Table of Contents

---

Table of Contents

	Very truly yours,
	Didier Pietri
	Chief Executive Officer

---

Table of Contents

	1. to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Reorganization, dated as of March 28, 2005, by and between Victory Acquisition Corp. and Vialta, Inc. and the merger contemplated thereby;
	2. to consider and vote upon a proposal to adjourn the special meeting if necessary to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to approve and adopt the Agreement and Plan of Reorganization referred to in Item 1 and the merger contemplated thereby; and
	3. to transact such other business as may properly come before the special meeting or any adjournments or postponements of the special meeting.

	By Order of the Board of Directors,
	Didier Pietri
	Chief Executive Officer

---

Table of Contents

			Page
FORWARD-LOOKING STATEMENTS				1
SUMMARY TERM SHEET				1
SPECIAL FACTORS				11
	Structure of the Transaction			11
	Background of the Merger			11
	Position of Vialta as to the Purpose and Reasons for the Merger			20
	Position of Vialta as to the Fairness of the Merger to Vialta’s Stockholders; Reasons for Recommending the Approval of the Merger Agreement and the Merger			21
	Recommendation of the Board of Directors			25
	Liquidation Analysis and Selection of Needham			25
	Opinion of the Financial Advisor to the Special Committee			27
	Position of the Participating Stockholders and Victory Acquisition Corp. as to the Purpose and Reasons for the Merger			35
	Position of the Participating Stockholders and Victory Acquisition Corp. as to the Fairness of the Merger to Vialta’s Stockholders			36
	Alternatives to the Merger			37
	Certain Effects of the Merger			37
	The Participating Stockholders’ Plans for Vialta After the Merger			40
	Merger Financing			40
	Interests of Certain Persons in the Merger			40
	Certain Fraudulent Transfer Risks			43
	Plans for Vialta if the Merger is Not Completed			43
	Estimated Fees and Expenses of the Merger			44
	Regulatory Approvals and Requirements			44
	Federal Income Tax Consequences			44
	Anticipated Accounting Treatment of the Merger			47
	Appraisal and Dissenters’ Rights			47
THE SPECIAL MEETING				53
	Date, Time and Place			53
	Matters to be Considered			53
	Record Date; Voting Rights			53
	Quorum			53
	Required Vote			53
	How Shares are Voted; Proxies; Revocation of Proxies			54
	Solicitation of Proxies			54
	Appraisal or Dissenters’ Rights			55
	Adjournment			55
	Attending the Special Meeting			55

i

---

Table of Contents

			Page
PARTIES INVOLVED IN THE PROPOSED TRANSACTION				55
	Information about Vialta			55
	Information about Victory and the Participating Stockholders			56
THE MERGER AGREEMENT				58
	Structure of the Merger			58
	When the Merger Becomes Effective			58
	Effect of the Merger on the Capital Stock of Vialta and Victory Acquisition Corp.			58
	Payment for Vialta Common Stock in the Merger			59
	Treatment of Stock Options			60
	Representations and Warranties			60
	Material Adverse Effect			61
	Conduct of Business Prior to the Effective Time of the Merger			61
	Proxy Statement; Special Meeting			63
	Changes to Recommendations of the Special Committee and the Board of Directors			63
	Indemnification and Directors’ and Officers’ Insurance			63
	Additional Agreements			63
	Limitation of Liability for Breaches of Covenants by Vialta			64
	Conditions to Completion of the Merger			64
	Termination of the Merger Agreement			65
	No Limitation on Solicitation of Transactions or Termination of Merger Agreement due to Fiduciary Obligations			66
	Expenses			66
	Modification or Amendment of the Merger Agreement			67
TRANSACTION AGREEMENTS				67
	Stock Contribution Agreement			67
	Voting Agreement			67
	Additional Contribution Agreement			68
	Pledge Agreement			69
SELECTED HISTORICAL FINANCIAL DATA				70
CERTAIN FINANCIAL MODELS RELATING TO POTENTIAL BROADBAND PRODUCTS				72
MARKET PRICE AND DIVIDEND INFORMATION				78
RECENT TRANSACTIONS AND PRIOR STOCK PURCHASES				78
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS				79
FUTURE STOCKHOLDER PROPOSALS				80
STOCKHOLDERS SHARING THE SAME ADDRESS				80
WHERE YOU CAN FIND MORE INFORMATION				80
Annexes
Annex A — Agreement and Plan of Reorganization				A-1
Annex B — Stock Contribution Agreement				B-1
Annex C — Voting Agreement				C-1
Annex D — Additional Contribution Agreement				D-1
Annex E — Pledge Agreement				E-1
Annex F — Opinion of Salem Partners LLC				F-1
Annex G — Section 262 of the Delaware General Corporation Law				G-1
Annex H — Chapter 13 of the California General Corporation Law				H-1
Annex I — Vialta, Inc. Annual Report on Form 10-K for the Year Ended December 31, 2004				I-1
Annex J — Vialta, Inc. Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 2005				J-1

ii

---

Table of Contents

---

Table of Contents

Q:		Why am I receiving these materials?
A:		The board of directors is providing these proxy materials to give you information for use in determining how to vote in connection with the special meeting.
Q:		When and where is the special meeting?
A:		The special meeting will be held on                     , 2005 at       a.m., local time, at the Fremont Marriott, 46100 Landing Parkway, Fremont, CA 94538.
Q:		What am I being asked to vote upon?
A:		You are being asked to consider and vote upon a proposal to approve and adopt the merger agreement and approve the merger, pursuant to which Victory will merge with and into Vialta, with Vialta as the surviving corporation in the merger.
Q:		Who can vote on the proposal to approve and adopt the merger agreement and approve the merger?
A:		All holders of Vialta common stock at the close of business on                     , 2005, the record date for the special meeting, may vote in person or by proxy on the proposal to approve and adopt the merger agreement and approve the merger at the special meeting.
Q:		What vote is required to approve and adopt the merger agreement and approve the merger?
A:		Stockholder approval of the merger agreement and the merger requires the affirmative vote of at least a majority of the shares outstanding as of the record date. An abstention or a broker non-vote will have the same effect as a vote against the merger agreement and the merger.
Q:		How will Mr. Chan and the other directors and officers of the company vote?
A:		Mr. Chan and the other participating stockholders contributed their shares of Vialta common stock to Victory. Victory has committed to vote its shares in favor of the merger in accordance with the terms of the voting agreement. See “TRANSACTION AGREEMENTS — Voting Agreement” and the actual terms of the agreement attached hereto as Annex C. Victory holds approximately 39% of Vialta’s outstanding shares of common stock.
		In addition, Vialta’s directors and executive officers other than Mr. Chan own approximately 5% of Vialta’s outstanding common stock, and have indicated to Vialta their intention to vote in favor of approval of the merger agreement and the merger.
Q:		Who is soliciting my proxy?
A:		Vialta’s board of directors, including Mr. Chan, is soliciting proxies to be voted at the special meeting.

A:	The parties involved in the proposed transaction are Vialta, Inc., the participating stockholders and Victory Acquisition Corp.

	•	Vialta, Inc. — Vialta is a Delaware corporation engaged in the business of designing and marketing a limited number of consumer electronics products. Vialta was incorporated in April 1999 as a wholly owned subsidiary of ESS Technology, Inc. It became a public company in August 2001, when it was spun off from ESS Technology, Inc. to operate as a stand-alone entity. Since the spin off, Fred S.L. Chan and members of the Chan family and related entities, have owned at least a 35% voting interest in Vialta.
	•	Participating Stockholders — The participating stockholders consist of Fred S.L. Chan; his wife Annie M.H. Chan; Annie M.H. Chan TR UA 07-25-95, The Annie M.H. Chan Living Trust; Mee Sim Lee & Sung Kook Kim & Myong Shin Kim TR UA DTD 12-21-87, The David Y.W. Chan Trust; Mee Sim Lee & Sung Kook Kim & Myong Shin Kim TR UA DTD 12-21-87, The Edward Y.C. Chan Trust; Mee Sim Lee & Sung Kook Kim & Myong Shin Kim TR UA DTD 3-16-92, The Michael Y.J. Chan Trust; Shiu Leung Chan & Annie M.H. Chan Gift Trust Dated 11/20/92; and Evershine XVI, L.P. The trusts were established by Fred S.L. Chan and Annie M.H. Chan for the benefit of their

2

---

Table of Contents

		children. Evershine XVI, L.P. is a related entity whose general partner is beneficially owned and controlled by Mr. and Mrs. Chan.
	•	Victory Acquisition Corp. — Victory Acquisition Corp. is a recently formed Delaware corporation established by the participating stockholders for the sole purpose of effecting the merger. The participating stockholders have contributed to Victory shares of Vialta common stock beneficially owned by them pursuant to the terms of a stock contribution agreement among Victory and the participating stockholders. The stock contribution agreement is attached to this proxy statement as Annex B. No cash merger consideration will be paid for shares that are exchanged for equity securities of Victory or for options held by the participating stockholders. In the merger, all shares of Victory common stock will be converted into Vialta common stock. As a result of the merger, the participating stockholders will collectively acquire 100% ownership of Vialta.

Q:		What will happen in the merger?
A:		Victory will be merged with and into Vialta, which will be the surviving corporation in the merger. Following the satisfaction or waiver of other conditions to the merger, the following will occur in connection with the merger:

	•	all shares of Vialta common stock that are held (1) in the treasury of Vialta, (2) by any wholly-owned subsidiary of Vialta, (3) by Victory or (4) by any of the participating stockholders will be canceled and retired without any consideration payable therefor;
	•	each other share of Vialta common stock issued and outstanding immediately before the merger becomes effective (other than any share as to which a dissenting stockholder has perfected or not lost the benefit of appraisal or dissenters’ rights under California or Delaware law) will be converted into the right to receive $0.36 in cash without interest;
	•	each share of Victory common stock will be converted into a share of common stock of Vialta, as the surviving corporation in the merger; and
	•	each vested stock option held at the effective time of the merger will be converted into the right to receive cash in respect of such stock option in an amount equal to the product of (1) the excess, if any, of the per-share merger consideration of $0.36 over the per-share exercise price of such stock option, multiplied by (2) the number of shares subject to such stock option (which amount will be payable without interest, net of any withholding tax and subject to the option holder’s having executed a written consent on a form provided by Vialta to the effect that the cash payment is in full consideration for the cancellation of such stock option). As a result of the transaction, unvested options held by Didier Pietri will accelerate in accordance with his stay bonus agreement and unvested options issued to directors will accelerate in accordance with the terms of the 2000 Directors Stock Option Plan.

		No shares of Vialta common stock are held by any wholly-owned subsidiary of Vialta. As a result of the merger, the stockholders of Vialta (other than the participating stockholders) will no longer have any interest in, and will no longer be stockholders of, Vialta and will not participate in any future earnings or growth of Vialta, and the participating stockholders will own, directly or indirectly, all of the outstanding shares of Vialta. Following the merger, Vialta common stock will no longer be publicly traded, and Vialta will no longer file periodic reports with the Securities and Exchange Commission (the “SEC”).
Q:		What will I receive in the merger?
A:		You will receive $0.36 in cash in exchange for each share of common stock owned by you at the effective time of the merger, unless either (1) you are a participating stockholder of Victory or (2) you do not vote in favor of the merger agreement and have perfected or have not otherwise lost or waived your dissenters’ or appraisal rights under Delaware or California law, as applicable. Prior to receipt of the merger consideration, you will be required to return an executed letter of transmittal in which you waive any right to dissenters’ or appraisal rights. Stockholders who do not vote in favor of approval of the merger agreement and who otherwise comply with the procedures for perfecting dissenters’ or appraisal rights under the statutory provisions of California or Delaware law, as applicable, summarized elsewhere in this

3

---

Table of Contents

		proxy statement may demand payment of the “fair value” of their shares in cash in connection with the consummation of the merger. See “SPECIAL FACTORS — Appraisal and Dissenters’ Rights.”
Q:		How will the merger be financed?
A:		It is expected that Vialta will use its cash on hand to pay the merger consideration. It is a condition to Victory’s obligation to complete the merger that Vialta have no less than $14.5 million in cash and cash equivalents as of midnight on the day prior to the closing of the merger. As of May 30, 2005, the company had approximately $25.5 million in cash and cash equivalents. As long as Vialta meets the minimum cash consideration, Victory has agreed to fund any shortfall in the merger consideration, up to a maximum of $4.0 million and Fred S.L. Chan has agreed to lend up to $4.0 million to Victory. See “SPECIAL FACTORS — Merger Financing” and “TRANSACTION AGREEMENTS — Additional Contribution Agreement.”
Q:		Is there a risk that the merger will be deemed a fraudulent conveyance?
A:		If, contrary to the belief of the board of directors, Vialta is held to be insolvent at the time of the merger (i.e., is unable to pay its debts as they become due, is left with unreasonably small capital, or its liabilities exceed its assets at the time), or Vialta becomes insolvent because of the merger, or if the transaction is deemed to have been entered into with an intent to evade creditors, then the funds paid to stockholders upon completion of the merger may be deemed to be a “fraudulent conveyance” under applicable law and therefore may be subject to the claims of Vialta’s creditors. If such claims are asserted by Vialta’s creditors, there is a risk that the entire transaction could be unwound and that persons who were stockholders at the effective time of the merger would be ordered by a court to return to Vialta all or a portion of the funds received following the completion of the merger. The board of directors of Vialta believes that Vialta and its subsidiaries, on a consolidated basis, will not be insolvent after giving effect to the merger and that there is not a substantial risk that the merger could be successfully challenged as a fraudulent conveyance. See “SPECIAL FACTORS — Certain Fraudulent Transfer Risks.”
Q:		How will Vialta be operated after the merger?
A:		Fred S.L. Chan plans to continue to operate Vialta with a significantly reduced staff, selling the company’s current products and focusing research and development efforts on broadband.
Q:		What are the reasons for the merger?
A:		Vialta’s purpose in undertaking the merger is to allow its stockholders (other than the participating stockholders) to realize value from their investment in Vialta now, in cash at a price that represents a premium to the market price of Vialta common stock before the public announcement of the merger agreement, rather than assuming the risks associated with Vialta’s ongoing operations. For the participating stockholders and Victory, the purposes of the merger are to permit Vialta greater operating flexibility as a privately held company; to reduce the substantial expenses associated with being a public company, including costs of compliance with new securities regulations relating to accounting and internal control procedures, and allow these resources to be used in operations; and to enable the participating stockholders to focus research and development on broadband products and benefit from future growth, if any, of Vialta after the merger. See “SPECIAL FACTORS — Position of Vialta as to the Purpose and Reasons for the Merger” and “— Position of the Participating Stockholders and Victory Acquisition Corp. as to the Purpose and Reasons for the Merger.”
Q:		What was the role of the special committee?
A:		Because certain directors of Vialta have actual or potential conflicts of interest in evaluating the merger, the board of directors appointed a special committee of independent directors to negotiate, review and evaluate the proposed merger.
Q:		What is the recommendation of the special committee?
A:		The special committee has unanimously recommended to Vialta’s board of directors that the merger and the merger agreement be approved and adopted. In arriving at its conclusion, the special committee considered, among other factors, the opinion of Salem Partners LLC, its independent financial advisor,

4

---

Table of Contents

		that, as of the date of such opinion and based upon and subject to the limitations, qualifications and assumptions set forth in the opinion, the cash consideration of $0.36 per share to be paid in the merger to the stockholders of Vialta other than the participating stockholders was fair, from a financial point of view, to such stockholders. The special committee has neither withdrawn nor modified its recommendation. See “SPECIAL FACTORS — Position of Vialta as to the Fairness of the Merger to Vialta’s Stockholders; Reasons for Recommending the Approval of the Merger Agreement and the Merger”.
Q:		What are the recommendations of the board of directors?
A:		The board of directors, based in part on the unanimous recommendation of the special committee, unanimously (with Mr. Chan abstaining) recommends that the Vialta stockholders vote FOR the approval of the merger agreement and the merger. Both the special committee and the board of directors of Vialta, after careful consideration of numerous factors, have determined and continue to believe that the merger agreement and the merger are fair to and in the best interests of the stockholders of Vialta other than the participating stockholders. See “SPECIAL FACTORS — Position of Vialta as to the Fairness of the Merger to Vialta’s Stockholders; Reasons for Recommending the Approval of the Merger Agreement and the Merger”.
		In view of his conflicts of interest with respect to the merger, Mr. Chan recused himself from the confidential portions of the board of directors’ deliberations with respect to the merger and the merger agreement and abstained from voting on the related resolutions, including the recommendation that Vialta stockholders vote for the approval and adoption of the merger agreement and the merger. Herbert Chang, who was the only member not present at the meeting, subsequently indicated his approval of the board’s resolutions.
Q:		What is Vialta’s position as to the fairness of the merger?
A:		Because certain members of Vialta’s board of directors have actual or potential conflicts of interest in evaluating the merger, the board of directors appointed a special committee of independent directors, consisting of George Cain and Michael Dubester, to evaluate the merger and make recommendations to the board of directors with respect to the merger agreement. Based on their evaluation, the special committee determined that the merger agreement and the merger are advisable, fair to, and in the best interests of the company and its stockholders (other than the participating stockholders) and recommended that the board of directors approve and adopt the merger agreement and the merger. Acting on the recommendation of the special committee, the board of directors has approved and adopted the merger agreement and approved the merger. The board of directors has neither withdrawn nor modified its recommendation that stockholders approve and adopt the merger agreement and approve the merger subsequent to the March 28 meeting. The board of directors, based in part on the unanimous recommendation of the special committee, unanimously, with Mr. Chan abstaining, recommends that the Vialta stockholders vote FOR the approval and adoption of the merger agreement and approval of the merger. See “SPECIAL FACTORS — Position of Vialta as to the Fairness of the Merger to Vialta’s Stockholders; Reasons for Recommending the Approval of the Merger Agreement and the Merger.”
Q:		What is the opinion of the financial advisor to the special committee with respect to the merger?
A:		Salem Partners LLC, the independent financial advisor to the special committee, has delivered an opinion to the special committee and the board of directors that, as of March 28, 2005 and based on and subject to the assumptions, limitations and qualifications set forth in the opinion, the cash consideration of $0.36 per share to be paid in the merger to the stockholders of Vialta other than the participating stockholders and Victory was fair, from a financial point of view, to such stockholders. The full text of Salem Partners LLC’s written opinion is included in this proxy statement as Annex F. You should read the opinion carefully in its entirety. See “SPECIAL FACTORS — Opinion of the Financial Advisor to the Special Committee.”
Q:		What is the position of the participating stockholders and Victory Acquisition Corp. as to the fairness of the merger to Vialta’s stockholders?
A:		Fred S.L. Chan, the other participating stockholders and Victory believed and continue to believe that the merger is substantively and procedurally fair to the other stockholders of Vialta. In arriving at their position as to the fairness of the merger, Mr. Chan, the other participating stockholders and Victory

5

---

Table of Contents

		considered the factors discussed in the section entitled “SPECIAL FACTORS — Position of the Participating Stockholders and Victory Acquisition Corp. as to the Fairness of the Merger to Vialta’s Stockholders.”
Q:		What are the consequences of the merger to present members of management and the board of directors?
A:		Like other stockholders, members of management and the board of directors other than Mr. Chan will be entitled to receive $0.36 per share in cash for each of their shares of Vialta common stock and cash with respect to vested stock options at the effective time of the merger in an amount equal to the product of (1) the excess, if any, of the per-share merger consideration of $0.36 over the per-share exercise price of such stock option, multiplied by (2) the number of shares subject to such stock option (which amount will be payable without interest, net of any withholding tax and subject to the option holder’s having executed a written consent on a form provided by Vialta to the effect that the cash payment is in full consideration for the cancellation of such stock option). The merger agreement requires Vialta to use its reasonable efforts to obtain the resignation of all officers and directors of the company as of the effective time of the merger. Mr. Chan, the sole officer and director of Victory immediately prior to the effective time of the merger, will be the initial officer and director of Vialta, as the surviving corporation.
		In considering the recommendations of the board of directors, you should be aware that certain of Vialta’s executive officers and directors have interests in the transaction that are different from, or are in addition to, the interests of Vialta’s stockholders generally. The special committee and the board of directors were aware of these potential or actual conflicts of interest and considered them along with other matters when they determined to recommend the merger. These interests, which are discussed in detail in the section entitled “SPECIAL FACTORS — Interests of Certain Persons in the Merger,” include the following:

	•	Mr. Chan, who abstained from the vote of the board of directors, is Vialta’s Chairman and the participating stockholders, who include Fred S.L. Chan, his wife Annie M.H. Chan, trusts established for the benefit of their children, and a related entity, have been the largest stockholders of Vialta since the company was founded. Mr. Chan and the other participating stockholders have contributed 32,039,840 shares of Vialta common stock (representing approximately 39% of the outstanding common stock) to Victory pursuant to the terms of the stock contribution agreement in consideration for an equal number of shares of common stock of Victory. Upon consummation of the merger, Mr. Chan and the other participating stockholders will be the sole stockholders of Vialta;
	•	Mr. Chan is the President, Treasurer and Secretary of Victory Acquisition Corp. Upon consummation of the merger, it is anticipated that Mr. Chan will continue in the positions of President, Treasurer and Secretary of Vialta, as the surviving corporation in the merger;
	•	unvested stock options held by Didier Pietri will accelerate in accordance with the terms of his stay bonus agreement and unvested stock options held by members of the board of directors (other than Mr. Chan) will accelerate in accordance with the terms of the 2000 Directors Stock Option Plan. Accelerated options will be converted into the right to receive cash in an amount equal to the product of (1) the excess, if any, of the per- share merger consideration of $0.36 over the per-share exercise price of such stock option, multiplied by (2) the number of shares subject to such stock option. As a result of the acceleration of stock options, Didier Pietri will be entitled to receive $40,000, each of George Cain and Michael Dubester will be entitled to receive $2,400 and Matthew Fong will be entitled to receive $1,250 with respect to previously unvested stock options;
	•	the merger agreement provides that indemnification will continue and directors and officers insurance arrangements made by Vialta before closing will be maintained for a period of six years following the effective time of the merger for Vialta’s directors and officers; and

6

---

Table of Contents

	•	each member of the special committee will receive $2,000 per meeting attended in person and $1,000 per meeting attended telephonically in consideration of such member’s service on the special committee, with a cap of $20,000 for the chairman and $18,000 for the other committee member. In addition, the special committee chairman is entitled to receive an annual fee of $25,000, payable quarterly at the end of each fiscal quarter, with any remaining balance payable at the effective time of the merger. The foregoing payments are due without regard to whether the special committee recommended approval of the merger agreement or whether the merger is consummated. To date, the chairman has received $26,250 and the other member has received $18,000.

Q:		Is the merger subject to the satisfaction of any conditions?
A:		Yes. Before completion of the transactions contemplated by the merger agreement, a number of closing conditions must be satisfied or waived. These conditions are described in this proxy statement in the section entitled “THE MERGER AGREEMENT — Conditions to the Completion of the Merger.” The obligations of Vialta and/or Victory to complete the merger are subject to the satisfaction or waiver of various conditions specified in the merger agreement, including conditions relating to, among other things:

	•	the absence of any order, decree, or ruling by any court or governmental agency which would prohibit, render illegal or enjoin the consummation of the merger;
	•	approval of the merger agreement by a majority vote of Vialta shares outstanding as of the record date;
	•	the accuracy of the parties’ representations and warranties under the merger agreement, except where a failure would not have a material adverse effect;
	•	performance by the parties in all material respects of their obligations under the merger agreement;
	•	the absence of a material adverse effect with respect to Vialta, as determined in the reasonable judgment of the board of directors of Victory;
	•	receipt of a legal opinion from counsel to Vialta as to the company’s due incorporation, power and authority to enter into the merger agreement, due execution and delivery of the agreement, and the merger agreement not violating the certificate of incorporation or bylaws of the company; and
	•	confirmation that Vialta has no less than $14,500,000 in cash and cash equivalents as of the closing.

A:	The merger agreement may be terminated at any time prior to the effective time of the merger by the mutual written consent of Vialta and Victory, acting under the direction of their respective boards of directors. In addition, either Vialta or Victory may generally (but is not required to) terminate the merger agreement at any time prior to the effective time of the merger in the event of:

	•	failure to consummate the merger by August 13, 2005;
	•	a final and nonappealable court or other governmental action prohibiting the merger; or
	•	failure to obtain the requisite stockholder approval of the merger agreement at the special meeting.

