SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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(MARK ONE)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___________ TO  _____________

Commission file number 0-28472



DIGITAL VIDEO SYSTEMS, INC.



|Delaware                                                       | 77-0333728                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number)

430 Cambridge Avenue, Suite 110
Palo Alto, California     94306

(650) 322-8108

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $0.0001 per share

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
    Yes  
x    No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.        
 ̈

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
    Yes  
 ̈    No

As of June 30, 2003, there were approximately 6,582,255 shares of the registrant's Common Stock outstanding.  The
aggregate market value of the Common Stock held by non-affiliates of the registrant (based on the closing price for the
Common Stock on the Nasdaq National Market on June 30, 2003) was approximately $10,261,468.  Shares of the registrant's
Common Stock held by each executive officer and director and by each entity that owns 5% or more of the registrant's
Common Stock have been excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

As of March 26, 2004, there were approximately 10,160,317 shares of the registrant's Common Stock outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for the Registrant's 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K to the
extent stated herein.  The Proxy Statement will be filed within 120 days of Registrant's fiscal
year ended December 31, 2003.









DIGITAL VIDEO SYSTEMS, INC.
                        ANNUAL REPORT ON FORM 10-K
                         Year Ended December 31, 2003

                               INDEX

|           |                                                                                       | Page
|---------- | ------------------------------------------------------------------------------------- | ----
|Part I.    |                                                                                       | 1   
|Item 1.    | Business                                                                              | 1   
|Item 2.    | Properties                                                                            | 7   
|Item 3.    | Legal Proceedings                                                                     | 8   
|Item 4.    | Submission of Matters to a Vote of Security Holders                                   | 8   
|Part II.   |                                                                                       | 10  
|Item 5.    | Market for the Registrant's Common Equity and Related Stockholder Matters             | 10  
|Item 6.    | Selected Consolidated Financial Data                                                  | 12  
|Item 7.    | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12  
|           | Risk Factors                                                                          | 23  
|Item 7a.   | Quantitative and Qualitative Disclosures About Market Risks                           | 34  
|Item 8.    | Financial Statements and Supplementary Data                                           | 35  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  | 35  
|Item 9A.   | Controls and Procedures                                                               | 35  
|Part III.  |                                                                                       | 37  
|Item 10.   | Directors and Executive Officers of the Registrant                                    | 37  
|Item 11.   | Executive Compensation                                                                | 37  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management                        | 37  
|Item 13.   | Certain Relationships and Related Transactions                                        | 37  
|Item 14.   | Principal Accounting Fees and Services                                                | 37  
|Part IV.   |                                                                                       | 37  
|Item 15.   | Exhibits, Financial Statements, Financial Statement Schedules and Reports on Form 8-K | 37  
|SIGNATURES |                                                                                       | 71  

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This Annual Report on Form 10-K includes "forward-looking
 statements" within the meaning of the federal securities laws,
particularly statements referencing gross margin costs and operating expenses;
factory utilization rates; the sufficiency of our cash balances and cash flows
for the next twelve months; potential investments of cash or stock to acquire or
invest in complementary businesses, products or technologies; the impact of
recent changes in accounting standards; and assumptions underlying any of the
foregoing. In some cases, forward-looking statements can be identified by the
use of terminology such as "may," "will," "would," "could," "should," "expects,"
"intends," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology. Although we believe that
the expectations reflected in the forward-looking statements contained herein
are reasonable, these expectations or any of the forward-looking statements
could prove to be incorrect, and actual results could differ materially from
those projected or assumed in the forward-looking statements. Our future
financial condition and results of operations, as well as any forward-looking
statements, are subject to risks and uncertainties, including but not limited to
the factors set forth in "Factors That May Affect Future Results" and elsewhere
in this report. All forward-looking statements and reasons why results may
differ included in this report are made as of the date hereof, and we assume no
obligation to update any such forward-looking statements or reasons why actual
results may differ.



PART I



Item 1.	Business

Introduction

Digital Video Systems, Inc. (Nasdaq SmallCap: DVID)
("DVS"), ("DVSI") or (the "Company") is a technology company specializing in the
development and application of digital video technologies that enable the
convergence of data, digital audio, digital video and high-end graphics. The
company's mission is to be the leading DVD (Digital Versatile Disc) solution
provider. The company's current product offerings include DVD loaders (the
principal hardware component of DVD players), DVD sub-systems and
components.

History

Digital Video Systems, Inc. was founded in 1992 to
develop, manufacture and market digital video compression and decompression
hardware and software for entertainment, commercial and educational
applications. Since our inception, we have been involved in the marketing and
development of a variety of products and technologies in the digital video
arena, such as video CD players, the design of decoder chips, networked video
servers that provide near Video-on-Demand, digital Ad-Insertion systems that
automatically insert digital video commercials into broadcasting programs, video
players for commercial kiosk applications, DVD players under agreements with
original equipment manufacturers (OEMs) or under the DVS brand name, and other
products developed for the computer peripheral market. During fiscal 1997 we
completed our initial public offering.

During the fiscal year ended March 31, 1999, we migrated
our product offerings into DVD technology, while phasing out certain older
discontinued product lines. Beginning in late 1999, due to the global over-supply
 of DVD-ROM drives, we stopped our production of DVD-ROM drives and
devoted our DVD production lines to the production of DVD loaders, which were
more profitable and in higher demand during that period. Our current product
offerings primarily include DVD loaders and other DVD sub-systems and
components.

Acquisition of Hyundai Electronics Industries, Co.,
LTD's ("Hyundai") DVD operations and formation of DVS Korea ("DVSK").

In June 1998, the Company acquired Hyundai
Electronics Industries, Co., LTD's ("Hyundai") DVD operations. The purchase
price was $1.0 million cash and 285,714 shares of our common stock. The shares
of our common stock were issued to Hyundai in exchange for a perpetual,
worldwide, royalty-free license to DVS to Hyundai's DVD technologies and related
intellectual properties, subsequently modified to an assignment to the Company.
The $1.0 million cash was paid to Hyundai to acquire its production equipment,
inventory, production supplies, test equipment, furniture, and computer systems
of Hyundai's DVD-ROM operations.

In 1998, we established DVS Korea Co., Ltd ("DVSK"), our (at
that time) 100% owned Korean subsidiary with its operations based on the
acquired Hyundai assets and operations.

Our prior growth was fueled by an unprecedented global
appetite for our primary product, the DVD loader, the chief component of the
popular DVD player. The demand for this product soon eclipsed the other items in
our product line.

During this phase of advancement, DVSK focused upon two
customer driven demands. These were the need to focus engineering expertise on
cost-reduction efforts for our prime product, the DVD loader, in order to
maximize manufacturing margins, and providing our existing OEM customers with
custom design and value engineering options tailored for specific customers. To
maintain and enhance our existing core business, addressing these existing
customer demands took precedence over the need for new product development.

As our market share in the DVD loader market has shown the
expected attrition from encroaching competition, we have sought to diversify
through increased emphasis on new products such as the rewritable drive which we
expect to sell into the large market and customer base that DVSK has
successfully established with our DVD Loader products.

In March 2003, three DVS executives joined the DVSK board of
directors to take a more active role in the day-to-day workings of this key
subsidiary.

Formation of Shanghai Fangyuan Digital Technology Ltd.
("SFDT")

In late 1999, the Company and Shanghai Industrial
Investment Group (SIIG) began negotiations to establish a business relationship
for the purpose of manufacturing DVD loaders in Mainland China. The purpose of
the Joint Venture in Shanghai China was to allow the Company to take advantage
of certain tax savings and lower labor and material costs. Since many DVD player
manufacturers are already located in China, the resulting shipping time and cost
savings are substantial. As a result of these negotiations, Shanghai Fangyuan
Digital Technology Ltd. ("SFDT") was formed. SFDT is 51% owned by our Korean
subsidiary, 10% owned directly by DVS, and 39% owned by SIIG.

The manufacturing facilities of SFDT began operations in May
2001. The factory owned by our Joint Venture was vacated in February 2003 and
has been leased to TRW Systems Consulting Services as of April 1, 2004. This
lease expires on April 1, 2007. Our monthly rental income is $32,197. The rental
income covers the expense of the new building (123,000 square feet) being leased
by the Joint Venture in the Shanghai Jinqiao Export Processing Zone (EXZ).

In February 2003, the Company made a strategic relocation of
its main manufacturing plant in China to a new site in the Shanghai Jinqiao
Export Processing Zone (EXZ). The new facility offers approximately 123,000
square feet of space. The monthly rent obligation is $27,549, or approximately
$0.23 per square foot. The monthly operating expenses at the new facility will
be approximately $2,754, or approximately $0.02 per square foot. The new lease
offers 50% more square footage than the former plant at the same or lower cost.
The term is 3 years and the total future minimum lease payment under this lease
was $0.6 million at December 31, 2003.

Korean Factory Opened

During the fourth quarter of 2001, our Korean
subsidiary opened a factory in Korea to produce high end products expected to
have greater margins and higher quality control. The Korea factory occupies
approximately 39,000 square feet. It is situated in a 155,830 square foot parcel
of land. The land is owned by the Korean government, which has granted the
Company a 20-year rent-free lease. The building is owned by DVS Korea. The
factory can accommodate up to six assembly lines.

Digital Video Systems Korea IPO

In September 2002, our Korean subsidiary (DVSK)
successfully completed an offering of 6 million common shares on the KOSDAK (a
Korean stock market) with trading beginning on October 1, 2002. The value of the
proceeds to the subsidiary were approximately $11 million. The proceeds have
been and are being used to fund new product activities including the DVD player
for the automobile market and rewritable DVD drives for the computing and home
markets.

The Company's ability to realize a higher valuation in Korea
($40 million U.S.) at the time of the IPO was a key factor in its decision to
raise capital on the KOSDAQ, and reflects the Company's position as a worldwide
supplier in the growing DVD market segment. The offering diluted the parent
Company's ownership from 74.6% to 51.4%.

Establishment of DVS Electronics Pvt. Ltd ("DVSE")

In August 2003, we established DVS Electronics
Pvt. Ltd ("DVSE"). Located in Bangalore, India, DVSE is a wholly owned
subsidiary of the Company. DVSE's strategy is to become a leading provider
of digital video products in India for the consumer and export markets.
DVSE is in the process of establishing an end user brand under the
DVS marquee for a product offering that includes DVD players and
home theatre systems.

DVSE's sales and marketing operations presently consist of
over 20 employees in six cities across India, including Bangalore, Chennai,
Mumbai, Delhi, Cochin and Hyderabad. DVSE's headquarters are located in
Bangalore. DVSE intends to develop sales channels, including a dealer and
distributor network, as well as business to business and alliance initiatives
with large corporations. In addition, DVSE is establishing a nationwide after
sales support network for its customers.

Throughout 2004, DVSE will be implementing a
marketing strategy in India to increase brand awareness and build a
sustainable platform for the Company's sales. This is expected to include both
mass media advertising and activities such as public relations, direct
marketing, promotions and sponsorships of events.

DVSE is currently in the initial stages of establishing a
manufacturing capability in India that is intended to serve both the domestic
and the export markets for end consumer and component products. DVSE also plans
to establish research and development (R&D) and product engineering
capabilities in Bangalore, for the development of new products and services
for the Indian and global markets.

Our Products

Our current product offerings consist primarily of
DVD loaders, DVD players and other DVD sub-systems and components. Currently we
are shifting our product development efforts to include recordable DVD loaders,
or DVD+RW, for consumer electronics and DVD players and slot loaders for the
automotive industry, home and portable markets.

DVD Loaders

We have developed a number of models of DVD loaders with
the ATAPI or AV interfaces, which are offered with competitive pricing, quality,
functionality and service. The ability to read imperfect discs is an important
differentiating factor in this market and we believe that our DVD products have
earned an excellent reputation with respect to this factor.

DVD+RW loader - The DRL-100 Recordable ATAPI DVD+RW
loader incorporates proprietary DVS technology and is designed to offer accurate
recording of digital media with low acoustic noise, superior resistance to
shock, and error correction capabilities. The Company believes that this new
DVD+RW loader will be used as the key system component by a wide range of
recorder/player suppliers.

Automotive DVD Product Line - Products include
automotive slot loaders and a range of finished products that include in-dash
DVD players, DVD receivers and portable DVD players designed for automobile and
home use. Some of the advanced features of the DVS line of automotive DVD units,
depending on the model, include: flexible mounting at any angle; superior shock
resistance and error correction; multiple media capability (8 cm as well as the
standard 12 cm discs); ability to read the full range of DVD, CD, and MP3
formats; slot-in loading; and support for multiple types of input/output
connections.

Research and Development

Despite the continued growth in the market for DVD
players, the rapid decline in prices paid by end-users has significantly eroded
the margins for low-end DVD loaders and may continue to decline. The Company's
strategy is to improve margins by moving aggressively into newer market
segments, such as DVD slot loaders, DVD recordables and DVD for automotive
applications.

During fiscal 2003, our research and development efforts
continued to focus on enhancing our DVD technologies, improving product quality,
reducing costs of manufacturing, enhancing product functionality, adopting new
and improved key components, developing new products, and improving the
integration of our products with our customer's products. We have developed more
advanced DVD loaders, including a range of slot loaders that are intended for
the automobile audio and video market and the home consumer market. We have also
developed a DVD-RW loader intended for the home video and PC market. The DVD-RW
product enables users to record data to a DVD-RW disc for various applications
including the recording of live TV broadcasts, the creation of DVD's made from
home videos, high capacity data backups, and the capability of copying VHS tapes
(movies) to discs. As of December 31, 2003, we had 51 engineering personnel,
some of whom focus on supporting the sales and marketing efforts in connection
with customizing product applications for specific customers.

There can be no assurance that our research and development
efforts will progress as anticipated or lead to development of successful, that
we will be able to reduce costs sufficiently to be able to compete with others
marketing similar products or that new product models will be developed on a
timely basis.

Sales, Marketing and Distribution

We sell our DVD loaders primarily to OEMs of DVD
players that do not independently produce the DVD loaders used in their DVD
players. Many of these OEMs are located in China, Turkey, Hong Kong and other
countries. China is one of the largest markets for DVD players, and some of the
DVD player manufacturers in China have been active in exporting their products
outside China at very competitive prices. Some of these DVD player models have
been offered in the United States and Europe under other brand names.

Our sales and marketing personnel attend tradeshows to
increase the awareness and interest in our product offerings. We employ
approximately 10 full time marketing and sales personnel based primarily in
South Korea, who travel to other parts of the world, to sell our products to
OEM's.

Other Business

MPEG-4

A critical success factor for technology companies in
this sector is the ability to judge emerging standards and extrapolate how those
new standards will affect the demand and supply for current and future
commercial products. DVS believes that the new H.264 or MPEG-4 part 10, as it is
otherwise known, is such a standard that will ultimately replace the existing
MPEG2 and MPEG4 standards.

The practical implications of H.264, with a 100% or more
compression improvement over current MPEG technologies, is that bandwidth and
storage requirements can be significantly reduced for future recording
standards, broadcasting networks, and cable and satellite TV systems. H.264 is
actively being considered for use in emerging High Definition DVD standards.

Jeecom Inc. Licensing Agreement

In November of 2002, the company entered into an
exclusive licensing agreement with Jeecom Inc. to develop, market, and sell its
existing and future software products aimed at the wireless mobile marketplace.
Jeecom MBI (Mobile Business Intelligence) is Jeecom's primary product. It
enables users to access and interact with all types of corporate database
applications from almost any mobile device, including laptop computers, PDAs,
and virtually all mobile phones. Other derivative products are planned to
address a variety of specialized and consumer mobile applications. Jeecom Inc.
was founded by Dr. Edmund Sun, the Company's Chairman Emeritus. Dr. Sun is the
majority owner of Jeecom Inc.

MobileTouch Subsidiaries

In January 2003, the Company created MobileTouch
Korea, a wholly owned subsidiary of DVS Korea and MobileTouch USA, a wholly
owned subsidiary of DVSI. MobileTouch USA, has actively been developing software
and hardware implementations based on H.264 technology.

MobileTouch USA, in partnership with Jeecom Inc., is
developing new products and applications directed at the corporate and consumer
mobile applications markets and in particular focusing on media-rich
applications for the consumer market. This project is part of an ongoing
relationship between DVS and Jeecom to develop software that allows mobile
wireless users to access data, information, video and audio, and other services
from a remote PC. The initial products under development will focus primarily on
consumer-oriented entertainment applications allowing mobile wireless users to
access photographs, MP3 audio, and video content from their personal
computer.

MobileTouch Korea has introduced in Korea an innovative
PC-based video conferencing service called PC Ring that enables peer-to-peer
video/audio conferencing among groups of two or more users. A key feature of the
peer-to-peer technology is the ability to operate seamlessly through network
firewalls, and between private networks using NAT (Network Address
Translation).

Other research involves implementing the new compression
technology in devices capable of supplying HDTV programming on next generation
DVD players. To this end, DVS has embarked on a program to create intellectual
property that may be used in next generation DVD integrated circuit solutions.
Ultimately DVS could further develop this technology into products such as HDTV
recorders for home markets.

The company has not generated revenues in connection with the
other businesses described above. In addition, there can be no assurance that
our new product plans will progress as anticipated, that we will be able to
reduce costs sufficiently to be able to compete with others marketing similar
products, or that new product models will be developed on a timely basis.

Intellectual Property and Other Proprietary Rights

We rely on a combination of patent, copyright,
trademark and trade secret rights, confidentiality procedures and licensing
arrangements to establish and protect our proprietary rights. As part of our
confidentiality procedures, we generally enter into non-disclosure agreements
with our employees, distributors and corporate partners and into license
agreements with respect to our software, documentation and other proprietary
information. In addition, we have patents and design rights granted in the
United States and Korea, covering 8 to 17 years. These patents and design rights
include areas such as DVD video, DVD ROM, and video recording to hard drive
applications. We cannot be certain that these measures will adequately protect
our intellectual property rights.

Competition

There are a number of foreign-based electronic
manufacturers substantially larger in size and having greater financial,
marketing, and other resources than we do, such as Thomson Electronics, Sanyo
and Phillips that are competitors or potential competitors with respect to our
DVD products. Some competitors may develop alternative technologies to compete
with our products. They may also begin operations or expand their existing
operations into our market segments.

Our strategy has been to provide each major customer with
changes required of our basic design to ensure compatibility with evolving
customer specifications. Additionally we have emphasized to our management team
that "time to market" is all important and, accordingly, we need to move faster
than our competitors.

Employees

At March 15, 2004 we had 248 full time
employees, including employees of our subsidiaries. We believe that our future
prospects will depend, in part, on our ability to obtain additional management,
finance, accounting, marketing, sales, manufacturing, and technical personnel.
Competition for such personnel is substantial, and the number of persons with
relevant experience is limited. None of our employees is represented by a labor
union. We believe that our employee relations are good.



Item 2.	Properties

As of March 15, 2004, we had the following
facilities leased from third parties, where our executive offices,
manufacturing, engineering, research and development and testing facilities are
located.



|Facility                               | Location                                       | Size (sq. ft.) | Monthly Rent
(in thousands)
|-------------------------------------- | ---------------------------------------------- | -------------- | ---------------------------
|US Main Offices                        | Palo Alto, CA                                  | 3,250          | $          6.3             
|US Sales Offices                       | Sunnyvale, CA                                  | 2,000          | $          2.3             
|Korea Main Offices                     | Sungnam City, Korea                            | 46,628         | $        18.3              
|MobileTouch Korea Offices              | Seoul, Korea                                   | 3,652          | $	2.6                      
|China Sales Offices                    | Shenzhen, China                                | 8,740          | $         4.1              
|Korea Factory                          | Pyengtak City, Korea                           | 39,060         | $         1.3              
|Factory and Warehouse                  | Shanghai Jinqiao Export Processing Zone, China | 123,000        | $       27.5               
|Sales and Administration Offices (Two) | Bangladore, India                              | 14,500         | $	11.6                     

We believe these facilities are adequate and suitable to meet
our needs for at least the next 12 months. Our principal executive offices are
located at 430 Cambridge Avenue, Suite 110, Palo Alto, California 94306 and
our telephone number at that location is (650) 322-8108. We were incorporated in
Delaware in October 1992.

