<PAGE>

                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                            Washington, DC 20549

                                  FORM 10-Q

(Mark One)

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the quarterly period ended September 30, 1999.

                                       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 No. 333-64483


                          DIVA Systems Corporation
           (Exact name of Registrant as specified in its charter)


                 Delaware                            94-3226532
      (State or other jurisdiction of              (IRS Employer
       Incorporation or organization)          Identification Number)

                              800 Saginaw Drive
                           Redwood City, CA 94063
                  (Address of principal executive offices)

                               (650) 779-3000
            (Registrant's telephone number, including area code)

          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.  [X] Yes  [  ] No

          The number of shares of Registrant's classes of Common Stock at
October 31, 1999 was:

             Title of each class
             -------------------
          Common Stock, $.001 par value                16,774,890
          Class C Common Stock, $.001 par value           857,370
<PAGE>

                          DIVA SYSTEMS CORPORATION

                        Quarterly Report on Form 10-Q

                              Table of Contents

                      Quarter Ended September 30, 1999



                        PART I - FINANCIAL INFORMATION

Item 1.   Consolidated Financial Statements (Unaudited)
             Consolidated Balance Sheet at September 30, 1999
               and June 30, 1999                                       1
             Consolidated Statement of Operations for the
               three months Ended September 30, 1999 and 1998          2
             Consolidated Statement of Cash Flows for the
               three months ended September 30, 1999 and 1998          3
             Notes to Consolidated Financial Statements                4
Item 2.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations                        5



                          PART II - OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds                  30
Item 4.    Submission of Matters to a Vote of Security Holders        30
Item 6.    Exhibits and Reports on Form 8-K                           30

Signatures                                                            31
<PAGE>

                                    PART I
ITEM 1.  FINANCIAL STATEMENTS

                   DIVA SYSTEMS CORPORATION AND SUBSIDIARIES
                         (A Development Stage Company)
                          Consolidated Balance Sheets
                       (in thousands, except share data)
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                      September 30,        June 30,
                                                                          1999               1999
                                                                     --------------      ------------
<S>                                                                   <C>                <C>
                             Assets
Current assets:
   Cash and cash equivalents                                          $     68,422            89,239
   Short-term investments                                                   48,044            41,498
   Inventory                                                                 3,072             2,663
   Prepaid expenses and other current assets                                 1,763             2,096
                                                                     --------------      ------------
             Total current assets                                          121,301           135,496

Property and equipment, net                                                 10,665             9,792
Debt issuance costs, net                                                     7,733             8,114
Deposits and other assets                                                      581               550
Intangible assets, net                                                         268               312
                                                                     --------------      ------------
             Total assets                                             $    140,548           154,264
                                                                     ==============      ============
   Liabilities, Redeemable Warrants, and Stockholders' Deficit

 Current liabilities:
    Accounts payable                                                  $      3,268             2,784
    Other current liabilities                                                1,446             1,221
                                                                     --------------      ------------
             Total current liabilities                                       4,714             4,005

 Notes payable                                                             284,363           275,564
                                                                     --------------      ------------
             Total liabilities                                             289,077           279,569
                                                                     --------------      ------------
 Redeemable warrants                                                         2,260             2,108
                                                                     --------------      ------------
Commitments and contingencies

Stockholders' deficit:
   Preferred stock, $0.001 par value; 30,000,000 shares authorized;
     21,447,711 and 21,390,283 shares issued and outstanding as of
     September 30, 1999, and June 30, 1999 respectively.                        21                21
   Common stock, $0.001 par value; 65,000,000 shares authorized;
     17,535,968 and 17,463,574 shares issued and outstanding as
     of September 30, 1999, and June 30, 1999 respectively.                     18                17
   Additional paid-in capital                                              117,097           117,170
   Deferred compensation                                                    (1,043)           (1,248)
   Deficit accumulated during the development stage                       (266,882)         (243,373)
                                                                     --------------      ------------
        Total stockholders' deficit                                       (150,789)         (127,413)
                                                                     --------------      ------------
        Total liabilities, redeemable warrants, and stockholders'
          deficit                                                     $    140,548           154,264
                                                                     ==============      ============
 </TABLE>
     See accompanying notes to interim consolidated financial statements.

                                       1
<PAGE>

                   DIVA SYSTEMS CORPORATION AND SUBSIDIARIES
                         (A Development Stage Company)
                     Consolidated Statements of Operations
                     (in thousands,except per share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                  Period from
                                                                                  July 1, 1995
                                                    Three Months Ended           (inception) to
                                                      September 30,               September 30,
                                                 1999              1998                1999
                                             ------------     -------------      --------------
<S>                                          <C>              <C>                <C>

Revenue                                        $     68                63                 443
                                             ------------     -------------      --------------
Operating expenses:
   Programming                                    1,242             1,871              19,072
   Operations                                     1,471             2,166              15,515
   Engineering and development                    5,281             4,974              67,870
   Sales and marketing                            1,613             1,225              15,735
   General and administrative                     4,895             2,973              35,183
   Depreciation and amortization                  1,430             2,246              26,740
   Amortization of intangible assets                 44                44                 267
   Acquired in-process research and
     Development                                     --                --              28,382
                                             ------------     -------------      --------------
           Total operating expenses              15,976            15,499             208,764
                                             ------------     -------------      --------------
           Operating loss                        15,908            15,436             208,321
                                             ------------     -------------      --------------
 Other (income) expense, net:
    Equity in loss of investee                       --                --               3,354
    Interest income                              (1,585)           (2,674)            (16,337)
    Interest expense                              9,186             8,021              60,868
                                             ------------     -------------      --------------
           Total other expense, net               7,601             5,347              47,885
                                             ------------     -------------      --------------

           Loss before extraordinary
             Item                                23,509            20,783             256,206

Extraordinary loss -- early
  extinguishment of debt                             --                --              10,676
                                             ------------     -------------      --------------
           Net loss                              23,509            20,783             266,882

Accretion of redeemable warrants                    152               385               1,975
                                             ------------     -------------      --------------
           Net loss attributable to
             common stockholders               $ 23,661            21,168             268,857
                                             ============     =============      ==============
Basic and diluted net loss per share:
   Loss before extraordinary item              $   1.36              1.24               17.07
   Extraordinary loss -- early
     extinguishment of debt                          --                --                0.71
                                             ------------     -------------      --------------
           Net loss per share                  $   1.36              1.24               17.78
                                             ============     =============      ==============
Shares used in per share  computation            17,389            17,011              15,122
                                             ============     =============      ==============
</TABLE>

     See accompanying notes to interim consolidated financial statements.


                                       2
<PAGE>

                   DIVA SYSTEMS CORPORATION AND SUBSIDIARIES
                         (A Development Stage Company)
                     Consolidated Statement of Cash Flows
                                (in thousands)
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                                                             Period from
                                                                                                             July 1, 1995
                                                                         Three Months Ended                 (inception) to
                                                                             September 30,                   September 30,
                                                                      1999                 1998                 1999
                                                                --------------        --------------        --------------
<S>                                                             <C>                  <C>                   <C>
Cash flows from operating activities:
   Net loss                                                      $   (23,509)               (20,783)             (266,882)
   Adjustments to reconcile net loss to net
     cash used in operating activities:
        Acquired in-process research   and development                    --                     --                28,382
        Depreciation and amortization                                  1,430                  2,246                26,740
        Amortization of intangible assets                                 44                     44                   267
        Equity in loss of investee                                        --                     --                 3,354
        Loss on disposition of property and equipment                     74                  1,161                 1,338
        Amortization of debt issuance costs and
           accretion of discount on notes payable                      9,184                  8,013                60,787
        Issuance of stock for services                                    --                     --                   343
        Amortization of deferred stock compensation                      205                     --                   943
        Extraordinary loss                                                --                     --                10,676
        Changes in operating assets and liabilities:
           Other assets                                                  333                    212                (1,895)
           Inventory                                                    (409)                    --                  (409)
           Accounts payable                                              484                    442                   641

           Other current liabilities                                     225                   (227)                1,446
                                                                --------------        --------------        --------------
                Net cash used in operating acitivies                 (11,939)                (8,892)             (134,269)
                                                                --------------        --------------        --------------
Cash flows from investing  activities:
   Purchases of property and equipment                                (2,377)                (4,171)              (37,850)
   Deposits on property and equipment                                    (31)                    (5)               (6,638)
   Purchase of short-term investments                                (17,486)               (29,832)             (160,573)
   Maturities/sales of short-term investments                            940                     --               112,529
   Cash acquired in business combinationm                                 --                     --                   402
   Purchase of Norstar                                                    --                     --                (3,358)
   Restricted cash released                                               --                     --                18,230
                                                                --------------        --------------        --------------
                Net cash used in investing activities                 (8,954)               (34,008)              (77,258)
                                                                --------------        --------------        --------------
Cash flows from financing activities:
   Issuance of preferred stock                                            --                     --                73,866
   Proceeds from notes payable, net of issuance costs                     --                     --               205,302
   Exercise of stock options and issuance of common stock                 80                     47                   804
   Payments on note payable                                               (4)                    --                   (23)
                                                                --------------        --------------        --------------
                Net cash provided by financing activities                 76                     47               279,949
                                                                --------------        --------------        --------------
Net increase (decrease) in cash and cash equivalents                 (20,817)               (42,853)               68,422

Cash and cash equivalents at beginning of period                      89,239                167,549                    --
                                                                --------------        --------------        --------------

Cash and cash equivalents at end of period                       $    68,422                124,696                68,422
                                                                ==============        ==============        ==============
</TABLE>

See accompanying notes to interim consolidated financial statements.