7

---

Table of Contents

	•	the failure of a representation or warranty of Vialta to be true and correct except where the failure would not have a material adverse effect, subject to a 30-day cure period;
	•	the failure of Vialta to perform or comply in all material respects with all of its covenants, subject to a 30-day cure period;
	•	the special committee’s withdrawing, amending or modifying its approval or recommendation of the merger agreement in a manner adverse to Victory or failing to reconfirm within 10 business days after request by Victory its recommendation of the merger agreement to Vialta stockholders;
	•	Vialta failing to include in this proxy the recommendation of the special committee or the board of directors in favor of the merger agreement and the merger;
	•	the special committee approving or publicly recommending an acquisition proposal other than the merger or a liquidation or dissolution;
	•	Vialta entering into a letter of intent or similar agreement accepting any acquisition proposal other than the merger; or
	•	Vialta failing to recommend rejection of a tender or exchange offer commenced by a party unaffiliated with Victory.

	•	the failure of any representation or warranty of Victory to otherwise be true and correct, subject to a 30-day cure period;
	•	the failure of Victory to perform or comply in all material respects with all of its covenants, subject to a 30-day cure period; or
	•	the determination by the board of directors or the special committee in good faith after consulting with its counsel that termination is necessary to comply with its fiduciary duties.

Q:		Does the merger agreement limit the solicitation of transactions or termination of the merger agreement?
A:		No. The merger agreement does not contain restrictions on Vialta’s ability to solicit or initiate any inquiries, proposals or offers with respect to any competing transaction, to respond to any inquiries, proposals or offers received, or ultimately to consummate any such competing transaction until stockholders of Vialta approve the merger. The board of directors or special committee may terminate the merger agreement or withdraw, modify or change its approval or recommendation of the merger agreement at any time before stockholder approval of the merger agreement and adoption of the merger if it determines in good faith that failure to take such action would be inconsistent with its fiduciary obligations to stockholders of Vialta (other than participating stockholders). See “THE MERGER AGREEMENT — No Limitation on Solicitation of Transactions or Termination of Merger Agreement due to Fiduciary Obligations.”
		In certain circumstances, in the event the merger agreement is terminated, Vialta must pay the out-of-pocket expenses actually and reasonably incurred by Victory and its affiliates (including the participating stockholders) up to a maximum of $250,000. See “THE MERGER AGREEMENT — Expenses.” In no event will any termination fee be payable under the merger agreement.
Q:		When do you expect the merger to be completed?
A:		We are working toward completing the merger as quickly as possible after the special meeting. However, there is no assurance that we will be able to do so.

8

---

Table of Contents

Q:		What are the U.S. federal income tax consequences of the merger to holders of Vialta stock?
A:		The receipt of cash by a United States holder in exchange for Vialta common stock will be a taxable transaction for U.S. federal income tax purposes. In general, United States holders of Vialta common stock who receive cash in exchange for their shares pursuant to the merger (including any cash received in connection with the exercise of dissenters’ or appraisal rights) should be deemed to have received cash from Vialta pursuant to a redemption of the shares held by such stockholder or pursuant to a sale of such shares. If the deemed redemption of the shares held by a particular United States holder qualifies as an “exchange” under section 302(b) of the Code, or if shares are considered sold, the United States holder will recognize gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the holder’s adjusted tax basis in the shares and the amount of cash received. If the United States holder holds Vialta common stock as a capital asset, any gain or loss should generally be a capital gain or loss. If the United States holder has held the shares for more than 1 year, any gain or loss should generally be a long-term gain or loss. The deductibility of capital losses is subject to limitations.
		The deemed redemption of Vialta common stock in exchange for cash generally should not result in gain or loss to Vialta or to the participating stockholders (i.e. Mr. Chan and his affiliates) for U.S. federal income tax purposes. Upon completion of the merger and deemed redemption, participating stockholders generally will hold shares of Vialta common stock with an aggregate tax basis equal to the participating stockholders’ aggregate tax basis in the shares of Victory common stock that will be converted into Vialta common stock as a result of the merger. If the deemed redemption of shares of Vialta common stock results in an “ownership change” within the meaning of section 382(g) of the Code, Vialta’s ability to use net operating loss carryforwards and certain other tax attributes (if any) may be limited. Tax matters are very complex, and the tax consequences of the merger to you will depend on the facts of your own situation. You should consult your tax advisor for a full understanding of the tax consequences of the merger to you, including the federal, state, local and foreign tax consequences of the merger. See “SPECIAL FACTORS — Federal Income Tax Consequences.”
Q:		What do I do to vote my Vialta stock?
A:		After carefully reading and considering the information contained in this proxy statement, whether or not you plan to attend the special meeting in person, please complete, sign, date and return the enclosed proxy in the accompanying self-addressed postage pre-paid envelope (or, if your shares are held in “street name” by a broker, nominee, fiduciary or other custodian, follow the directions given by the broker, nominee, fiduciary or other custodian regarding how to instruct it to vote your shares) as soon as possible. For more information on how to vote your shares, see the section entitled “THE SPECIAL MEETING — How Shares are Voted; Proxies; Revocation of Proxies.”
Q:		What happens if I do not return a proxy card?
A:		If you neither vote at the meeting nor grant your proxy as described in this proxy statement, your shares will not be voted, which will have the effect of voting against the approval of the merger agreement and the merger.
Q:		May I vote in person?
A:		Yes. You may attend the special meeting and vote your shares in person whether or not you sign and return your proxy card. If your shares are held of record in “street name” by a broker, nominee, fiduciary or other custodian and you wish to vote in person at the special meeting, you must obtain from the record holder a proxy issued in your name.
Q:		May I change my vote after I have mailed my signed proxy card?
A:		Yes. You may revoke your proxy at any time before it is actually voted by submitting to the Secretary of the company a written notice of revocation, by delivering a duly executed proxy bearing a later date or by attending the special meeting and voting in person. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the special meeting, you must bring to the meeting a proxy from the broker, bank or other nominee authorizing you to vote the shares. Attendance at the special meeting will not, by itself, revoke a proxy. If you have given voting instructions

9

---

Table of Contents

		to a broker, nominee, fiduciary or other custodian that holds your shares in “street name,” you may revoke those instructions by following the directions given by the broker, nominee, fiduciary or other custodian.
Q:		If my shares are held in “street name” by my broker, will my broker vote my shares for me?
A:		Your broker will not be able to vote your shares without instructions from you. You should instruct your broker to vote your shares, following the procedures provided by your broker. Failure to instruct your broker to vote your shares will have the same effect as voting against adoption of the merger agreement.
Q:		What does it mean if I receive more than one set of materials?
A.		This means you own shares of Vialta stock that are registered under different names. For example, you may own some shares directly as a stockholder of record and other shares through a broker; or you may own shares through more than one broker. In these situations, you will receive multiple sets of proxy materials. You must complete, sign, date and return all of the proxy cards or follow the instructions for any alternative voting procedure on each of the proxy cards that you receive in order to vote all of the shares you own. Each proxy card you receive comes with its own prepaid return envelope; if you vote by mail, make sure you return each proxy card in the return envelope that accompanies that proxy card.
Q:		If the merger is completed, how will I receive the cash for my shares?
A.		If the merger is completed, you will be contacted by Mellon Investor Services, who will act as paying agent in connection with the merger. The paying agent will provide instructions that will explain how to surrender stock certificates. You will receive cash for your shares from the paying agent after you comply with these instructions which will include waiving any dissenters’ or appraisal rights you may have. If your shares are held for you in “street name” by a broker, nominee, custodian or other fiduciary, you will receive instructions from the broker, nominee, custodian or other fiduciary as to how to effect the surrender of your shares and receive cash for those shares.
Q:		Should I send in my stock certificates now?
A:		No. If the merger is completed, you will receive written instructions for exchanging your Vialta stock certificates for cash.
Q:		Am I entitled to appraisal or dissenters’ rights with respect to my shares?
A:		If you do not vote in favor of approval of the merger agreement and the merger, and you otherwise timely comply with all legal requirements, you may seek a judicial appraisal of the fair value of your shares by following the procedures governing dissenters’ rights specified in Section 262 of the Delaware General Corporation Law, referred to in this proxy statement as the DGCL. A copy of Section 262 of the DGCL is included as Annex G to this proxy statement. In addition, you may be entitled to dissenters’ rights specified in Chapter 13 of the California General Corporation Law, referred to in this proxy statement as of the CGLC. A copy of Chapter 13 of the CGCL is included as Annex H to this proxy statement. The value of shares of Vialta common stock as of the completion of the merger as determined in a judicial appraisal may be equal to, greater than, or less than the merger consideration being offered in the merger. For a summary of certain differences between Delaware and California law with respect to dissenters’ and appraisal rights, see “SPECIAL FACTORS — Appraisal and Dissenters’ Rights.” Under both Delaware and California law, stockholders who vote in favor of the merger will have waived their rights to seek judicial appraisal of their shares. You are urged to consult your legal advisor if you are considering exercising appraisal rights or dissenters’ rights.
Q:		Who can help answer my questions?
A:		If you would like additional copies, without charge, of this proxy statement or if you have questions about the merger agreement or the merger, including the procedures for voting your shares, you should call the company at (510) 870-3088.

10

---

Table of Contents

	•	the stockholders of Vialta (other than the participating stockholders) will no longer have any interest in, and will no longer be stockholders of, Vialta and will not participate in any future earnings or growth of Vialta;
	•	the participating stockholders will own, directly or indirectly, all of the outstanding shares of Vialta;
	•	shares of Vialta common stock issued in exchange for Victory common stock to participating stockholders will not be registered on any exchange or listed on the OTC Bulletin Board, and there will be no public market for such shares; and
	•	the registration of Vialta common stock under the Securities Exchange Act of 1934, or Exchange Act, will be terminated, and Vialta will cease filing reports with the SEC.

	The Company

	Exploration of Strategic Alternatives

11

---

Table of Contents

12

---

Table of Contents

13

---

Table of Contents

14

---

Table of Contents

15

---

Table of Contents

	Mr. Chan’s Letter Regarding Going Private

	“I am submitting this letter to the Board of Directors of Vialta, Inc. to indicate my intent to discuss with the board a possible offer to purchase the shares of the company not now owned or controlled by me. This letter describes the broad outline of my thoughts on the transaction for discussion purposes.
	The transaction would take the form of either a merger with a new entity formed by me or a tender offer to the stockholders of the company. The purchase price would be mutually determined and paid to the stockholders in cash.
	I believe the transaction would be in the best interests of the company, its stockholders, employees and business partners and would have substantial advantages over the company’s current alternatives, including either an immediate or staged liquidation.
	I would like to begin due diligence on the company with a view toward coming to terms, if at all, on or before February 16, 2005 and if so, attempting to negotiate a definitive agreement by February 28, 2005 and a closing if possible by the end of April. As part of my due diligence process, I request reasonable access during normal business hours and, as necessary, during evenings and weekends, to the company’s books, records, contracts, technology, executive and other mutually agreed personnel of the company. Please let me know if the company has a standard nondisclosure agreement for us to sign in connection with this process; otherwise, I will be happy to provide a form.
	I look forward to discussing this transaction further with you in the next few days.”

	Special Committee; Negotiations with Mr. Chan

16

---

Table of Contents

17

---

Table of Contents

18

---

Table of Contents

19

---

Table of Contents

	Special Committee and Board Consideration of the Merger

20

---

Table of Contents

	•	approve and adopt the merger agreement;
	•	approve the merger; and
	•	recommend that the stockholders of Vialta vote for the approval of the merger agreement and the merger.

	•	the fact that prior to the execution of the merger agreement, no third party had come forward with a superior transaction proposal despite an extensive search for strategic alternatives conducted by Needham on behalf of Vialta;
	•	the fact that the terms of the merger agreement were negotiated by a two person special committee of the board of directors, neither member of which was an interested party in the transaction or otherwise affiliated with Mr. Chan or the other participating stockholders;
	•	the fact that the merger consideration of $0.36 per share in cash to be received by Vialta stockholders (other than the participating stockholders) represented, at the time of the special committee’s determination, a 50% premium to the average closing price of Vialta common stock for the 30 days prior to the March 28, 2005 announcement as well as a premium to the amount of proceeds stockholders, including participating stockholders (owning approximately 39% of the shares outstanding and who would participate in a liquidating distribution), reasonably could be expected to receive in a liquidation of the company (based on analyses by management, Needham and Salem Partners);
	•	the fact that the merger consideration of $0.36 per share exceeded management’s best-case extended liquidation scenario (including assets written off by the company), developed with Needham, of $0.33 per share and management’s base-case immediate liquidation scenario, developed with Needham, of $0.25 per share, which liquidation analyses did not take into consideration the fact that the company continues to experience operating losses and negative cash flow;
	•	the opinion delivered by Salem Partners on March 28, 2005 that, as of that date and based on and subject to the assumptions, limitations and qualifications set forth in the opinion, the cash consideration of $0.36 per share to be paid in the merger to the stockholders of Vialta other than the participating stockholders and Victory was fair, from a financial point of view, to such stockholders;
	•	the special committee’s consideration of the various analyses undertaken by Salem Partners, each of which is described below under “SPECIAL FACTORS — Opinion of Financial Advisor to the Special Committee”;

21

---

Table of Contents

	•	the special committee’s belief that the principal advantage of Vialta continuing as a public company would be to allow public stockholders to continue to participate in any potential growth in the value of Vialta’s equity, but that, under all of the relevant circumstances and in view of the historical results of operations, financial condition, assets, liabilities, business strategy and prospects of Vialta, the nature of the industry in which Vialta competes, and trading characteristics of companies with market capitalization similar in size to that of Vialta, and in light of the proposed merger consideration of $0.36 per share, the value to stockholders that would be achieved by continuing as a public company was not likely to be as great as the merger consideration of $0.36 per share;
	•	the active and direct role of the members of the special committee and their representatives in the negotiations with respect to the merger, and the consideration of the transaction by the special committee at numerous special committee meetings;
	•	the belief by the members of the special committee that $0.36 per share was the highest price that the participating stockholders and Victory would agree to pay to Vialta’s stockholders;
	•	the merger consideration of $0.36 per share in cash in relation to the then-current market price of Vialta common stock of $0.22 per share, the then-current value of Vialta in a freely negotiated transaction and the future value of Vialta as an independent entity;
	•	the terms of the merger agreement that permit Vialta and the special committee to explore an alternative acquisition proposal and, that permit the special committee to modify or withdraw its recommendation with respect to the merger agreement and the merger and to approve or recommend a different acquisition proposal;
	•	Vialta’s right to terminate the merger agreement prior to approval of the merger at the stockholders’ meeting, if the board of directors or the special committee determines in good faith, after consultation with outside legal counsel, that termination is necessary to comply with its fiduciary duties under applicable law;
	•	the fact that Didier Pietri, Chief Executive Officer of Vialta, has expressed a desire to terminate his employment and that the company’s outside accounting firm, PricewaterhouseCoopers LLP, has indicated that, while it has not resigned or declined to stand for re-appointment, it may decide not to continue as the company’s outside auditors;
	•	the terms and conditions of the voting agreement providing for Victory to vote in favor of approving the merger agreement; and
	•	the availability to stockholders who vote against approval of the merger agreement of appraisal or dissenters’ rights under California or Delaware law, which provide stockholders who dispute the fairness of the merger consideration with an opportunity to have a court determine the fair value of their shares.

	•	the fact that Vialta’s only recourse in the event of a wrongful termination or material breach of the merger agreement may be against Victory, a company with no assets other than Vialta common stock

22

---

Table of Contents

		and a commitment by Mr. Chan to contribute additional cash on its behalf to Vialta in the event of a shortfall, as set forth in the additional contribution agreement attached hereto as Annex D;
	•	the fact that, following the merger, Vialta’s stockholders will no longer participate in any future earnings of Vialta or benefit from any increases in Vialta’s value;
	•	the fact that Vialta’s stockholders will not benefit from any potential upside in the company’s broadband videophone products, which potential upside is highly speculative at this point and may, if continued to be pursued by Vialta, represent a potential loss in value to the then holders of Vialta common stock in the event of continued investments and losses (see “CERTAIN FINANCIAL MODELS RELATING TO POTENTIAL BROADBAND PRODUCTS”);
	•	the fact that, in the event that Vialta becomes profitable, Vialta’s current stockholders will not benefit from the company’s use of its net operating loss carryforwards to reduce its income tax payables, if any;
	•	the fact that certain parties, including Mr. Chan and other members of the board of directors, including members of the special committee, may have interests that are different from those of Vialta’s stockholders, as described under “SPECIAL FACTORS — Interests of Certain Persons in the Merger”;
	•	the possibility that Vialta could be required to reimburse Victory for up to $250,000 of its out-of-pocket expenses in the event that the merger is not consummated because of another transaction under certain circumstances;
	•	the risk of a potential fraudulent conveyance challenge to the merger described under “SPECIAL FACTORS — Certain Fraudulent Transfer Risks”; and
	•	the fact that, for U.S. federal income tax purposes, the cash merger consideration will be taxable to Vialta’s stockholders receiving the merger consideration.

	•	the special committee’s active and intense negotiations, with the assistance of its advisors, directly with Victory and its representatives regarding the merger consideration and the other terms of the merger and the merger agreement;
	•	other than their receipt of board of directors and special committee fees, their indemnification and liability insurance rights under the merger agreement and their entitlement to receive $2,400 each in respect of their accelerated Vialta stock options in connection with the merger, members of the special committee do not have an interest in the merger different from that of Vialta’s stockholders;
	•	the special committee retained and received the advice and assistance of Salem Partners as its financial advisor and Potter Anderson as its legal advisor, and requested and received from Salem Partners an opinion, delivered orally on March 28, 2005 and confirmed in writing, with respect to the fairness from a financial point of view of the merger consideration to be received by Vialta stockholders other than the participating stockholders and Victory;

23

---

Table of Contents

	•	the recognition by the special committee that it had no obligation to recommend the approval of the merger proposal or any other transaction and had full power to consider any strategic transaction, including but not limited to a liquidation of the company;
	•	the recognition by the special committee that the board of directors could consider and recommend superior proposals and otherwise terminate the merger if in good faith after consulting with counsel it concludes it is required to do so in accordance with its fiduciary duties; and
	•	the availability of dissenters’ and appraisal rights under California and Delaware law for Vialta’s stockholders who oppose the merger.

	•	the process the special committee conducted in considering the merger;
	•	the special committee’s having retained and received advice from its independent legal counsel, Potter Anderson;
	•	the special committee’s having retained and received advice from its independent financial advisor, Salem Partners;
	•	the special committee’s unanimous recommendation on March 28, 2005 that the board of directors determine that the merger agreement and the merger are fair to and in the best interests of Vialta’s stockholders other than the participating stockholders and approve and adopt the merger agreement and approve the transactions contemplated by the merger agreement, including the merger; and
	•	the availability of dissenters’ and appraisal rights under California and Delaware law for Vialta’s stockholders who oppose the merger.

	•	the fact that the special committee consisted solely of independent directors who are not affiliated with Mr. Chan or the other participating stockholders;
	•	the selection and retention by the special committee of its own financial advisor and legal counsel;
	•	the fact that negotiations that had taken place directly between Mr. Chan and his representatives, on the one hand, and the special committee and its representatives, on the other hand, were structured and conducted so as to preserve the independence of the special committee and promote the fairness of the transaction; and
	•	the fact that the merger agreement and the merger were unanimously approved by the members of the board of directors other than Mr. Chan.

24

---

Table of Contents

25

---

Table of Contents

		Immediate				Extended				Extended Liquidation
		Liquidation(1)				Liquidation(2)				and Development(3)
Assuming no Collection of Receivable(4)		$	0.28			$	0.30			$	0.29
Assuming Collection of Receivable		$	0.34			$	0.36			$	0.35

(1)	An immediate liquidation assumes, in addition to cash and cash equivalents, the company would receive in cash 40% of the value of accounts receivable, 20% of the value of inventories and 10% of the net value of equipment, in each case as reflected on the assumed balance sheet.
(2)	An extended liquidation assumed an orderly sale of the company’s assets over a 12 month period would result in an increase from an immediate liquidation to 90% of the value of accounts receivable, 70% of the value of inventories, and 20% of the net value of equipment and the incurrence of an additional $1.16 million of operating expenses during liquidation. Also assumed no change in transaction expenses.
(3)	An extended liquidation while continuing to develop the company’s broadband videophone assumes an increase from an extended liquidation to 90% of the value of inventories and the incurrence of an additional $1.95 million of operating expenses related to development.
(4)	Considers the effect of a $5.0 million note receivable held by the company but written off in 2002 due to significant uncertainty as to its collectibility. This note receivable was subsequently collected on April 28, 2005.

		Immediate				Extended				Extended Liquidation
		Liquidation(1)				Liquidation(2)				and Development(3)
Assuming No Collection of Receivable		$	0.24			$	0.27			$	0.22
Assuming Collection of Receivable		$	0.30			$	0.33			$	0.29

(1)	Assumes an increase of transaction expenses to $0.9 million relating to legal, tax, accounting and other professional services and additional transaction expenses of $1.07 million relating primarily to warranty and contingency reserves.
(2)	Assumes an increase of transaction expenses to $1.0 million and an increase of additional transaction expenses to $1.17 million assuming an increase in stay bonuses.
(3)	Assumes an increase of transaction expenses to $1.2 million and a decrease of additional transaction expenses to $1.07 million, assuming no need for stay bonuses as a result of the ongoing development. Also, assumes an increase of operating expenses to $6.23 million due to the ongoing development.

26

---

Table of Contents

	•	the proposed merger agreement dated as of March 28, 2005;
	•	certain audited historical financial statements of Vialta for the three fiscal years ended December 31, 2001, December 31, 2002 and December 31, 2003;
	•	the unaudited financial statements of Vialta for the fiscal year ended December 31, 2004;

27

---

Table of Contents

	•	certain internal business, operating and financial information and forecasts of Vialta prepared and provided by senior management of Vialta;
	•	the financial terms of the merger compared with publicly available information regarding the financial terms of certain other business combinations Salem Partners deemed relevant;
	•	the financial position and operating results of Vialta compared with those of certain other publicly traded companies Salem Partners deemed relevant;
	•	current and historical market prices and trading volumes of the common stock of Vialta;
	•	presentations by Needham to the board of directors of Vialta, as well as certain other materials prepared by Needham regarding various strategic alternatives, including the potential for sale of Vialta; and
	•	certain other publicly available information about Vialta.

