SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K/AAMENDMENT NO. 2
                                         TO
(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, 2002

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.        
x

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 28, 2002, the last business day
of the Registrant's most recently completed second fiscal quarter, there were
approximately 5,961,127 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 28, 2002) was approximately $6,569,663. 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.

6,832,255 shares of the Registrant's Common Stock were outstanding as of April 28, 2003.

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DOCUMENTS INCORPORATED BY REFERENCE

No information is incorporated into this report by reference.







EXPLANATORY NOTE



This Annual Report on Form 10-K/A ("Form 10-K/A") is being
filed as Amendment No. 2 to the Registrant's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on April 15, 2003 ("Form 10-K"), as
amended by Amendment No. 1 to the Form 10-K filed with the Securities and
Exchange Commission on April 30, 2003, for the purpose of amending Item 1 of
Part I, Item 7 of Part II, Item 14 of Part III and Item 15 of Part IV. Other
than as set forth below, the items of Form 10-K continue to speak as of the
date of the original filing of the Registrant's Form 10-K, and the
Registrant is not updating the disclosure in such items.

PART I

Item 1.	Business

Overview

Digital Video Systems, Inc. ("DVS" or the "Company")
(NASDAQ: DVID) 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. DVS's mission is to be the
leading DVD (Digital Versatile Disc) solution provider and remain at the
forefront of this technology convergence. Our current product offerings include
DVD loaders, the principal hardware component of DVD players and DVD-ROM drives,
as well as a portfolio of other related products.

History

DVS 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 (OEM's) or under
the DVS brand name, and other products developed for the computer peripheral
market. During the fiscal year ended March 31, 1999, we migrated our product
offerings into DVD technology, while phasing out certain older discontinued
product lines. Our current product offerings primarily include DVD loaders and
other DVD sub-systems and components.

DVS IPO

During the fiscal year ended on March 31, 1997, we
completed our initial public offering and a follow-on public offering,
generating total net proceeds of approximately $43.7 million.

Acquisition of Hyundai Electronics Industries, Co., Ltd's DVD
Operations.

In June 1998, DVS's founder, Dr. Edmund Y. Sun,
introduced the opportunity to acquire Hyundai Electronics Industries, Co., Ltd's
("Hyundai") DVD operations. To aid DVS in completing the acquisition, Dr. Sun
provided a $1.0 million loan to DVS as a short-term note that was converted to
190,211 shares of common stock in July 1998. With the $1.0 million cash and
285,714 shares of our common stock, DVS was able to complete the acquisition.
The shares of our common stock were issued to Hyundai in exchange for a
perpetual, worldwide, royalty-free license to Hyundai's DVD technologies and
related intellectual properties. 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.

Establishment of DVS Korea Co., Ltd.

Pursuant to an Investment Agreement dated October 15,
1998, Oregon Power Lending Institution ("OPLI") and certain investors had the
right to invest up to $12.25 million in the Company. By March 31, 1999, OPLI had
provided DVS with $6.5 million in additional financing. The cash infusion from
OPLI enabled us to establish the operations of DVS Korea Co., Ltd., our Korean
subsidiary ("DVS Korea" or "DVSK"), provide the working capital required to
expand DVS Korea's DVD production, increase sales, reduce certain liabilities,
pay certain costs relating to corporate restructuring, as well as provide
capital for continued marketing, R&D and corporate overhead expenses.

Formation of Shanghai Fangyuan Digital Technology Ltd.

In late 1999, DVS 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
proposed joint venture in Shanghai China was to allow the Company to take
advantage of certain tax savings and lower production costs. Under certain
Chinese tax regulations, a Chinese corporate entity may be entitled to two years
of complete tax exemption and three years of 50% tax reduction thereafter,
commencing from the first profit-making year, net of losses carried forward.
Also, since many DVD player manufacturers are already located in China, the
resulting shipping time and cost savings we expected to be substantial. The
joint venture, 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 and over one million units were produced in its first year of operation. At
times during the year 2002, SFDT achieved a production rate as high as 500,000
units per month.

The manufacturing facilities of SFDT occupy approximately
73,000 square feet in a six-story building acquired by SFDT in 2001, located in
an industrial park in Shanghai, China. The first two floors are used as
warehouse space, the next three floors are used for production and the sixth
floor is used as SFDT's administrative offices. Each production floor can house
up to four assembly lines. We believe that this facility has dramatically
increased our capacity to meet future production demands.

New Korean Factory Opened

During the fourth quarter of 2001, DVS Korea opened a new
factory in Korea to produce high end products expected to have greater margins
and higher quality control. The new Korea factory occupies approximately 39,000
square feet and 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. With the addition of this production capacity, we believe
DVS is well positioned to continue to expand its market share and to create
certain competitive advantages.

DVS Korea IPO

In September 2002, DVS Korea successfully
completed a public offering of 6 million common shares of DVSK on the KOSDAK
Exchange (a Korean stock market) with trading beginning on October 1, 2002. The
value of the proceeds to the subsidiary was approximately $11 million. The
proceeds will be used to fund new product activities, including a DVD player for
the automobile market, rewritable DVD drives for the computing and home markets,
and establishing a new venture, MobileTouch Korea, to develop and market new
products for the digital video and audio markets with a focus on mobile
applications. Additionally, the proceeds will support the increasing production
of our current products.

The ability to realize a higher valuation for DVSK's equity
in Korea ($40 million U.S.) was a key factor in our decision to raise capital on
the KOSDAQ, and reflects DVS's belief regarding its position as a leading
worldwide supplier in the growing DVD market segment. Although the offering
dilutes our ownership from 74.6% to 51.4%, we expect to continue to be the
majority shareholder of DVSK. In March 2003, Dr. Edmund Sun, Doug Watson and
Robert Baker, each an executive officer of DVS, joined the DVS Korea (DVSK)
board to take a more active role in the day-to-day workings of this key
subsidiary as it plans for greater margin potential through new products.

Our Products

Our current product offerings consist primarily of
DVD loaders and other DVD sub-systems and components. We also produce and/or
market other products for the consumer, commercial video and computer
peripherals markets, which are described in greater detail below. During 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 then, and are now, more profitable and in higher
demand.

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.

Other Products

On a smaller scale, our product offerings include
other computer peripherals, such as rewritable compact discs (CD-RWs),
thin-film-transistor liquid crystal display (TFT LCD) monitors, and DVD players.
Sales of these products accounted for less than 3% of our revenue in 2002 and
2001.

Research and Development

Because of DVS's firm position in the DVD loader
market and despite a general downturn in the economy, DVS has experienced large
growth in unit shipments. In recent years, DVS estimates that it has captured
one third of the non-captive DVD loader market. The issue confronting DVS,
however, is that with competition mounting and the precipitous decline in
end-user prices for DVD players,gross margins for DVD
loaders have and may continue to decline. As is typical with consumer electronic
products, gross margins are inversely proportional to the growth in unit
shipments.

During fiscal 2002, most of our research and development
efforts focused on enhancing our DVD technologies, improving product quality,
reducing costs of manufacturing, enhancing product functionality, adopting new
and improved key components, developing new product, and improving the
integration of our products by our customers. Currently, we are developing more
advanced DVD loaders including a front loader intended for the automobile audio
and video market and a DVD-RW intended for the home video and PC market. The
DVD-RW product enables users to record data to a DVD-RW disc for any application
including the creation of DVD's made from home videos, high capacity data
backups and the capability of copying VHS tapes (movies) to discs. Working
prototypes of these products were demonstrated at the annual meeting of
shareholders of DVS Korea on March 28, 2003. We are optimistic as to the rate of
growth and eventual size of the world-wide DVD drive market and we hope to
expand our presence in all segments of the DVD drive market. In addition, DVS
has initiated research and development efforts with respect to technologies
based on the MPEG-4 video compression standard and certain media-rich
applications designed for the mobile business and consumer markets as described
in greater detail below.

To date, DVS has not introduced marketable products as a
result of our development efforts with respect to next generation video engines,
products based on the MPEG-4 standard, car DVD audio and video players,
recordable DVD players, and mobile media-rich applications. DVS expects to
continue its research and development efforts until such products become
available for production and sale.

As noted above, we have sought to diversify our product base
through increased emphasis on new products such as the rewritable drive which we
anticipate will enjoy much greater margins and, more importantly, will sell into
the larger market and customer base that DVSK has successfully established with
our DVD loader products. In merging these vital areas of development in 2003, we
expect to generate losses as we invest heavily in R&D personnel and
engineers.

As of December 31, 2002, we had 49 engineering personnel,
some of whom focus on supporting our sales and marketing efforts in connection
with customizing product applications for specific customers.

Our research and development efforts involve numerous risks.
These efforts may not progress as anticipated, and we may not be able to reduce
costs sufficiently to be able to compete with others marketing similar products,
and our new product models may not be developed on a timely basis.

Sales, Marketing and Distribution

We sell our DVD loaders to original equipment
manufacturers ("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,
including Hong Kong, Turkey, Korea 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.

During fiscal 2002, due to active marketing and field
engineering, the unit sales of our DVD loaders have continued to increase
relative to prior periods. This increase has enabled us to hold our current
market share in this market.

In the past, we sold CD-based Video Engine products to Kiosk
distributors, who integrated our products as part of a complete solution that
included software titles. Subject to favorable evaluation of this product line,
we may develop and introduce next generation video engines to incorporate the
current DVD technologies. In this regard, DVS is awaiting a response from a
third party relating to a proposal for a potential Kiosk application
incorporating next generation video engines for use in the gaming industry in
England. As of May 31, 2003, DVS has not engaged in further development efforts
with respect to this proposal.

Our sales and marketing personnel attend tradeshows to
increase the awareness and interest in our product offerings. We employ ten 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.

New Markets and Products

DVS has embarked on a program of diversification of
product lines, expansion and ongoing support of existing its customer base,
participation in standards development, rigorous patent research, patent
acquisition, and patent filing, aggressive marketing, continued manufacturing
process reviews to reduce costs and/or increase productivity, and ongoing
research and development of new products utilizing the newest technologies.

MPEG-4

A critical success factor for technology companies in
the consumer electronics sectoris the ability to judge emerging
standards and extrapolate how the new standards will affect the demand and
supply for current and future commercial products. To drive the implementation
and facilitate development of such products based on digital formats, industry
representatives have organized committees and review boards to define certain
international compression standards for storage and playback of digital audio
and video data. MPEG, or the Moving Pictures Experts Group, is the review board
responsible for the development of standards for use in certain digital audio
and video technologies. Industry standards approved and adopted by MPEG include,
among others, MPEG1, MPEG2 and MPEG4, which relate to, among other things, the
ability to view, access, search and modify digital video and audio data.

DVS believes that the soon to be adopted MPEG-4AVC, or
H.264AVC or MPEG-4 part 10, as it is otherwise known, is such a standard that
will ultimately replace MPEG2 and MPEG4. The practical implications of MPEG-4AVC
(with a 100% or more compression improvement over current MPEG-4 technology)
could allow a tenfold increase in the amount of DVD-quality video stored on a
typical DVD disc; allow the storage of full-length HDTV programming on current
DVDs without resorting to new hardware based on blue-laser technologies; provide
the compression needed to stream high-quality video to mobile phones over the
existing GPRS network; or enable DVD quality video to be streamed over current
broad band connections.

Other MPEG-4AVC research involves implementing the new
compression technology in devices capable of supplying HDTV programming on DVD
players based on existing low-cost disc and player technologies. All other
current alternatives to provide HDTV-quality video on discs, including blue
laser technology, would require significant retooling in authoring, disc and
player manufacturing, and would rely on expensive new technologies. The new
MPEG4 AVC standard, although based on complex software technology, will require
only minor changes in the existing authoring, content production and consumer
electronics manufacturing. Ultimately, DVS believes that it could further
develop this technology into products such as HDTV recorders for home markets.
As such, DVS must continue to anticipate and monitor the development of new
industry standards, such as MPEG-4, in order to introduce new products and
remain competitive in the consumer electronics industry.

