10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(MARK ONE)

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

For the fiscal year ended December 31, 2004

OR

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

FOR THE TRANSITION PERIOD FROM ___________ TO _____________

Commission file number 0-28472

DIGITAL VIDEO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

 

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

430 Cambridge Avenue, Suite 110
Palo Alto, California    94306
(Address of Principal Executive Offices including Zip Code)

(650) 322-8108
(Registrant's Telephone Number, Including Area Code)

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

DIGITAL VIDEO SYSTEMS, INC.

ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2004
INDEX

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

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

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

PART I

Item 1. Business

Overview

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

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

Company Background

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

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

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

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

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

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

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

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

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

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

DVD Technology Overview

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

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

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

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

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

Market Overview

Home DVD Player Market

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

Worldwide DVD Products Market by Year Unit Shipments (000)
	1998	1999	2000	2001	2002	2003	2004
DVD-Players	3,000	6,000	16,000	40,504	58,150	69,160	85,850
DVD-ROM	5,500	15,000	31,100	35,780	54,600	68,500	82,600
Total	8,500	21,000	47,100	76,284	112,750	137,660	168,450
Sources: Data for 1998 and 1999 : Consumer Electronics Manufacturers Association (Published in the year 2000); data for 2000, 2001 and 2002 and forecast for 2003 and 2004 DVD-ROM: Techno Systems Research / Japan (Published in October 2002); and forecast for DVD-Players for 2003 and 2004: IDC (published in September 2003)

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

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

Automotive Market

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

Estimated Automotive DVD
Unit Shipments (000) 2003-2010

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

Source: IMS Research; May 2004.

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

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

• Higher gross margins - Margins are often double digit, and can be as high as 20%-30%.
• Substantial barriers to entry -  These include:
• Quality Standards - Few vendors qualify as suppliers under the ISO/TS 16949-2002 total quality management system.
• Technical Support - The ability to provide product design, engineering, analysis and validation to support the Tier 1 system integrators.
• In-House Technology Resources - Commodity manufacturers cannot support the necessary engineering and R&D requirements; they are manufacturers with slim margins and consequently rely upon the reference designs provided by larger chip or component manufacturers.
• Delivery requirements - Demonstrated ability to consistently deliver products on time and prompt response to product development needs are important.
• Modest price competition - For vendor ratings and selection, program cost and initial pricing may represent less than 5% of the overall ratings criteria used by Tier 1 companies; timely delivery, product quality and design criteria are typically more important. Moreover, the cost of switching to another vendor is very high because automotive manufacturers and the Tier 1 vendors cannot risk customer dissatisfaction as a result of saving a relatively small amount of money on a subsystem such as an audio or entertainment system. 
• Long development and sales cycle - A Tier 1 company typically selects vendors for OEM products a year before the scheduled delivery date. Consequently, vendors must complete their prototype development at least a year in advance in order to submit their proprietary designs and then compete on the basis of product design, quality management systems, manufacturing/delivery capability, etc.

DVD Recordable

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

India

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

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

Competition

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

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

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

Company Business Strategy

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

Automotive DVD Strategy

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

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

DVD Recordable and Consumer Electronics Strategy

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

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

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

India Strategy

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

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

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

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

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

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

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

Products

DVD Loaders

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

DVD+RW Loaders

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

Automotive DVD Product Line

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

Current Product Highlights

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

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

Engineering, Research and Development

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

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

Sales, Marketing and Distribution

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

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

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

Intellectual Property and Other Proprietary Rights.

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

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

Employees

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

Item 2. Properties

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

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

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

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

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

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

Item 3. Legal Proceedings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PART II

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

Market Information

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

	Common Stock
	High	Low
Fiscal 2004
First quarter	$30.00	$ 15.70
Second quarter	27.20	15.00
Third quarter	31.30	15.00
Fourth quarter	32.00	17.50
Fiscal 2003
First quarter	$ 28.20	$ 14.20
Second quarter	23.70	9.70
Third quarter	10.50	5.00
Fourth quarter	11.30	4.00

_______

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

Holders of Common Stock

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

Dividends

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

Recent Sales of Unregistered Securities

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

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

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

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

Item 6. Selected Consolidated Financial Data

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

_______

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

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

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

Results of Operations

Overview

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

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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(a) Contractual Obligations

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

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

(b) Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

Revenue Recognition

Net revenue includes product and component sales. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. These criteria are met at the time the product is shipped to the customer. Shipping terms are freight on board shipping point. Returns and discounts on sales are deducted from revenue upon issuance of a credit memo. Returns for products under warranty are repaired and returned to the customer at the Company's cost. The Company provides for an estimate of costs that may be incurred under its warranty at the time product revenue is recognized. We had a warranty reserve of $28 thousand and $54 thousand at December 31, 2004 and 2003, respectively.

Allowance for Doubtful Accounts

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

Excess and Obsolete Inventory

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

Deferred Taxes

We estimate our actual current tax exposure together with our temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. At December 31, 2004 we had provided a valuation allowance for the entire amount of tax assets net of tax liabilities. To the extent that we increase or decrease a valuation allowance in a period, the resulting expense or benefit is included within the tax provision. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.

Intangibles

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

Determining Functional Currencies for the Purpose of Consolidation

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

RISK FACTORS

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

Risks Related to Our Business

We have not recorded an annual operating profit since 2001.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

During the last three years, substantially all of our revenues have been generated by our DVD product line, which is central to our growth strategy. Successful development and commercialization of new DVD products, as well as market acceptance of such products, is essential to our achieving positive gross margins as well as growth and future profitability. While we are currently developing and introducing new products (e.g., automotive DVD products), we cannot assure you that these products will reach the market in a timely manner, satisfactorily address customer needs, be sold in high volume, or generate acceptable margins. In addition, we expect to continue to invest heavily in research and development and engineering during 2005, which will likely adversely impact achievement of near term profitability.

We are exposed to fluctuations in currency exchange rates.

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

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

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

● market acceptance of our new products, such as automotive DVDs and home DVD recorders;

● timing of our customers' new product development, which incorporates our products;

● continued availability of adequate capital under our bank line of credit in Korea or other financial sources to fund our operations, including the purchase of needed components and manufacturing of our products;

● exchange rate fluctuations;

● adverse results in pending litigation involving former officers of DVS and DVSK;

● difficulties in forecasting, planning and management of inventory levels, particularly given our ongoing implementation of our new enterprise resource planning ("ERP") system in Korea, which may trigger further inventory adjustments;

● the availability, timely delivery and cost of components from our suppliers;

● fluctuations in manufacturing yields and significant yield losses which may affect our ability to fulfill orders;

● new product announcements and introduction of competing products by our competitors;

● pressure to reduce the price at which we sell our products;

● the rate at which our products become obsolete;

● unpredictability of changes in demand for, or in the mix of, our products;

● the gain or loss of significant customers;

● changes in the channels through which our products are distributed and the timeliness of receipt of distributor resale information;

● general economic, political and environmental related conditions, such as natural disasters;

● unanticipated research and development expenses associated with new product introductions;

● the timing of significant orders and of license and royalty revenue; and

● the seasonality in our business.

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

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

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

Our international business activities are subject to a number of risks, each of which could impose unexpected costs on us that would have an adverse effect on our operating results. These risks include:

● greater difficulty in ensuring adequacy of our disclosure controls and procedures and internal control over financial reporting with respect to international operations;

● impact of currency fluctuations for which the Company currently has no hedging activity;

● difficulties in complying with foreign regulatory requirements and standards;

● tariffs and other trade barriers relating to cross border transactions;

● costs and risks associated with local business practices and customs in foreign countries;

● longer accounts receivable payment cycles from customers located in foreign countries;

● potentially adverse tax consequences resulting from changes in international tax regulations;

● limits on repatriation of earnings from our foreign operations; and

● limited ability to effect quality-control measures associated with our foreign operations.

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

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

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

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

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

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

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

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

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

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

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

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

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

To permit the growth of our business operations in the future, we will need to bring new products to market, which will likely require significant working capital. We have established credit facilities with certain Korean banks with a total borrowing limit of about $21.0 million as of December 31, 2004. We have also formed alliances with state-run businesses in China, which have committed to substantial amounts of trade credit and financing for production in China under certain terms. However, there is no assurance that these credit facilities will always be available. An equity offering has been initiated to meet our capital needs for at least the next twelve months, but we cannot assure you that any future equity financing will be available on terms acceptable to us, if at all. In addition, if we issue shares of our common stock, our shareholders will experience dilution with respect to their investment.

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

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

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

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

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

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

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

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

● significant pricing pressures that occur due to competition, over-supply, or other reasons;

● shortages of raw materials or fabrication, test or assembly capacity constraints that lead our suppliers to allocate available supplies or capacity to other customers which, in turn, harm our ability to meet our sales obligations; and

● the reduction, rescheduling or cancellation of customer orders.

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

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

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

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

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

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

The markets for our products are characterized by:

● rapidly changing technologies;

● evolving and competing industry standards;

● changing customer needs and expectations;

● frequent new product introductions and enhancements;

● increased integration with other functions; and

● rapid product obsolescence.

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

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

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

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

We rely on a combination of patent, trade secrets, copyright and mask work production laws and rights, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights. Policing unauthorized use of our products, however, is difficult, especially in foreign countries, such as China, South Korea and India, where the laws may not protect our proprietary rights as fully as in the United States. Litigation may continue to be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation could result in substantial costs and diversion of resources and could harm our business, operating results and financial condition regardless of the outcome of the litigation.

We have acquired ownership or license to a number of patents or patent applications related to our products. However, we cannot assure you that any pending patent application will be granted, or that such patents will provide adequate protection for our intellectual property. Since our competitors may design around our patents or otherwise independently develop competing technology, our operating results would be seriously harmed by the failure to protect our intellectual property.

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Investment in Our Securities

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

Our stock price has been extremely volatile in recent years. Since January 1, 2001, our stock has closed at prices ranging from a high of $62.30 on December 11, 2001 to a low of $1.89 on March 31, 2005. If our revenues do not grow or grow more slowly than we anticipate, or if operating or capital expenditures exceed our expectations or cannot be adjusted accordingly, the market price of our common stock could be materially and adversely affected. In addition, the market price of our common stock has been in the past and could in the future be materially and adversely affected for reasons unrelated to our specific business or results of operations. General market price declines or volatility in the future could adversely affect the price of our common stock. In addition, short-term trading strategies of certain investors can also have a significant effect on the price of our stock.

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

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

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

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

We do not expect to pay dividends.

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

Risks Related to Our Industry

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

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

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

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

There is seasonality in our business.

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

Item 8. Consolidated Financial Statements and Supplementary Data

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

Item 9A. Controls and Procedures

(a)    Evaluation of disclosure controls and procedures.

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

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

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

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

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

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

(b)    Changes in internal control over financial reporting.

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

PART III

Item 10. Directors and Executive Officers of the Registrant

MANAGEMENT

Executive Officers and Directors

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

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

Background and Business Experience of Directors and Executive Officers

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

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

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

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

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

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

Item 11. Executive Compensation

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

Item 13. Certain Relationships and Related Transactions

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

Item 14. Principal Accountant Fees and Services

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

PART IV

Item 15. Exhibits, Financial Statements, Financial Statement Schedules

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

1. Financial Statements:

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

2. Financial Statement Schedule

The following schedule of the Company is included herein:

Valuation and Qualifying Accounts (Schedule II)

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

3. Exhibits

See Item 14(c) below.

(b) Exhibits

See Exhibit Index.

DIGITAL VIDEO SYSTEMS, INC.

Index To Consolidated Financial Statements

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

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

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

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

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Digital Video Systems, Inc. and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for each of the year ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

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

/s/ Stonefield Josephson, Inc.

San Francisco, California
April 11, 2005

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

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

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

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

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

/s/ Burr, Pilger & Mayer LLP

Palo Alto, California
March 29, 2004

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DIGITAL VIDEO SYSTEMS, INC.

Notes to Consolidated Financial Statements

1. The Company and its Significant Accounting Policies

The Company

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

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

Liquidity

The Company has incurred net losses from operations for the last three years and has an accumulated deficit of $86.4 million and a working capital deficit of $7.2 million at December 31, 2004. Management recognizes the need for an additional infusion of cash within the next two quarters. The Company anticipates that it will acquire additional funding and may sell additional shares of its common or preferred stock through private placements or further public offerings, or it may seek additional credit facilities. The sales of additional equity or debt securities may result in additional dilution to existing stockholders. If additional funds are raised through the issuance of equity or debt securities, these securities could have rights that are senior to existing stockholders and could contain covenants that would restrict operations. Any additional financing may not be available in amounts or on terms acceptable to the Company, if at all.

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

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

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

Going Concern

The accompanying financial statements have been prepared assuming that the company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  No adjustments have been provided as if the company were unable to continue as a going concern.  Management plans to raise financing through equity sales, to continue to finance its activities.

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include impairment write-downs of fixed assets and intangibles, the level of accounts receivable and inventory reserves, the valuation allowance for deferred tax assets, stock compensation expense, warranty accruals and the valuation of notes receivable. The Company has identified and established inventory reserves for inventory items which could be surplus to its operational requirements. These estimates could change in the future which could significantly affect the financial statements. Actual results could differ from those estimates.

Credit Risk

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

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include money market accounts and highly liquid debt instruments with a original maturity of three months or less at the date of purchase. Restricted cash of $7,525 and $6,186, at December 31, 2004 and 2003, respectively, represented by passbook accounts and time deposits for its subsidiary, DVS Korea, are used for collateral related to borrowings and other required deposits.

As of December 31, 2004 and 2003, the fair value of the cash and cash equivalents, including restricted cash, consisted of cash and money market funds in the amount of $10.9 million and $12.6 million, respectively.

Revenue Recognition

Net revenues include product and component sales. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. These criteria are met at the time the product is shipped to the customer. Shipping terms are freight on board shipping point. Returns and discounts on sales are deducted from revenue upon issuance of a credit memo. Returns for products under warranty are repaired and returned to the customer at the Company's cost. The Company provides for an estimate of costs that may be incurred under its warranty at the time product revenue is recognized. The Company had a warranty reserve of $0.1 million and $0.1 million at December 31, 2004 and 2003, respectively.

Shipping and Handling Costs

The Company includes fees billed to customers for shipping and handling in net revenue. Shipping and handling costs are included in sales and marketing as an operating expense. For the year ended December 31, 2004, 2003, and 2002 these costs were $0.4 million, $0.9 million and $0.6 million, respectively.

Fair Value of Financial Instruments

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

Advertising Expense

Advertising expenditures are charged to operations as incurred and total $0.3 million, $0.0 million and $0.1 million in the years ended December 31, 2004, 2003 and 2002, respectively.

Research and Development

Research and development costs are expensed as incurred.

Accounting for Stock-Based Compensation

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

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

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

The weighted average fair value of stock awards (including restricted stock units granted in 2002) granted during 2004, 2003 and 2002 was $10.20, $11.30 and $9.00, respectively.

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

Net Loss per Share

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

Accounts receivable

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

Inventories

Inventories are stated at the lower of cost (moving average method) or market. The Company has recorded valuation reserves against inventory of $3.8 million and $1.1 million as of December 31, 2004 and 2003, respectively.