	Implied Transactional Statistics

		Values Implied by
		Price per Vialta Share				Values Implied by
		as of March 24, 2005				Merger Consideration
		of $0.23				of $0.36 per share
Vialta fully-diluted equity value		$	20.1 million			$	32.2 million
Vialta fully-diluted enterprise value		$	(3.3 million	)		$	8.8 million

28

---

Table of Contents

		Premium of Merger
		Consideration over
		Closing Trading Prices
March 24, 2005 price of $0.23 per share			60.0%
February 24, 2005 price of $0.24 per share			50.0%
December 23, 2004 price of $0.25 per share			44.0%
September 24, 2004 price of $0.25 per share			44.0%
March 24, 2004 price of $0.34 per share			5.9%

		Fully-diluted Enterprise Value
		to Revenue Multiple Implied
		by Merger Consideration of
		$0.36 per share
2004 Revenue			0.69x
Estimated 2005 Revenue			0.73x

	Review of Previous Sale Discussions

	Comparable Companies Analysis

29

---

Table of Contents

		Median Fully-diluted
		Enterprise Value/				Median Fully-diluted
		Actual Revenue for				Enterprise Value/
		the Latest				2005 Projected
		Twelve Months				Revenue
Specialty Consumer Electronics			0.58x				0.62x
Diversified Consumer Electronics			2.22x				1.97x

Implied Fully-diluted Equity Value of Vialta

$29.8 million - $54.1 million

Implied Price per Vialta Share

$0.33 - $0.57

	Precedent Transactions Analysis

Acquiror		Target
Tut Systems		CoSine Communications
Black Box		Nortan
Selectica		I Many
Fair Isaac		Braun Consulting
Art Technology Group		Primus Knowledge Solutions
Zhone Technologies		Sorrento Networks
SAFLINK		SSP Solutions
Stellent		Optika
Cisco Systems		Latitude Communications
Quovadx		Rogue Wave Software
Symantec		On Technology
Cubic		ECC International
GEAC Computer		Comshare
P-Com		SPEEDCOM Wireless
Vitesse Semiconductor		Multilink Technology
Audiovox		Recoton
Group 1 Software		Sagent Technology
Tumbleweed Communications		ValiCert
Symantec		Nexland
Electronics for Imaging		PrintCafe Software

30

---

Table of Contents

		Median Fully-diluted
		Enterprise Value/
		Actual Revenue for
		the Latest
		Twelve Months
Precedent Transactions			1.05x

Implied Fully-diluted Equity Value of Vialta

$33.0 million - $39.3 million

Implied Price per Vialta Share

$0.37 - $0.44

Acquiror		Target
Golden Gate Capital		Blue Martini
HIG Capital Management		T-Netix
Snowbird Holdings		Cysive
Dirk, Inc.		Troy Group
PartsBase, Inc. (Hammond)		PartsBase, Inc.
DF Merger Co.		Deltek Systems

		Median Fully-diluted
		Enterprise Value/
		Actual Revenue for
		the Latest
		Twelve Months
Going-Private Precedent Transactions			0.82x

31

---

Table of Contents

Implied Fully-diluted Equity Value of Vialta

$29.8 million - $36.2 million

Implied Price per Vialta Share

$0.33 - $0.40

			Average Premium				Median Premium
			Over Target Share				Over Target Share
			Price One Day Prior				Price One Day Prior
			to Announcement				to Announcement
63 Transactions since January 1, 2002, consisting of:				58.8	%			38.7	%
	4 Transactions in 2005			11.2	%			9.7	%
	16 Transactions in 2004			29.3	%			28.6	%
	26 Transactions in 2003			55.9	%			37.7	%
	17 Transactions in 2002			102.3	%			106.9	%
20 Technology Transactions since January 1, 2003				61.2	%			29.5	%
6 Going-Private Transactions since January 1, 2003				36.6	%			29.9	%

Implied Fully-diluted Equity Value of Vialta

$26.1 million — $28.1 million

Implied Price per Vialta Share

$0.29 to $0.44

Implied Fully-diluted Equity Value of Vialta

$26.1 million — $32.2 million

32

---

Table of Contents

Implied Price per Vialta Share

$0.29 — $0.36

Implied Fully-diluted Equity Value of Vialta

$25.1 million — $28.1 million

Implied Price per Vialta Share

$0.28 — $0.32

	Historical Stock Price Performance

		Closing Price
March 24, 2005		$	0.23
30 days prior (February 24, 2005)		$	0.24
90 days prior (December 23, 2005)		$	0.25
180 days prior (September 24, 2004)		$	0.25
360 days prior (March 24, 2004)		$	0.34

		Stock Price Performance
		From March 24, 2004 to
		March 24, 2005
Specialty Consumer Electronics			37.5	%
S&P 500 Index			7.3	%
NASDAQ Composite			4.3	%
Diversified Consumer Electronics			(0.7	%)
Vialta			(33.8	%)

	Discounted Cash Flow Analysis

33

---

Table of Contents

Implied Fully-diluted Equity Value of Vialta

$13.6 million

Implied Price per Vialta Share

$0.15

	Salem Liquidation Analysis

34

---

Table of Contents

35

---

Table of Contents

	•	as the sole stockholders of Vialta immediately after the merger, the participating stockholders will benefit from future growth, if any, of Vialta after it ceases to be publicly traded; and
	•	information concerning Vialta and its operations, financial results and directors and officers will no longer be available to competitors and potential competitors.

	•	as a result of the merger and related transactions, the participating stockholders’ investment in Vialta will become an illiquid investment in the stock of a private company;
	•	payment of the merger consideration will significantly reduce the company’s cash resources; and
	•	following the merger, the participating stockholders will bear the sole burden for any future losses or decrease in enterprise value.

	•	the merger consideration of $0.36 per share for Vialta’s common stock was 160% of the closing price of $0.225 per share on March 24, 2005, the date before the announcement of the merger, which pre-announcement price was consistent with closing prices of Vialta’s common stock for an extended period of time before the announcement;
	•	the company’s continuing operation, or extended liquidation, was likely to lead to a significantly lower return to stockholders, in light of the company’s history of ongoing losses and declining sales for its existing products, the unproven nature of its broadband products in development, and the substantially increased cost of continuing to operate as a public company taking into account expected Sarbanes-Oxley compliance costs;
	•	the fact that the board of director’s extended effort to sell the company with the assistance of Needham, including contacts with 47 potential acquirers, netted only three offers, two of which were withdrawn and the remaining one of which had a large securities component and was unacceptable to the board;
	•	the purchase price and other terms of the merger agreement were negotiated at the direction of, and approved unanimously by, a special committee of the board of directors whose members were independent and which was represented by its own Delaware counsel;

36

---

Table of Contents

	•	the unanimous approval (with Mr. Chan abstaining) of the merger agreement and the merger by the board of directors on the recommendation of the special committee;
	•	the fact that the merger agreement permits the company to terminate the agreement if it receives an offer it believes in the exercise of its fiduciary duty is better for stockholders, but despite the public announcement of the signing of the merger agreement on March 28, 2005, no potential acquirers have initiated discussions of an alternative proposal for the company; and
	•	the purchase price is payable in cash and does not involve investment or market risk.

	Conversion of Outstanding Vialta Common Stock and Stock Options

37

---

Table of Contents

	Effect on Ownership Structure of Vialta

	Effect on Listing, Registration and Status of Vialta Common Stock

	Effect on Organization and Management of Vialta

38

---

Table of Contents

	Beneficial and Detrimental Effects

	Effect on Participating Stockholders’ Interest in Net Book Value and Net Earnings

39

---

Table of Contents

		As of and for the Three Months Ended												Pro Forma as of and for the Three Months Ended
		March 31, 2005												March 31, 2005(1)
		Ownership				Interest in Net				Interest in				Ownership				Interest in Net				Interest in Net
		Interest				Book Value				Net Loss				Interest				Book Value				Loss
Victory Acquisition Corp.			39%	(2)		$	9,587,000			$	(418,000	)			100%			$	9,682,000	(3)		$	(1,071,000	)

(1)	Gives effect to the merger as if it was completed on March 31, 2005 for the purpose of calculating (i) net book value as of that date and (ii) net income for the three months ended March 31, 2005.
(2)	As of March 31, 2005.
(3)	Net book value after the merger as of March 31, 2005 reflects, on a pro forma basis for the merger, an increase in net assets of $5.0 million for receipt of a note receivable on April 28, 2005 and a reduction in Vialta’s assets of (i) approximately $18.4 million to be used by Victory to pay the merger consideration to Vialta stockholders and (ii) approximately $1.5 million to satisfy estimated transaction expenses.

40

---

Table of Contents

	Victory Acquisition Corp. and the Participating Stockholders; Equity Ownership in the Surviving Corporation Following the Merger

		Number of				Expected
		Vialta Shares				Percentage
		Held of Record				Interest of
		Prior to				Record in
		Contribution				Vialta After
		to Victory				Merger
Fred S.L. Chan			5,044,744				16	%
Annie M.H. Chan			5,748,960				18
Annie M. H. Chan TR UA 07-25-95, The Annie M. H. Chan Living Trust			8,042,932				25
Mee Sim Lee & Sung Kook Kim & Myong Shin Kim TR UA DTD 12-21-87, The David Y. W. Chan Trust			974,410				3
Mee Sim Lee & Sung Kook Kim & Myong Shin Kim TR UA DTD 12-21-87, The Edward Y. C. Chan Trust			974,408				3
Mee Sim Lee & Sung Kook Kim & Myong Shin Kim TR UA DTD 3- 16-92, The Michael Y. J. Chan Trust			334,939				1
Shiu Leung Chan & Annie M. H. Chan Gift Trust Dated 11/20/92			2,119,447				7
Evershine XVI, L.P.			8,800,000				27
TOTALS:			32,039,840				100	%

	Merger Consideration to be Received by Certain Directors and Officers of Vialta Other than Mr. Chan

41

---

Table of Contents

				Number of Shares				Total Merger
Name		Position		Beneficially Owned				Consideration
Didier Pietri(1)		Chief Executive Officer			4,059,436			$	61,397
George Cain(2)		Director			60,000			$	2,400
Michael Dubester(3)		Director			60,000			$	2,400
Matthew Fong(4)		Director			120,974			$	31,151
Herbert Chang(5)		Director			56,000			$	0

(1)	Includes options to acquire 4,000,000 shares of common stock, of which all 916,667 unvested options will accelerate in connection with the merger. Based on the merger consideration of $0.36 per share, options to purchase 2,000,000 of these shares are in the money.
(2)	Represents options to acquire 60,000 shares of common stock, of which all 45,000 unvested options will accelerate in connection with the merger. Based on the merger consideration of $0.36 per share, options to purchase 20,000 of these shares are in the money.
(3)	Represents options to acquire 60,000 shares of common stock, of which all 45,000 unvested options will accelerate in connection with the merger. Based on the merger consideration of $0.36 per share, options to purchase 20,000 of these shares are in the money.
(4)	Includes options to acquire 40,000 shares of common stock, of which all 35,000 unvested options will accelerate in connection with the merger. Based on the merger consideration of $0.36 per share, options to purchase 40,000 of these shares are in the money.
(5)	Includes options to acquire 56,000 shares of common stock, of which all 9,000 unvested options will accelerate in connection with the merger. Based on the merger consideration of $0.36 per share, options to purchase none of these shares are in the money.

	Indemnification and Insurance

42

---

Table of Contents

	Compensation of the Special Committee

43

---

Table of Contents

Fees and Expenses of Vialta			Estimated Amount
Financial advisory fees and expenses			$	210,000
Legal and accounting fees and expenses				[       ]
Special committee fees and expenses				63,000
Printing and mailing fees and expenses				[       ]
SEC filing fees				2,168
Miscellaneous				[       ]
	Total		$

Fees and Expenses of Victory Acquisition Corp.			Estimated Amount
Legal and accounting fees and expenses			$
Miscellaneous
	Total		$

	United States Holders Other than the Participating Stockholders

44

---

Table of Contents

45

---

Table of Contents

	Participating Stockholders

	Vialta

46

---

Table of Contents

47

---

Table of Contents

	Appraisal rights under Delaware law

	•	Written demand for appraisal. Stockholders must deliver to Vialta at 48461 Fremont Boulevard, Fremont, California 94538 a written demand for appraisal of their shares before the vote on the merger at the special meeting (scheduled to be held on                     , 2005), which demand will be sufficient if it includes the stockholder’s name, mailing address, number of shares of Vialta common stock covered by the demand and notice that he or she intends to demand the appraisal.

48

---

Table of Contents

	•	Refrain from voting for the merger. Stockholders must not vote in favor of the merger agreement. Because a proxy that does not contain voting instructions will, unless revoked, be voted in favor of the merger agreement, stockholders who vote by proxy and wish to exercise appraisal rights must mark their proxy to include their vote against the merger agreement or abstention from voting on the merger agreement. You are not required to vote against the merger to preserve dissenters’ rights.
	•	Continuous ownership of Vialta shares. Stockholders must continuously hold their shares from the date of making their demand through the effective time of the merger. Stockholders who hold shares of common stock on the date the written demand for appraisal is made but thereafter sell, transfer or otherwise dispose of their shares prior to the effective time of the merger, will lose any right to appraisal in respect of such shares.
	•	Notice. Within 10 days after the effective time of the merger, Vialta must notify each stockholder who is entitled to appraisal rights of the date that the merger became effective.

49

---

Table of Contents

	•	any attempt to withdraw such demand made more than 60 days after the effective time of the merger will require Vialta’s written approval, and
	•	no appraisal proceeding in the Delaware Chancery Court will be dismissed as to any stockholder without the approval of the Delaware Chancery Court, and that approval may be conditioned upon such terms as the Delaware Chancery Court deems just.

50

---

Table of Contents

	Dissenters’ rights under California law

	•	Refrain from voting for the merger. Stockholders must not vote in favor of the merger agreement and the merger. Because a proxy that does not contain voting instructions will, unless revoked, be voted in favor of the merger agreement, stockholders who vote by proxy and wish to exercise appraisal rights must vote against the merger agreement and the merger or abstain from voting on the merger agreement and the merger. You are not required to vote against the merger to preserve dissenters’ rights.
	•	Notice and declaration of fair value. If the merger agreement and the merger are approved by a sufficient number of votes, in person or by proxy, Vialta will, within 10 days after such approval, mail to any stockholder who may have a right to require the company to purchase such stockholder’s shares of Vialta common stock for fair value under Chapter 13 of the CGCL, or the “Dissenting Stockholders,” a notice that the required stockholder approval of the merger agreement was obtained, accompanied by a copy of Chapter 13 of the CGCL. The notice of approval will set forth the price that Vialta has determined represents the fair value of any dissenting shares (which shall constitute an offer to purchase such dissenting shares at such stated price) and will set forth a brief description of the procedures to be followed by the Dissenting Stockholders who wish to exercise their dissenters’ rights.
	•	Written demand of appraisal. Within 30 days after the date on which the notice of approval was mailed, Dissenting Stockholders are required to make a written demand to Vialta to purchase dissenting shares for a cash payment of their fair value. Written demand is required by law to contain a statement concerning the number of shares of Vialta common stock held by the Dissenting Stockholder and the amount that he or she claims to be the fair value of these shares as of March 28, 2005. The statement of fair value in the Dissenting Stockholder’s written demand will constitute such stockholder’s offer to sell these shares at the price identified in the demand. Such demand must be addressed to Vialta, Inc., 48461 Fremont Boulevard, Fremont, California 94538, Attention: Secretary. If the price contained in the notice of approval is acceptable to the stockholder, he or she may demand that price. This would constitute an acceptance of Vialta’s offer to purchase the stock at the price stated in the notice of approval. Stockholders may not withdraw their dissent or demand for payment unless Vialta consents to such withdrawal.
	•	Surrender of stock certificate(s). Within 30 days after the notice of approval was mailed, Dissenting Stockholders also must submit the certificates representing their dissenting shares (or if their dissenting shares are uncertificated, a written notice of the number of shares, which the shareholder demands that Vialta purchase) to Vialta, Inc., 48461 Fremont Boulevard, Fremont, California 94538, Attention: Secretary. The certificates representing dissenting shares will be stamped or endorsed with a statement that the shares are dissenting shares of common stock.

51

---

Table of Contents

	•	the merger is abandoned;
	•	a stockholder transfers his or her shares of common stock before submitting them for endorsement;
	•	Vialta and the Dissenting Stockholder do not agree on the status of the shares as dissenting shares or on the price of such shares and the Dissenting Stockholder fails to file suit against Vialta or intervene in a pending action within six months following the date on which the notice of approval was mailed;
	•	a stockholder withdraws his or her demand for the purchase of the dissenting shares of common stock with Vialta’s consent; or
	•	a stockholder fails to comply with the procedures for written demand of appraisal and surrender of stock certificates set forth in Chapter 13 of the CGCL.

52

---

Table of Contents

	•	consider and vote upon a proposal to approve and adopt the merger agreement and approve the merger;
	•	consider and vote upon a proposal to adjourn the special meeting if necessary to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to approve the merger agreement and the merger; and
	•	transact such other business as may properly come before the special meeting or any adjournments or postponements of the special meeting.

53

---

Table of Contents

54

---

Table of Contents

55

---

Table of Contents

56

---

Table of Contents

57

---

Table of Contents

	•	all shares of Vialta common stock that are held (1) in the treasury of Vialta, (2) by any wholly-owned subsidiary of Vialta, (3) by Victory or (4) by any of the participating stockholders will be canceled and retired and will cease to exist without any consideration payable therefor;

58

---

Table of Contents

	•	each other share of Vialta common stock issued and outstanding immediately before the merger becomes effective (other than any share as to which a dissenting stockholder has perfected or not lost the benefit of dissenters’ or appraisal rights under California or Delaware law, as applicable) will be converted into the right to receive $0.36 in cash without interest; and
	•	each share of Victory common stock will be converted into one share of common stock of Vialta, as the surviving corporation in the merger.

59

---

Table of Contents

	•	due organization, valid existence and good standing of itself and its subsidiaries;
	•	power and authority to enter into the merger agreement, and, subject to stockholder approval, to consummate the transactions contemplated thereby;
	•	capitalization;
	•	the absence of conflicts with law, organizational documents, contracts and orders;
	•	the absence of any required governmental filings, authorizations or approvals other than those specified in the merger agreement;
	•	the absence of any fees owed to brokers or finders in connection with the merger except as specified in the merger agreement; and
	•	no violation of existing agreements.

	•	binding obligation;
	•	subsidiaries;
	•	litigation;

60

---

Table of Contents

	•	tax matters;
	•	properties and leases;
	•	contracts and commitments;
	•	intellectual property;
	•	compliance with applicable laws;
	•	employee benefit plans and other agreements with employees;
	•	insurance;
	•	SEC filings and financial statements; and
	•	balance sheet items.

	•	entry into the contribution agreement, additional contribution agreement and voting agreement;
	•	information in SEC filings;
	•	vote required; and
	•	limited operations.

	•	incur any indebtedness for borrowed money except in the ordinary course of business consistent with past practices;
	•	enter into any transaction not in the ordinary course of business;

61

---

Table of Contents

	•	encumber or permit to be encumbered any of its assets except in the ordinary course of its business consistent with past practice and to an extent which is not material;
	•	dispose of any of its assets except in the ordinary course of business consistent with past practice;
	•	enter into any material lease or contract for the purchase or sale of any property, real or personal;
	•	fail to maintain its equipment and other assets in good working condition and repair, subject only to ordinary wear and tear;
	•	pay any bonus, increased salary or special remuneration to any officer, employee or consultant (except for normal salary increases consistent with past practices not to exceed 10% per year and except pursuant to existing arrangements previously disclosed) or enter into any new employment or consulting agreement with any such person;
	•	change accounting methods, except as required by GAAP or by a governmental authority, or materially revalue any of its assets;
	•	declare, set aside or pay any cash dividend or distribution in respect of capital stock, or redeem or otherwise acquire any of its capital stock;
	•	amend or terminate any contract, agreement or license to which it is a party except those amended or terminated in the ordinary course of business, consistent with past practice, and which are not material in amount or effect;
	•	lend any amount to any person or entity, other than (i) advances for travel and expenses which are incurred in the ordinary course of business consistent with past practice, not material in amount and documented by receipts for the claimed amounts or (ii) any loans pursuant to the Vialta 401(k) Plan;
	•	guarantee or act as a surety for any obligation except for the endorsement of checks and other negotiable instruments in the ordinary course of business, consistent with past practice, which are not material in amount;
	•	waive or release any material right or claim except in the ordinary course of business, consistent with past practice;
	•	issue or sell any shares of its capital stock of any class (except upon the exercise of an option or warrant currently outstanding), or any other of its securities, or issue or create any warrants, obligations, subscriptions, options, convertible securities, or other commitments to issue shares of capital stock, or accelerate the vesting of any outstanding option or other security;
	•	split or combine the outstanding shares of its capital stock of any class or enter into any recapitalization affecting the number of outstanding shares of its capital stock of any class or affecting any other of its securities;
	•	merge, consolidate or reorganize with, or acquire any entity;
	•	amend its Certificate of Incorporation or Bylaws;
	•	license any of its technology or intellectual property except on a non-exclusive basis and in the ordinary course of business consistent with past practice;
	•	change any tax election, agree to any audit assessment by any tax authority, settle any tax dispute or liability, or file any federal or state income or franchise tax return outside of the ordinary course of business;
	•	change any insurance coverage or permit any coverage in force to lapse, or issue any certificates of insurance;
	•	take any action with the intention directly or indirectly to adversely impact the merger;

62

---

Table of Contents

	•	commence any action at law or in equity or any arbitrations, other than to enforce Vialta’s rights and remedies under the merger agreement, unless authorized by the board of directors of Vialta; or
	•	agree to do, or permit any subsidiary to do or agree to do, any of the foregoing.

	•	promptly advise Victory in writing of any change which is expected to have a material adverse effect on Vialta;
	•	promptly deliver, when available, a monthly unaudited balance sheet and statement of operations commencing with the month ending March 31, 2005;
	•	use reasonable efforts to conduct its business in the same manner as prior to the date of the merger agreement;
	•	notify Victory of any material litigation;
	•	provide reasonable access to its files, books, records and offices; and
	•	use reasonable efforts to obtain the resignation of its officers and directors effective immediately prior to the effect time of the merger.

63

---

Table of Contents

	•	provide prompt notice to Vialta of any event occurring that would render a representation or warranty of Victory untrue or inaccurate in any material respect.

	•	cooperate and promptly prepare and file a proxy statement and joint Schedule 13E-3 with the Securities and Exchange Commission with respect to the merger;
	•	use their reasonable efforts to obtain all authorizations, approvals and consents of any governmental body which may be reasonably required or requested in connection with the completion of the merger and the related transactions; and
	•	use its reasonable efforts to satisfy the conditions precedent to the merger and to cause the merger to be consummated.

	•	the absence of any order, decree, or ruling by any court or governmental agency, or threat thereof, or any other fact or circumstance, which would prohibit, render illegal or enjoin the consummation of the merger; and
	•	approval of the merger agreement by a majority vote of Vialta shares outstanding as of the record date.

	•	the representations and warranties of Victory contained in the merger agreement being true and correct as of the date of the Agreement and on and as of the closing date of the merger except where the failure of a representation or warranty to be true and correct would not have a material adverse effect on Vialta, as evidenced by receipt of a certificate to such effect executed by Victory’s President and Chief Financial Officer; and
	•	Victory’s performance in all material respects of all of its obligations under the merger agreement that are required to be performed by Victory at or prior to the closing date of the merger, as evidenced by receipt of a certificate to such effect executed by Victory’s President and Chief Financial Officer.

	•	the representations and warranties of Vialta contained in the merger agreement being true and correct as of the date of the Agreement and on and as of the closing date of the merger except where the failure of a representation or warranty to be true and correct would not have a company material adverse effect on Victory, as evidenced by receipt of a certificate to such effect executed by Vialta’s President and Chief Financial Officer;

64

---

Table of Contents

	•	Vialta’s performance in all material respects of all of its obligations under the merger agreement that are required to be performed by Vialta at or prior to the closing date of the merger, as evidenced by receipt of a certificate to such effect executed by Vialta’s President and Chief Financial Officer;
	•	the determination, in the reasonable judgment of the board of directors of Victory that there has not been a material adverse effect with respect to Vialta;
	•	receipt of a legal opinion from counsel to Vialta as to the company’s due incorporation, power and authority to enter into the merger agreement, due execution and delivery of the agreement, and the merger agreement not violating the certificate of incorporation or bylaws of the company; and
	•	confirmation that Vialta has no less than $14,500,000 in cash and cash equivalents as of midnight on the day before the closing.

	•	the merger is not consummated by August 13, 2005, except that the right to terminate the merger agreement for this reason will not be available to any party whose action or failure to act has been a principal cause of or resulted in the failure of the merger to occur on or before August 13, 2005;
	•	a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which order, decree, ruling or other action is final and nonappealable; or
	•	stockholder approval of the merger agreement is not obtained at the special meeting (including any adjournment or postponement thereof), except that the right to terminate the merger agreement for this reason will not be available to Vialta where the failure to obtain stockholder approval shall have been caused by Vialta’s failure to fulfill its obligations with respect to preparing and filing a proxy statement and joint Schedule 13E-3 with the SEC or calling and holding a meeting of its stockholders and such failure constitutes a material breach by Vialta of this Agreement.