In February 2004, the Company reached agreement to lease the
factory owned by the China joint venture, which was vacated in February 2003.
The monthly rent is $32,197 and the lease runs from April 2004 to March 2007.
The rental income will cover the rental expense of the new building being leased
by the China joint venture.

In February 2003, the Company made a strategic relocation of
its main manufacturing plant in China to a new site in the Shanghai Jinqiao
Export Processing Zone (EXZ). The new facility offers approximately 123,000
square feet of space. The monthly rent obligation is $27,549, or approximately
$0.23 per square foot. The monthly operating expenses at the new facility will
be approximately $2,754, or approximately $0.02 per square foot. The new lease
offers 50% more square footage than the former plant at the same or lower cost.
The term is 3 years and the total future minimum lease payment under this lease
was $0.6 million at December 31, 2003.



Item 3.	Legal Proceedings

We are from time to time a party to various legal
proceedings arising in the ordinary course of our business. The outcome of any
pending legal matters may have a material adverse effect on our business,
operating results or financial condition.

On June 24, 2002, the Company filed a lawsuit in the Santa
Clara County Superior Court against Mali Kuo, Michael Chen, Meng Tek Ung and
Doe's 1 through 50. The complaint has been served on Mr. Chen and Ms. Kuo but
the Company has not yet been able to serve the other named defendants as they
are residing outside of the United States. As of December 31, 2002, the Company
had received Mr. Chen and Ms. Kuo's counterclaims. The Company has established
an accrual of $650,000 for wages and expenses related to prior employment, and
believes that it has meritorious defenses to all other claims.

While we have accrued certain amounts for the estimated legal
costs associated with defending these matters, there can be no assurance that
these cases and other third party assertions will be resolved without costly
litigation, in a manner that is not adverse to our financial position, results
of operations or cash flows or without requiring royalty payments in the future
which may adversely impact gross margins. No estimate can be made of the
possible loss or possible range of loss associated with the resolution of these
contingencies.



Item 4.	Submission of Matters to a Vote of Security
Holders

The Company's annual meeting of stockholders was held on
December 19, 2003.

On November 21, 2003 we mailed a Proxy Statement, pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, to our
security holders to solicit their votes regarding the following matters that
were discussed at our Annual Meeting:

Election of Directors: Dr. Edmund Y. Sun, Pratap K.
Kondamoori, Douglas Watson, John Fuller, Grover T. Wickersham and Venkatapathi
N. Rayapati were elected to serve as directors until the 2004 Annual Meeting of
Shareholders. The votes were as follows:

|Nominee                  | For:      | Against: | Abstain:
|------------------------ | --------- | -------- | --------
|Dr. Edmund Y. Sun        | 4,566,819 | 52,892   | --      
|Pratap K. Kondamoori     | 4,566,819 | 52,892   | --      
|Douglas Watson           | 4,581,819 | 37,892   | --      
|John Fuller              | 4,581,819 | 37,892   | --      
|Grover Wickersham        | 4,461,819 | 157,892  | --      
|Venkatapathi N. Rayapati | 4,581,819 | 37,892   | --      



Executive Officers of the Registrant

The following table sets forth certain information
concerning our executive officers as of March 15, 2004:

|Name              | Age | Position                            
|----------------- | --- | ------------------------------------
|Douglas T. Watson | 51  | Chief Executive Officer and Director
|Robert Baker      | 73  | Chief Financial Officer             

Our executive officers are appointed by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full-time
employee. There is no family relationship between any of our executive officers
or directors.

Management Profile, Corporate Headquarters, Palo Alto,
California

Douglas T. Watson, Chief Executive Officer

Mr. Watson has been a member of the DVS Board of
Directors since November 1998, the year in which he successfully facilitated a
$6 million dollar investment from Oregon Power Institution (OPLI) enabling DVS
to acquire the Hyundai Electronics DVD unit, its intellectual property, patents
and management team which later became DVS Korea. Watson served on the DVS
Executive Committee from November 1998 to March 2002, becoming Chief Executive
Officer in February 2002.

Prior to joining DVS, Watson held the role of President and
Chief Executive Officer of Astoria Metal Corporation (AMC), a California based
ship repair and dismantling firm he founded in 1992. AMC and affiliated
companies were responsible for multi-million dollar contracts with major oil and
gas companies such as Chevron and BP for oil tanker repair projects and other
required assignments. During the 1980's, Watson served in the Far East as a
consultant to Exxon Corporation.

Robert Baker, Chief Financial Officer

With experience as Chief Executive Officer and Chief
Financial Officer of both public and private companies, Robert Baker has served
in his current role of Chief Financial Officer since June 2002. He previously
served DVS as Chief Financial Officer from June 1999 to April 2000 and in a
consulting capacity for various projects from May 1997 to June 1999.

Mr. Baker's extensive financial career includes holding
management positions with General Electric (GE) and IT&T before founding his
own company, Baker Associates, Inc., a management consultant firm to the venture
capital community.



PART II



Item 5.	Market for Registrant's Common Equity and Related
Stockholder Matters and Issuer 	Purchases of Equity Securities

Market Information

Our common stock is listed on the Nasdaq Small Cap Market
under the symbol "DVID." The following table sets forth, for the periods
indicated, the high and low sales prices per share of our common stock as
reported by the Nasdaq Small Cap Market for each quarter within the last two
years.



|               | Common Stock
|-------------- | ------------
|               | High        
|Fiscal 2003    |             
|First quarter  | $	3.00      
|Second quarter | 2.72        
|Third quarter  | 3.13        
|Fourth quarter | 3.20        
|Fiscal 2002    |             
|First quarter  | $	4.46      
|Second quarter | 3.25        
|Third quarter  | 2.95        
|Fourth quarter | 4.60        

________

On March 26, 2004, the last reported sale price for
the common stock was $1.56 per share.

Holders of Common Stock

As of March 26, 2004, there were approximately
223 holders of record of our common stock. This number does not reflect the
number of beneficial holders of the common stock, which we believe is more than
3,000.

Dividends

We have never paid cash dividends on our common
stock. At present, we intend to retain any earnings for use in our business and
do not anticipate paying cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

During the quarter ended December 31, 2003, the
Company issued the following unregistered securities:

In October 2003, the Company issued an aggregate of 67,313
shares of common stock to two warrant holders who exercised previously issued
warrants. Of these warrants, 30,000 were exercised at $1.50 per share and 37,313
warrants were exercised at $1.34 per share.

In November 2003, the Company issued an aggregate of 187,500
shares of common stock to two warrant holders who exercised previously issued
warrants at $1.00 per share. Also in November 2003, 344,222 shares to four
parties in consideration for services rendered, as follows: (i) 50,000
shares at $2.521 per share; (ii) 76, 080 shares at $2.48 per share;
(iii) 168,142 shares at $2.48; and (iv) 50,000 shares at $1.58 per
shares.

In December 2003, the Company issued an aggregate of 106,157
shares of common stock to three warrant holders who exercised previously issued
warrants. Of these warrants, 37,500 were exercised at $1.00 per share;
(ii) 50,000 were exercised at $1.65 per share; and 18,657 were exercised at
$1.34 per share.

The above transactions were exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended, as transactions
not involving a public offering.

The cash proceeds received by the Company from the above
transactions were used to fund ongoing operations and working capital
requirements.



Item 6.	Selected Consolidated Financial Data

|                                                                  | Fiscal Year
Ended
December 31,        | Fiscal Year
Ended
December 31, | Fiscal Year
Ended
December 31, | Nine Month
Fiscal Period
Ended
December 31, | Fiscal Year Ended March 31,
|----------------------------------------------------------------- | ------------------------------------- | ------------------------------ | ------------------------------ | ------------------------------------------- | ---------------------------
|                                                                  | 2003                                  | 2002                           | 2001                           | 2000                                        | 2000                       
|                                                                  | (In thousands, except per share
data)
|Consolidated Statement of Operations Data:                        |                                       |                                |                                |                                             |                            
|Net revenue                                                       | $89,133                               | $157,214                       | $159,871                       | $73,103                                     | $60,292                    
|Gross profit                                                      | 3,588                                 | 11,285                         | 14,076                         | 10,110                                      | 7,783                      
|Research and development                                          | 5,769                                 | 3,043                          | 2,503                          | 2,493                                       | 2,492                      
|Sales and marketing                                               | 2,684                                 | 2,907                          | 2,173                          | 1,902                                       | 1,828                      
|General and administrative                                        | 7,276                                 | 7,054                          | 7,612                          | 3,467                                       | 5,639                      
|Gain (loss) from operations                                       | (12,141)                              | (1,719)                        | 1,788                          | 2,248                                       | (2,176)                    
|Income (loss) before income tax provisions and minority
interests | (13,093)                              | (3,982)                        | 1,895                          | 2,226                                       | 1,198                      
|Net income (loss)                                                 | (8,345)                               | (2,991)                        | 868                            | 1,148                                       | 861                        
|Net income (loss) per share (1):                                  |                                       |                                |                                |                                             |                            
|Basic                                                             | $(1.15)                               | $(0.50)                        | $0.16                          | $0.25                                       | $0.20                      
|Diluted                                                           | $(1.15)                               | $(0.50)                        | $0.14                          | $0.21                                       | $0.20                      
|Weighted average number of shares outstanding                     | 7,266                                 | 5,979                          | 6,146                          | 5,419                                       | 4,363                      

|                                 | December 31,                          | March 31,
|-------------------------------- | ------------------------------------- | ---------
|                                 | 2003                                  | 2002     
|                                 | (In thousands, except per share
data)
|Consolidated Balance Sheet Data: |                                       |          
|Current assets                   | $45,732                               | $59,458  
|Current liabilities              | 44,720                                | 48,086   
|Working capital                  | 1,012                                 | 11,372   
|Total assets                     | 58,771                                | 71,427   
|Long-term obligations            | -                                     | 96       
|Total liabilities                | 44,720                                | 48,182   
|Additional paid in capital       | 77,650                                | 73,334   
|Accumulated deficit              | (73,306)                              | (64,961) 
|Total stockholders equity        | 5,865                                 | 9,811    



1. See Note 1 of Notes to Consolidated
Financial Statements for an explanation of the determination of the number of
shares used to compute basic and diluted net loss per share.



Item 7.	Management's Discussion and Analysis of
Financial Condition and Results of Operations

The following discussion should be read in conjunction
with our Consolidated Financial Statements and notes thereto appearing elsewhere
in this report. Except for historical information, the following discussion
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
that involve risks and uncertainties, including, without limitation, statements
with respect to the Company's strategy, expected operating results, including
gross margins, expected liquidity needs, prospects for raising funds and
anticipated inventory and receivable turns, proposed introduction of new
products, including anticipated features, functionality and timing thereof,
expected impact on our gross margins for such new product introductions, sales
of the Company's products, the markets for the Company's products, and the
development of the Company's products. The Company's actual results may differ
materially from those described in these forward-looking statements due to a
number of factors, including, but not limited to, faster than expected declines
in the average selling prices of our products, a lack of market acceptance of
DVD loaders and other Company products, including our new recordable DVD loader
and products for the automotive industry, lack of availability of working
capital, planned growth of the Company's operations, dependence on a limited
number of suppliers of certain components used in the Company's operations,
risks associated with rapid technological change and obsolescence and product
development, timeliness of new product introductions, conducting business in
foreign countries, such as China, South Korea and India, the competitive market
for the Company's products and other factors described in this report under
"Factors That May Affect Future Results," as well as other documents the Company
has filed from time to time with the Securities and Exchange Commission. A
significant portion of the Company's revenue and net income is derived from
international sales, particularly from customers based in Asia. Fluctuation of
the U.S. dollar against foreign currencies and changes in local regulatory or
economic conditions, among other things, could adversely affect operating
results.

Overview

During the year ended December 31, 2003, the average
unit selling price of DVD loaders sold to OEM DVD player manufacturers continued
to decline to a level at which the Company determined that it would no longer be
able to generate acceptable margins on these products. Accordingly, the Company
has focused on developing products with higher margins. Moreover, many of our
larger customers have initiated their own DVD loader manufacturing operations
thus precipitating a significant reduction in units shipped and resulting
revenues.

In response to these actions, we have been supplying sub
assemblies, such as mechanisms and/or printed circuit boards, to these
companies. These sub-assemblies have a unit selling price that is significantly
lower than an assembled DVD loader, thus also having the effect of reducing
revenue. Although these products enjoy relatively higher margins, these margins
have also been declining. To a certain extent, we have migrated our product
offerings to these sub assemblies during the second half of 2003. Moreover, we
will continue to seek high end users, such as home theater system providers,
that will pay a premium for the increased functionality and reliability of our
DVD loader products.

This rapid and very abrupt reduction of loaders shipped
coupled with the continuing decline in the pricing of loaders and components of
loaders has resulted in an approximately 43% decrease in our annual revenue from
approximately $157 million in 2002 to approximately $89 million in 2003. We have
had to rebalance our inventory as a result of this change in demand for our
current loader products and have written down about $1 million for
inventory that appeared to be in excess of our requirements in 2004. A further
complicating factor which has impacted our cost of goods sold are inventory
shortages identified in the evaluation of our physical inventory taken by our
Korean subsidiary at year-end. At this point we believe these shortages are a
result of errors in the new inventory system implemented in the year 2003. The
impact of these shortages is about $3 million in the quarter ended December 31,
2003 for an aggregate inventory impact of approximately $4.0 million in that
quarter.

As reported in our previous periodic reports, the product
engineering group has been working extended schedules to bring out new and
innovative product in both the rewritable DVD drive for the computing and audio
markets and DVD players and loaders for the automotive market and the home
portable market. As a result, our R&D expenses have increased almost twofold
in absolute dollar terms compared to the year 2002 with spending in 2003
totaling $5.8 million, compared to $3.0 million in 2002. As a result of these
efforts we have developed the following products:

DVD+R/+RW recordable loader - Designed to offer highly
accurate recording of digital media with low acoustic noise, superior resistance
to shock and patented error correction capabilities.

AM/FM/DVD Receiver with fixed face. - In-dash car DVD
video playback support for both 8cm and 12cm disks Dolby Pro Logic Coaxial
output, and in.

Portable DVD Player - Super Slim Size with 3 three
available faces. All have slot in loading mechanisms, mounting at any angle,
color fluorescent displays and many other features and options available:

As reflected above we have diversified our product offerings
and sales and gross margins should show a
positive impact from these efforts in the first two quarters of 2004.

The Company is now working to raise funds to meet working
capital requirements worldwide. Working capital at December 31, 2003 of $1.0
million is down from $11.4 million at December 31, 2002. Our operations in the
United States will require the raising of additional capital within the next
twelve months in order to meet anticipated capital requirements. If we are not
successful in raising capital, we may not meet our financial obligations, and
may have to curtail or cease our operations.

Results of Operations

The table that follows summarizes the impact of these
factors on the Company's financial results (in millions):

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2003                   
|                           | (In thousands)         
|Revenues                   | $ 89.1                 
|Gross margin               | 3.6                    
|Research and development   | 5.8                    
|Sales and marketing        | 2.7                    
|General and administrative | 7.3                    
|Operating (loss) income    | (12.1)                 
|Net (loss) income          | (8.3)                  

Results of Operations for the Year Ended
December 31, 2003 Compared to the Year Ended December 31, 2002

The following table sets forth for the periods
indicated certain income and expense items expressed as a percentage of the
Company's total revenues for the years ended December 31, 2003, 2002, and 2001.
Please see our Consolidated Financial Statements of Operations and Item 6
Selected Consolidated Financial Data for additional details.

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2003                   
|                           | (Percent of revenue)   
|Revenues                   | 100.0%                 
|Gross margin               | 4.0%                   
|Research and development   | 6.4%                   
|Sales and marketing        | 3.0%                   
|General and administrative | 8.2%                   
|Operating income (loss)    | (13.6)%                
|Net income                 | (9.4)%                 

|                     | Year Ended December 31,
|-------------------- | -----------------------
|                     | 2003                   
|                     | (In thousands)         
|Consolidated revenue | $89,133                

As set forth above, total revenue in the twelve-month period
ended December 31, 2003 was $89.1 million, about 43% less than the $157.2
million for the twelve-month period in 2002. The decrease in total revenue is
primarily attributable to erosion of average selling prices for our products and
the shift by many large customers to in-house loader manufacturing requiring
only certain lower price components from the Company. Overseas sales represented
over 95% of revenue for each of the past three years. During the year ended
December 31, 2003, Ellion Digital, in which certain DVSK employees, officers and
directors have a significant ownership interest, Daewoo, and Vestal each
accounted for more than 10% of our revenues. During the year ended December 31,
2002, Vestel was the only customer which accounted for over 10% of revenues.
During the twelve months ended December 31, 2001, SIIG, our joint venture
partner in China, was our only customer which accounted for over 10% of
revenues.

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2003                   
|                           | (In thousands)         
|Gross margin               | $3,588                 
|As a percentage of revenue | 4.0%                   

The rapid decline in gross margin rates during the year 2002
and 2003 is almost entirely attributable to the decline in the selling prices of
DVD loaders during these periods.

During the fiscal year ending December 31, 2003, we
experienced continued pricing decline, in our loaders for the DVD Player market,
of about 10-12% as compared to 2002 levels as competition continues to intensify
in the Company's customer base and the DVD loader/player market. While we
anticipate that our new product introductions will help to reduce the impact of
this trend on our operating margins, should new product prices experience the
same level of reduction in the near term, our total margins will not improve,
and our results of operations and financial position will be significantly
harmed.

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2003                   
|                           | (In thousands)         
|Research and development   | $5,769                 
|As a percentage of revenue | 6.4%                   

Our research and development expenses consist of salaries and
related costs of employees engaged in ongoing research, design, and development
activities and providing our existing OEM customers with custom design and value
engineering options to meet their specific needs. R&D spending increased 90%
or $2.7 million over 2002, primarily due to additional engineers and support
staff added in the second half of 2003 to accelerate the development
of new product programs and to initiate MobileTouch Korea's R&D plan With
respect to our research and development efforts, we expect to continue spending
at about the same rate in absolute dollar terms during 2004 as we invest
heavily in R&D personnel and engineers.

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2003                   
|                           | (In thousands)         
|Sales and marketing        | $2,684                 
|As a percentage of revenue | 3.0%                   

Sales and marketing expense is comprised primarily of
employee related expenses, export freight and insurance, and
advertising/promotional costs. The Company has sales and marketing organizations
in Korea, China and in the United States. These organizations have been
moderately reduced in size from the prior year but still reflect the increases
of 2002 which were necessary due to the shift away from major distributors
(Hyundai in Korea and SIIG in China) used in prior years.

|                           | Year Ended December 31,
2001
|-------------------------- | ----------------------------
|                           | 2003                        
|                           | (In thousands)              
|General and administrative | $7,276                      
|As a percentage of revenue | 8.2%                        

General and administrative expenses increased in the year
ended December 31, 2003 as compared to the year ended December 31, 2002 by 3% or
$0.2 million. General and administrative expenses consist primarily of
administrative salaries and benefits, insurance, facility, legal, accounting,
investor relations and other business support costs. The moderate increase
reflects primarily the initial formation of our Indian subsidiary while also
maintaining our infrastructure as we transition to new products offerings.

