SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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

For the fiscal year ended December 31, 2004

OR

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

FOR THE TRANSITION PERIOD FROM ___________ TO  _____________

Commission file number 0-28472



DIGITAL VIDEO SYSTEMS, INC.



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

430 Cambridge Avenue, Suite 110
Palo Alto, California     94306

(650) 322-8108

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

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

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

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

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

As of June 30, 2004, there were approximately 1,070,218 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
SmallCap Market on June 30, 2004) was approximately $9,148,244. Shares of the registrant's common
stock held by each executive officer and director and by each entity that owns 5% or more of the
registrant's common stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive determination for other
purposes.

As of March 24, 2005, there were approximately 1,244,762 shares of the registrant's Common Stock outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for the Registrant's 2005 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K to the
extent stated herein.  The Proxy Statement will be filed within 120 days of Registrant's fiscal
year ended December 31, 2004.






DIGITAL VIDEO SYSTEMS, INC.
                        ANNUAL REPORT ON FORM 10-K
                         Year Ended December 31, 2004

                               INDEX

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

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

Unless the context otherwise indicates, all share and per share common stock
information in this Annual Report reflects a 1-for-10 reverse stock split of our common stock which
was effective on February 9, 2005.

PART I

Item 1. Business

Overview

We are a technology company that specializes in the development, application
and manufacture of digital video and optical disc technologies for Digital Versatile Disc
("DVD")based entertainment and digital information products.

Our current products include a range of DVD mechanisms, sub-systems and finished
products for the home consumer, portable and automotive entertainment markets. Our or our customers'
finished products include home DVD players, home theater systems, portable DVD players, DVD
recorders and automotive DVD players.

Company Background

Digital Video Systems ("DVS") was founded in 1992 to develop components (or
subsystems) and products using newly developed compressed digital video technologies, for use in
entertainment, commercial and educational applications. Since our inception, we have been involved
in the development and marketing of a variety of products and technologies in the global digital
video market.

In 1998, we acquired Hyundai Electronics Industries, Co., LTD's DVD operations
including a perpetual, worldwide, royalty-free license for Hyundai's DVD technologies and related
intellectual properties and formed DVS Korea Co., Ltd. ("DVSK"), a wholly-owned Korean subsidiary of
the Company. In September 2002, DVSK completed a public offering of its common shares, which trade
on the KOSDAQ (a Korean stock market). We currently own 51% of the outstanding shares of DVSK common
stock.

In 1998, we introduced our first DVD ROM (read only memory) drive just as the
consumer home market for DVDs was beginning to emerge. By the end of 1999, our sales consisted
almost entirely of DVD mechanisms and electronic sub-systems which we supplied to original equipment
manufacturers or OEMs, primarily in China, Taiwan and Korea.

In late 2000, we established a joint venture with Shanghai Industrial Investment
Group ("SIIG") to create a manufacturing operation in China to take advantage of certain tax savings
and lower labor and materials costs. Because many of our customers at that time were located in
China, we were able to achieve substantial savings in shipping cost and time. The joint venture,
Shanghai Fangyuan Digital Technology Ltd. ("SFDT"), is 51% owned by DVSK, 10% owned directly by DVS,
and 39% owned by SIIG. The joint venture began manufacturing operations in May 2001. Initially, much
of SFDT's production was sold into the Chinese domestic market, but as its sales to the rest of the
world increased, SFDT moved its operations to a new 123,000 square foot facility in the Shanghai
Jinqiao Export Processing Zone in 2003.

Fueled by the growth of the DVD player market, our revenues rapidly grew from $17
million in 1997 to a peak of nearly $160 million in 2001. During this time, our DVD components were
incorporated into finished products by major international consumer electronics companies, such as
Meridian, Daewoo, Samsung, LG Electronics and Philips, as well as by large OEMs in China where our
DVD loaders garnered over a 35% market share. As an early leader in the market, DVS gained
recognition in the industry for well-engineered, robust products having exceptional error resiliency
(the ability to read and correct for damaged disks or operate in difficult environmental
conditions).

By 2003, despite a substantial increase in unit sales volume, home DVD players
had become a commodity product with narrow profit margins at all levels in the supply chain. As DVD
disc quality improved, the home market OEMs would not pay a premium for our products, and we were
not able to quickly reduce our expenses to improve our margins. DVS had no established brand name of
its own which might garner higher prices. The commoditization of the home DVD player market had a
significant negative impact on our revenues and earnings. Revenues declined to $89 million with a
net loss of $8.3 million for the year ended December 31, 2003 and revenues were $87 million, with a
net loss of $13.1 million for the year ended December 31, 2004. In response to this trend, we
refocused our research and development, sales and marketing efforts on products and markets that we
believe have an opportunity for higher margins and improved return on investment.

During 2004, we eliminated operations which we believed would not provide
meaningful returns for several years. To this end, engineering development on the next generation of
video encoder/decoders which had been established to pursue technologies outside our core DVD
strengths, was terminated. In September 2004, we licensed our H.264 codec technology to EnMedia, a
fabless semi-conductor startup, under terms that provide us access to the resulting products and an
equity stake in EnMedia. Additionally, DVSK closed the operations of Mobile Touch Korea, which had
been involved in the development of hardware to support the implementation of wireless applications
utilizing H. 264 software under development by DVS.

We have now transitioned our products, customer base and operations to serve new
markets. We are now primarily focusing on:

- automotive DVD market;
- DVD RW- recordable DVD products; and
- consumer digital entertainment products in India.

We believe that the automotive market for our products is particularly promising
because our players are well suited for the demanding rigors of in-vehicle use. Our sales to this
market began in the third quarter of 2003 and have steadily increased during 2004. Similarly, the
DVD-read write ("RW") market is promising as consumers replace VCR and compact disc ("CD") products
with DVD-based systems. We are in the early stages of the market for DVD-RW and sales of these
products commenced during the second quarter of 2004. In the case of India, a middle class market of
more than 300 million people is beginning to adopt DVD technology, primarily to play motion pictures
produced by the Indian motion picture industry (commonly referred to as "Bollywood"), whose motion
picture production exceeds the output of Hollywood. In August 2003, we formed DVS Electronics
Private Limited ("DVSE") in Bangalore, India as a wholly owned subsidiary of DVS. Our
mission is to establish the DVS brand as a leading provider of digital video products in South
Asia for the end consumer, OEM and export markets. During 2004, we initiated brand awareness
programs, established subcontract local assembly and conducted test marketing with the goal of
commencing sales in India beginning in 2005.

DVD Technology Overview

The principal component of a DVD player is a mechanism called a DVD loader,
which consists of a motor drive and spindle, a laser pickup (optical pickup unit, or "OPU") and
control mechanism, disc loader mechanism, electronic sub-assemblies, including memory, front end
(which provides servo-control for the pickup) and back end (which contains the video decoder to
decompress the video signal for proper display) integrated circuits mounted on a printed circuit
board. Drivers designed for personal computer or PC applications are designed with the
widely-adapted "ATAPI" interface, while automotive and consumer electronics ("CE") loaders have an
audio-video ("AV") interface as well as the ATAPI interface. The automotive loader is a more robust system
that requires heavier duty components and special electronics to perform in the high vibration and
temperature extremes found in motor vehicles.

DVD has inherent advantages over other optical storage media. A DVD disc can
store up to 4.7 gigabytes of digital information on each side of the disc, and can be produced with
two layers on each side on which data can be stored. This has made it possible to store a full
length movie (which can fit in 4.7 gigabytes) on a single disc. This is a substantial improvement
over the 0.6 gigabytes capacity for a CD. This increased capacity allows for a number of
capabilities, including the storage of full length movies (DVD-Video format) on a single disc,
superior high fidelity audio with multi-channel surround sound (DVD-Audio format), sophisticated,
realistic interactive gaming applications (DVD-ROM format), and recordable formats such as DVD-RAM
(PC random multiple rewrite enabled), DVD-RW (serial multiple rewrite enabled) and DVD-R (single
recordable) for high capacity PC backup and content archiving, video recorders and camcorder
use.

DVD's greater functionality at a lower cost offers consumers substantial benefits
over previous video tape ("VHS") and CD technologies, and has made DVD the fastest-growing consumer
electronics product in history. It is anticipated that DVD technologies will replace CD and VHS
based technologies by the end of the decade for video content applications.

The emergence of high definition TV ("HDTV"), currently available via cable,
broadcast and satellite in the U.S. and Asia, is increasing the demand for greater storage capacity.
The amount of data necessary to store an HD image and sound is substantially greater than standard
TV. A full length motion picture in HD format requires 25 gigabytes of storage, exceeding the
capacity of current DVDs. It is anticipated that by 2006, DVD systems using blue laser (whose
shorter wavelength makes greater data densities possible than the data densities achieved with red
lasers currently used) will become more readily available to consumers. While a single standard has
not yet been established, competing formats will enable up to 50 gigabytes initially, and ultimately
over 100 gigabytes of storage on a single disc. This technology will deliver to the consumer full
length, feature rich, high definition motion picture content on a single disc for play on HDTVs.

In addition to the increased physical digital capacity of the DVD, video
compression technologies are continuing to reduce the file size necessary to store or transmit
content for high quality decompression and viewing. The latest such technologies defined by the
industry are H.264 and Microsoft's WM-10. These technologies enable increased volumes of high
quality video and audio content to be recorded and played on a single DVD for the new high
definition and interactive content marketplace.

Market Overview

Home DVD Player Market

Since their introduction in late 1996, the market for DVD players has grown
at an unprecedented rate. This growth has been driven by the widespread availability of digital
video content from Hollywood, support for a wide range of digital media formats (MP3, photography,
streaming video over internet-802.11b and Ethernet, etc.) as well as rapidly falling prices for
players.

|Worldwide DVD Products Market by Year
                  Unit Shipments (000)                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                  
|DVD-Players                                                                                                                                                                                                                                                                                                                       
|DVD-ROM                                                                                                                                                                                                                                                                                                                           
|Total                                                                                                                                                                                                                                                                                                                             
|Sources: Data for 1998 and 1999 : Consumer Electronics Manufacturers
Association (Published in the year 2000); data for 2000, 2001 and 2002 and forecast for 2003 and
2004 DVD-ROM: Techno Systems Research / Japan (Published in October 2002); and forecast for
DVD-Players for 2003 and 2004: IDC (published in September 2003)

During the past several years, the home DVD player market has experienced a very
rapid and severe price decline. This price decline was largely caused by integrated circuit ("IC")
manufacturers who provided Chinese manufacturers with complete reference designs in order to build a
large market for their IC's. This removed any barriers to entry into the business, and low-cost
Chinese manufacturers were able to offer DVD players at increasingly lower prices. Players that were
initially introduced to the market at over $500 per unit can now be found at mass retail outlets for
as low as $30 per unit. While this price reduction has fueled an increase in unit shipments, it has
also squeezed margins to the point where it is estimated that average manufacturing margins are less
than $1.00 per unit.

As the home entertainment market is largely price driven with no or minimal
premium for superior quality products, we have chosen to wind down our home DVD player business,
except in those niche markets where reasonable margins can be achieved. For example, we continue to
make our slim line slot loaders that are used in combination units (such as TVs with built-in DVD
players). As the DVD player comprises a small portion of the total system price, a high quality
price premium is justified to minimize costs associated with customer returns and warranty claims.
We will continue to provide our premium home entertainment DVD loaders to this market until the
price we receive falls below break-even levels.

Automotive Market

We believe that the worldwide automotive market represents a substantial
opportunity for us. In May 2004, IMS Research, a market research firm specializing in the global
electronics industry, published "The Worldwide Market for In-car Audio, Infotainment & Driver
Information/Telematics Systems." This report estimated that the worldwide annual market for
lightweight vehicles would be 58 million vehicles in 2004 and would grow to 60 million vehicles by
2010. The same report stated that the number of lightweight vehicles in use worldwide is expected to
grow from 692 million in 2004 to over 783 million in 2010. These vehicles represent the market for
in-car systems for audio, infotainment (entertainment and information systems with video capability)
and driver information/telematics (navigation, emergency communications, multi-function portals).
These systems are supplied either as after-market additions or are installed at the factory by the
automobile manufacturer. IMS Research projected that the worldwide market for these systems will
grow from almost 99 million units (worth approximately $25 billion, based on system manufacturer
prices) in 2004 to over 126 million units (worth approximately $38 billion, based on system
manufacturer prices) in 2010. Furthermore, the IMS Research best case estimates would increase the
total market by an additional 20% by 2010 to 155.2 million units. Because of the cost-effective
storage capacity and content quality available on DVDs, there is substantial growth potential for
DVDs in the automotive market, particularly for infotainment and navigation systems. IMS Research
projects the number of automotive DVD systems will grow from approximately 8.9 million units in 2004
to 26.4 million units in 2010.

Estimated Automotive DVD
                  Unit Shipments (000) 2003-2010



|Category             | 22003 | 22004 | 22005  | 22006  | 22007  | 22008  | 22009  | 22010 
|-------------------- | ----- | ----- | ------ | ------ | ------ | ------ | ------ | ------
|Audio Head Units     | 33    | 110   | 274    | 591    | 1,025  | 1,678  | 2,237  | 2,808 
|Infotainment         | 3,881 | 5,173 | 6,672  | 8,512  | 10,619 | 12,988 | 15,123 | 17,412
|DVD AutoChanger      | 77    | 140   | 290    | 504    | 731    | 739    | 634    | 475   
|Navigation Systems   | 3,016 | 3,463 | 3,581  | 3,712  | 4,259  | 4,769  | 5,292  | 5,689 
|                     |       |       |        |        |        |        |        |       
|Total Automotive DVD | 7,007 | 8,886 | 10,817 | 13,319 | 16,634 | 20,174 | 23,286 | 26,384

Source: IMS Research; May 2004.

Over the past several years, the major automobile manufacturers have spun
off their automotive parts divisions in order to narrow their supply chain. Today, parts for OEMs
are supplied by only a few "Tier 1" parts companies, all of whom compete with each other for
business with all of the auto manufacturers. Visteon, which was formerly part of Ford Motor
Co., Delphi, which was formerly part of General Motors Corporation, Johnson Controls and Blaupunkt
are Tier 1 suppliers of OEM automotive audio/entertainment/infotainment systems. The Tier 1 vendors
serve as systems integrators that provide products to the OEMs. They also sell products to the
high-end aftermarket through the automobile dealer channel. All of the Tier 1 vendors are major
multi-billion dollar international companies with sophisticated and stringent procurement and vendor
qualification processes to assure that they can meet the quality, "just in time" delivery, technical
and commercial requirements of their customers. Their customers, and consequently the Tier 1
suppliers, cannot risk purchasing products with poor quality or dealing with vendors who have a
history of missing delivery deadlines. To this end, the OEM and Tier 1 companies established ISO/TS
16949-2002, a comprehensive standard for qualifying vendors. To become qualified under ISO/TS
16949-2002, a vendor must pass rigorous tests involving quality, technology and product improvement
processes. Consequently, qualifying to sell to Tier 1 vendors often involves a long and difficult
process, but meeting the ISO/TS 16949-2002 standards offers the benefit of more predictable sales,
and a more protected market with a significant competitive barrier. In December 2003, we qualified
for ISO/TS 16949-2002 status as a supplier of DVD products.

