DIGITAL VIDEO SYSTEMS INC, SB-2/A, 1996-11-18

DIGITAL VIDEO SYSTEMS INC
SB-2/A, 1996-11-18
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996

REGISTRATION NO. 333-15471
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------

AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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DIGITAL VIDEO SYSTEMS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 3665 77-0333728
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)

2710 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051
(408) 748-2100
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)

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ROBERT B. PFANNKUCH
PRESIDENT
DIGITAL VIDEO SYSTEMS, INC.
2710 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051
TEL. (408) 748-2100 . FAX. (408) 727-1888
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES TO:
<TABLE>
<S> <C>
SANFORD J. HILLSBERG, ESQ. SHELDON MISHER, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION ALISON S. NEWMAN, ESQ.
1801 CENTURY PARK EAST, SUITE 1600 BACHNER, TALLY, POLEVOY & MISHER LLP
LOS ANGELES, CALIFORNIA 90067 380 MADISON AVENUE
TEL. (310) 553-4441 . FAX. (310) 201-4746 NEW YORK, NEW YORK 10017
TEL. (212) 687-7000 . FAX. (212) 682-5729
</TABLE>

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APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after
this Registration Statement becomes effective.

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

PURSUANT TO RULE 429(A) UNDER THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT ALSO RELATES TO THE COMPANY'S PRIOR REGISTRATION STATEMENT ON
FORM SB-2, REGISTRATION NO. 333-8213.
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<PAGE>

EXPLANATORY NOTE

Pursuant to Rule 429 of the Securities Act of 1933, as amended, this
Registration Statement relates to three different offerings, as follows:

Offering #1: This Registration Statement relates to the Company's offer (the
"Offering") of up to 26,450 units, each unit consisting of a minimum of 70 and
a maximum of 100 units of the Company's securities (the "IPO Units"). Each IPO
Unit consists of one share of Common Stock, one redeemable Class A Warrant
(the "Class A Warrants") and one redeemable Class B Warrant (the "Class B
Warrants"). The IPO Units are identical to the units sold in the Company's
initial public offering (the "IPO"), which was completed in May 1996. Each
Class A Warrant entitles the holder to purchase one share of Common Stock and
one Class B Warrant at an exercise price of $6.50, subject to adjustment, at
any time until May 9, 2001. Each Class B Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $8.75, subject to
adjustment, at any time until May 9, 2001. The Class A Warrants are currently
subject to redemption, and the Class B Warrants are subject to redemption
commencing May 9, 1997, by the Company at a redemption price of $.05 per
Warrant on 30 days' written notice, provided the closing bid price of the
Common Stock averages in excess of $9.10 or $12.25 per share, respectively,
for any 30 consecutive trading days ending within 15 days of the date the
Warrants are called for redemption.

Offering #2: This Registration Statement also relates to (i) 5,064,130
shares of Common Stock and 5,064,130 Class B Warrants of the Company issuable
upon exercise of the 4,830,000 Class A Warrants issued in the IPO and the
234,130 Class A Warrants issued to certain of the Selling Securityholders
(defined below) in connection with the IPO that have been resold by such
Selling Securityholders; (ii) 5,064,130 shares of Common Stock issuable upon
exercise of the Company's Class B Warrants, which are issuable upon exercise
of the Company's outstanding Class A Warrants; (iii) 4,830,000 shares of
Common Stock issuable upon exercise of the Company's outstanding Class B
Warrants issued in the IPO; and (iv) 420,000 shares of Common Stock, 420,000
Class A Warrants and 420,000 Class B Warrants issuable upon exercise of the
unit purchase options received by the Underwriter and its designees in
connection with the IPO (the "IPO Unit Purchase Option"), 420,000 shares of
Common Stock and 420,000 Class B Warrants issuable upon exercise of said
Class A Warrants and 840,000 shares of Common Stock issuable upon exercise of
all of said Class B Warrants.

The complete Prospectus relating to the Offering follows immediately after
this Explanatory Note. Following the Prospectus for the Offering are pages
(denoted as Alternate Offering #2 Pages) of the Prospectus relating solely to
the foregoing securities, including alternate front and back cover pages and
sections entitled "Concurrent Offerings," "Plan of Distribution" and "Use of
Proceeds" to be used in lieu of the sections entitled "Concurrent Offerings,"
"Underwriting" and "Use of Proceeds" in the Prospectus relating to the
Offering.

Offering #3: This Registration Statement also relates to (i) an additional
3,265,870 Class A Warrants (the "Selling Securityholder Warrants") held by the
holders thereof (the "Selling Securityholders"); (ii) 3,265,870 Class B
Warrants (the "Selling Securityholder Class B Warrants") underlying the
Selling Securityholder Warrants; and (iii) 6,531,740 shares of Common Stock
(the "Selling Securityholder Stock") underlying the Selling Securityholder
Warrants and the Selling Securityholder Class B Warrants, all for resale from
time to time by the Selling Securityholders. The Selling Securityholder
Warrants, the Selling Securityholder Class B Warrants and the Selling
Securityholder Stock are collectively referred to as the "Selling
Securityholder Securities."

The complete Prospectus relating to the Offering follows immediately after
this Explanatory Note. Following the Prospectus for the Offering are pages
(denoted as Alternate Offering #3 Pages) of the Prospectus relating solely to
the Selling Securityholder Securities, including alternative front and back
cover pages, a new section entitled "Selling Securityholders" and sections
entitled "Concurrent Offerings" and "Plan of Distribution" to be used in lieu
of the sections entitled "Concurrent Offerings" and "Underwriting" in the
Prospectus relating to the Offering. Certain sections of the Prospectus for
the Offering will not be used in the Prospectus relating to the Selling
Securityholder Securities, such as "Use of Proceeds."
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION DATED NOVEMBER 18, 1996

PROSPECTUS
23,000 UNITS

DIGITAL VIDEO SYSTEMS, INC.

EACH UNIT CONSISTING OF
A MINIMUM OF 70 AND A MAXIMUM OF 100 IPO UNITS, EACH CONSISTING OF ONE SHARE OF
COMMON STOCK,
ONE REDEEMABLE CLASS A WARRANT
AND ONE REDEEMABLE CLASS B WARRANT

Each unit ("Unit") offered hereby (the "Offering") by Digital Video Systems,
Inc. (the "Company") consists of a minimum of 70 and a maximum of 100 units of
the Company's securities (the "IPO Units"). Each IPO Unit consists of one share
of Common Stock, $.0001 par value per share (the "Common Stock"), one
redeemable Class A Warrant (the "Class A Warrants") and one redeemable Class B
Warrant (the "Class B Warrants"). The IPO Units are identical to the units sold
in the Company's initial public offering (the "IPO"), which was completed in
May 1996.

The components of the Units and IPO Units will be transferable separately
immediately upon issuance. It is currently anticipated that the public offering
price per Unit will be $1,000. The actual number of IPO Units to be included in
each Unit will be determined by negotiations between the Company and D.H. Blair
Investment Banking Corp. (the "Underwriter"), based primarily on the current
market price of the outstanding IPO Units, and a determination of the number of
IPO Units needed to successfully market the Units in light of market
conditions. Each Class A Warrant entitles the holder to purchase, at an
exercise price of $6.50, subject to adjustment, one share of Common Stock and
one Class B Warrant. Each Class B Warrant entitles the holder to purchase, at
an exercise price of $8.75, subject to adjustment, one share of Common Stock.
The Class A Warrants and the Class B Warrants included in the Units offered
hereby (collectively, the "SPO Warrants") are exercisable at any time after
issuance until May 9, 2001. The Class A Warrants are currently subject to
redemption, and the Class B Warrants are subject to redemption commencing May
9, 1997, by the Company at $.05 per Class A Warrant or Class B Warrant, upon 30
days' written notice, if the average closing bid price of the Common Stock has
equalled or exceeded $9.10 per share with respect to the Class A Warrants or
$12.25 per share with respect to the Class B Warrants (subject to adjustment in
each case) for 30 consecutive trading days ending within 15 days of the date
the Warrants are called for redemption. See "Description of Securities."

The Company's Common Stock, Class A Warrants and Class B Warrants are traded
on the Nasdaq National Market under the symbols "DVID," "DVIDW," and "DVIDZ,"
respectively, and the IPO Units are traded on the Nasdaq SmallCap Market under
the symbol "DVIDU." The closing prices of these securities on November 15, 1996
as reported by Nasdaq were $8, $4 3/4, $2 1/4 and $14 7/16, respectively. See
"Price Range of Securities." The Units offered hereby will not be traded
separately on Nasdaq. The exercise prices and other terms of the Class A
Warrants and Class B Warrants were determined by negotiation between the
Company and the Underwriter at the time of the IPO and do not necessarily bear
any relationship to the Company's assets, book value, results of operations,
net worth or any other recognized criteria of value. THE UNDERWRITER IS SUBJECT
TO AN INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION"). SEE "RISK FACTORS" AND "UNDERWRITING."

-----------

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES OFFERED HEREBY.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit........................ $1,000 $60 $940
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Total(3)........................ $23,000,000 $1,380,000 $21,620,000
</TABLE>
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(Footnotes appear on the following page)

The Units are offered by the Underwriter on a "firm commitment" basis when,
as and if delivered to and accepted by the Underwriter, and subject to
withdrawal or cancellation of the offer without notice and to their right to
reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Common Stock and
Warrants comprising the Units will be made at the offices of D.H. Blair
Investment Banking Corp., 44 Wall Street, New York, New York, on or about
November , 1996.