Jeecom, Inc. Licensing Agreement

To capitalize on products utilizing the new MPEG-4AVC
technology, in November 2002, we 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 the primary product designed to enable 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 address a variety of specialized and consumer
mobile applications. Jeecom, Inc. was founded by Dr. Edmund Sun, DVS's Chief
Technology Officer. Dr. Sun is the majority owner of Jeecom, Inc.

By acquiring this license we are now poised to successfully
incorporate the soon-to-be-adopted standards for new MPEG4 part 10 technologies
with innovative software designed for the mobile business market. The Jeecom
software provides the platform for successfully integrating video and other
multimedia products for the mobile market, while the next-generation video
compression standard should further enhance this new effort. This agreement
gives us the exclusive ability to sell and distribute Jeecom software to a
majority of the world's markets. The licensing agreement also extends to
hardware applications and represents the potential to generate new revenue
streams for DVS, DVS Korea and our new MobileTouch subsidiaries. The agreement
provides DVS with a worldwide license with an initial term tied to the duration
of the copyright for the software developed thereunder. The agreement is
renewable for a term based on the duration of any patent issued with respect to
any technology developed under the agreement. DVS will pay Jeecom a development
fee of $250,000 and royalties ranging from $2 to $10 per unit for products
developed under the agreement and based on the number of units sold.

New MobileTouch Subsidiaries

MobileTouch Korea, a wholly owned subsidiary of DVS
Korea, and MobileTouch, Inc. ("MobileTouch USA"), a wholly owned subsidiary of
DVS, were both incorporated in January 2003. These two new wholly-owned
subsidiaries are examples of diversification toward broader and more navigable
revenue streams to be derived from new products based on emerging compression
technologies employing the revolutionary MPEG4- Part 10 AVC-264 standard. These
enterprises are expected to enable DVS to develop new products for the mobile
marketplace in addition to its established DVD market.

MobileTouch USA, in partnership with Jeecom, Inc., will
develop new products and applications directed at the corporate and consumer
mobile applications markets and with a particular focus on media-rich
applications for the consumer market. This project is part of an ongoing
partnership between DVS and Jeecom, Inc. to develop software that is designed to
allow 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.

DVS has embarked on a program of diversification of product
lines; an expansion of its customer base and ongoing support of existing
customer base; participation in standards development efforts; rigorous patent
research, patent acquisition, and patent filing; aggressive marketing; continued
manufacturing process review to reduce costs and/or increase productivity; and
ongoing research and development of new products utilizing the newest
technologies.

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 our intellectual property rights for periods
ranging from 8 to 16 years. Our patents, design rights and other intellectual
property rights, such as trade secrets and licensed technology, are the basis
for our product development efforts and are important to our overall business.
Our business depends upon new product developments to remain competitive in our
industry, which is subject to rapid technological change. Our patents and other
proprietary rights are designed to protect our products from infringement or
other unauthorized use that could diminish the value of our product development
efforts and ultimately harm our business and operating results. 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 greater in financial, marketing,
and other resources than us, such as, Thomson Electronics, Sanyo and Phillips
that are our principal competitors with respect to our DVD products. Competitors
or potential competitors may develop alternative products to compete with our
DVD products. They may also begin operations or expand their existing operations
into our market segments.

The competitive environment is becoming more demanding due to
a number of factors, including the following:

- an increase in the number of new market
entrants;
- intensifying competition in the industry;
- rapid technological progress;
- oversupply of digital products; and
- global price erosion.

We believe, however, that our product mapping and
development, the high quality of our products, our reputation of innovative
product introductions, product improvements and service, and our extensive
sales, marketing and servicing efforts are the important factors that help us
remain competitive with respect to each of the competitive factors set forth
above. Although we believe our current overall competitive position to be
favorable with respect to each factor listed above, we expect to continue to
experience intense competitive pressure in the future.

Strategy

From the outset, our essential strategy has been to
provide each major customer with changes required of our basic design to insure
compatibility with individual customer demands. Additionally we have emphasized
the need to decrease "time to market", as our major competitors are very large
organizations that are unable to move as rapidly to meet market demands.

In adjusting to the swiftly-evolving digital world, DVS has
entered a period of exploring new avenues of enterprise as we adapt our
resources to research and development of revenue streams in both technology and
product areas offering higher margins. DVS is committed to further advancing
these technologies and commercializing them to create profitable product lines
in order to sustain its competitive advantage.

Our rapid advancement for the past four years has been fueled
by an unprecedented global appetite for our primary product, the DVD loader, the
chief component of the popular DVD player. The demand for the DVD loader soon
eclipsed other items in our product line, such as decoder chips, networked video
servers, and video players for commercial kiosk applications. During this phase
of advancement, our subsidiary DVS Korea focused upon two customer driven
demands: 1) the need to focus engineering expertise on cost-reduction efforts
for our prime product, the DVD loader to maximize manufacturing margins and
thereby maintain profits and 2) providing our existing OEM customers with custom
design and value engineering options tailored to their specific needs. 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 showed the expected
attrition from encroaching competition, we have sought to diversify through
increased emphasis on new products such as the rewritable drive which we
anticipate will enjoy much greater margins and, more importantly, will sell into
the larger market and customer base that DVSK has successfully established with
our DVD loader products. In merging these vital areas of development in 2003, we
expect to generate losses as we invest heavily in R&D personnel and
engineers.

With the erosion in gross margins for its current product
offerings, DVS is consciously shifting gears to focus on its real strength, the
ability to innovate and develop leading-edge technologies and commercialize new
products. DVS is ready to enter into new markets by leveraging its accumulated
wealth of knowledge and experience and developing newer, bolder and more
advanced products such as next generation video engines, the front-loaded DVD
loader/player, the car DVD audio and video player, and the recordable DVD
player. We are also developing MobileTouch products with our timely development
of (1) software required to optimize the utilization of new MPEG-4 part 10 video
compression in mobile wireless products and (2) software in support of the
decoder chip also being developed by MobileTouch USA that we expect will provide
DVS with higher margins and a sustainable competitive advantage in this
market.

To date, DVS has not introduced marketable products as a
result of our development efforts with respect to next generation video engines,
products based on the MPEG-4 standard, car DVD audio and video players,
recordable DVD players, and mobile media-rich applications. DVS expects to
continue its research and development efforts until such products become
available for production and sale.

Employees

At March 31, 2003, we had 470 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.

PART II

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. It is important to note that DVS changed its fiscal year end
from March 31 to December 31, beginning with the year ended
December 31, 2000. Therefore, the present report on Form 10-K covers
the twelve-month period for the years 2001 and 2002 and the nine month period
for the year period ending December 31, 2000 and the pro-forma results for the
nine month period ending December 31, 1999.

Overview

DVS derives over 95% of its revenues from the sale of
loaders and components associated with DVD loaders to DVD player manufacturers.
The majority of these sales are made to DVD player manufacturers in China, Korea
and Turkey. Average selling prices of these products have declined rapidly over
the past three years and currently are over 50% less than in the year 2000. In
the year ending December 31, 2002, average loader prices declined 28%. The mix
of sales continues to shift more to the components of the loader produced by the
Company resulting in lower average selling prices which are also experiencing
price erosion. The combination of lower prices for loaders and an unfavorable
price mix has resulted in a leveling of revenues between the years 2001 and
2002. Unit shipments on the other hand have more than doubled in 2002 over 2001,
allowing the Company to increase its market share to over 30% of the market for
loaders sold to external player manufacturers who do not have their own loader
technology. As our product line continues to mature we are likely to experience
further declines in the average selling prices of our current product offerings.
We are not able to predict the amount of such future change with any degree of
certainty.

Our costs of goods sold, which consist of purchased
components representing about 90% of the loader cost, have been reduced by about
40% over the past two years. Purchasing volume and lower costs of assembly in
our China joint venture have allowed us to maintain some margin during this
period of rapid sales price declines. At the present time gross margins have
eroded to somewhere between 2% to 5%, depending on mix of products sold in the
period. As previously stated, this unit price erosion and resulting reduction of
gross margins is likely to continue during 2003. We are at a point where new
products must be introduced if we are to experience any improvement in our rate
of gross margin. The amount of engineering effort required to value engineer the
loader product during the year 2002 has interrupted the "new product" programs
of our Korean subsidiary, thereby causing delays in the introduction of new
products such as DVD players for the automotive market and rewritable DVD drives
for the computing and audio markets. The new product engineering group in Korea
is currently working extended hours to get back on schedule, and we believe that
the introduction of the two previously mentioned products will occur late in the
third quarter of this year. Working prototypes of both these products were shown
at the Korean subsidiary's annual meeting in March 2003. We are not able to
predict the level of sales for these new products or their impact on our gross
margins with any degree of certainty for the year 2003.

Our operating income as shown in the table below has gone
from operating income of $1.8 million in fiscal year 2001 to an operating loss
of $1.7 million in the year ended December 31, 2002. This unfavorable change of
$3.5 million is made up of $0.7 million of increases in operating expense with
the remaining $2.8 million loss accounted for by the decline in our gross
margins resulting from average selling prices of loaders declining by 28%.

Additional new product activity has been initiated both in
Korea and in the United States with the formation of MobileTouch Korea and
MobileTouch USA, a wholly owned subsidiary of DVS Korea and the Company,
respectively. The subsidiaries, working in partnership with Jeecom, Inc., will
develop new products and applications directed at the corporate and consumer
mobile applications market, and in particular will focus on media rich
applications for the consumer market. MobileTouch USA has begun the development
of software required to optimize the utilization of new MPEG -4 part 10 video
compression in mobile wireless products and software in support of the decoder
chip also being developed by MobileTouch USA. We believe that this new standard
offers substantial benefits to many potential product areas such as, low
bandwidth video for mobile handsets, DVD video, broadband entertainment, and
digital cinema. We do not expect any major sales activity from these
developments in the year 2003.

In January 2003, the Company announced an exclusive licensing
agreement with Jeecom, Inc., a company founded by, and whose majority owner is,
Dr. Edmund Sun, the Company's Chief Technology Officer. The Jeecom, Inc. license
and software provide the platform for integrating video and other multimedia
products for the mobile market with the exclusive right to market the software
to the major markets of the world. The agreement provides DVS with a worldwide
license with an initial term tied to the duration of the copyright for the
software developed thereunder. The agreement is renewable for a term based on
the duration of any patent issued with respect to any technology developed under
the agreement. DVS will pay Jeecom a development fee of $250,000 and royalties
ranging from $2 to $10 per unit for products developed under the agreement and
based on the number of units sold.

As noted above, we have sought to diversify our product base
through increased emphasis on new products such as the rewritable drive which we
anticipate will enjoy much greater margins and, more importantly, will sell into
the larger market and customer base that DVSK has successfully established with
our DVD loader products. However, in merging these vital areas of development in
2003, we expect to generate losses as we invest heavily in R&D personnel and
engineers.

Our Korean subsidiary (DVSK) raised approximately $10.7
million during the last year and coupled with its line of credit is expected to
be able to fund new product programs and support the existing loader business in
both Korea and China in the year 2003. The Company plans to meet its operating
obligations for 2003 by raising money through private placements and receiving
management fees from its Korean subsidiary.

The Company's minority interest liability increased
significantly during September 2002 from the reduction of its ownership interest
in DVS Korea, as a result of the $10.7 million from DVS Korea's initial public
offering. The sale of the 23.2% interest in DVS Korea resulted in a gain from
the sale of subsidiary common stock of $1,177,000, which has been reflected in
additional paid-in capital at December 31, 2002.