Commodity consumer electronics businesses are characterized by low gross margins
(0 to 5%), very low barriers to entry, pure price competition, very short product life cycles and
high sales volatility (fast ramp up with reasonable margins to the early entrants, fast margin
squeeze, fast obsolescence). In contrast, the automotive DVD market, and especially the OEM and
high-end aftermarket served by Tier 1 systems integrators, is characterized by:

- Higher gross margins -
- Substantial barriers to entry -
- Quality Standards -
- Technical Support -
- In-House Technology Resources -
- Delivery requirements -
- Modest price competition -
- Long development and sales cycle -

DVD Recordable

The DVD-RW device is a DVD player that also can be used to record data onto a
DVD-RW disc. The DVD-RW disc can be re-recorded multiple times and is useful for a variety of
applications including the recording of live TV broadcasts, the creation of DVD's made from home
videos, high capacity data backups and the capability of copying VHS tapes (movies) onto discs. It
is expected that, as the price for DVD recorders fall, they will rapidly replace the DVD player in
the consumer market. According to a 2003 market study by IDC, a global market intelligence and
advisory firm, the market for DVD recorders will grow much faster than the market for DVD players
and sales of DVD recorders are expected to surpass DVD players in the next two years. By 2007, IDC
estimates the DVD recorder market will be over 65 million units. DVD recorder technology is more
complex than that for DVD players and the barriers to entry are much greater.

India

India is a country of over 1 billion people, with a growing middle class
estimated to be approximately 300 million people. During the past decade, the demand for consumer
products in India has grown substantially. Projections prepared by Philips India and LG Electronics
estimate 3 to 4 million DVD players will be sold in India in 2005. The Consumer Electronics
Manufacturing Association (CETMA) estimates that 10 million units of DVD players are expected to be
sold in India in 2005. There are over 51 million color TV households in India and it is anticipated
that this number will grow rapidly as the Indian economy continues to grow. India's very active film
industry, commonly referred to as "Bollywood," produces over 1000 movies per year, more than any
other country in the world, with movie entertainment a central part of Indian middle class culture.

The Indian government imposes significant import duty taxes and provides tax
credits for exports of consumer electronics products in an effort to build and protect its domestic
manufacturing base. At the present time, there is no domestic manufacturing base established for
DVDs because the adoption of DVD technology has only just begun in India. Consequently, we believe
that there is an opportunity to establish an early position in OEM DVD manufacturing and to supply
DVD player products to established brands who wish to offer DVD products, but do not want to
establish their own manufacturing in India. Furthermore, because a market for DVD products is just
beginning to emerge, no dominant brand has been established.

Competition

Consumer electronics or CE products, such as home DVD players and DVD
recorders, are typically profitable during the early stages of their life cycle, when the
developers/manufacturers are able to capitalize on early market entry and unique product features.
Because certain well-known CE brands such as Sony, Panasonic, Sanyo, Samsung, LG, Philips and
Pioneer are trusted to deliver satisfactory products, they can command a slightly greater price
premium, particularly in the early stage of a product's life cycle. Generally, if the product
category is capable of substantial volume (e.g., 10 million or more units per year), it will become
commoditized unless there is a competitive barrier such as patented technology. With design and
engineering support from integrated circuit ("IC") companies, a large industry for low-cost
manufacturing of CE products has developed in China, removing design and engineering capability as a
competitive barrier. While many consumers will continue to pay some premium for branded product,
margins are squeezed for an OEM manufacturer such as DVS.

During the early stages of a new product's life cycle, when technology solutions
may not have yet stabilized, we compete on the basis of our capability to provide engineering
support to customers with the integration of electro-mechanical and video devices to provide highly
reliable products that are compatible with evolving customer requirements. As solutions become more
mature and stabilized, engineering support is no longer needed, and we seek those remaining niche
markets where premium prices are available for our components and subsystems due to their quality
and reliability.

As previously noted, competition related to DVD products is very different in the
automotive market. While low-cost automotive aftermarket products marketed through mass retailers
share similarities with the CE market, competition for high-end aftermarket (e.g., dealer installed
options) and OEM products is not solely price based. Automotive quality DVD products are not the
same as home DVD products, though they may look alike. Automotive DVD products must meet difficult
and stringent performance criteria which cannot be achieved by CE quality products. Automotive OEM
customers have extensive and difficult vendor selection criteria, including the ISO/TS 16949-2002
quality system. Vendors must have expertise and reliable systems necessary to furnish product design
and engineering support. These higher standards eliminate the lower-cost Chinese and Taiwan
manufacturers from the competitive field, leaving Japanese companies as the primary competitors.
Japanese manufacturers provide roughly 70% of the global market for automotive audio, infotainment
and driver information products. IMS Research estimates that Panasonic, Pioneer, Alpine, Clarion,
Sony, Blaupunkt and Kenwood supplied over 50% of the 2003 automotive audio, infotainment and driver
information/infomatics systems.

Company Business Strategy

In the face of rapidly deteriorating margins in the consumer electronics DVD
player business, we have changed our focus to exploit opportunities where our engineering experience
and reputation and early market position provide better opportunities for profitable growth. Because
automotive DVD products require sophisticated engineering and a high-level of reliability, we
believe this sector represents our most significant opportunity. In the consumer electronics DVD
business, we have an opportunity to play a significant role in the early growth stages of the DVD
recordable business segment. In the growing India market, we are positioned as an early entrant into
the DVD and digital entertainment business to build a brand name that is less subject to
commoditization than the pure OEM business model.

Automotive DVD Strategy

We believe that the Company has a well-established record for being able to
rapidly develop high quality, reliable products on a timely basis. We also believe that we can
develop these products in a cost effective manner that will help us to establish an early leadership
position in the market for automotive DVD players. It is particularly important to establish market
share early in the introduction of new product categories such as DVD. As an example of this
strategy, we developed and now supply a portable DVD player which is incorporated into a docking
station inside an automobile. This system, marketed as the "Family Entertainment System" by Visteon,
a Tier 1 supplier, is the world's first detachable car docking DVD player system available to the
OEM and accessory aftermarket from a Tier 1 supplier. By first introducing the product into the
marketplace for dealer installation, Visteon has been able to prove consumer satisfaction and
demonstrate the product to OEMs for adoption into future OEM product plans. We believe that our
early entry into the automotive DVD market coupled with the high cost of test and evaluation of
alternative sources provide us with both a near-term and long-term competitive advantage.

As the automotive market increasingly integrates a number of technologies into
products unique to the automotive market, we are seeking to develop new products to broaden our
automotive offerings as well as adding features and functionality to existing products to extend
their product life.

DVD Recordable and Consumer Electronics Strategy

In order to compete in the home DVD market, we must maintain our engineering
leadership by identifying and adopting new technologies early in their life cycle, such as DVD
recordable and new systems using blue laser technology. As part of this strategy, we are looking to
establish business arrangements where we can reduce our capital investment requirements while
participating in the growth of an expected large market. For example, we have been working with a
major Japanese integrated circuit company to provide the servo control firmware combined with a
specific optical pickup unit for use in DVD recorders on a license basis. This offers us an
opportunity to sell our loaders with this solution before other competitive solutions become
available, and to benefit from a license stream as others adopt the chip solution to manufacture
their own DVD recorders and loaders.

Since HD DVD will use a next-generation blue laser pickup and is substantially
more complex than today's DVD, we believe that our historical expertise in electro-mechanical servo
control systems for optical disc systems will enable us to compete effectively in the new markets
that will develop around these technologies.

Our goal is to expand our offerings to include digital entertainment and
information systems that have uses beyond DVD based systems for the home market. We intend to
develop and build products using DVD, hard disc drives, flash memory cards, LCD screens in a variety
of form factors to offer a wide range of functions for the rapidly evolving market.

India Strategy

Our goal in India is to establish an end user brand under the DVS brand
name for a range of products including DVD players, recordable DVD players, home theatre
systems, automotive DVD players and portable DVD players.

As part of this effort, during 2004, we implemented a
marketing strategy in India to increase brand awareness and build a sustainable sales
platform. This effort included both mass media advertising and promotional activities such as
public relations, direct marketing, promotions and sponsorships of events.

We are currently beginning to phase in local assembly of complete knock down
components and subsystems. This enables us to compete aggressively on pricing with other CE brands
by taking advantage of favorable taxation and export credit regulations that offer incentives for
local sourcing of product components. This also allows us to provide OEM services for leading brands
for DVD recorder sales to both the Indian and export markets. While percent margins may be low for
such OEM supply services, aggregating the manufacture for others with production of our own branded
products can provide a significant contribution to operating overhead and at the same time reduce
the cost of goods on our branded products due to the economies of scale. We also intend to seek
favorable payment terms with large customers to minimize working capital needs.

DVSE's sales and marketing operations in India presently consist of over 30
employees in Bangalore, Chennai, Mumbai, Delhi, Cochin and Hyderabad. DVSE has developed a network
of independent dealers and distributors covering over 20 major metropolitan areas with approximately
500 retail outlets supported by a nationwide after sales support network.

DVSE has approached a number of Bollywood producers for exclusive distribution of
digital content within both the domestic and export markets (in particular, the United States and
United Kingdom.). The purpose of this expansion will be to:

- Drive sales of existing DVD products;
- Provide a platform for expanding into new product categories, such as
personal video recorders; and
- Generate additional content specific revenue streams.

Our strategy is to position DVSE as an end-to-end entertainment solutions
provider with an established national brand, company-owned intellectual property (in the form of
product designs and digital content) and world-class manufacturing capabilities which are all
supported by a highly qualified team of experienced industry professionals.

Products

DVD Loaders

We have developed a range of DVD loaders with ATAPI or AV interfaces, which
are competitive in terms of quality, performance and price with other similar products. Because our
DVD loaders can read imperfect discs, we believe that we have an important competitive advantage in
this market. Our products include `tray' loaders that are commonly used in low-end consumer DVD
players, `slot' loaders that are typically used in automotive and flat panel TV applications, and
`top' loaders that are used mostly in portable application models.

DVD+RW Loaders

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

Automotive DVD Product Line

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

Current Product Highlights

|Product            | Description                                                 | Key features                                                                                                                                                                                                                    
|------------------ | ----------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                   | Multi-System Products                                       |                                                                                                                                                                                                                                 
|VXA-1000
Prototype | In-Dash Auto-PC with  7" Monitor                            | DVD with GPS navigation system. Features mobile internet access, e-mail, and integration with vehicle instrument and diagnostic systems. Integral LCD screen.                                                                   
|VXA-1000
Prototype | In-Dash Auto-PC with  7" Monitor                            | This forward-looking model has DivX capabilities,plays DVD, CD and MP# files and features a vibrant 7" TFT LCD display, one AV-in and two AV-out ports and an optional TV tuner.                                                
|                   | Player Products                                             |                                                                                                                                                                                                                                 
|VXD-2100           | In-Dash Head Unit                                           | The VXD 2000 is an in-dash Car DVD/CD/MP3/AM/FM receiver with a flip down detachable front face plate. It combines the features of a car DVD player and AM/FM radio. It includes 200W amplifier                                 
|VXD-2000           | In-Dash Head Unit                                           | The VXD 2000 is an in-dash Car DVD/CD/MP3/AM/FM receiver.  It combines the features of a car DVD player and AM/FM radio. It includes 200W amplifier                                                                             
|VXM-3000           | Portable DVD Player with 10.2" Monitor                      | In vehicles, the player can be locked into a roof-mounted docking station for power and to connect to the vehicle's sound system. The VXM-3000 also runs on battery power, and can serve as the centerpiece of a multimedia home
|VXM-2000           | Portable DVD player                                         | VXM-2200 features a super-slim silhouette due to its slot-in type loader, and can be installed in either vertical or horizontal mountings in a car interior or at home.                                                         
|                   | Loader Products                                             | DVD Mechanism                                                                                                                                                                                                                   
|DSV-810/*830       | Slim slot-loader DVD mechanism for automotive applications. | Rugged slim design meets environmental, operating, and safety requirements for original automotive equipment applications. Any angle mounting.                                                                                  
|DVS-600            | Car DVD ATAPI  Loader                                       | Rugged slim design meets environmental, operating and safety requirements for OEM applications. With its ATAPI interface, this drive can be used in our navigation system and customized applications.                          
|DSS-813/*833       | High-End Slot-In Loader                                     | Slot in DVD mechanism which can be used in many DVD applications in car after market or consumer electronic devices which require durability. Any angle mounting.                                                               
|DSS-826/*836       | High-End Slot-In Loader                                     | Super slim design, quiet operation, and any-angle mounting. Designed for LCD-TV applications.                                                                                                                                   
|DRL-100            | Recordable Loader                                           | Designed for recordable consumer electronic devices.                                                                                                                                                                            

Remarks: *833, 830, 836, series has Divx function (MPEG 4)

Engineering, Research and Development

We believe that one of our most important strengths lies in the quality of
our DVD engineering team and intellectual property. In particular, we are noted for designing and
building robust, highly reliable products, with proprietary firmware which we load onto the
front-end integrated circuit to provide superior error resilient OPU control. We believe that our design,
engineering and production capabilities are superior to DVD suppliers in Taiwan or China, and are on
par with all of the major Japanese DVD companies.

As of December 31, 2004, we had 64 engineering personnel in Korea involved in
R&D and providing ongoing customer support to customize product applications for specific
customers. Our research and development efforts focus on enhancing our DVD technologies, improving
product quality, reducing costs of manufacturing, enhancing product functionality, adopting new and
improved key components, developing new products, and improving the integration of our products with
our customers' products.

Sales, Marketing and Distribution

We sell our DVD loaders and DVD-RW products primarily to OEMs of DVD players
and recorders who do not independently produce the loaders used in their DVD players. Many of these
OEMs are located in China, Turkey, Hong Kong and other countries. China is one of the largest OEM
markets for DVD players, and many of the DVD player manufacturers in China have been active in
exporting their products outside China at very competitive prices.

Our sales and marketing personnel attend tradeshows such as the CES (Consumer
Electronics Show) and SEMA (Specialty Equipment Marketing Association for automotive products) in
Las Vegas to increase the awareness and interest in our product offerings. We employ approximately
29 full time marketing and sales personnel based primarily in South Korea, who travel to other parts
of the world to sell our products to OEMs.

We have sales offices in Korea, China, India and the United States. DVS Sales
Inc., a wholly owned subsidiary of DVSK, is located in Sunnyvale, California, and focuses on sales
of automotive products to major OEMs in North and South America.

Intellectual Property and Other Proprietary Rights.

We have over 150 patents and patent applications registered in the United
States and Korea, that expire in 8 to 17 years. These patents and design rights include areas such
as DVD video, DVD ROM, and video recording to hard drive applications. Most of our patents relate to
optical disc technology and cover basic design concepts, control systems, applications, and
manufacturing systems. Other patents relate to disc-based video servers and cover a variety of
applications including insertion of advertising material into other programming content.