D.H. BLAIR INVESTMENT BANKING CORP.

The date of this Prospectus is November , 1996.
<PAGE>

(Footnotes for table on cover page)

(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $690,000 or $30
per Unit ($793,500 if the Underwriter's over-allotment option is exercised
in full); and (ii) an option to purchase up to 2,300 Units at an exercise
price of $1,300 per Unit, exercisable over a period of three years,
commencing two years from the date of this Prospectus (the "Unit Purchase
Option"). In addition, the Company has agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of the Offering of approximately
$1,417,000 ($1,520,000 if the Underwriter's over-allotment is exercised)
payable by the Company, including the Underwriter's non-accountable
expense allowance.
(3) The Company has granted to the Underwriter a 30-day option to purchase up
to 3,450 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If the over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be increased to
$26,450,000, $1,587,000 and $24,863,000, respectively. See "Underwriting."

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IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE IPO UNITS,
THE COMMON STOCK AND THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

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IN CONNECTION WITH THE OFFERING, THE UNDERWRITER AND SELLING GROUP MEMBERS
OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMPANY'S SECURITIES ON NASDAQ IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT"). SEE "RISK FACTORS--POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN
THE COMPANY'S SECURITIES" AND "UNDERWRITING."

Pursuant to Rule 429 under the Securities Act, this Prospectus also relates
to and may be used in connection with securities previously registered under
the Securities Act pursuant to Registration Statement No. 333-2228-LA and
consisting of (i) 5,064,130 shares of Common Stock and 5,064,130 Class B
Warrants issuable upon exercise of the 4,830,000 Class A Warrants issued in
the IPO and the 234,130 Class A Warrants issued to certain bridge financing
investors in connection with the IPO that have been resold by such investors;
(ii) 9,894,130 shares of Common Stock issuable upon exercise of the Class B
Warrants issued in the IPO and the Class B Warrants underlying the outstanding
Class A Warrants (collectively, the "IPO Warrants"); (iii) 420,000 shares of
Common Stock, Class A Warrants and Class B Warrants issuable upon exercise of
the unit purchase options received by the Underwriter and its designees in
connection with the IPO (the "IPO Unit Purchase Options"), 420,000 shares of
Common Stock and Class B Warrants issuable upon exercise of said Class A
Warrants and the 840,000 shares of Common Stock issuable upon exercise of all
of said Class B Warrants; and (iv) 3,265,870 Class A Warrants issued to
certain bridge financing investors in connection with the IPO (the "Bridge
Warrants") and 3,265,870 shares of Common Stock and 3,265,870 Class B Warrants
issuable upon exercise of the Bridge Warrants and the 3,265,870 shares of
Common Stock issuable upon exercise of the foregoing Class B Warrants. The SPO
Warrants and IPO Warrants are collectively referred to herein as the
"Warrants" and, unless the context otherwise requires, all references herein
to the Warrants shall include the Bridge Warrants.

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The Company is currently a reporting company under the Exchange Act, and as
such furnishes its securityholders with annual reports containing audited
financial statements and such interim unaudited reports as it deems
appropriate.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary does not purport to be complete and is qualified in its
entirety by the more detailed information and financial data (including the
financial statements and the notes thereto) appearing elsewhere in this
Prospectus. Unless otherwise noted, all information in this Prospectus includes
the issuance of the Acquisition Shares (defined below) and assumes no exercise
of (i) the Underwriter's over-allotment option, (ii) the Warrants; (iii) the
Underwriter's Unit Purchase Option; (iv) the Underwriter's IPO Unit Purchase
Options; (v) options granted or available for grant under the Company's 1993
Stock Option Plan (the "1993 Option Plan") or 1996 Stock Option Plan (the "1996
Option Plan"); or (vi) other outstanding options and warrants. All share, per
share and other information contained in this Prospectus has been adjusted to
reflect an approximately 1.078-for-1 stock split effected in January 1996. See
"Capitalization," "Management--Stock Option Plans" and "Description of
Securities." Prospective investors are cautioned that this Prospectus contains
forward-looking statements within the meaning of the "safe-harbor" provisions
of the Private Securities Litigation Reform Act of 1995 that involve various
risks and uncertainties, including, without limitation, statements with respect
to the Company's strategy, proposed sales of the Company's products, markets
for the Company's products and the development of the Company's products,
including integrated circuit products. The Company's actual results may differ
materially from those described in these forward-looking statements due to a
number of factors, including, but not limited to, the uncertainty of market
acceptance of Video CD players and components, planned rapid growth of the
Company's business, the risks relating to the Company's acquisition of ViComp
Technology, Inc., conducting business in foreign countries and the competitive
market for the Company's products and those identified under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as those discussed elsewhere in this
Prospectus and any document incorporated herein by reference.

THE COMPANY

Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats such as video tape. However, digital video,
unlike analog video, can be compressed, which allows for increased storage
capability and transmission efficiencies as well as the ability to reproduce
and transmit video images without perceptible image degradation. Digital video
also permits superior editing capabilities because of its greater compatibility
with computers. Although the large video entertainment markets throughout the
world are currently served primarily by VHS video cassettes (an analog format),
the Company believes that Video CDs and digital video discs ("DVD"), which are
an advanced video disc format, will effectively compete for these markets in
the future. A significant market for Video CD players recently has developed in
China, and the Company believes that the Video CD is likely to be the initial
format of choice in other developing countries, such as India and Malaysia, due
to a number of factors. These factors include recent reductions in the selling
prices for Video CD players, which have made them more affordable and
competitively priced with VHS video cassette players ("VCRs"), and the large
amount of entertainment software in Video CD format that is currently available
in languages indigenous to the developing countries. The quantity of
entertainment media available in the Video CD format, including movies, karaoke
and games, has increased from several hundred titles in 1994 to more than 5,000
titles worldwide in 1996, although only approximately 200 titles are available
in the United States.

Virtually all of the Company's product revenues to date have been generated
by sales of Video CD players and Video CD player components in China and
Taiwan. The Company markets its video encoding systems (including its recently
introduced video encoding board sets) to post-production houses, such as movie
and television studios, software developers and educational institutions, in
the United States and in foreign markets, that are converting large quantities
of analog video material to digital video for storage on Video CDs. In
addition, the Company recently has commenced marketing a network multimedia
system that has entertainment, education and business applications. If market
conditions are favorable, the Company may modify this multimedia system to
deliver video-on-demand to the hospitality industry, which includes hotels and
cruise ships.

3
<PAGE>

In October 1996, the Company acquired all of the outstanding capital stock of
ViComp Technology, Inc. ("ViComp") for 491,253 shares (the "Acquisition
Shares") of the Company's Common Stock (the "ViComp Acquisition"). ViComp was
founded in August 1995 and has been engaged in the design and development of
integrated circuits (or "chips") to decode MPEG-I (a standard for compression
of audio and video to CD-ROM) signals. The Company anticipates that ViComp's
decoding chip that is currently under development (the "ViComp MPEG-I Chip")
will be available for production in commercial quantities by the second half of
calendar year 1997. The Company plans to incorporate the ViComp MPEG-I Chip
into its Video CD products and may also market the chip to other manufacturers
of Video CD products. There can be no assurance, however, that the design and
development efforts by ViComp will be completed successfully or within the
foregoing time schedule. In addition, the Company intends to use ViComp's
integrated circuit design and development capabilities to create other chips,
such as an MPEG-II (an advanced standard for compression of audio and video to
broadcast systems) decoder chip, for use in products currently under
consideration by the Company. A portion of the net proceeds of the Offering
will be used to fund ViComp's current and anticipated design and development
activities, which will result in the Company incurring substantially increased
research and development expenses for the foreseeable future. Dr. Edmund Y.
Sun, the Chairman of the Board and Chief Executive Officer of the Company, was
a co-founder of ViComp and owned approximately 57% of ViComp's outstanding
capital stock at the time of the ViComp Acquisition. The terms of the ViComp
Acquisition provide that the Acquisition Shares received by Dr. Sun will be
subject to cancellation under certain conditions.

The Company's strategy is to continue to develop, market and sell key
electronic components for Video CD players in China and other such developing
countries as India and Malaysia. In addition, the Company intends to develop,
market and sell key electronic components for use in MPEG-II systems, such as
DVD, digital set top boxes and high definition television. See "Business--
Industry Background." A further objective of the Company will be to exploit
market niches that have not been broadly developed by the major consumer
electronic manufacturers. For example, the Company intends to pursue business
and educational applications for the Video CD player market. Similarly, the
Company will attempt to develop niche applications for its network multimedia
system, such as video-on-demand for the hospitality industry. To implement its
strategy, the Company has assembled a highly experienced engineering and
research and development team. In addition, the Company may seek to enter into
strategic partnerships or other collaborative arrangements to develop and
market these new products.

The Company was founded in 1992 by Dr. Sun. Dr. Sun is the founder and former
Chief Executive Officer ofC-Cube Microsystems Inc. ("C-Cube"), a leading
producer of digital video encoding and decoding products that are incorporated
into various consumer, communications and computer applications, including many
of the Company's products. In 1993, the Company entered into agreements with
Hyundai Electronics Industries Co., Ltd. ("Hyundai"), which funded a portion of
the Company's development of digital video karaoke players, jukeboxes, network
systems and encoding machines in exchange for an exclusive license to
manufacture, use and sell certain of the Company's products in Korea and a non-
exclusive license for other countries. Hyundai also made a substantial equity
investment in the Company.