Results of Operations for the Year Ended
December 31, 2002 Compared to the Year Ended December 31, 2001

The following table sets forth for the periods
indicated certain income and expense items expressed as a percentage of the
Company's total revenues for the years ended December 31, 2002, and 2001. Please
see our Consolidated Financial Statements of Operations for additional
details.

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2002                   
|                           | (percent of revenue)   
|Revenues                   | 100.0%                 
|Gross margin               | 7.2%                   
|Research and development   | 1.9%                   
|Sales and marketing        | 1.8%                   
|General and administrative | 4.5%                   
|Operating income(loss)     | (1.1)%                 
|Net income                 | (1.9)%                 



|                     | Year Ended December 31,
|-------------------- | -----------------------
|                     | 2002                   
|                     | (in thousands)         
|Consolidated revenue | $157,214               

As set forth above, total revenue in the twelve-month period
ended December 31, 2002 was $157.2 million, about 1.7% less than the $159.9
million for the twelve-month period in 2001. The decrease in total revenue is
primarily attributed to erosion of average selling prices for our products.
Overseas sales represented over 95% of revenue for the twelve-months ended
December 31, 2002, as was the case for the twelve-month period ended December
31, 2001. During the year ended December 31, 2002, Vestel was the only customer
which accounted for over 10% of sales. During the twelve months ended December
31, 2001, SIIG, our joint venture partner in China, was our only customer which
accounted for over 10% of sales. As mentioned previously, unit sales during 2002
more than doubled over 2001, with 4.9 million units shipped in 2002, as compared
to 2.2 million units shipped in 2001.

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2002                   
|                           | (in thousands)         
|Gross margin               | $11,285                
|as a percentage of revenue | 7.2%                   

The rapid decline in gross margin rates during the years 2001
and 2002 is almost entirely attributable to the decline in the selling prices of
DVD loaders during these periods. Using the average selling price of December
2000 as the base period (100%), the following rates of decline occurred with
respect to our margins:

|          | % to Base (100%) Period
|--------- | -----------------------
|          | Q1                     
|Year 2001 | 80%                    
|Year 2002 | 51%                    

In the fourth quarter of 2002 the average selling price of a
DVD loader was only 41% of what it was in December of 2000, a reduction of 59%.
The average selling price declined 43% in the year 2001 and 28% in the year
2002.

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2002                   
|                           | (in thousands)         
|Research and development   | $3,043                 
|as a percentage of revenue | 1.9%                   

Our research and development expenses consist of salaries and
related costs of employees engaged in ongoing research, design, and development
activities and providing our existing OEM customers with custom design and value
engineering options to meet their specific needs. R&D spending increased
20%, or $0.5 million over 2001, particularly in the second half of the fiscal
year as additional engineers and support staff were added to accelerate the
development of new product programs and to initiate MobileTouch Korea's R&D
efforts on the mobile phone hardware platform.

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2002                   
|                           | (in thousands)         
|Sales and marketing        | $2,907                 
|as a percentage of revenue | 1.8%                   

Sales and marketing expense is comprised primarily of
employee related expenses, export freight and insurance, and
advertising/promotional costs. The Company has sales and marketing organizations
in Korea, China and in the United States. These organizations have been
significantly expanded due to the shift away from our major distributors
(Hyundai in Korea and SIIG in China) used in prior years. As a result, overall
spending for sales and marketing increased 34%, or $0.7 million over 2001.

|                           | Year Ended December 31,
|-------------------------- | -----------------------
|                           | 2002                   
|                           | (in thousands)         
|General and administrative | $7,054                 
|as a percentage of revenue | 4.5%                   

General and administrative expenses decreased in the year
ended December 31, 2002 as compared to the year ended December 31, 2001 by 7%,
or $0.6 million. General and administrative expenses consist primarily of
administrative salaries and benefits, insurance, facility, legal, accounting,
investor relations and other business support costs. As reflected in the table
above, general and administrative expenses as a percentage of revenue remained
essentially constant when compared to the twelve-month period ended December 31,
2001.

Liquidity and Capital Resources

At December 31, 2003 the Company had $12.6 million
of cash and cash equivalents of which $6.2 million was restricted as collateral
for lines of credit.

Our operating activities used cash of $2.6 million during
2003. We experienced a net loss in 2003 of $8.3 million, adjusted by the non-cash
 reduction in the majority interest of the investors of our Korean
Subsidiary (DVSK) and Chinese joint venture, totaling $4.9 million, which was
partially offset by the non-cash impact of depreciation and amortization of $2.4
million, the issuance of common stock for services provided with a fair value of
$0.1 million and the increase of allowance for doubtful accounts of $0.8
million. Cash provided by operating activities in 2003 was provided by a
reduction in accounts receivable of $7.9 million partially offset by a $3.2
million account receivable from a related party. Net inventory was reduced by
$1.1 million which included accounting adjustments of approximately $4.0
million, as the Company adjusted to the significant and abrupt change in the
market demand for DVD loaders now being manufactured by the DVD player
providers. Reduction in accounts payable of $1.1 million were made during the
year 2003 attributable to a reduction in expenditures during the year.

Inventory turn and receivables turn for the years ended
December 31, 2003 and 2002 were as follows:

|                | Year Ended December 31,
|--------------- | -----------------------
|                | 2003                   
|Inventory turn  | 3.3 X                  
|Receivable turn | 10.8 X                 

We currently expect that for the year 2004, inventories will
turn at a slightly higher rate than in the previous twelve-month period.
Receivable turns in the year 2004, however, are likely to be lower than in the
previous twelve-month period due to the competitive market, which will likely
require the Company to extend open credit terms to maintain and attract
customers.

Net cash used in investing activities was $4.3 million, of
which $4.3 was for plant and equipment. Of the $4.3 million spent, $3.4 million
was in our Korean facilities. DVSK spent $1.9 million, which was used for molds
(tooling) for new products introduced in 2003, $0.7 million on building
additions, $0.6 on machinery and fixtures, and other items totaling $0.2
million. Additionally, the China joint venture acquired plant equipment totaling
$0.8 million and the remaining $0.1 million was spent by our U.S. and Indian
operations. The remaining $0.3 used in investing activities was a required
increase in restricted cash by our Korean bank lenders.

During 2003, net cash provided by financing activities was
$1.3 million, with $1.4 million in proceeds from the sale of stock in July 2003,
proceeds from bridge loans of $0.3 million and the exercise of warrants totaling
$0.4 million. Offsetting payments included of $0.6 million by our China joint
venture on their working capital loan, and $0.3 million payment by our Korean
subsidiary in paying off their long-term note.

In July 2003, the Company sold 1,293,643 common stock units
in a private placement resulting in net proceeds of $1.4 million, including the
conversion of the bridge loans issued in June and July 2003. Each unit consists
of one share of common stock and one warrant to purchase one share of common
stock at an exercise price of $2.80 per share. The warrants become exercisable
beginning in January 2004 and expire in July 2006. The Company has the right to
redeem any unexercised warrants for $0.10 per warrant upon 30 days notice, if
the underlying shares have been registered and the Company's common stock has a
closing sales price over $3.50 per share for the ten consecutive trading days on
the Nasdaq SmallCap Market.

In February 2003, the Company made a strategic relocation of
its main manufacturing plant in China to a new site in the Shanghai Jinqiao
Export Processing Zone (EXZ). The new facility offers approximately 123,000
square feet of space. The monthly rent obligation is $27,549, or approximately
$0.23 per square foot. The monthly operating expenses at the new facility will
be approximately $2,754, or approximately $0.02 per square foot. The new lease
offers 50% more square footage than the former plant at the same or lower cost.
The term is 3 years and the total future minimum lease payment under this lease
was $0.3 million for 2004 and 2005.

The factory owned by our joint venture of 73,000 square feet
was vacated in February 2003 and has been leased to TRW Systems Consulting
Services as of April 1,2004. This lease expires on April 1, 2007. Monthly rental
income from this lease is $32,197. The rental income exceeds the expense of the
new building (123,000 square feet) being leased by the joint venture in the
Shanghai Jinqiao Export Processing Zone (EXZ).

Our working capital is $1.0 million at December 31, 2003, as
compared to $11.4 at December 31, 2002. Our bank lines in Korea have been
reduced as of March 25, 2004 to $30.5 million, consistent with our current
operating levels and reflecting concern over our losses in 2003. We believe that
the banks line will be increased but will most likely require an infusion of
equity and/or debt subordinate to existing bank debt to fund our operations.

Our operations in the United States will require the raising
of additional capital within the next twelve months in order to meet currently
anticipated capital requirements and the Company is currently in discussions
with investors and investment firms and hopes to have agreements reached for
this funding during the second quarter of 2004. There is no assurance that the
Company will be able to raise additional capital on acceptable terms or at all.
If we do not raise additional capital, we may not be able to meet our financial
obligations, and may have to cease or curtail our operations or consider certain asset sales.

In January 2004, we sold 1,212,121 shares of our common stock
to a group of investors for $1.65 per share. The gross proceeds to us were
approximately $2.0 million. We have applied a portion of the proceeds for
initial funding of DVS Electronics, Pvt. Ltd., our subsidiary in India.

Contractual Obligations

The following table summarizes our significant
contractual obligations at December 31, 2003, and the effect such obligations
are expected to have on our liquidity and cash flows in future periods.

|                              | Payments Due by Period (in
000's)
|----------------------------- | ---------------------------------
|Contractual Obligations       | Total                            
|Operating lease obligations   | $1,683                           
|Line of Credit                | 26,051                           
|Notes payable                 | 3,663                            
|Total Contractual Obligations | $31,397                          

Off-Balance Sheet Arrangements

The Company had no "Off-Balance Sheet Arrangements"
(as defined by Item 303 of Regulation S-K) at December 31, 2003.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standard
Board ("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 have been delayed and currently apply
to the first fiscal year or interim period beginning after December 15, 2003. We
do not have any entities as of December 31, 2003 that will require disclosure or
new consolidation as a result of adopting the provisions of FIN 46.

In May 2003, the FASB issued Statement of Financial
Accounting Standard No. 150 ("SFAS" 150), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in certain circumstances). Many of these instruments
were previously classified as equity. Although some of the provisions of this
statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, "Elements of Financial Statements", the remainder is
consistent with FASB's intention to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. We adopted SFAS 150
effective July 1, 2003. The adoption of SFAS 150 did not have a material impact
on our financial position, results of operations or cash flows.

Critical Accounting Policies

Management's discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to product returns, accounts
receivable, inventories, investments, intangible assets, income taxes, warranty
obligations, restructuring, contingencies and litigation. Actual results may
differ from these estimates under different assumptions or conditions. These
estimates and judgments are reviewed by senior management on an ongoing basis,
and by the Audit Committee at the end of each quarter prior to the public
release of our financial results. We believe the following critical accounting
policies affect our more significant judgments and estimates used in preparation
of our consolidated financial statements.

Revenue Recognition

Net revenues include product and component sales. The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable, and collection
is probable. These criteria are met at the time the product is shipped to the
customer. Shipping terms are freight on board shipping point. Returns and
discounts on sales are deducted from revenue upon issuance of a credit memo.
Returns for products under warranty are repaired and returned to the customer at
the Company's cost. The Company provides for an estimate of costs that may be
incurred under its warranty at the time product revenue is recognized. The
Company had a warranty reserve of $54,000 and $130,000 at December 31, 2003 and
2002, respectively.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers or channel partners were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowance may be required.

Excess and Obsolete Inventory

We write down our excess and obsolete inventory equal to
the difference between the cost of inventory and the estimated market value
based upon assumptions about future product life-cycles, product demand, and
market conditions. If actual product life cycles, product demand and market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.

Deferred Taxes

We estimate our actual current tax exposure together with
our temporary differences resulting from differing treatment of items for tax
and accounting purposes. These temporary differences result in deferred tax
assets and liabilities. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income and to the extent we believe
that recovery is not likely, we must establish a valuation allowance. At
December 31, 2003 we had provided a valuation allowance for the entire amount of
tax assets net of tax liabilities. To the extent that we increase or decrease a
valuation allowance in a period, the resulting expense or benefit is included
within the tax provision. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets and liabilities
and any valuation allowance recorded against net deferred tax assets.

Goodwill and Other Identifiable Intangibles

We assess the impairment of goodwill and other
identifiable intangibles annually or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Significant under
performance relative to projected operating result, changes is the manner of our
use of the acquired assets and significant negative industry or economic trends
are the more significant indicators that we consider. Any resulting impairment
loss could have a material adverse impact on our financial condition and results
of operations. The Company wrote off $175,000 of goodwill after performing an
impairment assessment in 2002.

Determining Functional Currencies for the Purpose of
Consolidation

Our majority owned Korean subsidiary and Chinese joint
venture represent the vast majority of our revenues, assets, and liabilities at
December 31, 2003. In preparing our consolidated statements, we are required to
translate the financial statements of the foreign entity from the currency in
which they keep their accounting records, generally the local currency, into
United States dollars. This process results in exchange gains and losses which,
under the relevant accounting guidance are either included within the statement
of operations or as a separate part of our net equity under the caption
"cumulative translation adjustment."



RISK FACTORS

You should carefully consider the risks described below
before making an investment decision. The risks described below are not the only
ones facing our company. Additional risks not presently known to us or that we
currently believe are immaterial may also impair our business operations. Our
business could be harmed by any of these risks. The trading price of our common
stock could decline due to any of these risks and you may lose all or part of
your investment. In assessing these risks, you should also refer to the other
information contained or incorporated by reference herein, including our
consolidated financial statements and related notes.

Our capital resources may not be sufficient to meet our
capital requirements.

Since our inception, we have periodically experienced
negative cash flow from operations and could experience significant negative
cash flow from operations in the future. Our current and future capital
requirements are substantial, and we cannot be certain that cash generated from
operations will be sufficient or that financing will be available at favorable
terms when required, or at all. We have experienced significant shortages in our
cash flows and have experienced difficulties in funding our operating expenses
and paying our creditors. We believe our current capital resources are
insufficient to meet currently anticipated capital requirements over the next 12
months, so if we are not successful in raising capital, we may not meet our
financial obligations to our creditors when they become due or we may have to
curtail or cease certain operations.

Our operating results fluctuate significantly, and an
unanticipated decline in revenue or earnings may disappoint investors or
securities analysts and result in a decline in our stock price.

In addition to the losses incurred in the year ended
December 31, 2003 and during the year ended December 31, 2002, we have incurred
substantial net losses in the past, as recently as, among others, fiscal years
ended March 31, 1999, 1998 and 1997. We also expect to generate losses as
we invest heavily in personnel and engineers in connection with our research and
development efforts related to new product development during 2004. Our recent
quarterly and annual operating results have fluctuated, and will continue to
fluctuate, due to the following factors, all of which are difficult to forecast
and many of which are not within our control:

- market acceptance of our new products;
- ability of our customers to complete their development of their
products which incorporate our products;
- recent trends by current and former customers to
implement their own DVD loader manufacturing operations, and whether entities
that do so continue to buy sub-assemblies from us;
- the availability, timely delivery and cost of components
from our suppliers;
- fluctuations in manufacturing yields and significant
yield losses which affect our ability to fulfill orders;
- new product announcements and introductions for competing
products by us or our competitors;
- competitive pressures and related changes in selling
prices;
- the rate at which our products become obsolete;
- unpredictability of changes in demand for, or in the mix
of, our products;
- the gain or loss of significant customers;
- changes in the channels through which our products are
distributed and the timeliness of receipt of distributor resale information;
- exchange rate fluctuations;
- general economic, political and environmental-related
conditions, such as natural disasters;
- difficulties in forecasting, planning and management of
inventory levels, which may trigger lower of cost or market inventory
adjustments;
- unanticipated research and development expenses
associated with new product introductions;
- the timing of significant orders and of license and
royalty revenue; and
- the seasonality in our business.

A downturn in the market for consumer products such as
personal computers and DVD players that incorporate our products can also harm
our operating results. In addition, some of our customers may place orders at or
near the end of a quarter. As a result, we may not learn of revenue shortfalls
until late in a quarter and may not be able to predict future revenues with
accuracy. Additionally, a large portion of our costs consist of salaries for
personnel and materials that must be ordered several months in advance. These
costs are based in part on our expectations for future revenues and are
relatively fixed in the short term. As a result, any revenue shortfall below
expectations would likely harm our operating results.

Our growth and future profitability depend upon our
ability to successfully develop and commercialize new DVD products, as well as
market acceptance of such products.

During the last three years, a substantial amount of our
revenues have been generated by the DVD product line, which is central to our
growth strategy. The market for this line of products has experienced intense
competition and is highly price sensitive. We have recently experienced a
declining rate of revenues from sales of our DVD loaders as a result of a
decrease in demand from our customers. The average unit selling price for our
DVD loader products has decreased and we expect it to continue to decrease in
the foreseeable future. Unless we obtain an equally reduced cost of revenues,
our gross margins will continue to decline. Successful development and
commercialization of new products, as well as market acceptance of such
products, is essential to our growth and future profitability. While we are
currently developing and introducing new products in this product line, we
cannot assure you that these products will reach the market in a timely manner,
satisfactorily address customer needs, be sold in high volume, or be sold at
profitable margins. In addition, we expect to invest heavily in research and
development personnel and engineers during 2004.

We may require additional capital in order to bring new
products to market, and the issuance of new equity securities will dilute your
investment in our common stock.

To permit the growth of our business operations in the
future, we may need to bring new products to market, which will likely require
significant working capital. We have established credit facilities with certain
Korean banks with a total borrowing limit of about $44 million as of December
31, 2003. In March 2004, credit lines were reduced to a total of $30 million
consistent with our recent reduction in revenues and losses sustained in 2003.
We have also formed alliances with state-run businesses in China, which have
committed to substantial amounts of trade credit and financing for production in
China under certain terms. However, there is no assurance that these credit
facilities will always be available. We will likely need to sell shares of our
common stock or seek additional borrowings or outside capital infusions in the
next twelve months. We cannot assure you that such financing options will be
available on terms acceptable to us, if at all. In addition, if we issue shares
of our common stock, our shareholders will experience dilution with respect to
their investment.

We depend on a limited number of foreign suppliers to
manufacture certain key components, and these manufacturers may not be able to
satisfy our requirements, which could cause our revenues to decline.

We currently buy certain key components, including
optical pick-ups, motors, central processing units and certain other integrated
circuits from a limited number of suppliers including Zoran, Mediatech, and
Hitachi. We anticipate that these suppliers will manufacture sufficient
quantities of these key components to meet our production requirements. If these
suppliers fail to satisfy our requirements on a timely basis and at competitive
prices, we could suffer manufacturing delays, a possible loss of revenues or
higher than anticipated costs of revenues, any of which could seriously harm our
operating results. Any constraints on worldwide manufacturing capacity of these
key components may affect our ability to obtain adequate supplies from these
manufacturers. Although our on-going relationships with our key suppliers are
material in the aggregate, we do not have any specific agreement with any
supplier that is material to our business. We purchase materials from suppliers
on an as-needed basis through individual purchase orders, none of which is
material to our business or results of operations. In certain instances, we have
failed to meet the demand for our products or the scheduled shipment dates due
to our inability to obtain a sufficient supply of certain key components from
our suppliers. The suppliers with which we are currently working with, together
with any additional supplier at which capacity might be obtained, may not be
willing or able to satisfy all of our manufacturing requirements on a timely
basis at favorable prices. In addition, we have encountered delays in qualifying
new products and increasing new product production and could experience these
delays in the future. We are also subject to the risks of service disruptions,
raw material shortages and price increases by our suppliers. Such disruptions,
shortages and price increases could seriously harm our operating results.