We are currently evaluating products in the market produced by other parties to
determine if our patents are being violated. If we find that our patents are being infringed upon,
we will seek compensation for use of these patents. Notwithstanding the foregoing, we believe that
our future success will be dependent primarily on our ability to rapidly bring to market products
incorporating technological advances, reduce the cost of producing these products and establish
strong customer relationships through superior technical and service support rather than relying on
patent protection for these products.

Employees

At December 31, 2004, we had 225 full-time employees, including
employees of our subsidiaries. This consisted of 64 in research and development, 29 in sales and
marketing, 55 in operations and 77 in general and administrative. In addition, we hire a significant
number of part-time seasonal employees for our manufacturing operations in Korea and China, and had
65 such part-time employees at our Korean operations at December 31, 2004. We believe that our
future prospects will depend, in part, on our ability to obtain additional management, finance,
accounting, marketing, sales, manufacturing and technical personnel. Competition for such personnel
is substantial, and the number of persons with relevant experience is limited. None of our employees
is represented by a labor union. We believe that our employee relations are good.

Item 2. Properties

As of December 31, 2004, we leased the following facilities from third
parties, where our executive offices, manufacturing, engineering, research and development and
testing facilities are located.

|Facility                              | Location                                       | Size (sq ft) | Monthly rent
|------------------------------------- | ---------------------------------------------- | ------------ | ------------
|U.S. main office                      | Palo Alto, CA                                  | 2,130        | $ 3,800     
|U.S. sales office                     | Sunnyvale, CA                                  | 2,000        | $ 2,300     
|Korea main office                     | Sungnam City, Korea                            | 38,500       | $25,200     
|China sales office                    | Shenzhen, China                                | 8,740        | $ 4,100     
|Factory and warehouse                 | Pyengtak City, Korea                           | 53,400       | (1)         
|Factory and warehouse                 | Shanghai Jinqiao Export Processing Zone, China | 123,000      | $27,500     
|China Joint Venture
SFDT (old factory | Shanghai, China                                | 73,000       | $32,197     
|Sales and administration offices      | Bangladore, India                              | 14,500       | $11,600     

(1)	We receive free rent on the Pyengtak City factory and
warehouse for 20 years if the property is used by a subsidiary of a foreign business
entity.

We believe these facilities are adequate and suitable to meet our needs
for at least the next 12 months.

In February 2003, we made a strategic relocation of our main manufacturing plant
in China to a new site in the Shanghai Jinqiao Export Processing Zone (EXZ). The facility has
approximately 123,000 square feet of space. The monthly rent obligation is $27,500, or approximately
$0.23 per square foot. The monthly operating expenses at the facility are approximately $2,754, or
approximately $0.02 per square foot. The lease offers 50% more square footage than the former plant
that was owned by the Chinese joint venture SFDT, at a similar cost. The term of the lease is three
years.

In February 2004, we reached an agreement to lease the factory owned by SFDT,
73,000 sq. ft.owned by SFDT, the China joint venture, which was vacated in February 2003. The
monthly rental income is $32,197 and the lease runs from April 2004 to March 2007. The rental income
covers the rental expense of the building being leased by the China joint venture.

Item 3. Legal Proceedings

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

On June 24, 2002, the Company filed a lawsuit in the Superior Court of
California, County of Santa Clara, against Mali Kuo, Michael Chen and Meng Tek Ung, former officers,
directors and employees of the Company. Subsequently, former employees D.K. Lu and Jia-Hong Zang
were added as defendants. Our lawsuit included causes of action for breach of fiduciary duties,
negligent performance of employment duties and breach of employment contracts. The defendants filed
cross claims against us seeking compensation they allege is due to them under their employment
agreements. In 2002, we had established a reserve of $0.7 million for wages and
expenses related to the compensation claims of Mali Kuo and the other former employees. In December
2004 and January 2005, we settled all claims with Michael Chen, D.K. Lu and Ming Tek Ung for 47,739
shares of common stock, warrants to acquire 7,189 shares of common stock and $58,750 in cash
payments.  The aggregate value of these settlements is $0.3 million.

On February 1, 2005, the jury in our lawsuit against Mali Kuo rendered a verdict
against us finding that Ms. Kuo had a series of binding agreements with us and that she was entitled
to approximately $2,670,000. On February 4, 2005, the judge entered the verdict, but stayed its
enforcement for 70 days. On March 7 and 8, 2005, the judge heard our motions for a new trial, a
judgment notwithstanding the verdict ("JNOV") and equitable estoppel. On April 4, 2005 the judge
denied our motions. The Company filed an appeal on April 5, 2005. On April 8, 2005 the court entered
the judgment totaling $3,420,000 including all fees, costs and interest. The entire liability has
now been reserved in the financial statements for the fiscal year ended December 31, 2004.

In August 2004, we filed a lawsuit against Oregon Power Lending Institute
("OPLI") in the Superior Court of California, County of Santa Clara, seeking to collect on a
promissory note issued by OPLI (the "OPLI Note") in connection with the purchase of certain assets
of the Company. The face amount of the OPLI Note was $3.45 million, and it was secured by a pledge
of 86,250 shares of our common stock some of which was released upon partial payment of the note.
After making payments on the OPLI Note, OPLI stopped payments, leaving a balance outstanding of
approximately $1,974,000 secured by 54,194 shares of our common stock. The Company seeks collection
of the note and accrued interest. The note is carried on the books at the market value of the
collateral which was $341,000 as of December 31, 2004.

On October 29, 2004, we were named in a lawsuit filed by IDVD, Inc. in the
Superior Court of California, County of Santa Clara, alleging that the OPLI Note had been assigned
by DVS to IDVD as partial consideration for the purchase of a Chinese subsidiary of IDVD by DVS.
IDVD is seeking the sum of $2.51 million, which it asserts is owed by DVS in connection with the
purchase of the IDVD Chinese subsidiary. The Company vigorously disputes the allegations, and we
allege that the purported purchase agreement was never authorized by our board of directors, the
purchase was never consummated under the laws of the Peoples Republic of China and that IDVD did not
own the subsidiary at the time of the alleged sale to DVS and, as a consequence, IDVD has no
standing to bring the lawsuit. We also believe that our former CEO, Mali Kuo, was a director,
officer, employee or otherwise connected with IDVD, that Ms. Kuo had no authority to bind the
Company and that she breached her duty of loyalty by having IDVD enter into the purchase agreement
with DVS. On February 1, 2005, the jury in the wage case found that Ms. Kuo had violated her
fiduciary duty to DVS in connection with the assignment of the OPLI Note to IDVD, by virtue of her
being a principal of IDVD while serving as an officer and director of DVS.

In March 2004, the former CEO of our Korean subsidiary, DVSK,
obtained in Korea an ex-parte writ of attachment on approximately $1 million of the stock we own in
DVSK. The former CEO sought the writ of attachment based on claims for his salary for the remaining
term of his employment agreement with DVSK and severance payments allegedly due to him. We deny any
obligation for DVSK or the Company to pay such salaries or severance to the former CEO. In October
2004, we initiated a legal action to cancel the writ of attachment. On March 29, 2005, the Seoul
High Court cancelled the attachment. The former CEO may file a last appeal to the Supreme Court
within 14 days after receipt of the court written decision.  We are not aware at this time
whether the former CEO will appeal or commence any legal action for the claimed severance payments
in connection with this writ of attachment

On February 17, 2005, Kent Yu filed a lawsuit against the Company and
DVS Korea in the Superior Court of California, County of Santa Clara. Mr. Yu alleges that he is the
assignee of the equipment which has been allegedly sold by OPLI (who has been sued by the Company
for non payment of the note) to DVS Korea in December 2000 for $600,000 and had not received
payment. The Company has presented evidence to the attorneys representing Mr. Yu of timely payment
of $600,000 by DVS Korea. Consequently, DVS and DVSK both deny any liability or further
obligation.

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

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

On October 22, 2004 we mailed a Proxy Statement, pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended, to our security holders to solicit their
votes regarding the following matters. The Company's Annual Meeting of Stockholders was held on
November 18, 2004 at which the stockholders elected directors, approved proposals number 3, 4, 5, 6,
7 and 8, and rejected proposal number 2 which required a majority of total shares outstanding be
voted.

1. Election of Directors: John M. Fuller, Thomas A. Spanier, Douglas T. Watson,
Peter G. Hanelt, and Thomas J. Parilla were elected to serve as directors until the 2005 Annual
Meeting of Stockholders. The votes were as follows:

|Nominee           | For:      | Against: | Abstain:
|----------------- | --------- | -------- | --------
|John M. Fuller    | 6,313,659 | -        | 16,075  
|Thomas A. Spanier | 6,302,532 | -        | 27,202  
|Douglas T. Watson | 6,319,931 | -        | 9,803   
|Peter G. Hanelt   | 6,314,287 | -        | 15,447  
|Thomas J. Parilla | 6,314,045 | -        | 15,689  

2. Amending the Digital Video Systems, Inc. Amended and Restated Certificate of
Incorporation to increase the number of shares of authorized preferred stock by 5,000,000 shares
(from 5,000,000 shares to 10,000,000 shares).

|For:      | Against: | Abstain:
|--------- | -------- | --------
|3,299,657 | 41,714   | 12,189  

3. Granting authority to the Company's Board of Directors to amend our restated
certificate of incorporation to effect a reverse stock split of the Company's outstanding common
stock in the range of 1:2 to 1:10 in its discretion at any time between the date of the Annual
Meeting and November 18, 2005.

|For:      | Against: | Abstain:
|--------- | -------- | --------
|6,083,276 | 234,869  | 11,589  

4. Approving the issuance of shares of Common Stock issuable upon conversion of
shares of Series C Convertible Preferred Stock and upon exercise of Warrants issued in a private
placement.

|For:      | Against: | Abstain:
|--------- | -------- | --------
|3,289,421 | 51,665   | 12,474  

5. Approve the issuance of shares of Common Stock issuable upon exercise of
300,000 Warrants issued to a principal stockholder in connection with a loan transaction.

|For:      | Against: | Abstain:
|--------- | -------- | --------
|3,305,751 | 46,824   | 985     

6. Approve the issuance of shares of Common Stock issuable upon conversion of
shares of Series C Convertible Preferred Stock and upon exercise of Warrants issued to Oxcal Venture
Fund, LP in exchange for 550,000 common shares (2.62% of the outstanding shares) of our principal
subsidiary, DVS Korea Co. Ltd.

|For:      | Against: | Abstain:
|--------- | -------- | --------
|3,299,296 | 41,990   | 12,274  

7. Approve the issuance of shares of Common Stock issuable upon exercise of
305,000 Compensatory Warrants previously issued to certain consultants and former directors of the
Company or DVS Electronics Pvt. Ltd., our subsidiary in India, as compensation for services
rendered.

|For:      | Against: | Abstain:
|--------- | -------- | --------
|3,282,710 | 47,116   | 23,734  

8. Ratify the appointment of Stonefield Josephson, Inc. as the Company's
independent public accountants for the year ended December 31, 2004.

|For:      | Against: | Abstain:
|--------- | -------- | --------
|6,316,585 | 11,635   | 1,514   

PART II

Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

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



|               | Common Stock
|-------------- | ------------
|               | High        
|Fiscal 2004    |             
|First quarter  | $30.00      
|Second quarter | 27.20       
|Third quarter  | 31.30       
|Fourth quarter | 32.00       
|Fiscal 2003    |             
|First quarter  | $	28.20     
|Second quarter | 23.70       
|Third quarter  | 10.50       
|Fourth quarter | 11.30       

_______

The last reported sales price of our common stock on the Nasdaq SmallCap
Market on March 31, 2005 was $2.27 per shares. The information in the table set forth above gives
retroactive effect to the 1-for-10 reverse split of our common stock effective on February 9,
2005.

Holders of Common Stock

At December 31, 2004, there were approximately 231 holders of record of
our common stock. This number does not reflect the number of beneficial holders of the common stock,
which we believe is more than 3,000.

Dividends

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

Recent Sales of Unregistered Securities

During the quarter ended December 31, 2004, the Company issued the
following unregistered securities:

In October 2004 the Company issued 7,917 shares at $5.50 per share for service
rendered. In December 2004 the Company issued 35,246 shares at $4.80 per share in settlement of a
lawsuit. In December 2004 the Company issued 39,672 shares at $4.52 per share in a private
placement, and converted 8,197 shares of preferred stock to common shares of stock.

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

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

Item 6.	Selected Consolidated Financial Data

`Nine Month
                                                                                                 Fiscal
                                                                                                  Period
                                                        Fiscal Year Ended December 31,            Ended
                                                    ------------------------------------------  December 31,
                                                      2004       2003       2002       2001        2000
                                                    ---------  ---------  ---------  ---------  ----------
                                                            (In thousands, except per share data)
Consolidated Statement of Operations Data:                                                                
Net revenue ...................................... $  87,200  $  89,133  $ 157,214  $ 159,871  $   73,103
Gross profit .....................................     4,872      3,588     11,285     14,076      10,110
Research and development .........................     5,628      5,769      3,043      2,503       2,493
Sales and marketing ..............................     3,841      2,684      2,907      2,173       1,902
General and administrative  ......................     8,452      7,276      7,054      7,612       3,467
Gain (loss) from operations ......................   (13,049)   (12,141)    (1,719)     1,788       2,248
Income (loss) before income tax
   provisions and minority interests .............   (17,653)   (13,093)    (3,982)     1,895       2,226
Net income (loss) ................................   (13,070)    (8,345)    (2,991)       868       1,148
Net income (loss) per share (1):
Basic ............................................ $  (12.51) $  (11.48) $   (5.00) $    1.63  $     2.46
Diluted .......................................... $  (12.51) $  (11.48) $   (5.00) $    1.41  $     2.12
Weighted average number of shares outstanding ....     1,047        727        598        615         542
                                                                                                          
                                                                         December 31,
                                                    ------------------------------------------------------
                                                      2004       2003       2002       2001        2000
                                                    ---------  ---------  ---------  ---------  ----------
                                                            (In thousands, except per share data)
Consolidated Balance Sheet Data:                                                                          
Current assets ................................... $  27,519  $  45,732  $  59,458  $  34,892  $   22,400
Current liabilities ..............................    34,690     44,720     48,086     29,896      19,977
Working capital ..................................    (7,171)     1,012     11,372      4,996       2,423
Total assets .....................................    39,283     58,771     71,427     45,636      30,008
Long-term obligations ............................       238         --         96      1,753       1,560
Total liabilities ................................    34,928     44,720     48,182     31,648      21,537
Additional paid in capital .......................    83,426     77,650     73,334     71,350      69,020
Accumulated deficit ..............................   (86,406)   (73,306)   (64,961)   (61,970)    (62,838)
Total stockholders' (deficit) equity .............      (311)     5,865      9,811      9,111       6,683`

_______

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

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

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

Results of Operations

Overview

The Company has a 51% ownership interest in a subsidiary in South Korea
(DVSK) which generates most of our revenues. DVSK has a majority ownership interest in a
manufacturing joint venture in China where a significant portion of our production is performed and
additional revenues are generated.