Results of Operations

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

|                           | Fiscal Year
Ended
December 31, | Fiscal Year
Ended
December 31, | Nine Month
Fiscal Period
Ended
December 31, | (Unaudited) Nine Month
Fiscal Period
Ended
December 31,
|-------------------------- | ------------------------------ | ------------------------------ | ------------------------------------------- | -------------------------------------------------------
|                           | 2002                           | 2001                           | 2000                                        | 1999                                                   
|Revenues                   | $ 157.2                        | $ 159.9                        | $	73.1                                      | $ 45.6                                                 
|Gross margin               | 11.3                           | 14.1                           | 10.1                                        | 5.7                                                    
|Research and development   | 3.1                            | 2.5                            | 2.5                                         | 1.7                                                    
|Sales and marketing        | 2.9                            | 2.2                            | 1.9                                         | 1.7                                                    
|General and administrative | 7.0                            | 7.6                            | 3.5                                         | 2.9                                                    
|Operating (loss) income    | (1.7)                          | 1.8                            | 2.2                                         | (0.6)                                                  
|Net (loss) income          | (3.0)                          | 0.9                            | 1.1                                         | 2.6                                                    

Results of Operations for the Twelve-Month Period Ended
December 31, 2002 Compared to the Twelve-Month Period 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 twelve-month periods ended December 31,
2002 and 2001, the nine-month period ended December 31, 2000, and the
unaudited nine months ended December 31, 1999. Please see our Consolidated
Financial Statements of Operations and item 6 Selected Consolidated Financial
Data for additional details.

|                           | Twelve Months Ended
December 31, 2002 | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | (Unaudited) Nine Months Ended
December 31, 1999
|-------------------------- | ------------------------------------- | ------------------------------------- | ----------------------------------- | -----------------------------------------------
|                           | (Percent of revenue)                 
|Revenues                   | 100.0%                                | 100.0%                                | 100.0%                              | 100.0%                                         
|Gross margin               | 7.2%                                  | 8.8%                                  | 13.8%                               | 12.5%                                          
|Research and development   | 1.9%                                  | 1.6%                                  | 3.4%                                | 3.7%                                           
|Sales and marketing        | 1.8%                                  | 1.4%                                  | 2.6%                                | 3.6%                                           
|General and administrative | 4.5%                                  | 4.8%                                  | 4.7%                                | 6.6%                                           
|Operating income (loss)    | (1.1)%                                | 1.1%                                  | 3.1%                                | (1.4)%                                         
|Net income                 | (1.9)%                                | 0.5%                                  | 1.6%                                | 5.7%                                           



|                     | Twelve Months Ended
December 31, 2002 | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | (Unaudited) Nine Months Ended
December 31, 1999
|-------------------- | ------------------------------------- | ------------------------------------- | ----------------------------------- | -----------------------------------------------
|                     | (In thousands)                       
|Consolidated revenue | $157,214                              | $159,871                              | $73,103                             | $45,567                                        

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.

|                           | Twelve Months Ended
December 31, 2002 | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | (Unaudited) Nine Months Ended
December 31, 1999
|-------------------------- | ------------------------------------- | ------------------------------------- | ----------------------------------- | -----------------------------------------------
|                           | (In thousands)                       
|Gross margin               | $11,285                               | $14,076                               | $10,110                             | $5,696                                         
|As a percentage of revenue | 7.2%                                  | 8.8%                                  | 13.8%                               | 12.5%                                          

The rapid decline in gross margin rates during the year 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. Looking ahead to fiscal year ending December 31, 2003, we expect to
experience continued pricing pressure as competition becomes more intense in the
Company's customer base and the DVD market.

|                           | Twelve Months Ended
December 31, 2002 | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | (Unaudited) Nine Months Ended
December 31, 1999
|-------------------------- | ------------------------------------- | ------------------------------------- | ----------------------------------- | -----------------------------------------------
|                           | (In thousands)                       
|Research and development   | $3,048                                | $2,503                                | $2,493                              | $1,705                                         
|As a percentage of revenue | 1.9%                                  | 1.6%                                  | 3.4%                                | 3.7%                                           

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 the Company in order to
recover lost time in developing the new product programs and to initiate
MobileTouch Korea's R&D efforts on the mobile phone hardware platform. With
respect to our research and development efforts we expect to generate losses
during 2003 as we invest heavily in R&D personnel and engineers.

|                           | Twelve Months Ended
December 31, 2002 | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | (Unaudited) Nine Months Ended
December 31, 1999
|-------------------------- | ------------------------------------- | ------------------------------------- | ----------------------------------- | -----------------------------------------------
|                           | (In thousands)                       
|Sales and marketing        | $2,907                                | $2,173                                | $1,902                              | $1,652                                         
|As a percentage of revenue | 1.8%                                  | 1.4%                                  | 2.6%                                | 3.6%                                           

Sales and marketing expense is comprised primarily of
employee related expenses, export freight & insurance (when absorbed by the
Company), and advertising/promotional costs. The Company has sales and marketing
organizations in Korea, China and the U.S. These
organizations have been significantly expanded due to the shift away from 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.

|                           | Twelve Months Ended
December 31, 2002 | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | (Unaudited) Nine Months Ended
December 31, 1999
|-------------------------- | ------------------------------------- | ------------------------------------- | ----------------------------------- | -----------------------------------------------
|                           | (In thousands)                       
|General and administrative | $7,054                                | $7,612                                | $3,467                              | $2,989                                         
|As a percentage of revenue | 4.5%                                  | 4.8%                                  | 4.7%                                | 6.6%                                           

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.

Results of Operations for the Twelve-Month Period Ended
December 31, 2001 Compared to the Nine-Month Transition Period Ended
December 31, 2000 ("Fiscal 2000")

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 twelve-month period ended December 31,
2001, the nine-month period ended December 31, 2000 and the fiscal year
ended March 31, 2000. Please see our Consolidated Financial Statements of
Operations for additional details.

|                           | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | Fiscal Year Ended
March 31, 2000
|-------------------------- | ------------------------------------- | ----------------------------------- | --------------------------------
|                           | (percent of revenue)                 
|Revenues                   | 100.0%                                | 100.0%                              | 100.0%                          
|Gross margin               | 8.8%                                  | 13.8%                               | 12.9%                           
|Research and development   | 1.6%                                  | 3.4%                                | 4.1%                            
|Sales and marketing        | 1.4%                                  | 2.6%                                | 3.0%                            
|General and administrative | 4.8%                                  | 4.7%                                | 9.4%                            
|Operating income(loss)     | 1.1%                                  | 3.1%                                | (3.6%)                          
|Net income                 | 0.5%                                  | 1.6%                                | 1.4%*                           



* includes one-time gain from sale of
certain assets related to discontinued product lines.

|                     | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | Fiscal Year Ended
March 31, 2000
|-------------------- | ------------------------------------- | ----------------------------------- | --------------------------------
|                     | (in thousands)                       
|Consolidated revenue | $159,871                              | $73,103                             | $60,292                         

As set forth above, total revenue in the twelve-month period
ended December 31, 2001 was $159.9 million, about 119% higher than the
$73.1 million for the nine-month period in 2000. This significant increase of
$86.8 million was in part due to the additional three months of the current year
period coupled with the additional manufacturing brought on-line in Korea and in
Shanghai. Overseas sales represented almost 100% of revenue for the
twelve-months ended December 31, 2001, as was the case for the nine-month period
ended December 31, 2000. During the twelve months ended December 31,
2001, SIIG, our joint venture partner in China accounted for over 10% of
sales.

Net income of $0.9 million for the twelve-month period ended
December 31, 2001 was lower than the $1.1 million for the nine-month period
ended December 31, 2001, primarily because of increased expenses relating
to the establishment of new manufacturing facilities in Korea and China.

|                           | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | Fiscal Year Ended
March 31, 2000
|-------------------------- | ------------------------------------- | ----------------------------------- | --------------------------------
|                           | (in thousands)                       
|Gross margin               | $14,076                               | $10,110                             | $7,783                          
|as a percentage of revenue | 8.8%                                  | 13.8%                               | 12.9%                           

The sharp reduction in gross margin was principally due to
the opening of a new plant in Korea and the opening of the factory in Shanghai,
China, which increased our manufacturing costs significantly during this period.
The costs relate primarily to training personnel and establishing efficient
manufacturing processes. Additionally, the Company increased its monthly output,
as measured by net sales, an average of about 70%, from the prior period and had
to absorb the transition costs associated with such a sharp increase. And as
previously mentioned, the increased pricing pressure from competition also
contributed to the decline in gross margin.

|                           | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | Fiscal Year Ended
March 31, 2000
|-------------------------- | ------------------------------------- | ----------------------------------- | --------------------------------
|                           | (in thousands)                       
|Research and development   | $2,503                                | $2,493                              | $2,492                          
|as a percentage of revenue | 1.6%                                  | 3.4%                                | 4.1%                            

Research and development expenses as a percentage of revenue
decreased to 1.6% for the twelve-month period ended December 31, 2001,
compared with 3.4% for the nine-month period ended December 31, 2000. The
decrease in these expenses as a percentage of revenues is principally
attributable to an increase in sales volume while maintaining essentially the
same level of spending.

|                           | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | Fiscal Year Ended
March 31, 2000
|-------------------------- | ------------------------------------- | ----------------------------------- | --------------------------------
|                           | (in thousands)                       
|Sales and marketing        | $2,173                                | $1,902                              | $1,828                          
|as a percentage of revenue | 1.4%                                  | 2.6%                                | 3.0%                            

Sales and marketing expenses as a percentage of net revenues
decreased from 2.6% in the nine months ended December 31, 2000 to 1.4% in
the year ended December 31, 2001. The decrease in these expenses as a
percentage of revenue was also the result of a sharp increase in sales volume
while accompanied only by a slight increase in spending of approximately 10%.

|                           | Twelve Months Ended
December 31, 2001 | Nine Months Ended
December 31, 2000 | Fiscal Year Ended
March 31, 2000
|-------------------------- | ------------------------------------- | ----------------------------------- | --------------------------------
|                           | (in thousands)                       
|General and administrative | $7,612                                | $3,467                              | $5,639                          
|as a percentage of revenue | 4.8%                                  | 4.7%                                | 9.4%                            

As reflected in the table above, general and administrative
expenses as a percentage of revenue remained essentially constant when compared
to the nine-month period ended December 31, 2000. The actual rate of
spending increased about 60% from the period ended December 31, 2000,
reflecting costs associated with the establishment of SFDT and the additional
manufacturing facility in Korea.

Results of Operations for the Nine-Month Transition
Period Ended December 31, 2000 Compared to the Unaudited Pro-forma
Nine-Month Period Ended December 31, 1999

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 nine-month period ended December 31, 2000
and the unaudited nine-month period ended December 31, 1999. Please see
item 6 Selected Consolidated Financial Data for details.

|                           | Nine Months Ended
December 31, 2000 | (Unaudited)
                  Nine Months Ended
December 31, 1999
|-------------------------- | ----------------------------------- | -----------------------------------------------------------------
|                           | (Percent of revenue)               
|Revenues                   | 100.0%                              | 100.0%                                                           
|Gross margin               | 13.8%                               | 12.5%                                                            
|Research and development   | 3.4%                                | 3.7%                                                             
|Sales and marketing        | 2.6%                                | 3.6%                                                             
|General and administrative | 4.7%                                | 6.6%                                                             
|Operating income (loss)    | 3.1%                                | (1.4)%                                                           
|Net income                 | 1.6%                                | 5.7%                                                             



|                     | Nine Months Ended
December 31, 2000 | (Unaudited)
                  Nine Months Ended
December 31, 1999
|-------------------- | ----------------------------------- | -----------------------------------------------------------------
|                     | (In thousands)                     
|Consolidated revenue | $73,103                             | $45,567                                                          

As reflected above, total revenue in the nine-month period
ended December 31, 2000 was $73.1 million, about 60% higher than the $45.6
million for the same nine-month period in 1999. This significant increase of
$27.5 million was primarily the result of the Company's decision to focus its
resources on the DVD product line, which accounted for approximately 98% of
total revenue in 2000, as compared to 93% in 1999.  Overseas sales
represented almost 100% for the nine-months ended December 31, 2000, as
compared to about 91% for the nine-months ended December 31, 1999.

|                           | Nine Months Ended
December 31, 2000 | (Unaudited)
                  Nine Months Ended
December 31, 1999
|-------------------------- | ----------------------------------- | -----------------------------------------------------------------
|                           | (In thousands)                     
|Gross margin               | $10,110                             | $5,696                                                           
|As a percentage of revenue | 13.8%                               | 12.5%                                                            