If we are unable to increase our manufacturing capacity,
we may not achieve our planned growth.

Notwithstanding our recent expansion efforts, in order to
grow, we need to increase our present manufacturing capacity. Events that we
have not foreseen could arise which would limit our manufacturing capacity. In
addition, if we cannot satisfactorily increase our manufacturing capacity, our
ability to grow will be severely impaired and this may harm our operating
results.

Our financing requirements will increase in order to
obtain additional manufacturing capacity in the future.

To obtain additional manufacturing capacity, we may be
required to make deposits, equipment purchases, loans, joint ventures, equity
investments or technology licenses in or with other companies. These
transactions could involve a commitment of substantial amounts of our capital
and technology licenses in return for production capacity. We may be required to
seek additional debt or equity financing if we need substantial capital in order
to secure this capacity and we cannot assure you that we will be able to obtain
such financing on terms acceptable to us, if at all.

If we or our suppliers fail to achieve acceptable
manufacturing yields, we will experience higher costs of revenues and reduced
product availability.

The fabrication of our products requires certain
components produced in a highly controlled and clean environment. Companies that
supply our components sometimes have experienced problems achieving acceptable
manufacturing yields. Low yields may result from marginal design or
manufacturing process drift. Yield problems may not be identified until the
components are well into the production process, which often makes them
difficult, time consuming and costly to correct. Furthermore, we rely on
overseas suppliers of certain key components, which increases the effort and
time required to identify, communicate and resolve manufacturing yield problems.
If our suppliers fail to achieve acceptable manufacturing yields, we will
experience higher costs of revenues and reduced product availability, which
would harm our operating results.

If our suppliers discontinue the manufacturing processes
or lines needed to meet our demands, or fail to upgrade the technologies needed
to manufacture our products, we may face production delays and lower
revenues.

Our products' requirements may represent a small portion
of the total production of the suppliers that manufacture our components. As a
result, we are subject to the risk that a supplier may cease production on an
older or lower-volume manufacturing process that it uses to produce our parts.
Additionally, we cannot be certain our suppliers will continue to devote
resources to advance the production technologies on which the manufacturing of
our parts is based. Each of these events could increase our costs and harm our
ability to deliver our products on time.

Our operating expenses are relatively fixed, and we order
materials in advance of anticipated customer demand; therefore, we have limited
ability to reduce expenses quickly in response to any revenue shortfalls.

Our operating expenses are relatively fixed, and we
therefore have limited ability to reduce expenses quickly in response to any
revenue shortfalls. Consequently, our operating results will be harmed if our
revenues do not meet our revenue projections. We may experience revenue
shortfalls for the following reasons:

- significant pricing pressures that occur due to
competition, over-supply, or other reasons;
- sudden shortages of raw materials or fabrication, test or
assembly capacity constraints that lead our suppliers to allocate available
supplies or capacity to other customers which, in turn, harm our ability to meet
our sales obligations; and
- the reduction, rescheduling or cancellation of customer
orders.

In addition, we typically plan our production and inventory
levels based on customers' advance orders, commitments or forecasts, as well as
our internal assessment and forecasts of customer demand, which are highly
unpredictable and can fluctuate substantially, especially if competition becomes
more intense or the demand is reduced due to seasonal or other factors. From
time to time, in response to anticipated long lead times to obtain inventory and
materials from our suppliers, we may order materials in advance of anticipated
customer demand. This advance ordering may result in excess inventory levels or
unanticipated inventory write-downs if expected orders fail to materialize.

Because our products typically have lengthy sales cycles,
we may experience substantial delays between incurring expenses related to
research and development and the generation of revenues.

It usually requires a number of months to realize volume
shipments after we first contact a customer. We first work with customers to
achieve a design win, which may take months or longer. Our customers then
complete the design, testing and evaluation process and begin to ramp up
production, over a period which typically lasts months or longer. As a result, a
significant period of time may elapse between the time we incur expenses from
our research and development efforts and our realization of revenue, if any,
from volume purchasing of our products by our customers.

We face intense competition from companies with
significantly greater financial, technical and marketing resources that could
adversely affect our ability to maintain or increase sales of our products.

We compete with major international electronics
companies, many of which have substantially greater financial, technical,
marketing, distribution, and other resources than we do. Many of our competitors
have their own facilities for the production of semiconductor components and
have been active in increasing their market shares and their capacity for the
production of competing products. Our DVD products presently account for
substantially all of our revenues. Our competitors or potential competitors
include Hitachi, Toshiba, Sony, Pioneer, Teac, Sanyo, Samsung, Philips, LG, and
many others. Some of our competitors or potential competitors are also suppliers
of key components for some of our products. In these cases, our competitors may
have divisions making competing DVD products that have access to some of our
proprietary information through the divisions supplying components to us, or
exert influence on the parts supplying divisions in ways that may adversely
affect our parts supply. These actions would adversely affect our
competitiveness and sales. Competition may also come from alternative
technologies being developed by these companies.

Our markets are subject to rapid technological change and,
therefore, our success depends on our ability to develop and introduce new
products.

The markets for our products are characterized by:

- rapidly changing technologies;
- evolving and competing industry standards;
- changing customer needs;
- frequent new product introductions and
enhancements;
- increased integration with other functions; and
- rapid product obsolescence.

To develop new products for our target markets, we must
develop, gain access to and use leading technologies in a cost-effective and
timely manner and continue to expand our technical and design expertise. In
addition, we must have our products designed into our customers' future products
and maintain close working relationships with key customers in order to develop
new products that meet their changing needs. In addition, DVD products involve
continually evolving industry standards. Our ability to compete will depend on
our ability to identify and ensure compliance with these industry standards. As
a result, we could be required to invest significant time and effort and incur
significant expense to redesign our products and ensure compliance with relevant
standards. We cannot assure you that we will be able to identify new product
opportunities successfully, develop and bring to market new products, achieve
design wins or respond effectively to new technological changes or product
announcements by our competitors. In addition, we may not be successful in
developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance. Our pursuit of necessary
technological advances may require substantial time and expense. Failure in any
of these areas could harm our operating results.

Our future success depends in part on the continued
service of our key design engineering, sales, marketing and executive personnel
and our ability to identify, recruit and retain additional personnel.

We are highly dependent on our principal management and
engineering staff. There is intense competition for qualified personnel in our
industry, in particular the highly skilled technical personnel involved in the
development of DVD technologies and the production of DVD products. Competition
is especially intense in Silicon Valley, where our corporate headquarters are
located, and in South Korea, where our DVD products have been designed and where
most of our manufacturing takes place. We may not be able to continue to attract
and retain engineers or other qualified personnel necessary for the development
of our business or to replace engineers or other qualified personnel who may
leave our employ in the future. Our business is expected to place increased
demands on our resources and will likely require the addition of new management
and engineering personnel and the development of additional expertise by
existing management personnel. The failure to recruit and retain key technical
and management personnel could harm our business.

Our ability to compete successfully will depend, in part,
on our ability to protect our intellectual property rights, and we may be unable
to do so.

We rely on a combination of patent, trade secrets,
copyright and mask work production laws and rights, nondisclosure agreements and
other contractual provisions and technical measures to protect our intellectual
property rights. Policing unauthorized use of our products, however, is
difficult, especially in foreign countries, such as China and South Korea, where
the laws may not protect our proprietary rights as fully as in the United
States. Litigation may continue to be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Litigation could result in substantial
costs and diversion of resources and could harm our business, operating results
and financial condition regardless of the outcome of the litigation. We have
acquired ownership or license to a number of patents or patent applications
related to our products. However, we cannot assure you that any pending patent
application will be granted, or that such patents will provide adequate
protection for our intellectual property. Since our competitors may design
around our patents or otherwise independently develop competing technology, our
operating results would be seriously harmed by the failure to protect our
intellectual property.

If we are accused of infringing the intellectual property
rights of other parties we may become subject to time-consuming and costly
litigation. If we lose such litigation, we could suffer a significant impact on
our business and be forced to pay damages.

Third parties may assert that our products infringe their
proprietary rights, or may assert claims for indemnification resulting from
infringement claims against us. Any such claims may cause us to delay or cancel
shipment of our products or pay damages, which could seriously harm our
business, financial condition and results of operations. In addition,
irrespective of the validity or the successful assertion of such claims, we
could incur significant costs in defending against such claims. In addition, we
receive from time to time letters or communications from other companies stating
that such companies have patent rights relating to our products. Any legal
finding that we infringe the patent of another company would have a
significantly negative effect on our operating results. Furthermore, if such a
finding were made, there can be no assurance that we could license the other
company's technology on commercially reasonable terms or that we could
successfully operate without such technology. Moreover, if we are found to
infringe, we could be required to pay damages to the owner of the protected
technology and could be prohibited from making, using or selling any products
that infringe the protected technology. In addition, the management attention
consumed by and legal cost associated with any litigation could have a negative
effect on our operating results. During the course of lawsuits there may be
public announcements of the results of hearings, motions, and other interim
proceedings or developments in the litigation. If securities analysts or
investors perceive these results to be negative, it could have a substantial
negative effect on the trading price of our stock. Whether or not we are
successful in any litigation, we expect the litigation to consume substantial
amounts of our financial and managerial resources. Further, because of the
substantial amount of discovery required in connection with this type of
litigation, there is a risk that some of our confidential information could be
compromised by disclosure.

General economic conditions may reduce our revenues and
harm our business.

As our business has grown, we have become increasingly
subject to the risks arising from adverse changes in domestic and global
economic conditions. The impact of any slowdown on us is difficult to predict,
but it may result in reductions in purchases of products by our end-user
customers, longer sales cycles and increased price competition. As a result, we
might fall short of our revenue expectations for any given quarter or for the
entire year in which a slowdown takes place.

Our business may suffer due to risks associated with
international sales and operations.

Sales of products overseas accounted for 90.8%, 99.7%,
98.1%, 99.0% and 99.6% of our revenues in the fiscal year ended March 31,
2000, the nine-month period ended December 31, 2000, the fiscal year ended
December 31, 2001, the fiscal year ended December 31, 2002 and the fiscal
year ended December 31, 2003, respectively. Our international business
activities are subject to a number of risks, each of which could impose
unexpected costs on us that would have an adverse effect on our operating
results. These risks include:

- impact of currency fluctuations;
- difficulties in complying with foreign regulatory
requirements and standards;
- tariffs and other trade barriers relating to cross border
transactions;
- costs and risks of localizing products for foreign
countries;
- longer accounts receivable payment cycles from customers
located in foreign countries;
- potentially adverse tax consequences resulting from
changes in international tax regulations;
- limits on repatriation of earnings from our foreign
operations; and
- limited ability to effect quality-control measures
associated with our foreign operations.

We have offices and conduct our operations in China, South
Korea, and most recently India. We have derived most of our product revenue from
Asia during the last three years. Additionally, our major suppliers and assembly
subcontractors are all located in Asia. Any kind of economic, political or
environmental instability in this region of the world can have a severe negative
impact on our operating results due to the large concentration of our production
and sales activities in this region. For example, during 1997 and 1998, several
Asian countries where we currently do business, such as Japan, Taiwan and South
Korea, experienced severe currency fluctuation and economic deflation. If such
situations reoccur, it may negatively impact our total revenues and our ability
to collect payments from customers in these regions. During such situations, the
lack of capital in the financial sectors of these countries can make it
difficult for our customers to open letters of credit or other financial
instruments that are guaranteed by foreign banks. Finally, the economic
situation during such periods may exacerbate a decline in selling prices for our
products as our competitors may reduce product prices to generate needed cash.

In addition, we are greatly impacted by the political,
economic and military conditions in Taiwan and China, North Korea and South
Korea and India and Pakistan, which are continuously engaged in political
disputes. Some of these countries have from time to time conducted military
exercises in or near the other's territorial waters and airspace. Such disputes
may continue and even escalate, resulting in an economic embargo, a disruption
in shipping or even military hostilities. This could severely harm our business
by interrupting or delaying production or shipment of our products. Any kind of
activity of this nature or even rumors of such activity could severely
negatively impact our operations, revenues, operating results, and stock price.

We may encounter significant difficulties in understanding
local business practices that may require additional expenditures.

As a substantial portion of our operations are located in
Asia and subject to foreign laws and regulations, our operations in Asia may be
adversely affected by changes in local laws and regulations, such as those
relating to accounting practices, taxation, import and export tariffs,
environmental regulations, land use rights, property and other matters. Local
governments may impose new, stricter regulations or interpretations of existing
regulations, which would require additional expenditures. Asian economies may
also differ in terms of structure, government involvement, level of development,
growth rate, capital reinvestment, allocation of resources, self-sufficiency and
rate of inflation, among others. As a result, we may encounter significant
difficulties in understanding and addressing local business practices that may
require us to incur additional expenses in connection with our international
operations.

Because a small number of customers have accounted for,
and are likely to continue to account for, a substantial portion of our
revenues, our revenues could decline due to the loss of one of these
customers.

Products sold to our top five customers accounted for
approximately 47% and 60% of our revenues during the years ended
December 31, 2002 and 2003, respectively. Products sold to our top 10
customers accounted for approximately 75% 88% and 67% and 78% of our revenues
during the nine-month period ended December 31, 2000, the fiscal year ended
December 31, 2001, and the fiscal years ended December 31, 2002, and 2003,
respectively. In the fiscal year ended December 31, 2003, Ellion Digital, Inc.,
an entity in which certain officers, directors and employees of our Korean
subsidiary have a significant ownership interest, Daewoo, and Vestel accounted
for 19.7%, 16.2%, and 13.3% of our revenue, respectively. In the fiscal year
ended December 31, 2002, Vestel accounted for 23% of our revenue. In the fiscal
year ended December 31, 2001, SIIG, owner of 39% of our Chinese joint
venture,accounted for about 37% of our revenue. In the fiscal year ended
March 31, 2000, Hyundai accounted for about 36% of our revenue. In the
nine-month period ended December 31, 2000, Hyundai accounted for about 42% of
our revenue. No other customers accounted for more than 10% of our revenues
during these three periods. If we were to lose any of these customers or
experience any substantial reduction in orders from these customers, our
revenues and operating results would suffer.

We do not have long-term contracts with our customers and
the loss of a major customer could seriously harm our business.

We do not typically enter into long-term contracts with
our customers, and we cannot be certain as to future order levels from our
customers. When we do enter into a long-term contract, the contract is generally
terminable at the convenience of the customer. An early termination by one of
our major customers would harm our financial results, as it is unlikely that we
would be able to rapidly replace that revenue source.

Our backlog may not result in future revenue, which would
seriously harm our business.

Due to possible customer changes in delivery schedules
and cancellations of orders, our backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period. A reduction of
backlog during any particular period, or the failure of our backlog to result in
future revenue, could harm our business.

Business interruptions could adversely affect our
business.

Our operations are vulnerable to interruptions by fire,
earthquake, power loss, telecommunications failure and other events beyond our
control. We do not have a detailed disaster recovery plan. Our facilities in
Northern California may be subject to electrical blackouts as a consequence of a
shortage of available electrical power. In the event these blackouts occur,
continue or increase in severity, they could disrupt the operations of our
affected facilities. In connection with the shortage of available power, prices
for electricity have risen dramatically, and may continue to increase for the
foreseeable future. Such price changes will increase our operating costs, which
could in turn hurt our profitability. In addition, we do not carry sufficient
business interruption insurance to compensate us for losses that may occur, and
any losses or damages incurred by us could harm our business.

The dynamic nature of our business continues to place a
significant strain on our management systems and resources, and if we fail to
manage the changes in our products, markets and supply chain, our ability to
market and sell our products and develop new products may be harmed.

Our business is experiencing rapid change which has
strained our internal systems and will require us to develop or adopt more
sophisticated information management systems in order to manage the business
effectively. Although we have implemented an ERP system, there is no guarantee
that this system and any new systems implemented in the future will be adequate
to address the rapid changes in sales volume, product mix, regional mix, and
supply chain which we anticipate, or that management will be able to foresee in
a timely manner other infrastructure needs before they arise. Our success
depends on the ability of our executive officers to effectively manage in this
rapidly changing environment. If we are unable to manage our growth effectively,
our results of operations will be seriously harmed.

The price of our common stock is likely to be
volatile.

Our stock has closed at prices ranging from a high of
$6.23 on December 11, 2001 to a low of $1.08 on June 24, 2002. If our gross
and net profits do not grow or grow more slowly than we anticipate, or if
operating or capital expenditures exceed our expectations or cannot be adjusted
accordingly, the market price of our common stock could be materially and
adversely affected. In addition, the market price of our common stock has been
in the past and could in the future be materially and adversely affected for
reasons unrelated to our specific business or results of operations. General
market price declines or volatility in the future could adversely affect the
price of our common stock. In addition, short-term trading strategies of certain
investors can also have a significant effect on the price of specific
securities.

The exercise of warrants or options may depress our stock
price.

There are a significant number of warrants and options to
purchase our common stock outstanding. Holders may sell the common stock
acquired upon exercise of the warrants and options at a market price that
exceeds the exercise price of the warrants and options paid by the holders.
Sales of a substantial number of shares of common stock in the public market by
holders of warrants or options may depress the prevailing market price for our
common stock and could impair our ability to raise capital through the future
sale of our equity securities.

We do not expect to pay dividends.

We have never paid any cash dividends on our common
stock, and we do not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain any future earnings for funding growth and
therefore, do not expect to pay any dividends on our common stock in the
foreseeable future. Therefore, you may not receive any return on an investment
in our common stock in the form of dividends.

RISKS RELATED TO OUR INDUSTRY

The selling prices for our products are very volatile and
subject to industry-wide fluctuations. Our success is dependent on the growth
and strength of the PC market and the DVD video market.

With a focus on the DVD product line, most of our
revenues in the last three years were generated from DVD products. Most of our
new products currently being developed are in the DVD product line, particularly
DVD loaders. The sales of our DVD loaders are related to the markets for DVD
video disks and DVD video players. If we experience an unforeseen downturn in
the markets for DVD video disks and DVD video players or a global over-supply in
the production of DVD loaders, our results of operations from our DVD loaders
business will be adversely affected. Our business could be harmed by such
industry-wide fluctuations in the future.

The cyclical nature of the semiconductor industry could
create fluctuations in our operating results.

The semiconductor industry has historically been
cyclical, characterized by wide fluctuations in product supply and demand. From
time to time, there are shortages or over-production of memory or other types of
devices. Our business could be harmed by such industry-wide fluctuations in the
future because our products incorporate these technologies. When a shortage
occurs with one or more key components, it may be difficult for us to produce
enough quantities of products to fill customers' orders, and it may require us
to pay a higher price for the components in the event of a shortage, adversely
affecting our margin and profitability.

There is seasonality in our business.

Sales of our products in the computer peripherals market
and consumer electronics market are subject to seasonality. Seasonal purchasing
patterns generally lead to higher sales occurring in the second half of each
calendar year although there may be a sharp decline of sales near the Christmas
and New Year's holidays. Sales to China and certain other Asian regions may also
decline near the lunar New Year's holidays in January or February.



Item 7A.	Quantitative and Qualitative Disclosure About
Market Risk

Market Risk

The following discusses our exposure to market risk
related to changes in interest rates and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in "Risk Factors."

Interest Rate Risk

Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio. We do not use derivative
financial instruments in our investment portfolio. The primary objective of our
investment activities is to preserve principal while maximizing yields without
significantly increasing risk. Our investments consist primarily of commercial
paper and certificates of deposits. Due to the nature of our investments, we
believe that there is no material risk exposure. Cash equivalents and short-term
investment are carried at cost, which approximated market value, and investments
in marketability debt securities are carried at amortized cost, which
approximates market value.