In 2003, the average unit selling price of DVD loaders sold to OEM DVD player
manufacturers continued to decline to a level at which the Company determined that we would no
longer be able to generate acceptable margins from the sale of these products. Accordingly, we have
focused on developing products for users who will pay a premium for the increased functionality and
reliability of our DVD products, such as automotive and read-write DVD products. These new
automotive and read-write products have achieved higher margins than we received on our other DVD
player products in 2004 and in 2003, and we anticipate that they may favorably impact our gross
margins in future periods to the extent revenues derived from them increase.

During the second half of 2004, sales of our automotive products accounted for
38% of our revenues, favorably impacting our gross margins. Our gross margins in the second half of
2004 were also influenced by revenues from our DVD player loaders which have achieved improved gross
margins compared to prior periods. Gross margins in 2004 were also impacted by inventory charges
primarily related to the discontinuance of certain DVD products. We anticipate further improvements
in gross profit contribution in future years to the extent sales of the automotive and read-write
DVD products increase.

We experienced a significant increase in sales of our read-write products in the
second quarter of 2004 due to pent up demand, which substantially subsided in the third quarter of
2004. Revenue growth from our read-write products is dependent upon the extent to which the market
for such read-write products evolves in future periods.

Working capital declined from $1.0 million at December 31, 2003 to a $7.0 million
deficit at December 31, 2004. Our line of credit with banks in South Korea has been reduced to $21.0
million at December 31, 2004 and further reductions are possible going forward. Moreover, our
operations in the United States will require additional funding for 2005 operating requirements.
Consequently, an infusion of equity and/or debt subordinate to our existing bank debt will be
required to help fund our operations. There is no assurance that the Company will be able to raise
additional capital on acceptable terms or at all.

Results of Operations

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

`Year Ended December 31,
                                                           -------------------------------
                                                             2004       2003       2002
                                                           ---------  ---------  ---------
Revenues................................................. $    87.2  $    89.1  $   157.2
Gross margin.............................................       4.9        3.6       11.3
Research and development ................................       5.6        5.8        3.1
Sales and marketing .....................................       3.8        2.7        2.9
General and administrative ..............................       8.5        7.3        7.0
Operating loss...........................................     (13.0)     (12.1)      (1.7)
Net loss.................................................     (13.1)      (8.3)      (3.0)`

The following table sets forth for the periods indicated certain income and
expense items expressed as a percentage of the Company's total revenues for the years ended December
31, 2004, 2003, and 2002. Please see our Consolidated Financial Statements of Operations and Item 6
Selected Consolidated Financial Data for additional details.

`Year Ended December 31,
                                                           -------------------------------
                                                             2004       2003       2002
                                                           ---------  ---------  ---------
Revenues.................................................     100.0 %    100.0 %    100.0 %
Gross margin.............................................       5.6 %      4.0 %      7.2 %
Research and development ................................       6.5 %      6.5 %      2.0 %
Sales and marketing .....................................       4.4 %      3.0 %      1.8 %
General and administrative ..............................       9.7 %      8.2 %      4.5 %
Operating loss...........................................     (15.0)%    (13.6)%     (1.1)%
Net loss.................................................     (15.0)%     (9.4)%     (1.9)%`

Sales of our new automotive products increased substantially during the second
half of 2004. These sales, combined to a lesser extent with the sales of our read-write products,
offset most of the reduction in sales of our loader products as compared to 2003. The increase in
automobile DVD products, combined with improved margins on our remaining DVD loaders products,
produced gross margins of 5.6% for 2004, as compared to the 4.0% achieved in 2003. We anticipate
that increased sales of our automotive DVD products will result in improved gross margins in future
periods. The availability of parts and working capital, however, may limit any growth in revenues.
Further, because of the minority interest in DVSK, the Company will not fully realize all of DVSK's
earnings when, and if, DVSK returns to profitability. Consequently, we anticipate that we are likely
to incur net losses for at least the first quarter of 2005.

Results of Operations for the Year Ended December 31, 2004 Compared to the
Year Ended December 31, 2003

`Year Ended December 31,
                                                           --------------------      %
                  Consolidated Revenue                       2004       2003      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $  87,200  $  89,133         (2)%`

Total revenue decreased by $2.0 million, or 2%, for 2004 as compared with
2003. This decrease is primarily attributable to the decrease in sales of our legacy DVD loaders
substantially offset by the increased sales of our read-write and automotive DVD products.

In 2004, Ellion Digital and Kaixinda accounted for 18.5% and 13.9% of our
revenue, respectively. In 2003, Ellion, Daewoo and Vestal accounted for 19.7%, 16.2% and 13.3% of
our revenue, respectively. Ellion Digital, Inc., is a Korean DVD player manufacturer in which
certain officers, directors and employees of DVSK have a significant ownership interest. The revenue
generated from Ellion Digital in 2004 is primarily related to the production of complete DVD
systems. Sales to Ellion Digital substantially decreased during the second half of 2004.

`Year Ended December 31,
                                                           --------------------      %
                      Gross Margin                           2004       2003      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $   4,872  $   3,588         36 %
As a percentage of revenue...............................       5.6 %      4.0 %       --`

Gross profit margin increased by $1.3 million, or 36%, and the gross margin
percentage increased by 1.6% in 2004 compared to 2003. This increase was attributable to the higher
margins achieved on the auto DVD loaders and systems, obtaining higher margins on DVD loaders.
This improvement is after an increase of $2.7 million in inventory reserves, or 3.1% of
revenue, recorded in 2004 for obsolete and excess inventories. While we anticipate that our new
product introductions will help improve our operating margins, should new product prices experience
the same degree of price compression that our products have experienced in prior years, our total
margins, results of operations and financial position will be significantly impacted in a negative
manner.

`Year Ended December 31,
                                                           --------------------      %
                Research and Development                     2004       2003      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $   5,628  $   5,769         (2)%
As a percentage of revenue...............................       6.5 %      6.5 %       --`

Our research and development expenses consist primarily of salaries and
related costs of employees engaged in ongoing research, design and development activities and
providing our OEM customers with custom design and value engineering options to meet their specific
requirements. Research and development spending decreased by $0.1 million, or 2%, primarily due a
$0.5 million reduction at DVS and a $0.4 million reduction at DVSK resulting from a wind down of
operations on MobileTouch and Jeecom projects. These reductions were substantially offset by $0.8
million of increased spending at DVSK resulting from the addition of engineers and support staff to
accelerate the development of the new product programs for the automotive and DVD read-write
markets.

`Year Ended December 31,
                                                           --------------------      %
                   Sales and Marketing                       2004       2003      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $   3,841  $   2,684         43 %
As a percentage of revenue...............................       4.4 %      3.0 %       --`

Sales and marketing expenses consist primarily of employee related
expenses, export freight and insurance, and advertising/promotional costs. The Company has sales and
marketing organizations in South Korea, China, India and the United States. The $1.0 million
increase in expenses compared to the earlier period is primarily due to the establishment of our
subsidiary in India which incurred $0.9 million of sales and marketing expense in 2004, in addition
to $0.2 million of expense increases at DVSK.

`Year Ended December 31,
                                                           --------------------      %
               General and Administrative                    2004       2003      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $   8,452  $   7,276         16 %
As a percentage of revenue...............................       9.7 %      8.2 %       --`

General and administrative expenses consist of administrative salaries,
bonuses, benefits, insurance, facility costs, legal services, accounting services, investor
relations and other business support costs. The increase in 2004 as compared 2003 in general and
administrative expenses of $1.3 million, or 16%, is due to $0.3 increase non-cash warrant and stock
option compensation, $0.2 million increase in expenses at our Mobiletouch subsidiary first
established in 2003, a $0.2 million increase at our China joint venture.  In addition, the Company
recorded a $0.5 million reversal of expenses in 2003 due to a write-off of old accounts payable.

Other expense was $3.5 million in 2004 as compared to $0.1 million of other
income in 2003. The Company incurred a $3.1 million charge in 2004 due to a judgment against the
Company in the first quarter of 2005 resulting from litigation with a former CEO.

The Company had a $0.5 million reduction in interest income in 2004 as compared
to 2003 due to the decline in cash balances. The Company incurred in 2004 a $0.4 million charge
associated with the write down of the Company's stock collateralizing a note receivable from OPLI.
The Company achieved in 2004 $0.5 million of licensing income from the license of certain technology
to a company founded by the founder of the Company, with the compensation comprised of preferred
stock issued by the licensee.

Interest expense of $1.1 million and $1.0 million in 2004 and 2003, respectively,
consisted primarily of costs associated with borrowings outstanding during the respective annual
periods.

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

`Year Ended December 31,
                                                           --------------------      %
                  Consolidated Revenue                       2003       2002      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $  89,133  $ 157,214        (43)%`

Total revenue in the twelve-month period ended December 31, 2003 was $89.1
million, approximately 43% less than the $157.2 million in revenues for the twelve-month period in
2002. The decrease in total revenue is primarily attributable to erosion of average selling prices
for our products and the shift by many large customers to in-house loader manufacturing requiring
only certain lower price components from the Company. During the year ended December 31, 2003,
Ellion Digital, a company in which certain DVSK employees, officers and directors have a significant
ownership interest, Daewoo, and Vestal accounted for 19.7%, 16.2% and 13.3% of our revenues,
respectively. During the year ended December 31, 2002, Vestel accounted for 23.0% of our revenues.

`Year Ended December 31,
                                                           --------------------      %
                      Gross Margin                           2003       2002      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $   3,588  $  11,285        (68)%
As a percentage of revenue...............................       4.0 %      7.2 %`

The rapid decline in gross margin rates in 2003 as compared to 2002 is
almost entirely attributable to the decline in the selling prices of DVD loaders. During 2003 we
experienced continued pricing decline in our loaders for the DVD player market of about 10-12% as
compared to 2002 levels as competition continued to intensify for the Company's customer base and in
the DVD loader/player market.

`Year Ended December 31,
                                                           --------------------      %
                Research and Development                     2003       2002      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $   5,769  $   3,043         90 %
As a percentage of revenue...............................       6.5 %      1.9 %`

Our research and development expenses consist primarily of salaries and
related costs of employees engaged in ongoing research, design and development activities and
providing our OEM customers with custom design and value engineering options to meet their specific
requirements. Research and development spending increased by 90% or 2.7 million, primarily due to
additional engineers and support staff added in the second half of 2003 to accelerate the
development of new product programs and to initiate MobileTouch Korea's development plan.

`Year Ended December 31,
                                                           --------------------      %
                   Sales and Marketing                       2003       2002      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $   2,684  $   2,907         (8)%
As a percentage of revenue...............................       3.0 %      1.8 %`

The Company has sales and marketing organizations in Korea, China and in
the United States. These organizations were reduced in size in 2003 as compared to 2002. However,
their expenses still reflected ongoing expenses associated with the expansion of these functions in
2002 due to our shift away from major distributors (Hyundai in Korea and SIIG in China) that were
used in prior years.

`Year Ended December 31,
                                                           --------------------      %
               General and Administrative                    2003       2002      Change
---------------------------------------------------------  ---------  ---------  ---------
Amount (in thousands).................................... $   7,276  $   7,054          3 %
As a percentage of revenue...............................       8.2 %      4.5 %`

General and administrative expenses increased in the year ended December
31, 2003 as compared to the year ended December 31, 2002 by 3% or $0.2 million. The increase
reflected the initial formation of our Indian subsidiary while also maintaining our infrastructure
as we transition to new products offerings.

Liquidity and Capital Resources

At December 31, 2004, the Company had $10.9 million of cash and equivalents
including $7.5 million of cash restricted as collateral under the terms of our lines of credit.

Net cash provided by operating activities was $ 3.9 million during 2004. We
experienced a net loss of $13.1 million, as adjusted by the non-cash reduction in the minority
interest of the investors of our DVSK subsidiary and China joint venture of $4.6 million.
Inventories decreased by $11.9 million due to shipments of read-write DVD products, our ongoing
liquidation of our legacy DVD products and $3.8 million of inventory reserve provisions. Accounts
receivables decreased by $.8 million, accrued liabilities increased by $4.2 million and depreciation
and amortization was $3.1 million. These sources of funds were partially offset by a decrease in
accounts payable and related party accounts payable of $2.3 million.

Net cash used in operating activities was $2.6 million for 2003. We experienced a
net loss in 2003 of $8.3 million, adjusted by the non-cash reduction in the majority interest of the
investors of our Korean Subsidiary (DVSK) and Chinese joint venture, totaling $4.9 million, which
was partially offset by the non-cash impact of depreciation and amortization of $2.7 million, the
issuance of common stock for services provided with a fair value of $0.1 million and the increase of
allowance for doubtful accounts of $0.8 million. Accounts payable and related party accounts payable decreased by $0.6 million which
was attributable to a reduction in expenditures during the year. Cash was provided during this
period by several items. Accounts receivable decreased by $7.9 million, partially offset by a
$3.2 million account receivable from a related party. Net inventory was reduced by $.4 million,
which included adjustments of approximately $4.0 million as the Company adjusted to the significant
and abrupt change in the market demand for DVD loaders being manufactured by the DVD player
providers.

Net cash used in investing activities was $1.4 million for 2004, which consisted
of the acquisition of $1.3 million of property and equipment, primarily tooling and equipment in
Korea, as well as purchases of marketable debt securities of $0.3 million, partially offset by $1.0
million of proceeds from the disposal of fixed assets and a decrease in restricted cash of $1.3
million.

Net cash used in investing activities was $4.3 million for 2003, of which $4.3
was for plant and equipment. Of the $4.3 million of additions, $3.4 million was at our DVSK
facilities. DVSK spent $1.9 million for tooling for new products introduced in 2003, $0.7 million on
building additions, $0.6 on machinery and fixtures and other items totaling $0.2 million.
Additionally, the China joint venture acquired plant equipment totaling $0.8 million and there were
$0.1 million of additions at our domestic and Indian operations. There was also a $0.3 increase in
restricted cash at our DVSK operations.

Net cash used in financing activities was $7.0 million for 2004. We repaid $11.8
million on our line of credit with our Korean banks. We repaid $6.7 million of notes payable to our
Chinese bank, and received $6.6 million of proceeds. The cash provided by financing activities in
this period was primarily from the $2.0 million in proceeds from the sale of shares of common stock,
$1.3 million from the sale of preferred stock, $1.1 million from the exercise of options and
warrants, and $0.3 million from a long term loan.

We have credit facilities with five Korean banks that have been reduced from a
total borrowing limit of $43.8 million at December 31, 2003 to approximately $21.0 million at
December 31, 2004. On April 11, 2005, we were notified that the credit lines had been reduced by $3.0
million. These reductions are due to the adverse effects of change in the Korean banking environment,
coupled with the lenders' concerns over our losses. These credit lines are subject to significant
discretion on the part of the lenders. We also have $3.6 million in loans from a bank in China as of
December 31, 2004 that are secured by real estate owned by our joint venture SFDT in Shanghai and
are due in July 2005. There is no assurance that the lenders will continue to extend credit
facilities at current or any reduced levels. If the banks were to reduce or terminate these credit
facilities, our working capital and our ability to maintain our operations at current or projected
levels could be significantly impacted. In particular, the growth of automotive DVD business
requires working capital to finance accounts receivable, and our growth in the automotive sector
could be severely curtailed without adequate working capital.