Gross margin increased from 12.5% of revenue for the
nine-months ended December 31, 1999 to 13.8% of revenue for the nine-month period
ended December 31, 2000. The improvement reflects the continuing efforts of
the Company to lower its costs of revenue by implementing more cost efficient
production processes.

|                           | Nine Months Ended
December 31, 2000 | (Unaudited)
                  Nine Months Ended
December 31, 1999
|-------------------------- | ----------------------------------- | -----------------------------------------------------------------
|                           | (In thousands)                     
|Research and development   | $2,493                              | $1,705                                                           
|As a percentage of revenue | 3.4%                                | 3.7%                                                             

Research and development expenses as a percentage of revenue
decreased to 3.4% for the nine-month period ended December 31, 2000,
compared with 3.7% for the nine-months period ended December 31, 1999. The
decrease in these expenses as a percentage of net revenues is attributable to
reducing non-performing operations and focusing the engineering resources on the
DVD product line, which has generated substantial growth in revenues. The
increased revenue and improved margins allowed the Company to increase its
research and development expenses, from $1.7 million for the nine-month period
ended December 31, 1999 to $2.5 million for the same period in 2000.

|                           | Nine Months Ended
December 31, 2000 | (Unaudited)
                  Nine Months Ended
December 31, 1999
|-------------------------- | ----------------------------------- | -----------------------------------------------------------------
|                           | (In thousands)                     
|Sales and marketing        | $1,902                              | $1,652                                                           
|As a percentage of revenue | 2.6%                                | 3.6%                                                             

Sales and marketing expenses as a percentage of revenues
decreased from 3.6% in the nine-months ended December 31, 1999 to 2.6% in
the nine-month period ended December 31, 2000. The decrease in these
expenses as a percentage of revenue was also the result of the restructuring of
the Company's product lines that took place in this period to focus the sales
and marketing resources on the DVD product line, which resulted in substantial
increase in revenues. The increase in revenue and improvement in margins also
allowed increased allocation of capital for sales and marketing expenses, from
$1.7 million for the nine-month period ended December 31, 1999 to $1.9
million for the same period in 2000.

|                           | Nine Months Ended
December 31, 2000 | (Unaudited)
                  Nine Months Ended
December 31, 1999
|-------------------------- | ----------------------------------- | -----------------------------------------------------------------
|                           | (In thousands)                     
|General and administrative | $3,467                              | $2,989                                                           
|As a percentage of revenue | 4.7%                                | 6.6%                                                             

General and administrative expenses increased $0.5 million
for the nine-month period ended December 31, 2000 over the same period in
1999. The increase of $0.5 million was primarily attributable to increased
spending in professional fees for both legal and accounting services.

Liquidity and Capital Resources

At December 31, 2002 the Company had $18.2 million of
cash and cash equivalents of which $5.9 million was restricted as collateral for
lines of credit.

Our operating activities used cash of $17.3 million during
2002. The principal uses of cash were increased inventory of $13.9 million
resulting from the sales forecasts, which are the basis for material
procurement. During the fourth quarter, our sales did not meet forecasts and
volume purchases of major components beyond requirements were made in order to
maximize price rebates on certain purchased components. During 2002, accounts
receivable increased $8.6 million, which was consistent with the change in terms
from principally letters of credit in the year 2001 to open credit terms in
2002. We experienced a net loss in 2002 of $3.0 million, as adjusted by non-cash
impact of depreciation and amortization of $2.6 million, the impairment charge
of goodwill of $0.2 million, the issuance of common stock for services provided
with a fair value of $0.4 million, all of which was partially offset by the
non-cash reduction in the majority interest of the investors of our Korean
Subsidiary (DVSK) and Chinese Joint Venture, totaling $1.0 million. Reduction in
other short and long term liabilities totaling $3.0 million were made during the
year 2002, which included $1.5 million primarily representing amounts originally
provided for obligations of dormant foreign operation which are no longer
required. Cash provided by operating activities in 2002 was provided by an
increased accounts payable and accounts payable - related party of $11.7 million
and the return of the $1.0 million deposit required during the settlement of
litigation with a previous Korean employee.

Inventory turn and receivables turn from the twelve-month
period ended December 31, 2002 and December 31, 2001 were as follows:

|                | Twelve Months Ended
December 31, 2002 | Twelve Months Ended
December 31, 2001
|--------------- | ------------------------------------- | -------------------------------------
|Inventory turn  | 8.3 X                                 | 14.5 X                               
|Receivable turn | 24.6 X                                | 62.7 X                               

We currently expect that for the year 2003, inventories will
turn at a slightly lower rate than in the previous twelve-month period.
Receivable turns in the year 2003, however, are likely to be significantly 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 $4.9 million,
principally resulting from an increase in restricted cash of $2.7 million used
as collateral for the Korean subsidiary's lines of credit, and $1.6 million for
molds (tooling) for the factory opened in the fourth quarter of 2001 in Korea.
Additionally the China joint venture acquired plant equipment totaling $0.9
million and spent $0.7 million for leasehold improvements. Offsetting the above
was the maturity of marketable securities totaling $0.3 million. In addition, we
recorded an adjustment of a $1.1 million relating to the write down of a note
receivable from a related party due to non-payment in order to reconcile net
income to net cash provided by operating activities.

During 2002, net cash provided by financing activities was
$22.7 million, with $10.7 million in proceeds from the sale of the Korean
subsidiary's stock in an initial public offering in September 2002, $9.6 million
from Korean line of credit borrowings, and $2.4 million in proceeds from a note
payable from Shanghai bank and secured by the joint venture facility in China.

We believe that with working capital of $11.4 million at
December 31, 2002, and the renewal of our existing lines of credit in Korea, now
totaling $52.3 million of which we have taken down $26.1 million, that our
operations in Asia have sufficient resources to manage both their new product
plans and production requirements for the year 2003. Our operations in the U.S.
will require the raising of additional capital to finance MobileTouch USA. The
Company is currently in discussions with investment firms and hopes to have
agreements reached for this funding in the next sixty to ninety days.
Additionally, the Company anticipates obtaining management fees from its
subsidiaries to be advanced on a monthly basis.

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.
144, Accounting for the Impairment or Disposal of Long Lived Assets,
which addresses financial accounting and reporting for the impairment and
disposal of long-lived assets. The Company adopted SFAS No. 144 on January 1,
2002. The adoption of SFAS No. 144 did not have a material impact on the
Company's consolidated financial position or results of operations.

In June 2002, the FASB issued No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses the timing
and amount of costs recognized as a result of restructuring and similar
activities. The Company will apply SFAS No. 146 to activities initiated after
December 31, 2002. The adoption of SFAS No. 146 is not expected to have a
material impact on the Company's consolidated statements of income or financial
position.

In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure." This Statement amends
SFAS No. 123, "Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The alternative methods of transition of SFAS No. 148 are effective for
fiscal years ended after December 15, 2002. The Company follows APB 25 in
accounting for employee stock options. The disclosure provisions of SFAS No. 148
is effective for fiscal years ending after December 15, 2002 and have been
incorporated into these financial statements and accompanying footnotes.

In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which requires a guarantor to
recognize and measure certain types of guarantees at fair value. In addition,
Interpretation No. 45 requires the guarantor to make new disclosures for these
guarantees and other types of guarantees that are not subject to the initial
recognition and initial measurement provisions. The disclosure requirements are
effective for financial statements for interim or annual periods ended after
December 15, 2002, while the recognition and measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company is in the process of evaluating the impact the
initial recognition and initial measurement provisions will have on its
consolidated financial position and results of operations.

The Company does not believe that any of these recent
accounting pronouncements will have a material impact on their financial
position or results of operations.

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 $130,000 at December 31, 2002.

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, 2002 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, 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 after assessment has, as of December 31, 2002, written
off its remaining balance of goodwill totaling $175, net of
amortization.

Determining Functional Currencies for the Purpose of
Consolidation

Our majority owned foreign subsidiary and joint
venture represent the vast majority of our revenues, assets, and liabilities at
December 31, 2002. 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."

FACTORS THAT MAY AFFECT FUTURE RESULTS

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.

Our recent growth rate may not be sustainable and you
should not use our past financial performance to predict future operating
results. In addition to the losses incurred 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 R&D personnel and engineers in
connection with our research and development efforts related to new product
development during 2003. 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:

- the availability, timely delivery and cost of components
from our suppliers;
- competitive pressures and related changes in selling
prices;
- 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;
- 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;
- market acceptance of products utilizing our
technologies;
- 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 consists 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 could harm our business.

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. If our capital resources are insufficient to
meet future capital requirements, we may not meet our financial obligations to
our creditors when they become due or we may have to curtail or cease certain
operations.

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 currently are 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 growth and future profitability depend upon our
ability to successfully develop and commercialize new DVD products.

During the last three years, a substantial amount of
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. 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 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
generate losses as we invest heavily in R&D personnel and engineers during
2003.

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 anticipated growth 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. Because of the recent economic slowdown in the United
States, many industries are delaying or reducing technology purchases. The
impact of this 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, if the current economic
slowdown continues or worsens, we may fall short of our revenue expectations for
any given quarter in 2003 or for the entire year.

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% and 99.0% 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 and the fiscal year ended December 31, 2002,
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:

- 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 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, and North Korea and South
Korea, which are continuously engaged in political disputes. These countries
have recently 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% of our revenues during the year ended December 31, 2002.
Products sold to our top 10 customers accounted for approximately 75% 88% and
67% of our revenues during the nine-month period ended December 31, 2000,
the fiscal year ended December 31, 2001, and the fiscal year ended December
31, 2002, 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 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.

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 need to expand our production capacity and 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 $52 million as of December 31, 2002. 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 may also need to sell shares of our common stock or seek
additional borrowings or outside capital infusions in the future. We cannot
assure you that such financing options will be available on terms acceptable to
us, if at all, and at the time and place that we need them. In addition, if we
issue shares of our common stock, our shareholders will experience dilution with
respect to their investment.

Our growth continues to place a significant strain on our
management systems and resources and if we fail to manage our growth, our
ability to market and sell our products and develop new products may be
harmed.

Our business is experiencing rapid growth 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 our expected growth, 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 our growth. 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
revenues 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.

Provisions of our corporate charter documents could delay
or prevent a change of control.

Our Certificate of Incorporation grants our board of
directors the authority to determine the relative rights and preferences of our
preferred stock and gives the board the authority to issue such shares, all
without further stockholder approval. As a result, our board of directors could
authorize the issuance of a series of preferred stock that would grant to
holders preferred rights to our company's assets upon liquidation, the right to
special voting privileges, the right to receive dividends before dividends would
be declared upon the common stock and the right to redemption of such shares,
together with a premium, prior to the redemption of common stock. Our common
stockholders have no redemption rights. The ability of the board to issue large
blocks of preferred stock could have a potential anti-takeover effect, and the
issuance of preferred stock in accordance with such authority may delay or
prevent a change of control of our company.



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 discs and DVD video players. If we experience an unforeseen downturn in
the markets for DVD video discs 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.



PART III

Item 14.	Controls and Procedures

a.Evaluation of disclosure controls and
procedures.

Our chief executive officer and our chief financial
officer, after evaluating our "disclosure controls and procedures" (as defined
in Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14 (c) and 15-d
as of a date (the "Evaluation date") within 90 days before the filing date of
this Annual Report on Form 10-K have concluded that as of the Evaluation Date,
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 Securities and
Exchange Commission rules and forms.

During our fiscal year 2002 financial reporting process,
management in consultation with the Company's independent accountants identified
a deficiency in our processing and monitoring of inter-company transactions,
relating to the elimination of inter-company revenues and costs of goods sold,
which constitutes a "reportable condition" as defined under standards
established by the American Institute of Certified Public Accountants.

b.Changes in internal controls.