                                       3
<PAGE>

                   DIVA SYSTEMS CORPORATION AND SUBSIDIARIES
                         (A Development State Company)
              NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

Note 1--The Company And Basis Of Presentation

          DIVA Systems Corporation ("DIVA" or the "Company"), a Delaware
corporation, was formed in July 1995 to design, develop, and market video-on-
demand products and services for the cable television industry.  The Company is
in the development stage, and its primary activities to date have included
performing research and development, licensing program content, manufacturing
the necessary equipment, developing a service offering, establishing strategic
alliances, deploying service trials and limited commercial launches with cable
operators and raising capital.

          The interim unaudited financial statements as of September 30, 1999,
for the three months ended September 30, 1998 and 1999, and for the period from
July 1, 1995 (inception) to September 30, 1999, have been prepared on
substantially the same basis as the Company's audited financial statements for
the year ended June 30, 1999 and include all adjustments, consisting only of
normal recurring adjustments, that, in the opinion of management, are necessary
for a fair presentation of the financial information set forth herein.  The
results of operations for current interim periods are not necessarily indicative
of results to be expected for the current year or any other period.

          These interim unaudited financial statements should be read in
conjunction with the Company's annual financial statements, included in the
Company's Form 10-K for the year ended June 30, 1999 ("Fiscal 1999").


Note 2--Basic and Diluted Net Loss Per Share

          Basic and diluted net loss per share is computed using net loss
adjusted for the accretion of the redeemable warrants and the weighted-average
number of outstanding shares of common stock.  Potentially dilutive securities,
including options, warrants, restricted common stock, and preferred stock, have
been excluded from the computation of diluted net loss per share because the
effect of this inclusion would be antidilutive.  Information pertaining to
potentially dilutive securities is included in Notes 6 and 7 of notes to
consolidated financial statements included in the Company's  Fiscal 1999 Form
10-K.

                                       4
<PAGE>

     Item 2.  Management's Discussion and Analysis of Financial Condition and
     Results of Operations

          The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the unaudited
Consolidated Interim Financial Statements for the three months ended September
30, 1999.  This discussion contains forward-looking statements that involve
risks and uncertainties, including but not limited to, certain assumptions
regarding increases in customers, revenues and certain expenses.  Forward-
looking statements are identified with an asterisk (*) and reflect the Company's
current expectations.  Although the Company believes that its plans, intentions
and expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such plans, intentions or expectations will be
achieved.  Actual results will differ and such differences may be material.  All
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the cautionary statements
set forth below and in "--Factors Affecting Operating Results."


Overview

          The Company was founded in July 1995 and is still in the development
stage.  Since inception, the Company has devoted substantially all of its
resources to developing its video-on-demand ("VOD") system, establishing
strategic relationships, negotiating deployment agreements, carrying out initial
marketing activities and establishing the operations necessary to support the
commercial launch of the Company's VOD service.  Through September 30, 1999, the
Company has generated minimal revenues, has incurred significant losses and has
substantial negative cash flow, primarily due to the engineering and development
and start-up costs required to develop its VOD service.  Since inception through
September 30, 1999, the Company had an accumulated deficit of $266.9 million.
The Company currently intends to increase its operating expenses and its capital
expenditures in order to continue to deploy, develop and market its VOD products
and services. *  As a result, the Company expects to incur substantial
additional net losses and negative cash flow for at least the next several
years.*


Results of Operations

          Since its inception, the Company has engaged primarily in technology
development and activities related to the startup of business operations.
Accordingly, the Company's historical revenues and expenditures are not
necessarily indicative of, and should not be relied upon as an indicator of,
revenues that may be attained or expenditures that may be incurred by the
Company in future periods.

                                       5
<PAGE>

Revenues

          Currently, revenues consist of per-movie viewing fees, monthly service
fees and the sale of monthly subscription packages.  The majority of revenues
consist of per-movie viewing fees paid by customers to view movies on demand.
The Company initiated the commercial launch of its VOD service on September 29,
1997.  As of September 30, 1999, the Company's VOD service was deployed at six
multiple system operator  ("MSO") locations.  Revenue for the three months ended
September 30, 1998 and September 30, 1999 was $63,000 and $68,000, respectively.
The Company realizes monthly revenue pursuant to deployment agreements with MSOs
only when its VOD system is successfully integrated and operating and customer
billing commences.  Generally, the timing and extent of deployment under each
agreement is conditioned on a successful initial deployment phase, followed by a
larger rollout in the applicable MSO system based on an agreed upon schedule.

          Effective in the fourth quarter of Fiscal 1999, the Company now offers
for sale VOD products such as the DIVA Video Server (the "Video Server") and the
DIVA Digital Link (the "DDL") and also licenses its DIVA System Manager ("DSM")
software. In addition, the Company provides operational support services
including content acquisition and management, engineering services, billing and
navigator services at the option of the MSO. As a result, VOD product and
service revenues will differ significantly in timing and in amount when compared
to the previous mix of revenues which primarily resulted from monthly per-movie
fees. The Company believes that under this new business model, revenues will
fluctuate significantly from period to period and its success will depend on a
number of factors including the Company's ability to commercially deploy its VOD
products and services in a significant number of large headend locations.* See
"--Factors Affecting Operating Results--Uncertainty of Future Revenues;
Fluctuating Operating Results and Dependence on Cable Operator Participation;
Consolidation in Cable System Ownership; Unproven and Evolving Business Models."

Operating Expenses

          Programming expense.  Programming expense includes license fees
payable to content providers, costs for the acquisition and production of
digitally encoded programming content (i.e. movies, videos, previews,
promotions, etc.) and content duplication and distribution expenses. Programming
expense was $1.9 million and $1.2 million for the three months ended September
30, 1998 and 1999, respectively. The decrease in programming expenses was
primarily attributable to reduced labor and other related costs in the area of
program production services. During the second half of Fiscal 1999 the Company
reduced the number of trailers, previews, promotions, and other content related
material which it produced internally resulting in a reduction of overall
expenditures in this area. The current quarter reflects this reduced level of
expenditures when compared to the comparable quarter of the prior year. The
Company expects to continue to experience cost reductions in this area.*


                                       6
<PAGE>

          Operations Expense.  Operations expense includes the cost of field
operations, both for initial launches and for the ongoing operations of the
Company's VOD service. These costs include technical support, customer service
training, installation and launch support, maintenance costs for headend
equipment and other field support costs. In addition, operations expense
includes personnel and other costs which support the Company's ongoing
manufacturing relationships with third-party manufacturers for the Company's
Video Server and other VOD hardware. Operations expense was $2.2 million and
$1.5 million for the three months ended September 30, 1998 and 1999,
respectively. The decrease in operations expenses is primarily the result of the
Company's decision to discontinue the manufacture of its own proprietary set-top
box in the third quarter of Fiscal 1999. As a result, manufacturing related
costs have decreased in the current quarter when compared to the comparable
quarter in Fiscal 1999. However, the Company expects operations expense will
increase due to the activities related to the production of the Company's Video
Servers, DDLs and related headend equipment.*

          Engineering and Development Expense.  Engineering and development
expense consists of salaries, consulting fees and other costs to support product
development, prototype hardware costs, ongoing system software, system
integration and new services technology.  To date, the most substantial portion
of the Company's operating expenses has been engineering and development
expense.  Engineering and development expense was $5.0 million and $5.3 million
for the three months ended September 30, 1998 and 1999, respectively.  The
increase in engineering and development expense was attributable to the hiring
of additional engineering and development personnel and outside consultants in
connection with the Company's further development and refinement of its VOD
technology, including activities directed toward reducing the size and cost of
its VOD products. The Company intends to increase engineering and development
expenses to fund continued development and enhancements of its VOD products and
services.*  The Company believes significant investments in engineering and
development will be necessary to remain competitive and to respond to market
pressures.*

          Sales and Marketing Expense.  Sales and marketing expense consists of
the costs of marketing the Company's VOD products and services to MSOs and their
customers and includes business development and marketing personnel, travel
expenses, trade shows, consulting fees and promotional costs.  In addition,
sales and marketing expense includes direct costs related to acquiring
customers, such as telemarketing, direct mailings, targeted advertising and
promotional campaigns.  Sales and marketing expense was $1.2 million and $1.6
million for the three months ended September 30, 1998 and 1999 , respectively.
The primary items contributing to the increase in marketing expense were
promotional expenditures in connection with the Company's recent commercial
deployments, continued business development activities and product management
costs.  The Company expects sales and marketing expense to continue to increase
as the Company pursues and enters into new agreements.*

          General and Administrative Expense.  General and administrative
expense consists primarily of salaries and related expenses of management and
administrative personnel, professional fees and general corporate and
administrative expenses.  General and administrative expense covers a broad
range of the Company's infrastructure including corporate functions such as
executive,


                                       7
<PAGE>

administration, finance, legal, human resources, international business
development and facilities. In addition, general and administrative expense
includes costs associated with the development, support and growth of the
Company's complex information system infrastructure.