Approximately 90% of the Company's revenues in 1994 consisted of sales of
certain products and services to Hyundai and other affiliated customers which
the Company did not expect to be a continuing source of revenues. Since 1995,
the Company has shifted its focus to production and sale of commercial products
in an attempt to meet the significant growth in demand for digital video
products. However, as a result, at least in part, of insufficient working
capital to expand its operations to meet such demand, the Company has
recognized limited revenues from sales of its products to date. Having
significantly increased its working capital by completing the IPO in May 1996
and having thereafter expanded its marketing and production activities, the
Company believes that the continued increase in the demand for digital video
products may enable it to generate revenue growth in the balance of the
Company's fiscal year ending March 31, 1997. There can be no assurance,
however, that sales of the Company's products will ever generate significant
revenue growth. The Company anticipates that it will incur a substantial
operating loss for the balance of the current fiscal year, and there can be no
assurance that the Company thereafter will attain or sustain profitable
operations.

The principal executive offices of the Company are located at 2710 Walsh
Avenue, Santa Clara, California 95051. The Company's telephone number is
(408)748-2100.

4
<PAGE>

THE OFFERING

Securities Offered.......... 23,000 Units, each Unit consisting of a minimum
of 70 and a maximum of 100 IPO Units. Each IPO
Unit consists of one share of Common Stock, one
Class A Warrant and one Class B Warrant. See "De-
scription of Securities."

Terms of Warrants........... Each Class A Warrant entitles the holder to
purchase one share of Common Stock and one Class
B Warrant at an exercise price of $6.50 until May
9, 2001 subject, in certain circumstances, to
earlier redemption by the Company. Each Class B
Warrant entitles the holder to purchase one share
of Common Stock at an exercise price of $8.75
from the date of issuance until May 9, 2001
subject, in certain circumstances, to earlier
redemption by the Company. The exercise prices
and the number of shares of Common Stock issuable
upon exercise of the Warrants are subject to
adjustment in certain circumstances. See
"Description of Securities--Warrants."

Shares of Common Stock
Outstanding:

Prior to the Offering..... 17,533,091 shares(1)

After the Offering........ 19,833,091(1)(2)(3)

Use of Proceeds............ The net proceeds of the Offering will be utilized
(i) to fund ViComp's research and development
activities in connection with the completion of
the development of the ViComp MPEG-I Chip and the
design and development of other integrated
circuits for use in products currently under
consideration by the Company; (ii) for the
acquisition of inventory to support any potential
increase in the sale of the Company's products;
(iii) to expand the Company's sales and marketing
activities; and (iv) for working capital
purposes. See "Use of Proceeds."

Risk Factors................ The securities offered hereby involve a high de-
gree of risk and should not be purchased by in-
vestors who cannot afford the loss of their en-
tire investment. See "Risk Factors."

Nasdaq Symbols(4)........... IPO Units--DVIDU
Common Stock--DVID
Class A Warrants--DVIDW
Class B Warrants--DVIDZ
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(1) Includes 7,978,114 shares of Common Stock (the "Escrow Shares") that have
been deposited into escrow by the holders thereof and 491,253 Acquisition
Shares (of which a total of 302,493 shares (the "Escrow Acquisition
Shares") have been deposited into escrow by the holders thereof). Does not
include (i) 2,939,357 shares of Common Stock reserved for issuance under
the 1993 Option Plan and 1,000,000 shares of Common Stock reserved for
issuance under the 1996 Option Plan, under which options to purchase
2,516,687 and 189,557 shares of Common Stock, respectively, are
outstanding; and (ii) 205,990 shares of Common Stock issuable upon the
exercise of other outstanding options and warrants. Options to purchase
1,854,019 shares of Common Stock outstanding under either the 1993 Option
Plan or other options, and options to purchase 267,867 shares of Common
Stock available for grant under the 1993 Option Plan (collectively, the
"Escrow Options") have been deposited and agreed to be deposited into
escrow by the holders thereof and the Company, respectively, and represent
a portion of the excluded shares described in the preceding sentence.

5
<PAGE>

The Escrow Shares and the Escrow Options (collectively, the "Escrow
Securities") are subject to cancellation and will be contributed to the
capital of the Company if the Company does not attain certain earnings
levels or the market price of the Company's Common Stock does not achieve
certain levels, and the Escrow Acquisition Shares also are subject to
cancellation under certain conditions. Also excludes (i) 14,958,260 shares
of Common Stock issuable upon exercise of the IPO Warrants and the 234,130
Class A Warrants issued to certain bridge financing investors in connection
with the IPO that have been resold by such investors and the Class B
Warrants underlying the Class A Warrants; (ii) 6,531,740 shares of Common
Stock issuable upon exercise of the Bridge Warrants and the Class B Warrants
issuable upon exercise of the Bridge Warrants; and (iii) 1,680,000 shares of
Common Stock issuable upon exercise of the IPO Unit Purchase Options and the
Class A Warrants and Class B Warrants underlying such options. See
"Principal Shareholders--Escrow Securities" and "Business--ViComp
Acquisition."
(2) Excludes: (i) a minimum of 4,830,000 and a maximum of 6,900,000 shares of
Common Stock issuable upon exercise of the SPO Warrants; (ii) a minimum of
966,000 and a maximum of 1,380,000 shares of Common Stock issuable upon
exercise of the Underwriter's over-allotment option and the underlying SPO
Warrants included in the Units included in the over-allotment option;
(iii) a minimum of 161,000 and a maximum of 230,000 shares of Common Stock
issuable upon exercise of the Unit Purchase Option; and (iv) a minimum of
483,000 and a maximum of 690,000 shares of Common Stock issuable upon
exercise of the Class A Warrants and Class B Warrants underlying the Units
subject to the Unit Purchase Option. See "Description of Securities" and
"Underwriting."

(3) Assumes that each Unit consists of the maximum of 100 IPO Units. If each
Unit consists of the minimum of 70 IPO Units, 19,143,091 shares of Common
Stock would be outstanding after the Offering.
(4) The Units offered hereby will not be listed or traded separately on
Nasdaq.

SUMMARY AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PRO FORMA
NINE-MONTH PERIOD NINE-MONTH
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, PERIOD ENDED
------------------------ ------------------------ SEPTEMBER 30,
1994 1995 1995(1) 1996(1) 1996(2)
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $ 7,808,633 $ 3,520,831 $ 1,973,607 $ 4,895,514 $ 4,895,514
Cost of revenue........ 6,918,490 3,354,920 1,772,089 5,566,010 5,566,010
Gross profit (loss).... 890,143 165,911 201,518 (670,496) (670,496)
Loss from operations... (2,122,052) (3,154,131) (2,434,700) (4,515,214) (5,303,984)
Net loss(3)............ $(1,653,661) $(4,483,311) $(2,480,147) $(6,242,587) $(7,016,300)
Net loss per share..... $ (.39) $ (.84) $ (.46) $ (.81) $ (.89)
Shares used in
computation of net
loss per share(4)..... 4,195,148 5,337,668 5,353,284 7,675,792 7,885,525
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
PRO FORMA,
ACTUAL AS ADJUSTED(5)
----------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $16,827,685 $ 36,818,984
Total assets....................................... 18,606,499 39,131,258
Total liabilities.................................. 1,162,020 1,533,664
Accumulated deficit................................ (12,267,320) (14,025,719)
Total stockholders' equity......................... 17,444,479 37,597,594
</TABLE>
- -------

(1) In June 1996, the Company changed its fiscal year end from December 31 to
March 31. As a result, the Company's current fiscal year will end March
31, 1997.

(2) The pro forma statement of operations data combines the Company's
statement of operations data for the nine-month period ended September 30,
1996 with ViComp's statement of operations data for the period from its
inception (August 21, 1995) to August 31, 1996, as if the ViComp
Acquisition had occurred as of January 1, 1996. See "Pro Forma Financial
Information."

(3) The nine-month period ended September 30, 1996 includes a non-cash charge
of approximately $1,264,000 relating to repayment of the Bridge Notes.

(4) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the computation of weighted average number of shares of
Common Stock used in computing net loss per share. Excludes the Escrow
Shares. The net loss per share for the pro forma nine-month period ended
September 30, 1996 also reflects the shares issued in the ViComp
Acquisition (excluding the Escrow Acquisition Shares issued to Dr. Edmund
Y. Sun). See "Principal Shareholders--Escrow Securities" and Note 11 of
Notes to Financial Statements.
(5) Pro forma, as adjusted to give effect to the ViComp Acquisition and the
receipt of the estimated net proceeds to the Company from the sale of the
Units offered hereby. See "Use of Proceeds" and "Capitalization."

6
<PAGE>

RISK FACTORS

The securities offered hereby are highly speculative in nature and involve a
high degree of risk. Prospective investors should carefully consider, along
with the other information contained in this Prospectus, the following
considerations and risks in evaluating an investment in the Company. This
Prospectus contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995
that involve risks and uncertainties, including, without limitation,
statements with respect to the Company's strategy, proposed sales of the
Company's products, markets for the Company's products and the development of
the Company's products, including integrated circuit products. The Company's
actual results could differ materially from those discussed in these forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, the uncertainty of market acceptance of Video
CD players and components, planned rapid growth of the Company's business, the
risks relating to the ViComp Acquisition, conducting business in foreign
countries and the competitive market for the Company's products and those
discussed in the following section and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as those discussed elsewhere in this Prospectus and any document
incorporated herein by reference.