Unless the context otherwise indicates, all share and per share common stock
information in this Annual Report reflects a 1-for-10 reverse stock split of the common stock
effective on February 9, 2005. In the following discussion, the common shares are post split and the
amount of common stock into which the shares of preferred stock is convertible is adjusted to one
common share per 10 preferred shares.

In January 2004, we sold 121,212 shares of our common stock to a group of
purchasers for $16.50 per share which produced gross proceeds of approximately $2.0 million.

In April 2004, investors exercised outstanding warrants to acquire 51,186 shares
of common stock resulting in net proceeds of approximately $0.6 million. The warrants were
originally issued in a July 2003 financing, and we temporarily reduced the exercise price to $12.50
per share from the original exercise price of $28.00 in order to induce the immediate exercise and
the cash infusion it generated.

In September 2004, the Company raised approximately $1.1 million in net proceeds.
In connection with this transaction, we issued 2,081,964 shares of 8% Series C Convertible Preferred
Stock and 1,040,979 Class A Warrants to purchase shares of our common stock. The number of shares
and exercise price are to be proportionally adjusted to reflect the impact of the reverse stock
split. In addition, the investors received warrants entitling them to purchase an additional 50% of
the number of Series C Preferred Stock and Class A Warrants they originally purchased, which warrant
is exercisable for the ten-day period following the effective date of the registration statement
covering these shares (the "Green Shoe Warrants"). The Class A Warrants are exercisable for five
years at an exercise price of $6.10, subject to adjustment. In the event any Preferred Stock remains
outstanding on September 20, 2007, the Company will issue a five-year Class B warrant for 50% of the
number of shares into which the then-outstanding Preferred Stock is then convertible, also
exercisable at $6.10 per share. The Preferred Stock will automatically convert into common stock in
the event the Company's common stock trades at or above $12.20 per share for 20 trading days. The
Company may redeem the Preferred Stock at various prices beginning at $8.20 per share and at
decreasing prices thereafter. The Series C Preferred Stock is nonvoting and nonconvertible, and the
Class A Warrants are not exercisable unless and until the stockholders approve of the conversion and
exercise rights. The conversion and exercise rights of the Securities obtained stockholder approval
at the Company's annual stockholders meeting on November 18, 2004.

In September 2004, the Company issued a $0.3 million note with a two-year term at
8% interest. In connection with this note, the Company issued warrants to purchase 30,000 shares of
common stock. The warrants are exercisable for five years at $6.10 per share.

In September 2004, the Company entered into an agreement with the owner of
550,000 common shares of DVS Korea Co. Ltd., the Company's principal subsidiary (DVSK). The 550,000
shares represent a 2.62% ownership interest in DVSK. Under the terms of the agreement, the investor
transferred its entire interest in DVSK to the Company in exchange for 396,722 shares of the
Company's 8% Series C Convertible Preferred Stock and 198,361 warrants. As a result, the Company's
ownership interest in DVSK increased from 51.14% to 53.76%. The Warrants are exercisable for five
years at $6.60 per share. The conversion rights of the Series C Preferred were subject to
stockholder approval which was obtained on November 18, 2004. In December 2004, the owner informed
us that they were unable to transfer the DVSK shares to us, and instead the owner sold the shares on
the Kosdaq market and remitted the $0.2 proceeds to the Company. This reduced our ownership interest
in DVSK back to 51.14%.

In December 2004, DVS sold 738,768 shares of its 8% Series C convertible
preferred stock (the "Preferred Stock") and 369,383 Class A warrants (the "Class A Warrants")
(collectively, the Preferred Stock and Class A Warrants are referred to as the "Units" or the
"Securities") in a private transaction when a total of six accredited investors exercised their
"green shoe warrants" that had been issued as part of the September 20, 2004 private placement. Each
Unit consisted of one share of Preferred Stock and 50% warrant coverage. The consideration paid for
the Securities was $6.60 per Unit (the "Purchase Price"), for aggregate gross proceeds of
$450,648.48 to DVS. The Class A Warrants are exercisable for five years at an exercise price of
$6.60 , subject to adjustment. In the event any Preferred Stock remains outstanding on
September 20, 2007, DVS will issue a five-year Class B warrant for 50% of the number of shares
of common stock into which the then-outstanding Preferred Stock is then convertible, also
exercisable at $6.60 per share. The Preferred Stock will automatically convert into common stock in
the event DVS' common stock trades at or above 200% of the $6.60 Purchase Price for 20 consecutive
trading days. DVS may redeem the Preferred Stock at various prices beginning at 135% of the Purchase
Price and at decreasing prices thereafter.

In July 2004, the Company reached a settlement concerning legal fees owed to a
law firm by issuing 33,500 shares of its common stock. The stock had a fair market value on the
settlement date of $0.3 million. In September 2004, the Company issued 4,044 shares of common stock
to the same law firms as payment of $0.1 million due the law firm. In September 2004, the Company
issued 22,000 shares of common stock to another of the Company's law firms as partial payment of
amounts due the law firm. The Company extinguished $0.1 million of legal fees owed to the law firm
based on a fair market value of $6.30 per share on the date of issuance. The Company and the law
firm have agreed to adjust the number of shares as of the effective date of a registration statement
covering the resale of the shares so that the aggregate fair market value of the shares issued as of
that date equals the $0.2 million obligation due the firm as per the agreement. In December 2004,
the Company issued an aggregate of 35,246 pre split shares of its common stock and warrants to
purchase an additional 7,188 shares of its common stock at .48 per share to two former employees of
the Company in settlement of all claims relating to litigation for claimed compensation earned in
prior years.

Net cash provided by financing activities was $1.3 million for 2003. Cash was
provided by $1.4 million in proceeds from the sale of stock in July 2003, proceeds from bridge loans
of $0.3 million and the exercise of warrants totaling $0.4 million. Offsetting this was a $0.6
million reduction by our China joint venture on their working capital loan and $0.3 million used by
DVSK in repaying their long-term note. In July 2003, the Company sold 129,364 common stock units in
a private placement resulting in net proceeds of $1.4 million, including the conversion of the
bridge loans issued in June and July of 2003. Each unit consisted of one share of common stock and
one warrant to purchase one share of common stock at an exercise price of $28.00 per share. The
warrants become exercisable beginning in January 2004 and expire in July 2006. The Company has the
right to redeem any unexercised warrants for $10.00 per warrant upon 30 days notice the Company's
common stock has a closing sales price over $35.00 per share for the ten consecutive trading days on
the Nasdaq SmallCap Market.

Our working capital deficit is $7.2 million at December 31, 2004, as compared to
working capital of $1.0 million at December 31, 2003. Our bank lines in South Korea have been
reduced as of December 31, 2004 to $21.0 million due to the adverse effects of change in the banking
environment, coupled with our current operating levels and concern over our losses. On April 11, 2005 we
were notified that the credit lines had been reduced by $3.0 million. In the current circumstances,
management believes further reductions in our line of credit are possible. We have been offsetting
these reductions in our lines of credit by requesting prepayments from our customers on our new
products and extended payment terms from our vendors. Because such accommodations are largely at the
discretion of our customers and vendors, there is no assurance that we will continue to be
successful in these actions. In addition, our operations in the United States will require
additional capital in order to meet anticipated operating requirements in 2005. Therefore, we
believe that an infusion of equity and/or debt subordinate to our existing bank debt will be
required to help fund our operations.

On February 11, 2005 we filed a registration statement with the Securities and
Exchange Commission seeking to raise approximately $5 million to $15 million. However, there is no
assurance that we will be able to complete this offering or raise additional capital on acceptable
terms or at all. If we do not raise additional capital, we may not be able to meet our financial
obligations, and may have to cease or significantly curtail our operations.

(a) Contractual Obligations

The following table summarizes our significant contractual obligations at
December 31, 2004.

`Payments Due by Period (in 000's)
                                     ---------------------------------------------------------------
Contractual Obligations                Total    Less Than 1 Year 1-3 Years   4-5 Years  After 5 Years
                                     ---------  ---------------  ----------  ---------  ------------
Operating lease obligations........ $     918  $           651  $      267  $      --  $         --
Line of Credit.....................    14,250           14,250          --         --            --
Notes payable......................     3,900            3,600         300         --            --
                                     ---------  ---------------  ----------  ---------  ------------
Total contractual obligations...... $  19,068  $        18,501  $      567  $      --  $         --
                                     =========  ===============  ==========  =========  ============`

(b) Off-Balance Sheet Arrangements

The Company had no "Off-Balance Sheet Arrangements" (as defined by Item 303 of
Regulation S-K) at December 31, 2004.

Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board ("FASB")
issued a revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" which replaces the previously issued Statement. The revised Statement increases the
existing disclosures for defined benefit pension plans and other defined benefit postretirement
plans. However, it does not change the measurement or recognition of those plans as requires under
SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Specifically,
the revised Statement requires companies to provide additional disclosures about pension plan
assets, benefit obligations, cash flows, and benefit costs of defined benefit pension plans and
other defined benefit postretirement plans. Also, companies are required to provide a breakdown of
plan assets by category, such as debt, equity and real estate, and to provide certain expected rates
of return and target allocation percentages for these asset categories. The Company has implemented
this pronouncement and has concluded that the adoption has no material impact to the financial
statements.

In January 2003, the FASB issued interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one company includes
another entity in its consolidated financial statements. Previously, the criteria were based on
control through voting interest. Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the entity's residual
returns of both. A company that consolidates a variable interest entity is called the primary
beneficiary of that entity.

In December 2003, the FASB concluded to revise certain elements of FIN 46, which
will be issued shortly. The FASB also modified the effective date of FIN 46. For all entities that
were previously considered special purpose entities, FIN 46 should be applied in periods ending
after December 15, 2003. Otherwise FIN 46 is to be applied for registrants who file under Regulation
S-X in periods ending after March 15, 2004. The Company believes that the adoption of this
pronouncement did not have a material impact to the Company's financial position or results of
operations.

In April 2003, the FASB issued SFAS No.149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". FASB 149 amends and clarifies financial accounting
and reporting for derivative instruments, including derivative instruments embedded in other
contracts and for hedging activities under FASB 133. The Company believes that the adoption of this
pronouncement did not have a material impact to the Company's financial position or results of
operations.

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" This Statement established
standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It required that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some circumstances). Many of
these instruments were previously classified as equity. The provisions of this Statement were
effective for financial instruments entered into or modified after May 31, 2003, and otherwise at
the beginning of the first interim period beginning after June 15, 2003. The Company believes that
the adoption of this pronouncement did not have a material impact to the Company's financial
position or results of operations.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06, ("EITF
03-06"),Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings
Per Share. EITF 03-06 which addresses a number of questions regarding the computation of
earnings per share by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of the company when, and
if, it declares dividends on its common stock. The issue also provides further guidance in applying
the two-class method of calculating earnings per share, clarifying what constitutes a participating
security and how to apply the two-class method of computing earnings per share once it is determined
that a security is participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 was effective for fiscal periods beginning after March 31, 2004. The adoption
of EITF 03-06 did not have a material effect on the Company's results of operations or financial
position.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of
ARB No. 43, Chapter 4". The amendments made by Statement 151 clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as
current period charges and require the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. The guidance is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has
evaluated the impact of the adoption of SFAS 151, and does not believe the impact will be
significant to the Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by
Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have commercial substance. Previously,
Opinion 29 required that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive asset should be based
on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets. The Board believes
that exception required that some nonmonetary exchanges, although commercially substantive, be
recorded on a carryover basis. By focusing the exception on exchanges that lack commercial
substance, the Board believes this Statement produces financial reporting that more faithfully
represents the economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of
issuance. The provisions of this Statement shall be applied prospectively. The Company has evaluated
the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial statements with more
complete and neutral financial information by requiring that the compensation cost relating to
share-based payment transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase plans. Statement
123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted entities the option of continuing to
apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what
net income would have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply Statement 123(R) as of
the first interim or annual reporting period that begins after June 15, 2005. The Company has
evaluated the impact of the adoption of SFAS 123(R), and does not believe the impact will be
significant to the Company's overall results of operations or financial position.

In December 2004 the FASB issued two Staff Positions-FSP FAS 109-1, Application
of FASB Statement 109 "Accounting for Income Taxes" to the Tax Deduction of Qualified Production
Activities Provided by the American Jobs Creation Act of 2004, and FSP FAS 109-2 "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004." Neither of these affected the Company as it does not participate in the
related activities.

Critical Accounting Policies

Management's discussion and analysis of our financial condition and
results of operations are based upon our condensed 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 and by the Audit Committee on an ongoing
basis, 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 revenue includes 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. We had a warranty reserve of $28 thousand and $54 thousand at December 31,
2004 and 2003, respectively.

Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount
of probable credit losses in the Company's existing accounts receivable; however, changes in
circumstances relating to accounts receivable may result in a requirement for additional allowances
in the future. The Company determines the allowance based on historical write-off experience,
current market trends and, for larger accounts, the ability to pay outstanding balances. The Company
continually reviews its allowance for doubtful accounts. Past due balances over 90 days and other
higher risk amounts are reviewed individually for collectibiles.
Account
balances are charged against the allowance after all collection efforts have been exhausted and the
potential for recovery is considered remote.

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, 2004 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.

Intangibles

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

Determining Functional Currencies for the Purpose of
Consolidation

Our majority owned Korean subsidiary and Chinese joint venture represent the vast
majority of our revenues, assets and liabilities at December 31, 2004. In preparing our consolidated
statements, we are required to translate the financial statements of the foreign entity from the
currency in which they keep their accounting records, generally the local currency, into United
States dollars. This process results in exchange gains and losses which, under the relevant
accounting guidance are either included within the statement of operations or as a separate part of
our net equity under the caption "cumulative translation adjustment."

RISK FACTORS

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

Risks Related to Our Business

We have not recorded an annual operating profit since 2001.

Our last recorded annual profit was for the 2001 fiscal year. Since December 31,
2001, we have incurred cumulative losses of $20.9 million. We cannot assure you that we will achieve
profitability in 2005 or thereafter.

We rely upon bank credit facilities which are subject to periodic renewal, at
which time they may be maintained, reduced, or withdrawn.

We have credit facilities with five Korean banks that have been reduced from
a total borrowing limit of $43.8 million at December 31, 2003 to approximately $21.0 million at
December 31, 2004. On April 11, 2005, the borrowing limit was reduced to $18.0 million. These reductions
are due to the adverse effects of change in the Korean banking environment, coupled with the
lenders' concerns over our losses. These credit lines are subject to significant discretion on the
part of the lenders. We also have $3.6 million in loans from a bank in China as of December 31, 2004
that are secured by real estate owned by our joint venture in Shanghai and due in July 2005. There
is no assurance that the lenders will continue to extend credit facilities at current or any reduced
levels. If the banks were to reduce or terminate these credit facilities, our working capital and
our ability to maintain our operations at current or projected levels could be significantly
impacted. In particular, the growth of automotive DVD business requires working capital to finance
accounts receivable, and our growth in the automotive sector could be severely curtailed without
adequate working capital.