	•	the special committee withdraws or amends or modifies in a manner adverse to Victory its recommendation in favor of the adoption and approval of the merger agreement or the approval of the merger;
	•	Vialta fails to include in the proxy statement the recommendation of the special committee or the board of directors in favor of the adoption and approval of the merger agreement and the approval of the merger;
	•	the special committee fails to reaffirm its recommendation in favor of the adoption and approval of the merger agreement and the approval of the merger within 10 business days after Victory’s requests in writing that such recommendation be reaffirmed at any time following the public announcement of a competing acquisition proposal;
	•	the special committee approves or publicly recommends any competing acquisition proposal other than a liquidation or dissolution;

65

---

Table of Contents

	•	Vialta enters into any letter of intent or similar document or any agreement, contract or commitment accepting any competing acquisition proposal;
	•	a tender or exchange offer is commenced by a person unaffiliated with Victory, and Vialta has not sent to its securityholders a statement disclosing that Vialta recommends rejection of such tender or exchange offer within 10 business days after such tender or exchange offer is first published, sent or given; or
	•	Vialta breaches any representation, warranty, covenant or agreement, or if any representation or warranty of Vialta becomes untrue as a result of which, in either case, the conditions to completion of the merger would not be satisfied, and such breach is not curable through commercially reasonable efforts or, if curable, is not cured within 30 days of written notice from Victory.

	•	Victory breaches any representation, warranty, covenant or agreement, or if any representation or warranty of Victory becomes untrue as a result of which, in either case, the conditions to completion of the merger would not be satisfied, and such breach is not curable through commercially reasonable efforts or, if curable, is not cured within 30 days of written notice from Vialta; or
	•	prior to approval of the merger at the stockholders’ meeting, the board of directors or the special committee determines in good faith, after consultation with outside legal counsel, that termination is necessary to comply with its fiduciary duties under applicable law.

	•	Vialta terminates the merger agreement prior to approval of the merger at the stockholders’ meeting because the board of directors or the special committee determines in good faith, after consultation with outside legal counsel, that termination of the agreement is necessary for the board of directors or the special committee to comply with its fiduciary duties under applicable law;
	•	Victory terminates the merger agreement because (1) the special committee withdraws or amends or modifies its recommendation in a manner adverse to Victory; (2) Vialta fails to include in the proxy statement the recommendation of the special committee or the board of directors in favor of the adoption and approval of the merger agreement and the approval of the merger; (3) the special committee fails to reaffirm its recommendation within 10 business days after written request by Victory following the public announcement of a competing acquisition proposal; (4) the special committee approves or publicly recommends any competing acquisition proposal other than a liquidation or dissolution; (5) Vialta enters into any letter of intent or similar document or any agreement, contract or

66

---

Table of Contents

		commitment accepting any competing acquisition proposal; or (6) a tender or exchange offer is commenced by a person unaffiliated with Victory, and Vialta has not sent to its securityholders a statement disclosing that Vialta recommends rejection of such tender or exchange offer within 10 business days after such tender or exchange offer is first published, sent or given; or
	•	Victory terminates the merger agreement because a breach by Vialta causes the conditions to completion of the merger to not be satisfied and cured, if curable, within 30 days of written notice from Victory and Vialta consummates an “Acquisition Proposal” within six months following such termination. An “Acquisition Proposal” includes: (1) any acquisition or purchase of more than 50% of Vialta common stock, including by means of a tender offer or exchange offer, or any merger, consolidation, business combination or similar transaction pursuant to which the stockholders of Vialta immediately preceding such transaction hold less than 50% of the equity interests in the surviving or resulting entity of such transaction or its parent party; (2) any sale, lease, exchange, transfer, license, acquisition, or disposition of all or substantially all of the aggregate fair market value of assets of Vialta; or (3) any liquidation or dissolution of Vialta.

	Parties

	Stock Contribution

	Parties

	Voting

67

---

Table of Contents

	Transfer Restrictions

	•	directly or indirectly, sell, transfer, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, encumbrance, assignment or other disposition of, the subject shares or any interest contained therein (other than pursuant to the pledge agreement), except for transfers to an affiliate of Victory that executes a counterpart of the voting agreement and agrees to hold the subject shares subject to all of the terms and provisions of the voting agreement;
	•	grant any proxies or powers of attorney or enter into any other voting agreement or other arrangement with respect to the subject shares;
	•	enter into, or deposit the subject shares into, a voting trust; nor
	•	commit or agree to take any of the foregoing actions.

	Termination

	Parties

	Contribution Requirements

68

---

Table of Contents

	Parties

	Pledge

69

---

Table of Contents

																								Three Months
																								Ended
				Years Ended December 31,																				March 31,
				2004				2003				2002				2001				2000				2005				2004
				(In thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenue, net				$	12,747			$	10,331			$	—			$	—			$	—			$	2,958			$	4,974
Cost of good sold					8,022				2,941				—				—				—				2,170				1,396
Gross profit					4,725				7,390				—				—				—				788				3,578
Operating expenses:
	Product costs				—				—				10,421				—				—				—				—
	Engineering and development				1,247				2,557				13,264				25,250				19,558				292				336
	Sales and marketing				2,011				4,427				3,100				3,738				2,927				292				605
	General and administrative				4,573				5,753				5,643				9,301				6,699				1,478				1,360
	Amortization and impairment of content licenses				—				—				11,395				—				—				—				—
		Total operating expenses			7,831				12,737				43,823				38,289				29,184				2,062				2,301
Operating loss					(3,106	)			(5,347	)			(43,823	)			(38,289	)			(29,184	)			(1,274	)			1,277
Interest income, net					717				733				1,244				3,606				7,688				203				209
Gain on investment					—				571				—				—				—				—				—
Other income (expense)					—				—				—				(1,266	)			(1,682	)			—				—
Income (loss) before income tax benefit					(2,389	)			(4,043	)			(42,579	)			(35,949	)			(23,178	)		$	(1,071	)		$	1,486
Income tax benefit					—				—				—				—				260				—				—
Net income (loss)				$	(2,389	)		$	(4,043	)		$	(42,579	)		$	(35,949	)		$	(22,918	)		$	(1,071	)		$	1,486
Net income (loss) per share:
	Basic and diluted			$	(0.03	)		$	(0.05	)		$	(0.51	)		$	(0.83	)		$	(3.68	)		$	(0.01	)		$	0.02
Weighted average common shares outstanding:
	Basic				82,930				82,285				83,578				43,248				6,222				83,077				82,803
	Diluted				82,930				82,285				83,578				43,248				6,222				83,077				88,552

70

---

Table of Contents

		December 31,
																						March 31,
		2004				2003				2002				2001				2000				2005
		(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term investments		$	18,402			$	24,308			$	32,701			$	67,428			$	136,490			$	18,379
Restricted cash			3,057				2,226				—				—				—				3,066
Working capital			22,261				25,365				30,201				66,830				109,870				24,288
Total assets			29,402				37,114				40,327				83,866				153,691				27,016
Total current liabilities			3,753				9,061				7,949				3,587				33,594				2,434
Redeemable convertible preferred stock			—				—				—				—				142,600				—
Total stockholders’ equity (deficit)			25,649				28,053				32,378				80,279				(22,503	)			24,582

71

---

Table of Contents

72

---

Table of Contents

73

---

Table of Contents

				2005				2006
				(In thousands)
Revenue, net				$	12,166			$	14,600
Cost of goods sold					8,966				10,759
Gross profit					3,201				3,841
Operating expenses:
	Engineering and development				1,309				1,375
	Sales and marketing				2,112				2,217
	General and administrative				4,802				5,042
		Total operating expenses			8,223				8,634
Operating loss					(5,022	)			(4,793	)
Interest income and other:
	Interest income, net				697				700
		Total interest income and other			697				700
Net loss				$	(4,325	)		$	(4,093	)

	a) There will be no sales to CEC. CEC was one of the major Company’s Chinese customers which notified the Company in Q3 2004 that it no longer would purchase any Beamer product.
	b) All product lines unit sales increase 20% for each of 2005 and 2006 years from historical 2004 unit sales (excluding sales to CEC).
	c) There are no changes in product mix and there are no new types of products sold compared to the historical 2004 product mix.
	d) Sold units are valued using standard costs (that approximate actual cost) as of December 31, 2004. There are no inventory reserve releases in COGS in relation to sold or disposed inventory previously written off.
	e) The retail price for the BMTV and BM80 products decreases by $25 and for the VistaFrame products by $50 compared to historical average prices during the year ended December 31, 2004.
	f) Operating expenses increase by 5% for each of 2005 and 2006 years from historical 2004 operating expenses.
	g) Interest income, net primarily represents interest income on cash equivalents and short-term investments, and no collection of the $5.0 million note receivable which matured April 2005.

74

---

Table of Contents

				2005				2006
				(In thousands)
Revenue, net				$	12,166			$	14,600
Cost of goods sold					8,966				10,759
Gross profit					3,201				3,841
Operating expenses:
	Engineering and development				1,309				1,375
	BroadBand Development				333				667
	Sales and marketing				2,262				2,675
	General and administrative				4,802				5,042
		Total operating expenses			8,706				9,758
Operating loss					(5,505	)			(5,917	)
Interest income and other:
	Interest income, net				697				692
		Total interest income and other			697				692
Net loss				$	(4,808	)		$	(5,225	)

	a) There will be no sales to CEC. CEC was one of the major Company’s Chinese customers which notified the Company in Q3 2004 that it no longer would purchase any Beamer product.
	b) All product lines unit sales increase 20% for each of 2005 and 2006 years from historical 2004 unit sales (excluding sales to CEC).
	c) There are no changes in product mix and there are no new types of products sold compared to the historical 2004 product mix.
	d) Sold units are valued using standard costs (that approximate actual cost) as of December 31, 2004. There are no inventory reserve releases in COGS in relation to sold or disposed inventory previously written off.
	e) The retail price for the BMTV and BM80 products decreases by $25 and for the VistaFrame products by $50 compared to historical average prices during the year ended December 31, 2004.
	f) Operating expenses increase by 5% for each of 2005 and 2006 years from historical 2004 operating expenses. Additionally, sales and marketing costs increase by $150,000 for each of 2005 and 2006 years.
	g) Broadband development starts in 2005 at overall incremental development cost $1 million with one-third of the cost incurred in 2005 and two-thirds of the cost incurred in 2006.

75

---

Table of Contents

	h) Interest income, net primarily represents interest income on cash equivalents and short-term investments, and no collection of the $5.0 million note receivable which matured during April 2005.

76

---

Table of Contents

				2005E				2006E
				(In thousands)
Revenue, net				$	12,166			$	26,600
Cost of goods sold					8,966				20,759
Gross profit					3,201				5,841
Operating expenses:
	Engineering and development				1,309				1,375
	BroadBand Development				333				667
	Sales and marketing				2,262				2,675
	General and administrative				4,802				5,042
		Total operating expenses			8,706				9,758
Operating loss					(5,505	)			(3,917	)
Interest income and other:
	Interest income, net				697				725
		Total interest income and other			697				725
Net loss				$	(4,808	)		$	(3,192	)

77

---

Table of Contents

			High				Low
Fiscal 2003:
	First Quarter ended March 31, 2003		$	0.45			$	0.30
	Second Quarter ended June 30, 2003		$	0.51			$	0.28
	Third Quarter ended September 30, 2003		$	0.49			$	0.33
	Fourth Quarter ended December 31, 2003		$	0.81			$	0.35
Fiscal 2004:
	First Quarter ended March 31, 2004		$	0.70			$	0.32
	Second Quarter ended June 30, 2004		$	0.39			$	0.32
	Third Quarter ended September 30, 2004		$	0.35			$	0.23
	Fourth Quarter ended December 31, 2004		$	0.25			$	0.16
Fiscal 2005:
	First Quarter ended March 31, 2005		$	0.34			$	0.20
	Second Quarter (through April 21, 2005)		$	0.34			$	0.34

78

---

Table of Contents

							Percentage of
Name and Address(1)			Number of Shares				Class Outstanding
Knight Equity Markets, L.P.(2)				8,992,418				11	%
	545 Washington Blvd., 3rd Floor
	Jersey City, NJ 07310
Victory Acquisition Corp.(3)				32,039,840				39	%
Fred S.L. Chan(4)				33,658,420				40	%
Didier Pietri(5)				3,496,936				4	%
George M. Cain(6)				15,000				*
Herbert Chang(7)				49,666				*
Matthew K. Fong(8)				95,974				*
Michael S. Dubester(9)				15,000				*
William Scharninghausen(10)				165,208				*
Yin-Wu Chen(11)				180,000				*
All executive officers and directors as a group (8 persons)				37,676,204				43	%

	*	The amount shown is less than 1% of the outstanding shares of such class.

	(1)	Unless otherwise indicated, the address for each beneficial owner is c/o Vialta, Inc., 48461 Fremont Boulevard, Fremont, CA 94538.
	(2)	Based on a filing with the Securities and Exchange Commission on May 10, 2005 indicating beneficial ownership as of May 10, 2005.
	(3)	The address for Victory Acquisition Corp. is 19770 Stevens Creek Blvd., Cupertino, CA 95014. The participating stockholders have acted as a group in contributing their Vialta shares to Victory in connection with the proposed merger and may therefore be deemed as a group to have beneficial ownership of the entire 32,039,840 shares of Vialta stock held by Victory. See “SPECIAL FACTORS — Interests of Certain Persons in the Merger.”
	(4)	Includes all shares held by Victory Acquisition Corp., an entity controlled by Mr. Chan, and 1,618,580 shares which Mr. Chan has the right to acquire on or within 60 days of May 10, 2005 through the exercise of options. All of the options will be cancelled in connection with the merger.
	(5)	Includes 3,437,500 shares which Mr. Pietri has the right to acquire on or within 60 days of May 10, 2005 through the exercise of options.
	(6)	Includes 15,000 shares which Mr. Cain has the right to acquire on or within 60 days of May 10, 2005 through the exercise of options.
	(7)	Includes 49,666 shares which Mr. Chang has the right to acquire on or within 60 days of May 10, 2005 through the exercise of options.
	(8)	Includes 15,000 shares which Mr. Fong has the right to acquire on or within 60 days of May 10, 2005 through the exercise of options.
	(9)	Includes 15,000 shares which Mr. Dubester has the right to acquire on or within 60 days of May 10, 2005 through the exercise of options.

	(10)	Includes 165,208 shares which Mr. Scharninghausen has the right to acquire on or within 60 days of May 10, 2005 through the exercise of options.

79

---

Table of Contents

(11)	Includes 180,000 shares which Mr. Chen has the right to acquire on or within 60 days of May 10, 2005 through the exercise of options.

80

---

Table of Contents

	•	Annual Report on Form 10-K, for the year ended December 31, 2004, a copy of which is attached to this proxy statement as Annex I
	•	Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, a copy of which is attached to this proxy statement as Annex J.

81

---

Table of Contents

A-1

---

Table of Contents

	1.2.1 Certain Defined Terms. The term “Merger Consideration” shall mean $0.36 per share of Target Common Stock in cash.
	1.2.2 Conversion of Newco Stock. Each share of Newco capital stock immediately prior to the Effective Time (the “Newco Stock”) will be cancelled and extinguished and automatically converted into the right to receive one share of Common Stock of the Surviving Corporation.
	1.2.3 Cancellation of Newco Stock. Each share of Target Common Stock held by Newco or its officers, directors, stockholders or Affiliates immediately prior to the Effective Time (the “Newco Target Stock”) shall automatically be cancelled and retired and shall cease to exist, and no cash or other stock consideration shall be delivered or deliverable in exchange therefor.
	1.2.4 Cancellation of Treasury Stock. Each share of Target Common Stock held by Target or any Subsidiary (as defined below) of Target (“Treasury Stock”) shall automatically be cancelled and retired and shall cease to exist, and no cash or other stock consideration shall be delivered or deliverable in exchange therefor.
	1.2.5 Conversion of Other Shares. Subject to Section 1.3, each share of Target Common Stock issued and outstanding immediately prior to the Effective Time, other than shares of Newco Target Stock and shares of Treasury Stock, will be cancelled and extinguished and automatically converted into the right to receive the Merger Consideration in cash upon compliance with the procedures contemplated in Section 6.2 hereof.
	1.2.6 Options. At the Effective Time, each holder of a then outstanding vested option which is then exercisable to purchase shares of Target Common Stock (“Target Options”) (other than options held by Newco, its officers, directors, stockholders or Affiliates immediately prior to the Effective Time (“Newco Options”) which shall be cancelled) shall automatically be cancelled and converted into the right to receive in settlement thereof and net of applicable withholding taxes, cash in an amount equal to the product of (i) the Merger Consideration minus the applicable exercise price per share of such Target Options multiplied by (ii) the number of vested shares of Target Common Stock that such option may purchase upon exercise. If and to the extent required by the terms of the plans governing such options or the option granted thereunder, Target shall use its reasonable efforts to obtain the consent of each holder of outstanding options to the foregoing treatment of such options. At the Effective Time, each unvested Target Option shall automatically be terminated without further rights.

A-2

---

Table of Contents

	1.7.1 As promptly as practicable after the execution of this Agreement, Target and Newco shall cooperate and promptly prepare and file with the Securities and Exchange Commission (“SEC”) a proxy statement relating to the meeting of Target’s stockholders to be held in connection with the Merger (together with any amendments thereof or supplements thereto, the “Proxy Statement”), a joint Rule 13e-3 Transaction Statement on Schedule 13E-3 (the “Schedule 13E-3”) with respect to the Merger and any other filings made by or required to be made by Target with the SEC other than the Proxy Statement and Schedule 13E-3 (the “Other Filings”), if any. The respective parties shall cause the Proxy Statement, the Schedule 13E-3 and any Other Filings to comply as to form in all material respects with the applicable provisions of the Exchange Act, including Regulation 14A and Rule 13e-3 thereunder, and any other applicable laws. The respective parties, after consultation with the other, will use all reasonable efforts to respond to any comments made by the SEC with respect to the Proxy Statement, the Schedule 13E-3 and any Other Filings. Target and Newco shall furnish to each other all information concerning it and the holders of its capital stock as the other may reasonably request in connection with such actions and the preparation of the Proxy Statement, the Schedule 13E-3 and any Other Filings.
	As promptly as practicable after the clearance of the Proxy Statement and the Schedule 13E-3 by the SEC, Target shall mail the Proxy Statement to its stockholders (or, if the SEC chooses not to review the Proxy Statement and the Schedule 13E-3, within 10 days after the date that the SEC notifies Target that it will not review the Proxy Statement). The Proxy Statement shall include the recommendation of the Target Board of Directors and the Special Committee that adoption of the Merger Agreement by Target’s stockholders is advisable and that Target Board of Directors and the Special Committee has determined that the Merger is fair to, and in the best interests of, Target Stockholders other than Mr. Chan, Newco and their Affiliates, subject to Target Board of Directors or the Special Committee’s right to withdraw, modify or amend such recommendation if Target Board of Directors or the Special Committee, as applicable, determines in good faith, after receipt of the advice of its outside counsel, that such action is necessary for Target Board of Directors and the Special Committee to comply with their fiduciary duties under applicable law.
	No amendment or supplement to the Proxy Statement, the Schedule 13E-3 or any Other Filings will be made by Target without the approval of Newco, which shall not be unreasonably delayed or withheld. Target will advise Newco promptly after it receives notice thereof, of any request by the SEC for

A-3

---

Table of Contents

	amendment of the Proxy Statement or any Other Filings or comments thereon and responses thereto or requests by the SEC for additional information.
	1.7.2 Each of the parties agrees to use its reasonable efforts to cooperate and to provide each other with such information as any of such parties may reasonably request in connection with the preparation of the Proxy Statement, the Schedule 13E-3 and the Other Filings. Each party agrees promptly to supplement, update and correct any information provided by it for use in the Proxy Statement, the Schedule 13E-3 and the Other Filings to the extent that it is or shall have become incomplete, false or misleading. If at any time prior to the Effective Time, any event or circumstance relating to Newco or its officers and directors, should be discovered by Newco which should be set forth in an amendment to the Proxy Statement, the Schedule 13E-3 or Other Filings, Newco shall promptly inform Target. If at any time prior to the Effective Time, any event or circumstance relating to Target, or its officers or directors, should be discovered by Target which should be set forth in an amendment or a supplement to the Proxy Statement, any Other Filing or the Schedule 13E-3, Target shall promptly inform Newco.

	2.1 Organization and Good Standing. Target and each of its Subsidiaries is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has the corporate or other power and authority to carry on its business as now conducted, and is qualified as a foreign corporation in each jurisdiction listed on Section 2.1 of the Target Disclosure Letter. Except as listed on Section 2.1 of the Target Disclosure Letter, Target does not own or lease any real property, has no employees in, and does not maintain a place of business in any foreign country or in any state of the United States other than California.
	2.2 Power, Authorization and Validity.
	2.2.1 Power and Capacity. Target has the corporate power and authority to enter into and, subject to the approval of this Agreement by the requisite holders of the issued and outstanding shares of Target Common Stock as required by applicable law and this Agreement, perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly and validly approved and authorized by Target’s Board of Directors as required by applicable law and Target’s certificate of incorporation and bylaws.
	2.2.2 No Filings. No filing, authorization or approval, governmental or otherwise, by Target is necessary to enable Target to enter into, and to perform its obligations under, this Agreement, except for (a) the filing of the Certificate of Merger with the Delaware Secretary of State, and the filing of appropriate documents with the relevant authorities of other states in which Target is qualified to do business, if any, (b) such filings as may be required to comply with federal and state securities laws, (c) compliance with Section 1203 of California Law and (d) the approval of the holders of a majority of the issued and outstanding shares of Target Common Stock of the transactions contemplated hereby.