          General and administrative expense was $3.0 million and $4.9 million
for the three months ended September 30, 1998 and 1999, respectively.  Overall,
general and administrative expense has increased as a direct result of the
growth of the Company in all phases of its operations. In addition to the
increase in personnel related expenses, the increase in general and
administrative expense is the result of $490,000 in increased rent expense due
to the Company's relocation of its corporate headquarters to a new facility,
$400,000 in increased legal and patent related expenses and $300,000 in
international business development expenses, including the operations of an
office in the United Kingdom. General and administrative expense is expected to
increase substantially in order to support expansion of the Company's business.*

          Depreciation and Amortization.  Depreciation and amortization expense
includes depreciation of property and equipment, including DIVA Video Servers
and other headend hardware.  Generally, depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which range
from three to five years.  Depreciation and amortization expense was $2.2
million and $1.4 million for the three months ended September 30, 1998 and 1999,
respectively.  The decrease in depreciation and amortization expense is the
result of approximately $9.1 million in write-downs recorded in the fourth
quarter of Fiscal 1999 related to older, prototype Video Servers and other
server related hardware and components.  In addition, approximately $2.7 million
of previously capitalized equipment was transferred to inventory in the fourth
quarter of Fiscal 1999.  Although, depreciation and amortization expense
decreased for the current period, it is expected to increase in the future due
to planned expenditures for capital equipment and other capital costs associated
with the deployment and expansion of the Company's business.*

Other Income and Expense

          Other income and expense primarily consists of interest income and
interest expense. Interest income consists of earnings on cash, cash equivalents
and short-term investments.  Interest income was $2.7 million and $1.6 million
for the three months ended September 30, 1998 and 1999, respectively.  The
decrease in interest income is the result of a decrease in cash and cash
equivalent balances which are invested in short-term interest bearing accounts
and a decrease in short-term investments.  Interest expense consisted primarily
of accreted interest on the Company's outstanding debt.  Interest expense was
$8.0 million and $9.2 million for the three months ended September 30, 1998 and
1999, respectively.  The increase in interest expense was due to the significant
increase in the Company's debt as a result of the offering of the Company's 12-
5/8% Senior Discount Notes due 2008 (the "1998 Notes") which was completed on
February 19, 1998.  The 1998 Notes were issued at a substantial discount from
their aggregate principal amount at maturity of $463.0 million.  Although cash
interest is not payable on the 1998 Notes prior to September 1, 2003, the
Company's interest expense includes the accretion of such interest expense.  The
carrying amount of the 1998 Notes will accrete to its face value by March 1,
2003.  Beginning September 1, 2003, cash interest


                                       8
<PAGE>

will be payable on the notes semi-annually in arrears on each March 1st and
September 1st at a rate of 12 5/8% per annum.

Provision for Income Taxes

          The Company has not provided for or paid federal income taxes due to
the Company's net losses.  As of June 30, 1999, the Company had net operating
loss carryforwards of approximately $152.3 million to offset future income
subject to federal income taxes and $82.0 million available to offset future
California taxable income.  As of June 30, 1999, the Company had $6.5 million in
net operating losses to offset future New Jersey taxable income.  The extent to
which such loss carryforwards can be used to offset future taxable income may be
limited because of ownership changes pursuant to Section 382 of the Internal
Revenue Code of 1986, as amended.

Liquidity and Capital Resources

          From inception through September 30, 1999, the Company has financed
its operations primarily through the gross proceeds of private placements
totaling approximately $76.3 million of equity and $250.0 million of high yield
debt securities, net of repayments.  As of September 30, 1999, the Company had
cash and cash equivalents and short-term investments totaling $116.5  million.

          In May 1996, the Company received $25.0 million in gross proceeds from
the sale of 47,000 units, consisting of 1996 Notes with an aggregate principal
amount at maturity of $47.0 million and warrants to purchase an aggregate of
1,898,800 shares of Common Stock.  Aggregate proceeds of $285,000 were
attributed to these warrants.  In connection with the offering of the 1998
Notes, the Company subsequently retired all of the 1996 Notes in a debt
exchange.

          In July and August 1996, the Company completed the sale of Series C
Preferred Stock for approximately $25.9 million in gross proceeds.

          In August and September 1997, the Company completed the sale of Series
D Preferred Stock for approximately $47.4 million in gross proceeds.

          On February 19, 1998, the Company received $250.0 million in gross
proceeds from an offering of 463,000 units consisting of 1998 Notes with an
aggregate principal amount at maturity of $463.0 million and warrants to
purchase an aggregate of 2,778,000 shares of Common Stock.  Of these units, a
total of 404,998 units were offered for sale and an additional 58,002 units were
exchanged for all the 1996 Notes.  Each unit consists of one 1998 Note and three
warrants each exercisable to purchase two shares of the Company's Common Stock
at $0.005 per share.  The 1998 Notes are senior unsecured indebtedness of the
Company, and rank pari passu with any future unsubordinated unsecured
indebtedness.  The 1998 Notes will be senior to any future subordinated
indebtedness of the Company, but effectively will be subordinated to any secured
indebtedness of the Company.

                                       9
<PAGE>

          The 1998 Notes were issued at a substantial discount from their
aggregate principal amount at maturity of $463.0 million.  Although cash
interest is not payable on the 1998 Notes prior to September 1, 2003, the
Company's interest expense includes the accretion of such interest expense and
the carrying amount of the 1998 Notes will accrete to face value by March 1,
2003.  Beginning September 1, 2003, cash interest will be payable on the notes
semi-annually in arrears on each March 1 and September 1 at the rate of 12-5/8%
per annum.  There are no principal payments due on the 1998 Notes prior to
maturity on March 1, 2008.

          The gross proceeds to the Company from the issuance of the 1998 Notes
were approximately $250.0 million.  In connection with the offering, the Company
allocated approximately $18.1 million of the proceeds to the warrants.  The net
proceeds from the offering of the 1998 Notes were approximately $200.0 million,
after deducting placement fees and other offering costs, the extinguishment of
the 1996 Notes and a premium paid in connection with the early extinguishment of
the 1996 Notes.

          The Company expects to require significant working capital and incur
significant operating expenses in the future.*  Working capital requirements
include inventory expenditures for Video Servers, DDLs and other related headend
equipment, and general capital expenditures associated with the anticipated
growth of the Company.  The Company's working capital needs will, in part, be
driven by the rate at which cable operators introduce the Company's VOD products
and services.  In addition to working capital, the Company anticipates expending
a significant portion of its resources for continued development and enhancement
of its VOD technology, development of new services and other expenses associated
with the delivery of its VOD products and services.*  The Company's actual
funding requirements may vary from expectations and will depend on numerous
future factors and conditions, many of which are outside of the Company's
control, including, but not limited to (i) the ability of the Company to meet
its platform development and product integration schedules; (ii) the accuracy of
the Company's assumptions regarding the rate and extent of commercial deployment
and market acceptance of its VOD products and services; (iii) the number and
timing of VOD product sales, license and service agreements with cable
operators; (iv) the nature and cable operator acceptance of new products and
services to be offered by the Company; (v) unanticipated costs; and (vi) the
need to respond to competitive pressures and technological changes.  The Company
may also use a portion of its cash resources to purchase some of its outstanding
indebtedness in the open market from time to time depending on market
conditions.  The Company believes that its cash, cash equivalents and short-term
investments at September 30, 1999 will be sufficient to satisfy the Company's
liquidity at least through the end of calendar 2000.*  Thereafter, the Company
will need to raise significant additional funds to support its operations.
However, the Company may need to raise additional funds earlier if its estimates
of working capital and operating expenditure requirements change or prove to be
inaccurate.  The Company may also need to raise significant additional funds in
order to respond to unforeseen technological or marketing hurdles or to take
advantage of unanticipated opportunities.  The Company has no present
commitments or arrangements assuring it of any future equity or debt financing,
and there can be no assurance that the Company will be able to obtain any such
equity or debt financing on favorable terms or at all.  In the event that the
Company is unable to obtain such additional capital, the Company will be
required


                                      10
<PAGE>

to delay the expansion of its business or take other actions that could have a
material adverse effect on the Company's business, operation results, financial
condition and its ability to achieve sufficient cash flow to service its
indebtedness. To the extent the Company raises additional cash by issuing equity
securities, existing stockholders of the Company will be diluted.

Financial Market Risks

          The Company is exposed to financial market risks, including changes in
interest rates and marketable equity security prices.  The Company typically
does not attempt to reduce or eliminate its market exposures on its investment
securities because the majority of the Company's investments are short-term.

          The fair value of the Company's investment portfolio or related income
would not be significantly impacted by either a 100 basis point increase or
decrease in interest rates due mainly to the short-term nature of the major
portion of the Company's investment portfolio.

          All of the potential changes noted above are based on a sensitivity
analysis performed on the Company's balances as of June 30, 1999.

Year 2000 Compliance

          Many computer systems and software and electronic products are coded
to accept only two-digit entries in the date code field.  These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates.  As a result, computer systems and software ("IT Systems")
and other property and equipment not directly associated with information and
billing systems ("Non-IT Systems"), such as phones, other office equipment used
by many companies, including the Company and MSOs, may need to be upgraded,
repaired or replaced to comply with such "Year 2000" requirements.

          The Company has conducted an internal review of most of its internal
IT Systems, including finance, human resources, Intranet applications and
payroll systems.  The Company has contacted most of the vendors of its internal
IT Systems to determine potential exposure to Year 2000 issues and has obtained
certificates from such vendors assuring Year 2000 compliance.  Although the
Company has determined that most of its principal internal corporate
headquarters IT Systems are Year 2000 compliant, certain of such internal
systems, including the Company's use of the Windows NT operating system and
internal networking systems are not Year 2000 compliant or have not been
evaluated by the Company.  In addition, the Company has tested and analyzed its
proprietary VOD hardware and software for Year 2000 compliance.  The Company has
recently determined that certain versions of its earlier VOD server technology
currently deployed in several of the initial limited commercial trials are not
Year 2000 compliant.  The Company expects to retire, upgrade or replace such VOD
server technology with Year 2000 compliant technology by the end of calendar
1999.*  To date, costs to the Company of Year 2000 compliance related to its
proprietary VOD hardware and software have been included with the Company's
overall engineering and development


                                      11
<PAGE>

activities as a component of the overall design of the Company's VOD service.
Such costs have not been material to the Company's financial position or results
of operations.