HISTORY OF LOSSES AND ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES. To
date, the Company has incurred significant losses. At September 30, 1996, the
Company had an accumulated deficit of approximately $12,267,000. The Company
incurred operating losses of approximately $2,122,000 and $3,154,000 for the
fiscal years ended December 31, 1994 and 1995, respectively, and an operating
loss of approximately $4,515,000 for the nine-month period ended September 30,
1996. Such losses resulted principally from limited revenues from operations
and significant costs associated with the development of the Company's
technologies. The Company's net loss for the nine-month period ended September
30, 1996 of approximately $6,243,000 included certain non-operating charges,
including a non-cash charge of approximately $1,264,000 resulting from the
amortization of deferred financing costs and accretion of debt discount in
connection with the notes issued in the Company's bridge financing that was
completed in March 1996 (the "Bridge Financing"). The Company expects to incur
a substantial operating loss for the balance of the current fiscal year (which
will also include a non-cash charge to operations of approximately $1,758,000
in the three-month period ending December 31, 1996 in connection with the
ViComp Acquisition). The Company also expects to continue to incur losses in
the future until such time, if ever, as there is a substantial increase in
product sales. There can be no assurance that sales of the Company's products
will ever generate significant revenue, or that the Company will generate
positive cash flow from its operations or attain or thereafter sustain
profitability in any future period.

UNCERTAINTY OF MARKET ACCEPTANCE OF VIDEO CDS; LACK OF ESTABLISHED MARKET
FOR PRODUCTS. The Company's business is dependent on market acceptance of its
digital video technology and the successful commercialization of products
utilizing this technology. To date, demand for the Company's Video CD products
has been principally in China and Taiwan, and there can be no assurance that
demand in these countries will increase or that acceptance of Video CD
products in any other countries, specifically the United States, will ever
materialize. The Company is not aware of any marketing studies of the
potential size of the U.S. market or the willingness of potential customers to
purchase this new technology. The Company's ability to successfully market its
Video CD products will depend in part on the willingness of potential
customers to incur the costs involved in purchasing Video CD players, which in
turn will depend on the Company and others convincing potential customers of
the benefits of digital video. The Company has only recently released its
latest generation of Video CD players, and there can be no assurance that
these players or any other of the Company's products or product enhancements
will meet the requirements of the marketplace and achieve market acceptance.
The willingness of potential customers to purchase Video CD players will also
depend on the ability of consumers to purchase or rent Video CDs of desirable
titles at reasonable prices, and such Video CDs generally have not been
available to date in the United States or other large industrialized
countries. Failure of the Company's products in general (and the Video CD
player or player components in particular) to attain significant market
acceptance would have a material adverse effect on the Company's operating
results and financial condition.

RISK OF PLANNED RAPID GROWTH. The Company plans to significantly expand its
operations during the current fiscal year, which could place a significant
strain on its limited personnel, financial and other resources. The Company's
ability to manage this expansion will require significant expansion of its
product development and marketing and sales capabilities and personnel. In
particular, the Company is in the process of expanding its sales and marketing
organization to increase coverage in the Asia-Pacific region and Europe. There
can be no assurance that the Company will be able to find qualified personnel
to fill such sales and marketing positions or

7
<PAGE>

be able to successfully manage a broader sales and marketing organization. In
addition, the contemplated sale and distribution of products to numerous
licensees and subcontractors who will manufacture products incorporating the
Company's products in diverse markets and the requirements of such
manufacturers for design support will also place substantial demands on the
Company's product development, quality control and sales functions. The
failure of the Company's management to effectively expand or manage these
functions consistent with any growth which may occur could have a materially
adverse effect on the Company's business and results of operations.

DEPENDENCE ON LIMITED NUMBERS OF SUPPLIERS. The Company's products
incorporate computer chips produced by C-Cube. The Company has no contractual
right to obtain any specified number of chips from C-Cube. Although C-Cube
substantially increased its capacity to supply chips in April 1996, there can
be no assurance that the Company's allocation will increase sufficiently to
meet the Company's future needs. Should the Company's ability to obtain the
requisite number of C-Cube chips be limited for any lengthy period of time or
further impaired or if the cost of the C-Cube chips increases or if the C-Cube
chip is only available to the Company at prices substantially higher than
those paid by the Company's competitors for these chips or other functionally
equivalent chips, the Company's ability to supply products to its customers on
a competitive basis or at all could be materially and adversely affected. The
Company has recently secured from an Asian manufacturer a source of MPEG-I
decoder chips that are substantially equivalent to the C-Cube chip that has
been used in the Company's Video CD products at significantly lower prices.
However, the Company and that manufacturer have not yet completed the
integration of this chip into the Company's Video CD board. No assurances can
be given that such integration will be successfully completed in time to
enable the Company to utilize such chips prior to the end of calendar year
1996 or that a sufficient quantity of such chips will be made available to the
Company to meet its requirements. The Company could also encounter quality
control or other reliability problems with this chip after the Company
incorporates it into its products. It is the Company's intention ultimately to
utilize the ViComp MPEG-I Chip in place of the C-Cube chip or the replacement
chip described above. However, there can be no assurance that development of
this chip by ViComp will be successfully completed on a timely basis. The
Company's inability to obtain a sufficient quantity of chips from one or more
sources at a competitive cost would have a materially adverse effect on the
Company's business, prospects, operations and financial condition. See "--
Risks of Limited Protection for Company's Intellectual Property and
Proprietary Rights and Infringement of Third Parties' Rights" and "Business--
Suppliers."

RISKS OF VICOMP ACQUISITION. Although ViComp has completed a substantial
portion of the design and development work for the ViComp MPEG-I Chip, there
can be no assurance that it will be able to successfully complete development
of this product (currently scheduled for completion by the second half of
calendar year 1997) or that such development will not require expenditures
substantially in excess of those presently estimated. ViComp may experience
significant delays due to, among other things, unexpected design problems,
loss of key ViComp personnel or other factors in completing development of
this chip. Further, if the costs to commercially produce the ViComp MPEG-I
Chip are higher than currently anticipated or if third parties develop MPEG-I
decoder chips that can be commercially produced at costs lower than the ViComp
MPEG-I Chip, the ViComp MPEG-I Chip could be of limited or no value to the
Company. Development work has not yet commenced on any other ViComp products,
and there can be no assurance that any additional products will be
successfully developed by ViComp or that such products will be commercially
viable. In addition, the Company will need to obtain sufficient foundry
capacity to produce any chips developed by ViComp, and there can be no
assurance that prior shortages of foundry capacity in the integrated circuit
industry will not recur in the future.

The success of ViComp's design and development work will be heavily
dependent upon the efforts of James Kirkpatrick, Jr., a co-founder and former
Chief Executive Officer of ViComp. The Company does not have an employment
contract with Mr. Kirkpatrick, and the loss of his services could have a
materially adverse effect on the Company. The Company will incur a substantial
non-cash charge to earnings at such time, if ever, that the conditions for the
release of any or all of Dr. Sun's Escrow Acquisition Shares from escrow are
satisfied, which would increase the Company's loss or reduce or eliminate the
Company's net income, if any, for financial reporting purposes for the period
or periods during which such securities are, or become possible of being,

8
<PAGE>

released from escrow (except that, with respect to the release of any of Dr.
Sun's Escrow Acquisition Shares escrowed in connection with the ViComp
Acquisition, the Company may capitalize a portion of this amount and amortize
it over future periods). See "--Charge to Income in the Event of Release of
Escrowed Securities," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Charge to Income in the Event of Release
of Escrowed Securities" and "Business-- ViComp Acquisition."

RISKS OF INTERNATIONAL OPERATIONS. Sales outside the United States have
accounted for a significant portion of the Company's revenues to date (with
sales to China and Taiwan accounting for substantially all of the Company's
product revenues in 1995 and during the nine-month period ended September 30,
1996), and the Company believes that foreign sales will continue to account
for a significant portion of its future revenues. Moreover, the Company has
been manufacturing a substantial portion of its products in Taiwan, is
planning additional manufacturing operations through subcontractors in China
and may establish manufacturing operations in other countries to meet local
demand for its products in those markets when, if ever, such demand develops.
Accordingly, the Company will be subject to all of the risks inherent in
international operations, including work stoppages, transportation delays and
interruptions, political instability in, or conflict between, countries in
which the Company is doing business, such as Taiwan and China, foreign
currency fluctuations, economic disruptions, expropriation, the imposition of
tariffs and import and export controls, the payment of significant customs
duties to deliver products into markets such as China where the smuggling of
competing products into such markets without the payment of duties may be
widespread, changes in governmental policies (including United States trade
policy toward certain countries such as China and Japan) and other factors
which could have a materially adverse effect on the Company's business. In
particular, the Company's markets may be adversely affected by the political
environment in China. The Company will also be subject to the burdens of
complying with a wide variety of foreign laws and regulations. These
international trade factors may, under certain circumstances, materially and
adversely impact demand for the Company's products or the Company's ability to
deliver its products in a timely manner, which in turn may have an adverse
impact on the Company's relationships with its customers. The Company's
success will depend in part upon its ability to manage international marketing
and sales operations and manufacturing relationships, which are generally more
complex than domestic marketing and sales operations or manufacturing
relationships.