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 rectify
all past accounting misstatements and prevent the situations that resulted in
the need to restate prior period financial statements from recurring. To this
end, the Company is taking the following immediate steps:

- providing enhanced reporting and monitoring of
inter-company transactions; and
- defining in more detail the manner in which inter-company
transactions 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 controls and disclosure controls and procedures.

Other than as described above, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the Company's
evaluation.





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

We filed no reports on Form 8-K during the fourth
quarter ended December 31, 2002.

(c)	Exhibits

See Exhibit Index.

---

DIGITAL VIDEO SYSTEMS, INC.
                  Index To Consolidated Financial Statements

|                                                                                                                                          | Page   
|----------------------------------------------------------------------------------------------------------------------------------------- | -------
|Report of Burr, Pilger & Mayer LLP, Independent Auditors                                                                                  | 36     
|Consolidated Balance Sheets - December 31, 2002 and December 31,
2001                                                                     | 37     
|Consolidated Statements of Operations - Year ended December 31,
2002,
December 31, 2001 and nine months ended December 31, 2000           | 38     
|Consolidated Statements of Stockholders' Equity - Year ended
December 31, 2002,
December 31, 2001 and nine months ended December 31, 2000 | 39     
|Consolidated Statements of Cash Flows - Year ended December 31, 2002,

December 31, 2001 and nine months ended December 31, 2000          | 40 - 41
|Notes to Consolidated Financial Statements                                                                                                | 42     

---



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, 2002 and
2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 2002,
December 31, 2001, and the nine months ended December 31, 2000. Our audit
also included the financial statement schedule listed at Item 14(a)(2). The
consolidated financial statements and schedule are the responsibility of the
Digital Video Systems, Inc. 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,
2002 and 2001, and the results of their operations and their cash flows for the
year ended December 31, 2002, December 31, 2001, and nine months ended
December 31, 2000 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
                   April 4, 2003

---



DIGITAL VIDEO SYSTEMS, INC.
                  CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share
amounts)

|                                                                                                                                                                 | December 31,
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------
|                                                                                                                                                                 | 2002        
|ASSETS                                                                                                                                                           |             
|Current assets:                                                                                                                                                  |             
|Cash and cash equivalents                                                                                                                                        | $ 12,330    
|Restricted cash                                                                                                                                                  | 5,908       
|Accounts receivable, less allowance for doubtful accounts of
$127 and $320 for 2002 and 2001, respectively                                                       | 10,749      
|Inventories                                                                                                                                                      | 25,758      
|Marketable debt securities                                                                                                                                       | 427         
|Prepaid expenses and other current assets                                                                                                                        | 3,402       
|Note receivable - related party                                                                                                                                  | 884         
|Total current assets                                                                                                                                             | 59,458      
|Property and equipment, net of depreciation                                                                                                                      | 11,067      
|Intangibles                                                                                                                                                      | 587         
|Other assets                                                                                                                                                     | 315         
|Total assets                                                                                                                                                     | $	71,427    
|LIABILITIES AND STOCKHOLDERS'
EQUITY                                                                                                                             |             
|Current liabilities:                                                                                                                                             |             
|Line of credit                                                                                                                                                   | $	26,086    
|Current portion of long term debt                                                                                                                                | 192         
|Notes payable                                                                                                                                                    | 4,223       
|Notes payable - related party                                                                                                                                    | -           
|Accounts payable                                                                                                                                                 | 13,592      
|Accounts payable - related party                                                                                                                                 | 434         
|Other payable                                                                                                                                                    | 234         
|Accrued liabilities                                                                                                                                              | 3,325       
|Total current liabilities                                                                                                                                        | 48,086      
|Long-term liabilities-long term debt                                                                                                                             | 96          
|Other long term liabilities                                                                                                                                      | -           
|Total liabilities                                                                                                                                                | 48,182      
|Minority interest                                                                                                                                                | 13,434      
|Stockholders' equity                                                                                                                                             |             
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized;
no shares issued and outstanding at December 31, 2002 and December 31,
2001                     | -           
|Common stock, $0.0001 par value, 30,000,000 shares authorized;
6,183,555 and 5,899,252 shares issued and outstanding at December 31, 2002 and
2001, respectively | 1           
|Additional paid-in capital                                                                                                                                       | 73,334      
|Accumulated deficit                                                                                                                                              | (64,961)    
|Accumulated other comprehensive (loss) income                                                                                                                    | 1,457       
|Deferred compensation                                                                                                                                            | (20)        
|Total stockholders' equity                                                                                                                                       | 9,811       
|Total liabilities and stockholders' equity                                                                                                                       | $	71,427    



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

---





DIGITAL VIDEO SYSTEMS, INC.
                  CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share
amounts)

|                                                                | Year Ended
December 31, | Year Ended
December 31, | Nine Months Ended
December 31,
|--------------------------------------------------------------- | ----------------------- | ----------------------- | ------------------------------
|                                                                | 2002                    | 2001                    | 2000                          
|                                                                |                         |                         |                               
|Net revenue                                                     | $157,214                | $159,871                | $73,103                       
|Cost of revenue                                                 | 145,929                 | 145,795                 | 62,993                        
|Gross profit                                                    | 11,285                  | 14,076                  | 10,110                        
|Operating expenses:                                             |                         |                         |                               
|Research and development                                        | 3,043                   | 2,503                   | 2,493                         
|Sales and marketing                                             | 2,907                   | 2,173                   | 1,902                         
|General and administrative                                      | 7,054                   | 7,612                   | 3,467                         
|Total operating expenses                                        | 13,004                  | 12,288                  | 7,862                         
|(Loss) income from operations                                   | (1,719)                 | 1,788                   | 2,248                         
|Other income (expenses):                                        |                         |                         |                               
|Interest expense                                                | (2,050)                 | (1,155)                 | (453)                         
|Other (expense) income                                          | (213)                   | 1,274                   | 347                           
|(Loss) gain on disposal of fixed assets                         | -                       | (12)                    | 84                            
|(Loss) income before minority interest and income tax
provision | (3,982)                 | 1,895                   | 2,226                         
|(Benefit from) provision for income taxes                       | (33)                    | 722                     | 376                           
|(Loss) income before minority interest                          | (3,949)                 | 1,173                   | 1,850                         
|Net minority interest income (loss)                             | 958                     | (305)                   | (702)                         
|Net (loss) income                                               | $(2,991)                | $	868                   | $	1,148                       
|Basic net (loss) income per share                               | $ (0.50)                | $	0.16                  | $	0.25                        
|Diluted net (loss) income per share                             | $ (0.50)                | $	0.14                  | $	0.21                        

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

---



DIGITAL VIDEO SYSTEMS, INC.
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(in thousands, except shares)

|                                                                             |              |           | Additional      |             | Accumulated   |                  |             
|---------------------------------------------------------------------------- | ------------ | --------- | --------------- | ----------- | ------------- | ---------------- | ------------
|                                                                             |              |           | Paid-in Capital |             | Other         |                  |             
|                                                                             | Common Stock | Preferred | Common          | Accumulated | Comprehensive | Deferred         |             
|                                                                             | Shares       | Amount    | Stock           | Stock       | Deficit       | Income (Expense) | Compensation
|Balance at March 31, 2000                                                    | 5,646,905    | $ 1       | -               | $ 68,088    | $ (63,986)    | $ 1,802          | $ (305)     
|Comprehensive Income:                                                        |              |           |                 |             |               |                  |             
|Net income                                                                   | -            | -         | -               | -           | 1,148         | -                | -           
|Translation adjustment                                                       | -            | -         | -               | -           | -             | (1,171)          | -           
|Comprehensive Income:                                                        |              |           |                 |             |               |                  |             
|Exercise of common stock options                                             | 16,069       | -         | -               | 118         | -             | -                | -           
|Conversion of promissory notes to common stock                               | 160,748      | -         | -               | 680         | -             | -                | -           
|Issuance of common stock                                                     | 57,854       | -         | -               | 160         | -             | -                | -           
|Amortization of deferred compensation                                        | -            | -         | -               | (153)       | -             | -                | 174         
|Issuance of common stock in settlement of legal
obligations                  | 122,041      | -         | -               | 73          | -             | -                | -           
|Issuance of warrants in settlement of legal
obligations                      | -            | -         | -               | 54          | -             | -                | -           
|Balance at December 31, 2000                                                 | 6,003,617    | $ 1       | -               | $ 69,020    | $ (62,838)    | $ 631            | $ (131)     
|Comprehensive Income:                                                        |              |           |                 |             |               |                  |             
|Net income                                                                   | -            | -         | -               | -           | 868           | -                | -           
|Translation adjustment                                                       | -            | -         | -               | -           | -             | (841)            | -           
|Comprehensive Income:                                                        |              |           |                 |             |               |                  |             
|Exercise of common stock options                                             | 77,922       | -         | -               | 300         | -             | -                | -           
|Issuance of common stock                                                     | 723,362      | -         | -               | 1,450       | -             | -                | -           
|Amortization of deferred compensation                                        | -            | -         | -               | -           | -             | -                | 71          
|Issuance of warrants for legal services                                      | -            | -         | -               | 56          | -             | -                | -           
|Issuance of common stock for services and in settlement of legal
obligations | 210,492      | -         | -               | 524         | -             | -                | -           
|Escrow stock returned to capital                                             | (1,116,141)  | -         | -               | -           | -             | -                | -           
|Balance at December 31, 2001                                                 | 5,899,252    | $ 1       | -               | $ 71,350    | $ (61,970)    | $ (210)          | $ (60)      
|Comprehensive Income:                                                        |              |           |                 |             |               |                  |             
|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 in settlement of service
provided                   | 144,303      | -         | -               | 424         | -             | -                | -           
|Issuance of common stock in settlement of accounts
payable                   | 60,000       | -         | -               | 172         | -             | -                | -           
|Balance at December 31, 2002                                                 | 6,183,555    | $ 1       | -               | $ 73,334    | $ (64,961)    | $ 1,457          | $ (20)      

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

---



DIGITAL VIDEO SYSTEMS, INC.
                  CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

|                                                                                            | Year Ended
December 31, | Year Ended
December 31, | Nine Months Ended
December 31,
|------------------------------------------------------------------------------------------- | ----------------------- | ----------------------- | ------------------------------
|                                                                                            | 2002                    | 2001                    | 2000                          
|Operating activities:                                                                       |                         |                         |                               
|Net (loss) income                                                                           | $(2,991)                | $	868                   | $1,148                        
|Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |                         |                         |                               
|Minority interest                                                                           | (958)                   | 305                     | 702                           
|Depreciation                                                                                | 2,344                   | 758                     | 680                           
|Amortization                                                                                | 251                     | 453                     | 303                           
|Impairment of goodwill                                                                      | 175                     | -                       | -                             
|Loss (gain) on disposal of fixed assets                                                     | -                       | 12                      | (84)                          
|Stock and warrants issued for expenses                                                      | 424                     | 580                     | 76                            
|Amortization of deferred compensation                                                       | 40                      | -                       | -                             
|Changes in operating assets and liabilities:                                                |                         |                         |                               
|Accounts receivable                                                                         | (8,614)                 | 768                     | (1,028)                       
|Inventories                                                                                 | (13,872)                | (1,836)                 | (5,281)                       
|Prepaid expenses and other current assets                                                   | 1,101                   | (1,751)                 | (2,042)                       
|Other assets                                                                                | (48)                    | 2,782                   | (170)                         
|Accounts payable                                                                            | 10,024                  | (2,189)                 | 411                           
|Accounts payable - related party                                                            | (1,702)                 | 2,136                   | -                             
|Accrued liabilities                                                                         | (558)                   | 1,676                   | 101                           
|Other payable                                                                               | 1,397                   | 1,492                   | 374                           
|Other long-term liabilities                                                                 | (1,488)                 | -                       | -                             
|Net cash (used in) provided by operating activities                                         | (17,269)                | 6,054                   | (4,810)                       
|Investing activities:                                                                       |                         |                         |                               
|Write down of notes receivable - related party                                              | 1,090                   | -                       | -                             
|Maturities (purchase) of marketable debt securities                                         | 342                     | (769)                   | -                             
|Acquisition of property and equipment                                                       | (3,696)                 | (8,479)                 | (816)                         
|Increase in restricted cash                                                                 | (2,672)                 | (82)                    | (1,133)                       
|Investment in Shanghai joint venture                                                        | -                       | -                       | (324)                         
|Net cash used in investing activities                                                       | (4,936)                 | (9,330)                 | (2,273)                       
|Financing activities:                                                                       |                         |                         |                               
|Investment by minority interest in China Joint Venture                                      | -                       | 3,195                   | -                             
|Proceeds from the sale of common shares                                                     | 45                      | 1,450                   | 160                           
|Proceeds from the exercise of stock options                                                 | 166                     | 300                     | 118                           
|Proceeds from line of credit borrowing                                                      | 9,586                   | 5,336                   | 22,168                        
|Repayment of capital lease obligation                                                       | -                       | -                       | (356)                         
|Repayment of bank borrowings                                                                | (148)                   | (105)                   | (16,562)                      
|Proceeds from repayment of note receivable                                                  | -                       | 289                     | -                             
|Proceeds from sale of subsidiary stock                                                      | 10,685                  | -                       | -                             
|Repayment of notes payable                                                                  | -                       | (69)                    | (934)                         
|Proceeds from issuance of notes payable                                                     | 2,389                   | 1,834                   | 1,433                         
|Net cash provided by financing activities                                                   | 22,723                  | 12,230                  | 6,027                         
|Effect of exchange rate changes                                                             | 1,667                   | (841)                   | (1,171)                       
|Net increase (decrease) in cash and cash equivalents                                        | 2,185                   | 8,113                   | (2,227)                       
|Cash and cash equivalents at the beginning of year                                          | 10,145                  | 2,032                   | 4,259                         
|                                                                                            | $   12,330              | $  10,145               | $   2,032                     