          The Company has appointed a task force (the "Task Force") to oversee
Year 2000 issues.  To date, the Company has spent an immaterial amount to
remediate its Year 2000 issues.  The Company presently estimates that the total
cost of addressing its Year 2000 issues will be immaterial.  These estimates
were derived utilizing numerous assumptions, including the assumption that it
has already identified its most significant Year 2000 issues and that the plans
of its third-party suppliers and MSOs which currently deploy the Company's VOD
service will be fulfilled in a timely manner without cost to the Company.
However, these assumptions may not be accurate, and actual results could differ
materially from those anticipated.

          The Company has been informed by most of its suppliers and MSOs that
currently deploy its VOD service that such suppliers and MSOs will be Year 2000
compliant by the Year 2000.  The Company has been informed that the companies
that perform billing services for MSOs may not be fully Year 2000 compliant.
The Company understands that these companies have devoted resources to becoming
Year 2000 compliant.  Any failure of these third parties systems to achieve
timely Year 2000 compliance could have a material adverse effect on the
Company's business, operating results, financial condition and its ability to
generate sufficient cash flow to service its indebtedness.

          The Company has not determined the state of compliance of certain
third-party suppliers of services such as phone companies, long distance
carriers, financial institutions and electric companies, the failure of any of
which could severely disrupt the Company's ability to carry on its business as
well as disrupt the business of the Company's customers.

          Failure to provide Year 2000 compliant business solutions to MSOs or
to receive such business solutions from its suppliers could result in liability
to the Company or otherwise have a material adverse effect on the Company's
business, results of operations, financial condition and prospects.  The Company
could be affected through disruptions in the operation of the enterprises with
which it interacts or from general widespread problems or an economic crisis
resulting from noncompliant Year 2000 systems.  Despite the Company's efforts to
address the Year 2000 effect on its internal systems and business operations,
such effect could result in a material disruption of its business or have a
material adverse effect on its business, operating results, financial condition
and its ability to achieve sufficient cash flow to service its indebtedness.
The Company has not developed a contingency plan to respond to any of the
foregoing consequences of internal and external failures to be Year 2000
compliant, but expects the Task Force to develop such a plan.


                                      12
<PAGE>

Recent Account Pronouncements

          In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued.  SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, hedging activities, and exposure
definition.  SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.  The Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000.  Earlier application of
the Statement is permitted.  The Company does not expect it to have a material
impact on its consolidated results of operations or financial position.

          In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SOP") No. 98-1, "Software for Internal
Use," which provides guidance on accounting for the cost of computer software
developed or obtained for internal use.  SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998.  The Company does
not expect that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.

          In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs
of Start-Up Activities," which provides guidance on the financial reporting of
start-up costs and organization costs.  It requires costs of start-up activities
and organization costs to be expensed as incurred.  SOP No. 98-5 is effective
for financial statements for fiscal years beginning after December 15, 1998.
The Company does not expect that the adoption of SOP 98-5 will have a material
impact on its consolidated financial statements.

Factors Affecting Operating Results

  Substantial Leverage; Ability to Service Indebtedness; Restrictive Covenants

          As a result of the issuance of the 1998 Notes, the Company is highly
leveraged. As of September 30, 1999, the Company had total debt of approximately
$284.4 million, accreting to $463.0 million in 2003. The Company believes its
existing cash, cash equivalents and short-term investments at September 30, 1999
will be sufficient to meet its cash requirements at least through the end of
calendar year 2000.*  Thereafter, the Company will require substantial
additional capital to fund operating deficits, the continued development and
enhancement of its VOD system and working capital and other expenditures in
connection with commercial deployment of its system.  See "--Substantial Future
Capital Requirements."  As a result, the Company expects that it will continue
to have substantial indebtedness.* The degree to which the Company is leveraged
could have important consequences to the Company and its investors, including,
but not limited to, the following: (i) the Company's ability to obtain
additional financing in the future for working capital, operating expense in
connection with system deployments, development and enhancement of its VOD
system, capital expenditures, acquisitions and other general corporate purposes
may be materially limited or impaired; (ii) the Company's cash flow, if any,
will not be available for the Company's business


                                      13
<PAGE>

because a substantial portion of the Company's cash flow must be dedicated to
the payment of principal and interest on its indebtedness; (iii) the terms of
future permitted indebtedness may limit the Company's ability to redeem the 1998
Notes in the event of a Change of Control (as defined); and (iv) the Company's
high degree of leverage may make it more vulnerable to economic downturns, may
limit its ability to withstand competitive pressures and may reduce its
flexibility in responding to changing business and economic conditions.

          The ability of the Company to make scheduled debt service payments
(including with respect to the 1998 Notes) will depend upon the Company's
ability to achieve significant and sustained growth in its cash from operations
and to complete necessary additional financings. The Company's ability to
generate sufficient cash from operations is dependent upon, among other things,
the market acceptance of its VOD products and services; the Company's ability to
successfully continue the development and enhancement of its VOD system,
including compatibility with evolving industry standards as they are defined;
the future operating performance of the Company; integration of its digital
products and services with those provided by major cable industry suppliers; the
Company's ability to obtain broad distribution of its products and services to
MSOs and the rate of and success of commercial deployment of its VOD system. The
Company expects that it will continue to generate substantial operating losses
and negative cash flow for at least the next several years.* No assurance can be
given that the Company will be successful in achieving and maintaining a level
of cash from operations sufficient to permit it to pay the principal, premium,
if any, and interest on its indebtedness. If the Company is unable to generate
sufficient cash from operations to service its indebtedness, it may have to
forego or delay development and enhancement of its VOD system and service,
restructure or refinance its indebtedness or seek additional equity capital or
debt financing. There can be no assurance that (i) any such strategy could be
effected on satisfactory terms, if at all, in light of the Company's high
leverage or (ii) any such strategy would yield sufficient proceeds to service
the Company's indebtedness, including the 1998 Notes. Any failure by the Company
to satisfy its obligations with respect to the 1998 Notes or any other
indebtedness could result in a default under the Indenture and could cause a
default under agreements governing other indebtedness of the Company. In the
event of such a default, the holders of such indebtedness would have enforcement
rights, including the right to accelerate such debt and the right to commence an
involuntary bankruptcy proceeding against the Company. Absent a certain level of
successful commercial deployment of its VOD service, ongoing technical
development and enhancement of its VOD system and significant growth of its cash
flow, the Company will not be able to service its indebtedness.

          The indenture governing the 1998 Notes (the "Indenture") imposes
operating and financial restrictions on the Company and its subsidiaries. These
restrictions affect, and in certain cases significantly limit or prohibit, among
other things, the ability of the Company and its subsidiaries to incur
additional indebtedness, create liens upon assets, apply the proceeds from the
disposal of assets, make investments, make dividend payments and other
distributions on capital stock and redeem capital stock. There can be no
assurance that such covenants will not adversely affect the Company's ability to
finance its future operations or to engage in other business activities that may
be in the interest of the Company. However, the limitations in the Indenture are
subject to a number of important qualifications and exceptions. In particular,
while the Indenture restricts the Company's


                                      14
<PAGE>

ability to incur indebtedness by requiring that specified leverage ratios are
met, it permits the Company and its subsidiaries to incur substantial
indebtedness (which may be secured indebtedness), without regard to such ratios,
to finance the acquisition of equipment, inventory or network assets or to
finance or support working capital and operating expenditures for its business.

 Substantial Future Capital Requirements

          The Company will require substantial additional funds for the
continued development of its VOD system and the sale, license and provision of
underlying products and services. As of September 30, 1999, the Company had
approximately $116.5 million in cash, cash equivalents and short-term
investments. From inception until September 30, 1999, the Company had an
accumulated deficit of $266.9 million. The Company has made significant
investments in working capital and capital expenditures in order to fund
development activities, commercially deploy its VOD service, sell its products
and services and fund operations. The Company expects to continue to make
significant investments in working capital in order to continue these activities
under its evolving business model until such time, if at all, as the Company
begins to generate positive cash flows from operations.* The Company expects
that its cash flow from operating and investing activities will be increasingly
negative over at least the next several years.* The Company believes that its
existing cash, cash equivalents and short-term investments at September 30, 1999
will be sufficient to meet its working capital and capital expenditure
requirements at least through the end of calendar year 2000.* Thereafter, the
Company will require substantial additional capital to fund operating deficits,
the continued development and enhancement of its VOD system, working capital and
other operating expenditures that support commercial deployments of its VOD
system. However, the Company may need to raise additional funds earlier if its
estimates of working capital and/or capital expenditure requirements change or
prove to be inaccurate. The Company may also need to raise significant
additional funds in order to respond to unforeseen technological or marketing
hurdles or to take advantage of unanticipated opportunities. Actual capital
requirements may vary from expectations and will depend on numerous future
factors and conditions, many of which are outside of the Company's control,
including, but not limited to (i) the ability of the Company to meet its
platform development and product integration schedules; (ii) the accuracy of the
Company's assumptions regarding the rate and extent of commercial deployment and
market acceptance of its VOD products and services; (iii) the number and timing
of VOD product sales, license and service agreements with cable operators; (iv)
the nature and cable operator acceptance of new products and services to be
offered by the Company; (v) unanticipated costs; and (vi) the need to respond to
competitive pressures and technological changes. The Company has no present
commitments or arrangements assuring it of any future equity or debt financing,
and there can be no assurance that the Company will be able to obtain any such
equity or debt financing on favorable terms or at all. In the event that the
Company is unable to obtain such additional capital, the Company will be
required to delay the expansion of its business or take other actions that could
have a material adverse effect on the Company's business, operating results,
financial condition and its ability to achieve sufficient cash flow to service
its indebtedness.