Foreign Currency Risk

We develop products in the United States, Korea, China
and India and market our products in North America and the Asia-Pacific region.
As a result, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. As our sales are primarily in U.S. dollars, a strengthening of the
dollar could make our products less competitive in foreign markets.



Item 8.	Financial Statements and Supplementary Data

The financial statements required pursuant to this item
are included in Part IV, Item 15 of this Form 10-K.



Item 9.	Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure

Not applicable.



Item 9A.	Controls and Procedures

(a)    Evaluation of disclosure controls and
procedures.

Our management evaluated, with the participation of our
Chief Executive Officer and our Chief Financial Officer, the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures are effective, except as noted in the next paragraph, to
ensure that information we are required to disclose in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.

During our fiscal year 2003 financial reporting process, the
Company's Chief Executive Officer and Chief Financial Officer, in consultation
with the Company's independent accountants, identified the following
deficiencies which constitute a "reportable condition" as defined under
standards established by the American Institute of Certified Public
Accountants:

- processing and monitoring of work-in-process inventory
resulting from implementation of a new enterprise resource planning system
(ERP); and
- processing and monitoring of intercompany profits
in inventory.

As a result of the above deficiencies, we were not
able to accurately determine inventory levels using our ERP system as of the end
of the period covered by this Annual Report on Form 10-K. However, this problem
was discovered following a physical inventory that was performed at the end of
the period. Based on the results of the physical inventory, the inventory amount
was correctly adjusted as of the end of the period.

(b)    Changes in internal control over financial
reporting.

There was no change in our internal control over
financial reporting that occurred during our fourth quarter that materially
affected, or is reasonably likely to affect, our internal control over financial
reporting, except that, during fiscal 2003, we installed a new ERP system to
address, among other matters, inventory management, which system developed
problems as a result of which we were not able to accurately determine inventory
control levels using that system.

Under the direction of the Audit Committee and the Board of
Directors, senior management directed that the Company dedicate resources and
take steps to strengthen control processes in order both to identify and prevent
the situation that resulted in the year end adjustments for book-to-physical and
intercompany profits in inventory. To this end, the Company is taking the
following immediate steps:

- working on re-programming the enterprise resource
planning system to eliminate the system deficiency that lead to the book-to-physical
 inventory adjustment;
- performing physical inventories on a quarterly basis;
- providing enhanced reporting and monitoring of
intercompany profits in inventory; and
- defining in more detail the manner in which intercompany
profits in inventory arise and should be accounted for.

The Company continues to evaluate the need for further
improvements, including further formalizing its processes, procedures and
policies, to its internal control over financial reporting and disclosure
controls and procedures.



PART III



Item 10.	Directors and Executive Officers of the
Registrant

Information with respect to Directors is included under
the caption "Proposal One - Election of Directors" in the Proxy Statement
for the 2004 Annual Meeting (the "2004 Proxy Statement") and is incorporated
herein by reference. Information with respect to Executive Officers is included
under the caption "Executive Officers of the Registrant" in Part I hereof
after Item 4.

Information regarding delinquent filers pursuant to
Item 405 of Regulation S-K is included under the heading "Section
16(a) Beneficial Ownership Reporting Compliance" in the 2004 Proxy Statement and
is incorporated herein by reference.

Certain information concerning our Audit Committee, Audit
Committee Financial Expert(s) and Code of Ethics is incorporated herein by
reference to our Proxy Statement.



Item 11.	Executive Compensation

The information required by this item is included under
the caption "Proposal One - Election of Directors - Director Compensation" and
"Executive Officer Compensation" in the 2004 Proxy Statement and is incorporated
herein by reference.



Item 12.	Security Ownership of Certain Beneficial
Owners and Management

The information required by this item is included under
the caption "Security Ownership of Principal Stockholders and Management" in the
2004 Proxy Statement and is incorporated herein by reference.



Item 13.	Certain Relationships and Related
Transactions

The information required by this item is included under
the caption "Transactions with Management" in the 2004 Proxy Statement and is
incorporated herein by reference.



Item 14.	Principal Accountant Fees and Services

The information required by this item is included under
the caption "Proposal Three - Ratification of Appointment of Independent
Auditors" in the 2004 Proxy Statement and its incorporated by reference.



PART IV



Item 15.	Exhibits, Financial Statements, Financial
Statement Schedules and Reports on Form 8-K

(a)	The following documents are filed as part of this
Annual Report on Form 10-K:

1.	Financial Statements:

Digital Video Systems, Inc. Consolidated Financial
Statements, the related notes thereto, and the Report of Independent Auditors
are filed as a part of this Form 10-K under this Item 15.

2.	Financial Statement Schedule

The following schedule of the Company is included herein:

Valuation and Qualifying Accounts (Schedule II)

All other schedules are omitted because they are not
applicable or the amounts are immaterial or the required information is
presented in the Consolidated Financial Statements and Notes thereto in
Item 8 above.

3.	Exhibits

See Item 14(c) below.

(b)	Reports on Form 8-K

The Company furnished information under Item 12 on a
Current Report on Form 8-K on November 14, 2003.

(c)	Exhibits

See Exhibit Index.

---

DIGITAL VIDEO SYSTEMS, INC.

Index To Consolidated Financial Statements

|                                                                                               | Page   
|---------------------------------------------------------------------------------------------- | -------
|Report of Burr, Pilger & Mayer LLP, Independent Auditors                                       | 39     
|Consolidated Balance Sheets - December 31, 2003 and 2002                                       | 40     
|Consolidated Statements of Operations - Years ended December 31, 2003,
2002 and 2001           | 41     
|Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2003, 2002 and 2001 | 42     
|Consolidated Statements of Cash Flows - Years ended December 31, 2003,
2002 and 2001           | 43 - 44
|Notes to Consolidated Financial Statements                                                     | 45 - 69

---



REPORT OF BURR, PILGER & MAYER LLP, INDEPENDENT
AUDITORS

To the Board of Directors and Stockholders of

Digital Video Systems, Inc.

We have audited the accompanying consolidated balance sheets
of Digital Video Systems, Inc. and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2003. Our audit also included the financial statement schedule
listed at Item 15(a)(2). The consolidated financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting amounts and disclosures
in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Digital Video Systems, Inc. and subsidiaries as of December 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

/s/ Burr, Pilger & Mayer LLP

Palo Alto, California
                   March 29, 2004

---



DIGITAL VIDEO SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share
amounts)

|                                                                                                                                                                 | December 31,
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------
|                                                                                                                                                                 | 2003        
|ASSETS                                                                                                                                                           |             
|Current assets:                                                                                                                                                  |             
|Cash and cash equivalents                                                                                                                                        | $6,444      
|Restricted cash                                                                                                                                                  | 6,186       
|Marketable debt securities                                                                                                                                       | 423         
|Accounts receivable, less allowance for doubtful accounts of
$480 and $127 for 2003 and 2002, respectively                                                       | 2,045       
|Accounts receivable - related party                                                                                                                              | 3,176       
|Inventories                                                                                                                                                      | 24,645      
|Prepaid expenses and other current assets                                                                                                                        | 2,081       
|Note receivable - related party                                                                                                                                  | 732         
|Total current assets                                                                                                                                             | 45,732      
|Property and equipment, net                                                                                                                                      | 12,639      
|Intangibles                                                                                                                                                      | 335         
|Other assets                                                                                                                                                     | 65          
|Total assets                                                                                                                                                     | $58,771     
|LIABILITIES AND STOCKHOLDERS'
EQUITY                                                                                                                             |             
|Current liabilities:                                                                                                                                             |             
|Line of credit                                                                                                                                                   | $26,051     
|Current portion of long term debt                                                                                                                                | -           
|Notes payable                                                                                                                                                    | 3,603       
|Notes payable - related party                                                                                                                                    | 60          
|Accounts payable                                                                                                                                                 | 11,903      
|Accounts payable - related party                                                                                                                                 | 524         
|Other payables                                                                                                                                                   | 626         
|Accrued liabilities                                                                                                                                              | 1,953       
|Total current liabilities                                                                                                                                        | 44,720      
|Long-term debt                                                                                                                                                   | -           
|Total liabilities                                                                                                                                                | 44,720      
|Minority interest                                                                                                                                                | 8,186       
|Commitments and contingencies (Note 11)                                                                                                                          |             
|Stockholders' equity                                                                                                                                             |             
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized;
no shares issued and outstanding at December 31, 2003 and 2002                                  | -           
|Common stock, $0.0001 par value, 30,000,000 shares authorized;
8,881,090 and 6,183,555 shares issued and outstanding at December 31, 2003 and
2002, respectively | 1           
|Additional paid-in capital                                                                                                                                       | 77,650      
|Accumulated deficit                                                                                                                                              | (73,306)    
|Accumulated other comprehensive (loss) income                                                                                                                    | 1,521       
|Deferred compensation                                                                                                                                            | (1)         
|Total stockholders' equity                                                                                                                                       | 5,865       
|Total liabilities and stockholders' equity                                                                                                                       | $58,771     



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

---



DIGITAL VIDEO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share
amounts)

|                                                                          | Year Ended December 31,
|------------------------------------------------------------------------- | -----------------------
|                                                                          | 2003                   
|                                                                          |                        
|Net revenue                                                               | $89,133                
|Cost of revenue                                                           | 85,545                 
|Gross profit                                                              | 3,588                  
|Operating expenses:                                                       |                        
|Research and development                                                  | 5,769                  
|Sales and marketing                                                       | 2,684                  
|General and administrative                                                | 7,276                  
|Total operating expenses                                                  | 15,729                 
|(Loss) income from operations                                             | (12,141)               
|Other income (expenses):                                                  |                        
|Interest expense                                                          | (1,048)                
|Other income (expense)                                                    | 96                     
|Loss on disposal of fixed assets                                          | -                      
|(Loss) income before minority interest and income tax
(benefit) provision | (13,093)               
|Provision for (benefit from) income taxes                                 | 196                    
|(Loss) income before minority interest                                    | (13,289)               
|Minority interest                                                         | 4,944                  
|Net (loss) income                                                         | $(8,345)               
|Basic net (loss) income per share                                         | $ (1.15)               
|Diluted net (loss) income per share                                       | $ (1.15)               

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

---



DIGITAL VIDEO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

|                                                                             |              |            |               | Accumulated   |           |             
|---------------------------------------------------------------------------- | ------------ | ---------- | ------------- | ------------- | --------- | ------------
|                                                                             |              |            |               | Other         |           |             
|                                                                             |              | Additional |               | Comprehensive |           |             
|                                                                             | Common Stock | Paid-in    | Comprehensive | Income        | Deferred  |             
|                                                                             | Shares       | Amount     | Capital       | Deficit       | (Expense) | Compensation
|Balance at December 31, 2000                                                 | 6,003,617    | $1         | $69,020       | $(62,838)     | $631      | $(131)      
|Comprehensive Income (Loss):                                                 |              |            |               |               |           |             
|Net income                                                                   | -            | -          | -             | 868           | -         | -           
|Translation adjustment                                                       | -            | -          | -             | -             | (841)     | -           
|Comprehensive Income:                                                        |              |            |               |               |           |             
|Exercise of common stock options                                             | 77,922       | -          | 300           | -             | -         | -           
|Conversion of promissory notes to common stock                               | 723,362      | -          | 1,450         | -             | -         | -           
|Issuance of common stock                                                     | -            | -          | 56            | -             | -         | -           
|Amortization of deferred compensation                                        | -            | -          | -             | -             | -         | 71          
|Issuance of common stock in settlement of legal
obligations                  | 210,492      | -          | 524           | -             | -         | -           
|Cancellation of shares placed in escrow                                      | (1,116,141)  | -          | -             | -             | -         | -           
|Balance at December 31, 2001                                                 | 5,899,252    | 1          | 71,350        | (61,970)      | (210)     | (60)        
|Comprehensive Income (Loss):                                                 |              |            |               |               |           |             
|Net loss                                                                     | -            | -          | -             | (2,991)       | -         | -           
|Translation adjustment                                                       | -            | -          | -             | -             | 1,667     | -           
|Comprehensive (Loss):                                                        |              |            |               |               |           |             
|Exercise of common stock options                                             | 50,000       | -          | 166           | -             | -         | -           
|Issuance of common stock                                                     | 30,000       | -          | 45            | -             | -         | -           
|Amortization of deferred compensation                                        | -            | -          |               | -             | -         | 40          
|Gain on sale of subsidiary common stock                                      | -            | -          | 1,177         | -             | -         | -           
|Issuance of common stock for services and in settlement of legal
obligations | 144,303      | -          | 424           | -             | -         | -           
|Escrow stock returned to capital                                             | 60,000       | -          | 172           | -             | -         | -           
|Balance at December 31, 2002                                                 | 6,183,555    | 1          | 73,334        | (64,961)      | 1,457     | (20)        
|Comprehensive Income (Loss):                                                 |              |            |               |               |           |             
|Net loss                                                                     | -            | -          | -             | (8,345)       | -         | -           
|Translation adjustment                                                       | -            | -          | -             | -             | 64        | -           
|Comprehensive (Loss):                                                        |              |            |               |               |           |             
|Exercise of common stock warrants                                            | 330,970      | -          | 446           | -             | -         | -           
|Issuance of common stock                                                     | 1,157,217    | -          | 1,474         | -             | -         | -           
|Issuance of common stock upon conversion of bridge
loans                     | 186,426      | -          | 261           | -             | -         | -           
|Amortization of deferred compensation                                        | -            | -          |               | -             | -         | 19          
|Issuance of common stock for services and in settlement of legal
obligations | 494,222      | -          | 961           | -             | -         | -           
|Issuance of common stock in settlement of accounts
payable                   | 528,700      | -          | 957           | -             | -         | -           
|Fair value of common stock warrants issued to non-
employees                 | -            | -          | 217           | -             | -         | -           
|Balance at December 31, 2003                                                 | 8,881,090    | $1         | $77,650       | $(73,306)     | $1,521    | $(1)        

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

---



DIGITAL VIDEO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

|                                                                                                   | Year Ended December 31,
|-------------------------------------------------------------------------------------------------- | -----------------------
|                                                                                                   | 2003                   
|Operating activities:                                                                              |                        
|Net (loss) income                                                                                  | $(8,345)               
|Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities: |                        
|Minority interest                                                                                  | (4,944)                
|Depreciation                                                                                       | 2,427                  
|Amortization                                                                                       | 252                    
|Issuance of common stock for service provided                                                      | 81                     
|Write down of notes receivable                                                                     | 152                    
|Allowance for doubtful accounts                                                                    | 763                    
|Reserve for inventory                                                                              | 677                    
|Amortization of deferred compensation                                                              | 104                    
|Extinguishment of accounts payable in connection with legal
settlement                             | 334                    
|Deferred tax assets                                                                                | 251                    
|Noncash interest expense                                                                           | 132                    
|Impairment of goodwill                                                                             | -                      
|Loss (gain) on disposal of fixed assets                                                            | 1                      
|Changes in operating assets and liabilities:                                                       |                        
|Accounts receivable                                                                                | 7,941                  
|Accounts receivable - related party                                                                | (3,176)                
|Inventories                                                                                        | 436                    
|Prepaid expenses and other current assets                                                          | 1,372                  
|Other assets                                                                                       | (1)                    
|Accounts payable                                                                                   | (1,064)                
|Accounts payable - related party                                                                   | 90                     
|Accrued liabilities                                                                                | (499)                  
|Other payable                                                                                      | 392                    
|Net cash (used in) provided by operating activities                                                | (2,624)                
|Investing activities:                                                                              |                        
|Maturities (purchases) of marketable debt securities                                               | 4                      
|Acquisition of property and equipment                                                              | (4,280)                
|Proceeds from the sale of property and equipment                                                   | 280                    
|Increase in restricted cash                                                                        | (278)                  
|Net cash used in investing activities                                                              | (4,274)                
|Financing activities:                                                                              |                        
|Investment by minority interest in China joint venture                                             | -                      
|Proceeds from the sale of common stocks, net                                                       | 1,428                  
|Proceeds from the exercise of options and warrants                                                 | 446                    
|(Repayment) of proceeds from line of credit borrowing                                              | (35)                   
|Repayment of bank borrowings                                                                       | -                      
|Proceeds from repayment of note receivable                                                         | -                      
|Proceeds from sale of subsidiary stock                                                             | -                      
|Proceeds from bridge loans                                                                         | 261                    
|Repayment of notes payable                                                                         | (4,220)                
|Proceeds from issuance of notes payable                                                            | 3,660                  
|Repayment of long term debt                                                                        | (288)                  
|Net cash provided by financing activities                                                          | 1,252                  
|Effect of exchange rate changes                                                                    | (240)                  
|Net (decrease) increase in cash and cash equivalents                                               | (5,886)                
|Cash and cash equivalents at the beginning of year                                                 | 12,330                 
|                                                                                                   | $6,444                 

DIGITAL VIDEO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

(in thousands)

|                                                            | Year Ended December 31,
|----------------------------------------------------------- | -----------------------
|                                                            | 2003                   
|Supplemental disclosures:                                   |                        
|Interest paid                                               | $           846        
|Taxes paid                                                  | $	63                   
|Supplemental disclosure of non-cash transaction:            |                        
|Offset of notes payable and note receivable-related
party   | $	-                    
|Issuance of common stock in payment of accounts payable     | $	957                  
|Issuance of common stock and warrants for legal
settlements | $	880                  
|Issuance of common stock for service rendered               | $	81                   
|Issuance of common stock upon conversion of bridge
loans    | $	261                  
|Issuance of common stock for other current assets           | $	46                   

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

---



DIGITAL VIDEO SYSTEMS, INC.
                  Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands Unless Otherwise
Indicated)



The Company

Digital Video Systems, Inc. ("DVS" or "the Company")
develops and markets DVD-ROM drives, DVD loaders, video engines, and certain
computer peripherals.

A significant portion of the Company's operations is based
outside of the United States, principally in South Korea and China. As a result,
the Company must comply with a wide variety of foreign laws and regulations. In
particular, the Company may be materially adversely affected by changes in the
political, social and economic conditions in these countries, and by changes in
government policies with respect to such matters as laws and regulations,
methods to address inflation, currency conversion and restrictions and rates and
methods of taxation.

Liquidity

The Company has incurred net losses and negative cash
flow from operations for the last two years and has an accumulated deficit of
$73.3 million at December 31, 2003. The Company experienced a reduction in
gross margin during the years ended December 31, 2003 and 2002 due to
increased pricing pressure from competition. The Company expects to experience
continued pricing pressure during 2004 as competition becomes more intense. To
partially offset the impact, the Company has taken steps to improve margins and lower costs and
expenses which include controls related to purchasing and engineering efforts.
Management also recognizes the need for an infusion of cash during the year
ended December 31, 2004. The Company expects to require additional funding
and may sell additional shares of its common or preferred stock through private
placements or further public offerings, or it may seek additional credit
facilities and consider certain asset sales. The sales of additional equity or debt securities may result in
additional dilution to existing stockholders. If additional funds are raised
through the issuance of equity or debt securities, these securities could have
rights that are senior to existing stockholders and could contain covenants that
would restrict operation. Any additional financing may not be available in
amounts or on terms acceptable to the Company, if at all.

While the Company is aggressively pursuing the actions
discussed above, there can be no assurance that the Company will be successful
in its efforts to achieve profitable operations, generate sufficient cash from
operations or obtain additional funding sources.

Additionally, the Company is involved in several outstanding
legal matters discussed in note 21, an unfavorable outcome from one or more
of these matters could result in a material adverse effect upon the Company's
financial position and results of operations.