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, at present, cash generated from
operations is not sufficient to meet these requirements. We cannot be sure in the future that cash
generated from operations will be sufficient to meet our requirements or that financing will be
available at favorable terms when required, or at all. Currently and in recent years, we have
experienced significant shortages in our cash flows and have experienced difficulties in funding our
operating expenses and paying our creditors. We believe our current capital resources are sufficient
to meet anticipated capital requirements through the end of the first quarter of 2005. We have filed
a registration statement with the SEC that is intended to fund DVS' operations in the United States
for calendar 2005 and to enable us to invest at least $2 million in our Korean subsidiary, DVSK. If
we are not successful in raising additional capital through this offering or another offering, we
may not be able to meet our financial obligations to our creditors when they become due and we may
have to curtail or cease certain operations.

Our auditors have a substantial doubt about
our ability to continue as a going concern

Intheir report in connection with our 2004 financial
statements, our auditors included an explanatory paragraph stating that, because we have incurred
significant net losses and as of December 31, 2004 have a net capital deficiency, working capital
deficiency, and because there is substantial doubt about our ability to continue as a going
concern. Our continued existence will depend in large part upon our ability to successfully secure
additional financing to fund future operations. We have filed a Registration Statement for a public
offering which seeks to raise approximately $5 million of equity capital. The offering has been
deferred pending settlement of the $3,420,000 obligation arising from the legal dispute with our
former chief executive officer. This offering is a principal element of our plan to move toward
profitable operations. Even after this offering, if in the future we are not able to achieve
positive cash flow from operations or to secure additional financing as needed, we may again
experience the risk that we will not be able to continue our operations. If we cannot successfully
continue as a going concern, our stockholders may lose their entire investment.

A recent jury verdict awarding substantial damages against us, as well as
other pending litigation, could have a substantial negative effect on our capital and could
adversely impact our ability to obtain additional financing.

In 2002, we filed a lawsuit in the Superior Court of California, County of
Santa Clara, against our former CEO, Mali Kuo. Our lawsuit included causes of action for breach of
fiduciary duties, negligent performance of employment duties and breach of employment contracts. Ms.
Kuo filed a cross claim against us seeking compensation she alleged is due to her under her
purported employment agreements.

On February 1, 2005, the jury in our lawsuit against Ms Mali Kuo rendered a
verdict against us finding that Ms. Kuo had a series of binding agreements with us and that she was
entitled to approximately $2,670,000. On February 4, 2005, the judge entered the verdict, but stayed
its enforcement for 70 days. On March 7 and 8, 2005, the judge heard our motions for a new trial, a
judgment notwithstanding the verdict ("JNOV") and equitable estoppel. April 4, 2005 the court denied
our motions. The Company then filed an appeal on April 5, 2005. On April 8, 2005 the court entered a
judgment totaling $3,420,000 including all fees, costs and interest. If we are not successful in
overturning or substantially reducing the size of this judgement, our capital structure would be
severely impacted.

We are also involved in a lawsuit in the Superior Court of California, County of
Santa Clara, wherein we are suing to collect approximately $1.97 million due on a promissory note.
Another company, which we believe is affiliated with Mali Kuo, has filed a lawsuit in the Superior
Court of California, County of Santa Clara, seeking to collect $1.95 million on the same note, which
it alleges was assigned to them as consideration for the sale of a Chinese subsidiary company they
allegedly sold to us. In addition to trying to collect on the note, the plaintiff is seeking $0.6
million in cash it alleges was part of the purchase price. In February 2005, an individual filed a
lawsuit in the Superior Court of California, County of Santa Clara, seeking to collect $0.6 million
on a related purported amount due OPLI, which the individual claims was assigned to him. Although we
are vigorously pursuing our collection effort in the first lawsuit and believe we have substantial
meritorious defenses against the second and third lawsuit, an adverse result in either case could
have a significant negative impact on our capital.

The DVD player industry is highly competitive with few barriers to entry.

Although DVD players were only first introduced commercially in 1997, the
market quickly became "commoditized." Today much of the manufacturing is done in China where
products can be manufactured on a large-scale, cost-effective basis. As competition has increased,
the market for home DVD players has experienced significant declines in both unit prices and
margins. Because most of our DVD products are sold in Asia we have experienced a substantial decline
in our revenues and have suffered net losses over the past eight quarters.

In response to the commoditization of the home DVD player market, we have
refocused our business to our DVD products, such as automotive DVDs, that are not as susceptible to
price erosion. Although we have had some initial success in selling into these markets, there can be
no assurance that our new products will not become susceptible to the same commoditization
pressures, we faced with DVD players.

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

During the last three years, substantially all of our revenues have been
generated by our DVD product line, which is central to our growth strategy. Successful development
and commercialization of new DVD products, as well as market acceptance of such products, is
essential to our achieving positive gross margins as well as growth and future profitability. While
we are currently developing and introducing new products (e.g., automotive DVD products), 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 generate acceptable margins. In addition, we
expect to continue to invest heavily in research and development and engineering during 2005, which
will likely adversely impact achievement of near term profitability.

We are exposed to fluctuations in currency exchange rates.

A large portion of our business is conducted outside the United States. Sales
of products outside of the United States, primarily in Asia, represented over 90% of our total
revenues for fiscal 2004 as well as for each of our 2002 and 2003 fiscal years. Although some of our
revenue and expenses are transacted in U.S. dollars, we are exposed to currency exchange
fluctuations since we transact a significant portion of our business in local currencies. Moreover,
most of our expenses in Korea, China and India are paid in local currency, which subjects us to the
risks of foreign currency fluctuations between the U.S. dollar and such currencies. As a result, an
increase in the value of such currencies in comparison to the U.S. dollar could increase our
research and development, sales and marketing and general and administrative expenses, and increase
the cost of our products, potentially making them less competitive in international markets.

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

In addition to the losses incurred in during the years ended December 31,
2004 and 2003, we have incurred substantial net losses in the past, as recently as, among others,
fiscal years ended December 31, 2002, and fiscal years ended March 31, 1999, 1998 and 1997. We
also expect to generate losses as we continue our spending on engineering and other personnel in
connection with our research and development efforts related to new product development during 2005
and our expansion into the Indian DVD market. Our recent quarterly and annual operating results have
fluctuated, and will continue to fluctuate, due to the following factors, all of which are difficult
to forecast and many of which are not within our control:

| | ● |  | market acceptance of our new products, such as automotive DVDs and home DVD
recorders;                                                                                                                                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ● |  | timing of our customers' new product development, which incorporates our
products;                                                                                                                                                       
| | ● |  | continued availability of adequate capital under our bank line of credit in Korea
or other financial sources to fund our operations, including the purchase of needed components and
manufacturing of our products;                      
| | ● |  | exchange rate fluctuations;                                                                                                                                                                                                              
| | ● |  | adverse results in pending litigation involving former officers of DVS and
DVSK;                                                                                                                                                         
| | ● |  | difficulties in forecasting, planning and management of inventory levels,
particularly given our ongoing implementation of our new enterprise resource planning ("ERP") system
in Korea, which may trigger further inventory adjustments;
| | ● |  | the availability, timely delivery and cost of components from our suppliers;                                                                                                                                                             
| | ● |  | fluctuations in manufacturing yields and significant yield losses which may
affect our ability to fulfill orders;                                                                                                                        
| | ● |  | new product announcements and introduction of competing products by our
competitors;                                                                                                                                                     
| | ● |  | pressure to reduce the price at which we sell our products;                                                                                                                                                                              
| | ● |  | the rate at which our products become obsolete;                                                                                                                                                                                          
| | ● |  | unpredictability of changes in demand for, or in the mix of, our products;                                                                                                                                                               
| | ● |  | the gain or loss of significant customers;                                                                                                                                                                                               
| | ● |  | changes in the channels through which our products are distributed and the
timeliness of receipt of distributor resale information;                                                                                                      
| | ● |  | general economic, political and environmental related conditions, such as natural
disasters;                                                                                                                                             
| | ● |  | 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 DVD players that
incorporate our products, can also harm our operating results. In addition, some of our customers
may place orders at or near the end of a quarter. As a result, we may not learn of revenue
shortfalls until late in a quarter and may not be able to predict future revenues with accuracy.
Additionally, a large portion of our costs consist of salaries for personnel and materials that must
be ordered several months in advance. These costs are based in part on our expectations for future
revenues and are relatively fixed in the short term. As a result, any revenue shortfall below
expectations would likely harm our operating results.

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

Sales of products overseas accounted for 99.7%, 98.1%, 99.0%, 99.6% and 90.3%
of our revenue in the nine-month transition period ended December 31, 2000, the fiscal years
ended December 31, 2001, 2002, 2003 and 2004, respectively. Because our automotive DVD sales
are principally directed at the American market, we expect the percentage of overseas sales to
decline as our automotive DVD sales increase. Prior to the introduction of our automotive DVD
products in the third quarter of 2003, substantially all of our sales were outside of the United
States. Consequently, even if automotive DVD sales increase to represent a higher percentage of our
revenues, we still expect to have very significant overseas sales.

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:

| | ● |  | greater difficulty in ensuring adequacy of our disclosure controls and procedures
and internal control over financial reporting with respect to international operations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ● |  | impact of currency fluctuations for which the Company currently has no hedging
activity;                                                                                 
| | ● |  | difficulties in complying with foreign regulatory requirements and
standards;                                                                                            
| | ● |  | tariffs and other trade barriers relating to cross border transactions;                                                                                                  
| | ● |  | costs and risks associated with local business practices and customs in foreign
countries;                                                                               
| | ● |  | longer accounts receivable payment cycles from customers located in foreign
countries;                                                                                   
| | ● |  | potentially adverse tax consequences resulting from changes in international tax
regulations;                                                                            
| | ● |  | limits on repatriation of earnings from our foreign operations; and                                                                                                      
| | ● |  | limited ability to effect quality-control measures associated with our foreign
operations.                                                                               

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

In addition, we are greatly impacted by the political, economic and military
conditions in North Korea and South Korea, Taiwan and China, and India and Pakistan, which are
frequently engaged in political disputes. In the past, several of these countries have engaged in
military hostilities and still continue to conduct military exercises in or near the other's
borders, 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 employment regulations, accounting practices,
taxation, import and export tariffs, environmental regulations, land use rights, 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 revenue, our revenue could decline due to the
loss of one of these customers.

Products sold to our top five customers accounted for approximately 60% and
56% of our revenue during the years ended December 31, 2003 and 2004, respectively. Products
sold to our top 10 customers accounted for approximately 88%, 67%, 78% and 70.3% of our revenue
during the fiscal years ended December 31, 2001, 2002, 2003 and 2004, respectively. In the year
ended December 31, 2004, Ellion Digital, Kaixinda and Samsung Electronics accounted for 19%, 14% and
7% of our revenue, respectively. In the fiscal year ended December 31, 2003, Ellion Digital,
Daewoo and Vestel accounted for 20%, 16% and 13% of our revenue, respectively. In the fiscal year
ended December 31, 2002, Vestel accounted for 23% of our revenue. No other customers accounted for
more than 10% of our revenues during these periods. We anticipate that our sales may continue to be
concentrated in a few major accounts. If we were to lose any of our principal customers or
experience any substantial reduction in orders from these customers, our revenues and operating
results would suffer.

We may not be able to maintain our listing on the Nasdaq SmallCap Market and
if we fail to do so, the price and liquidity of our common stock may decline.

Nasdaq has quantitative and corporate governance maintenance criteria for the
continued listing of common stock on the Nasdaq SmallCap Market. The current requirements that may
affect our future listing status include (i) having a minimum of $2.5 million in stockholders'
equity, and (ii) maintaining a minimum bid price per share of $1.00. On August 19, 2004, we
received notification by Nasdaq that because our stockholders' equity at June 30, 2004 was $2.0
million, we did not the meet the requirement of a minimum of $2.5 million in stockholders' equity
for continued listing on the Nasdaq SmallCap Market under Marketplace Rule 4310-(c)(2)(B).
Subsequently, we raised additional capital to regain compliance with the $2.5 million minimum
stockholders' equity requirement. On August 19, 2004, we received notification by Nasdaq that for 30
consecutive trading days, the price of our common stock closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4310 (c)(4). In order to regain
compliance with Marketplace Rule 4310(c)(8)(D), the bid price of our common stock must close at or
above $1.00 per share or more for a minimum of 10 consecutive trading days prior to February 23,
2005 the board and stockholders approved a reverse stock split effective February 9, 2005 under the
terms of the reverse stock split each 10 shares of our common stock was combined into one share, and
our common stock began trading on a reverse stock split basis on that date.

On April 1, 2005, we were notified by Nasdaq that the Company had satisfied its
listing requirements subject to the condition that the financial statements contained in each of the
Company's periodic reports for periods ending on or before March 31, 2006 must evidence
shareholders' equity of at least $2.5 million; and that if, during this monitor period, the Company
should fail to meet the shareholders' equity requirement, or otherwise fail to satisfy any other
requirement for continued listing, the Panel will promptly consider the reasons for such a failure
and thereafter render a determination with respect to the Company's continued listing on The Nasdaq
Stock Market, which could result in the delisting of the Company's securities from The Nasdaq Stock
Market. As of December 31, 2004 the Company shows a stockholders' deficit of $0.3 million and therefore is not in compliance with this shareholders equity requirement.

There can be no assurance that we will be able to comply with the quantitative
and corporate governance maintenance criteria or any of the other Nasdaq SmallCap Market's rules in
the future. If we are delisted, it could have a material adverse effect on the market price of, and
the liquidity of the trading market for, our common stock.

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

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

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 will need
to bring new products to market, which will likely require significant working capital. We have
established credit facilities with certain Korean banks with a total borrowing limit of about $21.0
million as of December 31, 2004. 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. An equity offering has been initiated to meet our capital needs for at least the next
twelve months, but we cannot assure you that any future equity financing will be available on terms
acceptable to us, if at all. In addition, if we issue shares of our common stock, our shareholders
will experience dilution with respect to their investment.

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

We currently buy certain key components, including optical pick-ups, motors,
central processing units and certain other integrated circuits from a limited number of suppliers
including Zoran, Mediatech, Philips 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 whom
we are currently working, together with any additional suppliers, 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 or our suppliers fail to achieve acceptable manufacturing yields, we
will experience higher costs of revenues and reduced product availability.

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

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

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

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

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

| | ● |  | significant pricing pressures that occur due to competition, over-supply, or
other reasons;                                                                                                                                               
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ● |  | 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 achieve volume shipments after we
first contact a customer. Often, we first work with customers to develop the basic product, 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 and expectations;           
| | ● |  | 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. 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 effectively 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 South Korea, where our DVD products are designed
and where much of our initial "pilot" manufacturing takes place and in Silicon Valley, where our
corporate headquarters are located. We may not be able to continue to attract and retain engineers
or other qualified personnel necessary for the development of our business or to replace engineers
or other qualified personnel who may leave our employ in the future. Our business is expected to
place increased demands on our resources and will likely require the addition of new management and
engineering personnel and the development of additional expertise by existing management personnel.
The failure to recruit and retain key technical and management personnel could harm our business.