A-4

---

Table of Contents

	2.2.3 Binding Obligation. Subject to approval of this Agreement and the Merger by the requisite vote of the stockholders of Target, this Agreement is, assuming this Agreement constitutes valid and binding obligations of Newco, valid and binding obligations of Target enforceable in accordance with its terms, except as to the effect, if any, of (a) applicable bankruptcy, insolvency and other similar laws affecting the rights of creditors generally, (b) rules of law governing specific performance, injunctive relief and other equitable remedies, and (c) the enforceability of provisions requiring indemnification in connection with the offering, issuance or sale of securities.
	2.3 Capitalization.
	2.3.1 Authorized and Outstanding Capital Stock. The authorized capital stock of Target consists of 400,000,000 shares of Common Stock, $0.001 par value, of which 83,052,852 shares are issued and outstanding, as of March 7, 2005. All issued and outstanding shares of Target Common Stock have been duly authorized and were validly issued, are fully paid and nonassessable, are not subject to any right of rescission, are not subject to preemptive rights by statute, the Certificate of Incorporation or Bylaws of Target, or any agreement or document to which Target is a party or by which it is bound and have been offered, issued, sold and delivered by Target in compliance with all registration or qualification requirements (or applicable exemptions therefrom) of applicable federal and state securities laws. There is no liability for dividends accrued but unpaid with respect to Target’s outstanding securities.
	2.3.2 Options/Rights. Except as disclosed in Section 2.3.2 of the Target Disclosure Letter, there are no shares of preferred stock, stock appreciation rights, options, warrants, calls, rights, commitments, conversion privileges or preemptive or other rights or agreements outstanding to purchase or otherwise acquire any of Target’s capital stock or any securities or debt convertible into or exchangeable for shares of Target capital stock or obligating Target to grant, extend or enter into such option, warrant, call, commitment, conversion privileges or preemptive or other right or agreement. Section 2.3.2 of the Target Disclosure Letter sets forth a true and complete list of each outstanding option to acquire shares of Target Common Stock, the exercise price thereof, the vesting schedule therefor.
	2.4 Subsidiaries. Except for the Subsidiaries of Target listed on Section 2.4 of the Target Disclosure Letter (collectively the “Subsidiaries” and each a “Subsidiary”), each of which is wholly-owned by Target, Target does not have any subsidiaries or any interest, direct or indirect, in any corporation, partnership, joint venture or other business entity.
	2.5 No Violation of Existing Agreements. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will conflict with, or (with or without notice or lapse of time, or both) result in a termination, breach, impairment or violation of (a) any provision of the Certificate of Incorporation or Bylaws of Target or any Subsidiary, as currently in effect, (b) in any material respect, any material instrument or contract to which Target or any Subsidiary is a party or by which Target or any Subsidiary is bound or (c) subject to the filings or other compliance contemplated by Section 2.2.2 any federal, state, local or foreign judgment, writ, decree, order, statute, rule or regulation applicable to Target or any Subsidiary or their respective assets or properties.
	2.6 Litigation. As of the date hereof and except as disclosed on Section 2.6 of the Target Disclosure Letter, to the knowledge of Target, there is no action, proceeding, claim or investigation pending against Target or any Subsidiary before any court or administrative agency. As of the date hereof, there is not outstanding against Target or any of it Subsidiaries or any of their properties any judgment, writ or decree.
	2.7 Taxes. Except as disclosed on Section 2.7 of the Target Disclosure Letter, Target and each of its Subsidiaries has filed all federal, state, local and foreign tax returns required to be filed, has paid all taxes required to be paid in respect of all periods for which returns have been filed, has established an adequate accrual or reserve for the payment of all taxes payable in respect of the periods subsequent to the periods covered by the most recent applicable tax returns, has made all necessary estimated tax payments. Neither Target nor any Subsidiary is delinquent in the payment of any tax or is delinquent in the filing of any tax returns, and no deficiencies for any tax have been threatened, claimed, proposed or

A-5

---

Table of Contents

	assessed in writing which have not been paid. No tax return of Target or any Subsidiary is currently being audited by the Internal Revenue Service or any state taxing agency or authority. For the purposes of this Section, the terms “tax” and “taxes” include all federal, state, local and foreign income, gains, franchise, excise, property, sales, use, employment, license, payroll, occupation, recording, value added or transfer taxes, governmental charges, fees, levies or assessments (whether payable directly or by withholding), and, with respect to such taxes, any estimated tax, interest and penalties or additions to tax and interest on such penalties and additions to tax.
	2.8 Title to Properties. Target has good and marketable title to all of its assets as shown on the balance sheet filed with its most recent periodic filing with the SEC under the Exchange Act (the “Balance Sheet”), free and clear of all liens, charges, restrictions or encumbrances (other than for taxes not yet due and payable). All machinery and equipment included in such properties is in good condition and repair, normal wear and tear excepted, and all leases of real or personal property to which Target or any Subsidiary is a party are fully effective and afford Target or the Subsidiary peaceful and undisturbed possession of the subject matter of the lease.
	2.9 Contracts and Commitments. Neither Target nor any Subsidiary is in default in any material respect under any contract that is material to the business of Target or a Subsidiary.
	2.10 Intellectual Property. Target and the Target Subsidiaries own, or have the right to use, all material Intellectual Property Rights (as defined below) required for the conduct of their respective businesses as presently conducted (such Intellectual Property Rights being hereinafter collectively referred to as the “Target IP Rights”). There are no material royalties, honoraria, fees or other payments payable by Target to any person by reason of the ownership, use, license, sale or disposition of the Target IP Rights (other than as set forth in Section 2.10 of the Target Disclosure Letter). To the Knowledge of Target, neither the manufacture, marketing, license, sale or intended use of any product currently licensed or sold by Target or any of the Target Subsidiaries violates any license or agreement between Target or any of the Target Subsidiaries and any third party or infringes any Intellectual Property Right of any other party. Target has taken reasonable and practicable steps designed to safeguard and maintain the secrecy and confidentiality of, and its proprietary rights in, all material Target IP Rights. All current officers, employees and consultants of Target and each Subsidiary have executed and delivered to Target or the Subsidiary an agreement regarding the protection of proprietary information and the assignment to Target or the Subsidiary of all Intellectual Property Rights arising from the services performed for Target or the Subsidiary by such persons. Exhibit 2.10 to the Target Disclosure Letter sets forth a true and complete list of each material (i) patent and patent application, (ii) copyright registration and copyrights registration application; (iii) each trademark registration and trademark registration application and (iv) each domain name, in each case pursuant to federal, state and foreign laws owned or filed on behalf of Target or any of its Subsidiaries. To the Knowledge of Target, as of the date hereof, no person is infringing Target’s Intellectual Property Rights. As used herein, the term “Intellectual Property Rights” shall mean all worldwide industrial and intellectual property rights, including patents, patent applications, patent rights, trademarks, trademark applications, trade names, service marks, service mark applications, domain names, copyright, copyright applications, franchises, licenses, inventories, know-how, trade secrets, customer lists, proprietary processes and formulae, all source and object code, algorithms, architecture, structure, display screens, layouts, inventions, development tools and all documentation and media constituting, describing or relating to the above, including manuals, memoranda and records.
	2.11 Compliance with Laws. Target and each of its Subsidiaries has complied in all material respects with all applicable laws, ordinances, regulations, and rules, and all orders, writs, injunctions, awards, judgments, and decrees applicable to it or to the assets, properties, and business thereof (the violation of which would have a material adverse effect upon its business), including: (a) all applicable federal and state securities laws and regulations, (b) all applicable federal, state, and local laws, ordinances, regulations, and all orders, writs, injunctions, awards, judgments, and decrees pertaining to (i) the sale, licensing, leasing, ownership, or management of its owned, leased or licensed real or personal property, products and technical data, (ii) employment and employment practices, terms and conditions of employment, and wages and hours and (iii) safety, health, fire prevention, environmental protection,

A-6

---

Table of Contents

	toxic waste disposal, building standards, zoning and other similar matters, (c) the Export Administration Act and regulations promulgated thereunder and all other laws, regulations, rules, orders, writs, injunctions, judgments and decrees applicable to the export or re-export of controlled commodities or technical data, (d) the Immigration Reform and Control Act, and (e) the Foreign Corrupt Practices Act. Each of Target and the Subsidiaries has received all material permits and approvals from, and has made all filings with, government agencies and authorities that are necessary in connection with its business as currently conducted.
	2.12 Employees, ERISA and Other Compliance.
	2.12.1 Neither Target nor any Subsidiary has any employment contracts or consulting agreements currently in effect that are not terminable at will (other than agreements with the sole purpose of providing for the confidentiality of proprietary information or assignment of inventions).
	2.12.2 Copies of all Target Employee Plans (and, if applicable, related trust agreements) and all amendments thereto and written interpretations thereof (including summary plan descriptions) have been filed in a timely manner, together with the three most recent annual reports (Form 5500, including, if applicable, Schedule B thereto) prepared in connection with any such Target Employee Plan. All contributions due from Target or any Subsidiary with respect to any of the Target Employee Plans have been made as required under ERISA or have been accrued on Target’s or any such Target Subsidiary’s financial statements as of the date of the Balance Sheet. Each Target Employee Plan has been maintained substantially in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including ERISA and the Code, which are applicable to such Target Employee Plans. Target has no Target Pension Plans.
	2.12.3 No benefit payable or which may become payable by Target or any Subsidiary pursuant to any Target Employee Plan or as a result of or arising under this Agreement shall constitute an “excess parachute payment” (as defined in Section 280G(b)(1) of the Code) which is subject to the imposition of an excise Tax under Section 4999 of the Code or which would not be deductible by reason of Section 280G of the Code.
	2.13 No Brokers. Except for the fees and expenses payable by Target to Salem Partners LLC in accordance with that certain letter agreement dated March 3, 2005 and expenses payable by Target to Needham & Co., Inc., neither Target nor any of the Target Stockholders is obligated for the payment of fees or expenses of any investment banker, broker or finder in connection with the origin, negotiation or execution of this Agreement or the Certificate of Merger or in connection with any transaction contemplated hereby or thereby.
	2.14 Insurance. Target and its Subsidiaries maintain and at all times during the prior three years have maintained fire and casualty, general liability insurance which it believes to be reasonably prudent for similarly sized and similarly situated businesses. Target and its Subsidiaries have in full force and effect workers’ compensation insurance required in each jurisdiction where any of them is required to maintain such insurance because of its business operations. Target has not received any notification from any carrier issuing any policy under which it is currently the insured a notice of cancellation or of limitation of coverage. Target does not have any claim pending under any insurance policy of Target, and Target has not been denied coverage under any such policy for any claim, asserted in connection with any pending or threatened litigation against Target or for any material claim asserted by Target under any insurance policy in the last year.
	2.15 SEC Documents.
	2.15.1 SEC Reports. Since January 1, 2003, as of their respective filing dates, or, with respect to registration statements as of their effective dates, and prior to the date of this Agreement, in each case as amended or supplemented, Target’s reports, filings, registration statements and other documents required to be filed by it with the SEC (“Target SEC Documents”) were filed and complied in all material respects with the requirements of the Exchange Act or the Securities Act, as applicable, and none of the Target SEC Documents contained any untrue statement of a material fact or omitted to state a material

A-7

---

Table of Contents

	fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the extent corrected, modified or superseded by a subsequently filed Target SEC Document.
	2.15.2 Disclosure Statements. (a) The Proxy Statement, as supplemented or amended, if applicable, at the time such Proxy Statement or any amendment or supplement thereto is first mailed to stockholders of Target, at the time such stockholders vote on adoption of this Agreement and at the Effective Time and (b) the Schedule 13E-3 and any Other Filings or any supplement or amendment thereto, at the time of the filing thereof and at the time of any distribution or dissemination thereof, in each case, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. The representations and warranties contained in this Section 2.15.2 will not apply to statements or omissions included in the Proxy Statement, Schedule 13E-3 or any Other Filings based upon information furnished in writing to Target by or on behalf of Newco or its Affiliates.
	2.16 Certain Balance Sheet Items. Section 2.16 of the Target Disclosure Letter sets forth, as of February 28, 2005, Target’s (i) cash and cash equivalents, as defined by GAAP, and (ii) inventory changes through such date from December 31, 2004 (the date of Target’s last physical inventory). Such information is prepared from Target’s books and records in accordance with GAAP.

	3.1 Organization and Good Standing. Newco is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power and authority to own, operate and lease its properties. Newco has not and will not conduct any business prior to the Effective Time.
	3.2 Power, Authorization and Validity.
	3.2.1 Newco has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement, and all agreements to which Newco is or will be a party that are required to be executed pursuant to this Agreement (the “Newco Ancillary Agreements”). The execution, delivery and performance of this Agreement and the Newco Ancillary Agreements have been duly and validly approved and authorized by Newco’s Board of Directors in compliance with applicable law and the certificate of incorporation and bylaws of the Newco.
	3.2.2 No filing, authorization or approval, governmental or otherwise, is necessary to enable Newco to enter into, and to perform it obligations under, this Agreement and the Newco Ancillary Agreements, except for the filing of the Certificate of Merger with the Delaware Secretary of State.
	3.2.3 This Agreement and the Newco Ancillary Agreements are, or when executed by Newco will be, valid and binding obligations of Newco enforceable in accordance with their respective terms, except as to the effect, if any, of (a) applicable bankruptcy, insolvency and other similar laws affecting the rights of creditors generally, (b) rules of law governing specific performance, injunctive relief and other equitable remedies and (c) the enforceability of provisions requiring indemnification in connection with the offering, issuance or sale of securities; provided, however, that the Certificate of Merger will not be effective until filed with the Delaware Secretary of State.
	3.3 No Violation of Existing Agreements. Neither the execution and delivery of this Agreement nor any Newco Ancillary Agreement, nor the consummation of the transactions contemplated hereby, will conflict with, or (with or without notice or lapse of time, or both) result in a termination, breach, impairment or violation of (a) any provision of the Certificate of Incorporation or Bylaws of Newco, as currently in effect, (b) in any material respect, any material instrument or contract to which Newco is a party or by which Newco is bound, or (c) any federal, state, local or foreign judgment, writ, decree, order, statute, rule or regulation applicable to Newco or its assets or properties.

A-8

---

Table of Contents

	3.4 Vote Required. All votes or consents of the holders of any of the outstanding shares of capital stock or any other securities of Newco necessary to approve this Agreement or the Merger have been obtained.
	3.5 Finders’ Fees. There is no investment banker, broker, finder or other intermediary who might be entitled to any fee or commission from Newco or any of its Affiliates upon consummation of the Merger.
	3.6 Additional Contribution. Newco has entered into an Additional Contribution Agreement with Mr. Chan. True and correct copies of the Additional Contribution Agreement have been provided to Target.
	3.7 Capitalization. The authorized capital stock of Newco consists of 50,000,000 shares of common stock, $0.0001 par value per share, of which 32,039,840 shares are issued and outstanding as of the date hereof. On the date hereof, Newco and the parties listed on Section 3.7 of the Newco Disclosure letter have entered into the Contribution Agreement, a true and correct copy of which is attached as Exhibit 3.7 hereto, whereby each party thereto contributes all of the Target Common Stock owned, legally or beneficially, by them, as of the date hereof or hereafter through the Effective Time, to Newco. The parties to the Contribution Agreement represent and, as of the Closing Date will represent, all of the legal and beneficial owners of common stock of Newco. Except as set forth on Section 3.7 of the Newco Disclosure Letter, Newco has no liabilities. Newco has good and marketable title to all of its assets, free and clear of all liens, charges, restrictions or encumbrances (other than for taxes not yet due and payable or the pledge of the Newco Target Stock pursuant to the Pledge Agreement).
	3.8 Voting. Newco has entered into the Voting Agreement dated as of the date hereof among Newco and Target attached hereto as Exhibit E.
	3.9 Information in Securities Filings. All documents required to be filed by Newco or its Affiliates with the SEC in connection with the Merger, and any information supplied by Newco or their Affiliates for inclusion or incorporation by reference in the Proxy Statement, the Schedule 13E-3 and any Other Filings, or any supplement or amendment to any such filings, will not at the respective times when such are filed with the SEC and/or are first published, given or mailed to Target’s stockholders, as the case may be, and at the Effective Time, in each case, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they are made, not misleading. The representations and warranties contained in this Section 3.9 will not apply to statements or omissions included in any such filings based upon information furnished in writing by or on behalf of Target.
	3.10 Limited Operations of Newco. Newco was formed in 2005 solely for the purpose of engaging in the Merger. Newco has not engaged in any other business activities. Except for (i) obligations or liabilities incurred in connection with its organization and the Merger and (ii) this Agreement and any other agreements and arrangements contemplated hereby or entered into in furtherance hereof, Newco has not incurred any obligations or liabilities or engaged in any business activities.

	4.1 Advice of Changes. Target will promptly advise Newco in writing of any change which is expected to have a Material Adverse Effect on Target. Target shall also deliver, promptly when available, to Newco a monthly unaudited balance sheet and statement of operations commencing with the month ending March 31, 2005, which financial statements shall be prepared in the ordinary course of business, in accordance with Target’s books and records and GAAP.
	4.2 Maintenance of Business. Except as disclosed in the Target Disclosure Letter, as contemplated by this Agreement or as consented to by Newco, which consent will not be unreasonably delayed or withheld, Target will use reasonable efforts to conduct its business and its relationships with customers,

A-9

---

Table of Contents

suppliers, employees and others in substantially the same manner as it has prior to the date hereof and will not accelerate or delay the payment or collection of accounts. Without limiting the foregoing, until the Effective Time or earlier termination of this Agreement, except as disclosed in the Target Disclosure Letter or as contemplated by this Agreement, Target will not, and will not permit any of its Subsidiaries to do any of the following, without the prior written consent of the President of Newco, which consent will not be unreasonably withheld or delayed:

	(a) Incur any indebtedness for borrowed money except in the ordinary course of business consistent with past practices;
	(b) enter into any transaction not in the ordinary course of business;
	(c) encumber or permit to be encumbered any of its assets except in the ordinary course of its business consistent with past practice and to an extent which is not material;
	(d) dispose of any of its assets except in the ordinary course of business consistent with past practice;
	(e) enter into any material lease or contract for the purchase or sale of any property, real or personal;
	(f) fail to maintain its equipment and other assets in good working condition and repair according to the standards it has maintained to the date of this Agreement, subject only to ordinary wear and tear;
	(g) pay any bonus, increased salary or special remuneration to any officer, employee or consultant (except for normal salary increases consistent with past practices not to exceed 10% per year and except pursuant to existing arrangements previously disclosed to Newco) or enter into any new employment or consulting agreement with any such person;
	(h) change accounting methods, except as required by GAAP or by a governmental authority, or materially revalue any of its assets;
	(i) declare, set aside or pay any cash dividend or distribution in respect of capital stock, or redeem or otherwise acquire any of its capital stock;
	(j) amend or terminate any contract, agreement or license to which it is a party except those amended or terminated in the ordinary course of business, consistent with past practice, and which are not material in amount or effect;
	(k) lend any amount to any person or entity, other than (i) advances for travel and expenses which are incurred in the ordinary course of business consistent with past practice, not material in amount and documented by receipts for the claimed amounts or (ii) any loans pursuant to the Target 401(k) Plan;
	(l) guarantee or act as a surety for any obligation except for the endorsement of checks and other negotiable instruments in the ordinary course of business, consistent with past practice, which are not material in amount;
	(m) waive or release any material right or claim except in the ordinary course of business, consistent with past practice;
	(n) issue or sell any shares of its capital stock of any class (except upon the exercise of an option or warrant currently outstanding), or any other of its securities, or issue or create any warrants, obligations, subscriptions, options, convertible securities, or other commitments to issue shares of capital stock, or accelerate the vesting of any outstanding option or other security;
	(o) split or combine the outstanding shares of its capital stock of any class or enter into any recapitalization affecting the number of outstanding shares of its capital stock of any class or affecting any other of its securities;

A-10

---

Table of Contents

	(p) merge, consolidate or reorganize with, or acquire any entity;
	(q) amend its Certificate of Incorporation or Bylaws;
	(r) license any of its technology or intellectual property except on a non-exclusive basis and in the ordinary course of business consistent with past practice;
	(s) change any tax election, agree to any audit assessment by any tax authority, settle any tax dispute or liability, or file any federal or state income or franchise tax return outside of the ordinary course of business;
	(t) change any insurance coverage or permit any coverage in force to lapse, or issue any certificates of insurance;
	(u) take any action with the intention directly or indirectly to adversely impact any transaction contemplated by this Agreement;
	(v) unless authorized by the Board of Directors of Target, commence any action at law or in equity or any arbitrations, other than to enforce Target’s rights and remedies under this Agreement; or
	(w) agree to do, or permit any Subsidiary to do or agree to do, any of the things described in the preceding clauses 4.3(a) through 4.3(v).

	4.3 Regulatory Approvals. Target will execute and file, or join in the execution and filing, of any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign which may be reasonably required, or which Newco may reasonably request (at Newco’s sole cost and expense, except with regard to the preparation and distribution of the Proxy Statement and the conduct of the Target special meeting of stockholders to consider the Merger and this Agreement), in connection with the consummation of the transactions contemplated by this Agreement. Target will use its reasonable efforts to obtain all such authorizations, approvals and consents.
	4.4 Necessary Consents. Target will use its reasonable efforts to obtain such written consents and take such other actions as may be necessary to allow the consummation of the transactions contemplated hereby.
	4.5 Litigation. Target will notify Newco in writing promptly after learning of any material actions, suits, proceedings or investigations by or before any court, board or governmental agency, initiated against it or any Subsidiary, or to the Knowledge of Target threatened against it or any Subsidiary after the date of this Agreement.
	4.6 Access to Information. Target will allow Newco and its agents reasonable access the files, books, records and offices of Target and each Subsidiary, including, any and all information relating to Target’s taxes, commitments, contracts, leases, licenses, and real, personal and intangible property and financial condition. Target will cause its accountants to cooperate with Newco and its agents in making available all financial information reasonably requested, including the right to examine all working papers pertaining to all financial statements prepared or audited by such accountants.
	4.7 Target Dissenting Shares. As promptly as practicable after the date of the Target Stockholders’ Meeting and prior to the Closing Date, Target shall furnish Newco with the name and address of each holder of Dissenting Shares and the number of Dissenting Shares owned by such Target Dissenting Stockholder. Surviving Corporation shall take all steps required pursuant to Chapter 13 of the California Law, to mail to each stockholder of Target, as required, in a timely manner, a notice of the approval of the Merger and containing such additional information as required pursuant to Chapter 13 of the California Law.
	4.8 Satisfaction of Conditions Precedent. Subject to the fiduciary obligations of Target, the Board of Directors and the Special Committee, Target will use its reasonable efforts to satisfy or cause to be

A-11

---

Table of Contents

	satisfied all the conditions precedent which are set forth in Section 8, and Target will use its reasonable efforts to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary on its part in order to effect the transactions contemplated hereby.
	4.9 Section 16 Matters. Prior to the Effective Time, Target shall take action (in accordance with that certain no-action letter, dated January 12, 1999, issued by the SEC to Skadden, Arps, Slate, Meagher & Flom) designed to provide that the treatment of Target Options will qualify for exemption under Rule 16b-3(d) or (e), as applicable, under the Exchange Act.
	4.10 Other Proposals. Prior to Target Board of Directors or Special Committee, after receiving an Acquisition Proposal, withdrawing or modifying its approval or recommendation of this Agreement or the Merger or adjourning or canceling any scheduled meeting of stockholders of Target to consider this Agreement or the Merger, approving or recommending an Acquisition Proposal, or entering into an agreement with respect to an Acquisition Proposal, Target shall provide Newco with a written notice (a “Notice of Acquisition Proposal”) advising Newco of the Acquisition Proposal, specifying the material terms and conditions of such Acquisition Proposal and identifying the person making such Acquisition Proposal, and neither Target nor any Subsidiary shall enter into an agreement with respect to an Acquisition Proposal until two business days after the first Notice of Acquisition Proposal with respect to a given third party was given to Newco.
	4.11 Available Cash. Target shall deliver to Newco, two business days prior to the Closing Date, Target’s written good faith estimate of Target’s cash and cash equivalents as of midnight on the day prior to the Closing Date.
	4.12 Resignation of Directors and Officers. Target shall use reasonable efforts to obtain the resignation, as of the Effective Time, of the directors and officers of Target in office immediately prior to the Effective Time as directors and officers of the Surviving Corporation.

	5.1 Advice of Changes. Newco will promptly advise Target in writing of any event occurring subsequent to the date of this Agreement that would render any representation or warranty of Newco contained in this Agreement, if made on or as of the date of such event or the Closing Date, untrue or inaccurate in any material respect.
	5.2 Regulatory Approvals. Newco will execute and file, or join in the execution and filing, of any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be reasonably required, or which Target may reasonably request, in connection with the consummation of the transactions contemplated by this Agreement. Newco will use its reasonable efforts to obtain all such authorizations, approvals and consents.
	5.3 Satisfaction of Conditions Precedent. Newco will use its reasonable efforts to satisfy or cause to be satisfied all the conditions precedent which are set forth in Section 7, and Newco will use its reasonable efforts to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and give all notices to, third parties that may be necessary or reasonably required on its part in order to effect the transactions contemplated hereby.
	5.4 Indemnification; Insurance. At all times following the Merger, the Surviving Corporation shall indemnify all present and former directors or officers of Target and its Subsidiaries (“Indemnified Parties”) against any costs or expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages, penalties or liabilities (collectively, “Costs”) incurred in connection with any claim,

A-12

---

Table of Contents

	action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters, existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, by reason of the fact of such Indemnified Party’s service as a director or officer of Target or any of its Subsidiaries, except to the extent it is determined in a final, non-appealable determination by a court of competent jurisdiction that such indemnification is prohibited by applicable law, to the extent such Costs have not been paid for by insurance and shall, in connection with defending against any action for which indemnification is available hereunder, promptly advance to such Indemnified Parties any reasonable costs and expenses as incurred by or on behalf of such Indemnified Parties; provided that such advance shall be conditioned upon such Indemnified Parties’ agreement promptly to return such amounts if a court of competent jurisdiction shall ultimately determine that indemnification of such Indemnified Parties is prohibited by applicable law. The foregoing rights shall be in addition to any rights to which any Indemnified Party may be entitled by reason of the by-laws or certificate of incorporation of Target or any of its Subsidiaries, any contract and/or any applicable law. Target shall acquire and the Surviving Corporation will maintain (and not cancel or allow to lapse) for a period of not less than six years from the Effective Time Target’s current directors’ and officers’ liability insurance and indemnification policy (or a policy providing substantially similar coverage) (the “D&O Insurance”) for all persons who are directors and officers of Target and its Subsidiaries covered by Target’s D&O Insurance as of the Effective Time. The provisions of this Section are intended for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives.
	5.5 Section 16 Matters. Prior to the Effective Time, Newco shall take action (in accordance with that certain no-action letter, dated January 12, 1999, issued by the SEC to Skadden, Arps, Slate, Meagher & Flom) designed to provide that the treatment of Target Options will qualify for exemption under Rule 16b-3(d) or (e), as applicable, under the Exchange Act.
	5.6 Target Common Stock. Newco will, until the Effective Time or the earlier termination of this Agreement, legally and beneficially own all of the shares of Target Common Stock contributed pursuant to the Contribution Agreement. No shareholder of Newco will legally or beneficially own any shares of Target Common Stock other than indirectly through the ownership of Newco Stock.