Principles of Consolidation

The accompanying consolidated financial statements of DVS
include the accounts of the Company, its subsidiaries and its majority owned and
controlled corporate joint venture in China. All significant intercompany
transactions and balances have been eliminated in consolidation and the
Company's investment in the consolidated corporate joint venture has been
accounted for at its historical book value. In the opinion of management, the
consolidated financial statements reflect all normal and recurring adjustments
which are necessary for a fair presentation of the Company's financial position,
results of operations and cash flows as of the dates and for the periods
presented.

Use of Estimates

The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Significant
estimates include the level of accounts receivable and inventory reserves.
Actual results could differ from those estimates.

Credit Risk

Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of cash and cash
equivalents, marketable debt securities, and accounts receivables. The Company
primarily invests its cash and cash equivalents and marketable debt securities
in time deposits with high-credit quality institutions and corporate bonds and
notes. The Company is exposed to credit risk in the event of default by these
institutions and corporate entities to the extent of the amount recorded in the
balance sheet. With respect to receivables from customers, the Company primarily
sells its products worldwide to original equipment manufacturers and product
distribution companies in Asia. The Company generally does not require
collateral, and maintains reserves for potential credit losses.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include money market accounts
and highly liquid debt instruments with a remaining maturity of three months or
less at the date of purchase. Restricted cash of $6,186, represented by passbook
accounts and time deposits for its subsidiary, DVS Korea, are used for
collateral related to borrowings and other required deposits.

As of December 31, 2003 and 2002, the fair value of the
cash and cash equivalents consisted of cash and money market funds in the amount
of $12,630 and $18,238, respectively.

Investment in Marketable Debt Securities

The Company classifies its marketable debt securities as
"held to maturity securities" as the Company has the intent and ability to hold
these securities to maturity. These securities are recorded at amortized cost
using the specific identification method. Interest income is recorded using an
effective interest rate, with the associated premium or discount amortized to
interest income. Realized gains and losses are included in earnings.
Additionally, the Company assesses whether an other-than-temporary impairment
loss on the investments has occurred due to declines in fair value or other
market conditions. Declines in fair value that are considered other than
temporary are recorded as charges in the statement of operations. Total
marketable debt securities of $423 and $427 as of December 31, 2003 and
2002, respectively, consist of corporate bonds that mature at various dates
through 2008.

Revenue Recognition

Net revenues include product and component sales. The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable, and collection
is probable. These criteria are met at the time the product is shipped to the
customer. Shipping terms are freight on board shipping point. Returns and
discounts on sales are deducted from revenue upon issuance of a credit memo.
Returns for products under warranty are repaired and returned to the customer at
the Company's cost. The Company provides for an estimate of costs that may be
incurred under its warranty at the time product revenue is recognized. The
Company had a warranty reserve of $54 and $130 at December 31, 2003 and
2002, respectively.

Shipping and Handling Costs

The Company includes fees billed to customers for
shipping and handling in net revenue. Shipping and handling costs are included
in sales and marketing as an operating expense. For the year ended December 31,
2003, 2002, and 2001 these costs were $362, $914 and $581, respectively.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial
instruments including cash and cash equivalents, marketable debt securities,
accounts receivable, line of credit, accounts payable and accrued liabilities
approximate fair value due to their short maturities. Based upon borrowing rates
currently available to the Company for debt with similar terms, the carrying
value of its debt approximates fair value.

Advertising Expense

Advertising expenditures are charged to operations as
incurred and total $35, $126, and $147 in the years ended December 31,
2003, 2002, and 2001, respectively.

Research and Development

Research and development costs are expensed as
incurred.

Accounting for Stock-Based Compensation

The Company accounts for stock based employee
compensation using the intrinsic value method under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations and complies with the disclosure provisions of Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure - an Amendment of FASB Statement No.
123". Under APB 25, compensation expense is recognized on the measurement date
based on the difference, if any, between the fair value of the Company's common
stock and the exercise price.

The following table illustrates the effect on net (loss)
income and net (loss) income per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" to stock based compensation.

|                                                                                               | Year Ended
December 31,
|---------------------------------------------------------------------------------------------- | -----------------------
|                                                                                               | 2003                   
|Reported net (loss) income                                                                     | $(8,345)               
|Add: Stock-based compensation, as reported                                                     | 19                     
|Deduct: Total stock-based compensation determined under fair
value based method for all awards | (910)                  
|Adjusted net (loss) income, fair value method for all stock-
based awards                      | $(9,236)               
|Basic (loss) income per share - as reported	$$                                                 | $	(1.15)               
|Basic (loss) income per share - performa	$$                                                    | $	(1.27)               
|Diluted (loss) income per share - as reported	$$                                               | $	(1.15)               
|Diluted (loss) income per share - performa	$$                                                  | $	(1.27)               

The fair value for each option granted was estimated at the
date of grant using a Black-Scholes option-pricing model, assuming no expected
dividends and the following assumptions:

|                                          | Year Ended December 31,
|----------------------------------------- | -----------------------
|                                          | 2003                   
|Weighted average risk-free interest rates | 1.91%                  
|Average expected life (in years)          | 2.0                    
|Volatility	$$                             | 109% - 155%            

The weighted average fair value of stock awards (including
restricted stock units granted in 2002) granted during 2003, 2002 and 2001 was
$1.13, $0.90, and $2.88, respectively.

The Company accounts for equity instruments issued to
non-employees in accordance with the provision of SFAS 123 and EITF No. 96-18, which
requires that such equity instruments be recorded at fair value on the
measurement date, which is typically the grant date.

Net Income (Loss) per Share

Net income (loss) per share is presented on a basic and
diluted basis, and is computed by dividing net income (loss) by the weighted
average number of common shares and equivalent shares outstanding during the
period. Common share equivalents consist of warrants and stock options (using
the treasury stock method). Under the basic method of calculating net income
(loss) per share, equivalent shares are excluded from the computation. Under the
diluted method of calculating net income (loss) per share, equivalent shares are
excluded from the computation only if their effect is anti-dilutive.

Inventories

Inventories are stated at the lower of cost (moving
average method) or market. The Company has recorded valuation reserves against
inventory of $1,087 and $410 as of December 31, 2003 and 2002,
respectively.

Property and Equipment

Property and equipment are stated at cost net of
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the assets estimated useful lives
of three to seven years or the term of the lease if shorter. When property and
equipment is retired or otherwise disposed of, the cost and accumulated
depreciation or amortization are relieved from the accounts and the resulting
gain or loss is included in the determination of income.

Income Taxes

The Company accounts for income taxes under the liability
method. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowance are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

Long-Lived Assets

Whenever events or changes in circumstances indicate that
the carrying amounts of long-lived assets may not be recoverable, the Company
estimates the future cash flows, undiscounted and without interest charges,
expected to result from the use of those assets and their eventual disposition.
If the sum of the future cash flows is less than the carrying amount of those
assets, the Company recognizes an impairment loss based on the excess of the
carrying amount over the fair value of the assets.

Intangibles

Intangible assets consist of acquired technology and are
stated at cost net of accumulated amortization or at their impaired value.
Amortization is computed using the straight-line method over the assets
estimated useful lives of three to seven years.

Foreign Currency Translation

The functional currency of the Company's foreign
subsidiaries is the local currency. Translation adjustments, which result from
the process of translating foreign currency financial statements into U.S.
dollars, are included as a component of accumulated other comprehensive income.
Transaction gains and losses of $644 for 2003 are included in interest and other
income in the accompanying statement of operations. The amounts for 2002 and
2001 were not considered material.

Comprehensive Income

Other comprehensive income (loss) includes certain
changes in equity that are excluded from net income (loss), such as, translation
adjustments, unrealized holding gains and losses on available-for-sale
marketable securities and certain derivative instruments. The Company's other
comprehensive income (loss) is composed of foreign currency translation
adjustments.

Reclassifications

Certain prior year amounts have been reclassified to
conform to the current year presentation.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standard Board
("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 have been delayed and currently apply to the first fiscal year or
interim period beginning after December 15, 2003. We do not have any entities as
of December 31, 2003 that will require disclosure or new consolidation as a
result of adopting the provisions of FIN 46.

In May 2003, the FASB issued Statement of Financial
Accounting Standard No. 150 ("SFAS" 150), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in certain circumstances). Many of these instruments
were previously classified as equity. Although some of the provisions of this
statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, "Elements of Financial Statements", the remainder is
consistent with FASB's intention to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. We adopted SFAS 150
effective July 1, 2003. The adoption of SFAS 150 did not have a material impact
on our financial position, results of operations or cash flows



Inventories consisted of the following at
December 31, 2003 and 2002:



|                        | 2003    | 2002   
|----------------------- | ------- | -------
|Raw materials           | $16,716 | $9,718 
|Work-in-process         | 2,892   | 8,220  
|Finished goods          | 6,124   | 8,230  
|Total inventories       | 25,732  | 26,168 
|Less inventory reserves | (1,087) | (410)  
|Net inventories         | $24,645 | $25,758



Property and equipment consisted of the following at
December 31, 2003 and 2002:



|                                    | 2003    | 2002   
|----------------------------------- | ------- | -------
|Building and leasehold improvements | $6,034  | $5,143 
|Machinery and computer equipment    | 12,290  | 10,126 
|Furniture and fixtures              | 1,328   | 717    
|Total property and equipment        | 19,652  | 15,987 
|Accumulated depreciation            | (7,013) | (4,920)
|Net property and equipment          | $12,639 | $11,067



Depreciation expense totaled $2,427, $2,344, and $758 for
the years ended December 31, 2003, 2002 and 2001, respectively.



Intangible assets consisted of the following at
December 31, 2003 and 2002:



|                                         | 2003    | 2002   
|---------------------------------------- | ------- | -------
|Intangible assets of acquired businesses | $2,400  | $2,400 
|Less: accumulated amortization           | (2,065) | (1,813)
|                                         | $	335   | $	587  

Amortization expense totaled $252, $251 and $453 for the
years ended December 31, 2003, 2002 and 2001.

In June 2001, the FASB issued SFAS No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets
with an indefinite life are not amortized. Instead of amortizing goodwill and
intangible assets deemed to have an indefinite life, the statement requires a
test for impairment to be performed annually, or immediately if conditions
indicate that such an impairment could exist. The amortization period of
intangible assets with finite lives will no longer be limited to forty years.
This statement had the effect of reducing to zero the Company's amortization of
goodwill effective January 1, 2002. Had the Company been accounting for its
goodwill under SFAS 142 for 2001, the Company's net income would have been $131
more than reported or $0.02 per share on a basic and diluted basis.

During 2002, the Company recognized an impairment charge of
$175 for the remaining book value of goodwill.

Intangible assets will be amortized on a straight-line basis
over their estimated useful lives of three to seven years. The
intangibles-developed technology acquired was determined during fiscal year March 31,
2000 to provide future product developments in the coming years. Thus, the
estimated useful life of the amortization period was changed effective
July 1, 1999 from three to seven years. The aggregate amortization expense
of intangibles over their remaining life is as follows:



|      | Amount
|----- | ------
|2004  | $	250 
|2005  | 85    
|Total | $	335 



On September 30, 1999, the Company entered into an
Asset Purchase and Option Agreement (the "Agreement") with OPLI, a related
party. Pursuant to the Agreement, the Company sold the assets used in its
digital video business, which are comprised of the ad insertion business and the
video on demand businesses (the "Purchased Assets") to OPLI.

The purchase prices for the Purchased Assets and for the
Option (described below) was $3,450 with the purchased asset valued at $2,700
and the Option at $750. The purchase price was paid by delivery of a promissory
note in the principal amount of $3,450 (the "Note"). Principal on the Note was
payable in 36 equal monthly installments commencing on October 31, 1999.
The unpaid principal balance of the Note bears interest at an annual rate of 7%.
The Note was originally secured by a first priority security interest in favor
of the Company in the Purchased Assets and a first priority pledge in favor of
the Company of 987,500 shares of common stock of the Company owned by OPLI.

Pursuant to the terms of the Agreement, OPLI purchased the
option (the "Option") to acquire 212,000 shares (the "Option Shares") of the
common stock of DVS Korea Ltd., a corporation organized under the laws of the
Republic of Korea and at that time was a wholly owned subsidiary of the Company
(DVS Korea). The Option Shares constituted 20% of the issued and outstanding
shares of capital stock of DVS Korea. The Option was exercisable in whole or in
part, for an aggregate exercise price of $500 payable in cash upon exercise of
the Option.

The sale of the Purchased Assets and the Option was recorded
as a note receivable. The purchased assets were written off the books as of
March 31, 1999 as part of a restructuring. As a result, no book value for
these assets existed as of the date of the transaction. The gain of $2,700 for
the sale of the purchased assets has been recognized as other income in the
fiscal year ending March 31, 2000.

OPLI exercised its right to acquire the Option Shares in
November 1999. The book value of the Option Shares at that time was $762. The
sale of the Option for $750 and the proceeds of $500 for exercising the Option
resulted in a gain for the sale of the Option Shares. This gain has been
recognized as other income in the fiscal year ending March 31, 2000.

At December 31, 2001, the OPLI note receivable
outstanding was at $1,974 and was in default. Payment in arrears totaled $1.0
million. The shares of the Company's common stock purchased in 1998 plus the
assets acquired, giving rise to the note receivable, have been pledged and
secured. Some shares of common stock of OPLI shareholders pledged are in the
possession of the Company and at December 31, 2001 had a market value that
equals approximately the outstanding balance due on the note receivable.

DVS provided OPLI with Notice of Default on October 2, 2002.
OPLI failed to cure its default under the note within 10 days of the Notice. On
October 17, 2002, the Company gave Notice to OPLI declaring all amounts due
under the promissory note.

During February 2003, the market value of common stock of
OPLI shareholders held by the Company have a market value of approximately $884
resulting in an adjustment to the reserve requirement of $1,090. The total
reserve at December 31, 2002 is $1,090.

During March 2004, the market value of common stock of OPLI
shareholders held by the Company have a net market value of approximate $732
resulting in an adjustment to the reserve requirement of $1,242. The total
reserve at December 31, 2003 is $1,242.



The Company generally warrants its products for a
specific period of time against material defects. The Company provides for the
estimated future costs of warranty obligations in costs of goods sold when the
related revenue is recognized. The accrued warranty costs represent the best
estimate at the time of sale of the total costs that the Company expects to
incur to repair or replace product parts which fail while still under warranty.
The amount of accrued estimated warranty costs is primarily based on historical
experience as to product failures as well as current information on repair
costs. The following table reflects the change in the Company's warranty accrual
during each of the three periods ended December 31, 2003 (in thousands):



|                                    | 2003 | 2002  | 2001
|----------------------------------- | ---- | ----- | ----
|Warranty accrual, beginning of year | $130 | $335  | $128
|Additions                           | -    | 53    | 207 
|Subtractions                        | (76) | (258) | -   
|Warranty accrual, end of year       | $54  | $130  | $335



The Company has lines of credit with several Korean banks
with borrowing limits varying from $800 to $21,494. The total borrowing limit as
of December 31, 2003 was $43,709. Borrowings under these lines of credit incur
interest at rates between 0.34% to 6.76%, and are guaranteed up to $756 by the
Korea Credit Guarantee fund. The expiration date for these lines of credit vary
between January and November 2004. Cash and cash equivalent deposits of
approximately $6.2 million are restricted as collateral for lines of credit.

The provisions of these lines of credit contain no covenants
related to the maintenance of working capital or other financial ratios. As of
December 31, 2003, the Company owed a total of $26,051 on the lines of credit
and the amount is due as the lines expire.

As of March 25, 2004, borrowing limits have been reduced to
$30,500 and the expiration dates have been extended to May and November
2004.



The Company has notes payable from Shanghai Bank in the
amount of $3,600 and $4,220 for the years ended December 31, 2003 and 2002,
respectively. These notes bear interest at rates between 1.78% to 2.035%, are
collateralized by the joint venture building in China and are due on May 14,
2004. The notes require that the Company maintain certain minimum inventory
levels as collateral for the loans. Other demand notes payable of $3 at December
31, 2003 and 2002 bear interest at a rate of 10% per annum.



At December 31, 2003, the Company had notes payable from
two directors of the Company. The amounts were $15 and $45, respectively, and
bear interest between 5% and 10% and due on demand. The Company repaid both of
these notes in March, 2004.



Long-term debt at December 31, 2003 and 2002 consisted of
the following:



|                                                                                          | 2003 | 2002 
|----------------------------------------------------------------------------------------- | ---- | -----
|Unsecured note payable due to Hanvit Bank, with
interest rate of 6%, due on June 15, 2004 | $ -  | $ 288
|Less current portion                                                                      | -    | (192)
|Total long-term debt                                                                      | $ -  | $ 96 



i. Commitments

The Company leases its facilities and certain office
equipment under non-cancelable leases that require the Company to pay operating
costs, including property taxes, insurance and maintenance. Future minimum lease
payments under these operating leases at December 31, 2003 are as
follows:



|           | Amount
|---------- | ------
|2004       | $	661 
|2005       | 565   
|2006       | 234   
|2007       | 15    
|2008       | 15    
|Thereafter | 193   
|           | $1,683

Rent expense charged to operations was approximately $543,
$661 and $481 for the years ended December 31, 2003, 2002 and 2001,
respectively.

DVS Korea has a license agreement with Phillips which
requires payment of a $3.50 royalty on each "after-the-agreement" sale of a DVD
player.

ii. Minority Interest

During the year ended December 31, 2001, the Company
increased its investment in DVS Korea by acquiring an additional 127,000 shares,
raising its ownership in DVS Korea to 82%. Subsequently employees of DVS Korea
were issued 121,000 shares in satisfaction of outstanding loans to the Company,
thereby reducing the Company's ownership in DVS Korea to 74.6%. In September
2002, DVS Korea went public on the KOSDAQ Exchange issuing 6,000,000 of its
common stock to the Korean public and reducing the Company's ownership in DVS
Korea to 51.4%. At December 31, 2002, the Company also held a 10% ownership
interest in a Joint Venture in China (see note 17) with DVS Korea holding a 51%
interest and the remaining 39% held by the Chinese partner. The sale of the
23.2% interest in DVS Korea resulted in a gain from the sale of subsidiary
common stock of $1,177 which was reflected in additional paid-in capital at
December 31, 2002.

iii. Pending Litigation

On June 18, 2001, the Company filed a lawsuit in the
Santa Clara County Superior Court against Ernst & Young, LLP, the Company's
former auditors. The complaint claims professional negligence, breach of
contract, breach of fiduciary duty, fraud and deceit. The case was scheduled for
mediation in October 2002. Mediation was scheduled for April 28, 2003 pending
discussion between all parties. The case was settled in 2003 and all monies
owing to Ernst & Young, LLP were forgiven plus the Company received cash to
settle expenses incurred in this matter. The settlement was concluded during
2003.

On December 4, 2001, a lawsuit was filed in United
States District Court, Northern District of California against DVS and certain
directors, officers and employees of DVS. The plaintiffs in the foregoing action
are certain investors that purchased securities from DVS in May 2001 and July
2001 in transactions not involving a public offering. The complaint relating to
these transactions purports to allege claims relating to violation of state and
federal securities laws, breach of fiduciary duties, breach of contract, fraud,
and negligent misrepresentation. The plaintiffs seek declaratory judgment
relief, compensatory damages in excess of $1,000, punitive damages, and costs of
suit, including attorneys' fees. DVS has reached a settlement related to this
case and the Company has accrued and reflected in general and administrative
expense $465 during December 31, 2002 related to the lawsuit. This matter was
settled in February 2003. Terms of the settlement included cash of $50,
150,000 shares of common stock with a market value of $315, 225,000 warrants
with an exercise price of $1.00 and an unsecured note of $150 to be paid at the
time the warrants are exercised. The unsecured note of $150 was paid at the time
the warrants were exercised so there is no remaining balance outstanding at
December 31, 2003.