Property and Equipment

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

Income Taxes

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

Long-Lived Assets

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

Intangibles

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

Foreign Currency Translation

The functional currency of the Company's foreign subsidiaries is the local currency. Translation adjustments, which result from the process of translating foreign currency financial statements into U.S. dollars, are included as a component of accumulated other comprehensive income. Transaction gains and losses of $1.1 million and $0.6 million for 2004 and 2003 are included in interest and other income in the accompanying statement of operations. The amounts for 2002 were not considered material.

Comprehensive Income

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

Recent Accounting Pronouncements

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

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

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

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

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

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

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

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

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

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

2. Inventories

Inventories consisted of the following at December 31, 2004 and 2003 (in thousands):

                                                                   2004        2003
                                                                ----------  ----------            
Raw materials ................................................ $    9,200  $   16,716
Work-in-process ..............................................      3,114       2,892
Finished goods ...............................................      1,534       6,124
                                                                ----------  ----------
Total inventories ............................................     13,848      25,732
Less inventory reserves ......................................     (3,808)     (1,087)
                                                                ----------  ----------
Net inventories .............................................. $   10,040  $   24,645
                                                                ==========  ==========

3. Property and Equipment

Property and equipment consisted of the following at December 31, 2004 and 2003 (in thousands):

                                                                   2004        2003
                                                                ----------  ----------            
Building and leasehold improvements .......................... $    5,642  $    6,034
Machinery and computer equipment .............................     14,804      12,290
Furniture and fixtures .......................................      1,106       1,328
                                                                ----------  ----------
Total property and equipment .................................     21,552      19,652
Accumulated depreciation .....................................    (10,675)     (7,013)
                                                                ----------  ----------
Net property and equipment ................................... $   10,877  $   12,639
                                                                ==========  ==========

Depreciation expense totaled $2.8 million, $2.4 million and $2.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.

4. Intangible Assets

Intangible assets (patents) consisted of the following at December 31, 2004 and 2003 (in thousands):

                                                                   2004        2003
                                                                ----------  ----------            
Intangible assets of acquired businesses ..................... $    2,400  $    2,400
Less: accumulated amortization ...............................     (2,316)     (2,065)
                                                                ----------  ----------
                                                               $       84  $      335
                                                                ==========  ==========

Amortization expense totaled $0.3 million, $0.3 million and $0.3 for the years ended December 31, 2004, 2003 and 2002.

During 2002, the Company recognized an impairment charge of $0.2 million for the remaining book value of goodwill.

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

                                                                  Amount
                                                                ----------                        
2005 ......................................................... $       84

5. Note Receivable-Related Party

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

The purchase prices for the Purchased Assets and for the Option (described below) was $3.5 million with the purchased asset valued at $2.7 million and the Option at $0.8 million. The purchase price was paid by delivery of a promissory note in the principal amount of $3.4 million (the "Note"). Principal on the Note was payable in 36 equal monthly installments commencing on October 31, 1999. The unpaid principal balance of the Note bears interest at an annual rate of 7%. The Note was originally secured by a first priority security interest in favor of the Company in the Purchased Assets and a first priority pledge in favor of the Company of 987,500 shares of common stock of the Company owned by OPLI.

Pursuant to the terms of the Agreement, OPLI purchased the option (the "Option") to acquire 212,000 shares (the "Option Shares") of the common stock of DVS Korea Ltd., a corporation organized under the laws of the Republic of Korea and at that time was a wholly owned subsidiary of the Company (DVS Korea). The Option Shares constituted 20% of the issued and outstanding shares of capital stock of DVS Korea. The Option was exercisable in whole or in part, for an aggregate exercise price of $0.5 million payable in cash upon exercise of the Option.

The sale of the Purchased Assets and the Option was recorded as a note receivable. The purchased assets were written off the books as of March 31, 1999 as part of a restructuring. As a result, no book value for these assets existed as of the date of the transaction. The gain of $2.7 million for the sale of the purchased assets has been recognized as other income in the fiscal year ending March 31, 2000.

OPLI exercised its right to acquire the Option Shares in November 1999. The book value of the Option Shares at that time was $0.8 million. The sale of the Option for $0.8 million and the proceeds of $0.5 million for exercising the Option resulted in a gain for the sale of the Option Shares. This gain has been recognized as other income in the fiscal year ending March 31, 2000.

At December 31, 2001, the OPLI note receivable outstanding was at $2.0 million and was in default. Payment in arrears totaled $1.0 million. The shares of the Company's common stock purchased in 1998 plus the assets acquired, giving rise to the note receivable, have been pledged and secured. Some shares of common stock of OPLI shareholders pledged are in the possession of the Company and at December 31, 2001 had a market value that equaled approximately the outstanding balance due on the note receivable.

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

During February 2003, the market value of common stock of OPLI shareholders held by the Company had a market value of approximately $0.9 million resulting in an adjustment to the reserve requirement of $1.1 million. The total reserve at December 31, 2002 was $1.1 million.

During December 31, 2003, the market value of common stock of OPLI shareholders held by the Company had a net market value of approximately $0.7 million, resulting in a $.1 million adjustment to the reserve requirement during 2003.  The total reserve at December 31, 2003 was $1.2 million.

During December 31, 2004, the market value of common stock of OPLI shareholders held by the Company have a net market value of approximate $0.3 million, resulting in a $.4 million adjustment to the reserve requirement during 2004. The total reserve at December 31, 2004 is $1.6 million.

The Company does not record any interest on the impaired note.

6. Warranty Accrual

The Company generally warrants its products for a specific period of time against material defects. The Company provides for the estimated future costs of warranty obligations in costs of goods sold when the related revenue is recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that the Company expects to incur to repair or replace product parts which fail while still under warranty. The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as current information on repair costs. The following table reflects the change in the Company's warranty accrual during each of the three periods ended December 31, 2004 (in thousands):

                                                                   2004        2003        2002
                                                                ----------  ----------  ----------
Warranty accrual, beginning of year........................... $       54  $      130  $      335
    Additions.................................................         65          --          53
    Subtractions..............................................        (91)        (76)       (258)
                                                                ----------  ----------  ----------
Warranty accrual, end of year................................. $       28  $       54  $      130
                                                                ==========  ==========  ==========

7. Line of Credit

The Company has lines of credit with five Korean banks with borrowing limits varying from $2.0 million to $8.6 million. The total borrowing limit as of December 31, 2004 was $21.0 million. Borrowings under these lines of credit incur interest at rates between 0.67% to 9.69%, with an approximate weighted average of 4.3%, 5.8% and 5.0% during 2004, 2003 and 2002 respectively. The borrowings are guaranteed up to $0.9 by the Korea Credit Guarantee fund. The expiration date for these lines of credit have been extended to between March and October 2005. On April 11, 2005 the credit lines were reduced by $3 million to $18 million. These reductions are due to the adverse effects of change in the Korean banking environment, coupled with the lenders' concerns over our losses. These credit lines are subject to significant discretion on the part of the lenders. Cash and cash equivalent deposits of approximately $7.5 million are restricted as collateral for lines of credit, and a facility in Korea is used as collateral for one of the banks.

The provisions of these lines of credit contain no covenants related to the maintenance of working capital or other financial ratios. As of December 31, 2004, the Company owed a total of $14.3 million on the lines of credit and the amount is due as the lines expire.

As of February 28 2005, borrowing limits were $ 21.4 million and the expiration dates have been extended to March and October, 2005. On April 11, 2005 we were notified that the credit lines had been reduced by $3.0 million. These reductions are due to the adverse effects of change in the Korean banking environment, coupled with the lenders' concerns over our losses. These credit lines are subject to significant discretion on the part of the lenders.

8. Notes Payable

In July 2004, the Company obtained two loans with a Chinese bank for $1.8 million each. The loans are collateralized by the joint venture's building in China and have a one-year term with interest at LIBOR plus 0.7%. The Company had notes payable from Shanghai Bank in the amount of $3.6 million at December 31, 2003. These notes had interest at rates between 1.78% to 2.035%, were collateralized by the joint venture building in China and were repaid in May 2004. The notes required that the Company maintain certain minimum inventory levels as collateral for the loans. Other demand notes payable of $0.1 million at December 31, 2003 bear interest at a rate of 10% per annum. The average interest rates on the notes payable were approximately 3%, 2% and 2% for the years ended December 31, 2004, 2003 and 2002, respectively.

9. Notes Payable - Related Parties

At December 31, 2003, the Company had notes payable due to two directors of the Company. Both note amounts were a total of $0.1 million, had interest between 5% and 10% and were due on demand. The Company repaid both of these notes in March 2004.

10. Long-term Debt

Long-term debt at December 31, 2004 consisted of the following (in thousands):

                                                                             2004
                                                                          ----------                        
Unsecured note payable due to Empire Capital, a stockholder, with
   interest rate of 8%, due on September 20, 2006 ...................... $      237
Note payable to ICICI Bank toward the purchase of motor vehicle.........          3
Less current portion ...................................................         (2)
                                                                          ----------
Total long-term debt ................................................... $      238
                                                                          ==========

11. Commitments and Contingencies

Commitments

The Company leases its facilities and certain office equipment under non-cancelable leases that require the Company to pay operating costs, including property taxes, insurance and maintenance. Future minimum lease payments under these operating leases at December 31, 2004 are as follows (in thousands):

                                                                            Amount
                                                                          ----------                        
2005 ................................................................... $      565
2006 ...................................................................        234
2007 ...................................................................         15
2008 ...................................................................         15
2009 ...................................................................         15
Thereafter .............................................................        193
                                                                          ----------
                                                                         $    1,037
                                                                          ==========

Rent expense charged to operations was approximately $0.5 million, $0.5 million and $0.7 million for the years ended December 31, 2004, 2003 and 2002, respectively.

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

Minority Interest

During the year ended December 31, 2001, the Company increased its investment in DVS Korea by acquiring an additional 127,000 shares, raising its ownership in DVS Korea to 82%. Subsequently employees of DVS Korea were issued 121,000 shares in satisfaction of outstanding loans to the Company, thereby reducing the Company's ownership in DVS Korea to 74.6%. In September 2002, DVS Korea went public on the KOSDAQ Exchange issuing 6,000,000 of its common stock to the Korean public and reducing the Company's ownership in DVS Korea to 51.4%. At December 31, 2002, the Company also held a 10% ownership interest in a Joint Venture in China with DVS Korea holding a 51% interest and the remaining 39% held by the Chinese partner. The sale of the 23.2% interest in DVS Korea resulted in a gain from the sale of subsidiary common stock of $1.2 million which was reflected in additional paid-in capital at December 31, 2002.

Pending Litigation

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

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

On February 1, 2005, the jury in our lawsuit against Mali Kuo rendered a verdict against us finding that Ms. Kuo had a series of binding agreements with us and that she was entitled to approximately $2,670,000. On February 4, 2005, the judge entered the verdict, but stayed its enforcement for 70 days. On March 7 and 8, 2005, the judge heard our motions for a new trial, a judgment notwithstanding the verdict ("JNOV") and equitable estoppel and on April 4, 2005 the court denied the motions. The Company then filed an appeal on April 5, 2005. On April 7, 2005, Ms. Kuo sought attorney's fees, costs, and prejudgment interest in the amount of $2,518,000 approximately. After arguments the judge ruled that Ms. Kuo was only entitled to $750,000 in attorney's fees costs and prejudgment interest. On April 7, 2005 the court entered the judgment totaling $3,420,000 including all fees, costs and interest, which was accrued. The entire liability has been accrued as of December 31, 2004, including a reserve of $0.4 million previously entered in 2002.

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

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

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

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

The Company has been named as a defendant in several other lawsuits in the normal course of its business. Management currently does not believe that the liabilities, if any, resulting from these matters will have a material effect on the consolidated financial statements of the Company.

12. Income Taxes

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

                                                                                Year Ended December 31,
                                                                          ----------------------------------
                                                                             2004        2003        2002
                                                                          ----------  ----------  ----------
Domestic ............................................................... $   (7,089) $   (3,540) $   (2,518)
Foreign ................................................................     (5,981)     (4,805)       (473)
                                                                          ----------  ----------  ----------
Total .................................................................. $  (13,070) $   (8,345) $   (2,991)
                                                                          ==========  ==========  ==========

There was no benefit from income taxes in the year ended December 31, 2004 due to the full valuation allowance recorded against deferred tax assets. The provision for income taxes in the year ended December 31, 2003 of $0.2 million relates to the full valuation allowance recorded against the deferred tax assets in the current year, some of which were not reserved at December 31, 2002. The provision for income taxes in the year ended December 31, 2002 was comprised of state taxes of $0.0 million and foreign tax credits of $0.1 million.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets at December 31, 2004 and 2003 are as follows (in thousands):

                                                                             2004        2003
                                                                          ----------  ----------            
Deferred tax assets:
Net operating loss carryforwards ....................................... $   14,765  $   11,852
Foreign net operating loss carryforwards ...............................      3,771       1,314
Foreign net- Other .....................................................        844          --
Reserves and other accrued expenses ....................................       (362)        137
Depreciation timing differences ........................................        242          95
                                                                          ----------  ----------
Total deferred assets ..................................................     19,260      13,398
Valuation allowance for deferred tax assets ............................    (19,260)    (13,398)
                                                                          ----------  ----------
Net deferred tax assets ................................................ $       --  $       --
                                                                          ==========  ==========

The increase in the valuation allowance for deferred taxes for the year ended December 31, 2004 and 2003 was $5.9 million and $3.5 million, respectively. The decrease in the valuation allowance for deferred taxes for the year ended December 31, 2002, was $8.2 million.

The Company has federal net operating loss carryforwards as of December 31, 2004 of approximately $37.9 million, $12.0 million of state net operating loss carryforwards net of limitations and $13.9 million of Korean net operating loss carryforwards expiring as follows (in thousands):

Expiration Date     Federal        California        Korea
- ---------------  --------------  ---------------  ------------
     2005       $           --  $            -- $         643
     2006                   --               --           384
     2008                   --               --         5,427
     2009                  552              417         7,466
     2010                2,811               --            --
     2011                1,324            1,693            --
     2012                5,808               33            --
     2013                  954            4,812            --
     2014                   --            5,008            --
     2019                5,724               --            --
     2020                5,131               --            --
     2021                4,882               --            --
     2022                  830               --            --
     2023                3,543               --            --
     2024                6,338               --            --
                 --------------  ---------------  ------------
                $       37,897  $        11,963  $     13,920
                 ==============  ===============  ============

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

Under Korean tax regulations the Company's Korean subsidiary is allowed a foreign investment exemption, currently 51.4% of taxable income, for 7 years from the taxable year after the year in which the Korean subsidiary first recognize taxable income, which was fiscal 2000. The Korean subsidiary is then allowed an additional three-year exemption at 50% of its foreign investment ratio. The Company's Korean subsidiary had a tax loss for the years ended December 31, 2004, 2003 and 2002 as such received no benefit from the foreign tax exemption in the current year.

Under Chinese tax regulations the Company's Chinese joint venture is entitled to two years of complete tax exemption followed by three years of 50% tax reduction, commencing from the first profit making year net of losses carried forward. The Chinese Joint Venture is in tax loss position for the years ended December 31, 2004, 2003 and 2002 and as such has received no benefit from the foreign tax exemption.