A-13

---

Table of Contents

A-14

---

Table of Contents

	7.1 Accuracy of Representations and Warranties. Except where the failure of a representation or warranty to be true and correct would not have a Material Adverse Effect, the representations and warranties of Newco set forth in Section 3 (as qualified by the Newco Disclosure Letter) shall be true and accurate in all respects as of the date of this Agreement, and on and as of the Closing, with the same force and effect as if they had been made at the Closing, and except for those representations and warranties that address matters only as of a particular date (which shall remain true and correct as of such particular date), with the same force and effect as if they had been made at the Closing, and Target shall receive a certificate to such effect executed by Newco’s President and Chief Financial Officer.
	7.2 Covenants. Newco shall have performed and complied in all material respects with all of its covenants contained in Section 5 on or before the Closing, and Target shall receive a certificate to such effect signed by Newco’s President and Chief Financial Officer.
	7.3 Compliance with Law. There shall be no order, decree, or ruling by any court or governmental agency or threat thereof, or any other fact or circumstance, which would prohibit, render illegal or enjoin the transactions contemplated by this Agreement.
	7.4 Stockholder Approval. This Agreement shall have been validly approved and adopted by the affirmative vote of the holders of a majority of the shares of Target Common Stock outstanding as of the record date for the Target Stockholders’ Meeting.

	8.1 Accuracy of Representations and Warranties. Except where the failure of a representation or warranty to be true and correct would not have, alone or in the aggregate, a Material Adverse Effect, the representations and warranties of Target set forth in Section 3 (as qualified by the Target Disclosure Letter) shall be true and accurate in all respects as of the date of this Agreement, and on and as of the Closing, with the same force and effect as if they had been made at the Closing, and except for those representations and warranties that address matters only as of a particular date (which shall remain true and correct as of such particular date), with the same force and effect as if they had been made at the Closing, and Newco shall receive a certificate to such effect executed by Target’s President and Chief Financial Officer.
	8.2 Covenants. Target shall have performed and complied in all material respects with all of its covenants contained in Section 4 on or before the Closing, and Newco shall receive a certificate to such effect signed by Target’s President and Chief Financial Officer.
	8.3 Absence of Material Adverse Change. Since the date of this Agreement, there shall not have been, in the reasonable judgment of the Board of Directors of Newco, any Material Adverse Effect with respect to Target.
	8.4 Compliance with Law. There shall be no order, decree, or ruling by any court or governmental agency which would prohibit, render illegal or enjoin the transactions contemplated by this Agreement.

A-15

---

Table of Contents

	8.5 Legal Opinion. Newco shall have received from counsel to Target an opinion substantially in the form of Exhibit 8.5.
	8.6 Available Cash. Target shall not have less than fourteen million five hundred thousand dollars ($14,500,000) in cash and cash equivalents as of midnight on the day prior to the Closing Date.
	8.7 Stockholder Approvals. This Agreement shall have been approved and adopted by the affirmative vote of the holders of a majority of the shares of Target Common Stock outstanding as of the record date for the Target Stockholders’ Meeting.

	9.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, and except as set forth below, whether before or after the requisite approvals of the stockholders of Target or Newco:
	(a) by mutual written consent duly authorized by the Boards of Directors of Newco and Target;
	(b) by either Target or Newco if the Merger shall not have been consummated by August 13, 2005 for any reason; provided, however, that the right to terminate this Agreement under this Section 9.1(b) shall not be available to any party whose action or failure to act has been a principal cause of or resulted in the failure of the Merger to occur on or before such date;
	(c) by either Target or Newco if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger, which order, decree, ruling or other action is final and nonappealable;
	(d) by either Target or Newco, if the approval and adoption of this Agreement, and the approval of the Merger, by the stockholders of Target shall not have been obtained by reason of the failure to obtain the required vote at a meeting of Target stockholders duly convened therefor or at any adjournment thereof at which a vote thereon was taken; provided, however, that the right to terminate this Agreement under this Section 9.1(d) shall not be available to Target where the failure to obtain the Target stockholder approval shall have been caused by the failure of Target to fulfill its obligations under Sections 1.7 or 1.8 and such failure constitutes a material breach by Target of this Agreement;
	(e) by Newco (at any time prior to the adoption and approval of this Agreement and the Merger by the required vote of the stockholders of Target) if a Triggering Event shall have occurred;
	(f) by Target, upon a breach of any representation, warranty, covenant or agreement on the part of Newco set forth in this Agreement, or if any representation or warranty of Newco shall have become untrue, in either case such that the conditions set forth in Section 7.1 or Section 7.2 would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided that if such inaccuracy in Newco’s representations and warranties or breach by Newco is curable by Newco through the exercise of its commercially reasonable efforts, then Target may not terminate this Agreement under this Section 9.1(f) for 30 days after delivery of written notice from Target to Newco of such breach, provided Newco continues to exercise commercially reasonable efforts to cure such breach (it being understood that Target may not terminate this Agreement pursuant to this paragraph (f) if such breach by Newco is cured during such 30-day period, or if Target shall have materially breached this Agreement);
	(g) by Newco, upon a breach of any representation, warranty, covenant or agreement on the part of Target set forth in this Agreement, or if any representation or warranty of Target shall have become untrue, in either case such that the conditions set forth in Section 8.1 or Section 8.2 would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided that if such inaccuracy in Target’s representations and warranties or breach by Target is curable by Target through the exercise of its commercially reasonable efforts, then Newco may not terminate this Agreement under this Section 9.1(g) for 30 days after delivery of written notice from Newco to Target of such breach, provided Target continues to exercise commercially reasonable efforts to cure such breach

A-16

---

Table of Contents

	(it being understood that Newco may not terminate this Agreement pursuant to this paragraph (g) if such breach by Target is cured during such 30-day period, or if Newco shall have materially breached this Agreement); or
	(h) by Target before approval of this Agreement and the Merger by Target Stockholders, if the Board of Directors of Target or the Special Committee determines in good faith, after consultation with outside legal counsel, that failure to terminate the Agreement is necessary for the Board of Directors of Target or the Special Committee to comply with their fiduciary duties under applicable law.

A-17

---

Table of Contents

If to Newco:		Victory Acquisition Corporation
		19770 Stevens Creek Blvd.
		Cupertino, CA 95014
		Attention: President
		Facsimile: (408) 343-1018
with a copy to:		Fenwick & West LLP
		275 Battery Street, 15th Floor
		San Francisco, CA 94111
		Attention: Robert Dellenbach
		Facsimile: (415) 281-1350

A-18

---

Table of Contents

If to Target:		Vialta, Inc.
		48461 Fremont Blvd.
		Fremont, CA 94538
		Attention: Didier Pietri
		Facsimile: (510) 870-3099
with a copy to:		Kaye Scholer LLP
		1999 Avenue of the Stars, Suite 1700
		Los Angeles, CA 90067
		Attn: Barry L. Dastin
		Facsimile: (310) 788-1200

A-19

---

Table of Contents

A-20

---

Table of Contents

“Newco”		“Target”
VICTORY ACQUISITION CORP		VIALTA, INC.
By:		By:
Its:		Its:

A-21

---

Table of Contents

A-22

---

Table of Contents

A-23

---

Table of Contents

A-24

---

Table of Contents

	1. CONTRIBUTION. As part of an integrated plan with the Merger, each Investor hereby contributes such Investor’s Vialta Shares to the Company in exchange for, and in consideration of the issuance of, the Company Shares, as specified on Exhibit A. Each Investor hereby delivers to the Company: (a) the original stock certificate representing such Investor’s Vialta Shares together; and (b) a duly executed Stock Transfer Power and Assignment in the form of Exhibit B. The Company agrees to issue to each Investor a stock certificate representing the number of Company Shares set forth opposite such Investor’s name on Exhibit A. Until the earlier of (i) the Effective Time of the Merger or (ii) the Termination of the Merger Agreement, each Investor agrees that it will contribute to the Company as an additional contribution to capital all Vialta Shares which it acquires (if any) during such period.
	2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Investor that the statements in the following paragraphs of this Section 2 are all true and complete:

	2.1 Organization, Good Standing, Corporate Power and Qualification. The Company has been duly incorporated and organized, and is validly existing in good standing, under the laws of the State of Delaware. The Company has the requisite corporate power and authority to enter into and perform this Agreement.
	2.2 Due Authorization. All corporate action on the part of the Company necessary for (i) the authorization, execution, delivery of, and the performance of all obligations of the Company under, this Agreement and; (ii) the authorization, issuance, reservation for issuance and delivery of all of the Company Shares under this Agreement.
	2.3 Valid Issuance. The Company Shares issued under this Agreement will be validly issued, fully paid and nonassessable.

B-1

---

Table of Contents

	3.1 Authorization. This Agreement constitutes such Investor’s valid and legally binding obligation, enforceable in accordance with its terms except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) the effect of rules of law governing the availability of equitable remedies. Each Investor represents that such Investor has full power and authority to enter into this Agreement.
	3.2 Acquisition for Own Account. The Company Shares to be acquired by such Investor hereunder will be acquired for investment for such Investor’s own account, not as a nominee or agent, and not with a view to the public resale or distribution thereof within the meaning of the Securities Act of 1933, as amended (the “1933 Act”), and such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same.
	3.3 No Solicitation. At no time was the Investor presented with or solicited by any publicly issued or circulated newspaper, mail, radio, television or other form of general advertising or solicitation in connection with the offer, sale and purchase of the Company Shares.
	3.4 Investment Experience. Such Investor understands that the acquisition of the Company Shares involves substantial risk. Such Investor is an “accredited investor” within the meaning of Regulation D promulgated under the 1933 Act and: (i) has experience as an investor in securities of companies in the development stage and acknowledges that such Investor is able to fend for itself, can bear the economic risk of such Investor’s investment in the Company Shares and has such knowledge and experience in financial or business matters that such Investor is capable of evaluating the merits and risks of this investment in the Company Shares and protecting its own interests in connection with this investment and/or (ii) has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables such Investor to be aware of the character, business acumen and financial circumstances of such persons.
	3.5 Restricted Securities. Such Investor understands that the Company Shares are characterized as “restricted securities” under the 1933 Act inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under the 1933 Act and applicable regulations thereunder such securities may be resold without registration under the 1933 Act only in certain limited circumstances. In this connection, such Investor represents that such Investor is familiar with Rule 144 of the U.S. Securities and Exchange Commission (the “SEC”), as presently in effect, and understands the resale limitations imposed thereby and by the 1933 Act. Such Investor understands that the Company is under no obligation to register any of the securities sold hereunder. Such Investor understands that no public market now exists for any of the Company Shares and that it is uncertain whether a public market will ever exist for the Company Shares.
	3.6 Further Limitations on Disposition. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Company Shares unless and until there is then in effect a registration statement under the 1933 Act covering such proposed disposition and such disposition is made in accordance with such registration statement. Notwithstanding the foregoing, no such registration statement shall be required: (i) for any transfer of any Company Shares in compliance with SEC Rule 144 or Rule 144A, or (ii) for any transfer of any Company Shares by an Investor that is a partnership or a corporation without payment of consideration to (A) a partner of such partnership or stockholder of such corporation, (B) a controlled affiliate of such partnership or corporation, (C) a retired partner of such partnership who retires after the date hereof, (D) the estate of any such partner or stockholder, or (iii) for the transfer by gift, will or intestate succession by any Investor to his or her spouse or lineal descendants or ancestors or any trust for any of the foregoing; provided that in each of the foregoing cases the transferee agrees in writing to be subject to the terms of this Section 3 (other than Section 3.4) to the same extent as if the transferee were an original Investor hereunder.

B-2

---

Table of Contents

	3.8 Legends. It is understood that the certificates evidencing the Company Shares and the Conversion Shares will bear the legends set forth below:

	(a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY OTHER JURISDICTIONS. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
	(b) Any legend required by the laws of the State of California, including any legend required by the California Department of Corporations and Sections 417 and 418 of the California Corporations Code or any other state securities laws.

The legend set forth in (a) above shall be removed by the Company from any certificate evidencing Company Shares upon delivery to the Company of an opinion by counsel, reasonably satisfactory to the Company, that a registration statement under the 1933 Act is at that time in effect with respect to the legended security or that such security can be freely transferred in a public sale without such a registration statement being in effect and that such transfer will not jeopardize the exemption or exemptions from registration pursuant to which the Company issued the Company Shares.

	3.9 Title to Vialta Shares. Investor has valid marketable title to the Vialta Shares to be contributed under this Agreement, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. The Vialta Shares constitute all of the shares of Vialta stock owned or controlled by the Investor.

	4.1 Successors and Assigns. Except as otherwise provided in this Agreement, this Agreement, and the rights and obligations of the parties hereunder, will be binding upon and inure to the benefit of their respective successors, assigns, heirs, executors, administrators and legal representatives.
	4.2 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of California, without giving effect to that body of laws pertaining to conflict of laws.
	4.3 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed an original, and all of which together shall constitute one and the same agreement.
	4.4 Notices. Any and all notices required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing.
	4.5 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the outstanding Company Shares issuable hereunder. Any amendment or waiver effected in accordance with this Section shall be binding upon each holder of any Company Shares at the time outstanding, each future holder of such securities, and the Company. No delay or failure to require performance of any provision of this Agreement shall constitute a waiver of that provision as to that or any other instance. No waiver granted under this Agreement as to any one provision herein shall constitute a subsequent waiver of such provision or of any other provision herein, nor shall it constitute the waiver of any performance other than the actual performance specifically waived.

B-3

---

Table of Contents

	4.6 Severability. If any provision of this Agreement is determined by any court or arbitrator of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such provision will be enforced to the maximum extent possible given the intent of the parties hereto.
	4.11 Entire Agreement. This Agreement, together with all the Exhibits hereto, constitutes the entire agreement and understanding of the parties with respect to the subject matter of this Agreement, and supersede any and all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof.

B-4

---

Table of Contents

By:	/s/ Fred Shiu Leung Chan

Name: Fred Shiu Leung Chan
Title: President

/s/ Annie M.H. Chan
Annie M.H. Chan, Trustee

B-5

---

Table of Contents

B-6

---

Table of Contents

		Number of Vialta				Number of Company
Investor		Shares				Shares
Fred Shiu Leung Chan			5,044,744				5,044,744
Annie M.H. Chan			5,748,960				5,748,960
Annie M. H. Chan TR UA 07-25-95, The Annie M. H. Chan Living Trust			8,042,932				8,042,932
Mee Sim Lee & Sung Kook Kim & Myong Shin Kim TR UA DTD 12-21-87, The David Y. W. Chan Trust			974,410				974,410
Mee Sim Lee & Sung Kook Kim & Myong Shin Kim TR UA DTD 12-21-87, The Edward Y. C. Chan Trust			974,408				974,408
Mee Sim Lee & Sung Kook Kim & Myong Shin Kim TR UA DTD 3-16-92, The Michael Y. J. Chan Trust:			334,939				334,939
Shiu Leung Chan & Annie M. H. Chan Gift Trust Dated 11/20/92			2,119,447				2,119,447
Evershine XVI, L.P.			8,800,000				8,800,000
TOTALS:			32,039,840				32,039,840

B-7

---

Table of Contents

Dated:
(Signature)
(Please Print Name)
(Spouse’s Signature, if any)
(Please Print Spouse’s Name)

B-8

---

Table of Contents

C-1

---

Table of Contents

C-2

---

Table of Contents

C-3

---

Table of Contents

	If to the Company, to:
	Vialta, Inc.
	48461 Fremont Blvd.
	Fremont, CA 94583
	Attn: Special Committee of the Board of Directors
	Tel: (510) 870-3088
	Fax: (510) 870-3060

C-4

---

Table of Contents

	with a copy to:
	Kaye Scholer LLP
	1999 Avenue of the Stars, Suite 1700
	Los Angeles, CA 90064
	Attn: Barry Dastin, Esq.
	Tel: (310) 788-1000
	Fax: (310) 788-1200
	and a copy to:
	Potter Anderson & Corroon LLP
	Hercules Plaza, 6th Floor
	1313 N. Market Street
	Wilmington DE 19801
	Attn: John Grossbauer, Esq.
	Tel: (302) 984-6000
	Fax: (302) 658-1192
	If to Stockholder, to:
	Victory Acquisition Corp.
	19770 Stevens Creek Blvd.
	Cupertino, CA 95014
	Attn: Fred S.L. Chan
	Tel: (408) 863-7332
	Fax: (408) 343-1018
	with a copy to:
	Fenwick & West LLP
	275 Battery Street, Suite 1500
	San Francisco, CA 94111
	Attn: Robert Dellenbach, Esq.
	Tel: (415) 875-2323
	Fax: (415) 875-2350

C-5

---

Table of Contents

C-6

---

Table of Contents

VIALTA, INC.
/s/ Didier Pietri
Name: Didier Pietri
Its: Chief Executive Officer
VICTORY ACQUISITION CORP.
/s/ Fred Shiu Leung Chan
Name: Fred Shiu Leung Chan
Its: President

C-7

---

Table of Contents

Name of Stockholder		Number of Shares				Number of Options
Victory Acquisition Corp.			32,039,840				0	(1)

(1)	Fred S. L. Chan holds options to acquire 1,000,000 shares of Company Common Stock. If Mr. Chan elects to exercise such options, he is obligated to contribute any shares acquired upon such exercise to the Stockholder pursuant to that certain Stock Contribution Agreement of even date herewith.

C-8

---

Table of Contents

D-1

---

Table of Contents

	1. LOAN. As part of an integrated plan with the Merger, Investor hereby agrees that in the event of a Shortfall, as determined by the Company, the Company shall make a written demand (“Demand”) on Investor requiring Investor to deliver to the Company (or to the Exchange Fund on behalf of the Company) the amount of the Shortfall, in cash in immediately available funds, up to a maximum of $4 million (“Loan Amount”). Investor hereby agrees to advance the Loan Amount to the Company or to the Exchange Fund on behalf of the Company, as requested by the Company pursuant to a Demand, as of the Effective Time. The advance of the Loan Amount will be considered a loan to the Company and the Company’s obligation to repay the Loan Amount will be evidenced by a promissory note in the form of Exhibit A attached hereto (“Note”).
	2. GENERAL PROVISIONS.
	2.1 Successors and Assigns. Except as otherwise provided in this Agreement, this Agreement, and the rights and obligations of the parties hereunder, will be binding upon and inure to the benefit of their respective successors, assigns, heirs, executors, administrators and legal representatives.
	2.2 Governing Law. This Agreement and the Note will be governed by and construed in accordance with the laws of the State of California, without giving effect to that body of laws pertaining to conflict of laws.
	2.3 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed an original, and all of which together shall constitute one and the same agreement. This Agreement may be executed and delivered by facsimile and upon such delivery the facsimile signature will be deemed to have the same effect as if the original signature had been delivered to the other party.
	2.4 Notices. Any and all notices required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing.
	2.5 Amendments and Waivers. Any term of this Agreement or the Note may be amended and the observance of any term of this Agreement or the Note may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investor. No delay or failure to require performance of any provision of this Agreement or the Note shall constitute a waiver of that provision as to that or any other instance. No waiver granted under this Agreement or the Note as to any one provision herein or therein shall constitute a subsequent waiver of such provision or of any other provision herein or therein, nor shall it constitute the waiver of any performance other than the actual performance specifically waived. Vialta shall be a third party beneficiary hereof with respect to the deposit into the Exchange Fund of the shortfall.
	2.6 Severability. If any provision of this Agreement or the Note is determined by any court or arbitrator of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such provision will be enforced to the maximum extent possible given the intent of the parties hereto.
	2.7 Entire Agreement. This Agreement, together with the Note, constitutes the entire agreement and understanding of the parties with respect to the subject matter of this Agreement, and supersedes any and all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof.

D-2

---

Table of Contents

VICTORY ACQUISITION CORPORATION:

By:	/s/ Fred Shiu Leung Chan

Name:	Fred Shiu Leung Chan

Title:	President

$	Made as of                                                             , 2005 Maturity Date: [24 months following the date hereof]

D-3

---

Table of Contents

	the Company fails to make any payment when due hereunder;
	the Company breaches any material obligation to the Holder under this Note or the Additional Contribution Agreement, or the Company fails to perform promptly at the time and strictly in the manner provided in this Note; or
	a receiver is appointed for any material part of the Company’s property, the Company makes an assignment for the benefit of creditors, or the Company becomes a debtor or alleged debtor in a case under the U.S. Bankruptcy Code or becomes the subject of any other bankruptcy or similar proceeding for the general adjustment of its debts.

D-4

---

Table of Contents

By:

D-5

---

Table of Contents

E-1

---

Table of Contents

	(a) The Pledgor has the power and authority to execute, deliver and perform this Agreement and to grant to Target the security interests in the Pledged Collateral. No consent, approval, or authorization of, or declaration or filing with, any governmental authority, and no consent of any other person, is required in connection with the Pledgor’s execution, delivery, and performance of this Agreement except for those already duly obtained. This Agreement has been duly executed and delivered by the Pledgor, and constitutes the legal, valid and binding obligation of the Pledgor, enforceable against it in accordance with its terms. The Pledgor’s execution, delivery, and performance of this Agreement does not, and will not, conflict with, or constitute a violation or breach of, or constitute a default under, or result in the creation or imposition of any lien upon, the Pledged Collateral by reason of the terms of (i) any contract, mortgage, lien, lease, agreement, indenture, or instrument to which the Pledgor is a party or which is binding upon it or its property except as provided in this Agreement or (ii) any judgment, law, statute, rule or governmental regulation applicable to the Pledgor.
	(b) The Pledgor is the sole, direct, legal and beneficial owner of each of the Pledged Interests and the only securities entitlement holder with respect to each of the Pledged Interests which constitute securities entitlements, and each of the Pledged Interests as applicable, have been duly authorized and are fully paid and nonassessable.
	(c) There are no restrictions upon the voting rights associated with any of the Pledged Collateral other than those under the Voting Agreement.
	(d) The Pledgor has the right, subject to the provisions of this Agreement, (i) to vote the Securities, subject to the terms of the Voting Agreement, and (ii) to pledge and grant a security interest in all or any part of the Pledged Collateral, free of any lien or other charge, encumbrance or restriction.

E-2

---

Table of Contents

E-3

---

Table of Contents

E-4

---

Table of Contents

E-5

---

Table of Contents

	Victory Acquisition Corp.

	By:	/s/ Fred Shiu Leung Chan

	Title:	President

	Notice Address:
	19770 Stevens Creek Blvd.
	Cupertino, California 95014
	AGREED & ACCEPTED:
	Vialta, Inc.

	By:	/s/ Didier Pietri

	Its: CEO
	Notice Address:
	48461 Fremont Blvd.
	Fremont, CA 94538
	Attn: Didier Pietri
	With a copy to:
	Kaye Scholer LLP
	1999 Avenue of the Stars, Suite 1700
	Los Angeles, CA 90067
	Attn: Barry L. Dastin

E-6

---

Table of Contents

E-7

---

Table of Contents

F-1

---

Table of Contents

F-2

---

Table of Contents

	(1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of § 251 of this title.
	(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to §§ 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except:

	a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof;
	b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders;
	c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or
	d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph.

	(3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under § 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation.

G-1

---

Table of Contents

	(1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of such stockholder’s shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of such stockholder’s shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder’s shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or
	(2) If the merger or consolidation was approved pursuant to § 228 or § 253 of this title, then either a constituent corporation before the effective date of the merger or consolidation or the surviving or resulting corporation within 10 days thereafter shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder’s shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder’s shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder’s shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given.

G-2

---

Table of Contents

G-3

---

Table of Contents

G-4

---

Table of Contents

	(1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100 or (B) listed on the National Market System of the NASDAQ Stock Market, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in subparagraph (A) or (B) if demands for payment are filed with respect to 5 percent or more of the outstanding shares of that class.
	(2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger; provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting.
	(3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301.
	(4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1302.