Should the Company substantially increase its product sales in China or
other countries, the Company anticipates that it will be required to
significantly increase the amount of credit it extends to purchasers in these
markets. The Company has had only limited experience in extending credit to
foreign customers and will encounter increased risks in extending credit to
new customers in these markets, including the creditworthiness of such
customers and the difficulty of collecting accounts receivable in these
countries. While the Company sells certain of its products in international
markets and buys certain items incorporated into its products in currencies
other than the U.S. dollar, the Company does not currently hedge its exposure
to foreign currency fluctuations. As a result, currency fluctuations could
have a material adverse effect on the Company's business and results of
operations. With respect to international sales that are denominated in
U.S. dollars, an increase in the value of the U.S. dollar relative to foreign
currencies could increase the effective price of, and reduce demand for, the
Company's products relative to competitive products priced in the local
currency.

EFFECT OF TRADE DISPUTES. The United States has had disputes with China
relating to trade and human rights issues and has considered trade sanctions
against China and Japan. If trade sanctions were imposed, China or Japan could
enact trade sanctions in response. Because a number of the Company's current
and prospective customers and suppliers of items incorporated into its
products are located in China, Taiwan or Japan, trade sanctions, if imposed,
could have a materially adverse effect on the Company's business and results
of operations. Similarly, protectionist trade legislation in either the United
States or foreign countries, such as China and Taiwan, could affect the
Company's ability to import and export products and have a materially adverse
effect on the Company's ability to manufacture or to sell its products in
foreign markets. In addition, recent efforts by China to limit certain ongoing
practices, such as the pirating of Video CD titles, may increase the cost of
such titles and result in a substantial decrease in demand in that country for
the Company's Video CD products, including the Video CD player.

9
<PAGE>

RAPID TECHNOLOGICAL CHANGE AND OBSOLESCENCE; RISKS ASSOCIATED WITH PRODUCT
DEVELOPMENT INTRODUCTIONS AND ANNOUNCEMENTS. The markets for the Company's
products are characterized by evolving industry standards, rapid technological
advances resulting in short product life cycles, price reductions, significant
price/performance improvements and frequent new product introductions. The
Company's future success will depend at least in part upon its ability to
enhance its existing products and to develop and introduce new products and
features that meet changing customer requirements and emerging industry
standards on a timely basis. There can be no assurance that one or more of the
Company's products will not be rendered noncompetitive or obsolete by
technological advances or changing customer preferences. In addition, from
time to time, the Company or others may announce products, features or
technologies that have the potential to shorten the life cycle of or replace
the Company's then existing products, including the Company's products that
only use the MPEG-I format. See "Business--Industry Background." Such
announcements could cause customers to defer the decision to buy or determine
not to buy the Company's products or cause the Company's distributors to seek
to return products to the Company, any of which could cause the Company to
write down some or all of its inventory. Any such writedown could have a
materially adverse effect on the Company's business and results of operations.

The Company has from time to time experienced delays in introducing new
products and product enhancements, and there can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products or product
enhancements in the future. The Company will be required to continue to invest
in research and development to attempt to maintain and enhance its existing
technologies, and there can be no assurance that it will have the funds
available at such time as it will be necessary to do so. Furthermore, products
such as those offered by the Company may contain defects when they are first
introduced or as new or enhanced versions are released. The Company has in the
past discovered defects in certain of its new products, such as the karaoke
jukebox, and in certain of its product enhancements. These defects have
required correction by the Company, thereby resulting in delays in the
marketing of such products or product enhancements. There can be no assurance
that, despite significant quality control testing by the Company, defects will
not be found in new products and product enhancements after commencement of
commercial shipments, resulting in delays in or loss of market acceptance.

RISKS RELATING TO THE ESTABLISHMENT OF AN ACCEPTED DISC FORMAT FOR VIDEO
DISCS. The DVD format for storage of compressed audio and video information
has been agreed to by the major electronic manufacturers and entertainment
companies as the basic industry standard for digital video recording and the
principal manufacturers have recently reached cross-licensing agreements.
Although the final standards for DVD have not been released to the public, and
the commercial viability of DVD has not yet been established, particularly
since most of the major film studios have not yet agreed to the recording of
their films on DVD, introduction of this format may have an adverse effect on
the Company's business and products. While the Company's research and
development activities have included products incorporating MPEG-II standards,
substantially all of the Company's current products are in the MPEG-I format.
The Company may have less experience with the new DVD format than other
companies and could be slower than its competitors in developing products for
this or any other new format. Accordingly, there can be no assurance that the
Company will be able to compete effectively in the market for Video CD players
using the new format or any different format.

Moreover, if such new format is introduced, potential customers for the
Company's products utilizing the new format may be deterred from purchasing
such products due to the possibility that such products may become obsolete
(as was the case with beta video cassettes). Should this occur, demand for the
Company's products could be adversely affected. Further, if the new format is
not accepted, the Company may be forced to develop its Video CD products
utilizing a different format. Even if the new DVD format or another format
which has enough storage capacity for MPEG-II products is accepted, the new
format could adversely affect the Company's business by making its existing
MPEG-I products obsolete.

DEPENDENCE ON KEY PERSONNEL AND NEED FOR ADDITIONAL MANAGEMENT
PERSONNEL. The Company's success to date has depended in large part on the
skills and efforts of Dr. Edmund Y. Sun, the Company's

10
<PAGE>

Chairman, Chief Executive Officer and founder and, to a lesser extent, Robert
B. Pfannkuch, the Company's President, James A. Munro, the Company's Director
of Engineering, and Ed Martini, the Company's Project Manager for Network
Video. The Company's success also depends to a significant extent on the
performance and continued service of certain other key employees. The Company
recently has hired a senior sales and marketing director and is seeking other
personnel to complete its management team in connection with the Company's
proposed expansion of its operations. The Company also needs to strengthen its
accounting management capabilities and is seeking to hire additional senior
level executives in this area. Competition for highly-skilled business, product
development, technical and other personnel is intense, and there can be no
assurance that the Company will be successful in recruiting new personnel or in
retaining any of its existing personnel. The Company may experience increased
costs in order to retain and attract skilled employees. In addition, other than
employment agreements with Dr. Sun and Mr. Pfannkuch, the Company does not have
employment contracts with any of its employees. The Company's failure to
attract additional qualified employees or to retain the services of key
personnel could have a material adverse effect on the Company's operating
results and financial condition.

COMPETITION. The Company's products compete with products marketed by other
manufacturers of Video CD players and their components as well as with
alternative methods of displaying audio and video such as video cassette
players, laser discs, multimedia computers and game machines, as well as with
other companies' products that use similar technologies. The large video
entertainment markets of the United States and other industrial nations are
currently served primarily by VHS video cassettes and laser discs, and there
can be no assurance that Video CDs and newer digital video disc formats will be
able to effectively compete for these markets in the future. Should a
significant market for DVD develop, many of the major electronics manufacturers
are expected to compete for this market. Most of the Company's competitors and
potential competitors are substantially larger in size and have far greater
financial, technical, marketing, customer service and other resources than the
Company. Certain of the Company's potential competitors may have technological
capabilities or other resources that would allow them to develop alternative
products which could compete with the Company's products.

Potential competitors may begin operations or expand their existing
operations into the Company's proposed markets before the Company is able to
successfully market its products. The Company's ability to effectively compete
may be adversely affected by the ability of these competitors to offer their
products at lower prices than the price of the Company's products and to devote
greater resources to the sales and marketing of their products than are
available to the Company. To the extent the Company does not have the resources
or is otherwise unable to establish its own brand name identification for its
Video CD players in China and other markets, it will face increased pressure to
compete on the basis of the price and features of its products. Manufacturers
of Video CD player components have substantially reduced the selling prices of
these components in recent months, and further reductions in those prices can
be expected. As a result, the Company has been reducing its production costs in
order to remain competitive in the Video CD player and component market. There
can be no assurance, however, that the Company will be able to remain
competitive or that its operating margins will not be materially adversely
affected should competitors substantially reduce their prices in the future.
Several companies have announced their intention to introduce MPEG-I decoder
chips into the Video CD market, including Sony and Toshiba. Any increases in
the supply of chips may allow the Company's existing competitors to produce
more competing products or encourage new competitors to produce Video CD
products. There can be no assurance that future technological advances will not
result in improved products or services that could adversely affect the
Company's business. Competition in the electronics industry also extends to
attracting and retaining qualified technical and marketing personnel, and there
can be no assurance that the Company will be successful in attracting and
retaining such qualified personnel. See "Business--Competition."