13. Net Loss Per Share

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

                                                                                Year Ended December 31,
                                                                        ----------------------------------
                                                                           2004        2003        2002
                                                                        ----------  ----------  ----------
Net loss available to common stockholders  ........................... $  (13,100) $   (8,345) $   (2,991)
                                                                        ==========  ==========  ==========

Weighted average common shares outstanding ...........................      1,072         748         598
Weighted average unvested restricted stock ...........................        (25)        (21)         --
                                                                        ----------  ----------  ----------
Weighted average common shares outstanding - basic                          1,047         727         598
Effect of dilutive stock options and warrants ........................         --          --          --
                                                                        ----------  ----------  ----------
Weighted average common shares and equivalents outstanding - diluted .      1,047         727         598
                                                                        ==========  ==========  ==========

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

At December 31, 2004, 2003, and 2002, 569,478, 477,395 and 258,332 options and other warrants were excluded from the calculation of diluted earnings per share because the effect was anti-dilutive. At December 31, 2004 and 2003, there were 25,000 and 21,000 shares of restricted common stock outstanding respectively.

14. Stockholders' Equity

Common Stock

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

During 2002, the Company completed a stock exchange of 20,430 shares for debt and services rendered. Additionally the Company completed a small private placement of 3,000 common shares. The invested amount was $0.1 million. Options exercised during 2002 were 5,000 shares valued at $0.2 million.

During 2003, the Company completed private placements totaling 115,721 common shares and completed a stock exchange of 71,512 shares for debt and services. Additionally shares issued in settlements of legal obligations and for services provided totaled 49,422. Warrants exercised during 2003 were 33,097 shares for $0.5 million. No options were exercised.

In January 2004, the Company sold 121,212 shares of its common stock to a group of purchasers for $16.50 per share. The gross proceeds were approximately $2.0 million. The proceeds are being used for general corporate purposes and the initial funding of DVS Electronics, Pvt. Ltd., ("DVSE"), the Company's subsidiary in India which was formed in 2003.

In April 2004, investors exercised outstanding warrants for 53,186 shares of common stock resulting in net proceeds of approximately $0.6 million. The warrants were originally issued in a July 2003 financing and were temporarily repriced to $12.50 per share from the original exercise price of $28.00 in order to induce the exercise. The Company has used the proceeds from the warrant exercise for general corporate purposes. In connection with the warrant repricing the Company incurred a warrant modification charge of $0.2 million in the second quarter of 2004.

In July 2004, the Company reached a settlement concerning legal fees owed to a law firm by issuing 33,500 shares of its common stock. The stock had a fair market value on the settlement date of $0.3 million, resulting in a $0.3 million gain on the settlement. In September and October 2004, the Company issued 11,961 shares of common stock to the same law firm as payment of $0.1 million due the law firm. In September 2004, the Company issued 22,000 shares of common stock to another of the Company's law firms as partial payment of amounts due the law firm. The Company extinguished $0.1 million of legal fees owed to the law firm based on a fair market value of $6.30 per share on the date of issuance. The Company and the law firm have agreed to adjust the number of shares as of the effective date of a registration statement covering the resale of the shares so that the aggregate fair market value of the shares issued as of that date equals the $0.2 million obligation due the law firm as per the agreement. In November 2004, the Company issued an aggregate of 35,246 shares of its common stock and warrants to purchase an additional 7,189 shares of its common stock to two former employees of the Company in settlement of all claims relating to litigation for claimed compensation earned in prior years. The aggregate value of this settlement was $0.2 million, and because accrual for this liability had been entered in 2002 there was no P&L effect in 2004 for this transaction.

Preferred Stock

In September 2004, the Company entered into an agreement with the owner of 550,000 common shares of DVS Korea Co. Ltd., the Company's principal subsidiary ("DVSK"). The 550,000 shares represented a 2.62% ownership interest in DVSK. Under the terms of the agreement, the investor transferred its entire interest in DVSK to the Company in exchange for 396,722 shares of the Company's 8% Series C Convertible Preferred Stock and warrants to purchase an additional 198,361 shares of its common stock. The Company's ownership interest in DVSK increased from 51.14% to 53.76% as a result of the exchange. The Warrants are exercisable for five years at $0.66 per share. The conversion rights of the Series C Preferred were subject to stockholder approval, which was obtained at the Annual Meeting of Stockholder's held on November 18, 2004. In connection with the purchase, the Company incurred a loss of $0.1 million. In December 2004, the owner reported to the Company that they were unable to transfer the shares to the Company. Instead, the owner sold the DVSK shares on the Kosdaq market and remitted the $0.2 million of proceeds to the Company. Accordingly, the Company's ownership interest in DVSK reverted back to 51.14%. In December 2004 the 396,722 shares of the company's 8% series C convertible preferred were converted to 39,672 shares of the company's common stock.

In September 2004, the Company raised approximately $1.1 million in net proceeds. In connection with this transaction, it issued 2,081,964 shares of 8% Series C Convertible Preferred Stock and 1,040,979 Class A Warrants to purchase shares of common stock. In addition, the investors received warrants entitling them to purchase an additional 50% of the number of Series C Preferred Stock and Class A Warrants they originally purchased, which warrants are exercisable for the ten-day period following the effective date of the registration statement covering these shares (the "Green Shoe Warrants"). The Class A Warrants are exercisable for five years at an exercise price of $0.61, subject to adjustment. In the event any Preferred Stock remains outstanding on September 20, 2007, the Company will issue a five-year Class B warrant for 50% of the number of shares into which the then-outstanding Preferred Stock is then convertible, also exercisable at $0.61 per share. The Preferred Stock will automatically convert into common stock in the event the Company's common stock trades at or above $12.20 per share for 20 consecutive trading days. The Company may redeem the Preferred Stock at various prices beginning at $.82 per share and at decreasing prices thereafter. The Series C Preferred Stock is nonvoting and nonconvertible until stockholder approval, and the Class A Warrants are not exercisable unless the stockholders approve of the conversion and exercise rights. The conversion and exercise rights of the Securities were obtained at the Company's annual stockholders meeting on November 18, 2004. In connection with the warrants issued on this financing, the Company incurred $0.5 million for the beneficial conversion feature which amount will be accreted as a preferred stock dividend using the interest method over the life of the instrument.

In December 2004, DVS sold 738,768 shares of its 8% Series C convertible preferred stock (the "Preferred Stock") and 369,383 Class A warrants (the "Class A Warrants") (collectively, the Preferred Stock and Class A Warrants are referred to as the "Units" or the "Securities") in a private transaction when a total of six accredited investors exercised their "green shoe warrants" that had been issued as part of the September 20, 2004 private placement. Each Unit consisted of one share of Preferred Stock and 50% warrant coverage.. The consideration paid for the Securities was $0.61 per Unit (the "Purchase Price"), for aggregate gross proceeds of $450,648 to DVS. The Class A Warrants are exercisable for five years at an exercise price of $0.61, subject to adjustment. In the event any Preferred Stock remains outstanding on September 20, 2007, DVS will issue a five-year Class B warrant for 50% of the number of shares of common stock into which the then-outstanding Preferred Stock is then convertible, also exercisable at $0.61 per share. The Preferred Stock will automatically convert into common stock in the event DVS' common stock trades at or above 200% of the $6.10 Purchase Price for 20 consecutive trading days. DVS may redeem the Preferred Stock at various prices beginning at 135% of the Purchase Price and at decreasing prices thereafter.

Escrowed Securities

All common shares and options to purchase common stock previously held in escrow were returned to capital at July 15, 2001. Shares returned to capital totaled 111,614 common shares. These shares were placed in escrow in 1996 through 1997 and their release was subject to certain performance criteria, not met, and any shares not released to be forfeited on July 15, 2001. No shares were released.

Directors Stock Plan

The Company's stock option plan for its directors provide for the granting of non-statutory stock option to each non-employee directors at an exercise price equaling 100% of market price at date of grant. Options vest 25% every six (6) months from date of grant. Each non-employee director was granted 3,000 options effective with the adoption of the 2002 Director Option Plan on May 24, 2002. Each subsequent January 1^st each non-employee director who has served for at least six months will receive an additional grant of 1,000 shares. Under the 2002 Director Option Plan, options granted are exercisable over a maximum term of ten years from the date of grant and are subject to various restrictions. No expense was recorded under these plans.

Stock Option Plans

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

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

                                                                          Outstanding Options
                                                                        ----------------------
                                                                                    Weighted
                                                                                     Average
                                                                          Number    Exercise
                                                                        of Shares     Price
                                                                        ----------  ----------            
Balance at December 31, 2001 .........................................     52,463  $    54.10
Options granted ......................................................     84,820       15.70
Options exercised ....................................................     (5,000)      33.20
Options cancelled ....................................................    (18,379)      55.90
                                                                        ----------
Balance at December 31, 2002 .........................................    113,904       26.00
Options granted ......................................................     56,750       18.00
Options exercised ....................................................         --          --
Options cancelled ....................................................     (4,000)      20.40
                                                                        ----------
Balance at December 31, 2003 .........................................    166,654       23.40
Options granted ......................................................     73,250       14.90
Options exercised ....................................................         --          --
Options cancelled ....................................................    (92,812)      23.06
                                                                        ----------
Balance at December 31, 2004 .........................................    147,092  $    19.35
                                                                        ==========

The following table summarizes information regarding stock options outstanding at December 31, 2004:

                     Weighted
                      Average
                     Remaining
                    Outstanding                           Exercisable
                        at       Contractual   Average        at         Average
     Range of      December 31,     Life      Exercise   December 31,   Exercise
 Exercise Prices       2004        (Years)      Price        2004         Price
- ------------------ ------------- -----------  ---------  -------------  ---------
   $5.50-$9.40           18,250        9.89  $    7.96          1,313  $    8.60
  $13.00-$32.48         108,663        7.68      16.25         58,789      16.10
  $36.26-$59.08          16,452        4.69      39.08         16,452      39.08
  $70.00-$87.50           3,727        3.63      78.51          3,727      78.51
                   -------------                         -------------
                        147,092        6.06  $   19.35         80,281  $   23.58
                   =============                         =============

At December 31, 2004and 2003, option to purchase 97,089 shares and 34,358 shares of common stock were exercisable, respectively.

Warrants

In connection with the sale of preferred stock to OPLI in 1998, the Company granted a 2 year option to purchase 42,857 shares of common stock at an exercise price of $52.50. The Board subsequently authorized an extension to January 25, 2002 for the exercise of the OPLI option. The options were not exercised and have been cancelled. Additionally, OPLI had been given the right to invest $3.5 million in the Company's common stock at an exercise price of $32.90, which right expired on January 25, 2002. The right was not exercised and has been cancelled.

In connection with bridge loans issued in June and July 2003, the Company issued warrants to purchase 13,037 shares of common stock with an exercise price of $16.50 per share. The warrants are exercisable beginning in November 2003 and expired in November 2004. The fair value of the warrants, calculated using the Black-Scholes option pricing model, totaling $0.1 million, was recorded as a discount on the loans and will be amortized over 2 years.

In June 2003, the Company issued warrants to purchase 5,000 shares of common stock to a former Board member as part of his separation. The warrants are exercisable immediately and expire in June 2006. The fair value of the warrants, calculated using the Black-Scholes option pricing model, totaling $0.1 million, was recorded as compensation expense.

In connection with a private placement in July 2003, the Company issued warrants to purchase 129,364 shares of common stock to investors at an exercise price of $28.00 per share. The warrants are exercisable beginning in January 2004 and expire in July 2006. The Company has the right to redeem any unexercised warrants for $1.00 per warrant upon 30 days notice, if the underlying shares have been registered and the Company's common stock has a closing sale price over $35.00 per share for ten consecutive trading days on the Nasdaq SmallCap Market. In December 2003, warrants to purchase 5,000 shares of common stock were exercised. In connection with the private placement, the Company issued 12,936 warrants to purchase the common stock units (one share of common stock and one warrant to purchase one share of common stock) issued in the private placement at $14.00 per share to the placement agent. The warrants are exercisable on the earlier of January 8, 2004 or the effective date of the registration statement covering the resale of the common stock and expire in July 2006.

In September 2004, the Company issued warrants to purchase 30,000 shares of common stock. These warrants were issued in connection with a $0.3 million loan made by a creditor to the Company. The warrants are exercisable for five years at $6.10 per share, recorded at a fair value of $.1 million amortized using the interest method over the life of the loan.

Warrants to acquire the Company's common stock outstanding at December 31, 2004 totaled 422,386. The following table sets forth the key terms of these warrants:

                                                                              Average
  Date of      Underlying      Shares                            Expiration  Exercise    Reasons for Grant
   Grant        Security       Granted       Vesting of Grant       Date       Price        of Warrants
- ------------ --------------- ------------ ---------------------- ----------  --------- ---------------------
 01/08/1999  Common Stock         25,000  Closing of Financing   01/08/2009 $   63.70  Employee Services
 07/08/2002  Common Stock         39,403  Immediate              07/08/2007     13.40  Board Services
 07/08/2002  Common Stock          3,000  Immediate              07/08/2007     13.40  Future Board Services
 06/17/2003  Common Stock          5,000  Immediate              06/16/2006     16.10  Board Services
 07/07/2003  Common Stock         91,115  January 2004           07/06/2006     12.68  Private Placements
 07/28/2003  Common Stock          1,000  Immediate              07/06/2006     35.00  Purchase
 09/01/2003  Common Stock         26,500  Immediate              08/31/2006     17.50  Consultant Services
 09/01/2003  Common Stock          4,500  Immediate              09/01/2008     17.50  Board Services
 09/03/2003  Common Stock         20,000  Immediate              09/03/2007     17.50  Private Placement
 03/31/2004  Common Stock          2,250  Immediate              09/30/2005     15.40  Consultant Services
 09/21/2004  Common Stock        104,098  Immediate              09/12/2009      6.10  Private Placement
 09/30/2004  Common Stock         30,000  Immediate              09/30/2009      6.10  Private Placement
 09/30/2004  Common Stock         19,836  Immediate              09/30/2009      6.60  Private Placement
 09/30/2004  Common Stock          6,557  Immediate              09/30/2009      6.10  Consultant Services
 11/4/2004   Common Stock          7,189  Immediate              11/04/2005      6.10  Litigation Settlement
 12/27/2004  Common Stock         36,938  Immediate              12/27/2009      6.10  Private Placement
                             ------------                                    ---------
                                 422,386                                    $   13.30
                             ============                                    =========

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

Employee Stock Purchase Plan

In September 1997, the shareholders approved 7,142 shares for distribution under the Company's employee stock purchase plan which employees may purchase shares, subject to certain limitations, at no less than 85% of the lower of the fair market value of the shares at the beginning or end of a three-month purchase period. The first enrollment period for the stock purchase plan began on April 1, 1998. As of December 31, 2004, no shares have been distributed to employees under this plan.

15. Segment Information

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

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

Geographic information for revenues and long-lived assets for the years ended December 31, 2004, 2003 and 2002 are as follows (in thousands):

                                        Year Ended December 31,
                                     -------------------------------
                                       2004       2003       2002
                                     ---------  ---------  ---------
Geographic:
  United States.................... $   8,470  $     715  $   1,517
  Asia.............................    64,557     70,979    117,422
  Europe...........................     5,398      5,254      1,091
  Other international countries....     8,775     12,185     37,184
                                     ---------  ---------  ---------
       Total sales................. $  87,200  $  89,133  $ 157,214
                                     =========  =========  =========

                                        Year Ended December 31,
                                     -------------------------------
                                       2004       2003       2002
                                     ---------  ---------  ---------
Identifiable assets:
  United States.................... $   2,827  $   1,399  $   2,197
  Korea............................    22,793     30,345     51,534
  China............................    12,980     26,833     17,696
  India............................       683        194         --
                                     ---------  ---------  ---------
                                    $  39,283  $  58,771  $  71,427
                                     =========  =========  =========

Significant customers for the years ended December 31, 2004, 2003 and 2002 are as follows:

                                        Year Ended December 31,
                                     -------------------------------
                                       2004       2003       2002
                                     ---------  ---------  ---------
Customer A ........................        19%        20%        *
Customer B.........................        14%        *          *
Customer C.........................        *          16%        *
Customer D.........................        *          13%        23%
Customer E.........................        *          *          *
Customer F.........................        *          *          *
Customer G.........................        *          *          *

In the year ended December 31, 2004 and 2003, the Company had one customer accounting for 40% and 64% of total accounts receivable.