H-1

---

Table of Contents

H-2

---

Table of Contents

H-3

---

Table of Contents

	(a) The corporation abandons the reorganization. Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable attorneys’ fees.
	(b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or are surrendered for conversion into shares of another class in accordance with the articles.
	(c) The dissenting shareholder and the corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the shares, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six months after the date on which notice of the approval by the outstanding shares or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder.
	(d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholder’s demand for purchase of the dissenting shares.

H-4

---

Table of Contents

H-5

---

Table of Contents

(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the Fiscal Year ended December 31, 2004.
OR
o		TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the transition period from:           to:           .

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

I-1

---

				Page
PART I
Item 1.		Business			I-4
Item 2.		Properties			I-6
Item 3.		Legal Proceedings			I-7
Item 4.		Submission of Matters to a Vote of Security Holders			I-7
PART II
Item 5.		Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			I-8
Item 6.		Selected Financial Data			I-9
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			I-10
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			I-24
Item 8.		Financial Statements and Supplementary Data			I-26
Item 9.		Changes In and Disagreements with Accountants on Accounting and Financial Disclosure			I-47
Item 9A.		Controls and Procedures			I-47
PART III
Item 10.		Directors and Executive Officers of the Registrant			I-48
Item 11.		Executive Compensation			I-48
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			I-48
Item 13.		Certain Relationships and Related Transactions			I-48
Item 14.		Principle Accountants Fees and Services			I-48
PART IV
Item 15.		Exhibits and Financial Statement Schedules			I-49
Signatures					I-50

I-2

---

Table of Contents

I-3

---

Table of Contents

I-4

---

Table of Contents

I-5

---

Table of Contents

I-6

---

Table of Contents

I-7

---

Table of Contents

Item 5:	Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

			High				Low
Fiscal 2002:
	First Quarter ended March 31, 2002		$	1.50			$	1.01
	Second Quarter ended June 30, 2002		$	1.07			$	0.45
	Third Quarter ended September 30, 2002		$	1.18			$	0.59
	Fourth Quarter ended December 31, 2002		$	0.72			$	0.26
Fiscal 2003:
	First Quarter ended March 31, 2003		$	0.45			$	0.30
	Second Quarter ended June 30, 2003		$	0.51			$	0.28
	Third Quarter ended September 30, 2003		$	0.49			$	0.33
	Fourth Quarter ended December 31, 2003		$	0.81			$	0.35
Fiscal 2004:
	First Quarter ended March 31, 2004		$	0.70			$	0.32
	Second Quarter ended June 30, 2004		$	0.39			$	0.32
	Third Quarter ended September 30, 2004		$	0.35			$	0.23
	Fourth Quarter ended December 31, 2004		$	0.25			$	0.16

I-8

---

Table of Contents

				Years Ended December 31,
				2004				2003				2002				2001				2000
				(In thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenue, net				$	12,747			$	10,331			$	—			$	—			$	—
Cost of good sold					8,022				2,941				—				—				—
Gross profit					4,725				7,390				—				—				—
Operating expenses:
	Product costs				—				—				10,421				—				—
	Engineering and development				1,247				2,557				13,264				25,250				19,558
	Sales and marketing				2,011				4,427				3,100				3,738				2,927
	General and administrative				4,573				5,753				5,643				9,301				6,699
	Amortization and impairment of content licenses				—				—				11,395				—				—
		Total operating expenses			7,831				12,737				43,823				38,289				29,184
Operating loss					(3,106	)			(5,347	)			(43,823	)			(38,289	)			(29,184	)
Interest income, net					717				733				1,244				3,606				7,688
Gain on investment					—				571				—				—				—
Other income (expense)					—				—				—				(1,266	)			(1,682	)
Loss before income tax benefit					(2,389	)			(4,043	)			(42,579	)			(35,949	)			(23,178	)
Income tax benefit					—				—				—				—				260
Net loss				$	(2,389	)		$	(4,043	)		$	(42,579	)		$	(35,949	)		$	(22,918	)
Net loss per share:
	Basic and diluted			$	(0.03	)		$	(0.05	)		$	(0.51	)		$	(0.83	)		$	(3.68	)
Weighted average common shares outstanding:
Basic and diluted					82,930				82,285				83,578				43,248				6,222

		December 31,
		2004				2003				2002				2001				2000
		(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term investments		$	18,402			$	24,308			$	32,701			$	67,428			$	136,490
Restricted cash			3,057				2,226				—				—				—
Working capital			22,261				25,365				30,201				66,830				109,870
Total assets			29,402				37,114				40,327				83,866				153,691
Total current liabilities			3,753				9,061				7,949				3,587				33,594
Redeemable convertible preferred stock			—				—				—				—				142,600
Total stockholders’ equity (deficit)			25,649				28,053				32,378				80,279				(22,503	)

I-9

---

Table of Contents

	For the year ended December 31, 2004 compared with the year ended December 31, 2003

I-10

---

Table of Contents

	For the year ended December 31, 2003 compared with the year ended December 31, 2002

I-11

---

Table of Contents

I-12

---

Table of Contents

I-13

---

Table of Contents

I-14

---

Table of Contents

		Balance at								Write-offs
		Beginning								Net of				Balance at End
		of Year				Additions				Recoveries				of Year
December 31, 2004		$	63			$	14			$	—			$	77
December 31, 2003		$	30			$	33			$	—			$	63
December 31, 2002		$	665			$	—			$	(635	)		$	30

		December 31,				December 31,
		2004				2003
Beginning balance		$	484			$	—
Accruals for warranties issued during the year			564				814
Settlements made during the year			(649	)			(330	)
Ending balance		$	399			$	484

	Valuation of Inventories

	Property and Equipment

Computer equipment			3-5  years
Furniture and fixtures			5 years
Software and web site development costs			1-3  years

I-15

---

Table of Contents

	Stock-Based Compensation

	If our products do not achieve broad market acceptance, we may not be able to continue operating our business.

	•	educate consumers on the advantages of our Beamer videophone products and VistaFrame;
	•	commit a substantial amount of human and financial resources to support the retail distribution of our products;
	•	continue to develop our sales, marketing and support activities to consumers and retailers; and
	•	expand the number and location of retailers carrying our products.

I-16

---

Table of Contents

	We have incurred net losses and may never achieve significant revenues or profitability.

	It may take a substantial amount of time and resources to achieve broad market acceptance of our products, and we cannot be sure that these efforts will generate the level of broad market acceptance necessary to generate sufficient revenues to sustain our business.

	If we are unable to raise additional capital on acceptable terms, our ability to develop and market our products and operate our business could be harmed.

I-17

---

Table of Contents

	Our limited operating history may make it difficult for us or investors to evaluate trends and other factors that affect our business.

	We face intense competition from participants in the consumer electronics market, which may impair our revenues and ability to generate customers.

	If we fail to create consumer demand and consumer acceptance of our Beamer videophone products and VistaFrame, we may not be able to generate sufficient revenues to sustain our business.

I-18

---

Table of Contents

	If we are unable to develop and introduce new products, we may not be able to generate sufficient revenues to sustain and grow our business.

	We depend on two contract manufacturers and a limited number of other third parties, including ESS, to manufacture and supply critical components for our products, and we may be unable to operate our business if those parties do not perform their obligations.

	We may have potential business conflicts of interest with ESS with respect to the companies’ ongoing relationships, and we may not be able to resolve these conflicts on terms favorable to us.

	•	Although we entered into agreements with ESS that govern our business relationship after the distribution of our stock to ESS shareholders, ESS has no obligation to extend the terms of those agreements beyond their stated duration;
	•	ESS may supply semiconductors to competitors, which may affect ESS’ capacity to supply semiconductors to us;
	•	We may compete with ESS with respect to business opportunities that are attractive to both companies, and ESS is not restricted from competing with our business.

	If we are unable to maintain satisfactory relationships with, or increase the number of, retailers and distributors that sell our products, our business will suffer.

I-19

---

Table of Contents

	We may need to expand our operations for future growth, and our failure to manage any such growth could disrupt business and impair our ability to generate revenues.

	•	We may need to attract and retain qualified personnel, and any failure to do so may impair our ability to offer new products or grow our business. We may be unable to successfully attract, integrate or retain sufficiently qualified personnel. If we are unable to hire, train, retain or manage the necessary personnel, we may be unable to successfully introduce new products or otherwise implement our business strategy.
	•	We may need to provide acceptable customer support, and any inability to do so will impair our ability to develop consumer acceptance of our products. We expect that some of our customers will require support when using our products. We also anticipate that purchasers of any future products will require support in their use of such products. We do not have experience with widespread deployment of our products to a diverse customer base, and we may not have adequate personnel to provide the levels of support that our customers will require. Our failure to provide adequate customer support for our products will damage our reputation in the consumer electronics marketplace and strain our relationships with customers and strategic partners. This could prevent us from gaining new or retaining existing customers and could harm our reputation and brand.
	•	We may need to improve our operational and financial systems, procedures and controls to support our expected growth, and any inability to do so will adversely impact our ability to grow our business. Our current and planned systems, procedures and controls may not be adequate to support our future operations and expected growth. Delays or problems associated with any improvement or expansion of our operational systems and controls could adversely impact our relationships with customers and harm our reputation and brand.

	Product defects, system failures or interruptions may have a negative impact on our revenues, reputation and ability to attract new customers.

	Our future results could be harmed by economic, political, regulatory and other risks associated with our reliance on international sales and operations.

	•	changes in political and strategic relations between China, Taiwan and the U.S.;
	•	changes in foreign currency exchange rates;
	•	changes in a specific country’s or region’s political or economic conditions, particularly in China, Taiwan and other emerging Asian markets;
	•	trade protection measures and import or export licensing requirements;

I-20

---

Table of Contents

	•	potentially negative consequences from changes in tax laws;
	•	difficulty in managing widespread sales and manufacturing operations;
	•	less effective protection of intellectual property.

	Our success partly depends on our ability to secure and protect our proprietary rights.

	We may be subject to claims that our intellectual property infringes upon the proprietary rights of others, and a successful claim could harm our ability to sell and develop our products.

	If we lose key management personnel, we may not be able to successfully operate our business.

	Any future business acquisitions may disrupt our business, dilute stockholder value or distract management attention.

	•	difficulty of integrating the operations, products and personnel of the acquired businesses;
	•	potential disruption of our ongoing business;
	•	unanticipated costs associated with the acquisition;

I-21

---

Table of Contents

	•	inability of management to manage the financial and strategic position of acquired or developed products and technologies;
	•	inability to maintain uniform standards, controls, policies and procedures; and
	•	impairment of relationships with employees and customers that may occur as a result of integration of the acquired business.

	Laws or regulations that govern the consumer electronics industry, the telecommunications industry, copyrighted works or the Internet could expose us to legal action if we fail to comply or could require us to change our business.

	•	Federal Communications Commission regulations relating to the electronic emissions of consumer products;
	•	Federal Communications Commission regulations relating to consumer products that connect to the public telephone network;
	•	federal export regulations relating to the export of sensitive computer technologies such as encryption and authentication software.

	Our stock may be subject to the requirements for penny stocks, which could adversely affect your ability to sell and the market price of our shares.

	Our quarterly operating results may fluctuate significantly, which may adversely affect the market prices of our stock and could lead to us becoming the target of costly securities class action litigation.

I-22

---

Table of Contents

	•	consumer awareness and demand for our products;
	•	ongoing demand and supply for our products;
	•	seasonality and other consumer and advertising trends;
	•	changes in the economic terms of our relationships with our strategic partners;
	•	shortfalls in the supply of components necessary for the manufacture of our products;
	•	changes in our pricing policies, the pricing policies of our competitors and general pricing trends in the consumer electronics market;
	•	unanticipated shortfalls in revenue due to the fact that our expenses precede associated revenues;
	•	changes in estimates of our financial performance or changes in recommendations by securities analysts;
	•	release of new or enhanced products or services or introduction of new marketing initiatives by us or our competitors;
	•	announcements by us or our competitors of the creation or termination of significant strategic partnerships, joint ventures, significant contracts, or acquisitions;
	•	the market price generally for consumer electronics and retail industry stocks;
	•	market conditions affecting the consumer electronics industry;
	•	additions or departures of key personnel;
	•	demand for and consumer acceptance of other anticipated future products offerings; and
	•	general economic conditions.

	Seasonal trends may cause our quarterly operating results to fluctuate, which may adversely affect the market price of our stock.

	Our historical financial information may not be representative of our future operating results as a separate company.

I-23

---

Table of Contents

	Conflicts of interest may arise because our Chairman is also the Chairman of ESS and both he and another director own securities of both companies.

	ESS submitted a request to the Internal Revenue Service (IRS) to rule that its distribution of our shares to ESS shareholders was tax-free. The IRS determined that it would not provide such a ruling.

I-24

---

Table of Contents

I-25

---

Table of Contents

			Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM				I-27
CONSOLIDATED BALANCE SHEETS				I-28
CONSOLIDATED STATEMENTS OF OPERATIONS				I-29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY				I-30
CONSOLIDATED STATEMENTS OF CASH FLOWS				I-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS				I-32
Financial Statements Schedules
	All schedules have been omitted because they are not applicable, not required, or the information required is included in the financial statements or notes thereto
SUPPLEMENTARY FINANCIAL DATA				I-??

I-26

---

Table of Contents

I-27

---

Table of Contents

					December 31,
					2004				2003
					(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents				$	7,296			$	9,356
	Restricted cash					3,057				2,226
	Short-term investments					11,106				14,952
	Accounts receivable, net					2,761				3,941
	Inventories					4,500				5,196
	Prepaid expenses and other current assets					351				729
		Total current assets				29,071				36,400
Property and equipment, net						302				685
Other assets						29				29
		Total assets			$	29,402			$	37,114
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	373			$	1,915
	Accrued expenses and other current liabilities					2,070				3,149
	Deferred profit					1,310				3,997
		Total current liabilities				3,753				9,061
Commitments (Note 15)
Redeemable convertible preferred stock, $0.001 par value; 30,000 shares authorized, no shares issued and outstanding (Note 8)						—				—
Stockholders’ equity:
	Common stock, $0.001 par value, 400,000 shares authorized, 95,017 and 94,702 shares issued, 83,053 and 82,738 shares outstanding					95				95
	Additional paid-in capital					144,122				144,114
	Treasury stock					(9,458	)			(9,458	)
	Accumulated deficit					(109,098	)			(106,709	)
	Accumulated other comprehensive income (loss)					(12	)			11
		Total stockholders’ equity				25,649				28,053
			Total liabilities, redeemable convertible preferred stock and stockholders’ equity		$	29,402			$	37,114

I-28

---

Table of Contents

				Years Ended December 31,
				2004				2003				2002
				(In thousands, except per share
				amounts)
Revenue, net				$	12,747			$	10,331			$	—
Cost of goods sold					8,022				2,941				—
Gross profit					4,725				7,390				—
Operating expenses:
	Product costs				—				—				10,421
	Engineering and development				1,247				2,557				13,264
	Sales and marketing				2,011				4,427				3,100
	General and administrative				4,573				5,753				5,643
	Amortization and impairment of content licenses				—				—				11,395
		Total operating expenses			7,831				12,737				43,823
Operating loss					(3,106	)			(5,347	)			(43,823	)
Interest income, net					717				733				1,244
Gain on investment					—				571				—
Net loss				$	(2,389	)		$	(4,043	)		$	(42,579	)
Net loss per share:
	Basic and diluted			$	(0.03	)		$	(0.05	)		$	(0.51	)
Weighted average common shares outstanding:
	Basic and diluted				82,930				82,285				83,578

I-29

---

Table of Contents

				Common Stock																				Accumulated				Total
				(See Note 8)								Additional												Other				Stockholders’
												Paid In				Treasury				Accumulated				Comprehensive				Equity				Comprehensive
				Shares				Amount				Capital				Stock				Deficit				Income				(Deficit)				Loss
				(In thousands)
Balance at December 31, 2001					85,625			$	92			$	144,164			$	(4,046	)		$	(60,087	)		$	156			$	80,279
Shares transferred to ESS Technology, Inc					612				—				—				—				—				—				—
Exercise of stapled stock options					1,419				1				(1	)			—				—				—				—
Exercise of stock options					69				1				19				—				—				—				20
Repurchase of common stock					(4,969	)			—				—				(5,117	)			—				—				(5,117	)
Income tax benefit on disqualified disposition of stock options					—				—				(77	)			—				—				—				(77	)
Components of comprehensive loss:
	Net loss				—				—				—				—				(42,579	)			—				(42,579	)		$	(42,579	)
	Unrealized losses on available-for-sale investments				—				—				—				—				—				(148	)			(148	)			(148	)
		Total comprehensive loss																														$	(42,727	)
Balance at December 31, 2002					82,756				94				144,105				(9,163	)			(102,666	)			8				32,378
Exercise of stapled stock options					701				—				—				—				—				—				—
Exercise of stock options					40				1				9				—				—				—				10
Repurchase of common stock					(759	)			—				—				(295	)			—				—				(295	)
Components of comprehensive loss:													—
	Net loss				—				—				—				—				(4,043	)			—				(4,043	)		$	(4,043	)
	Unrealized gains on available-for-sale investments				—				—				—				—				—				3				3				3
		Total comprehensive loss																														$	(4,040	)
Balance at December 31, 2003					82,738				95				144,114				(9,458	)			(106,709	)			11				28,053
Exercise of stapled stock options					283				—				—				—				—				—				—
Exercise of stock options					32				—				8				—				—				—				8
Components of comprehensive loss:													—
	Net loss				—				—				—				—				(2,389	)			—				(2,389	)		$	(2,389	)
	Unrealized losses on available-for-sale investments				—				—				—				—				—				(23	)			(23	)			(23	)
		Total comprehensive loss																														$	(2,412	)
Balance at December 31, 2004					83,053			$	95			$	144,122			$	(9,458	)		$	(109,098	)		$	(12	)		$	25,649

I-30

---

Table of Contents

						Years Ended December 31,
						2004				2003				2002
						(In thousands)
Cash flows from operating activities:
	Net loss					$	(2,389	)		$	(4,043	)		$	(42,579	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization					389				1,638				6,036
		Amortization and impairment of content license fees					—				—				11,395
		Changes in assets and liabilities:
			Accounts receivables, net				1,180				(2,579	)			(1,362	)
			Related party receivables/payables, net				(154	)			248				97
			Inventories				696				(2,362	)			(2,834	)
			Prepaid expense and other assets				378				540				1,672
			Restricted cash deposit				(831	)			(2,226	)			—
			Deferred profit				(2,687	)			767				3,115
			Accounts payable and accrued liabilities				(2,467	)			97				1,137
				Net cash flows used in operating activities			(5,885	)			(7,920	)			(23,323	)
Cash flows from investing activities:
	Purchase of short-term investments						(11,448	)			(25,835	)			(36,677	)
	Proceeds from sales of short-term investments						15,271				23,624				33,397
	Purchase of content licenses						—				—				(10,053	)
	Acquisition of property and equipment						(6	)			(191	)			(170	)
				Net cash flows provided by (used in) investing activities:			3,817				(2,402	)			(13,503	)
Cash flows from financing activities:
	Issuance of common stock						8				10				20
	Repurchase of common stock						—				(295	)			(5,117	)
				Net cash flows provided by (used in) financing activities:			8				(285	)			(5,097	)
Net decrease in cash and cash equivalents							(2,060	)			(10,607	)			(41,923	)
Cash and cash equivalents, beginning of the period							9,356				19,963				61,886
Cash and cash equivalents, end of the period						$	7,296			$	9,356			$	19,963
Supplemental disclosure of cash flow information:
	Unrealized gains (losses) on available-for-sale investments					$	(23	)		$	3			$	(148	)

I-31

---

Table of Contents

Note 1 —	The Company

Note 2 —	Summary of Significant Accounting Policies

	Use of Estimates

	Principles of Consolidation

	Cash Equivalents and Investments

I-32

---

Table of Contents

	Fair Value of Financial Instruments

	Inventories

	Property and Equipment

Computer equipment			3-5  years
Furniture and fixtures			5 years
Software and web site development costs			1-3  years
Repairs and maintenance costs are expensed as incurred.

	Long-Lived Assets

	Comprehensive Income (Loss)

	Revenue Recognition

I-33

---

Table of Contents

	Allowances for Sales Return and for Doubtful Accounts

		Balance at								Write-offs
		Beginning								Net of				Balance at
		of Year				Additions				Recoveries				End of Year
December 31, 2004		$	63			$	14			$	—			$	77
December 31, 2003		$	30			$	33			$	—			$	63
December 31, 2002		$	665			$	—			$	(635	)		$	30

	Warranty

		December 31,				December 31,
		2004				2003
Beginning balance		$	484			$	—
Accruals for warranties issued during the year			564				814
Settlements made during the year			(649	)			(330	)
Ending balance		$	399			$	484

	Engineering and Development

	Advertising Costs

	Income Taxes

I-34

---

Table of Contents

	Foreign Currency Translation

	Net Loss Per Share

	Stock-Based Compensation

			Years Ended December 31,
			2004				2003				2002
Net loss, as reported			$	(2,389	)		$	(4,043	)		$	(42,579	)
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards				(672	)			(1,738	)			(3,208	)
Pro forma net loss			$	(3,061	)		$	(5,781	)		$	(45,787	)
Net loss per share — basic and diluted:
	As reported		$	(0.03	)		$	(0.05	)		$	(0.51	)
	Pro forma		$	(0.04	)		$	(0.07	)		$	(0.55	)

	Revision in Classification of Certain Securities

I-35

---

Table of Contents

	Recent Accounting Pronouncements

Note 3 —	Risks and Uncertainties

I-36

---

Table of Contents

Note 4 —	Marketable Securities

		2004																2003
		Available-for-Sale Securities																Available-for-Sale Securities
						Gross				Gross												Gross				Gross
						Unrealized				Unrealized												Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value				Cost				Gains				Losses				Fair Value
Money market funds		$	4			$	—			$	—			$	4			$	2			$	—			$	—			$	2
Commercial paper			2,542				—				—				2,542				4,101				—				—				4,101
Cash			4,750				—				—				4,750				5,253				—				—				5,253
Total cash and cash equivalents		$	7,296			$	—			$	—			$	7,296			$	9,356			$	—			$	—			$	9,356
Market auction preferred securities		$	5,300			$	—			$	—			$	5,300			$	4,400			$	—			$	—			$	4,400
U.S. government debt securities			4,741				—				(10	)			4,731				3,470				10				—				3,480
Corporate debt securities			1,077				—				(2	)			1,075				7,071				1				—				7,072
Total short-term investments		$	11,118			$	—			$	(12	)		$	11,106			$	14,941			$	11			$	—			$	14,952

Note 5 —	Content Licenses

I-37

---

Table of Contents

Note 6 —	Inventories and Product Costs

			Gross				Reserve				Net
As of December 31, 2002			$	11,866			$	(9,032	)		$	2,834
	Purchase of inventories			5,369				—				5,369
	Shipments, net			(7,361	)			4,603				(2,758	)
	Use or disposal of inventories			(542	)			293				(249	)
As of December 31, 2003				9,332				(4,136	)			5,196
	Purchase of inventories			10,906				—				10,906
	Additional reserves			—				(3,390	)			(3,390	)
	Shipments, net			(10,205	)			2,395				(7,810	)
	Use or disposal of inventories			(493	)			91				(402	)
As of December 31, 2004			$	9,540			$	(5,040	)		$	4,500
	Raw material		$	4,041			$	(1,615	)		$	2,426
	Finished goods			5,499				(3,425	)			2,074
			$	9,540			$	(5,040	)		$	4,500

Note 7 —	Other Balance Sheet Components (in thousands):

		December 31,				December 31,
		2004				2003
Short-term investments
US Government debt securities		$	4,731			$	3,480
Market auction preferred securities			5,300				4,400
Corporate debt securities			1,075				7,072
		$	11,106			$	14,952
Due after one year		$	3,385			$	3,989
Due within one year			7,721				10,963
		$	11,106			$	14,952
Accounts receivable, net
Accounts receivable		$	2,838			$	4,004
Less: Allowance for doubtful accounts			(77	)			(63	)
		$	2,761			$	3,941