On December 31, 2001, the Company has reached final
settlement agreement with the Company's former corporate counsel, Troy &
Gould, related to unpaid capital raising fees and legal costs. The Company
satisfied the terms of the settlement agreement and received full satisfaction
of the judgment rendered on the previously reported lawsuit by payment of the
settlement amounts in the settlement agreement. The amounts due under the
settlement agreement were payment of $150 in cash and issuance of 23,333 shares
of Company stock. The stock was issued in 2000 and $100 of cash was paid during
2001. An accrual of $50 was recorded at December 31, 2001 for amounts owed under
the settlement agreement and the balance of $50 was paid during February 2002.

On June 24, 2002, the Company filed a lawsuit in the Santa
Clara County Superior Court against Mali Kuo, Michael Chen, Meng Tek Ung and
Doe's 1 through 50. The complaint has been served on Mr. Chen and Ms. Kuo but
the Company has not yet been able to serve the other named defendants as they
are residing outside of the United States. The Company is confident it will
obtain a favorable outcome to the suit. As of December 31, 2002, the Company has
received Mr. Chen and Ms. Kuo's counter claim. The Company has established an
accrual of $650 for wages and expenses related to prior employment of Mr. Chen
and Ms Kuo.

The Company has been named as a defendant in several other
lawsuits in the normal course of its business. In the opinion of management,
after consulting with legal counsel, the liabilities, if any, resulting from
these matters will not have a material effect on the consolidated financial
statements of the Company.



The components of income (loss) before provision for
(benefit from) income taxes were as follows:



|         | Year Ended December 31,
|-------- | -----------------------
|         | 2003                   
|         |                        
|Domestic | $(3,540)               
|Foreign  | (4,609)                
|Total    | $(8,149)               

The provision for income taxes in the year ended
December 31, 2003 of $196 relates to the full valuation allowance recorded
against the deferred tax assets in the current year, some of which were not
reserved at December 31, 2002. The provision for income taxes in the year
ended December 31, 2002 was comprised of state taxes of $27 and foreign tax
credits of $60. The provision for income taxes for the year ended
December 31, 2001 was comprised of states taxes of $60 and foreign taxes
amounting to $662.

Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at December 31,
2003 and 2002 are as follows (in thousands):



|                                            | 2003     | 2002    
|------------------------------------------- | -------- | --------
|Deferred tax assets:                        |          |         
|Net operating loss carryforwards            | $ 11,852 | $ 10,248
|Foreign net operating loss carryforwards    | 1,314    | -       
|Reserves and other accrued expenses         | 137      | (209)   
|Depreciation timing differences             | 95       | (109)   
|Total deferred assets                       | 13,398   | 9,930   
|Valuation allowance for deferred tax assets | (13,398) | (9,930) 
|Net deferred tax assets                     | $	-      | $	-     

The increase in the valuation allowance for deferred taxes
for the year ended December 31, 2003 was $3,468. The decrease in the valuation
allowance for deferred taxes for the year ended December 31, 2002, was
$8,201 and the increase in the valuation allowance for deferred taxes for the
year ended December 31, 2001 was $2,771.

The Company has federal net operating loss carryforwards as
of December 31, 2003 of approximately $31.6 million expiring at various
dates through 2023 and $8.9 million state net operating loss carryforwards net
of limitations expiring as follows:



|Expiration Date | Federal  | California
|--------------- | -------- | ----------
|2002            | $	-      | $	954     
|2003            | -        | 954       
|2004            | -        | 417       
|2009            | 552      | -         
|2010            | 2,811    | -         
|2011            | 1,324    | 1,693     
|2012            | 5,808    | 33        
|2013            | 954      | 4,812     
|2019            | 5,724    | -         
|2020            | 5,131    | -         
|2021            | 4,882    | -         
|2022            | 830      | -         
|2023            | 3,543    | -         
|                | $	31,559 | $	8,863   

Due to the "change in ownership" provisions of the Internal
Revenue Code, the availability of the Company's net operating loss and credit
carryforwards may be subject to an annual limitation in future periods. Such a
change could substantially limit the eventual tax utilization of these
carryforwards. After analyzing the "change in ownership" provisions of the
Internal Revenue Code, Code Section 382, during 2002 the availability of the
Company's net operating loss has been limited in future periods. Due to a
"change in control" in 2002, it is estimated that approximately $24.9 million
federal net operating loss and $4.1 million state net operating loss forward
have been lost.

Under Korean tax regulations the Company's Korean subsidiary
is allowed a foreign investment exemption, currently 51.4% of taxable income,
for 7 years from the taxable year after the year in which the Korean subsidiary
first recognize taxable income, which was fiscal 2000. The Korean subsidiary is
then allowed an additional three-year exemption at 50% of its foreign investment
ratio. The aggregate dollar value of the Company's tax holiday for the Company's
Korean subsidiary foreign tax exemption is $2.0 million dollars for the year
ended December 31, 2001. The impact of the tax holiday on fully diluted earnings
per share is $0.33 for the year ended December 31, 2001. The Company's Korean
subsidiary had a tax loss for the years ended December 31, 2003 and 2002 and as
such received no benefit from the foreign tax exemption in the current year.

Under Chinese tax regulations the Company's Chinese joint
venture is entitled to two years of complete tax exemption followed by three
years of 50% tax reduction, commencing from the first profit making year net of
losses carried forward. The Chinese Joint Venture is in tax loss position for
the years ended December 31, 2003, 2002 and 2001 and as such has received no
benefit from the foreign tax exemption.



The computation of net income (loss) per share was as
follows:

|                                                                     | Year Ended December 31,
|-------------------------------------------------------------------- | -----------------------
|                                                                     | 2003                   
|Net (loss) income                                                    | $  (8,345)             
|Weighted average common shares outstanding                           | 7,478                  
|Weighted average unvested restricted stock                           | (212)                  
|Weighted average common shares outstanding - basic                   | 7,266                  
|Effect of dilutive stock options and warrants                        | -                      
|Weighted average common shares and equivalents outstanding -
diluted | 7,266                  
|Basic net (loss) income per share                                    | $ (1.15)               
|Diluted net loss income per share                                    | $ (1.15)               

At December 31, 2003, 2002, and 2001, 4,773,951,
2,583,325, and 936,778 options and other warrants were excluded from the
calculation of diluted earnings per share because the effect was anti-dilutive.
At December 31, 2003, there were 250,000 shares of restricted common stock
outstanding.



Common Stock

During 2001, the Company completed a private placement of
723,362 shares of the Company's common stock. Proceeds from the private
placement were $1,700 less costs of raising capital of $250 netting the Company
$1,450. Additionally, the Company issued 210,492 shares in settlement of legal
obligations totaling $524. Options exercised during the year 2001 were 77,922
valued at $300.

During 2002, the Company completed a stock exchange of
204,303 shares for debt and services rendered. Additionally the Company
completed a small private placement of 30,000 common shares. The invested amount
was $45. Options exercised during 2002 were 50,000 shares valued at $166.

During 2003, the Company completed private placements
totaling 1,157,217 common shares and completed a stock exchange of 715,126
shares for debt and services. Additionally shares issued in settlements of legal
obligations and for services provided totaled 494,222. Warrants exercised during
2003 were 330,970 shares for $446. No options were exercised.

Escrowed Securities

All common shares and options to purchase common stock
previously held in escrow were returned to capital at July 15, 2001. Shares
returned to capital totaled 1,116,141 common shares. These shares were placed in
escrow in 1996 through 1997 and their release was subject to certain performance
criteria, not met, and any shares not released to be forfeited on July 15,
2001. No shares were released.

Director Stocks Plan

The Company's stock option plan for its directors provide
for the granting of non-statutory stock option to each non-employee directors at
an exercise price equaling 100% of market price at date of grant. Options vest
25% every six (6) months from date of grant. Each non-employee director was
granted 30,000 options effective with the adoption of the 2002 Director Option
Plan on May 24, 2002. Each subsequent January 1st each non-employee
director who has served for at least six months will receive an additional grant
of 10,000 shares. Under the 2002 Director Option Plan, options granted are
exercisable over a maximum term of ten years from the date of grant and are
subject to various restrictions.

Stock Option Plans

The Company's stock option plans provide for the granting
of incentive stock options and non-statutory stock options to employees,
directors and consultants at prices ranging from 100% to 110% (depending on the
type of grant and the nature of the optionee) of the fair value of the common
stock on the grant date as determined by the Board of Directors. Options vest
ratably over two to four year period commencing as of the date of grant. The
Company has authorized shares of common stock for issuance under the 1993 Stock
Option Plan (the "1993 Plan"), shares of common stock for issuance under the
1996 Stock Option Plan (the "1996 Plan"), shares of common stock for issuance
under the 1998 Stock Option Plan (the "1998 Plan"), and shares of common stock
for issuance under 2002 Stock Plan (the "2002 Plan"). The options granted under
the 1993 Plan, 1996 Plan, 1998 Plan, and 2002 Plan are exercisable over a
maximum term of ten years from the date of grant, and are subject to various
restrictions.

Option activity under the 1993 Plan, 1996 Plan, 1998 Plan,
and 2002 Plan was as follows:



|                             | Outstanding Options
|---------------------------- | -------------------
|                             | Number
of Shares   
|Balance at December 31, 2000 | 661,542            
|Options granted              | -                  
|Options exercised            | (77,922)           
|Options cancelled            | (58,993)           
|Balance at December 31, 2001 | 524,627            
|Options granted              | 848,203            
|Options exercised            | (50,000)           
|Options cancelled            | (183,791)          
|Balance at December 31, 2002 | 1,139,039          
|Options granted              | 567,500            
|Options exercised            | -                  
|Options cancelled            | (40,000)           
|Balance at December 31, 2003 | 1,666,539          

The following table summarizes information regarding
stock options outstanding at December 31, 2003:

|Range of
Exercise Prices | Weighted Average Remaining Outstanding at
December 31, 2003 | Contractual
Life
(Years) | Average
Exercise
Price | Exercisable at
December 31, 2003 | Average
Exercise
Price
|------------------------ | ----------------------------------------------------------- | ------------------------ | ---------------------- | -------------------------------- | ----------------------
|1.300-3.248              | 1,370,696                                                   | 8.86                     | 1.64                   | 676,239                          | 1.58                  
|3.626-5.908              | 221,571                                                     | 5.69                     | 3.94                   | 221,571                          | 3.94                  
|7.000-7.875              | 45,486                                                      | 4.50                     | 7.85                   | 45,486                           | 7.85                  
|8.750-14.658             | 28,786                                                      | 6.08                     | 14.61                  | 27,595                           | 14.61                 
|                         | 1,666,539                                                   | 8.27                     | 2.34                   | 970,891                          | 2.79                  

At December 31, 2002 and 2001, option to purchase 343,578
shares and 326,864 shares of common stock were exercisable, respectively.

Warrants

The Board has authorized a contingent grant of warrants
for Mali Kuo, as former chief executive officer, to purchase 250,000 shares of
the Company's common stock, subject to attainment of certain financing targets
for the Company. These warrants have an exercise price of $6.37. None of these
warrants have been exercised to date.

In connection with the sale of preferred stock to OPLI in
1998, the Company granted a 2 year option to purchase 428,571 shares of common
stock at an exercise price of $5.25. The Board subsequently authorized an
extension to January 25, 2002 for the exercise of the OPLI option. The
options were not exercised and have been cancelled. Additionally, OPLI had been
given the right to invest $3.5 million in the Company's common stock at an
exercise price of $3.29, which right expired on January 25, 2002. The right
was not exercised and has been cancelled.

In connection with bridge loans issued in June and July 2003,
the Company issued warrants to purchase 130,375 shares of common stock with an
exercise price of $1.65 per share. The warrants are exercisable beginning in
November 2003 and expire in November 2004. The fair value of the warrants,
calculated using the Black-Scholes option pricing model, totaling $132, was
recorded as a discount on the loans and accreted to interest expense.

In June 2003, the Company issued warrants to purchase 50,000
to a former Board member as part of his separation. The warrants are exercisable
immediately and expire in July 2006. The fair value of the warrants, calculated
using the Black-Scholes option pricing model, totaling $74, was recorded as
compensation expense.

In connection with a private placement in July 2003, the
Company issued warrants to purchase 1,293,643 shares of common stock to
investors at an exercise price of $2.80 per share. The warrants are exercisable
beginning in January 2004 and expire in July 2006. The Company has the right to
redeem any unexercised warrants for $0.10 per warrant upon 30 days notice, if
the underlying shares have been registered and the Company's common stock has a
closing sale price over $3.50 per share for ten consecutive trading days on the
Nasdaq SmallCap Market. In December 2003, warrants to purchase 50,000 shares of
common stock were exercised. In connection with the private placement, the
Company issued 129,364 warrants to purchase the common stock units (one share of
common stock and one warrant to purchase one share of common stock) issued in
the private placement at $1.40 per share to the placement agent. The warrants
are exercisable on the earlier of January 8, 2004 or the effective date of
the registration statement covering the resale of the common stock and expire in
July 2006.

Warrants to acquire the Company's common stock outstanding at
December 31, 2003 totaled 3,107,412. The following table sets forth the key
terms of these warrants:

|Date of Grant | Underlying Security | Shares Granted | Vesting of Grant     | Expiration Date | Average
Exercise
Price | Reasons for Grant of Warrants
|------------- | ------------------- | -------------- | -------------------- | --------------- | ---------------------- | -----------------------------
|01/08/99      | Common Stock        | 250,000        | Closing of Financing | 01/08/09        | 6.37                   | Employee Services            
|04/04/01      | Common Stock        | 130,000        | Immediate            | 04/04/04        | 2.75                   | Raising Capital              
|04/04/01      | Common Stock        | 150,000        | Immediate            | 04/04/04        | 2.75                   | Employee Services            
|08/07/01      | Common Stock        | 30,000         | Immediate            | 08/06/04        | 3.05                   | Legal Services               
|07/08/02      | Common Stock        | 394,030        | Immediate            | 07/08/07        | 1.34                   | Board Services               
|07/08/02      | Common Stock        | 30,000         | Immediate            | 07/08/07        | 1.34                   | Future Board Services        
|06/17/03      | Common Stock        | 50,000         | Immediate            | 06/16/06        | 1.61                   | Board Services               
|07/07/03      | Common Stock        | 130,375        | November 2003        | 11/15/04        | 1.65                   | Bridge Financing             
|07/07/03      | Common Stock        | 1,373,007      | January 2004         | 07/06/06        | 2.67                   | Private Placements           
|07/28/03      | Common Stock        | 10,000         | Immediate            | 07/06/06        | 3.50                   | Purchase                     
|09/01/03      | Common Stock        | 265,000        | Immediate            | 08/31/06        | 1.75                   | Consultant Services          
|09/01/03      | Common Stock        | 45,000         | Immediate            | 09/01/08        | 1.75                   | Board Services               
|09/03/03      | Common Stock        | 200,000        | Immediate            | 09/03/07        | 1.75                   | Private Placement            
|11/18/03      | Common Stock        | 50,000         | Immediate            | 11/18/04        | 1.65                   | Private Placement            
|              |                     | 3,107,412      |                      |                 | 2.59                   |                              

The warrants granted in 2002 and 2001 to Board members and
employees were done at prices equal to the fair market value of the stock at the
date of grant and as such no compensation expense was recognized in 2002 or 2001
in accordance with APB 25 intrinsic value accounting. The warrants granted for
legal services and capital raising services in connection with the issuance of
common stock have been valued using the fair value at the date of grant using
the Black-Scholes option pricing model. The Company has accounted for the
warrants granted for legal services by recognizing as an expense the fair value
of the warrants at the date of grant. The warrants granted for capital raising
services have been recorded as issuance costs of the transactions.

Employee Stock Purchase Plan

In September 1997, the shareholders approved 71,429
shares for distribution under the Company's employee stock purchase plan which
employees may purchase shares, subject to certain limitations, at no less than
85% of the lower of the fair market value of the shares at the beginning or end
of a three-month purchase period. The first enrollment period for the stock
purchase plan began on April 1, 1998. As of December 31, 2003, no
shares have been distributed to employees under this plan.



During fiscal 1998, the Company implemented a 401(k)
tax-deferred savings plan under which all U.S. employees may contribute up to 16% of
their compensation, subject to certain Internal Revenue Service limitations. The
Company has not contributed to the plan to date. The plan was discontinued
effective December 13, 2001. Total plan assets at December 31, 2002 were $118
were and distributed to the participants of the plan during the year 2003. There
are no plan assets as of December 31, 2003.



The Company operates in one business segment, which
includes developing, producing and marketing digital video systems and
sub-assemblers and computer peripherals.

The Company's net sales by product line are as follows:



|              | _________ Year Ended
December 31,__________
|------------- | -------------------------------------------
|              | 2003                                       
|Product line: |                                            
|Net sales     |                                            
|DVD products  | $ 88,747                                   
|CD product    | 386                                        
|All other     | -                                          
|              | $89,133                                    

A significant portion of the Company's revenue and net income
is derived from international sales, particularly from customers based in Asia.
Fluctuation of the U.S. dollar against foreign currencies and changes in local
regulatory or economic conditions could adversely effect operating results.

Geographic information for revenues and long-lived assets for
the years ended December 31, 2003, 2002 and 2001 are as follows:



|                    | __________Year Ended
December 31,__________
|------------------- | -------------------------------------------
|                    | 2003                                       
|Product line:       |                                            
|Net sales           |                                            
|Domestic            | $	380                                      
|Foreign             | 88,753                                     
|                    | $89,133                                    
|Identifiable assets |                                            
|Domestic            | $1,616                                     
|Foreign             | 57,155                                     
|                    | $58,771                                    

In the years ended December 31, 2003 and 2002, foreign
sales to China were approximately $10 million and $92 million, respectively, and
sales to Turkey were approximately $16 million and $37 million, respectively. In
the year ended December 31, 2001 foreign sales to China were approximately
$125 million.

In the fiscal year ended December 31, 2003, Ellion Digital,
Inc., Daewoo, and Vestel accounted for 19.7%, 16.2%, and 13.3% of our revenue,
respectively. During the year ended December 31, 2002, the Company had a
major customer who accounted for approximately 22.9% of our revenue. In the year
ended December 31, 2001, the Company had a major customer who accounted for
approximately 42.5% of our revenue.

In the year ended December 31, 2003, the Company had one (1)
customer accounting for 61% of the total accounts receivable.



During 2001, the Company formalized its participation in
a joint venture in China. The Company's majority owned subsidiary, DVS Korea,
received a 51% ownership interest in exchange for the contribution of cash,
assembly and test equipment and the execution of a Technology Investment
Exchange Agreement. The Chinese partner received a 39% ownership interest in
exchange for a cash contribution and the Company received the remaining 10%
ownership interest in exchange for its investment of equipment. The Joint
Venture Agreement has been approved by all partners and by the Chinese
Government. Since the Company controls the activities of the joint venture, its
financial statements have been included in the consolidated financial statements
of the Company using historical book values for the Company's investments.



DVS Electronics Pvt. Ltd. formed in 2003, extended to
Xalted Information System, Pvt. Ltd. (Xalted) a line of credit allowing for
borrowings of up to approximately $280 at an interest rate of 8% per annum. A
Co-Chairman of our Company is the Chief Executive Officer of Xalted. There were
no borrowings in 2003. Xalted borrowed $154 in January 2004, which was repaid in
March 2004. Xalted has provided various operational services to the Company
since DVSE's formation last year, including free rent.