Ellion Digital, Inc., a company in which certain of the employees, officers and directors of the Company's subsidiary in Korea have a significant ownership interest, accounted for approximately 19% and 20% of the Company's total revenue for 2004 and 2003, respectively. Ellion Digital, Inc. comprised 40% and 64% of the combined total of accounts receivable and accounts receivable from related party at December 31, 2004 and December 31, 2003, respectively.

The Company currently buys certain key components, including optical pick-ups, motors, central processing units and certain other integrated circuits from a limited number of suppliers including Zoran, Mediatech, Philips and Hitachi. The Company anticipates that these suppliers will manufacture sufficient quantities of these key components to meet its production requirements. If these suppliers fail to satisfy the Company's requirements on a timely basis and at competitive prices, the Company could suffer manufacturing delays, a possible loss of revenues or higher than anticipated costs of revenues, any of which could seriously harm the Company's operating results. Any constraints on worldwide manufacturing capacity of these key components may affect the Company's ability to obtain adequate supplies from these manufacturers.

16. Joint Venture

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

17. Related Party Transactions

DVS Electronics Pvt. Ltd. ("DVSE") formed in 2003, extended to Xalted Information System, Pvt. Ltd. (Xalted) a line of credit allowing for borrowings of up to approximately $0.3 million at an interest rate of 8% per annum. A former Co-Chairman of our Company is the Chief Executive Officer of Xalted. There were no borrowings in 2003. Xalted borrowed $0.2 million in January 2004, which was repaid in March 2004. Xalted has provided various operational services to the Company since DVSE's formation last year, including free rent.

During 2004, a firm affiliated with a director of DVSE received compensation of $95,000 cash in connection with financings.  Additionally, the DVSE director was granted 5,738 non-qualified stock options (post split) valued at 29,000 in connection with services rendered relating to business development for which no expense was recorded.

During 2002, certain DVS Korea employees, officers and board members made significant equity investments into Ellion Digital. During 2003, DVS Korea and the joint venture in China had related party transactions with Ellion Digital. During the year ended December 31, 2003, DVS Korea had total sales of approximately $3.1 million to Ellion Digital. As of December 31, 2003, DVS Korea had receivables from Ellion Digital of $0.8 million for product and equipment sales. Further, the China joint venture sold products to Ellion Digital in the amount of $14.4 million during the year ended December 31, 2003 and had $2.4 million in accounts receivable from Ellion Digital as of December 31, 2003. During the year ended December 31, 2004, DVS Korea had total sales of approximately $0.6 million to Ellion Digital. As of December 31, 2004, DVS Korea had receivables from Ellion Digital of $1.0 million for product and equipment sales. Further, the China joint venture sold products to Ellion Digital in the amount of $15.5 million during the year ended December 31, 2004 and had $1.2 million in accounts receivable from Ellion Digital as of December 31, 2004

License Agreement with Related Party

On December 10, 2002, the Company executed an exclusive licensing agreement with Jeecom Asia, Inc. Jeecom is a mobile enterprise software developer founded by one of the Company's directors. The Company has agreed to a development fee of $0.3 million which has been paid. Royalties will be paid to the Company on product unit sales on a sliding scale based on volume sold.

Financing with Related Party

In the private placement in July 2003 a director and an officer of the Company purchased 4,000 shares of common stock for approximately $0.1 million and received warrants to purchase 7,537 shares of common stock.

18. Amendment to Certificate of Incorporation

On September 20, 2004, in connection with the issuance of the Series C Preferred, the Company filed a Certificate of Designation of Preferences of 8% Series C Convertible Preferred Stock with the Office of the Delaware Secretary of State. A total of 4,500,000 shares, of the 5,000,000 authorized preferred shares were designated as Series C Preferred Stock. The Series C Preferred Stock is convertible at the option of the holder into shares of the Company's common stock, on a one-for-ten basis, subject to adjustment. In addition, in the event that the Company's first firmly underwritten public offering following the private placement results in the sale of securities at a price less than $0.61, the conversion price will decrease to the lower public offering price. The Preferred Stock will automatically convert into common stock in the event the common stock trades at or above $12.20 per share for 20 consecutive trading days. The Preferred Stock is entitled to receive a cumulative dividend of 8% per annum until the third anniversary of the initial issuance, at which time the dividend increases to 24% if any shares of Preferred Stock remain outstanding. The Preferred Stock also has a liquidation preference equal to the $0.61 purchase price plus any accrued and unpaid dividends. The Preferred Stock is redeemable by the Company, upon 30 days' prior written notice, at various decreasing redemption prices. The holders of the Preferred Stock vote, as converted, together with the common stock as a single class.

19. Selected Quarterly Financial Data (unaudited)

The following tables contain selected unaudited statements of operations information for each quarter of the years ended December 31, 2004 and 2003.

                                                          Year Ended December 31, 2004
                                              --------------------------------------------------
                                                Fourth        Third       Second        First
                                                Quarter      Quarter      Quarter      Quarter
                                              -----------  -----------  -----------  -----------
                                              (in thousands, except per share amounts, unaudited)
Net revenue ................................ $    17,891  $    19,055  $    32,732  $    17,522
Gross profit (loss) ........................         994        2,409        2,461         (992)
Net loss available to common stockholders ..      (5,640)        (393)      (2,379)      (4,688)
Net loss per share (1) basic and diluted ... $     (5.39) $     (0.37) $     (2.31) $     (4.87)
Shares used in computation of
    basic and diluted net loss per share ...       1,047        1,070        1,031          962
                                                                                                
                                                          Year Ended December 31, 2003
                                              --------------------------------------------------
                                                Fourth        Third       Second        First
                                                Quarter      Quarter      Quarter      Quarter
                                              -----------  -----------  -----------  -----------
                                              (in thousands, except per share amounts, unaudited)
Net revenue ................................ $    18,530  $    19,677  $    23,244  $    27,682
Gross profit (loss) ........................      (2,182)       2,208        2,940          622
Net loss ...................................      (3,851)      (1,596)        (909)      (1,989)
Net loss per share (1) basic and diluted ... $     (4.65) $     (2.01) $     (1.33) $     (3.11)
Shares used in computation of
    basic and diluted net loss per share ...         828          795          683          649

_______

(1) See Consolidated Statements of Operations.

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

Gross profit for the 2004 fourth quarter include a charge of approximately $1.4 million related to adjustments to inventory reserves and a $3.1 million charge for a judgment against the Company in litigation with a former CEO. The effect of these adjustments was to decrease the 2004 fourth quarter net loss and net loss per share by approximately $4.5 million and $4.30 per share.

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

DIGITAL VIDEO SYSTEMS, INC.

Schedule II

Valuation and Qualifying Accounts and Reserves

(in thousands)

                                                                   Additions
                                                     Balance at   Charged to                 Balance at
                                                    Beginning of   Costs and                   End of
                   Description                         Period      Expenses     Deductions     Period
- --------------------------------------------------  ------------  -----------  ------------  ----------
2004:                                                                                                  
Allowance for doubtful accounts receivable ....... $        480  $       456  $          1  $      935
Warranty reserve .................................           54           65            91          28
Deferred tax asset valuation allowance ...........       13,398        5,862            --      19,260
Reserve for slow moving and obsolete inventory ...        1,087        2,721            --       3,808
Allowance for note receivable ....................        1,242          391                     1,633
                                                                                                       
2003:                                                                                                  
Allowance for doubtful accounts receivable ....... $        127  $       763  $        410  $      480
Warranty reserve .................................          130           --            76          54
Deferred tax asset valuation allowance ...........        9,930        3,468            --      13,398
Reserve for slow moving and obsolete inventory ...          410          677            --       1,087
Allowance for note receivable ....................        1,090          152                     1,242
                                                                                                       
2002:                                                                                                  
Allowance for doubtful accounts receivable ....... $        320  $        18  $        211  $      127
Warranty reserve .................................          335           53           258         130
Deferred tax asset valuation allowance ...........       18,131           --         8,201       9,930
Reserve for slow moving and obsolete inventory ...          328           82            --         410
Allowance for note receivable ....................           --        1,090                     1,090

SIGNATURES

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

DIGITAL VIDEO SYSTEMS, INC.

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

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

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

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

EXHIBIT INDEX

Exhibit No.	Exhibit Footnote	Description
3.1		Amended and Restated Certificate of Incorporation of the Company      PDF
3.2		Certificate of Designations of Preferences of 8% Series C Convertible Preferred Stock      PDF
3.3		Certificate of Amendment of Amended and Restated Certificate of Incorporation      PDF
3.4		Amended Bylaws of the Company      PDF
4.1	(1)	Form of Common Stock Certificate
4.2	(2)	Form of Class A Warrant
4.3	(2)	Form of Class B Warrant
4.4	(2)	Form of Registration Rights Agreement between the Registrant and the Series C Preferred Stockholders
10.1		Form of Indemnification Agreement with the Registrant's Officers and Directors      PDF
10.2	(3)	2002 Stock Plan
10.3	(3)	2002 Director Option Plan
10.4	(4)	Share Exchange Agreement between the Registrant and Oxcal Venture Fund, LP, dated as of September 30, 2004
10.5	(5)	Technology License Agreement between the Registrant and EnMedia, Inc.
10.6		Revolving Credit Agreement between DVS Korea Co. Ltd. and Woori Bank      PDF
10.7		Revolving Line of Credit Agreement between DVS Korea Co. Ltd. and Hana Bank      PDF
10.8		Credit Agreement between DVS Korea Co. Ltd. and Korean Exchange Bank      PDF
10.9		Credit Agreement between DVS Korea Co. Ltd. and Kookmin Bank      PDF
10.10		Letter of Credit Commitment Agreement between DVS Korea Co. Ltd. and Sanup Bank      PDF
21.1		Subsidiaries of the Registrant
23.1		Consent of Stonefield Josephson, Inc., independent registered public accounting firm
23.2		Consent of Burr, Pilger & Mayer LLP, independent registered public account firm
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

________

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

(2) Incorporated by reference from the Registrant's Current Report on Form 8-K, filed with the Commission on September 20, 2004.

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

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

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

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Douglas T. Watson, certify that:

1. I have reviewed this annual report on Form 10-K of Digital Video Systems, Inc.;

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

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

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

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

b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

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

a) all significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

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

Date: : April 15, 2005

/s/ Douglas T. Watson
Douglas T. Watson
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Digital Video Systems, Inc. (the "Company") on Form 10-K for the year ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Thomas Spanier, Chief Executive Officer, and Douglas T. Watson, Chief Financial Officer, of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request.

/s/ Thomas Spanier
Thomas Spanier
Chief Executive Officer
(Principal Executive Officer)
April 15, 2005

/s/ Douglas T. Watson
Douglas T. Watson
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
April 15, 2005

EX-3.1

EXHIBIT 3.1

Delaware PAGE 1

The First State

I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF "DIGITAL VIDEO SYSTEMS, INC.", FILED IN THIS OFFICE ON THE THIRTIETH DAY OF MAY, A.D. 2002, AT 9 O'CLOCK A.M.

A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY RECORDER OF DEEDS.

STATE OF DELAWARE

SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 05/30/2002

020345353 - 2312385

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION

OF

DIGITAL VIDEO SYSTEMS, INC.

(originally incorporated on October 13, 1992 under the name Digital Video Systems, Inc.)

Douglas T. Watson certifies that:

One: He is the duly elected and acting President of Digital Video Systems, Inc., a Delaware corporation.

Two: The Certificate of Incorporation of this corporation shall be amended and restated to read in full as follows:

ARTICLE I

The name of this corporation is Digital Video Systems, Inc.

ARTICLE II

The address of the corporation's registered office in the State of Delaware is 15 E. North Street, Dover, Delaware 19901. The name of its registered agent at such address is Incorporating Services, Ltd., County of Kent.

ARTICLE III

The purpose of this corporation is to engage in any lawful act or. activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

ARTICLE IV

This corporation is authorized to issue two classes of shares, which shall be designated as Common Stock, $.0001 par value per share, and Preferred Stock, 5.0001 par value per share. The total number of shares of Common Stock which this corporation is authorized to issue is Thirty Million (30,000,000) and the total number of shares of Preferred Stock which this corporation is authorized to issue is Five Whoa (5,000,000). The Preferred Stock may lee issued from time to time in on or more series.

The Board of Directors of the Corporation is authorized to determine the number of additional series into which shares of Preferred Stock may be divided, to determine the designations, powers, preferences and voting and other right% and the qualifications, limitations and restrictions granted to or imposed upon such additional Preferred Stock or any series thereof or any holder thereof, to determine and alter the designations, powers, preferences and rights, and the qualifications, limitations and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock or the holders thereof, to fix the number of shares of that series and to increase or decrease, within the limits stated in any resolution of the Board of Directors originally fixing the number of shares constituting any series (but not below the member of such shares they outstanding), the number of shares of any such series subsequent to the issuance of shares of that series.

ARTICLE V

The relative rights, preferences, privileges, and restrictions granted to or imposed upon the respective classes of the shares or the holders thereof are as follows:

A. Dividend Preference. The holders of Series A Preferred and Series B Preferred shall be entitled to receive, out of funds legally available therefor, dividends at an annual rate. of $0.1231668 for each share of Series A Preferred or Series B Preferred held by them, payable when and as declared by the Board, in preference and priority to the payment of dividends on any shares of Common Stock (other than those payable solely in Common Stock or involving the repurchase of shares of Common Stock from terminated employees, officers, directors, or consultants pursuant to contractual arrangements). The dividends payable to the holders of Series A Preferred and Series B Preferred shall not be cumulative, and no right shall accrue to the holders of Series A Preferred and Series B Preferred by reason of the fact that dividends on the Series A Preferred and Series B Preferred are not declared or paid in any previous fiscal year of the corporation, whether or not the earnings of the corporation in that previous fiscal year were sufficient to pry such dividends in whole or in part. In the event that the corporation shell have declared but unpaid dividends outstanding immediately prior to, and in the event of a conversion of Series A Preferred or Series B Preferred (as provided in Section D hereof), the corporation shall, at the option of the holder, pay in cash to the holders) of Series A Preferred and Series B Preferred subject to conversion the full amount of any such dividends or allow such dividends to be converted into Common Stock in accordance with, and pursuant to the terms specified in, Section D hereof

B. Liquidation Preference.

1. In the event of any liquidation, dissolution, or winding up of the corporation (a "Liquidation Event") within three years from the date of first issuance of Series A Preferred, whether voluntary or not, distributions to the stockholders of the corporation shall be made in the following manner: The holders of Series A Preferred and Series B Preferred shall be entitled to receive, before any amount shall be paid to the holders of Common Stock, an amount per share equal to 51.5395856 (as adjusted for future stock splits, combinations or similar events and hereafter referred to as the "Original Issue Price's for each share of Series A Preferred and Series B Preferred plus all declared but unpaid dividends. If, upon the occurrence of any such Liquidation Event, the assets and surplus finds distributed among the holders of Series A Preferred and Series B Preferred shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and surplus funds of the corporation legally available for distribution shall be distributed ratably among the holders of Series A Preferred and Series B Preferred. If, upon the occurrence of any such Liquidation Event after the payment to the holders of Series A Preferred and Series B Preferred of such full preferential amount, assets or surplus funds remain in the corporation, the holders of Common Stock shall be entitled to receive an amount per share equal to $1,504,000 divided by the number of shares of Common Stock then outstanding.