I-38

---

Table of Contents

		December 31,				December 31,
		2004				2003
Prepaid expenses and other
Prepaid insurance		$	207			$	308
Other receivables from supplier			—				296
Other current assets			144				125
		$	351			$	729
Property and equipment, net
Machinery and equipment		$	1,037			$	5,918
Furniture and fixtures			551				561
Software and web site development cost			259				5,323
			1,847				11,802
Less: Accumulated depreciation			(1,545	)			(11,117	)
		$	302			$	685
Accrued liabilities and other
Accrued compensation costs		$	880			$	1,241
Customer deposits			12				764
Product return/warranty liability			399				484
Accrued charges, related party			127				281
Professional fees			274				216
Other current liabilities			378				163
		$	2,070			$	3,149
Deferred profit
Deferred revenue		$	3,086			$	5,198
Deferred costs			(1,776	)			(1,201	)
Deferred profit		$	1,310			$	3,997

Note 8 —	Spin-Off and Recapitalization of Equity

I-39

---

Table of Contents

										Class A				Class B
		Preferred				Conversion				Common				Common				Outstanding
Capital Stock		Shares				Ratio				Stock				Stock				Total
Series A — ESS owned			40,000				1 to 1				40,000				—				40,000
Series B — ESS owned			20,000				1 to 1				20,000				—				20,000
Series B — third party owned			31,000				1.1 to 1				—				34,100				34,100
			91,000								60,000				34,100				94,100
Shares returned to Vialta by ESS, reserved for issuance upon exercise of stapled options											(9,840	)			—				(9,840	)
Additional shares transferred by ESS as part of the spin-off transaction											(612	)			—				(612	)
Issuance of common stock upon exchange of third party owned common stock for Class B common stock											—				589				589
Conversion of original common stock to Class A and Class B common stock											400				5,892				6,292
Total effect of re-capitalization and spin-off transaction on Class A and Class B common stock outstanding											49,948				40,581				90,529

I-40

---

Table of Contents

Note 9 —	Related Party Transactions

			Year Ended December 31,
			2004				2003				2002
Net receivables (payables) at beginning of period			$	(281	)		$	(33	)		$	64
Charges by Vialta to ESS:
	Administrative & management service fees			—				—				223
	Other			26				4				77
Charges by ESS to Vialta:
	Administrative & management service fees			(14	)			(73	)			(201	)
	Purchase of products			(782	)			(412	)			(1,403	)
	Building lease			(502	)			(1,182	)			(1,852	)
Cash receipts from ESS				(26	)			(4	)			(424	)
Cash payments made to ESS				1,452				1,419				3,483
Net payables at end of period			$	(127	)		$	(281	)		$	(33	)

Note 10 —	Net Loss Per Share

		Years Ended December 31,
		2004				2003				2002
Net loss		$	(2,389	)		$	(4,043	)		$	(42,579	)
Basic and diluted weighted average common shares outstanding			82,930				82,285				83,578
Basic and diluted net loss per share		$	(0.03	)		$	(0.05	)		$	(0.51	)

			Years Ended December 31,
			2004				2003				2002
Effect of potential shares of common stock:
	Options outstanding			11,609				12,149				11,255
Total potential shares of common stock				11,609				12,149				11,255

Note 11 —	Common Stock and Stock Options

	Common Stock Repurchases

I-41

---

Table of Contents

	1999 Stock Incentive Plan

	2000 Directors Stock Option Plan

	2001 Non-Statutory Stock Option Plan

						Options Outstanding
										Weighted
										Average
		Available for				Numbers of				Exercise
		Grant				Options				Price
Balance at December 31, 2001			5,789,995				13,106,606				0.29
Granted			(913,957	)			913,957				0.85
Cancelled			1,277,205				(1,277,205	)			0.79
Exercised			—				(1,488,670	)			0.01
Balance at December 31, 2002			6,153,243				11,254,688				0.31
Granted			(2,510,595	)			2,510,595				0.35
Cancelled			875,842				(875,842	)			0.71
Exercised			—				(740,697	)			0.02
Balance at December 31, 2003			4,518,490				12,148,744				0.31
Granted			(210,009	)			210,009				0.21
Cancelled			434,474				(434,474	)			0.49
Exercised			—				(314,341	)			0.03
Balance at December 31, 2004			4,742,955				11,609,938				0.31

I-42

---

Table of Contents

		Options Outstanding												Options Exercisable
						Weighted
						Average				Weighted								Weighted
						Remaining				Average								Average
		Number				Contractual				Exercise				Number				Exercise
Exercise Price		Outstanding				Life (Years)				Price				Exercisable				Price
$0.00			4,995,312				3.60			$	—				4,622,488			$	—
$0.25 — $0.34			3,201,750				7.21				0.32				2,386,792				0.31
$0.36 — $1.18			3,250,876				7.08				0.70				2,389,973				0.76
$1.20 — $1.95			100,000				6.41				1.69				98,000				1.70
$2.01			62,000				4.07				2.01				62,000				2.01
			11,609,938				5.60			$	0.31				9,559,253			$	0.30

	Fair Value Disclosures

		Years Ended
		December 31,
		2004				2003				2002
Expected dividend yield			0.00	%			0.00	%			0.00	%
Risk-free interest rate			3.69	%			1.29	%			3.50	%
Expected volatility			88	%			99	%			96	%
Expected life (in years)			3				4				4

Note 12 —	Income Taxes

I-43

---

Table of Contents

			December 31,
			2004				2003				2002
Benefit from income taxes at statutory rate			$	836			$	1,415			$	14,903
State income taxes net of federal tax benefit				45				232				1,971
Other				(448	)			636				359
Tax losses not benefited				(433	)			(2,283	)			(17,233	)
	Income tax benefit/(expense)		$	—			$	—			$	—

			December 31,
			2004				2003
Net operating loss carryforwards			$	33,919			$	31,161
Depreciation and amortization				2,102				3,519
Accruals and reserves				3,140				3,806
Federal and state credits carryforward				1,121				1,232
Other				3,211				3,209
Gross deferred tax assets				43,493				42,927
Valuation allowance				(43,493	)			(42,927	)
	Net deferred tax assets		$	—			$	—

Note 13 —	Employee Benefit Plans

Note 14 —	Segment and Geographic Information

I-44

---

Table of Contents

Note 15 —	Commitments and Contingencies

Note 16 —	Subsequent Events

I-45

---

Table of Contents

			For the Three Months Ended
			March 31,				June 30,				September 30,				December 31,
			2004				2004				2004				2004
Revenue			$	4,974			$	2,782			$	1,365			$	3,626
Cost of goods sold				1,396				997				3,718				1,911
Gross profit (loss)				3,578				1,785				(2,353	)1			1,715
Operating expenses:
Engineering and development				336				266				321				324
Sales and marketing				605				511				284				611
General and administrative				1,360				1,333				845				1,035
Total operating expenses				2,301				2,110				1,450				1,970
	Operating income (loss)			1,277				(325	)			(3,803	)			(255	)
Interest income, net				209				160				171				177
Net income (loss)			$	1,486			$	(165	)		$	(3,632	)		$	(78	)
Net income (loss) per share attributable to common shares — basic & diluted			$	0.02			$	(0.00	)		$	(0.04	)		$	(0.00	)
Weighted average common shares outstanding				82,803				82,907				82,985				83,025

			For the Three Months Ended
			March 31,				June 30,				September 30,				December 31,
			2003				2003				2003				2003
Revenue			$	3,843			$	2,520			$	1,284			$	2,684
Cost of goods sold				863				570				517				991
Gross profit				2,980				1,950				767				1,693
Operating expenses:
Engineering and development				968				621				480				488
Sales and marketing				442				641				547				2,797
General and administrative				1,730				1,974				1,091				958
Total operating expenses				3,140				3,236				2,118				4,243
	Operating loss			(160	)			(1,286	)			(1,351	)			(2,550	)
Interest income, net				188				178				168				199
Gain on investment				—				—				—				571
Net income (loss)			$	28			$	(1,108	)		$	(1,183	)		$	(1,780	)
Net income (loss) per share attributable to common shares — basic & diluted			$	0.0			$	(0.01	)		$	(0.01	)		$	(0.02	)
Weighted average common shares outstanding				82,238				82,151				82,227				82,523

1	The gross loss for the three months ended September 30, 2004 includes additional inventory reserves of $3.4 million on raw materials and finished good inventory.

I-46

---

Table of Contents

I-47

---

Table of Contents

Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Number of

Number of Securities

Securities to be

Remaining Available for

Issued upon Exercise

Weighted Average

Future Issuance under

of Outstanding

Exercise Price of

Equity Compensation Plans

Options, Warrants

Outstanding Options,

(Excluding Securities

and Rights(1)

Warrants and Rights

Reflected in Column (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

11,609,938

$

0.31

4,742,955

Equity compensation plans not approved by security holders

—

—

—

11,609,938

$

0.31

4,742,955

(1)	Includes only options outstanding under our stock option plans, as no stock warrants or rights were outstanding as of December 31, 2004.

I-48

---

Table of Contents

Item 15:	Exhibits, Financial Statement Schedules

I-49

---

Table of Contents

	Vialta, Inc.

	By:	/s/ Didier Pietri

	Didier Pietri
	Chief Executive Officer

Signature				Title		Date
/s/ Didier Pietri   Didier Pietri				Chief Executive Officer (principal executive officer)		March 31, 2005
/s/ William M. Scharninghausen   William M. Scharninghausen				Chief Financial Officer (principal financial officer)		March 31, 2005
/s/ Fred S.L. Chan   Fred S.L. Chan				Chairman of the Board		March 31, 2005
/s/ George M. Cain   George M. Cain				Director		March 31, 2005
/s/ Herbert Chang   Herbert Chang				Director		March 31, 2005
/s/ Michael S. Dubester   Michael S. Dubester				Director		March 31, 2005
/s/ Matthew K. Fong   Matthew K. Fong				Director		March 31, 2005

I-50

---

Table of Contents

Exhibit
Number				Description of Exhibit
	2	.1		Form of Master Distribution Agreement between the Registrant and ESS Technology, Inc. (Exhibit No. 2.1 to Form 10 File No. 000-32809)
	2	.2		Form of Master Technology Ownership and License Agreement between the Registrant and ESS Technology, Inc. (Exhibit No. 2.2 to Form 10 File No. 000-32809)
	2	.3		Form of Employee Matters Agreement between the Registrant and ESS Technology, Inc. (Exhibit No. 2.3 to Form 10 File No. 000-32809)
	2	.4		Form of Tax Sharing and Indemnity Agreement between the Registrant and ESS Technology, Inc. (Exhibit No. 2.4 to Form 10 File No. 000-32809)
	2	.5		Form of Real Estate Matters Agreement between the Registrant and ESS Technology, Inc. (Exhibit No. 2.5 to Form 10 File No. 000-32809)
	2	.6		Form of Master Confidential Disclosure Agreement between the Registrant and ESS Technology, Inc. (Exhibit No. 2.6 to Form 10 File No. 000-32809)
	2	.7		Form of Master Transitional Services Agreement between the Registrant and ESS Technology, Inc. (Exhibit No. 2.7 to Form 10 File No. 000-32809)
	3	.1		Amended and Restated Certificate of Incorporation of the Registrant (Exhibit No. 4.1 to Form S-8 File No. 333-65752)
	3	.2		Amended and Restated Bylaws of the Registrant (Exhibit No. 4.2 to Form S-8 File No. 333-65752)
	4	.1		Form of Class A Common Stock Certificate of the Registrant (Exhibit No. 4.1 to Form 10 File No. 000-32809)
	4	.2		Form of Class B Common Stock Certificate of the Registrant (Exhibit No. 4.2 to Form 10 File No. 000-32809)
	10	.1		1999 Stock Incentive Plan (Exhibit No. 10.1 to Form 10 File No. 000-32809)*
	10	.2		2000 Directors Stock Option Plan, as amended and restated (Exhibit No. 10.2 to Form 10 File No. 000-32809)*
	10	.3		2001 Nonstatutory Stock Option Plan, as amended on August 1, 2001 (Exhibit No. 10.3 to Form 10 File No. 000-32809)*
	10	.4		2001 Employee Stock Purchase Plan (Exhibit No. 10.4 to Form 10 File No. 000-32809)*
	10	.5		Lease Agreement between the Registrant and ESS Technology, Inc. for the premises located at 48461 Fremont Boulevard, Fremont, California (Exhibit No. 10.5 to Form 10 File No. 000-32809)
	10	.6		Purchase Agreement between the Registrant and ESS Technology, Inc. (Exhibit No. 10.6 to Form 10 File No. 000-32809)
	10	.7		DVD Manufacturing License Agreement between the Registrant and Macrovision Corporation (Exhibit No. 10.7 to Form 10 File No. 000-32809)
	10	.8		Offer Letter Agreement between the Registrant and Charles Root (Exhibit No. 10.8 to Form 10 File No. 000-32809)*
	10	.9		Lease Agreement between the Registrant and 235 Investments Limited for the premises located at 235 Yorkland Boulevard, Ontario, Canada (Exhibit No. 10.9 to Form 10 File No. 000-32809)
	10	.10		Lease Agreement between Vialta.com Hong Kong Company Limited and Upcentre Investments Limited for the premises located at 238 Nathan Road, Kowloon, Hong Kong (Exhibit No. 10.10 to Form 10 File No. 000-32809)
	10	.11		Trademark License Agreement between the Registrant and Digital Theater Systems, Inc. (Exhibit No. 10.11 to Form 10 File No. 000-32809)
	10	.12		Software License Agreement between the Registrant and EnReach Technology, Inc. (Exhibit No. 10.12 to Form 10 File No. 000-32809)
	10	.13		Offer Letter Agreement between the Registrant and Didier Pietri (Exhibit No. 10.13 to Form 10 File No. 000-32809)*
	10	.14		Offer Letter Agreement between the Registrant and Steve Charng (Exhibit No. 10.5 to Form 10 File No. 000-32809)

I-51

---

Table of Contents

Exhibit
Number				Description of Exhibit
	10	.15		Offer Letter Agreement between the Registrant and Michael Wang (Exhibit No. 10.9 to Form 10 File No. 000-32809)
	10	.16		Agreement and Plan of Reorganization, dated March 28, 2005, by and between Victory Acquisition Corp. and Vialta, Inc. (Exhibit No. 10.1 to Form 8-K filed March 31, 2005).
	21	.1		Subsidiaries of the Registrant (Exhibit No. 21.1 to Form 10 File No. 000-32809)
	23	.1		Consent of PricewaterhouseCoopers LLP (filed herewith)
	31	.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2		Certification 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

*	Indicates a management contract or compensatory plan.

I-52

---

Table of Contents

(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the quarterly period ended March 31, 2005.
OR
o		TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

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

J-1

---

Table of Contents

						Page
PART I.				FINANCIAL INFORMATION
Item 1.				Financial Statements (unaudited):			J-3
				Condensed Consolidated Balance Sheets — March 31, 2005 and December 31, 2004			J-3
				Condensed Consolidated Statements of Operations — three months ended March 31, 2005 and 2004			J-4
				Condensed Consolidated Statements of Cash Flows — three months ended March 31, 2005 and 2004			J-5
				Notes to Condensed Consolidated Financial Statements			J-6
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			J-13
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			J-16
Item 4.				Controls and Procedures			J-16
PART II.				OTHER INFORMATION
Item 6.				Exhibits and Reports on Form 8-K			J-17
SIGNATURES							J-18
EXHIBIT INDEX

J-2

---

Table of Contents

ITEM 1:	Financial Statements

				March 31,				December 31,
				2005				2004
				(In thousands)
				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	14,101			$	7,296
	Restricted cash				3,066				3,057
	Short-term investments				4,278				11,106
	Accounts receivable, net				518				2,761
	Inventories				4,497				4,500
	Prepaid expenses and other current assets				262				351
		Total current assets			26,722				29,071
Property and equipment, net					265				302
Other assets					29				29
		Total assets		$	27,016			$	29,402
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	221			$	373
	Accrued expenses and other liabilities				1,837				2,070
	Deferred profit				376				1,310
		Total current liabilities			2,434				3,753
Stockholders’ equity:
	Common stock				95				95
	Additional paid-in capital				144,122				144,122
	Treasury stock				(9,458	)			(9,458	)
	Accumulated deficit				(110,169	)			(109,098	)
	Accumulated other comprehensive loss				(8	)			(12	)
		Total stockholders’ equity			24,582				25,649
		Total liabilities and stockholders’ equity		$	27,016			$	29,402

J-3

---

Table of Contents

				Three Months Ended
				March 31,
				2005				2004
				(In thousands, except
				per share data)
				(Unaudited)
Net revenue				$	2,958			$	4,974
Cost of goods sold					2,170				1,396
Gross profit					788				3,578
Operating expenses:
	Engineering and development				292				336
	Sales and marketing				292				605
	General and administrative				1,478				1,360
		Total operating expenses			2,062				2,301
Operating income (loss)					(1,274	)			1,277
Interest income and other, net					203				209
Net income (loss)				$	(1,071	)		$	1,486
Net income (loss) per share:
	Basic			$	(0.01	)		$	0.02
	Diluted			$	(0.01	)		$	0.02
Weighted average common shares outstanding:
	Basic				83,077				82,803
	Diluted				83,077				88,552

J-4

---

Table of Contents

						Three Months Ended
						March 31,
						2005				2004
						(In thousands)
						(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income (loss)					$	(1,071	)		$	1,486
	Adjustments to reconcile net income (loss) to net cash used in operating activities:
		Depreciation					37				197
		Changes in operating assets and liabilities:
			Accounts receivable, net				2,243				2,061
			Inventories				3				(914	)
			Prepaid expenses and other				89				234
			Restricted cash deposit				(9	)			(807	)
			Deferred profit				(934	)			(2,042	)
			Accounts payable and accrued liabilities and other				(385	)			(1,820	)
				Net cash used in operating activities			(27	)			(1,605	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of short-term investments						(516	)			(5,064	)
	Proceeds from sales of short-term investments						7,348				6,111
	Acquisitions of property and equipment						—				(6	)
				Net cash provided by investing activities			6,832				1,041
Net increase (decrease) in cash and cash equivalents							6,805				(564	)
Cash and cash equivalents, beginning of the period							7,296				9,356
Cash and cash equivalents, end of the period						$	14,101			$	8,792

J-5

---

Table of Contents

NOTE 1.	THE COMPANY

NOTE 2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

	Basis of presentation

J-6

---

Table of Contents

	Principles of consolidation

	Cash equivalents and investments

	Revenue recognition

	Allowances for sales returns and Doubtful Accounts

	Warranty

J-7

---

Table of Contents

		March 31,				March 31,
		2005				2004
Beginning balance		$	399			$	484
Accruals for warranties issued during the period			159				460
Settlements made during the period			(210	)			(285	)
Ending balance		$	348			$	659

	Comprehensive gain

	Stock-based compensation

			Three Months Ended
			March 31,
			2005				2004
Net income (loss), as reported			$	(1,071	)		$	1,486
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects				(69	)			(234	)
Pro forma net income (loss)			$	(1,140	)		$	1,252
Pro forma net income (loss) per share:
	Basic		$	(0.01	)		$	0.02
	Diluted		$	(0.01	)		$	0.01

	Revision in Classification of Certain Securities

J-8

---

Table of Contents

NOTE 3.	RELATED PARTY TRANSACTIONS

			Three Months
			Ended March 31,
			2005				2004
Net payables at beginning of period			$	(127	)		$	(281	)
Charges by Vialta to ESS				208				2
Charges by ESS to Vialta:
	Purchase of products			(12	)			(339	)
	Building lease			(125	)			(124	)
	Other			(2	)			(6	)
Cash receipts from ESS				(208	)			(2	)
Cash payments made to ESS				169				436
Net payables at end of period			$	(97	)		$	(314	)

NOTE 4.	MARKETABLE SECURITIES

		March 31, 2005																December 31, 2004
		Available-for-Sale Securities																Available-for-Sale Securities
						Gross				Gross												Gross				Gross
						Unrealized				Unrealized												Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value				Cost				Gains				Losses				Fair Value
Money market funds		$	11			$	—			$	—			$	11			$	4			$	—			$	—			$	4
Commercial paper			9,442				—				(1	)			9,441				2,542				—				—				2,542
Cash			4,649				—				—				4,649				4,750				—				—				4,750
Total cash and cash equivalents		$	14,102			$	—			$	(1	)		$	14,101			$	7,296			$	—			$	—			$	7,296
Market auction preferred securities		$	500			$	—			$	—			$	500			$	5,300			$	—			$	—			$	5,300
U.S. government debt securities			3,267				—				(5	)			3,262				4,741				—				(10	)			4,731
Corporate debt securities			518				—				(2	)			516				1,077				—				(2	)			1,075
Total short-term investments		$	4,285			$	—			$	(7	)		$	4,278				11,118			$	—			$	(12	)		$	11,106

J-9

---

Table of Contents

NOTE 5.	INVENTORIES

		Gross				Reserve				Net
As of December 31, 2004		$	9,540			$	(5,040	)		$	4,500
Purchase of inventories			751				—				751
Shipments and Returns			(751	)			—				(751	)
Use or Disposal of inventories			(3	)			—				(3	)
As of March 31, 2005		$	9,537			$	(5,040	)		$	4,497
Raw Material		$	2,708			$	(1,615	)		$	1,093
Finished Goods			6,829				(3,425	)			3,404
		$	9,537			$	(5,040	)		$	4,497

NOTE 6.	BALANCE SHEET COMPONENTS (in thousands)

		March 31,				December 31,
		2005				2004
Short-term investments
US Government debt securities		$	3,262			$	4,731
Market auction preferred securities			500				5,300
Corporate debt securities			516				1,075
		$	4,278			$	11,106
Due after one year		$	1,370			$	3,385
Due within one year			2,908				7,721
		$	4,278			$	11,106
Accounts receivable, net
Accounts receivable		$	681			$	2,838
Less: Allowance for doubtful accounts			(163	)			(77	)
		$	518			$	2,761
Prepaid expenses and other
Prepaid insurance		$	129			$	207
Other current assets			133				144
		$	262			$	351
Property and equipment, net
Machinery and equipment		$	1,037			$	1,037
Furniture and fixtures			551				551
Software and web site development cost			259				259
			1,847				1,847
Less: Accumulated depreciation			(1,582	)			(1,545	)
		$	265			$	302

J-10

---

Table of Contents

		March 31,				December 31,
		2005				2004
Accrued liabilities and other
Accrued compensation costs		$	620			$	880
Professional fees			394				274
Other current liabilities			378				390
Product return/warranty liability			348				399
Accrued charges, related party			97				127
		$	1,837			$	2,070
Deferred profit
Deferred revenue		$	1,032			$	3,086
Deferred costs			(656	)			(1,776	)
Deferred profit		$	376			$	1,310

NOTE 6.	COMPUTATION OF NET INCOME (LOSS) PER SHARE

		For the Three Months
		Ended March 31,
		2005				2004
Basic:
Net income (loss)		$	(1,071	)		$	1,486
Weighted shares outstanding			83,077				82,803
Net income (loss) per share		$	(0.01	)		$	0.02
Diluted:
Net income (loss)		$	(1,071	)		$	1,486
Weighted shares outstanding			83,077				82,803
Effects of dilutive securities: stock options			—				5,749
Diluted weighted shares outstanding			83,077				88,552
Net income (loss) per share		$	(0.01	)		$	0.02

J-11

---

Table of Contents

NOTE 7.	SUBSEQUENT EVENTS

J-12

---

Table of Contents

ITEM  2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Overview

	Results of Operations

	For the three months ended March 31, 2005 compared with three months ended March 31, 2004

J-13

---

Table of Contents

	Liquidity and Capital Resources

J-14

---

Table of Contents

	Revision in Classification of Certain Securities

	Critical Accounting Policies

J-15

---

Table of Contents

	Other Factors That May Affect Our Business and Future Results

ITEM 3:	Quantitative and Qualitative Disclosure About Market Risk

ITEM 4:	Controls and Procedures

J-16

---

Table of Contents

	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

J-17

---

Table of Contents

	VIALTA, INC. (Registrant)

	By:	/s/ Didier Pietri

	Didier Pietri
	President and Chief Executive Officer

	By:	/s/ William M. Scharninghausen

	William M. Scharninghausen
	Chief Financial Officer

J-18

---

Table of Contents

 

---

Table of Contents