DEPENDENCE ON NONAFFILIATED AND FOREIGN MANUFACTURERS. The Company primarily
relies on subcontractors and licensees (most of whom have been or are expected
to be located in China or Taiwan) to manufacture its products or products
incorporating the Company's products. None of these manufacturers are
contractually obligated to meet the long-term production requirements of the
Company. There can be no

11
<PAGE>

assurance that the Company will be successful in entering into any such future
manufacturing arrangements with third parties on terms acceptable to the
Company, or at all. The Company's arrangements with manufacturers in China or
elsewhere may not prevent these manufacturers from entering into similar
arrangements with competitors of the Company or competing directly with the
Company. The Company's reliance on third parties for manufacturing components
of its products reduces the Company's control over the manufacture of its
products and makes the Company substantially dependent upon such third parties
to deliver its products in a timely manner, with satisfactory quality controls
and on a competitive basis. On several occasions, the Company has had a small
number of its products manufactured in Taiwan returned to it by customers due
to quality control problems. There can be no assurance that the Company will
not incur quality control problems or product recalls in the future in its
foreign manufacturing operations that could have a materially adverse effect on
the Company's operations and financial condition. Further, foreign
manufacturing is subject to a number of risks inherent in foreign operations,
including risks associated with the availability of and time required for the
transportation of products from such foreign countries and increased risks of
theft by personnel of source codes and other proprietary product information in
countries where intellectual property is not well protected by law. See "--
Risks of International Operations" and "--Risks of Limited Protection for
Company's Intellectual Property and Proprietary Rights and Infringement of
Third Parties' Rights." To the extent the Company ultimately determines to
undertake commercial scale manufacturing, if ever, it will require substantial
additional personnel and financial resources.

LIMITED SALES AND MARKETING EXPERIENCE. The Company's operating results will
depend to a large extent on its ability to successfully sell and market its
Video CD products. The Company currently has limited marketing capabilities and
needs to hire additional sales and marketing personnel. There can be no
assurance that the Company will be able to recruit, train or retain qualified
personnel to market and sell its products or that it will develop a successful
sales and marketing strategy. The Company also has very limited marketing
experience. There can be no assurance that any marketing efforts undertaken by
the Company will be successful or will result in any significant sales of its
products.

RISKS OF LIMITED PROTECTION FOR COMPANY'S INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS AND INFRINGEMENT OF THIRD PARTIES' RIGHTS. The Company
regards its products as proprietary and relies primarily on a combination of
trademark, copyright and trade secret laws and employee and third-party
nondisclosure agreements to protect its proprietary rights. The Company does
not possess any patent or other intellectual property rights which would limit
competition against it (including with respect to the ViComp MPEG-I Chip), but
has applied for patent protection in the United States and certain other
countries covering certain of the technologies that relate to its network video
systems. There are few barriers to entry into the market for the Company's
products, and there can be no assurance that any patents applied for by the
Company will be granted for any of these technologies or that the scope of any
patent claims allowed will be sufficiently broad to protect against the use of
similar technologies by the Company's competitors. There can be no assurance,
therefore, that any of the Company's competitors, many of whom have far greater
resources than the Company, will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. Further,
the Company distributes its products in countries where intellectual property
laws are not well developed or are poorly enforced. Legal protections of the
Company's rights may be ineffective in such countries, and software developed
in such countries may not be protectable in jurisdictions where protection is
ordinarily available. Software piracy and ineffective legal protection of the
Company's software in foreign jurisdictions may cause substantial losses of
sales by the Company, which could have a material adverse effect on the
Company's operating results and financial condition.

There can also be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current
or future products, including without limitation, the ViComp MPEG-I Chip or any
other future products developed by ViComp. If infringement is alleged, the
Company could be required to discontinue the use of certain software codes or
processes, to cease the manufacture, use and sale of infringing products, to
incur significant litigation costs and expenses and to develop non-infringing
technology or to obtain licenses to the alleged infringing technology. There
can be no assurance that the Company would be able to develop alternative
technologies or to obtain such licenses or, if a license were obtainable, that
the terms would

12
<PAGE>

be commercially acceptable to the Company. The Company contemplates utilizing
an MPEG-1 decoder chip in its Video CD products that is being manufactured by
an Asian company that is substantially equivalent to an MPEG-1 chip currently
marketed by C-Cube. Because of the similarities of this chip to the C-Cube
chip, it is possible that C-Cube could seek to bar the sale of this chip to the
Company or others. Should C-Cube successfully bar such sale at a time when the
ViComp MPEG-1 chip or other low-cost chip alternatives are not available to the
Company, the Company's operations could be materially and adversely affected.

The Company may be involved from time to time in litigation to determine the
enforceability, scope and validity of any proprietary rights of the Company or
of third parties asserting infringement claims against the Company. Any such
litigation could result in substantial costs to the Company and diversion of
efforts by the Company's management and technical personnel.

CONTROL BY INSIDERS. The Company's directors and officers, together with
Hyundai (a principal shareholder of the Company), beneficially own shares of
the Company's capital stock representing approximately 67% of the total voting
power of the Company (59% following the completion of the Offering, assuming
the maximum of 100 IPO Units per Unit are sold and the Underwriter's over-
allotment option is exercised). Accordingly, it is likely that they will
continue to be able to elect at least a majority of the Company's directors and
thereby direct the policies of the Company after completion of the Offering.
See "Principal Shareholders."

CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROWED SECURITIES. In the event
any Escrow Securities owned by securityholders of the Company who are officers,
directors, consultants or employees of the Company or 140,760 of the Escrow
Acquisition Shares owned by Dr. Edmund Y. Sun that have been escrowed in
connection with the Offering are released from escrow, compensation expense
will be recorded for financial reporting purposes. Therefore, in the event the
Company attains any of the earnings or stock price thresholds required for the
release of the Escrow Securities and the foregoing Escrow Acquisition Shares
owned by Dr. Sun, the release will be treated, for financial reporting
purposes, as expense of the Company. In the event that the 140,760 of the
Escrow Acquisition Shares owned by Dr. Sun that have been escrowed in
connection with the ViComp Acquisition are released from escrow, the Company
will record additional purchase price for the ViComp Acquisition at the time of
such release, which will either be (i) expensed at that time or (ii)
capitalized and amortized over future periods. Accordingly, the Company will,
in the event of the release of the Escrow Securities or Dr. Sun's Escrow
Acquisition Shares escrowed in connection with the Offering, recognize, during
the period that the conditions for such release are met, a substantial non-cash
charge to earnings that would increase the Company's loss or reduce or
eliminate earnings, if any, at such time. In the event of the release of Dr.
Sun's Escrow Acquisition Shares escrowed in connection with the ViComp
Acquisition, the Company will either recognize such charge during the period
that the conditions for such release are met or recognize such charge over
future periods. The amount of those charges will be equal to the aggregate
market price of such Escrow Securities or Escrow Acquisition Shares at the time
of release from escrow. Although the amount of expense recognized by the
Company will not affect the Company's total shareholders' equity or cash flow,
it may have a depressive effect on the market price of the Company's
securities. See Note 11 of Notes to Financial Statements.

BROAD DISCRETION AS TO USE OF PROCEEDS. Of the net proceeds of the Offering,
approximately $7,603,000 or approximately 37.7% has been allocated to working
capital (and not otherwise allocated for a specific purpose) and will be used
for such purposes as management may determine in its sole discretion without
the need for shareholder approval with respect to any such allocation.

FUTURE SALES OF COMMON STOCK. Upon sale of the Units offered hereby, the
Company will have outstanding 19,833,091 shares Common Stock, 10,630,000 Class
A Warrants (including 3,265,870 Bridge Warrants ), and 7,130,000 Class B
Warrants (assuming the maximum number of IPO Units included in the Units and no
exercise of the Underwriter's over-allotment option). All of the IPO Units and
the underlying shares of Common Stock, Class A Warrants and Class B Warrants
included in the Units sold in the Offering and the IPO Units, consisting of
4,830,000 shares of Common Stock, 5,064,130 Class A Warrants and 4,830,000
Class B Warrants sold in the IPO or issued to certain bridge financing
investors in connection with the IPO and

13
<PAGE>

subsequently resold by such investors, will be freely tradeable without
restriction under the Securities Act, unless acquired by "affiliates" of the
Company as that term is defined in the Securities Act. In connection with the
IPO, the Company also registered on behalf of certain selling stockholders (the
"Selling Securityholders") an aggregate of 3,265,870 currently outstanding
Bridge Warrants (as well as 234,130 Class A Warrants which have been resold by
such Selling Securityholders) and the 6,531,740 shares of Common Stock
underlying the currently outstanding Bridge Warrants and the Class B Warrants
issuable upon exercise thereof, subject to a contractual restriction that such
Selling Securityholders not sell any of the Bridge Warrants for at least 90
days from the date of the closing of the IPO (which period has expired) and,
during the period from 91 to 270 days after the date of the closing of the IPO,
may only sell specified percentages of such Bridge Warrants. In addition, the
Company will have outstanding (i) the IPO Unit Purchase Options covering
420,000 IPO Units (or 1,680,000 shares of Common Stock if the underlying
Warrants are exercised), and (ii) the Unit Purchase Option covering 2,300 Units
(or 920,000 shares of Common Stock assuming the maximum number of IPO Units
included in the Units and exercise of the underlying Warrants).