2. In the event of any Liquidation Event which occurs more than three years after the first issuance of the Series A Preferred, the first $11,500,000 of assets and funds available for distribution shall be distributed so that (i) each holder of Series A Preferred and each holder of Series B Preferred shall be entitled to receive the Original Issue ?rice P^er share for an aggregate of $10,00b,000 and (ii) the holders of Common Stock shall receive an amount per share equal to $1,500,000 divided by the number of shares of Common Stock then outstanding. If, upon the occurrence of any such Liquidation Event, the assets and funds available to be distributed among the holders of the Series A Preferred and Series B Preferred and Common Stock shall be less than $11,500,000, then the entire assets and funds of the corporation legally available for distrⁱbution to such holders shall be distributed 13% to the holders of Common Stock as a class and 87% to the holders of Series A Preferred and Series B Preferred as a class, with the aggregate amount distributed within each such class to be distributed ratably based on the number of shares of Series A Preferred and Series B Preferred as a class, or Common Stock, respectively, held by each holder of shares of each such class.

3. After payment has been made to the holders of the Series A Preferred, the" Series B Preferred and the Common Stock of the full amounts to which they shall be entitled under paragraphs 1 or 2 above, as the case may be, the remaining assets of the corporation available for distribution to stockholders shall be distributed ratably among the holders of Series A Preferred, Series B Preferred and holders of Common Stock based on the number of shares of Common Stock held by each (assuming conversion in full of all Series A Preferred and Series B Preferred).

4. A sale of .all or substantially all of the assets of the corporation, or the acquisition of this corporation by another entity by means of consolidation or merger resulting in the exchange of the outstandⁱng shares of this corporation for securities or other consideration issued, or caused to be issued, by the acquiring corporation or corporations and pursuant to which the stockholders of this corporation (determined prior to such event) do not hold more than 50% of the voting power of the surviving corporation, shall be a Liquidation Event within the meaning of this Section B.

5. Each holder of Series A Preferred and Series B Preferred shall be deemed to have consented under the Delaware General Corporation Law to distributions made by the corporation in connection with the repurchase of shares of Common Stock issued to or held by officers, directors, or employees of, or consultants to, the corporation or its subsidiaries upon termination of their employment or services pursuant to agreements (whether now existing or hereafter entered into) providing for the right of said repurchase between the corporation and such persons.

6. The value of securities and property paid or distributed pursuant to this Section B shall be computed at fair market value at the time of payment to the corporation or at the time made available to stockholders, all as determined by the Board of Directors in the good faith exercise of its reasonable business judgment, provided that: (i) if such securities are listed on any established stock exchange or a national market system, their fair market value shall be the average closing sales price for such securities as quoted on such system or exchange (or the largest such exchange) for the five business days preceding the date the value is to be determined (or if there are no sales for such dates, then for the last five preceding business days on which there were sales); and (ii) if such securities are regularly quoted by a recognized securities dealer but selling prices arc not reported, their fair market value shall be the average of the mean between the high bid and low asked prices for such securities on the five business days preceding the date the value is to be determined (or if there are no quoted prices for such dates, then for the last five preceding business days on which there were quoted prices).

7. Nothing hereinabove set forth shall affect in any way the right of each holder of Preferred Stock to convert such shares at any time and from time to time into Common Stock in accordance with Section D hereof.

C. Voting Rights.

1. Except as otherwise required bylaw or hereunder, the holder of each share of Common Stock issued and outstanding shall have one vote and the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Preferred Stock could be converted at the record date for determination of the Stockholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders. is solicited, such votes to be counted together with all other shares of stock of the Company having general voting power and not separately as a class. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights shall (alter aggregating all shares into which shares of Preferred Stock held by each holder could be converted) be rounded to the nearest whole number. Holders of Common Stock and Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation.

2. Notwithstanding the foregoing, at each annual or special meeting called for the purpose of electing directors, the holders of the Series A Preferred and Series B Preferred, voting together as a separate class, shall he entitled to elect one (1) director, and all remaining directors shall be elected by the holders of Common Stock voting together as a single class. The provisions of this Section C(2) shall expire and be of no further force or effect upon conversion of all outstanding shares of Preferred Stock into Common Stock pursuant to the provisions of Section A hereof. In the case of any vacancy in the office of a director elected by a specified group of stockholders, a successor shall be elected to hold office for the unexpired term of such director by the affirmative vote of a majority of the shares of such specified group given at a special meeting of such stockholders duly called or by an action by written consent for that purpose. Any director who shall have been elected by a specified group of stockholders may be removed during the aforesaid term of office, either for or without cause, by, and only by, the affirmative vote of the holders of a majority of the shares of such specified group, given at a special meeting of such stockholders duly called or by an action by written consent for that purpose, and any such vacancy thereby created may be filled by the vote of the holders of a majority of the shares of such specified group represented at such meeting or in such consent.

D. Conversion Rights. The holders of Preferred Stock shall have conversion rights as follows (the "Conversion Rights"):

1. Right to Convert. Each share of Series A Preferred and Series B Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the corporation or any transfer agent for such Series A Preferred or Series B Preferred, as the case may be. Bach share of Series A Preferred and each share of Series B Preferred shall be convertible into fully paid and non-assessable shares of Common Stock at a rate of one share of Common Stock for each share of Series A Preferred or Series B Preferred, subject to adjustment in accordance with Section D(4). The number of shares of Common Stock into which each share of the Series A Preferred or Series B Preferred is convertible is hereinafter referred to as the "Conversion Rate."

2. Automatic Conversion. Each share of Series A Preferred and Series B Preferred shall automatically be converted into shares of Common Stock at the then effective Conversion Rate upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock or other securities of the corporation for the account of the corporation to the public at (i) a price per share or unit (prior to underwriter commissions and offering expenses) of not less than $5.00 per share or unit (appropriately adjusted for any stock combination, stock split, stock dividend, recapitalization, or other similar transaction) or (ii) an aggregate offering price to the public of greater than $10,000,00 (the "Automatic Conversion"). In the event of the automatic Conversion of the Preferred Stock upon a public offering as aforesaid, the person(s) entitled to receive the Common Stock issuable upon such conversion shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities.

3. Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lien of any fractional shares to which the holder would otherwise be entitled, the corporation shall pay cash equal to such fraction multiplied by the then fair market value of a share of Common Stock (as determined in good faith by the Board of Directors). Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the corporation at such office that he or she elects to convert the same; provided, however, that in the event of an Automatic Conversion pursuant to Section D(2), the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the corporation or its transfer agent, and provided further that the corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the corporation or its transfer agent as provided above, or the holder notifies the corporation or its transfer agent that such certificates have been lost, stolen, or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection with such certificates. The corporation shall, as soon as practicable after such delivery, or such agreement and indemnification in the case of a lost certificate, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be convened, or in the case of Automatic Conversion on the date of closing of the public offering, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date.

4. Adjustments to Conversion Rate.

(a) Adjustments for Dividends, Splits, Subdivisions,_ Combinations or Consolidation of Common Stock. In the event the outstanding shares of Common Stock shall be increased by a stock dividend payable in Common Stock, stock split, subdivision, or other similar transaction into a greater number of shares of Common Stock, the Conversion Rate then in effect for the Series A Preferred and Series B Preferred or the number of outstanding shares of Series A Preferred and Series B Preferred shall, concurrently with the effectiveness of such event, be increased in proportion to the percentage increase in the outstanding number of shares of Common Stock. In the event the outstanding shares of Common Stock shall be decreased by reverse stock split, combination, consolidation, or other similar transaction into a lesser number of shares of Common Stock, the Conversion Rate then in effect for the Series A Preferred and Series B Preferred or the number of outstanding shares of Series A Preferred and Series B Preferred shall, concurrently with the effectiveness of such event, be decreased in proportion to the percentage decrease in the outstanding number of shares of Common Stock.

(b) Adjustments for other Distributions. In the event the corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities of the corporation other than shares of Common Stock and other than as otherwise adjusted in this Section D, then and in each such event provision shall be made so that the holders of Series A Preferred and Series B Preferred shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the corporation which they would have received had their Series A Preferred and Series B Preferred been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section D with respect to the rights of the holders of the Series A Preferred and Series B Preferred.

(c) Adjustments for Reclassification. Exchange and Substitution. If the Common Stock issuable upon conversion of the Series A Preferred and Series B Preferred shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a -subdivision or combination of shares provided for above), the Conversion Rate then in affect for the Series A Preferred and Series B Preferred shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Series A Preferred and the Series B Preferred shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of such Series A Preferred and Series B. Preferred immediately before that change.

5. No Impairment. The corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section D) and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred and the Series B Preferred against impairment.

6. Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Rate for a series of Preferred Stock pursuant to this Section D, the corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or^. readjustment is based. The corporation shall, upon the written request at any time of any holder of Series A Preferred or Series B Preferred, furnish or cause to be furnished to such holder like certificate setting forth: (i) such adjustments and readjustments; (ii) the Conversion Rate at the time in effect; and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Series A Preferred or the Series B Preferred.

7. Notices of Record Date. In the event that this corporation shall propose at any time:

(a) to declare any dividend or distribution upon its Common Stock, whether in. cash, property, stock, or other securities, whether or not a regular^. cash dividend and whether or not out of earnings or earned surplus;

(b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights;

(c) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or

(d) to merge or consolidate with or into any other corporation, or sell, lease, or convey all or substantially all its property or business, or to liquidate, dissolve, or wind up; then, in connection with each such event, this corporation shall send to the holders of the Series A Preferred and Series B Preferred:

(i) at least 20 days prior written notice of the date on which a record shall be taken for such dividend, distribution. or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (c) and (d) above; and

(ii) in the case of the matters referred to in (c) and (d) above, at least 20 days prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occur^rence of such event or the record date for the determination of such holders if such record date is earlier).

Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of the Series A Preferred and the Series B Preferred at the address for each such holder as shown on the books of this corporation.

8. Issue Taxes. The corporation shall pay any and all issue and other taxes (other than income taxes) that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series A Preferred and Series B Preferred pursuant hereto; provided, however, that the corporation shall not be obligated to pay any transfer taxes . resulting from any transfer requested by any holder in connection with any such conversion.

9. Reservation of Stock Issuable Upon Conversion. The corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred and the Series B Preferred such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series A Preferred and Series B Preferred; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series A Preferred and Series B Preferred, the corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to its Certificate of Incorporation.

10. Status of Converted Stock. In case any shares of Series A Preferred or Series B Preferred shall be converted pursuant to this Section A, the shares so converted shall be retired and shall not be reissued.

E. Protective Provisions. In addition to any other rights provided by law, so long as any shares of Series A Preferred or Series B Preferred shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of the outstanding shares of Series A Preferred and Series B Preferred, voting together as a single class:

1. amend or repeal any provision of, or add any provision to: (i) the corporation's certificate of incorporation; or (ii) the corporation's Bylaws, if such action would increase the authorized number of directors;

2. (i) dissolve or otherwise liquidate the corporation; (ii) sell, convey or otherwise dispose of all or substantially all of its property or business; or (iii) merge into or consolidate with any other corporation (other than a wholly owned subsidiary corporation) or effect any other transaction or series of related transactions disposing of more than 50% of the voting power of the corporation; or

3. engage in any extraordinary corporate transaction which could have a material effect on the business or operations of the corporation.

ARTICLE VI

The corporation is to have perpetual existence.

ARTICLE VII

In furtherance and not in limitation of the powers conferred by statute:

A. The Board of Directors of the corporation is expressly authorized; to adopt, amend, alter, or repeal the Bylaws of the corporation.

B. Elections of directors need not be by written ballot unless the Bylaws of the corporation shall so provide.

C. The books of the corporation may be kept at such place within or without the State of Delaware as the Bylaws of the corporation may provide or as may be designated from time to time by the Board of Directors of the corporation.

ARTICLE VIII

Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if^, sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation.

ARTICLE IX

To the fullest extent permitted by the General Corporation Law of the State of Delaware as the same now exists, or as it may hereafter be amended, no director of the corporation shall be

personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. No amendment to or repeal of this Article IX, or the adoption of any provision of this Certificate of Incorporation inconsistent with this Article IX, shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment.

ARTICLE X

A. Actions, Suits and Proceedings Other than by or in the Right the Corporation. The corporation shall indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the corporation), by reason of the fact that he or she is or was, or has agreed to become, a director or officer of the corporation, or is or was serving, or has agreed to serve, at the request of the corporation, as a director, officer, or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust, or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an 'Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys^' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such action, suit, or proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Notwithstanding anything to the contrary in this Article, except as set forth in Section F below, the corporation shall not indemnity an indemnitee seeking. indemnification in connection with a proceeding (or part thereof) initiated by the Indemnitee unless the initiation thereof was approved by the Board of Directors of the corporation.

B. Actions or Suits by or in the Right of the Corporation. The corporation shall indemnify any Indemnitee who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such Indemnitee is or was, or has agreed to become, a director or officer of the corporation, or is or was saving, or has agreed to serve, at the request of the corporation, as a director, officer, or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust, or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection with such^. action, suit, or proceeding and any appeal therefrom, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to

be liable to the corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses (including attorneys' fees) which the Court of Chancery of Delaware or such other court shall deem proper.

C. Indemnification for Expenses of Successful Party. Notwithstanding the other provisions of this Article, to the extent that an Indemnitee has been successful, on the merits or otherwise, in defense of any action, suit, or proceeding referred to in Sections A and B of this Article, or in defense of any claim, issue, or matter therein, or on appeal from any such action, suit, or proceeding, Indemnitee shall be indemnified against all expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection therewith. Without limiting the foregoing, if any action, suit, or proceeding is disposed of,. on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to the Indemnitee; (ii) an adjudication that the Indemnitee was liable to the corporation; (iii) a plea of guilty or nolo contendere by the Indemnitee; (iv) an adjudication that the Indemnitee did not act in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the corporation; and (v) with respect to any criminal proceeding, an adjudication that the Indemnitee bad reasonable cause to believe his or her conduct was unlawful, the Indemnitee shall be considered for the purposes hereof to have been wholly successful with respect thereto.

D. Notification and Defense of Claim. As a condition precedent to the right to be indemnified, the Indemnitee must notify the corporation in writing as soon as practicable of any action, suit, proceeding, or investigation involving Indemnitee for which indemnity will or could be sought. With respect to any action, suit; proceeding, or investigation of which the corporation is so notified, the corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. After notice from the corporation to the Indemnitee of its election so to assume such defense, the corporation shall not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with such claim, other than as proved below in this Section D. The Indemnitee shall have the right to employ his or her own counsel in connection with such claim, but the fees and expenses of such counsel incurred after notice from the corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless: (i) the employment of counsel by the Indemnitee has been authorized by the corporation; (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the corporation and the Indemnitee in the conduct of the defense of such action; or (iii) the corporation shall not in fact have employed counsel to assume the defense. of such action, in each of which cases the fees, and expenses of counsel for the Indemnitee shall be at the expense of the corporation except as otherwise expressly provided by this Article. The corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above.