During 2002, certain DVS Korea employees, officers and board
members made significant equity investments into Ellion Digital. During 2003,
DVS Korea and the joint venture in China had related party transactions with
Ellion Digital. During the year ended December 31, 2003, DVS Korea had total
sales of approximately $3,127 to Ellion Digital. As of December 31, 2003, DVS
Korea had receivables from Ellion Digital of $759 for product and equipment
sales. Further, the China joint venture sold products to Ellion Digital in the
amount of $14,429 during the year ended December 31, 2003 and had $2,417 in
accounts receivable from Ellion Digital as of December 31, 2003.

License Agreement with Related Party

On December 10, 2002, the Company executed an
exclusive licensing agreement with Jeecom Asia, Inc. Jeecom is a mobile
enterprise software developer founded by one of the Company's directors. The
Company has agreed to a development fee of $250 of which 50% was paid in January
2003 and the remainder to be paid by April 30, 2003. Royalties will be paid
on product unit sales on a sliding scale based on volume sold.

Sales to Related Party

During the year ended December 31, 2001, DVS Korea
sold under letter of credit arrangements, $48 million of product to a
partner in the China joint venture.

Accounts Payable from Related Party

At December 31, 2003 and 2002, the Company had
accounts payable to SIIG, a partner in the China joint venture of $524 and $434,
respectively.

Financing with Related Party

In the private placement in July 2003 a director and an
officer of the Company purchased 45,000 shares of common stock for approximately
$63 and received warrants to purchase 75,375 shares of common stock.



In January 2004, we sold 1,212,121 shares of our common
stock to a group of purchasers for $1.65 per share. The gross proceeds were
approximately $2.0 million. The proceeds will be utilized for general corporate
purposes and initial funding of DVS Electronics, Pvt. Ltd., (DVSE) the Company's
subsidiary in India formed in 2003. As mentioned previously we will require
raising of additional capital.

In February 2004, the Company reached agreement to lease the
factory owned by the China joint venture which was vacated in February 2003. The
monthly rent is $32 and the lease runs from April 2004 to March 2007. The rental
income will cover the rental expense of the new building being leased by the
China joint venture.



The following tables contain selected unaudited
statements of operations information for each quarter of the year ended December
31, 2003, and 2002.

|                                                                   | Year Ended December 31,
2003                        
|------------------------------------------------------------------ | ----------------------------------------------------
|                                                                   | Fourth Quarter                                      
|                                                                   | (in thousands, except per share amounts)
(unaudited)
|Net revenue                                                        | $	18,530                                            
|Gross profit                                                       | (2,182)                                             
|Net loss                                                           | (3,851)                                             
|Net loss per share (1) - basic and diluted                         | $ (0.47)                                            
|Shares used in computation of basic and diluted net loss per
share | 8,282                                               

|                                                                           | Year Ended December 31,
2002                        
|-------------------------------------------------------------------------- | ----------------------------------------------------
|                                                                           | Fourth Quarter                                      
|                                                                           | (in thousands, except per share amounts)
(unaudited)
|Net revenue                                                                | $	44,032                                            
|Gross profit                                                               | 861                                                 
|Net (loss) income                                                          | (2,040)                                             
|Net(loss) income per share (1) - basic and diluted                         | $ (0.34)                                            
|Shares used in computation of basic and diluted net(loss) income
per share | 5,979                                               

_________

(1)	See Consolidated Statements of
Operations.

The four quarters for net income (loss) per share may
not add to the total year because of differences in the weighted average number
of shares outstanding during the quarters and the year.

Gross profit for the 2003 fourth quarter include a charge of
approximately $3.6 million related to a book to physical adjustment as well as
adjustments to the inventory reserve. In addition, the net loss for the 2003
fourth quarter also included adjustments to reduce general and administrative
expenses of approximately $0.9 million due to the release of accruals no longer
required. The effect of these adjustments was to increase the 2003 fourth
quarter net loss and net loss per share by approximately $2.7 million and $0.33
per share.

---



DIGITAL VIDEO SYSTEMS, INC.

Schedule II

Valuation and Qualifying Accounts and Reserves

(in thousands)

|Description                                    | Balance at
Beginning
of Period | Additions
Charged to
Costs and
Expenses | Deductions | Balance at
End of Period
|---------------------------------------------- | ------------------------------ | --------------------------------------- | ---------- | ------------------------
|2003:                                          |                                |                                         |            |                         
|Allowance for doubtful accounts receivable     | $	127                          | $	763                                   | $ 410      | $	480                   
|Warranty reserve                               | 130                            | -                                       | 76         | 54                      
|Deferred tax asset valuation allowance         | 9,930                          | 1,970                                   | -          | 11,900                  
|Reserve for slow moving and obsolete inventory | 410                            | 677                                     | -          | 1,087                   
|2002:                                          |                                |                                         |            |                         
|Allowance for doubtful accounts receivable     | $	320                          | $ 18                                    | $ 211      | $	127                   
|Warranty reserve                               | 335                            | 53                                      | 258        | 130                     
|Deferred tax asset valuation allowance         | 18,131                         | -                                       | 8,201      | 9,930                   
|Reserve for slow moving and obsolete inventory | 328                            | 82                                      | -          | 410                     
|2001:                                          |                                |                                         |            |                         
|Allowance for doubtful accounts receivable     | $	952                          | $	423                                   | $1,055     | $	320                   
|Warranty reserve                               | 128                            | 207                                     | -          | 335                     
|Deferred tax asset valuation allowance         | 15,360                         | 2,771                                   | -          | 18,131                  
|Reserve for slow moving and obsolete inventory | 397                            | -                                       | 69         | 328                     

---



SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Palo Alto, State of California on this 12th day of April 2004.

DIGITAL VIDEO SYSTEMS, INC.

By: /s/ Douglas T. Watson                   	Douglas T. Watson
                    Chief Executive Officer and Director

By: /s/ Robert Baker                   	Robert Baker
                   	Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

|Signature                                                                            | Title                                | Date          
|------------------------------------------------------------------------------------ | ------------------------------------ | --------------
|/s/ Douglas T. Watson
                               Douglas T. Watson               | Chief Executive Officer and Director | April 12, 2004
|/s/ Dr. Edmund Y. Sun
                               Dr. Edmund Y. Sun               | Director                             | April 13, 2004
|/s/ Pratap K. Kondamoori
                               Pratap K. Kondamoori         | Director                             | April 12, 2004
|/s/ John Fuller
                               John Fuller                           | Director                             | April 12, 2004
|/s/ Venkatapathi N. Rayapati
                               Venkatapathi N. Rayapati | Director                             | April 12, 2004
|/s/ Grover Wickersham
                               Grover Wickersham               | Director                             | April 12, 2004
|/s/ Tom Spanier
                               Tom Spanier                           | Director                             | April 12, 2004

---

EXHIBIT INDEX

|Exhibit Number | Document                                                                                                                                                                                                                                        
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            | Amended and Restated Certificate of Incorporation of the Company.(1)                                                                                                                                                                            
|3.2            | Bylaws of the Company.(1)                                                                                                                                                                                                                       
|4.1            | Specimen Common Stock Certificate.(3)                                                                                                                                                                                                           
|4.2            | Form of Warrant Agreement (the "Warrant Agreement") by and among the Company,
American Stock Transfer and Trust Company and the Underwriter (including forms
of Class A and Class B Warrant certificates).(3)                                   
|4.3            | Form of Underwriter's Unit Purchase Option (issued in connection with the
Company's initial public offering).(1)                                                                                                                                
|4.4            | Warrant Agreement.(1)                                                                                                                                                                                                                           
|4.5            | Escrow Agreement dated as of April 23, 1996 among American Stock Transfer and
Trust Company, the Company and Optionholders listed on Exhibit B
thereto.(3)                                                                                      
|4.6            | Form of Subscription Agreement from the Bridge Financing.(2)                                                                                                                                                                                    
|4.7            | Escrow Agreement dated as of October 17, 1996 made by and between the Company
and Dr. Edmund Y. Sun.(4)                                                                                                                                         
|4.8            | Escrow Agreement dated as of October 17, 1996 made by and among the Company,
Dr. Edmund Sun and American Stock Transfer and Trust Company.(4)                                                                                                   
|4.9            | Escrow Agreement dated as of October 17, 1996 made by and among the Company,
the shareholders named on the signature pages thereto and American Stock
Transfer and Trust Company.(4)                                                            
|4.10           | Form of Amendment to the Warrant Agreement.(4)                                                                                                                                                                                                  
|4.11           | Form of Underwriter's Unit Purchase Option.(4)                                                                                                                                                                                                  
|10.1           | 1993 Amended and Restated Stock Option Plan.(2)                                                                                                                                                                                                 
|10.2           | Employment Agreement as of March 1, 1996 between the Company and Dr. Edmund
Sun.(2)                                                                                                                                                             
|10.3           | Product Agreement made March 16, 1993 between Hyundai and the
Company.(1)                                                                                                                                                                       
|10.4           | Technical Assistance and License Agreement made March 16, 1993 between
Hyundai and the Company.(1)                                                                                                                                              
|10.5           | 1995 Hyundai Technical Assistance and License Agreement.(1)                                                                                                                                                                                     
|10.6           | Consulting Agreement made as of February 1, 1996 between the Company and
Intermarkt.(1)                                                                                                                                                         
|10.7           | Sublease Agreement, dated as of November 15, 1995, between the Company and
McAfee Associates, Inc. (along with consent to sublease and master lease
agreement).(1)                                                                              
|10.8           | House Leasing Agreements dated August 31, 1994 and September 6, 1994 for
facility in Taiwan (translated).(1)                                                                                                                                    
|10.9           | Form of Indemnity Agreement with the Company's officers and
directors.(1)                                                                                                                                                                       
|10.10          | Series A Preferred Stock Purchase Agreement made as of January 21, 1994
between the Company and Hyundai.(1)                                                                                                                                     
|10.11          | Series B Preferred Stock Purchase Agreement made as of April 1995 between the
Company and Hyundai.(1)                                                                                                                                           
|10.12          | Consulting and Employment Agreement between the Company and Robert B.
Pfannkuch entered into as of March 15, 1996.(2)                                                                                                                           
|10.13          | Agreement and Plan of Merger dated as of October 17, 1996 by and between the
Company, ViComp Technology, Inc. and the shareholders of ViComp Technology,
Inc.(4)                                                                                
|10.14          | Registration Rights Agreement dated as of October 17, 1996 by and between the
Company and the shareholders of ViComp Technology, Inc. named therein.(4)                                                                                         
|10.15          | 1996 Stock Option Plan.(4)                                                                                                                                                                                                                      
|10.16          | Consulting Agreement made as of September 27, 1996 between the Company and
Sitrick and Company Inc.(4)                                                                                                                                          
|10.17          | Office Lease Agreement commencing on October 15, 1996 between the Company and
Paulsen Office Park.(4)                                                                                                                                           
|10.18          | Lease, dated July 17, 1996, between the Company and Ken Yang Real Estate
(Shanghai) Co. Ltd.(4)                                                                                                                                                 
|10.19          | Letter dated April 10, 1997 from Robert B. Pfannkuch to the Company regarding
resignation as an Officer.(5)                                                                                                                                     
|10.20          | Employment Agreement between the Company and Thomas R. Parkinson entered into
March 28, 1997.(5)                                                                                                                                                
|10.21          | Settlement Agreement and General Release entered into January 30, 1997
between the Company and Janis P. Gemignani.(5)                                                                                                                           
|10.22          | Joint Venture Agreement dated as of August 5, 1997 by and between D.V.S.
H.K., a wholly-owned subsidiary of the Company, and Panyu Tian Le Electrical
Appliance Manufacturing Co., Ltd. (6)                                                     
|10.23          | Asset Purchase Agreement dated as of July 25, 1997 by and between the Company
and Arris Interactive LLC. (7)                                                                                                                                    
|10.24          | Amendment No. 1 to Asset Purchase Agreement by and between the Company and
Arris Interactive LLC dated as of August 1, 1997. (7)                                                                                                                
|10.25          | Form of Escrow Agreement by and between the Company and Arris Interactive
LLC. (7)                                                                                                                                                              
|10.26          | 1997 Employee Stock Purchase Plan. (8)                                                                                                                                                                                                          
|10.27          | 1993 Amended and Restated Stock Option Plan. (8)                                                                                                                                                                                                
|10.28          | 1996 Amended and Restated Stock Option Plan. (8)                                                                                                                                                                                                
|10.29          | Employment Agreement dated as of August 1, 1997 by and between the Company
and Gary Franza. (9)                                                                                                                                                 
|10.30          | Ownership Shares Transfer Agreement by and between D.V.S. H.K., a wholly-owned
 subsidiary of the Company, and Panyu.(10)                                                                                                                       
|10.31          | Lease Agreement by and between D.V.S. H.K., a wholly-owned subsidiary of the
Company, and Panyu.(10)                                                                                                                                            
|10.32          | Form of Joint Venture Partner Substitution Agreement (superceded).(10)                                                                                                                                                                          
|10.33          | Employment Agreement dated as of January 12, 1998 by and between the Company
and Edward Miller.(10)                                                                                                                                             
|10.34          | Lease Agreement by and between Digital Video Systems, Inc. and Dell
Enterprises. (10)                                                                                                                                                           
|10.35          | Asset Purchase Agreement dated as May 8, 1998 by and between the Company and
Hyundai Electronic Industries Company, Ltd. (11)                                                                                                                   
|10.36          | Amendment to Asset Purchase Agreement dated June 23, 1998 by and between the
Company and Hyundai Electronic Industries Company, Ltd. (11)                                                                                                       
|10.37          | Joint Venture Partner Substitution Agreement (11)                                                                                                                                                                                               
|10.38          | Amendment to the Asset Purchase Agreement dated March 26, 1998 by and between
the Company and Arris Interactive LLC. (11)                                                                                                                       
|10.39          | Employment Agreement dated as of May 8, 1998 by and between the Company and
Sung Hee Lee. (12)                                                                                                                                                  
|10.40          | Subscription Agreement dated June 24, 1998 by and between the Company and Dr.
Edmund Sun. (12)                                                                                                                                                  
|10.41          | Investment Agreement by and between Digital Video Systems, Inc. and Oregon
Power Lending Institution (13)                                                                                                                                       
|10.42          | Convertible Promissory Note of $1,000,000 payable to Oregon Power Lending
Institution dated November 12, 1998. (14)                                                                                                                             
|10.43          | Convertible Promissory Note of $500,000 payable to Oregon Power Lending
Institution dated December 31, 1998. (14)                                                                                                                               
|10.44          | Convertible Promissory Note of $200,000 payable to Oregon Power Lending
Institution dated January 21, 1999. (14)                                                                                                                                
|10.45          | Convertible Promissory Note of $100,000 payable to Oregon Power Lending
Institution dated February 2, 1999. (14)                                                                                                                                
|10.46          | Convertible Promissory Note of $186,000 payable to Oregon Power Lending
Institution dated February 3, 1999. (14)                                                                                                                                
|10.47          | Convertible Promissory Note of $100,000 payable to Oregon Power Lending
Institution dated February 5, 1999. (14)                                                                                                                                
|10.48          | Convertible Promissory Note of $100,000 payable to Oregon Power Lending
Institution dated February 8, 1999. (14)                                                                                                                                
|10.49          | Convertible Promissory Note of $433,326.40 payable to Oregon Power Lending
Institution dated February 11, 1999. (14)                                                                                                                            
|10.52          | Lease agreement with Hyundai Capital Services dated January 28, 1999.
(14)                                                                                                                                                                      
|10.53          | Regarding the issuance of common stock and Series C Preferred Stock in
connection with that certain investment agreement entered into with Oregon Power
Lending Institution and also constituting notice of action taken without a
meeting. (15)
|10.54          | Sublease Agreement dated as of November 17, 1998 by and among Digital Video
Systems, Inc., Savoir Technology Group and Technology Park Atlanta, Inc.
(17)                                                                                       
|10.55          | Lease Termination Agreement dated as of November 17, 1998 by and between
Digital Video Systems, Inc and Dell Enterprises. (17)                                                                                                                  
|10.56          | Lease agreement dated as of December 18th, 1998 by and between Digital Video
Systems, Inc. and Sun and Sun LLP. (17)                                                                                                                            
|10.57          | Agreement dated as of February 1999 by and among Digital Video Systems, Inc.,
Savoir Technology Group and Technology Park Atlanta, Inc. (17)                                                                                                    
|10.58          | Employment Agreement dated as of February 18, 1999 by and between Digital
Video Systems, Inc. and Mali Kuo. (17)                                                                                                                                
|10.59          | Finder's Agreement dated as of January 8, 1999 by and between Digital Video
Systems, Inc. and Mali Kuo. (17)                                                                                                                                    
|10.60          | Agreement dated as of April 28, 1999 by and between Digital Video Systems,
Inc. and Chinapro. (17)                                                                                                                                              
|10.61          | Agreement dated as of July 28, 1999 by and between Digital Video Systems,
Inc. and Shanghai Industrial Investment (Group) Co., Ltd. (17)                                                                                                        
|10.62          | Purchase and Option Agreement dated as of September 30, 1999 by and between
Digital Video Systems, Inc. and Oregon Power Lending Institution. (16)                                                                                              
|21.1           | List of Subsidiaries                                                                                                                                                                                                                            
|23.1           | Consent of Burr, Pilger & Mayer LLP Independent Auditors                                                                                                                                                                                        
|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 and Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                 

________

(1)	Incorporated by reference from the
Company's Registration Statement on Form SB-2 (Registration No. 333-2228),
as filed with the Commission on March 8, 1996.

(2)	Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form SB-2 (Registration No. 333-2228)
as filed with the Commission on April 23, 1996.

(3)	Incorporated by reference from Amendment No. 2 to the
Company's Registration Statement on Form SB-2 (Registration No. 333-2228),
as filed with the Commission on May 8, 1996.

(4)	Incorporated by reference from the Company's
Registration Statement on Form SB-2 (Registration Statement No. 333-15471), as
filed with the Commission on November 4, 1996.

(5)	Incorporated by reference from the Company's
Form 10-KSB for the Fiscal Year Ended March 31, 1997 as filed with the
Commission on June 30, 1997.

(6)	Incorporated by reference to the Company's Current
Report on Form 8-K filed with the Commission on August 15, 1997.

(7)	Incorporated by reference to the Company's Current
Report on Form 8-K filed with the Commission on September 26,
1997.

(8)	Incorporated by reference to the Company's Definitive
Proxy Statement filed with the Commission on August 11, 1997.

(9)	Incorporated by reference from the Company's
Form 10-QSB for the quarter ended September 30, 1997 as filed with the
Commission on November 19, 1997.

(10)	Incorporated by reference from the Company's
Form 10-QSB for the quarter ended December 31, 1997 as filed with the
Commission on February 12, 1998.

(11)	Incorporated by reference from the Company's
Form 10-KSB for the Fiscal Year Ended March 31, 1998 as filed with the
Commission on July 14, 1998.

(12)	Incorporated by reference from the Company's
Form 10-QSB for the quarter ended June 30, 1998 as filed with the
Commission on August 14, 1998.

(13)	Incorporated by reference to the Company's Current
Report on Form 8-K filed with the Commission on November 3, 1998.

(14)	Incorporated by reference from the Company's
Form 10-QSB for the quarter ended December 31, 1998 as filed with the
Commission on February 23, 1999.

(15)	Incorporated by reference to the Company's Definitive
Proxy Statement filed with the Commission on April 7, 1999.

(16)	Incorporated by reference to the Company's Current
Report on Form 8-K filed with the Commission on September 30,
1999.

(17)	Incorporated by reference to the Company's Annual
Report on Form 10-KSB filed with the Commission on July 31, 2000.

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