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

---

DIGITAL VIDEO SYSTEMS, INC.
                  CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued(in thousands)

|                                                            | Year Ended
December 31, | Year Ended
December 31, | Nine Months Ended
December 31,
|----------------------------------------------------------- | ----------------------- | ----------------------- | ------------------------------
|                                                            | 2002                    | 2001                    | 2000                          
|Supplemental disclosures:                                   |                         |                         |                               
|Interest paid                                               | $         1,999         | $         1,199         | $           413               
|Taxes paid                                                  | $	516                   | $	244                   | $	54                          
|Supplemental disclosure of non-cash transaction:            |                         |                         |                               
|Conversion of notes payable to common stock                 | $	-                     | $	-                     | $	680                         
|Offset of notes payable and note receivable-related
party   | $	-                     | $	289                   | $	319                         
|Issuance of common stock in payment of accounts payable     | $            172        | $	-                     | $	-                           
|Issuance of common stock and warrants for legal
settlements | $	-                     | $	580                   | $	73                          
|Issuance of common stock for service provided               | $	424                   | $	-                     | $	-                           

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

---



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

1. The Company and its Significant Accounting
Policies

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. During 2000 the Company changed its fiscal year end to
December 31 from March 31. (See comparative unaudited financial information
for the nine-month period ended December 31, 1999 in note 24).

Financial Results and Liquidity

The accompanying financial statements have been prepared
in conformity with accounting principles generally accepted in the Unites States
of America, which contemplate continuation of the Company as a going concern.
However, the Company has an accumulated deficit of $65.0 million. The
financial statements do not include any adjustments relating to the
recoverability and classification of the recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.

The Company experienced a reduction in gross margin during
the year ended December 31, 2002 due to increased pricing pressure from
competition. The Company expects during the year end December 31, 2003 to
experience continued pricing pressure as competition becomes more intense. To
partially offset the impact, the Company has taken steps to lower costs and
expenses which include controls related to purchasing and engineering
efforts.

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.

Funding is needed to discharge the Company's liabilities from
the current and prior years in which substantial operating losses were incurred
and to meet the operating obligations of the U.S. based headquarters and other
operations. During the coming year the Company plans to meet these operating
needs by raising additional working capital and receiving management fees from
its Korean Subsidiary (DVS Korea). During September 2002, DVS Korea raised $10.7
million in proceeds from the sale of its stock. Management believes that these
funds will be sufficient to meet the working capital of DVS Korea and the China
Joint Venture (SFDT) in the coming year.

Basis of Presentation

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 values. 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.

Cash and Equivalents and Short-term Investments

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 $5,908 represented by passbook
accounts and time deposits for DVS Korea and are used for collateral related to
borrowings and other required deposits.

As of December 31, 2002 and 2001, the estimated fair
value of the cash equivalents and short-term investments consisted of cash and
money market funds in the amount of $18,238 and $13,381, respectively.

Investment in Marketable Debt Securities

The Company classifies its investments in marketable debt
securities as "held to maturity securities" in accordance with SFAS 115.
These securities are recorded at amortized costs. Total investment in marketable
debt securities is $427 and $769 as of December 31, 2002 and 2001,
respectively.

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 $130,000 at December 31, 2002.

Shipping and Handling Costs

Shipping and handling costs are included in
sales and marketing as an operating expense. For the year ended December 31,
2002, 2001 and the nine months ended December 31, 2000 these costs were $914,
$581 and $305, respectively.

Advertising Expense

Advertising expenditures are charged to operations as
incurred and total $126, $147, and $15 in the twelve months ending
December 31, 2002, December 31, 2001 and nine months ending
December 31, 2000, respectively.

Accounting for Stock-Based Compensation

The Company has stock-based employee compensation plans,
which are described more fully in Note 16. The Company accounts for these plans
under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees, and related
Interpretations.

The following table illustrates the effect on net loss if the
Company had applied the fair value recognition provisions of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.



|                                                                                               | Year Ended December 31, | Nine Months Ended December 31,
|---------------------------------------------------------------------------------------------- | ----------------------- | ------------------------------
|                                                                                               | 2002                    | 2001                          
|Reported net (loss) income                                                                     | $ (2,991)               | $ 868                         
|Add: Stock-based compensation, as reported                                                     | 40                      | 71                            
|Deduct: Total stock-based compensation determined under fair
value based method for all awards | (589)                   | (445)                         
|Adjusted net (loss) income, fair value method for all
stock-based awards                       | $ (3,540)               | $ 494                         
|Basic (loss) income per share - as reported	$$                                                 | $ (0.50)                | $ 0.16                        
|Diluted (loss) income per share - as reported	$$                                               | $ (0.50)                | $ 0.14                        
|Basic (loss) income per share - SFAS No. 123
adjusted	$$                                       | $ (0.59)                | $ 0.09                        
|Diluted (loss) income per share - SFAS No. 123
adjusted	$$                                     | $ (0.59)                | $ 0.08                        



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 weighted average assumptions:

|                                 | Year Ended
                  December 31, | Nine Months Ended December 31,
|-------------------------------- | ----------------------------------------- | ------------------------------
|                                 | 2002                                      | 2001                          
|Average risk-free interest rates | 2.97%                                     | 5.98%                         
|Average expected life (in years) | 2.0                                       | 2.0                           
|Volatility	$$                    | 109% - 125%                               | 126%                          

The weighted average fair value of stock awards (including
restricted stock units granted in 2002) granted during 2002, 2001 and the nine
months ended 2000 was $0.90, $2.88, and $2.52, respectively.

Inventories

Inventories are stated at the lower of cost (moving
average method) or market. The Company has recorded valuation reserves against
inventory of $410 and $328 as of December 31, 2002 and 2001,
respectively.

Long-Lived Assets

Property and equipment are stated at cost net of
accumulated depreciation and amortization over their estimated useful lives.
Depreciation and amortization are computed using the straight-line method over
the assets estimated useful lives of three to seven years. The Company performs
reviews for impairments whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.

Intangibles

Intangible assets consist of acquired technology and
purchased goodwill 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, which have not been material to date, are included
in interest and other income in the accompanying statement of operations.

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 August 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard ("SFAS")
No. 144, Accounting for the Impairment or Disposal of Long Lived
Assets, which addresses financial accounting and reporting for the
impairment and disposal of long-lived assets. The Company adopted SFAS No. 144
on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact
on the Company's consolidated financial position or results of operations.

In June 2002, the FASB issued No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses the
timing and amount of costs recognized as a result of restructuring and similar
activities. The Company will apply SFAS No. 146 to activities initiated after
December 31, 2002. The adoption of SFAS No. 146 is not expected to have a
material impact on the Company's consolidated statements of income or financial
position.

In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure." This
Statement amends SFAS No. 123, "Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The alternative methods of transition of SFAS
No. 148 are effective for fiscal years ended after December 15, 2002. The
Company follows APB 25 in accounting for employee stock options. The disclosure
provisions of SFAS No. 148 is effective for fiscal years ending after December
15, 2002 and have been incorporated into these financial statements and
accompanying footnotes.

In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which requires a guarantor to
recognize and measure certain types of guarantees at fair value. In addition,
Interpretation No. 45 requires the guarantor to make new disclosures for these
guarantees and other types of guarantees that are not subject to the initial
recognition and initial measurement provisions. The disclosure requirements are
effective for financial statements for interim or annual periods ended after
December 15, 2002, while the recognition and measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company is in the process of evaluating the impact the
initial recognition and initial measurement provisions will have on its
consolidated financial position and results of operations.

The Company does not believe that any of these recent
accounting pronouncements will have a material impact on their financial
position or results of operations.



Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of cash
equivalents, short-term investments, and receivables from customers. The Company
primarily invests its cash equivalents and short-term investments 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.



Inventories consisted of the following at
December 31, 2002 and 2001:



|                        | 2002               | 2001              
|----------------------- | ------------------ | ------------------
|Raw materials           | $	9,718            | $	3,772           
|Work-in-process         | 8,220              | 6,464             
|Finished goods          | 8,230              | 1,978             
|Total inventories       | 26,168             | 12,214            
|Less inventory reserves | (410)              | (328)             
|Net inventories         | $           25,758 | $           11,886



Property and equipment consisted of the following at
December 31, 2002 and 2001:



|                                    | 2002             | 2001             
|----------------------------------- | ---------------- | -----------------
|Building and leasehold improvements | $	5,143          | $	6,193          
|Machinery and computer equipment    | 10,126           | 5,424            
|Furniture and fixtures              | 717              | 674              
|Total property and equipment        | 15,987           | 12,291           
|Accumulated depreciation            | (4,920)          | (2,576)          
|Net property and equipment          | $         11,067 | $           9,715

Depreciation expense totaled $2,344, $758, and $680 for the
year ended December 31, 2002, December 31, 2001 and the nine months
ending December 31, 2000, respectively.



Intangible assets consisted of the following at
December 31, 2002 and 2001:



|                                         | 2002    | 2001   
|---------------------------------------- | ------- | -------
|Goodwill                                 | $	-     | $	655  
|Intangible assets of acquired businesses | 2,400   | 2,400  
|Total intangible assets                  | 2,400   | 3,055  
|Less: accumulated amortization           | (1,813) | (2,042)
|                                         | $	587   | $	1,013

Amortization expense totaled $251, $453 and $303 for the year
ended December 31, 2002, December 31, 2001 and the nine months ending
December 31, 2000.

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.

As of December 31, 2002, the company recognized an impairment
charge of $175 for the remaining book value of goodwill.