E. Advance of Expenses. Subject to the provisions of Section F below, in the event that the corporation does not assume the defense pursuant to Section D of this Article of any action, suit, proceeding, or investigation of which the corporation receives notice under this Article, any expenses (including attorneys' fees) incurred by an Indemnnitee in defending a civil or criminal action, suit, proceeding, or investigation or any appeal therefrom shall be paid by the corporation in advance of the final disposition of such matter, provided, however, that the payment of such expenses incurred by an Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the corporation as authorized in this Article. Such undertaking may be accepted without reference to the financial ability of such person to make such repayment.

F. Procedure for Indemnification. In order to obtain indemnification or advancement of expenses pursuant to Sections A, B, C or E of this Article, the Indemnitee shall submit to the corporation a written request, including in such request such documentation and information as is reasonably available to thc Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification or advancement of expenses. Any such indemnification or advancement of expenses shall be made promptly, and in any event within 60 days after receipt by the corporation of the written request of the Indemnitee, unless with respect to requests under Section A, B or E the corporation determines, by clear and convincing evidence, within such 60-day period that the Indemnnitee did not meet the applicable standard of standard set forth in Section A or B. as the case may be. Such determination shall be made in each instance by (a) a majority vote of a quorum of the directors or the corporation consisting of persons who are not at that time parties to the action, suit, or proceeding in question ("'disinterested directors"), (b) if no such quorum is obtainable, a majority vote of a committee of two or more disinterested directors, (c) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote for directors, voting as a single -class, which quorum shall consist of stockholders who are not at that time parties to the action, suit, or proceeding in question, (d) independent legal counsel (who may be regular legal counsel to the corporation), or (e) a court of competent jurisdiction.

G. Remedies. The right to indemnification or advances are granted by this Article shall be enforceable by the Indemnitee in any court of competent jurisdiction if the corporation denies such request, in whole or in part, or if no disposition thereof is made within the 60-day period referred to above in Section F. Unless otherwise provided by law, the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under this Article shall be on the corporation. Neither the failure of the corporation to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the corporation pursuant to Section F that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's expenses (including attorneys' fees) incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the corporation.

H. Subsequent Amendment. No amendment, termination, or repeal of this Article or of the relevant provisions of the General Corporation Law of the State of Delaware or any other applicable laws shall affect or diminish in any way the rights of any Indemnnitee to indemnification under the provisions hereof with respect to any action, suit, proceeding, or investigation arising out of or relating to any actions, transactions, or facts occurring prior to the final adoption of such amendment, termination, or repeal.

I. Other Rights. The indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other rights to which an Indemnitee. seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement, or vote of stockholders or disinterested directors or otherwise, both as to action in Indemnitee's official capacity and as to action in any other capacity while holding office for the corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors, and administrators of the Indemnitee. Nothing contained in this Article shall be deemed to prohibit, and the corporation is specifically authorized to enter into, agreements with officers and directors providing indemnification' rights and procedures different from those set forth in this Article. In addition, the corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the corporation or other persons serving the corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article.

J. Partial Indemnification. If an Indemnitee is entitled under any provision of this Article to indemnification by the corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines, or amounts paid in settlement actually and reasonably incurred by or on Indemnitee's behalf in connection. with any action, suit, proceeding, or investigation and any appeal therefrom but not, however, for the total amount thereof, the corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including attorneys' fees), judgments, fines, or amounts paid in settlement to which the Indemnitee is entitled.

K. Insurance. The corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee, or agent of the corporation or another corporation, partnership, joint venture, trust, or other enterprise (including any employee benefit plan) against any expense, liability, or loss incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify such person against such expense, liability, or loss under the General Corporation Law of the State of Delaware.

L. Merger or Consolidation. If the corporation is merged into or consolidated with. another corporation and the corporation is not the surviving corporation, the surviving corporation shall assume the obligations of the corporation under this Article with respect to any action, suit, proceeding, or investigation arising out of or relating to any actions; transactions, or facts occurring prior to the date of such merger or consolidation.

M. Savings Clauses. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Indemnitee as to any expenses (including attorneys' fees) judgments, fines, and amounts paid in settlement in connection with any action, suit, proceeding, or investigation, whether civil, criminal, or administrative, including any action by or in the right of the corporation, to the fullest extent permitted by any applicable portion of this Article that shall not have been invalidated and to the fullest extent permitted by applicable law.

N. Definitions. Terms used herein and defined in Section 145(h) and Section 145(i) of the General Corporation Law of the State of Delaware shall have the respective meanings assigned to such terms in such Section 145(h) and Section 145(i).

O. Subsequent Legislation. If the General Corporation Law of the State of Delaware is amended after adoption of this Article to expand further the indemnification permitted to Indemnitee, then the corporation shall indemnify such persons to the fullest extent permitted by the General Corporation Law of Delaware, as so amended.

ARTICLE XI

The corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation.

Three: The foregoing amendment and restatement of Certificate of Incorporation has been duly approved by the Board of Directors of the corporation.

Four: The foregoing amendment and restatement of Certificate of Incorporation was approved by the holders of the required number of shares of the corporation in accordance with Sections 228, 242 and 245 of the Delaware General Corporation Law. The number of shares voting in favor of the amendment equaled or exceeded the vote required.

IN WITNESS WHEREOF, the undersigned has executed this Amended and Restated , Certificate of Incorporation on May 24, 2002.

/s/ Douglas T. Watson

EX-3.2

EXHIBIT 3.2

Delaware PAGE 1

The First State

I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "DIGITAL VIDEO SYSTEMS, INC.", FILED IN THIS OFFICE ON THE TWENTIETH DAY OF SEPTEMBER, A.D. 2004, AT 1:36 O'CLOCK P.M.

A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE

KENT COUNTY RECORDER OF DEEDS.

.~

Harriet Smith Windsor, Secretary of State

2312385 8100AUTHENTICATION: 3362291 040677705 DATE: 09-21-04

State of Delaware

Secretary of State

Division of Corporations

Delivered 01:47 PM 09/20/2004

FILED 01:36 PM 09/20/2004

SRV 040677705 - 2312385 FILE

CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF
8% SERIES C CONVERTIBLE PREFERRED STOCK
OF DIGITAL VIDEO SYSTEMS
a Delaware corporation

Pursuant to Section 151
of the General Corporation Law of the State of Delaware

I, THOMAS A. SPANIER, Chairman of the Board and Chief Executive Officer of Digital Video Systems, Inc., a Delaware corporation (the "corporation"), certify that pursuant to the authority contained in Article IV of the corporation's Certificate of Incorporation, as amended, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Corporation's Board of Directors has adopted the following resolutions creating a series of its Preferred Stock designated as 8% Series C Convertible Preferred Stock:

WHEREAS, Certificate of Incorporation of this corporation provides for a class of shares known as Preferred Stock, issuable from time to time in one or more series; and

WHEREAS, the Board of Directors of this corporation is authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, to fix the number of shares constituting any such series, and to determine the designation thereof, or any of them;

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors (the "Board") hereby fixes and determines the designations of, the number of shares constituting, and the rights, preferences, privileges and restrictions relating to, a new series of Preferred Stock as follows:

(a) Designation. The series of Preferred Stock shall be designated "8% Series C Convertible Preferred Stock" (the "Series C Preferred Stock").

EX-3.3

EXHIBIT 3.3

Delaware PAGE 1

The First State

I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "DIGITAL VIDEO SYSTEMS, INC.", FILED IN THIS OFFICE ON THE EIGHTH DAY OF FEBRUARY, A.D. 2005, AT 10:52 O'CLOCK A.M.

A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE

KENT COUNTY RECORDER OF DEEDS.

AND I DO HEREBY FURTHER CERTIFY THAT THE EFFECTIVE DATE OF THE AFORESAID CERTIFICATE OF AMENDMENT IS THE NINTH DAY OF FEBRUARY, A. D. 2005.

__/s/ Harriet Smith Windsor

Harriet Smith Windsor, Secretary of State AUTHENTICATION: 3672673

State of Delaware

Secretary of State

Division of Corporations

Delivered 11:02 AM 02/08/2005

FILED 10:52 AM 02/08/2005

SRV 050101189 - 2312385 FILE

CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIGITAL VIDEO SYSTEMS, INC.

Digital Video Systems, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware:

DOES HEREBY CERTIFY:

FIRST: That by action of the Board of Directors taken at a duly called and held meeting on January 18, 2005 and by delegated authority of the Chief Executive Officer on February 7, 2005, resolutions were duly adopted setting forth a proposed amendment of the Amended and Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and declaring that the matter should be brought before the stockholders for consideration. The resolution setting forth the proposed amendment is as follows:

RESOLVED, that the Amended and Restated Certificate of Incorporation of this corporation be amended by changing the first paragraph of the Article thereof numbered "IV" so that, as amended, said first paragraph of such Article shall be and read as follows:

The Corporation is authorized to issue two classes of shares, which shall be designated as Common Stock, $0.0001 par value per share, and Preferred Stock, $0.0001 par value per share. The total number of shares of Common Stock which this Corporation is authorized to issue is Thirty Million (30,000,000) and the total number of shares of Preferred Stock which this Corporation is authorized to issue is Five Million (5,000,000). Upon the amendment of this article to read as herein set forth, each ten shares of Common Stock outstanding shall be combined and converted into one share of Common Stock. In lieu of fractional shares, the Company shall pay in cash the fair market value of the fractional share, based on the closing price of the Corporation's Common Stock on the date on which this Certificate of Amendment is filed with the Delaware Secretary of State. This amendment shall be effective as of February 9, 2005.

SECOND: On November 18, 2004, at a meeting duly called and held in accordance with Section 211 of the General Corporation Law of the State of Delaware, the holders of a majority of the outstanding voting shares of the Corporation voted in favor of the amendment.

THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, said corporation has caused this certificate to be signed by Thomas A. Spanier, its authorized officer, this 8th day of February, 2005.

/s/ Thomas A. Spanier
Thomas A. Spanier
Chairman of the B rd and Chief Executive Officer

Attest:

/s/ A. John Murphy
A. John Murphy
Secretary

EX-3.4

EXHIBIT 3.4

BYLAWS
OF
DIGITAL, VIDEO SYSTEMS, INC.
(as amended May 24, 2002)

* * * * *

ARTICLE I

OFFICES

Section 1. Registered Office. The registered office of the Corporation shall be 15 E. North Street in the City of Dover, County of Kent, State of Delaware. The name of its registered agent at such address is Incorporating Services Ltd.

Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

Section 3. Books. The books of the Corporation may be kept within or without of the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1. Time and Place of Meetings. All meetings of stockholders shall be held at the principal executive offices of the Corporation, or at such other place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a designation by the Board of Directors).

Section 2. Annual Meetings. An annual meeting of stockholders shall be held each year, commencing with the year 1993, to elect the Board of Directors and transact such other business as may properly be brought before the meeting.

Section 3. Special Meetings. A special meeting of stockholders may be called at any time by the Board of Directors, the chairman of the Board, the president or chief executive officer of the Corporation, or upon the request in writing of holders of record holding in the aggregate not less than 10% of the outstanding capital stock of the Corporation entitled to vote.

Section 4. Notice of Meetings and Adjourned Meetings; Waivers of Notice.

(a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the general nature of the business for which the meeting is called. Unless otherwise provided by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("Delaware Law"), such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Unless these bylaws otherwise require, when a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned. meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

(b) A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

Section 5. Quorum. Unless otherwise provided under the Certificate of Incorporation of the Corporation (the "Certificate of Incorporation") or these Bylaws and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business.

If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time.

If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by Delaware Law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting.

Section 6. Voting

1. Unless otherwise provided in the Certificate of Incorporation and subject to Delaware Law, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Unless otherwise provided in Delaware Law, the Certificate of Incorporation or these bylaws, the affirmative vote of a majority of the shares of capital stock of the Corporation present, in person or by proxy, at a meeting of stockholders and entitled to vote on the subject matter shall be the act of the stockholders.
2. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.

Section 7. Action by Consent.

1. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall he signed by the holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the books in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.
2. Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required by this Section and Delaware Law to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

Section 8. Organization. At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, (or in his absence or if one shall not have been elected, the President) shall act as chairman of the meeting_. The Secretary (or in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof.

Section 9. Order of Business. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting.

Section 10. Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held.

The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.

ARTICLE III

DIRECTORS

Section. l. General Powers. Except as otherwise providers in Delaware Law or the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

Section 2. Number, Election and Term of Office. The number of directors which shall constitute the whole Board shall be fixed from time to time by resolution of the Board of Directors, except that in the absence of any such designation, such number shall be eleven (11). The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 12 of this Article III, and each director so elected shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal. Directors need not be stockholders.

Section 3. Quorum and Manner of Acting. Unless the Certificate of Incorporation or these Bylaws require a greater number, a majority of the total number of directors shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the directors present at meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

Section 4. Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a determination by the Board of Directors).

Section 5. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. in the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice.

Section 6. Regular Meetings. After the place and time of regular meetings of the Board of Directors shall have been determined and notice thereof shall have been once given to each member of the Board of Directors, regular meetings may be held without further notice being given.

Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Chairman of the Board, President or Secretary on the written request of, one-third of the directors then in office (rounded up to the nearest whole number). Notice of special meetings of the Board of Directors shall be given to each director by whom notice is not waived at least two days before the date of the meeting in such manner as is determined by the Board of Directors.

Section 8. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the bylaws of the Corporation; and unless the resolution of the Board of Directors or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

Section 9. Action by Consent. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

Section 10. Telephonic Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

Section 11. Resignation. Any director may resign at any time by giving written notice to the Board of Directors or to the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 12. Vacancies. Unless otherwise provided in the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all the stockholders having the right to vote as a single class may be filed by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Each director so chosen shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. If there are no directors in office, then an election of directors may be held in accordance with Delaware Law. Unless otherwise provided in the Certificate of Incorporation, when one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in the filling of other vacancies.

Section 13. Removal. Any director or the entire Board of Directors may be removed, with or without cause, at any time by the affirmative vote of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote and the vacancies thus created may be filled in accordance with Section 12 of this Article III.

Section 14. Compensation. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses.

ARTICLE IV

OFFICERS

Section 1. Principal Officers. The principal officers of the Corporation shall be a President, one or more Vice Presidents, a Treasurer and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other principal officers, including one or more Controllers, as the Board may in its discretion appoint. One person may hold the offices and perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of President and Secretary.

Section 2. Election, Term of Office and Remuneration. The principal officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. The remuneration of all officers of the Corporation shall be fixed by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine.

Section 3. Subordinate Officers. In addition to the principal officers enumerated in Section 1 of this Article IV, the Corporation may have one or more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such other subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees.

Section 4. Removal. Except as otherwise permitted with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors.

Section 5. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 6. Powers and Duties. The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors.

ARTICLE V

GENERAL PROVISIONS

Section 1. Fixing the Record Date.

1. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting.
2. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by Delaware Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by Delaware Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

(c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

Section 2. Dividends. Subject to limitations contained in Delaware Law and the Certificate of Incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, in property or in shares of the capital stock of the Corporation.

Section 3. Fiscal Year. The fiscal year of the Corporation shall commence on January 1 and end on December 31 of each year.

Section 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced.

Section 5. Voting of Stock Owned by the Corporation. The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock.

Section 6. Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram or mailgram. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mails or by telegraph or mailgram, shall be the time of the giving of the notice.

Section 7. Waivers. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver.

Section 8. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof.

Section 9. Reliance Upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care.

Section 10. Time Periods. In applying any provision of these Bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included.

Section 11. Amendments. These Bylaws or any of them, may be altered, amended or repealed, or new Bylaws may be made, by the stockholders entitled to vote thereon at any annual or special meeting thereof or by the Board of Directors; provided, however, that Article III, Section 2 of these Bylaws may only be amended by a vote of the stockholders holding not less than sixty-five percent (65%) of the Corporation's outstanding shares.

EX-10.1

EXHIBIT 10.1

DIGITAL VIDEO SYSTEMS, INC.

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (the "Agreement") is effective as of [ ], by and between Digital Video Systems, Inc., a Delaware corporation (the "Company") and [ ] (the "Indemnitee").

WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities;

WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law;

WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance;

WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and

WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified and advanced expenses by the Company as set forth herein;

NOW, THEREFORE, the Company and the Indemnitee hereby agree as set forth below.

1. Certain Definitions
1. "Change in Control" shall mean an event that shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a trustee or other fiduciary holding securities under an employee benefit plan of the company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, who becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding or immediately prior thereto continuing to represent (either remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets.
2. "Claim" shall mean, with respect to a Covered Event, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other.
3. References to the "Company" shall include, in addition to Recruitsoft, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which Recruitsoft, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.
4. "Covered Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity.
5. "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), actually and reasonably incurred, of any Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement.
6. "Expense Advance" shall mean a payment to Indemnitee, pursuant to Section 3 hereof, of Expenses in advance of the settlement of or final judgment in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim.
7. "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements).
8. References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement.
9. "Reviewing Party" shall mean, subject to the provisions of Section 2(d) hereof, any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors or Independent Legal Counsel.
10. "Section" refers to a section of this Agreement unless otherwise indicated.
11. "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors.
2. Indemnification.
1. Indemnification of Expenses. Subject to the provisions of Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses.
2. Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) hereof to make any payments to Indemnitee not made prior to such determination by such Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid in indemnifying Indemnitee; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law in accordance with Section 2(c) hereof, then any determination made by any Reviewing Party that, under applicable law, Indemnitee is not entitled to be indemnified hereunder shall not be binding, and, until a final judicial determination is made with respect to such legal proceedings (as to which all rights of appeal therefrom have been exhausted or lapsed), (x) Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee and (y) Indemnitee shall be entitled to receive interim payments of Expenses pursuant to Section 2(a) hereof. Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon.
3. Indemnitee Rights on Unfavorable Determination; Binding Effect. If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15 hereof, the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee.
4. Selection of Reviewing Party; Change in Control. If there has not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors. If there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement, or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the Company otherwise determines or (ii) any Indemnitee shall provide a written statement setting forth in detail a reasonable objection to such Independent Legal Counsel representing other indemnitees.
5. Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 10 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith.
3. Expense Advances.
1. Obligation to Make Expense Advances. Upon receipt of a written undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefor by the Company, the Company shall make Expense Advances to Indemnitee.
2. Form of Undertaking. Any obligation to repay any Expense Advances hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured and no interest shall be charged thereon.
3. Determination of Reasonable Expense Advances. The parties agree that for the purposes of any Expense Advance for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
1. Timing of Payments. All payments of Expenses (including, without limitation, Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than forty-five (45) business days after such written demand by Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than twenty (20) days after such written demand by Indemnitee is presented to the Company.
2. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power.
3. No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, it is the parties' intention that if Indemnitee commences legal proceedings to secure a judicial determination that Indemnitee should be indemnified under this Agreement or applicable law, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, , shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish by clear and convincing evidence that Indemnitee is not so entitled.
4. Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies.
5. Selection of Counsel. In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently employed by or on behalf of Indemnitee with respect to the same Claim; provided that (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder.
5. Additional Indemnification Rights; Nonexclusivity.
1. Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof.
2. Nonexclusivity. The indemnification and the payment of Expense Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement:
1. Excluded Action or Omissions. To indemnify Indemnitee for Expenses resulting from acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law; provided, however, that notwithstanding any limitation set forth in this Section 10(a) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled under Section 3 hereof to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has engaged in acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law.
2. Claims Initiated by Indemnitee. To indemnify or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification or insurance recovery, as the case may be.
3. Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 hereof that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 hereof that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous.
4. Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Exchange Act, as amended, or any similar successor statute; provided, however, that notwithstanding any limitation set forth in this Section 10(d) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled under Section 3 hereof to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has violated said statute.
11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or Interpretation. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 hereof to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled under Section 3 hereof to receive payment of Expense Advances hereunder with respect to such action.
14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of the Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.
17. Choice of Law. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws.
18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities.

IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written.

DIGITAL VIDEO SYSTEMS, INC.

By:___________________________

Name: ________________________

Title: _________________________

AGREED TO AND ACCEPTED

INDEMNITEE:

____________________________________

(signature)

Name: _________________________________

Address: _______________________________

EX-10.6

EXHIBIT 10.6

Revolving Line of Credit Agreement

Borrower:   DVS Korea Co., Ltd.
196 Kumkok Dong, Boon Dang Gu, Sung Nam City, Kyunggi Province
Mr. Song Sim, CEO

Lender:   Woori Bank (Previously Hanvit Bank)

Principal (Limit on the Line of Credit): 380,000,000 Korean Won

Purpose of the Loan: Overdraft

This Revolving Line of Credit dated May 12, 2004, is made and executed between DVS Korea Co., Ltd.("Borrower") and Woori Bank ("Lender") on the following terms and conditions.

Borrower understands and agrees that in granting, renewing, or extending any loan, Lender is relying upon Borrower's representation, warranties, and agreements as set forth in this Agreement; the granting, renewing, or extending of any loan by lender at times shall be subject to Lender's sole judgment and discretion; and all such loans shall be and remain subject of the terms and conditions of this Agreement.

Term

This Agreement shall be effective as of May 12, 2004, and shall continue in full force and effect until May 3, 2005.

Interest Rate

The annual interest rate on this Agreement is fixed rate of 12.0%. The annual interest rate for this Agreement is computed on a 365 day basis; that is, by applying the ratio of the annual interest rate over a year of 365 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

Description Collateral

• Installment Savings Deposit of 2,205,000,000 Korean Won covering all the credit provided by Lender.

In addition, Borrower shall provide to Lender a blank draft. Lender may submit to the Borrower's bank the draft for full payment of unpaid principal and accrued interest when Borrower fails to make payment in accordance with the terms of this Agreement.

Late Charge and Interest After Default

Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay accrued interest, monthly payment, outstanding principal balance on final maturity date, and excess draw on the account, Lender will adjust annual interest rate to 19% and applied to past due, if any.

Payment

Borrower will pay this loan in full of all outstanding principal plus all accrued interest on the maturity date. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date.

Cessation of Advances

If Lender has made any commitment to make any Loan to Borrower under this Agreement, Lender has right to reduce the Loan limit or shall have no obligation make Loan Advances or to disburse Loan proceeds, if: (i) there occurs a material adverse change in financing community; or (ii) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan. If Lender decides to reduce the Loan limit and Borrower's outstanding loan exceeds such new limit, excess is due immediately upon demand of Lender.

Letter of Credit Commitment Agreement

Borrower:   DVS Korea Co., Ltd.
196 Kumkok Dong, Boon Dang Gu, Sung Nam City, Kyunggi Province
Mr. Song Sim, CEO

Lender:   Woori Bank (Previously Hanvit Bank)

Limit: $2,400,000 USD

Purpose of the Loan: USANCE (Term) Letter of Credit

This Letter of Credit Commitment Agreement dated June 15, 2004, is made and executed between DVS Korea Co., Ltd.("Borrower") and Woori Bank ("Lender") on the following terms and conditions.

Borrower understands and agrees that in granting, renewing, or extending any loan, Lender is relying upon Borrower's representation, warranties, and agreements as set forth in this Agreement; the granting, renewing, or extending of any loan by lender at times shall be subject to Lender's sole judgment and discretion; and all such loans shall be and remain subject of the terms and conditions of this Agreement.

Term

This Agreement shall be effective as of June 15, 2004, and shall continue in full force and effect until February 24, 2005.

Description Collateral

• Installment Savings Deposit of 2,205,000,000 Korean Won covering all the credit provided by Lender.

In addition, Borrower shall provide to Lender a blank draft. Lender may submit to the Borrower's bank the draft for full payment of unpaid principal and accrued interest when Borrower fails to make payment in accordance with the terms of this Agreement.

Furthermore, Borrower grant Lender a security interest in all property at any time shipped under, or pursuant to, or in connection with the Letter of Credit or anyway related thereto, or to the drafts drawn thereunder, whether or not Borrower receives the documents covering such property or release the same to Lender on trust receipt and also in and to all shipping documents, warehouse receipts, policies or certificates of insurance and other documents or liability to Borrower at any time existing under or with reference to the Letter of Credit of this agreement .

Interest Rate

The annual interest rate on this Agreement is variable. It changes day to day based on Lender's cost of fund negotiated with lending foreign banks. The annual interest rate for this Agreement is computed on a 365 day basis; that is, by applying the ratio of the annual interest rate over a year of 365 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

Late Charge and Interest After Default

Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay accrued interest, monthly payment, outstanding principal balance on final maturity date, and excess draw on the account, Lender will adjust annual interest rate to 19% and applied to past due, if any.

Payment

Borrower shall pay the outstanding principal plus all accrued interest of each payment made by Lender to beneficiary bank(s) designated by Borrower on behalf of Borrower with the terms prescribed on the Application for Commercial Letter of Credit or other trade related documents. However, Lender has the sole right to extend the terms if necessary.

As to drafts or acceptances under or purporting to be under the Letter of Credit, which are payable in foreign currency, Borrower may pay Lender in Korean Won at the current rate of exchange in Korea for cable transfer to the place of payment in the currency of the draft.

Cessation of Advances

If Lender has made any commitment to make any Loan to Borrower under this Agreement, Lender has right to reduce the Loan limit or shall have no obligation make Loan Advances or to disburse Loan proceeds, if: (i) there occurs a material adverse change in financing community; or (ii) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan. If Lender decides to reduce the Loan limit and Borrower's outstanding loan exceeds such new limit, excess is due immediately upon demand of Lender.

Fees

Borrower shall pay Lender, on demand, commission and all charges and expenses paid or incurred, earned by Lender in connection wherewith, and interest where chargeable.

Change in Terms Agreement

Woori Bank has made a line of credit evidenced by the Agreement dated June 15, 2004, in the original amount of $2,400,000 USD.

Date of Agreement:

November 24, 2004

Description of changes in Terms

Maturity date is changed from November 24, 2004 to February 24, 2005.

Revolving Line of Credit Agreement

Borrower:   DVS Korea Co., Ltd.
196 Kumkok Dong, Boon Dang Gu, Sung Nam City, Kyunggi Province
Mr. Song Sim, CEO

Lender:   Woori Bank (Previously Hanvit Bank)

Principal (Limit on the Line of Credit): 3,200,000,000 Korean Won

Purpose of the Loan: International Trade Financing

This Revolving Line of Credit dated June 11, 2004,, is made and executed between DVS Korea Co., Ltd.("Borrower") and Woori Bank ("Lender") on the following terms and conditions.

Borrower understands and agrees that in granting, renewing, or extending any loan, Lender is relying upon Borrower's representation, warranties, and agreements as set forth in this Agreement; the granting, renewing, or extending of any loan by lender at times shall be subject to Lender's sole judgment and discretion; and all such loans shall be and remain subject of the terms and conditions of this Agreement.

Term

This Agreement shall be effective as of June 11, 2004, and shall continue in full force and effect until February 24, 2005.

Interest Rate

The annual interest rate on this Agreement is variable. It changes day to day based on Lender's cost of fund negotiated with lending foreign banks. The annual interest rate for this Agreement is computed on a 365 day basis; that is, by applying the ratio of the annual interest rate over a year of 365 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

Description Collateral

• Installment Savings Deposit of 2,205,000,000 Korean Won covering total credit provided by Lender.

In addition, Borrower shall provide to Lender a blank draft. Lender may negotiate with the Borrower's bank upon which the draft was drawn for full payment of unpaid principal and accrued interest if Borrower fails to make payment in accordance with the terms of this Agreement.

Furthermore, Borrower grant Lender a security interest in all property at any time shipped under, or pursuant to, or in connection with the Letter of Credit or anyway related thereto, or to the drafts drawn thereunder, whether or not Borrower receives the documents covering such property or release the same to Lender on trust receipt and also in and to all shipping documents, warehouse receipts, policies or certificates of insurance and other documents or liability to Borrower at any time existing under or with reference to the Letter of Credit of this agreement .

Late Charge and Interest After Default

Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay accrued interest, monthly payment, outstanding principal balance on final maturity date, and excess draw on the account, Lender will adjust annual interest rate to 19% and applied to past due, if any.

Payment

Borrower will pay this loan in full of all outstanding principal plus all accrued interest on the maturity date. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date determined at the time of advance.

Cessation of Advances

If Lender has made any commitment to make any Loan to Borrower under this Agreement, Lender has right to reduce the Loan limit or shall have no obligation make Loan Advances or to disburse Loan proceeds, if: (i) there occurs a material adverse change in financing community; or (ii) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan. If Lender decides to reduce the Loan limit and Borrower's outstanding loan exceeds such new limit, excess is due immediately upon demand of Lender.

Advances

Advances under this Agreement shall be requested pursuant to the forms and procedures prescribed by Lender.

Fees on Unused Portion of Line of Credit Limit

Lender will charge prevailing fees on unused portion of the line of credit limit provided to Borrower.

Fees

Borrower shall pay Lender, on demand, commission and all charges and expenses paid or incurred, earned by Lender in connection wherewith, and interest where chargeable.

EX-10.7

EXHIBIT 10.7

Revolving Line of Credit Agreement

Borrower:   DVS Korea Co., Ltd.
196 Kumkok Dong, Boon Dang Gu, Sung Nam City, Kyunggi Province
Mr. Song Sim, CEO

Lender:   Hana Bank

Principal (Limit on the Line of Credit): 4,000,000,000 Korean Won

Purpose of the Loan: International Trade Financing

This Revolving Line of Credit dated March 22, 2002, is made and executed between DVS Korea Co., Ltd.("Borrower") and Hana Bank ("Lender") on the following terms and conditions.

Borrower understands and agrees that in granting, renewing, or extending any loan, Lender is relying upon Borrower's representation, warranties, and agreements as set forth in this Agreement; the granting, renewing, or extending of any loan by lender at times shall be subject to Lender's sole judgment and discretion; and all such loans shall be and remain subject of the terms and conditions of this Agreement.

Term

This Agreement shall be effective as of March 23, 2002, and shall continue in full force and effect until March 23, 2003.