                                      15
<PAGE>

 Development Stage Company; Limited Revenues; History of Losses

          The Company is a development stage company with limited commercial
operating history, having commercially deployed its VOD service on a limited
basis beginning in September 1997. The Company has incurred substantial net
losses since inception through September 30, 1999 of approximately $266.9
million. The Company expects to continue to incur substantial losses and
experience substantial negative cash flow for at least the next several years as
it continues to develop its VOD service capability and sell and license its
products and services.* The Company's limited operating history makes the
prediction of future operating results difficult or impossible. Through
September 30, 1999, the Company recognized revenues of approximately $443,000.
The Company does not expect to generate any substantial revenues unless and
until its VOD service is deployed at a significant number of additional cable
headend locations.*

          The Company's prospects should be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving
markets. The Company's future success depends in part on its ability to
accomplish a number of objectives, including, but not limited to (i) entering
into agreements for broad distribution of its products and services to MSOs;
(ii) integrating its digital platform and software with other digital
applications and services selected by the cable operator, including integration
of set-top boxes, headend components and electronic program guides; (iii)
modifying its headend equipment and headend equipment provided by cable industry
suppliers and further integration of all such headend equipment and related
systems in order to achieve cost reductions and reduce physical space
requirements for widespread VOD deployment in a large number of headends; (iv)
completing further technical development of the Video Server, DDL and other VOD
system components in order to reduce their cost of manufacture; (v) modifying
the Video Server, other system components and service software to enable
enhanced functionality, such as music videos and time-shifting; (vi) continued
scaling of its VOD system solution for use with larger numbers of customers and
an increased number of movie titles; and (vii) implementing existing contracted
VOD deployments with acceptable system performance and consumer acceptance.

  Uncertainty of Future Revenues; Fluctuating Operating Results

          As a result of the Company's limited operating history, the emerging
nature of the market in which it competes, and the unproven nature of both its
initial and new business models, the Company is unable to accurately forecast
its revenues.  The timing and amount of future revenues will depend in large
part upon the business model employed with each MSO and the date of installation
and deployment of VOD products and services purchased by the MSO for each
headend. New sales, service and licensing agreements are expected to be secured
on an irregular basis, if at all, and there may be prolonged periods of time
during which the Company does not enter into new agreements or expanded
arrangements.  Once an agreement for the sale of VOD products and services is
entered into, revenue from the sale of Video Servers and DDL equipment will be
recognized upon installation of this equipment in each cable headend;  receipt
of revenue from the DSM license will vary depending on the payment option chosen
by the MSO; and revenue from the


                                      16
<PAGE>

provision of content, engineering and other operations services will be
recognized on an "as provided" basis. Further, the Company's quarterly operating
results may fluctuate significantly in the future as a result of a variety of
factors, either alone or in combination. Many of these factors are outside
DIVA's control. Factors that may affect DIVA's quarterly operating results
relating to provision of its VOD products and services include (i) the Company's
success in obtaining agreements with MSOs to purchase the Company's products and
services for deployment in large numbers of cable system headends (See "--
Dependence on Cable Operator Participation; Consolidation in Cable System
Ownership; Unproven Business Models."); (ii) the mix and timing of revenues
under the Company's various business models; (iii) the timing and completion of
MSO upgrades of their distribution infrastructures (See "--Dependence on
Advanced Cable Distribution Networks and Deployment of Digital Set-Top Boxes.");
(iv) the effectiveness of MSO marketing of VOD services and related operations;
(v) demand for and consumer acceptance of digital tier services that include VOD
as either a core or value added service; (vi) the evolution of alternative forms
of in-home entertainment systems; and (vii) the market for home video
entertainment services. Factors that may affect DIVA's quarterly operating
results generally include (i) the amount and timing of operating expenses
devoted to compliance with cable industry standards and technical integration of
the Company's VOD products with products and services provided by third party
cable industry suppliers (See "--Compliance with Industry Standards; Need to
Integrate with Third Party Products."); (ii) the amount and timing of operating
expenses devoted to research and development to modify DIVA's products to keep
pace with technological developments (See "--Risk of Technological Change and
New Product Development."); (iii) the introduction of new products and services
by the Company or its competitors and price competition among VOD product and
service providers (See "--Competition Among VOD Suppliers."); and (iv) general
economic conditions and economic conditions specific to the cable industry. A
significant portion of DIVA's expenses are operating costs that are relatively
fixed and necessary to develop the Company's business and independent of revenue
generated by sales of products and services to MSOs. If revenue falls below
expectations in any quarter, the adverse impact of the revenue shortfall on
operating results in that quarter may be magnified by the Company's inability to
adjust fixed spending to compensate for the shortfall. To the extent that such
increased expenses are not subsequently followed by increased revenues, the
Company's business, operating results, financial condition and its ability to
generate sufficient cash flow to service its indebtedness.

          Any one of these factors, most of which are outside of the Company's
control, could cause the Company's operating results to fluctuate significantly
in the future. In response to a changing competitive environment, the Company
may choose or may be required from time to time to make certain pricing, service
or marketing decisions or enter into strategic alliances or investments or be
required to develop upgrades or enhancements to its system that could have a
material adverse effect on the Company's business, operating results, financial
condition and its ability to generate sufficient cash flow to service its
indebtedness. The Company believes that its quarterly revenues, expenses and
operating results will vary significantly in the future and that period-to-
period comparisons are not meaningful and are not indicative of future
performance.* As a result of the foregoing factors, it is likely that in some
future quarters or years the Company's operating results will fall below the
expectations of securities analysts or investors, which would have a material
adverse effect on the trading price of the 1998 Notes.*


                                      17
<PAGE>

  Dependence on Cable Operator Participation; Consolidation in Cable System
  Ownership;  Unproven and Evolving Business Models

          DIVA's future success depends in large part on its ability to sell its
products and services and deploy its VOD system in a broad base of cable system
headends, on terms and conditions that will generate a profit.  Broad MSO
deployments will in turn depend upon, among other things, DIVA's success in
demonstrating to MSOs that (i) DIVA's technical solution is reliable and
scalable; (ii) VOD is a compelling consumer product and MSO customers will
purchase VOD content at prices and in quantities that will justify the MSO's
investment in DIVA's VOD system, products and services rather than alternative
entertainment services such as PPV and NVOD; (iii) the Company's VOD system
performs and has features that are as compelling, and at competitive prices, as
other VOD products offered or in development by competitors; (iv) DIVA's VOD
system will be integrated with third party products and services provided by
other cable industry suppliers chosen by the MSO; (v) DIVA will evolve its VOD
products to be compatible with OpenCable and other cable industry standards as
they are finalized; (vi) the Company will continue research and development
efforts to assure that its VOD platform will enable new value-added services and
functions; and (vii) DIVA's VOD products will have open interfaces to ensure
compatibility with commercially available hardware and software.

          To date, the Company has entered into multiple cable headend contracts
with Lenfest Communications, Inc. ("Lenfest"), Chambers Communications Corp.
("Chambers"), Insight Communications Co., L.P. ("Insight"), MediaOne of
Colorado, Inc. ("MediaOne"), and NTL Group Limited ("NTL"), and contingent
single headend contracts, subject to significant conditions, with Adelphia
Communications Corporation ("Adelphia"), Cablevision Systems Corporation
("Cablevision"), and R & A Management LLC ("Rifkin"). The Company is in
discussions with various other cable operators regarding sale of DIVA products
and services in order to deploy VOD in specific systems. There can be no
assurance that the Company will be able to add new cable system headends to the
existing contracts with these MSOs, to remove the contingencies and complete or
expand deployment sites under the three existing contingent MSO contracts, or to
enter into definitive agreements with any other cable operators. If cable
operators are not persuaded to purchase DIVA's products or services to deploy
VOD broadly in their cable systems, there can be no assurance that the Company
can modify its VOD system and successfully market it to alternative video
providers, and such modifications would require additional time and capital if
pursued.

          Initially, the Company directed its marketing efforts to medium sized
cable operators which had not pursued and would not likely undertake the
development of their own VOD solutions. While the Company has contracts with two
large U.S. MSOs (Cablevision and MediaOne) and one large European MSO (NTL), the
current consolidation of cable properties in the U.S. and in Europe is resulting
in the absorption of medium sized cable operators into the large MSOs. There can
be no assurance that such large MSOs will be willing to purchase VOD products
and services from the Company or be willing to do so on terms and conditions
which are economically justifiable to the Company. Further, there can be no
assurance that any new large MSO will select DIVA or any other single VOD
product or service provider for deployments in all of its upgraded cable
systems, and


                                      18
<PAGE>

instead it is highly likely that large MSOs will choose to purchase
VOD products and services from a variety of competing providers.

          In light of the consolidation of cable system ownership, and in
response to reaction of larger MSOs to DIVA's original business model, the
Company has changed its business proposition to offer the MSO more choices and
more control of the VOD service.  The Company's initial business model was
significantly different from those commonly employed in the cable television
industry.  Under the Company's original business model, DIVA owned, installed
and funded all headend hardware and software components of its VOD system,
acquired, assembled, managed and delivered the VOD service offering to cable
subscribers, and intended to generate earnings through long-term deployment
agreements with MSOs based on a share of "per view" and other content prices set
by the Company. It is likely under this initial standard VOD service model that
MSOs found it difficult to determine the net effect on revenue of either adding
the Company's service to their product mix, or replacing elements of their
service offerings with the Company's VOD service. Further, larger MSOs expressed
reluctance to have DIVA or any other third party own and operate a VOD system
interfaced to their cable distribution networks. As a result, the Company has
recast its business model so that the Company sells its Video Server and DDL to
MSOs, licenses the DSM software to MSOs, and provides a suite of content
acquisition and management services, engineering services, and business and
operations support services at the election of the MSO. The new business model
anticipates that VOD service enabled by DIVA's system will be a part of the
entry level digital tier of services provided by the MSO.  Under this revised
business model, the cable operator purchases, owns and maintains the VOD system
hardware and takes the capital and operating expense risk associated with such
ownership.  The MSO can then select the other DIVA VOD support services it wants
to employ, thereby having an alternative to the original turnkey approach.  The
MSO can choose the entire package of content and management services provided by
DIVA for a share of "per view" revenue, or some or all of these services on a
contract fee for service basis.

