million.

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NOTE 5. BALANCE SHEET COMPONENTS (in thousands)