Interest Rate

The annual interest rate on this Agreement is fixed rate of 6.25%. The annual interest rate for this Agreement is computed on a 365 day basis; that is, by applying the ratio of the annual interest rate over a year of 365 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

Description Collateral

• Payment guarantee issued by Credit Guarantee Fund: maximum liability of 900,000,000 Korean Won.
• Installment Savings Deposit of 1,200,000,000 Korean Won covering total credit provided by Lender.

In addition, Borrower shall provide to Lender a blank draft. Lender may negotiate with the Borrower's bank upon which the draft was drawn for full payment of unpaid principal and accrued interest if Borrower fails to make payment in accordance with the terms of this Agreement.

Furthermore, Borrower grant Lender a security interest in all property at any time shipped under, or pursuant to, or in connection with the Letter of Credit or anyway related thereto, or to the drafts drawn thereunder, whether or not Borrower receives the documents covering such property or release the same to Lender on trust receipt and also in and to all shipping documents, warehouse receipts, policies or certificates of insurance and other documents or liability to Borrower at any time existing under or with reference to the Letter of Credit of this agreement .

Late Charge and Interest After Default

Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay accrued interest, monthly payment, outstanding principal balance on final maturity date, and excess draw on the account, Lender will adjust annual interest rate to 19% and applied to past due, if any.

Payment

Borrower will pay this loan in full of all outstanding principal plus all accrued interest on the maturity date. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date determined at the time of advance.

Cessation of Advances

If Lender has made any commitment to make any Loan to Borrower under this Agreement, Lender has right to reduce the Loan limit or shall have no obligation make Loan Advances or to disburse Loan proceeds, if: (i) there occurs a material adverse change in financing community; or (ii) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan. If Lender decides to reduce the Loan limit and Borrower's outstanding loan exceeds such new limit, excess is due immediately upon demand of Lender.

Advances

Advances under this Agreement shall be requested pursuant to the forms and procedures prescribed by Lender.

Fees on Unused Portion of Line of Credit Limit

Lender will charge prevailing fees on unused portion of the line of credit limit provided to Borrower.

Fees

Borrower shall pay Lender, on demand, commission and all charges and expenses paid or incurred, earned by Lender in connection wherewith, and interest where chargeable.

Change in Terms Agreement

Hana Bank has made a Letter of Credit Commitment Agreement dated March 22, 2002, in the original amount of 4,000,000,000 Korean Won.

Date of Agreement:

March 21, 2003

Description of changes in Terms

Maturity date is changed from March 23, 2003 to March 23, 2004.

Change in Terms Agreement

Hana Bank has made a Letter of Credit Commitment Agreement dated March 22, 2002, in the original amount of 4,000,000,000 Korean Won.

Date of Agreement:

March 23, 2004

Description of changes in Terms

Maturity date is changed from March 23, 2004 to September 23, 2004.

Change in Terms Agreement

Hana Bank has made a Letter of Credit Commitment Agreement dated March 22, 2002, in the original amount of 4,000,000,000 Korean Won.

Date of Agreement:

September 23, 2004

Description of changes in Terms

Maturity date is changed from September 23, 2004 to March 23, 2005.

Decrease of credit amount from 4,000,000,000 Korean Won. to 2,650,000,000 Korean Won.

Collateral is changed as bellows.

Payment guarantee issued by Credit Guarantee Fund: maximum liability of 900,000,000 Korean Won.

Installment Savings Deposit of 1,750,000,000 Korean Won.

EX-10.8

EXHIBIT 10.8

Credit Agreement

Borrower:   DVS Korea Co., Ltd.
196 Kumkok Dong, Boon Dang Gu, Sung Nam City, Kyunggi Province
Mr. Song Sim, CEO

Lender:   Korea Exchange Bank

Total Limit on the Credit: 10,000,000,000 Korean Won

This Credit Agreement dated February 11, 2004, is made and executed between DVS Korea Co., Ltd.("Borrower") and Korean Exchange Bank ("Lender") on the following terms and conditions.

Borrower understands and agrees that in granting, renewing, or extending any loan, Lender is relying upon Borrower's representation, warranties, and agreements as set forth in this Agreement; the granting, renewing, or extending of any loan by lender at times shall be subject to Lender's sole judgment and discretion; and all such loans shall be and remain subject of the terms and conditions of this Agreement.

Limit

Types	Sublimit	Interest
International Trade Revolving Line of Credit	8,000,000,000 Korean Won	Variable interest: may change day to day based on the rates established for standard trade credit by Korean Banking Association.
At Sight Letter of Credit	2,000,000 US Dollars	Variable interest: may change day to day based on the rates established for standard trade credit by Korean Banking Association.
Usuance (Term) Letter of Credit	3,000,000 US Dollars	Variable interest: may change day to day based on Lender's cost of fund negotiated with borrowing foreign banks.

• Sum of all the borrowings shall not exceed the Total Credit Limit.

Term

This Agreement shall be effective as of February11, 2004, and shall continue in full force and effect until July 30, 2004.

Interest Rate

The annual interest rate for this Agreement is computed on a 365 day basis; that is, by applying the ratio of the annual interest rate over a year of 365 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

Description Collateral

• Installment Savings Deposit of 3,251,537,461 Korean Won covering total credit provided by Lender.

In addition, Borrower shall provide to Lender a blank draft. Lender may submit to the Borrower's bank the draft for full payment of unpaid principal and accrued interest when Borrower fails to make payment in accordance with the terms of this Agreement.

Furthermore, Borrower grant Lender a security interest in all property at any time shipped under, or pursuant to, or in connection with the Letter of Credit or anyway related thereto, or to the drafts drawn thereunder, whether or not Borrower receives the documents covering such property or release the same to Lender on trust receipt and also in and to all shipping documents, warehouse receipts, policies or certificates of insurance and other documents or liability to Borrower at any time existing under or with reference to the Letter of Credit of this agreement

Late Charge and Interest After Default

Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay accrued interest, monthly payment, outstanding principal balance on final maturity date, and excess draw on the account, Lender will adjust annual interest rate to 19% and applied to past due, if any.

Advances

Advances or Request of Letter of Credit under this Agreement shall be requested pursuant to the forms and procedures prescribed by Lender.

Payment

Borrower shall pay the outstanding principal plus all accrued interest of each advance in accordance with the terms prescribed on Trust Receipts or other trade related documents. However, Lender has the sole right to extend the terms if necessary.

As to drafts or acceptances under or purporting to be under the Letter of Credit, which are payable in foreign currency, Borrower may pay Lender at the current rate of exchange in Korea for cable transfer to the place of payment in the currency of the draft

Cessation of Advances

If Lender has made any commitment to make any Loan to Borrower under this Agreement, Lender has right to reduce the Loan limit or shall have no obligation make Loan Advances or to disburse Loan proceeds, if: (i) there occurs a material adverse change in financing community; or (ii) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan. If Lender decides to reduce the Loan limit and Borrower's outstanding loan exceeds such new limit, excess is due immediately upon demand of Lender.

Fees

Borrower shall pay Lender, on demand, commission and all charges and expenses paid or incurred, earned by Lender in connection wherewith, and interest where chargeable.

Amendment

In the event of any amendments or modifications of the terms of the Credit Agreement, this agreement shall be binding upon Lender with regard to the Credit Agreement so amended.

Change in Terms Agreement

Korea Exchange Bank has made a line of credit evidenced by the Agreement dated February 11, 2004, in the original Credit Limit 10,000,000,000 Korean Won

Date of Change:

August 2, 2004

Details of changes in Terms

Maturity date is changed from July 30, 2004 to January 31, 2005.

Decrease of Total Lending Limits from 10,000,000,000 Korean Won to 9,000,000,000 Korean Won. till December 31, 2004.

EX-10.9

EXHIBIT 10.9

Credit Agreement

Borrower:   DVS Korea Co., Ltd.
196 Kumkok Dong, Boon Dang Gu, Sung Nam City, Kyunggi Province
Mr. Song Sim, CEO

Lender:   Kookmin Bank

Total Credit Limit: 3,000,000,000 Korean Won

This Credit Agreement dated July 16, 2002, is made and executed between DVS Korea Co., Ltd.("Borrower") and Kookmin Bank ("Lender") on the following terms and conditions.

Borrower understands and agrees that in granting, renewing, or extending any loan, Lender is relying upon Borrower's representation, warranties, and agreements as set forth in this Agreement; the granting, renewing, or extending of any loan by lender at times shall be subject to Lender's sole judgment and discretion; and all such loans shall be and remain subject of the terms and conditions of this Agreement.

Limit

Types	Sublimit	Interest
Usuance (Term) Letter of Credit	3,000,000,000 Korean Won	Variable interest: may change day to day based on Lender's cost of fund negotiated with borrowing foreign banks.

Term

This Agreement shall be effective as of July 16, 2002, and shall continue in full force and effect until July 30, 2003.

Interest Rate

The annual interest rate for this Agreement is computed on a 365 day basis; that is, by applying the ratio of the annual interest rate over a year of 365 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

Late Charge and Interest After Default

Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay accrued interest, monthly payment, outstanding principal balance on final maturity date, and excess draw on the account, Lender will adjust annual interest rate to 19% and applied to past due, if any.

Description Collateral

Borrower shall provide to Lender a blank draft. Lender may submit to the Borrower's bank upon which the draft was drawn for full payment of unpaid principal and accrued interest when Borrower fails to make payment in accordance with the terms of this Agreement.

Furthermore, Borrower grant Lender a security interest in all property at any time shipped under, or pursuant to, or in connection with the Letter of Credit or anyway related thereto, or to the drafts drawn thereunder, whether or not Borrower receives the documents covering such property or release the same to Lender on trust receipt and also in and to all shipping documents, warehouse receipts, policies or certificates of insurance and other documents or liability to Borrower at any time existing under or with reference to the Letter of Credit of this agreement .

Advances

Advances or Request of Letter of Credit under this Agreement shall be requested pursuant to the forms and procedures prescribed by Lender.

Cessation of Advances

If Lender has made any commitment to make any Loan to Borrower under this Agreement, Lender has right to reduce the Loan limit or shall have no obligation make Loan Advances or to disburse Loan proceeds, if: (i) there occurs a material adverse change in financing community; or (ii) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan. If Lender decides to reduce the Loan limit and Borrower's outstanding loan exceeds such new limit, excess is due immediately upon demand of Lender.

Payment

Borrower shall pay the outstanding principal plus all accrued interest of each advance or borrowings in accordance with the terms prescribed on the Application for Commercial Letter of Credit, Trust Receipts or other trade related documents. However, Lender has the sole right to extend the terms if necessary.

As to drafts or acceptances under or purporting to be under the Letter of Credit, which are payable in foreign currency, Borrower may pay Lender in Korean Won at the current rate of exchange in Korea for cable transfer to the place of payment in the currency of the draft.

Fees

Borrower shall pay Lender, on demand, commission and all charges and expenses paid or incurred, earned by Lender in connection wherewith, and interest where chargeable.

Amendment

In the event of any amendments or modifications of the terms of the Credit Agreement, this agreement shall be binding upon Lender with regard to the Credit Agreement so amended.

Change in Terms Agreement

Kookmin Bank has made a Letter of Credit Commitment Agreement dated July 16, 2002, in the original amount of 3,000,000,000 Korean Won.

Date of Agreement:

July 30, 2003

Description of changes in Terms

Maturity date is changed from July 30, 2003 to July 30, 2004.

Change in Terms Agreement

Kookmin Bank has made a Letter of Credit Commitment Agreement dated July 16, 2002, in the original amount of 3,000,000,000 Korean Won.

Date of Agreement:

August 11, 2004

Description of changes in Terms

Maturity date is changed from July 30, 2004 to August 31, 2005.

Decrease of credit amount from 3,000,000,000 Korean Won. to 2,633,000,000 Korean Won till August 31, 2004, and 2,333,000,000 Korean Won till February 28, 2005, and 1,933,000,000 Korean Won till August 31, 2005,.

EX-10.10

EXHIBIT 10.10

Letter of Credit Commitment Agreement

Borrower:   DVS Korea Co., Ltd.
196 Kumkok Dong, Boon Dang Gu, Sung Nam City, Kyunggi Province
Mr. Song Sim, CEO

Lender:   Sanup Bank

Limit: $2,000,000 USD

Purpose of the Loan: USANCE (Term) Letter of Credit

This Letter of Credit Commitment Agreement dated October 23, 2003, is made and executed between DVS Korea Co., Ltd.("Borrower") and Sanup Bank ("Lender") on the following terms and conditions.

Borrower understands and agrees that in granting, renewing, or extending any loan, Lender is relying upon Borrower's representation, warranties, and agreements as set forth in this Agreement; the granting, renewing, or extending of any loan by lender at times shall be subject to Lender's sole judgment and discretion; and all such loans shall be and remain subject of the terms and conditions of this Agreement.

Term

This Agreement shall be effective as of October 23, 2003, and shall continue in full force and effect until October 23, 2004.

Description Collateral

• Installment Savings Deposit of 580,000,000 Korean Won

In addition, Borrower shall provide to Lender a blank draft. Lender may submit to the Borrower's bank the draft for full payment of unpaid principal and accrued interest when Borrower fails to make payment in accordance with the terms of this Agreement.

Furthermore, Borrower grant Lender a security interest in all property at any time shipped under, or pursuant to, or in connection with the Letter of Credit or anyway related thereto, or to the drafts drawn thereunder, whether or not Borrower receives the documents covering such property or release the same to Lender on trust receipt and also in and to all shipping documents, warehouse receipts, policies or certificates of insurance and other documents or liability to Borrower at any time existing under or with reference to the Letter of Credit of this agreement .

Interest Rate

The annual interest rate on this Agreement is variable. It changes day to day based on Lender's cost of fund negotiated with lending foreign banks. The annual interest rate for this Agreement is computed on a 365 day basis; that is, by applying the ratio of the annual interest rate over a year of 365 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

Late Charge and Interest After Default

Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay accrued interest, monthly payment, outstanding principal balance on final maturity date, and excess draw on the account, Lender will adjust annual interest rate to 19% and applied to past due, if any.

Payment

Borrower shall pay the outstanding principal plus all accrued interest of each payment made by Lender to beneficiary bank(s) designated by Borrower on behalf of Borrower with the terms prescribed on the Application for Commercial Letter of Credit or other trade related documents. However, Lender has the sole right to extend the terms if necessary.

As to drafts or acceptances under or purporting to be under the Letter of Credit, which are payable in foreign currency, Borrower may pay Lender in Korean Won at the current rate of exchange in Korea for cable transfer to the place of payment in the currency of the draft.

Cessation of Advances

If Lender has made any commitment to make any Loan to Borrower under this Agreement, Lender has right to reduce the Loan limit or shall have no obligation make Loan Advances or to disburse Loan proceeds, if: (i) there occurs a material adverse change in financing community; or (ii) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan. If Lender decides to reduce the Loan limit and Borrower's outstanding loan exceeds such new limit, excess is due immediately upon demand of Lender.

Fees

Borrower shall pay Lender, on demand, commission and all charges and expenses paid or incurred, earned by Lender in connection wherewith, and interest where chargeable.

Change in Terms Agreement

Sanup Bank has made a line of credit evidenced by the Agreement dated October 23, 2003 in the original amount of $2,000,000 USD.

Date of Agreement:

October 25, 2004

Description of changes in Terms

Maturity date is changed from October 23, 2004 to October 23, 2005.

Description Collateral

Installment Savings Deposit of 580,000,000 Korean Won

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