          DIVA's first five existing MSO contracts are under the initial
business model. The recent contracts with Insight, MediaOne and NTL represent
varying combinations of the elements of the new business model. To date, DIVA's
VOD system solution has not been rolled out to a large number of digital
customers in any MSO deployment. See "--Limited Commercial Deployments to Date;
Scalability Not Proven." Consequently, until the economics under either of
DIVA's business models are proven, cable operators may be reluctant to broadly
deploy the Company's VOD products and services in their systems or may be
unwilling to purchase its VOD offerings at all. There can be no assurance that
the Company will be able to expand the scope of deployments using its initial
business model, convert existing turnkey VOD contracts to the new suite of
offerings, or broadly deploy under its new business model, or that cable
operators will be willing to purchase the Company's VOD products and services on
these or any other terms. VOD is a new market, and the Company's VOD system
solution is only one possible means available to cable operators for providing
movies in the home. The inability of the Company to enter into definitive
agreements with cable operators for the DIVA VOD solution, or the lack of
acceptance of VOD as a consumer product by cable operators and their
subscribers, would have a material adverse effect on the Company's business,
operating results, financial condition and its ability to generate sufficient
cash flow to service its indebtedness.


                                      19
<PAGE>

 Limited Commercial Deployments to Date; Scalability Not Proven

          The Company has commercially deployed its VOD service in a single
headend location in cable systems owned by Lenfest, Adelphia, Cablevision, and
Rifkin, and in two headend locations in cable systems owned by each of Chambers
and Insight. The Company's agreements with Adelphia, Cablevision and Rifkin are
conditioned upon completion of an initial deployment phase designed to enable
the cable operator to verify the business viability of DIVA's initial business
model, the turnkey VOD system. DIVA is in the initial deployment phase with all
three such MSOs. If the Company's VOD service does not demonstrate business
viability or if the cable operator otherwise determines that such service does
not meet its business or operational expectations, none of Adelphia, Cablevision
nor Rifkin is obligated to deploy the Company's VOD service. There can be no
assurance that the Company will successfully complete these initial commercial
deployment phases or that its VOD system and service will be deployed beyond the
initial phases in any such cable operator's systems.

          The existing commercial deployments with Lenfest, Chambers and
Insight, while not conditioned upon completion of an initial commercial phase,
are not yet rolled out to the full extent of available upgraded cable plant and
currently serve a limited number of customers. Until the Company's VOD products
are deployed on a large scale in one cable system, the scalability of the
Company's VOD system will remain unproven. Further, there can be no assurance
that unforeseen problems will not develop as the Company evolves its technology,
products and services, or that the Company will be successful in the continued
development, cost reduction, integration and commercial implementation of its
technology, products and services on a wide scale.

 Competition for VOD Services

          The market for in-home video entertainment services is intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition in the market for VOD services to intensify and
increase in the future.* A number of companies have announced an intention to
introduce a VOD service or deliver VOD components that might be deployed by a
video service provider. Intertainer, a company owned in part by Comcast Cable
Communications ("Comcast"), Intel Corporation ("Intel"), Sony Corp. of America
and NBC, is currently conducting trials with Comcast and US West to provide VOD
and other services over high speed networks such as ADSL (Asymmetric Digital
Subscriber Line) and cable modems primarily to the personal computer, but plans
to provide services to television sets in the future. It is possible that
companies currently operating overseas will adapt their technology and offer it
through high-speed networks in the United States. Elmsdale Media is currently
conducting a trial for its VOD system in Cardiff, Wales for NTL. VideoNet is
conducting a trial in Britain over telephone wires offering VOD and other
interactive services to non-paying customers. Hongkong Telecom began offering
commercial interactive services, including VOD, in March 1998. Other companies
internationally and domestically have also announced plans to provide VOD
services which vary in degree of commercial viability. There can be no assurance
that these or other companies will not provide


                                      20
<PAGE>

equivalent or more attractive capabilities that could be more acceptable to
cable operators and their subscribers.

          It is also possible that competitors may form alliances, develop a
competitive VOD service and rapidly acquire significant market share. Such
competition would materially and adversely affect the Company's business,
operating results and financial condition. Companies that are or may be capable
of delivering VOD components include Concurrent Computer Corp, Celerity Systems
Inc., Mitsubishi Electronics America, Nippon Electric Corp., nCUBE, Pioneer and
its affiliates, SeaChange International, Inc., Silicon Graphics Inc., Unisys,
General Instrument, Scientific-Atlanta, Sony Corporation, Vivid Technology Inc.
and FreeLinQ Communications Corporation. Some of these competitors have
developed VOD products that have undergone tests or trials and may succeed in
obtaining market acceptance of their products more rapidly than the Company. In
addition, Time Warner Inc. previously field tested an integrated system solution
utilizing components from a number of the aforementioned entities. This trial
has since been terminated. Notwithstanding termination of its field trial in
Orlando, Time Warner Inc. has reached agreements with certain industry suppliers
for elements that might be used in designing and integrating a next generation
VOD system solution for an initial deployment in 2000. Cablevision has operated
limited trials of in-house VOD solutions. Certain of the Company's competitors
or potential competitors have developed affiliations with cable operators or
alternative distribution providers to develop services or technologies that may
be better or more cost effective than the Company's VOD service. These services
or technologies may be more attractive to cable operators, particularly those
that desire to own all hardware and software components of the VOD service. In
addition, certain of these potential competitors are either directly or
indirectly affiliated with content providers and cable operators and could
therefore materially impact the Company's ability to sign long-term service
contracts with such cable operators and obtain content from such providers.
Although the Company is pursuing joint development efforts to port its VOD
service to digital platforms that are or will be broadly deployed in the cable
industry, these third party equipment manufacturers have the financial and
technical ability to develop and sustain deployment of their own proprietary VOD
platforms. There can be no assurance that the Company will not face competition
from these suppliers or their affiliates or that they will support the
integration of Company's VOD service with their own components. See "--
Compliance with Industry Standards; Need to Integrate with Set-Top Box
Manufacturers."

          The Company may also face competition from cable operators or other
organizations, including but not limited to the telephone companies, providers
of DBS, PPV and NVOD, cable programmers and Internet service providers, who
could provide VOD-like services through cable and alternative delivery
platforms, including the Internet, telephone lines and satellite and other
wireless services. Recent announcements of combinations of DBS services DirecTV
and the Dish Network with digital recording devices from Replay Networks and
TiVo may represent stronger competition through the ability to store and replay
broadcast programming with pause, play, fast-forward and reverse capability. For
example, the Company could encounter competition from companies such as
Microsoft/WebTV Plus, Excite@Home or video streaming companies that in the
future may be able to deliver movies over the Internet to the television, or
from consumer use of purchased or rented digital video discs or variants
thereof. In addition, the competitive environment in which the


                                      21
<PAGE>

Company will operate may inhibit its ability to offer its VOD service to cable
operators and other types of operators that compete with one another in the same
territory. A cable operator may require the Company to provide its VOD service
exclusively to such cable operator in a particular territory. Further, cable
operators themselves may offer competing services, including increased NVOD
offerings, or may be unwilling to use the Company's VOD service and/or products
exclusively. There can be no assurance that any cable operator will commit
exclusively to the Company's VOD service and/or products. In particular, cable
operators may trial a number of different alternatives. The Company will also
face competition for viewers from providers of home video rentals, which are
increasingly entering into revenue sharing arrangements with content providers.
These arrangements have resulted in a significant increase in the number of
copies available for rental and an extension in the rental period at major video
chains and, accordingly, have made home video rentals more attractive to
consumers.

          Many of the Company's competitors and potential competitors have
longer operating histories, greater name recognition, and significantly greater
financial, technical, marketing and distribution resources than the Company. As
a result, they may be able to respond to new or emerging technologies and
changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products and services more effectively
than the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results, financial condition and its ability to achieve
sufficient cash flow to service its indebtedness.

 Risks Associated with Anticipated Growth

          The Company believes the opportunities presented by MSO reaction to
its new business model may require it to meet multiple aggressive engineering,
integration, product delivery and installation targets.* The growth in size and
scale of the Company's business has placed and is expected to continue to place
significant demands on its management, operating, development, third party
manufacturing and financial resources. The Company's ability to manage growth
effectively will require continued implementation of and improvements to its
operating, manufacturing, development and financial systems and will require the
Company to expand and continue to train and manage its employee base. These
demands likely will require the addition of new management personnel and the
development of additional expertise by existing management personnel. Although
the Company believes that it has made adequate allowances for the costs and
risks associated with future growth, there can be no assurance that the
Company's systems, procedures or controls or financial resources will be
adequate to support the Company's operations or that management will be able to
keep pace with such growth. If the Company is unable to manage its growth
effectively, the Company's business, operating results, financial condition and
ability to generate sufficient cash flow to service its indebtedness will be
materially adversely affected.