The transitional disclosures required under FAS 142 are as
follows:

|(in thousands, except per share amounts)               | Year Ended
                  December 31, | Nine Months Ended December 31,
|------------------------------------------------------ | ----------------------------------------- | ------------------------------
|                                                       | 2002                                      | 2001                          
|Reported net (loss) income                             | $ (2,991)                                 | $ 868                         
|Addback: Amortization of goodwill, net of income taxes | -                                         | 131                           
|Adjusted net (loss) income                             | $ (2,991)                                 | $ 999                         
|                                                       |                                           |                               
|Reported (loss) income - basic                         | $ (0.50)                                  | $ 0.16                        
|Addback: Amortization of goodwill, net of income taxes | -                                         | 0.02                          
|Adjusted net (loss) income - basic                     | $ (0.50)                                  | $ 0.18                        
|                                                       |                                           |                               
|Reported (loss) income - diluted                       | $ (0.50)                                  | $ 0.14                        
|Addback: Amortization of goodwill, net of income taxes | -                                         | 0.02                          
|Adjusted net (loss) income - diluted                   | $ (0.50)                                  | $ 0.16                        

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 - developed technology over the succeeding five fiscal years is
as follows:



|      | Amount
|----- | ------
|2003  | $	251 
|2004  | 251   
|2005  | 85    
|Total | $	587 



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 is
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 a wholly owned subsidiary of the Company (DVS Korea). The
Option Shares constitute 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 exists 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. At this time, the Company is considering further
legal action against OPLI and its shareholders to recover all remaining claims
including all legal costs incurred.

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



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, 2002 (in thousands):



|                                    | 2002  | 2001 | 2000
|----------------------------------- | ----- | ---- | ----
|Warranty accrual, beginning of year | $335  | $128 | $ - 
|Additions                           | 53    | 207  | 128 
|Subtractions                        | (258) | -    | -   
|Warranty accrual, end of year       | $130  | $335 | $128



The Company has lines of credit with several Korean banks
during the year ended December 31, 2002, with borrowing limits varying from
$2,416 to $16,426. The total borrowing limit as of December 31, 2002 was
$52,320. Borrowings under these lines of credit incur interest at rates between
0.38% to 12%, and are guaranteed up to $2,676 by The Korea Technology Guarantee
Trust Fund and the Korea Credit Guarantee fund. The expiration date for these
lines of credit are between March and October 2003. Cash and cash equivalent
deposits of approximately $5,908 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, 2002, the Company owed a total of $26,086 on the lines of credit.



The Company has a note payable of $4,220 and $1,757 for
the year ended December 31, 2002 and 2001 respectively from Shanghai Bank. This
note bears interest rate of 6% and is secured by the joint venture building in
China. The note requires that the Company maintain certain minimum inventory
levels as collateral for the loan. Other notes payable of $3 at December 31,
2002 bear interest at a rate of 10% per annum.



The Company has an unsecured note payable at December 31,
2001 of $77 from M. Tek Ung. This note bears interest at 10%. The note was
repaid during 2002.



Long-term debt at December 31, 2002 and 2001 consisted of
the following:



|                                                                                          | 2002  | 2001 
|----------------------------------------------------------------------------------------- | ----- | -----
|Unsecured note payable due to Hanvit Bank, with interest
rate of 6%, due on June 15, 2004 | $ 288 | $ 436
|Less current portion                                                                      | (192) | (172)
|Total long-term debt                                                                      | $ 96  | $ 264

Repayments of long-term borrowings for:



|      | Amount
|----- | ------
|2003  | $ 	192
|2004  | 96    
|Total | $ 	288



Lease 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, 2002 are as
follows:



|           | Amount
|---------- | ------
|2003       | $ 	276
|2004       | 31    
|Thereafter | -     
|           | $ 	307

Rent expense charged to operations was approximately $661,
$481 and $381 for the year ended December 31, 2002, December 31, 2001
and nine months ended December 31, 2000, respectively.



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 19) with DVS Korea holding a 51%
interest and the remaining 39% held by the Chinese partner. The Company's
minority interest liability increased significantly during September 2002 for
the reduction of its ownership interest in DVS Korea as a result of the $10.7
million from its initial public offerings. 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 has been reflected in additional paid-in capital at December 31, 2002.



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



|         | Year Ended
December 31, | Year Ended
December 31, | Nine Months Ended
December 31,
|-------- | ----------------------- | ----------------------- | ------------------------------
|         | 2002                    | 2001                    | 2000                          
|         |                         |                         |                               
|Domestic | $    (2,518)            | $   (1,728)             | $   (1,234)                   
|Foreign  | (506)                   | 3,318                   | 2,758                         
|Total    | $    (3,024)            | $     1,590             | $     1,524                   

The provision for income taxes in the year ended
December 31, 2002 was comprised of state taxes of $27 and foreign taxes
credit 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. The provision for taxes for the nine months ended
December 31, 2000 was comprised of state taxes of $20 and foreign taxes of
$356.

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,
2002 and 2001 are as follows (in thousands):



|                                                                      | 2002     | 2001    
|--------------------------------------------------------------------- | -------- | --------
|Deferred tax assets:                                                  |          |         
|Net operating loss carryforwards                                      | $ 10,248 | $17,469 
|Reserves and other accrued expenses deductible for
taxes not on books | (209)    | 876     
|Depreciation timing differences                                       | (109)    | (214)   
|Total deferred assets                                                 | 9,930    | 18,131  
|Valuation allowance for deferred tax assets                           | (9,930)  | (18,131)
|Net deferred tax assets                                               | $	-      | $	-     

The decrease in valuation allowance for deferred taxes for
the year ended December 31, 2002 was $8,201. The increase in valuation allowance
for deferred taxes for the year ended December 31, 2001, and the nine
months ended December 31, 2000 was $2,771 and $354, respectively.

The Company has federal net operating loss carryforwards as
of December 31, 2002 of approximately $28.3 million expiring at various
dates through 2022 and $5.0 million state net operating loss carryforwards net
of limitations expiring as follows:



|Expiration Date | Federal  | California
|--------------- | -------- | ----------
|2002            | $	-      | $	954     
|2003            | -        | 954       
|2004            | -        | 459       
|2009            | 552      | -         
|2010            | 2,811    | -         
|2011            | 1,324    | -         
|2012            | 5,808    | 2,654     
|2013            | 954      | -         
|2019            | 5,724    | -         
|2020            | 5,131    | -         
|2021            | 4,819    | -         
|2022            | 1,163    | -         
|                | $	28,286 | $	5,021   

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", it is estimated that approximately $24.8 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 and $0.9 million dollars for the
year ended December 31, 2001 and nine months ended December 31, 2000,
respectively. The impact of the tax holiday on basic earnings per share is $0.38
and $0.20 per share, respectively, for the year ended December 31, 2000 and nine
months ended December 31, 2000. The impact of the tax holiday on fully diluted
earnings per share is $0.33 and $0.17 per share, respectively, for the year
ended December 31, 2001 and nine months ended December 31, 2000. The Company's
Korean subsidiary had a tax loss for the year ended December 31, 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 year ended December 31, 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:



|                                              | Income (Loss)
(Numerator) | Shares
(Denominator) | Per Share
Amount
|--------------------------------------------- | ------------------------- | -------------------- | ----------------
|Year ended December 31, 2002:                 |                           |                      |                 
|Basic (loss)                                  | $(2,991)                  | 5,979,350            | $	(0.50)        
|Effect of dilutive stock options and warrants | -                         | -                    | -               
|Diluted loss                                  | $(2,991)                  | 5,979,350            | $	(0.50)        
|Year ended December 31, 2001:                 |                           |                      |                 
|Basic income                                  | $	868                     | 5,336,948            | $	0.16          
|Effect of dilutive stock options and warrants | -                         | 809,068              | (0.02)          
|Diluted income                                | $	868                     | 6,146,016            | $	0.14          
|Nine months ended December 31, 2000:          |                           |                      |                 
|Basic income                                  | $	1,148                   | 4,658,358            | $	0.25          
|Effect of dilutive stock options and warrants | -                         | 761,004              | (0.04)          
|Diluted income                                | $ 1,148                   | 5,419,362            | $	 0.21         

At December 31, 2002, December 31, 2001, and
December 31, 2000, 2,583,325, 936,778 and 1,082,192 options and other warrants
were excluded from the calculation of diluted earnings per share because the
effect was anti-dilutive.



Common Stock

During year 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 year 2002 the Company completed a stock exchange of
204,303 shares for debt and services rendered. Also 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.

Escrowed Securities

As of December 31, 2000 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 March 31, 2000    | 1,094,148          
|Options granted              | 28,571             
|Options exercised            | (16,069)           
|Options cancelled            | (445,108)          
|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          

The following table summarizes information regarding stock
options outstanding at December 31, 2002:

|Range of
Exercise Prices | Weighted Average Remaining Outstanding at
December 31, 2002 | Contractual
Life
(Years) | Average
Exercise
Price | Exercisable at
December 31, 2002 | Average
Exercise
Price
|------------------------ | ----------------------------------------------------------- | ------------------------ | ---------------------- | -------------------------------- | ----------------------
|1.300-3.248              | 843,196                                                     | 9.85                     | 1.55                   | 101,345                          | 1.68                  
|3.626-5.908              | 221,571                                                     | 6.91                     | 3.94                   | 179,851                          | 3.97                  
|7.000-7.875              | 45,486                                                      | 5.02                     | 7.85                   | 42,525                           | 7.85                  
|8.750-14.658             | 28,786                                                      | 6.99                     | 14.61                  | 19,857                           | 14.59                 
|                         | 1,139,039                                                   |                          |                        | 343,578                          |                       

Other Options and Warrants

The Board has authorized a contingent grant of options
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 options have an exercise price of $6.37. None of these
options 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.

The Chief Technology Officer was granted a one (1) year
option of 493,500 shares at $3.85, immediately exercisable, on December 6,
2000. This option was not exercised and has been cancelled.

Warrants to acquire the Company's Common Stock outstanding at
December 31, 2002 totaled 1,444,286. 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            
|12/31/00      | Common Stock        | 34,286         | Immediate            | 12/31/03        | 5.25                   | Legal Services               
|04/04/01      | Common Stock        | 250,000        | 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               
|05/22/02      | Common Stock        | 250,000        | Immediate            | 05/21/07        | 1.78                   | Board Services               
|07/08/02      | Common Stock        | 450,000        | Immediate            | 07/08/07        | 1.34                   | Board Services               
|07/08/02      | Common Stock        | 30,000         | Immediate            | 07/08/07        | 1.34                   | Future Board Services        
|              |                     | 1,444,286      |                      |                 | 2.81                   |                              

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 by recognizing as an expense the fair value of the warrants at the date
of grant.

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, 2002, 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 are $118 and
in the process of being distributed to the participants of the plan.



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



|              | Year Ended
December 31, | Year Ended
December 31, | Nine Months Ended
December 31,
|------------- | ----------------------- | ----------------------- | ------------------------------
|              | 2002                    | 2001                    | 2000                          
|Product line: |                         |                         |                               
|Net sales     |                         |                         |                               
|DVD products  | $ 154,943               | $158,091                | $71,490                       
|CD product    | 2,271                   | 730                     | 251                           
|All other     | -                       | 1,050                   | 1,362                         
|              | $157,214                | $159,871                | $73,103                       

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 year ended December 31, 2002, December 31, 2001 and the nine
months ended December 31, 2000 are as follows:



|                    | Year Ended
December 31, | Year Ended
December 31, | Nine Months Ended
December 31,
|------------------- | ----------------------- | ----------------------- | ------------------------------
|                    | 2002                    | 2001                    | 2000                          
|Product line:       |                         |                         |                               
|Net sales           |                         |                         |                               
|Domestic            | $	1,517                 | $	3,051                 | $	251                         
|Foreign             | 155,697                 | 156,820                 | 72,852                        
|                    | $157,214                | $159,871                | $73,103                       
|Identifiable assets |                         |                         |                               
|Domestic            | $	2,197                 | $	5,707                 |                               
|Foreign             | 69,230                  | 39,929                  |                               
|                    | $71,427                 | $45,636                 |                               

In the twelve months ended December 31, 2002 foreign
sales to China were approximately $92 million and sales to Turkey were $37
million. In the year ended December 31, 2001 foreign sales to China were
approximately $125 million. Sales to China in the nine months ended
December 31, 2000 were $57 million.

During the year ending December 31, 2002, the Company
had a major customer who accounted for over 10% of sales for $36 million. In the
year ended December 31, 2001, the Company had a major customer who
accounted for over 10% of sales. The largest customer had sales of $68.0
million. During the nine months ended December 31, 2000, the Company had
two major customers, who individually accounted for over 10% of sales. The
largest customer had sales of $20.7 million and the other customer had sales of
$9.3 million.