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

We rely on a combination of patent, trade secrets, copyright and mask work
production laws and rights, nondisclosure agreements and other contractual provisions and technical
measures to protect our intellectual property rights. Policing unauthorized use of our products,
however, is difficult, especially in foreign countries, such as China, South Korea and India, 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.

We have become increasingly subject to the risks arising from adverse changes
in domestic and global economic conditions. DVD players are to some extent a discretionary item
(particularly with respect to automotive DVD players) that consumers may forgo purchasing in
difficult economic times. The impact of any slowdown on us is difficult to predict, but it may
result in reductions in purchases of products by our end-user customers, longer sales cycles and
increased price competition. As a result, we might fall short of our revenue expectations for any
given quarter or for the entire year in which a slowdown takes place.

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.

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

In order to grow, we may need to increase our present manufacturing capacity.
Events that we have not foreseen could arise which would limit our manufacturing capacity or our
ability to outsource manufacturing. 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, purchase, equipment lease or build new facilities, obtain loans, enter into joint
ventures, seek equity investments or enter into technology licenses in or with other companies.
These transactions could involve a commitment of substantial amounts of our capital and require
making available 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.

Risks Related to Investment in Our Securities

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

Our stock price has been extremely volatile in recent years. Since January 1,
2001, our stock has closed at prices ranging from a high of $62.30 on December 11, 2001 to a
low of $1.89 on March 31, 2005. 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 our stock.

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.

When we account for employee stock options using the fair value method, it
could significantly increase our net loss.

In December 2004, the Financial Accounting Standard Boards (FASB) issued
Statement of Financial Accounting Standard No. 123 ("SFAS 123R") "Share-Based Payment (Revised
December 2004)" which requires a company to recognize, as an expense, the fair value of
stock options and other stock-based compensation to employees beginning with interim and annual
periods occurring after June 15, 2005 and subsequent reporting periods. We are required to
record an expense for our stock-based compensation plans using the fair value method as described in
SFAS 123R, which could have significant and ongoing accounting charges and adversely affect our
future results.

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 cash dividends.

Risks Related to Our Industry

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

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 used in DVD products. Our business could be harmed by
such industry-wide fluctuations in the future because our products incorporate these technologies.
When a shortage occurs with one or more key components, it may be difficult for us to produce enough
quantities of products to fill customers' orders, and it may require us to pay a higher price for
the components in the event of a shortage, adversely affecting our margin and profitability.

There is seasonality in our business.

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

Item 8.	Consolidated Financial Statements and Supplementary
Data

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

Item 9A.	Controls and Procedures

(a)    Evaluation of disclosure controls and procedures.

The Chief Executive Officer and the Chief Financial Officer of the Company,
with the participation of the Company's management, carried out an evaluation of the effectiveness
of the Company's disclosure controls and procedures pursuant to Securities Exchange Act of 1934 Rule
13a-15(e). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures as of the end of the period covered by this
Annual Report on Form 10-K, were not effective in ensuring that material information relating to the
Company, required to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SEC's rules and forms.

In assessing the effectiveness of the Company's internal control over
financial reporting as of December 31, 2004, management identified the following material weaknesses
in the operating effectiveness of the Company's internal controls:

- Significant year-end obsolete inventory adjustments at our majority owned
subsidiary in Korea ("DVSK") and Shanghai Fang Yuan Digital Technology ("SFDT"), its Chinese joint
venture company; and
- Inadequate depth of senior and middle management accounting personnel at these
entities.

In response to these material weaknesses, both DVSK and SFDT developed add-on
management systems during 2004 to supplement the information provided by their enterprise resource
planning (ERP) systems and to enable them to more accurately value inventory on a monthly basis.
DVSK implemented a thorough analysis of its slow moving inventory as part of its systems improvement
process in Korea, and during the first quarter of 2005 completed an engineering estimate analysis of
slow moving inventory in China. These analyses were completed and appropriate adjustments were made
for obsolete inventory at both entities at year-end.

There is inadequate senior and middle management accounting staff at DVSK and
SFDT. Consequently, DVS has needed to make appropriate accounting adjustments for these subsidiaries
at each period end. To remediate this weakness, during 2004, DVSK hired additional qualified
accounting personnel to facilitate the monitoring as well as the integration of systems and
information between DVSK and DVS. Additionally, DVS placed a senior manager in Asia to improve the
oversight of its operations in Korea, China and India. DVS also initiated a search for a qualified
CFO to be located in Korea.

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

(b)    Changes in internal control over financial reporting.

During the fourth quarter of fiscal 2004, there was no change in the
Company's internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial reporting.

PART III

Item 10.	Directors and Executive Officers of the
Registrant

MANAGEMENT

Executive Officers and Directors

The following table lists our directors and executive officers as of March
31, 2005:



|Name              | Age | Position                             
|----------------- | --- | -------------------------------------
|Thomas A. Spanier | 59  | Chairman and Chief Executive Officer 
|Douglas T. Watson | 52  | President and Chief Financial Officer
|John M. Fuller    | 61  | Director                             
|Thomas J. Parilla | 39  | Director                             

Background and Business Experience of Directors and Executive Officers

The following is a brief description of the principal occupation and recent
business experience of each of our executive officers and directors:

Thomas A. Spanier - Mr. Spanier was elected as a director by the Board in
March 2004 to fill a vacancy. On April 14, 2004, he was appointed Chairman of the Board and Chief
Executive Officer. From April 2003 to April 2004, Mr. Spanier was the principal of Spanier &
Associates, in Novato, California, a firm which provides interim management and consulting services.
From April 2001 to April 2003, he served as Senior Vice President of Finance and Operations of
Cradle Technologies, Mountain View, California, a fabless semiconductor company. From April 2000 to
April 2001, he served as President and Chief Operating Officer of Uptime One, Inc., a development
stage applications service provider focused on connecting food manufacturing companies and their
suppliers. Prior thereto, from April 1998 to April 2000, Mr. Spanier was the Executive Vice
President and Chief Operating Officer of the California Culinary Academy, San Francisco, California,
which is a for-profit culinary school. Mr. Spanier received a B.S. degree in Business Administration
and Managerial Economics from University of California, Berkeley (Phi Beta Kappa) and a M.B.A. from
Harvard Business School.

Douglas T. Watson - Mr. Watson has served as a director since November
1998. Mr. Watson served as our Chief Executive Officer from February 2002 to April 2004, when
he was named President, Chief Operating Officer and Chief Financial Officer. Mr. Watson also served
as a member of the Executive Committee from November 1998 to March 2002. Prior to joining DVS,
Mr. Watson served as President and Chief Executive Officer of Astoria Metal Corporation (AMC)
from 1992 to 1999, a ship repair and dismantling firm which he founded in 1992.

John M. Fuller - Mr. Fuller has served as a director since May 2002. He
has been President of Pantechnicon Aviation Ltd., a privately-held aircraft charter and leasing
business from March 1997 to the present. Prior to becoming President, Mr. Fuller served on the
Board of Directors of Pantechnicon while employed with TECOP International, an international
aerospace market development company. Mr. Fuller received an M.B.A. from the Harvard Business
School and an A.B. in Economics from the University of California, Berkeley.

Thomas J. Parilla - Mr. Parilla has been the President of The Parilla
Investment Group in Erie, Pennsylvania since January 2004. Prior to forming his own investment
group, from October 2002 to January 2004, Mr. Parilla served as Vice President of PNC Investments, a
division of PNC bank. From June 2000 to August 2002, he served as the Regional Manager and Vice
President of Investments of First National Investment Services, a division of First National Bank.
Mr. Parilla began his career in finance with Morgan Stanley and has been an investment broker over
the last decade. Mr. Parilla received his B.A. in Economics from Mercyhurst College in Erie,
Pennsylvania.

There are no family relationships among the directors or executive officers of
DVS.

Item 11.	Executive
Compensation

The information required by this item is included under the caption "Proposal
One - Election of Directors - Director Compensation" and "Executive Officer Compensation" in the
2005 Proxy Statement and is incorporated herein by reference.

Item 12.	Security Ownership of Certain Beneficial Owners
and Management

The information required by this item is included under the caption "Security
Ownership of Principal Stockholders and Management" in the 2005 Proxy Statement and is incorporated
herein by reference.

Item 13.	Certain Relationships and Related
Transactions

The information required by this item is included under the caption
"Transactions with Management" in the 2005 Proxy Statement and is incorporated herein by
reference.

Item 14.	Principal Accountant Fees and Services

The information required by this item is included under the caption "Proposal
Three - Ratification of Appointment of Independent Auditors" in the 2005 Proxy Statement and
its incorporated by reference.

PART IV

Item 15.	Exhibits, Financial Statements, Financial Statement
Schedules

(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)	Exhibits

See Exhibit Index.

DIGITAL VIDEO SYSTEMS, INC.

Index To Consolidated Financial Statements

|                                                                                               | Page   
|---------------------------------------------------------------------------------------------- | -------
|Report of Stonefield Josephson, Inc. Independent Registered Public Accounting
Firm             | 52     
|Report of Burr, Pilger & Mayer LLP, Independent Registered Public
Accounting Firm              | 53     
|Consolidated Balance Sheets - December 31, 2004 and 2003                                       | 54     
|Consolidated Statements of Operations - Years ended December 31, 2004, 2003 and
2002           | 55     
|Consolidated Statements of Stockholders' Equity - Years ended December 31,
2004, 2003 and 2002 | 56     
|Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 and
2002           | 57 - 58
|Notes to Consolidated Financial Statements                                                     | 59 - xx

---



Report of Stonefield Josephson, Inc. Independent Registered Public Accounting Firm

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, 2004, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended December 31, 2004. Our audit
also included the financial statement schedule listed at Item 15(a)(2). The consolidated
financial statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements and the related
consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with audit standards of the Public Company
Accounting Oversight Board (United States). 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, 2004, and the results of their operations and their cash flows for
each of the year ended December 31, 2004 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company has suffered recurring losses from operations and has a working capital deficiency and
deficit in stockholders' equity, that raise substantial doubt about the ability to continue as a
going concern. Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the outcome of this
uncertainty.

/s/ Stonefield Josephson, Inc.

San Francisco, California
                    April 11, 2005

---



Report of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
                   Digital Video Systems, Inc.

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

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

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

/s/ Burr, Pilger & Mayer LLP

Palo Alto, California
                   March 29, 2004

---





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

`December 31,
                                                                                                                  ----------------------
                                                                                                                     2004        2003
                                                                                                                  ----------  ----------
                                                     ASSETS
Current assets:
   Cash and cash equivalents ................................................................................... $    3,359  $    6,444
   Restricted cash .............................................................................................      7,524       6,186
   Marketable securities .......................................................................................        166         423
   Accounts receivable, less allowance for doubtful accounts of $935 and $480 for 2004 and 2003, respectively ..      3,168       2,045
   Accounts receivable - related party .........................................................................      1,395       3,176
   Inventories .................................................................................................     10,040      24,645
   Prepaid expenses and other current assets ...................................................................      1,526       2,081
   Note receivable - related party .............................................................................        341         732
                                                                                                                  ----------  ----------
      Total current assets .....................................................................................     27,519      45,732
Property and equipment, net ....................................................................................     10,877      12,639
Intangibles ....................................................................................................         84         335
Other assets ...................................................................................................        803          65
                                                                                                                  ----------  ----------
      Total assets ............................................................................................. $   39,283  $   58,771
                                                                                                                  ==========  ==========

                                 LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
   Line of credit .............................................................................................. $   14,250  $   26,051
   Notes payable bank...........................................................................................      3,604       3,603
   Notes payable - related party ...............................................................................         --          60
   Accounts payable ............................................................................................     10,467      12,529
   Accounts payable - related party ............................................................................        245         524
   Accrued liabilities .........................................................................................      6,124       1,953
                                                                                                                  ----------  ----------
      Total current liabilities ................................................................................     34,690      44,720
Long-term debt .................................................................................................        238          --
                                                                                                                  ----------  ----------
      Total liabilities ........................................................................................     34,928      44,720
                                                                                                                  ----------  ----------
Minority interest ..............................................................................................      4,666       8,186
                                                                                                                  ----------  ----------
Commitments and contingencies (Note 11)

Stockholders'(deficit) equity:
   Preferred stock, $0.0001 par value, 5,000,000 shares authorized;
       2,738,765 shares issued and outstanding at December 31, 2004.............................................         --          --
   Common stock, $0.0001 par value, 30,000,000 shares authorized; 1,220,794 and 888,109 shares
       issued and outstanding at December 31, 2004 and 2003, respectively ......................................          1           1
   Additional paid-in capital ..................................................................................     83,426      77,650
   Accumulated deficit .........................................................................................    (86,406)    (73,306)
   Accumulated other comprehensive income ......................................................................      2,668       1,521
   Deferred compensation .......................................................................................         --          (1)
                                                                                                                  ----------  ----------
      Total stockholders'(deficit) equity ......................................................................       (311)      5,865
                                                                                                                  ----------  ----------
      Total liabilities and stockholders' equity ............................................................... $   39,283  $   58,771
                                                                                                                  ==========  ==========`

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

---





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

`Year Ended December 31,
                                                                     -------------------------------
                                                                       2004       2003       2002
                                                                     ---------  ---------  ---------
Net revenue ....................................................... $  87,200  $  89,133  $ 157,214
Cost of revenue ...................................................    82,328     85,545    145,929
                                                                     ---------  ---------  ---------
    Gross profit ..................................................     4,872      3,588     11,285
                                                                     ---------  ---------  ---------
Operating expenses:
  Research and development ........................................     5,628      5,769      3,043
  Sales and marketing .............................................     3,841      2,684      2,907
  General and administrative ......................................     8,452      7,276      7,054
                                                                     ---------  ---------  ---------
    Total operating expenses ......................................    17,921     15,729     13,004
                                                                     ---------  ---------  ---------
    Loss from operations ..........................................   (13,049)   (12,141)    (1,719)
Other income (expenses):
Interest expense ..................................................    (1,056)    (1,048)    (2,050)
Other income (expense)(principally litigation settlement in 2004)..    (3,548)        96       (213)
                                                                     ---------  ---------  ---------
    Loss before minority interest and income
        tax (benefit) provision ...................................   (17,653)   (13,093)    (3,982)
Provision for (benefit from) income taxes .........................        --        196        (33)
                                                                     ---------  ---------  ---------
    Loss before minority interest .................................   (17,653)   (13,289)    (3,949)
Minority interest  ................................................     4,583      4,944        958
                                                                     ---------  ---------  ---------
    Net loss....................................................... $ (13,070) $  (8,345) $  (2,991)
                                                                     =========  =========  =========
Dividends on preferred stock.......................................        30         --         --
                                                                     ---------  ---------  ---------
    Net loss available to common stockholders...................... $ (13,100) $  (8,345) $  (2,991)
                                                                     =========  =========  =========