The holders of the IPO Unit Purchase Options and the Unit Purchase Option
have been granted registration rights with respect to the shares of Common
Stock and Warrants issuable upon exercise of the IPO Unit Purchase Options or
the Unit Purchase Option. In addition, the Company has granted certain
stockholders demand and piggyback registration rights with respect to a total
of 4,388,252 shares of Common Stock. None of such rights require the Company to
file a registration statement for any of the foregoing shares prior to May
1997. One holder of 1,198 shares of Common Stock and warrants to purchase 5,990
shares of Common Stock who has piggyback registration rights with respect to
those shares has waived these rights with respect to the Offering. See
"Management--Employment and Consulting Agreements." The remaining 12,703,091
shares of Common Stock currently outstanding are "restricted securities" as
that term is defined in Rule 144 promulgated under the Securities Act, and
under certain circumstances may be sold without registration pursuant to such
Rule or otherwise. Such shares are eligible for sale under Rule 144 at varying
periods, subject to the lock-up described above. However, the Company's
directors and executive officers and the holder of 3,896,999 of the foregoing
shares of Common Stock have agreed not to sell or otherwise dispose of any
securities of the Company for a period of 13 months following completion of the
Offering without the written consent of the Underwriter. See "Underwriting."
The Company is unable to predict the effect that sales made under Rule 144, or
otherwise, may have on the then prevailing market price of the Common Stock
although any substantial sale of securities pursuant to exercise of a
registration right or Rule 144 may have an adverse effect. The sale, or the
availability for sale, of substantial amounts of the Company's securities in
the public market at any time subsequent to the Offering could adversely affect
the prevailing market price of such securities. See "Description of
Securities," "Shares Eligible for Future Sale" and "Underwriting."

EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Upon completion of the Offering,
the Company will have outstanding 10,630,000 Class A Warrants (including the
Bridge Warrants held by the Selling Securityholders) and 7,130,000 Class B
Warrants (assuming the maximum number of IPO Units in the Units and no exercise
of the Underwriter's over-allotment option). In addition, the Company will have
outstanding the IPO Unit Purchase Options to purchase an aggregate of 1,680,000
shares of Common Stock (assuming exercise of the underlying Warrants), the Unit
Purchase Option to purchase an aggregate of 920,000 shares of Common Stock
(assuming the maximum number of IPO Units in the Units and exercise of the
underlying Warrants), 2,939,357 shares of Common Stock reserved for issuance
under the 1993 Option Plan, under which options to purchase 2,516,687 shares
are outstanding at exercise prices ranging from $.14 to $3.50 per share,
1,000,000 shares of Common Stock reserved for issuance under the 1996 Option
Plan, under which options to purchase 189,557 shares are outstanding at an
exercise price of $8.38 per share, and additional options to purchase 200,000
shares of Common Stock at an exercise price of $5.00 per share and warrants to
purchase 5,990 shares of Common Stock at an exercise price of $8.38 per share.
Holders of options to purchase 1,854,019 shares of Common Stock outstanding
under the 1993 Option Plan and other options have placed such options in escrow
and the Company has agreed to place options to purchase 267,867 shares of
Common Stock available for grant under the 1993 Option Plan in escrow. Holders
of such options and warrants may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable
to the

14
<PAGE>

Company. Moreover, while these options and warrants are outstanding, the
Company's ability to obtain financing on favorable terms may be adversely
affected. See "Management," "Principal Shareholders--Escrow Securities" and
"Description of Securities."

IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Units offered hereby
will incur immediate and substantial dilution in the net tangible book value of
the Common Stock included in the Units, estimated to be approximately $12.32
per share or 86% if the minimum number of IPO Units are contained in the Units
and $8.10 or 81% if the maximum number of IPO Units are contained in the Units
(allocating no value to the Warrants). The pro forma net tangible book value
per share of Common Stock (after giving effect to the ViComp Acquisition) was
$.99 at September 30, 1996. Additional dilution to public investors may result
to the extent that the Warrants, the IPO Unit Purchase Options, the Unit
Purchase Option or outstanding options or warrants are exercised at a time when
the net tangible book value per share of Common Stock exceeds the exercise
price of any of such securities.

POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; POTENTIAL ANTI-
TAKEOVER PROVISIONS. The Company's Amended and Restated Certificate of
Incorporation authorizes the issuance of a maximum of 5,000,000 shares of
Preferred Stock on terms which may be fixed by the Company's Board of Directors
without further shareholder action. The terms of any series of preferred stock,
which may include priority claims to assets and dividends and special voting
rights, could adversely affect the rights of holders of the Common Stock and
thereby reduce the value of the Common Stock. The issuance of preferred stock
could make the possible takeover of the Company or the removal of management of
the Company more difficult, discourage hostile bids for control of the Company
in which shareholders may receive premiums for their shares of Common Stock or
otherwise dilute the rights of holders of Common Stock. In addition, the
agreement governing the Escrow Securities contains certain procedures that may
make a possible takeover of the Company more difficult. See "Principal
Shareholders--Escrow Securities."

CONTINUATION OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF PRICE OF
SECURITIES. No assurance can be given that an active trading market in the
Company's securities will continue to exist following the completion of the
Offering. The Company believes factors such as quarterly fluctuations in
financial results and announcements of new technology in the entertainment
industry may cause the market price of the Company's securities to fluctuate,
perhaps substantially. These fluctuations, as well as general economic
conditions, such as recessions or high interest rates, may adversely affect the
market price of the securities.

CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Purchasers of the Units will be able to exercise the Warrants only if
a current prospectus relating to the securities underlying the Warrants is then
in effect under the Securities Act and such securities are qualified for sale
or exempt from qualification under the applicable securities or "blue sky" laws
of the states in which the various holders of the Warrants then reside.
Although the Company has undertaken to use reasonable efforts to maintain the
effectiveness of a current prospectus covering the securities underlying the
Warrants, no assurance can be given that the Company will be able to do so. The
value of the Warrants may be greatly reduced if a current prospectus covering
the securities issuable upon the exercise of the Warrants is not kept effective
or if such securities are not qualified or exempt from qualification in the
states in which the holders of the Warrants then reside.

ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS. The Class A Warrants are
currently subject to redemption by the Company and the Class B Warrants are
subject to redemption commencing May 9, 1997, on at least 30 days' prior
written notice, if the average of the closing bid prices of the Common Stock
for 30 consecutive trading days ending within 15 days of the date on which the
notice of redemption is given exceeds $9.10 per share with respect to the Class
A Warrants or $12.25 per share with respect to the Class B Warrants. (In July
1996, these conditions were met with respect to, and the Company gave notice of
redemption of, the Class A Warrants but subsequently withdrew such notice due
to market conditions.) If the Class A Warrants or Class B Warrants are
redeemed, holders of the class of Warrants being redeemed will lose their right
to exercise the Warrants, except during such 30-day notice of redemption
period. Upon the receipt of a notice of redemption of the Warrants, the holders
thereof would be required to: (i) exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for them to do so; (ii) sell the
Warrants, to the extent then permitted, at

15
<PAGE>

the then current market price (if any) when they might otherwise wish to hold
the Warrants; or (iii) accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities--Redeemable Warrants."

NO DIVIDENDS. The Company has not paid any dividends on its Common Stock
since its inception. The Company has no current plans to pay dividends on its
Common Stock and intends to retain earnings, if any, for working capital
purposes. See "Dividend Policy."

LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER DELAWARE
LAW. Pursuant to the Company's Amended and Restated Certificate of
Incorporation, and as authorized under applicable Delaware law, directors of
the Company are not liable for monetary damages for breach of fiduciary duty,
except (i) in connection with a breach of the duty of loyalty; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for dividend payments or stock repurchases
illegal under Delaware law; or (iv) for any transaction in which a director has
derived an improper personal benefit. See "Management--Limitation of Liability
and Indemnification Matters."

POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO
INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION OF THE UNDERWRITER AND
D.H. BLAIR & CO. The Commission is conducting an investigation concerning
various business activities of the Underwriter and D.H. Blair & Co., Inc.
("Blair & Co."), a selling group member that will distribute substantially all
of the Units offered hereby. The investigation appears to be broad in scope,
involving numerous aspects of the Underwriter's and Blair & Co.'s compliance
with the Federal securities laws and compliance with the Federal securities
laws by issuers whose securities were underwritten by the Underwriter or Blair
& Co., or in which the Underwriter or Blair & Co. made over-the-counter
markets, persons associated with the Underwriter or Blair & Co., such issuers
and other persons. The Company has been advised by the Underwriter that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. The Underwriter cannot predict whether this
investigation will ever result in any type of formal enforcement action against
the Underwriter or Blair & Co. or, if so, whether any such action might have an
adverse effect on the Underwriter or the securities offered hereby. The
Underwriter has advised the Company that Blair & Co. intends to continue to
make a market in the Company's securities following the Offering. An
unfavorable resolution of the Commission's investigation could have the effect
of limiting such firm's ability to make a market in the Company's securities,
which could adversely affect the liquidity or price of such securities. See
"Underwriting."

POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. The Underwriter has advised the Company that Blair & Co. intends to
continue to make a market in the Company's securities following the Offering.
Rule 10b-6 under the Exchange Act will prohibit Blair & Co. from engaging in
any market-making activities with regard to the Company's securities for the
period from nine business days (or such other applicable period as Rule 10b-6
may provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or
the termination (by waiver or otherwise) of any right that the Underwriter may
have to receive a fee for the exercise of Warrants following such solicitation.
As a result, Blair & Co. may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. In
addition, under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Bridge Warrants may not
simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period (at least two
and possibly nine business days) prior to the commencement of such
distribution. Accordingly, in the event the Underwriter or Blair & Co. is
engaged in a distribution of the Bridge Warrants, neither of such firms will be
able to make a market in the Company's securities during the applicable
restrictive period. Any temporary cessation of such market-making activities
could have an adverse effect on the market prices of the Company's securities.
See "Underwriting."