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.



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 the Company's Chief Technology Officer. 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.

Loan Agreement with Related Party

On October 29, 2002, DVS Korea (DVSK) agreed to loan the
Company $500. The money was subsequently received on January 6, 2003. The loan
is evidenced by a note payable due in six months at 10% interest per annum and
is secured by the Company's common stock priced at the current market price on
the date of default.

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
joint venture.

Accounts Payable from Related Party

Accounts payable to SIIG, a partner in the joint venture,
at December 31, 2002 and December 31, 2001 was $434 and $2,136,
respectively.



The Company has reached final settlement agreement with
the Company's former corporate counsel, Troy & Gould, on December 13, 2001
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 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.

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 has been scheduled for April 28, 2003 pending
discussion between all parties. The Company is hopeful it will obtain a
favorable outcome to the suit.

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 which the Company believes is adequate.

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.



On January 2, 2003, DVS Korea invested $505 and
established a 100% wholly owned subsidiary Mobile Touch, Inc. Mobile Touch, Inc.
will sell mobile business integration software and develop a smart phone with a
mobile business integration solution application. On March 28, 2003, the board
of directors approved DVS Korea to invest an additional investment of $477 in
Mobile Touch Korea by April 30, 2003.

On January 3, 2003, the Company formed MobileTouch, Inc. in
the State of Delaware. The subsidiary is 100% owned by the Company and will be
staffed to accomplish research work in digital video compressive technologies.

As of March 24, 2003, the Company has issued 184,000 shares
of common stock for settlement of legal issues, 94,700 shares to settle debt,
and 250,000 shares to be held by the Company's legal counsel to be used if
necessary in connection with the potential default on the DVSK note payable.
(See Note 20).



The following tables contain selected unaudited statement
of operations information for each quarter of the year ended December 31, 2002
and December 31, 2001.

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



24. Selected Quarterly Financial Data (unaudited)

|                                                              | Year Ended December 31,
2001
|------------------------------------------------------------- | ----------------------------
|                                                              | Fourth Quarter              
|                                                              | (in thousands) (unaudited)  
|Net revenue                                                   | $	56,977                    
|Gross profit                                                  | 1,579                       
|Net income (loss)                                             | (190)                       
|Basic income (loss) per share (1)                             | (0.04)                      
|Diluted income (loss) per share (1)                           | (0.04)                      
|Shares used in computation of basic
income (loss) per share   | 5,337                       
|Shares used in computation of diluted
income (loss) per share | 6,146                       

______

(1)	See Consolidated Statement of
Operations.

|                                                              | Nine Months Ended December 31,
2000
|------------------------------------------------------------- | -----------------------------------
|                                                              | Fourth Quarter                     
|                                                              | (in thousands) (unaudited)         
|Net revenue                                                   | $	25,730                           
|Gross profit                                                  | 3,780                              
|Net income (loss)                                             | (81)                               
|Basic income (loss) per share (1)                             | (0.02)                             
|Diluted income (loss) per share (1)                           | (0.02)                             
|Shares used in computation of basic
income (loss) per share   | 4,670                              
|Shares used in computation of diluted
income (loss) per share | 5,527                              

______

(1)	See Consolidated Statement of
Operations.

24.	Comparative Transitional Financial Information
(Unaudited)

The following contains unaudited financial information as
of and for the nine months ended December 31, 1999:

|Condensed Balance Sheet                                                                                                     | December 31, 1999
|--------------------------------------------------------------------------------------------------------------------------- | -----------------
|ASSETS                                                                                                                      |                  
|Current assets:                                                                                                             |                  
|Cash and cash equivalents                                                                                                   | $ 4,169          
|Accounts receivable, net                                                                                                    | 1,337            
|Inventories                                                                                                                 | 7,754            
|Prepaid expenses and other current assets                                                                                   | 1,829            
|Total current assets                                                                                                        | 15,089           
|Property and equipment, net of depreciation                                                                                 | 2,139            
|Investment in Shanghai                                                                                                      | 204              
|Notes receivable - non-current                                                                                              | 1,782            
|Intangibles                                                                                                                 | 1,905            
|Other assets                                                                                                                | 824              
|Total assets                                                                                                                | $	21,943         
|LIABILITIES AND STOCKHOLDERS'
EQUITY                                                                                        |                  
|Current liabilities:                                                                                                        |                  
|Accounts payable                                                                                                            | $	6,942          
|Other payable                                                                                                               | 1,012            
|Notes payable                                                                                                               | 4,877            
|Accrued liabilities                                                                                                         | 1,945            
|Total current liabilities                                                                                                   | 14,776           
|Stockholders' equity                                                                                                        |                  
|Preferred stock, $0.0001 par value, 5,000,000 shares authorized;
no shares issued and outstanding at December 31, 1999      | -                
|Common stock, $0.0001 par value, 50,000,000 shares authorized;
5,626,869 shares issued and outstanding at December 31, 1999 | 3                
|Additional paid-in capital                                                                                                  | 70,477           
|Accumulated deficit                                                                                                         | (65,328)         
|Accumulated other comprehensive (loss) income                                                                               | 2,015            
|Deferred compensation                                                                                                       | -                
|Total stockholders' equity                                                                                                  | 7,167            
|Total liabilities and stockholders' equity                                                                                  | $	21,943         

24.	Comparative Transitional Financial Information
(Unaudited)

|Condensed Statement of Operations            | Nine Months EndedDecember 31, 1999
|-------------------------------------------- | ----------------------------------
|Net revenue                                  | $	45,567                          
|Cost of revenue                              | 39,871                            
|Gross profit                                 | 5,696                             
|Operating expenses:                          |                                   
|Research and development                     | 1,705                             
|Sales and marketing                          | 1,652                             
|General and administrative                   | 2,864                             
|Acquired in-process research and development | 125                               
|Total operating expenses                     | 6,346                             
|(Loss) from operations                       | (650)                             
|Other income (expense), net                  | 3,269                             
|Net income                                   | $	 2,619                          
|Basic net income per share                   | $	 0.20                           
|Diluted net income per share                 | $	 0.20                           



|Condensed Statement of Cash Flows                                                           | Nine Months EndedDecember 31, 1999
|------------------------------------------------------------------------------------------- | ----------------------------------
|Operating activities:                                                                       |                                   
|Net income                                                                                  | $	 2,619                          
|Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |                                   
|Depreciation                                                                                | 629                               
|Acquired in-process research and development                                                | 125                               
|Changes in operating assets and liabilities:                                                |                                   
|Accounts receivable                                                                         | (576)                             
|Inventories                                                                                 | 31                                
|Prepaid expenses and other current assets                                                   | (605)                             
|Accounts payable                                                                            | 1,502                             
|Accrued liabilities                                                                         | (1,451)                           
|Cumulative translation                                                                      | 416                               
|Net cash provide by (used in) operating activities                                          | 2,690                             
|Investing activities:                                                                       |                                   
|Acquisition of property and equipment                                                       | (695)                             
|Investment in Shanghai                                                                      | (204)                             
|Net cash used in investing activities                                                       | (899)                             
|Financing activities:                                                                       |                                   
|Issuance of preferred stock                                                                 | (1)                               
|Proceeds from intangible assets                                                             | 9                                 
|Proceeds from short-term loan                                                               | 2,757                             
|Issuance of notes receivable                                                                | (1,662)                           
|Net cash provided by financing activities                                                   | 1,103                             
|Net increase in cash and cash equivalents                                                   | 2,894                             
|Cash and cash equivalents at the beginning of period                                        | 1,276                             
|Cash and cash equivalents at the end of period                                              | $ 	 4,170                         

---



SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this
Amendment No. 2 on Form 10-K/A to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Palo Alto, State of California on this
14th day of July 2003.

DIGITAL VIDEO SYSTEMS, INC.

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

CERTIFICATIONS

I, Douglas T. Watson, certify that:

1.	I have reviewed this Amendment No. 2 on Form 10-K/A of
Digital Video Systems, Inc.;

2.	Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;

3.	Based on my knowledge, the financial statements, and
other financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this annual
report;

4. 	The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. 	The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

6. 	The registrant's other certifying officer and I have
indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: July 14, 2003

/s/ Douglas T. Watson				                       Douglas T. Watson
                       Chief Executive Officer
                       (Principal Executive Officer)

I, Robert Baker, certify that:

1.	I have reviewed this Amendment No. 2 on Form 10-K/A of
Digital Video Systems, Inc.;

2.	Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;

3.	Based on my knowledge, the financial statements, and
other financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this annual
report;

4. 	The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. 	The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and

6. 	The registrant's other certifying officer and I have
indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: July 14, 2003

/s/ Robert Baker				                   Robert Baker
                   Chief Financial Officer
   (Principal Financial Officer and Principal Accounting Officer)

---

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
|---------------------------------------------- | ------------------------------ | --------------------------------------- | ---------- | ------------------------
|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                     
|2000:                                          |                                |                                         |            |                         
|Allowance for doubtful accounts receivable     | $	4,259                        | $	519                                   | $	3,826    | $	952                   
|Warranty reserve                               | -                              | 128                                     | -          | 128                     
|Deferred tax asset valuation allowance         | 15,006                         | 354                                     | -          | 15,360                  
|Reserve for slow moving and obsolete inventory | 1,411                          | -                                       | 1,014      | 397                     

---

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)                                                                                              
|10.63          | Service Agreement dated January 4, 2001 by and between DVS Korea Corporation
and Dong IL.(18)                                                                                                                                                   
|10.64          | Credit Agreement dated May 2, 2001 by and between DVS Korea Co., Ltd. and
Woori Bank.(18)                                                                                                                                                       
|10.65          | Letter of Credit Commitment Agreement dated November 15, 2001 by and between
DVS Korea Co., Ltd. and Hana Bank.(18)                                                                                                                             
|10.66          | Letter of Credit Commitment Agreement dated November 16, 2001 by and between
DVS Korea Co., Ltd. and Hana Bank.(18)                                                                                                                             
|10.67          | Revolving Line of Credit Agreement dated March 22, 2002 by and between DVS
Korea Co., Ltd. and Hana Bank.(18)                                                                                                                                   
|10.68          | Revolving Line of Credit Agreement dated March 22, 2002 by and between DVS
Korea Co., Ltd. and Hana Bank.(18)                                                                                                                                   
|10.69          | Credit Agreement dated July 15, 2002 by and between DVS Korea Co., Ltd. and
Korean Exchange Bank.(18)                                                                                                                                           
|10.70          | Credit Agreement dated July 16, 2002 by and between DVS Korea Co., Ltd. and
Kookmin Bank.(18)                                                                                                                                                   
|10.71          | Credit Agreement dated September 20, 2002 by and between DVS Korea Co., Ltd.
and Hanmi Bank (Korea Industrial Bank).(18)                                                                                                                        
|10.72          | Credit Agreement dated October 17, 2002 by and between DVS Korea Co., Ltd.
and Sanup Bank (Korea Industrial Bank).(18)                                                                                                                          
|10.73          | Loan Hypothecation Contract dated December 2002 by and between Shanghai
Fangyuan Digital Technology Company, Ltd. and Shanghai Bank Caohejing
Branch.(18)                                                                                       
|10.74          | Foreign Currency Loan Contract dated as of December 18, 2002 by and
between Shanghai Fangyuan Digital Technology Co., Ltd. and Shanghai
Bank.(18)                                                                                               
|10.75          | Technology License and Joint Development Agreement dated as of
December 10, 2002 by and between Digital Video Systems, Inc. and Jeecom,
Inc.(18)                                                                                                
|21.1           | List of Subsidiaries(18)                                                                                                                                                                                                                        
|23.1           | Consent of Burr, Pilger & Mayer, Inc., Independent Auditors                                                                                                                                                                                     
|99.1           | Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 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 FormSB-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.

(18)	Incorporated by reference to the Company's Annual
Report on Form 10-K filed with the Commission on April 15, 2003.

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