Basic and diluted net loss per share .............................. $  (12.51) $  (11.48) $   (5.00)`

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

---





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

`Accumulated
                                                                                                                                              Other
                                                                                                                                             Compre-
                                                                     Preferred Stock        Common Stock        Additional                   hensive      Deferred
                                                                  ---------------------- ---------------------    Paid-in    Accumulated     Income        Compen-
                                                                    Shares      Amount     Shares      Amount     Capital      Deficit       (Loss)        sation        Total
                                                                  ----------  ---------- -----------  --------  -----------  -----------  -------------  -----------  ------------
Balance at December 31, 2001  ...................................        --  $       --     589,925  $      1  $    71,350  $   (61,970) $        (210) $       (60) $      9,111
Comprehensive income (loss):
   Net loss .....................................................        --          --          --        --           --       (2,991)            --           --        (2,991)
   Translation adjustment .......................................        --          --          --        --           --           --          1,667           --         1,667
                                                                                                                                                                      ------------
Comprehensive loss...............................................                                                                                                          (1,324)
Exercise of common stock options ................................        --          --       5,000        --          166           --             --           --           166
Issuance of common stock ........................................        --          --       3,000        --           45           --             --           --            45
Amortization of deferred compensation ...........................        --          --          --        --           --           --             --           40            40
Gain on sale of subsidiary common stock .........................        --          --          --        --        1,177           --             --           --         1,177
Issuance of common stock for services
   and in settlement of legal obligations .......................        --          --      14,430        --          424           --             --           --           424
Escrow stock returned to capital ................................        --          --       6,000        --          172           --             --           --           172
                                                                  ----------  ---------- -----------  --------  -----------  -----------  -------------  -----------  ------------
Balance at December 31, 2002  ...................................        --          --     618,356         1       73,334      (64,961)         1,457          (20)        9,811
Comprehensive income (loss):
   Net loss .....................................................        --          --          --        --           --       (8,345)            --           --        (8,345)
   Translation adjustment .......................................        --          --          --        --           --           --             64           --            64
                                                                                                                                                                      ------------
Comprehensive loss...............................................                                                                                                          (8,281)
Exercise of common stock warrants ...............................        --          --      33,097        --          446           --             --           --           446
Issuance of common stock ........................................        --          --     115,722        --        1,474           --             --           --         1,474
Issuance of common stock upon conversion of bridge loans ........        --          --      18,643        --          261           --             --           --           261
Amortization of deferred compensation ...........................        --          --          --        --           --           --             --           19            19
Issuance of common stock for services
   and in settlement of legal obligations .......................        --          --      49,422        --          961           --             --           --           961
Issuance of common stock in settlement of accounts payable ......        --          --      52,870        --          957           --             --           --           957
Fair value of common stock warrants issued to non-employees .....        --          --          --        --          217           --             --           --           217
                                                                  ----------  ---------- -----------  --------  -----------  -----------  -------------  -----------  ------------
Balance at December 31, 2003  ...................................        --          --     888,109         1       77,650      (73,306)         1,521           (1)        5,865
Comprehensive income (loss):
   Net loss .....................................................        --          --          --        --           --      (13,070)            --           --       (13,070)
   Translation adjustment .......................................        --          --          --        --           --           --          1,147           --         1,147
                                                                                                                                                                      ------------
Comprehensive loss...............................................                                                                                                         (11,923)
Dividends on preferred stock.....................................        --          --          --        --           --          (30)            --           --           (30)
Exercise of common stock warrants ...............................        --          --      53,186        --          636           --             --           --           636
Exercise of convertible preferred stock warrants ................   738,768          --          --        --          451           --             --           --           451
Issuance of common stock ........................................        --          --     121,212        --        2,035           --             --           --         2,035
Issuance of warrants with notes payable .........................        --          --          --        --           83           --             --           --            83
Preferred stock converted to common stock........................  (478,689)         --      47,869        --           --           --             --           --            --
Issuance of convertible preferred stock and attached warrants.... 2,478,686          --          --        --        1,422           --             --           --         1,422
Amortization of deferred compensation ...........................        --          --          --        --           --           --             --            1             1
Issuance of common stock for services
   and in settlement of legal obligations .......................        --          --      42,956        --          289           --             --           --           289
Issuance of common stock in settlement of accounts payable ......        --          --      67,461        --          525           --             --           --           525
Fair value of common stock warrants issued to non-employees .....        --          --          --        --          335           --             --           --           335
                                                                  ----------  ---------- -----------  --------  -----------  -----------  -------------  -----------  ------------
Balance at December 31, 2004  ................................... 2,738,765  $       --   1,220,794  $      1  $    83,426  $   (86,406) $       2,668  $        --  $       (311)
                                                                  ==========  ========== ===========  ========  ===========  ===========  =============  ===========  ============`

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

---



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

`Year Ended December 31,
                                                                                  -------------------------------
                                                                                    2004       2003       2002
                                                                                  ---------  ---------  ---------
Operating activities:
    Net loss available to common stockholders .................................. $ (13,100) $  (8,345) $  (2,991)
    Adjustments to reconcile net loss to net cash provided
        by (used in) operating activities:
        Minority interest ......................................................    (4,583)    (4,944)      (958)
        Depreciation ...........................................................     2,795      2,427      2,344
        Amortization ...........................................................       264        252        251
        Issuance of common stock for service provided ..........................       120         81         --
        Write down of notes receivable .........................................       391        152      1,090
        Allowance for doubtful accounts ........................................      (355)       763         18
        Reserve for inventory ..................................................     2,721        677         82
        Amortization of deferred compensation ..................................         1        104         40
        Extinguishment of accounts payable in connection with legal settlement .       694        334        424
        Stock compensation expense..............................................       335         --         --
        Deferred tax assets ....................................................        --        251         --
        Noncash interest expense ...............................................         7        132         --
        Impairment of goodwill .................................................        --         --        175
        Loss on disposal of fixed assets .......................................        66          1         --
    Changes in operating assets and liabilities:
        Accounts receivable ....................................................      (769)     7,941     (8,632)
        Accounts receivable - related party ....................................     1,781     (3,176)        --
        Inventories ............................................................    11,883        436    (13,954)
        Prepaid expenses and other current assets ..............................       555      1,372      1,101
        Other assets ...........................................................      (738)        (1)       (48)
        Accounts payable .......................................................    (2,062)      (672)     8,627
        Accounts payable - related party .......................................      (279)        90     (1,702)
        Accrued liabilities ....................................................     4,171       (499)      (558)
                                                                                  ---------  ---------  ---------
            Net cash (used in) provided by operating activities ................     3,898     (2,624)   (14,691)
                                                                                  ---------  ---------  ---------
Investing activities:
    Maturities (purchases) of marketable debt securities .......................       257          4        342
    Acquisition of property and equipment ......................................    (1,267)    (4,280)    (3,696)
    Proceeds from the sale of property and equipment ...........................       998        280         --
    Increase in restricted cash ................................................    (1,338)      (278)    (2,672)
                                                                                  ---------  ---------  ---------
            Net cash used in investing activities ..............................    (1,350)    (4,274)    (6,026)
                                                                                  ---------  ---------  ---------
Financing activities:
    Proceeds from the sale of common stocks, net ...............................     2,035      1,428         45
    Proceeds from the exercise of common stock warrants ........................       636        446        166
    Proceeds (repayment) from line of credit ...................................   (11,801)       (35)     9,586
    Dividend on preferred stock ................................................        30         --         --
    Repayment of bank borrowings ...............................................        --         --       (148)
    Proceeds from sale of subsidiary stock .....................................        --         --     10,685
    Proceeds from bridge loans .................................................        --        261         --
    Repayment of notes payable .................................................    (6,661)    (4,220)        --
    Proceeds from redeemable preferred stock and warrants, net..................     1,842         --         --
    Proceeds from issuance of notes payable and warrants........................     6,604      3,660      2,389
    Proceeds from issuance of notes payable and warrants to a stockholder.......       300         --         --
    Repayment of long term debt ................................................        --       (288)    (1,488)
                                                                                  ---------  ---------  ---------
            Net cash (used in) provided by financing activities ................    (7,015)     1,252     21,235
                                                                                  ---------  ---------  ---------
Effect of exchange rate changes ................................................     1,382       (240)     1,667
                                                                                  ---------  ---------  ---------
Net (decrease) increase in cash and cash equivalents ...........................    (3,085)    (5,886)     2,185
Cash and cash equivalents at the beginning of year .............................     6,444     12,330     10,145
                                                                                  ---------  ---------  ---------
Cash and cash equivalents at the end of year ................................... $   3,359  $   6,444  $  12,330
                                                                                  =========  =========  =========`

---



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

`Year Ended December 31,
                                                                                  -------------------------------
                                                                                    2004       2003       2002
                                                                                  ---------  ---------  ---------
Supplemental disclosures:
    Interest paid .............................................................. $   1,000  $     846  $   1,999
    Taxes paid ................................................................. $      65  $      63  $     516
Supplemental disclosure of non-cash transaction:
    Issuance of common stock in payment of accounts payable..................... $   1,000  $     957  $     172
    Issuance of common stock and warrants for legal settlements ................ $     800  $     880  $      --
    Issuance of common stock for service rendered .............................. $      85  $      81  $     424
    Issuance of common stock upon conversion of bridge loans ................... $     275  $     261  $      --
    Issuance of common stock for other current assets .......................... $      50  $      46  $      --`

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

---



DIGITAL VIDEO SYSTEMS, INC.

Notes to Consolidated Financial Statements

1. The Company and its Significant Accounting Policies
2. Inventories
3. Property and Equipment
4. Intangible Assets
5. Note Receivable-Related Party
6. Warranty Accrual
7. Line of Credit
8. Notes Payable
9. Notes Payable - Related Parties
10. Long-term Debt
11. Commitments and Contingencies
12. Income Taxes
13. Net Loss Per Share
14. Stockholders' Equity
15. Segment Information
16. Joint Venture
17. Related Party Transactions
18. Amendment to Certificate of Incorporation
19. Selected Quarterly Financial Data (unaudited)

---



DIGITAL VIDEO SYSTEMS, INC.

Schedule II

Valuation and Qualifying Accounts and Reserves

(in thousands)

`Additions
                                                     Balance at   Charged to                 Balance at
                                                    Beginning of   Costs and                   End of
                   Description                         Period      Expenses     Deductions     Period
--------------------------------------------------  ------------  -----------  ------------  ----------
2004:                                                                                                  
Allowance for doubtful accounts receivable ....... $        480  $       456  $          1  $      935
Warranty reserve .................................           54           65            91          28
Deferred tax asset valuation allowance ...........       13,398        5,862            --      19,260
Reserve for slow moving and obsolete inventory ...        1,087        2,721            --       3,808
Allowance for note receivable ....................        1,242          391                     1,633
                                                                                                       
2003:                                                                                                  
Allowance for doubtful accounts receivable ....... $        127  $       763  $        410  $      480
Warranty reserve .................................          130           --            76          54
Deferred tax asset valuation allowance ...........        9,930        3,468            --      13,398
Reserve for slow moving and obsolete inventory ...          410          677            --       1,087
Allowance for note receivable ....................        1,090          152                     1,242
                                                                                                       
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
Allowance for note receivable ....................           --        1,090                     1,090`

---



SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, State of California on this 15th
day of April 2005.

DIGITAL VIDEO SYSTEMS, INC.

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

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

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

|Signature                               | Title                                | Date          
|--------------------------------------- | ------------------------------------ | --------------
|/s/ THOMAS SPANIER
Thomas Spanier       | Chief Executive Officer and Director | April 15, 2005
|/s/ Douglas T. Watson
Douglas T. Watson | Chief Financial Officer and Director | April 15, 2005
|/s/ THOMAS PARILLA
Thomas Parilla       | Director                             | April 15, 2005
|/s/ John Fuller
John Fuller             | Director                             | April 15, 2005
|                                        |                                      |               
|                                        |                                      |               
|                                        |                                      |               

---



EXHIBIT INDEX

|Exhibit No. | Exhibit Footnote | Description                                                                                                                                                                   
|----------- | ---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |                  | Amended and Restated Certificate of Incorporation of the Company
     PDF                                                                                                     
|3.2         |                  | Certificate of Designations of Preferences of 8% Series C Convertible Preferred Stock
     PDF                                                                                
|3.3         |                  | Certificate of Amendment of Amended and Restated Certificate of Incorporation
     PDF                                                                                        
|3.4         |                  | Amended Bylaws of the Company
     PDF                                                                                                                                        
|4.1         | (1)              | Form of Common Stock Certificate                                                                                                                                              
|4.2         | (2)              | Form of Class A Warrant                                                                                                                                                       
|4.3         | (2)              | Form of Class B Warrant                                                                                                                                                       
|4.4         | (2)              | Form of Registration Rights Agreement between the Registrant and the Series C Preferred Stockholders                                                                          
|10.1        |                  | Form of Indemnification Agreement with the Registrant's Officers and Directors
     PDF                                                                                       
|10.2        | (3)              | 2002 Stock Plan                                                                                                                                                               
|10.3        | (3)              | 2002 Director Option Plan                                                                                                                                                     
|10.4        | (4)              | Share Exchange Agreement between the Registrant and Oxcal Venture Fund, LP, dated as of September 30, 2004                                                                    
|10.5        | (5)              | Technology License Agreement between the Registrant and EnMedia, Inc.                                                                                                         
|10.6        |                  | Revolving Credit Agreement between DVS Korea Co. Ltd. and Woori Bank
     PDF                                                                                                 
|10.7        |                  | Revolving Line of Credit Agreement between DVS Korea Co. Ltd. and Hana Bank
     PDF                                                                                          
|10.8        |                  | Credit Agreement between DVS Korea Co. Ltd. and Korean Exchange Bank
     PDF                                                                                                 
|10.9        |                  | Credit Agreement between DVS Korea Co. Ltd. and Kookmin Bank
     PDF                                                                                                         
|10.10       |                  | Letter of Credit Commitment Agreement between DVS Korea Co. Ltd. and Sanup Bank
     PDF                                                                                      
|21.1        |                  | Subsidiaries of the Registrant                                                                                                                                                
|23.1        |                  | Consent of Stonefield Josephson, Inc., independent registered public accounting firm                                                                                          
|23.2        |                  | Consent of Burr, Pilger & Mayer LLP, independent registered public account firm                                                                                               
|31.1        |                  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.                         
|31.2        |                  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.                         
|32.1        |                  | Certifications 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 Registrant'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 the Registrant's Current Report on Form 8-K, filed with the Commission on September 20, 2004.

(3) Incorporated by reference from the Registrant's Registration Statement on Form S-8 (File No. 333-103243), filed with the Commission on February 14, 2003.

(4) Incorporated by reference from the Registrant's Current Report on Form 8-K, filed with the Commission on September 30, 2004.

(5) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the Period Ended June 30, 2004, filed with the Commission on August 16,2004.

---