                                      22
<PAGE>

  Dependence on Advanced Cable Distribution Networks and Deployment of Digital
  Set-Top Boxes

          The Company's VOD service requires deployment on cable systems
upgraded to HFC architecture with the return path from the customer to the
headend activated to enable two-way operation. According to the Cablevision Blue
Book, approximately 45% of the total U.S. homes passed by cable had been
upgraded to HFC architecture with return path capability at the end of 1998, but
only a limited portion of the upgraded plant is currently activated for two-way
transmission. A number of cable operators have announced and begun to implement
major infrastructure investments to deploy two-way capable HFC systems which
require significant financial, managerial, operating and other resources. HFC
upgrades have been, and likely will continue to be, subject to delay or
cancellation. In addition, the Company believes that the widespread deployment
of VOD services will not occur until MSOs decide to deploy digital services
through this upgraded plant and invest in new digital set-top boxes.* Although
set-top box manufacturers have announced major orders of digital set-top boxes
by MSOs, the availability of commercial quantities of field tested digital set-
top boxes with cable return path capability cannot be predicted or assured.
There can be no assurance that MSOs deploying digital set-top boxes or any other
cable operators will continue to upgrade their cable plant or that sufficient,
suitable cable plant will be available in the future that is capable of
supporting deployment of the Company's VOD products and services. The failure of
cable operators to complete planned upgrades in a timely and satisfactory
manner, or at all, and the lack of suitable cable plant would have a material
adverse effect on the Company's business, operating results, financial condition
and its ability to generate sufficient cash flow to service its indebtedness. In
addition, the reliable performance of the VOD products and services provided by
the Company is highly dependent on cable operators maintaining their cable
infrastructure and headends in accordance with system specifications provided by
the Company. Therefore, the future success and growth of the Company's business
will be subject to economic and other factors affecting the ability of cable
operators to finance substantial capital expenditures to maintain and upgrade
the cable infrastructure to enable VOD system deployment.

 Risk of Technological Change and New Product Development

          Rapid technological developments are expected to occur in the home
video entertainment industry. As a result, the Company has modified and expects
to continue to modify its research and development plan.* Such modifications,
including those related to the set-top box integration, have resulted in delays
and increased costs. Furthermore, the Company expects that it will be required
to continue to enhance its current VOD products and services and develop and
introduce increased functionality and performance to keep pace with
technological developments and consumer preferences.* In particular, the Company
must accomplish a number of objectives, including, but not limited to (i)
modification of its headend equipment and of headend equipment provided by cable
industry suppliers and further integration of all such headend equipment and
related systems in order to achieve cost reductions and reduce physical space
requirements for widespread VOD deployment in a large number of headends; (ii)
integrating its digital platform and software with other digital applications
and services selected by the cable operator, including integration of set-top
box, headend components and electronic program guides; (iii) further technical
development of and


                                      23
<PAGE>

reduction of the cost of manufacturing the DIVA Video Server and other system
components and modification of the service software for future advances; (iv)
continued scaling of the VOD system for use with larger numbers of customers and
an increased number of movie titles; and (v) enhancing its system to enable
additional services, including music videos and time-shifting.* There can be no
assurance that the Company will, on a satisfactory timetable, be able to
accomplish any of these tasks or do so while maintaining the same functionality.
There can be no assurance that the Company will be successful in developing and
marketing product and service enhancements or new services that respond to
technological and market changes or that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of such new services or enhancements. Failure to
successfully develop these projects could have a material adverse effect on the
Company's business, operating results, financial condition and its ability to
generate sufficient cash flow to service its indebtedness. The Company has
encountered delays in product development, service integration and field tests
and other difficulties affecting both software and hardware components of its
system and its ability to operate successfully over HFC plant. In addition, many
of the Company's competitors have substantially greater resources than the
Company to devote to further technological and new product development. See "--
Competition for VOD Services." There can be no assurance that technological and
market changes or other significant developments in VOD technology by the
Company's competitors will not render its VOD products and services obsolete.

 Compliance with Industry Standards; Need to Integrate with Third-Party Products

          The cable industry has launched an initiative called OpenCable which
will redefine the requirements and features of digital set-top converters as
well as the requirements and features of their control systems located in the
boxes themselves and in cable headends. The OpenCable initiative is managed by
CableLabs on behalf of the cable MSOs and is supported by some of the cable
equipment manufacturers, including General Instrument and Scientific-Atlanta.
The OpenCable initiative is defining future digital platform requirements as
they relate to set-top box requirements and control systems, which could affect
DIVA's digital platform and its efforts to integrate its digital platform and
VOD application with digital set-top and headend equipment manufactured by third
party cable industry suppliers. There can be no assurance that the Company will
be successful in complying with the requirements of the OpenCable initiative as
they are finally adopted, or that compliance will not cause difficulties that
could delay or prevent successful development, introduction or broad deployment
of its VOD products and services.

          Although the Company developed a set-top box that was able to meet MSO
requirements for a single box that both enables VOD and processes broadcast
analog and digital cable signals, the Company determined that it needs to port
its VOD solution to other digital platforms that are or will be broadly deployed
in the cable industry, including those that may be offered by General
Instrument, Scientific-Atlanta, Pace and other companies. The Company and
General Instrument have demonstrated the successful port of the Company's VOD
application to General Instrument's DNS, the initial implementation of this
integration was tested on a limited, non-commercial basis with Lenfest, and a
commercial version has been launched in systems owned by Chambers and Insight.
The Company and General Instrument are continuing joint development efforts to
more


                                      24
<PAGE>

closely integrate the VOD products with DNS, including achieving cost
reductions, reducing physical space requirements of headend equipment and
enabling industry accepted VOD encryption capability. There can be no assurance
that the Company will be successful in accomplishing continued General
Instrument integration on a cost-effective basis or at all.

          The Company is party to a developer agreement with Scientific-Atlanta
which should enable the Company to access the necessary information and material
to effectively port its VOD system products to the Scientific-Atlanta platform.
However, there can be no assurance that the Company and Scientific-Atlanta will
be able to achieve compatibility between their respective systems. The Company's
ability to enter into relationships with MSOs that require a single box solution
and choose to deploy Scientific-Atlanta's Digital Broadband Delivery System
could therefore be significantly impaired.

          Although the Company has developed an on-screen interactive guide or
navigator that is closely integrated with its VOD service, MSO customers and
their subscribers are likely to expect a seamless link between the navigator and
third party electronic programming guides ("EPGs") that provide information
regarding programming schedules. The ability to create cross access points
between the navigator and various EPGs may be limited by the engineering and
memory characteristics of the digital platforms and EPG applications provided by
major cable industry suppliers. Further, positioning the navigator as the first
or one of the first screens viewed by a subscriber, which would create enhanced
revenue and promotional opportunities, may be limited by these third-party
platform characteristics or by existing or future agreements between EPG
providers and MSOs.

 Reliance on Third-Party Manufacturers; Exposure To Component Shortages

          The Company depends and will continue to depend on third parties to
manufacture the major elements of its VOD system. The Company subcontracts
manufacturing of its proprietary components of its Video Server and the DDL to
third-party manufacturers. All of such subcontractors are bound by
confidentiality agreements. As a result of the complexity of the Company's
hardware components, manufacturing and quality control are time consuming
processes. Consequently, there can be no assurance that these manufacturers will
be able to meet the Company's requirements in a timely and satisfactory manner
or the Company would be able to find or maintain a suitable relationship with
alternate qualified manufacturers for any such elements. The Company's reliance
on third-party manufacturers involves a number of additional risks, including
the absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance, production yields and costs. In the event the Company is
unable to obtain such manufacturing on commercially reasonable terms, its
business, operating results, financial condition and its ability to achieve
sufficient cash flow to service its indebtedness would be materially adversely
affected.

          Certain of the Company's subassemblies and components used in the
Video Server and the DDL are procured from single sources and others are
procured only from a limited number of sources. Consequently, the Company may be
adversely affected by worldwide shortages of certain components, significant
price increases, reduced control over delivery schedules, and manufacturing


                                      25
<PAGE>

capability, quality and cost. Although the Company believes alternative
suppliers of products, services, subassemblies and components are available, the
lack of alternative sources could materially impair the Company's ability to
deploy its VOD system. Manufacturing lead times can be as long as nine months
for certain critical components. Therefore, the Company may require significant
working capital to pay for such components well in advance of revenues.
Moreover, a prolonged inability to obtain certain components could have a
material adverse effect on the Company's business, operating results, financial
condition and its ability to achieve sufficient cash flow to service its
indebtedness and could result in damage to MSO or customer relationships.

 Uncertainty of Protection of Patents and Proprietary Rights

          The Company's future success depends, in part, on its ability to
protect its intellectual property and maintain the proprietary nature of its
technology through a combination of patents, licenses and other intellectual
property arrangements. The Company has licensed rights to the DIVA Video Server
and the DIVA set-top decoder initially developed by Sarnoff. Sarnoff and the
Company have been awarded patents and have filed applications and intend to file
additional applications for patents covering the DIVA Video Server. Sarnoff and
the Company have filed applications for patents covering the set-top decoder,
and the Company has filed patent applications, and intends to file additional
and derivative patent applications covering the interactive service and its
technology. There can be no assurance, however, that any patents issued to
Sarnoff or the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide proprietary protection to the
Company. Despite the efforts of Sarnoff and the Company to safeguard and
maintain these proprietary rights, there can be no assurance that the Company
will be successful in doing so or that the Company's competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to the Company's technologies. From time to time, the Company has
received notices from third parties claiming infringement of certain
intellectual property rights. Although the Company does not believe it infringes
any third party's intellectual property rights, DIVA could encounter similar
claims in the future.*

          Since patent applications in the U.S. are not publicly disclosed until
the patent has been issued, applications may have been filed that, if issued as
patents, would relate to the Company's products. In addition, the Company has
not conducted a comprehensive patent search relating to the technology used in
the DIVA Video Server or the Company's VOD system. The Company is subject to the
risk of claims and litigation alleging infringement of the intellectual property
rights of others. There can be no assurance that third parties will not assert
infringement claims against the Company in the future based on patents or trade
secrets or that such claims will not be successful. Parties making such claims
may be able to obtain injunctive or other equitable relief which could
effectively block the Company's ability to provide its VOD service in the U.S.
and internationally, and could result in an award of substantial damages. In the
event of a successful claim of infringement, the Company, its MSOs and other end
users may be required to obtain one or more licenses from third parties. There
can be no assurance that the Company or its customers could obtain necessary
licenses from third parties at a reasonable cost or at all. The defense of any
lawsuit could result in time consuming and expensive litigation regardless of
the merits of such claims, and damages, license fees, royalty payments and
restrictions on the Company's ability to provide its


                                      26
<PAGE>

VOD products or services, any of which could have a material adverse effect on
the Company's business, operating results, financial condition and its ability
to generate sufficient cash flow to service its indebtedness.

 Risks Associated with Programming Content

          In those MSO deployments where DIVA provides programming content, the
Company's success will depend, in part, on its ability to obtain access to
sufficient movies (including new releases and library titles), special interest
videos and other programming content on commercially acceptable terms. Although
the Company has entered into arrangements with most of the major movie studios
and a number of other content providers for its initial deployments, there can
be no assurance that the Company will be able to continue to obtain the content,
during the segment of time available to VOD providers and others such as PPV, to
support its VOD service beyond the geographic area of its initial deployments.
Studios may require the Company to make prepayments prior to the time that
customers pay for viewing a title or require the Company to enter into long-term
contracts with minimum payments. Further, studios may increase the license fees
currently charged to the Company.  The Company's failure to obtain timely access
to such content on commercially acceptable terms could have a material adverse
effect on its business, operating results, financial condition and its ability
to generate sufficient cash flow to service its indebtedness.

 Dependence on Key Personnel

          The Company's performance is substantially dependent on the
performance of its officers and key employees. Given the Company's early stage
of development, the Company is dependent on its ability to retain and motivate
qualified personnel, especially its management. The Company does not have "key
person" life insurance policies on any of its employees. There can be no
assurance that key personnel will continue to be employed by the Company or that
the Company will be able to attract and retain qualified personnel in the
future. The Company's future success also depends on its ability to identify,
hire, train and retain technical, sales, marketing and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to attract, assimilate or retain such personnel in the
future. The inability to attract and retain its officers and key employees and
the necessary technical, sales, marketing and managerial personnel could have a
material adverse effect upon the Company's business, operating results,
financial condition and its ability to achieve sufficient cash flow to service
its indebtedness.

 Government Regulation

          The Federal Communications Commission ("FCC") has broad jurisdiction
over the telecommunications and cable industries. The majority of FCC
regulations, while not directly affecting the Company, do affect cable
companies, the primary potential purchasers of DIVA's VOD products and services.
As such, the indirect effect of these regulations may adversely affect the
Company's business. The Communications Act of 1934, as significantly amended by
Congress in 1992 and more recently by the Telecommunications Act of 1996 (as so
amended, the "Act"), provides a significant regulatory framework for the
operation of cable systems. Rules promulgated


                                      27
<PAGE>

by the FCC under the Act impose restrictions and obligations that could affect
how the cable operator offers or prices the VOD service enabled by the Company's
products and services. None of these impose direct rate or service restrictions
on the Company.

          In addition, certain FCC rules, and FCC rulemakings in process or
required in the future under the Act could directly affect the joint efforts of
the Company and third-party equipment manufacturers such as General Instrument
to port the Company's VOD solution to digital platforms that are broadly
deployed in the cable industry. FCC rules to date have focused on analog
equipment, rather than digital equipment such as the Company's. However, it is
anticipated that as digital equipment, transmission and services are deployed by
cable operators, the FCC will extend analog rules to digital transmission, or
craft rules specific to digital platforms. An example being discussed is digital
"must carry" which would require cable operators to transmit on their systems
not only the analog channels of local broadcast television stations in all
markets, but the newly authorized digital broadcast channels as well. Digital
"must carry" for local over-the-air broadcast licensees could consume a
significant amount of the increased channel capacity being created by cable
operators through their upgrades. There can be no assurance that any MSO will
elect to launch VOD using the Company's or any competitor's VOD products and
services as opposed to other, less expensive analog and digital services using
the transmission capacity that remains after implementation of digital "must
carry" in any local market.

          Local franchising authorities retain certain statutory and general
regulatory authority with respect to cable operators including the ability to
regulate or exclude content that they deem inappropriate under local community
standards. In MSO deployments where DIVA provides programming content, the MSO
has the option of including adult offerings in its VOD service. Because local
community standards will vary, the local cable operator may decide to either
restrict the scope or entirely exclude adult content. The Company's VOD system
also enables individual subscribers to exclude entirely or restrict access to
such content. To the extent that DIVA shares in "per view" revenues in any MSO
system that restricts or excludes adult content, the Company's operating results
could be impacted by the decisions of local regulatory authorities and cable
operators regarding such content.

          Finally, the Act authorizes, but does not require, local franchising
authorities to impose a fee of up to 5% on the gross revenues derived by third
parties from the provision of cable service over a cable system. To the extent
that the Company assembles and provides a VOD service directly to cable
subscribers (rather than providing it to cable operators for resale to cable
subscribers) and the local franchise agreement has been amended or renewed and
includes appropriate language, the Company could be required to pay a franchise
fee of up to 5% of gross revenues derived from its VOD service in a specific
franchise area to the local franchising authority.

          There are other rulemakings that have been and still are being
undertaken by the FCC which will interpret and implement provisions of the Act.
It is anticipated that the Act will stimulate increased competition generally in
the telecommunications and cable industries, which may adversely impact the
Company. No assurance can be given that changes in current or future laws or
regulations, including those limiting or abrogating exclusive MSO contracts, in
whole or in part, adopted by the


                                      28
<PAGE>

FCC or other federal, state or local regulatory authorities would not have a
material adverse effect on the Company's business.

          In addition, VOD services in Canada are licensed by the Canadian Radio
and Telecommunications Commission, and VOD services are licensed in a variety of
ways if provided in the United Kingdom and other EU member countries in which
DIVA is marketing its VOD products and services. The Company is seeking to
determine the basis on which it may offer its VOD products and services in
Canada, the UK and EU, the extent of regulatory controls and the terms of any
revenue arrangements that may be required as conditions to the deployment of its
VOD service in such countries. The Company may not be able to obtain
distribution rights to movie titles in non-U.S. jurisdictions under regulatory
and financial arrangements acceptable to the Company.

 Control by Insiders

          The Company's executive officers and directors, together with entities
affiliated with such individuals, and Acorn Ventures, Inc. beneficially own
approximately 47.4% of the Common Stock (assuming conversion of all outstanding
Preferred Stock into Common Stock). Accordingly, these stockholders have
significant influence over the affairs of the Company. This concentration of
ownership could have the effect of delaying or preventing a change in control of
the Company.

 Forward-Looking Statements

          The statements contained in the "Factors Affecting Operating Results"
section that are not historical facts are "forward-looking statements," which
can be identified by the use of forward-looking terminology such as "estimates,"
"projects," "anticipates," "expects," "intends," "believes," or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. These forward-looking
statements, including statements regarding market opportunity, deployment plans,
market acceptance, the Company's business models, capital requirements,
anticipated net losses and negative cash flow, revenue growth, anticipated
operating expenditures and product development plans are only estimates or
predictions and cannot be relied upon. No assurance can be given that future
results will be achieved; actual events or results may differ materially as a
result of risks facing the Company or actual results differing from the
assumptions underlying such statements. Such risks and assumptions include, but
are not limited to, those discussed in this "Factors Affecting Operating
Results" section, which could cause actual results to vary materially from the
future results indicated, expressed or implied in such forward-looking
statements. The Company disclaims any obligation to update information contained
in any forward-looking statement.


                                      29
<PAGE>

                           PART II  OTHER INFORMATION


     Item 1, Item 3 and Item 5 are not applicable with respect to the current
     reporting period.

     Item 2.  Changes in Securities and Use of Proceeds

     During the three months ended September 30, 1999, the Company issued and
     sold an aggregate of 72,394 shares of Common Stock to employees and
     consultants for an aggregate purchase price of $74,952 pursuant to
     exercises of options under its 1995 Stock Plan.  These issuances were
     deemed exempt from registration under the Securities Act of 1933, as
     amended, in reliance upon Rule 701 promulgated thereunder.

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

     On September 29, 1999, the Companys stockholders approved by written
     consent an amendment to the Company's 1995 stock plan increasing the number
     of Common Stock reserved for issuance therunder by 1,000,0000 shares to a
     total of 9,200,000 shares.

     Item 6.  Exhibits and Reports on Form 8-K:

              a.  Exhibits.

                  27.1   Financial Data Schedule

              b.  Reports on Form 8-K.

                  No reports on Form 8-K were filed with the Securities and
                  Exchange Commission during the quarter ended September 30,
                  1999.


                                      30
<PAGE>

                                   SIGNATURES

          Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                              DIVA SYSTEMS CORPORATION



                              By: /s/ WILLIAM M. SCHARNINGHAUSEN
                                  --------------------------------
                                  William M. Scharninghausen
                                  Vice President, Finance and Administration,
                                    and Chief Financial Officer



Dated: November 12, 1999
       -----------------


                                      31