16
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of 23,000 Units offered
hereby, at an assumed offering price of $1,000 per Unit, after deducting the
underwriting discounts and commissions and other estimated expenses of the
Offering, are expected to be approximately $20,203,000 ($23,343,000 if the
Underwriter's over-allotment option is exercised in full). The Company expects
the net proceeds to be utilized approximately as follows:

<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
----------- ----------
<S> <C> <C>
ViComp research and development(1)....................... $ 5,600,000 27.7%
Acquisition of inventory(2).............................. 3,500,000 17.3
Sales and marketing(3)................................... 3,500,000 17.3
Working capital(4)....................................... 7,603,000 37.7
----------- -----
$20,203,000 100.0%
=========== =====
</TABLE>
- --------
(1) Represents the projected capital and operating expenses estimated in
connection with the completion of the development of the ViComp MPEG-I
Chip as well as the design and development of MPEG-II based integrated
circuits by ViComp for a variety of applications. See "Business--ViComp
Acquisitions."
(2) To finance the acquisition of inventory by the Company to support any
potential increase in the sales of the Company's products, including sales
of Video CD components.
(3) Represents the estimated costs to be incurred in opening sales and support
offices in China and the estimated costs to be incurred in connection with
increasing the Company's marketing efforts in Singapore, India and Europe.
(4) A portion of this amount may be used to finance any increase in accounts
receivable resulting from any potential increase in the sales of the
Company's products, and a portion of this amount will be used to pay
legal, accounting, investment banking and other closing costs of the
ViComp Acquisition, which are estimated to total $250,000.

The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering during the next 24 months. This estimate is
based upon the current status of its business operations, its current plans,
and current economic and industry conditions. Future events, including changes
in economic or competitive conditions or the Company's business and the
results of the Company's sales and marketing activities, may make shifts in
the allocation of funds necessary or desirable. The amounts actually expended
for each purpose set forth above may vary significantly in the event any of
these assumptions prove inaccurate. The Company reserves the right to change
its use of proceeds, as unanticipated events or opportunities may cause the
Company to redirect its priorities and reallocate the proceeds accordingly.
The Company may use a portion of the proceeds to acquire other businesses or
technologies or products which are compatible with the Company's business for
the purpose of expanding its business or the Company may enter into strategic
alliances with other such companies. The Company does not currently have any
agreements, commitments or arrangements with respect to any proposed
acquisition or joint venture, and no assurance can be given that any
acquisitions, joint ventures or strategic alliances will be made in the
future.

The Company anticipates, based on currently proposed plans and assumptions
relating to its present operations, that the remaining net proceeds of the
IPO, together with the net proceeds of the Offering, will be sufficient to
satisfy the Company's contemplated cash requirements for at least the next 24
months. If the Company's estimates prove incorrect, the Company may have to
seek alternative sources of financing during such period, including debt or
equity financing, and may need to reduce operating costs or curtail growth
plans. No assurance can be given that such financing could be obtained by the
Company on favorable terms, if at all, and if the Company is unable to obtain
needed financing, the Company's business would be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Prior to their use, the net proceeds of the Offering will be invested in
short-term, high-grade interest-bearing investments or accounts.

17
<PAGE>

DIVIDEND POLICY

The Company has not paid any dividends on its Common Stock since its
inception. The Company has no current plans to pay dividends on its Common
Stock and intends to retain earnings, if any, for working capital purposes.
Any future determination as to the payment of dividends on the Common Stock
will depend upon the results of operations, capital requirements, the
financial condition of the Company and other factors deemed relevant by the
Company's Board of Directors.

PRICE RANGE OF SECURITIES

The Company's Common Stock, Class A Warrants and Class B Warrants have
traded separately on the Nasdaq National Market under the symbols DVID, DVIDW
and DVIDZ, respectively, and the Company's IPO Units have traded on the Nasdaq
SmallCap Market under the symbol DVIDU since May 9, 1996. The following table
sets forth the high and low last sale or bid prices for these securities for
the periods set forth below, as reported by Nasdaq. These prices do not
reflect retail mark-ups, markdowns or commissions.

<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
IPO UNITS
May 9, 1996 through June 30, 1996............................ $21.000 $8.000
July 1, 1996 through September 30, 1996...................... 19.250 8.000
October 1, 1996 through November 1, 1996..................... 16.500 15.500

COMMON STOCK
May 9, 1996 through June 30, 1996............................ $12.000 $8.000
July 1, 1996 through September 30, 1996...................... 9.500 5.750
October 1, 1996 through November 1, 1996..................... 9.000 8.375

CLASS A WARRANTS
May 9, 1996 through June 30, 1996............................ $ 7.750 $3.250
July 1, 1996 through September 30, 1996...................... 6.375 4.250
October 1, 1996 through November 1, 1996..................... 5.500 5.000

CLASS B WARRANTS
May 9, 1996 through June 30, 1996............................ $ 6.375 $1.500
July 1, 1996 through September 30, 1996...................... 3.547 1.750
October 1, 1996 through November 1, 1996..................... 3.000 2.500
</TABLE>

The closing sales prices on November 15, 1996 as reported by the Nasdaq
National Market were $8.000 per share of Common Stock, $4.750 per Class A
Warrant and $2.250 per Class B Warrant and the closing bid price on that date
as reported by Nasdaq was $14.438 per IPO Unit.

As of October 15, 1996, there were 43, 199 and 11 record holders of the
Common Stock, Class A Warrants and Class B Warrants, respectively.

18
<PAGE>

DILUTION

The following discussion and tables allocate no value to the Warrants
contained in the IPO Units.

At September 30, 1996, the pro forma net tangible book value of the
Company's Common Stock (after giving effect to the ViComp Acquisition) was
approximately $17,395,000 or $.99 per share based on 17,500,893 pro forma
shares outstanding. After giving effect to the sale by the Company of 23,000
Units, at an assumed price of $1,000 per Unit and assuming no exercise of any
outstanding options or warrants (including the Underwriter's over-allotment
option, the IPO Unit Purchase Options, and the Unit Purchase Option), the pro
forma net tangible book value at September 30, 1996 would have been
approximately $1.97 per share if each Unit contains the minimum number of IPO
Units or $1.90 per share if each Unit contains the maximum number of Units
(taking into account the estimated underwriting discounts and offering
expenses), representing an immediate increase in net tangible book value of
approximately $20,203,000 or $.98 per share based on the minimum number of IPO
Units per Unit or an immediate increase in net tangible book value of
$20,203,000 or $.91 per share based on the maximum number of IPO Units per
Unit, to existing shareholders and an immediate dilution of $12.32 per share
or approximately 86%, or $8.10 per share or approximately 81%, based on the
minimum and maximum number of IPO Units per Unit, respectively. "Dilution" per
share represents the difference between the public offering price per share
and the pro forma net tangible book value per share at September 30, 1996, as
adjusted for the Offering. The foregoing is illustrated in the following
table:

<TABLE>
<CAPTION>
IF EACH UNIT IF EACH UNIT
CONTAINS THE CONTAINS THE
MINIMUM MAXIMUM
IPO UNITS IPO UNITS
------------ ------------
<S> <C> <C> <C> <C>
Assumed public offering price per share of
Common Stock.............................. $14.29 $10.00
Pro Forma net tangible book value before
the Offering............................ $.99 $.99
Increase in net tangible book value per
share of Common Stock attributable to
public investors........................ .98 .91
---- ----
Pro forma net tangible book value per share
of Common Stock after the Offering(1)..... 1.97 1.90
------ ------
Dilution per share of Common Stock to
public investors(1)....................... $12.32 $ 8.10
====== ======
</TABLE>
- --------

(1) Assumes no exercise of the Underwriter's over-allotment option. The
dilution of net tangible book value per share to new investors, assuming
the Underwriter's over-allotment option is exercised in full, would be
$12.18 per share, if each Unit contains the minimum number of IPO Units or
$7.98 per share if each Unit contains the maximum number of IPO Units.

The following tables set forth (i) the number of shares of Common Stock
purchased from the Company by those persons who were shareholders immediately
prior to the IPO; (ii) the number of shares of Common Stock sold in the IPO;
(iii) the total consideration paid, and the average price per share paid for
such shares by the existing shareholders; and (iv) the number of shares of
Common Stock to be sold by the Company to the purchasers of the 23,000 Units
offered hereby, the total consideration to be paid, and the average price per
share:

<TABLE>
<CAPTION>
IF EACH UNIT CONTAINS THE
MINIMUM IPO UNITS
---------------------------------------------------------
SHARES PURCHASED(1) CONSIDERATION PAID(1) AVERAGE PER
--------------------- ---------------------- SHARE OF
NUMBER PERCENTAGE AMOUNT PERCENTAGE COMMON STOCK
---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Pre IPO Shareholders.... 11,958,572 65.0% $ 8,279,930 14.9% $ .69
Investors in IPO........ 4,830,000 26.2 24,150,000 43.6 $ 5.00
Investors in the
Offering............... 1,610,000 8.8 23,000,000 41.5 $14.29
---------- ----- ----------- -----
Total................. 18,398,572 100.0% $55,429,930 100.0%
========== ===== =========== =====
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
IF EACH UNIT CONTAINS THE
MAXIMUM IPO UNITS
---------------------------------------------------------
SHARES PURCHASED(1) CONSIDERATION PAID(1) AVERAGE PER
--------------------- ---------------------- SHARE OF
NUMBER PERCENTAGE AMOUNT PERCENTAGE COMMON STOCK
---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Pre IPO Shareholders.... 11,958,572 62.6% $ 8,279,930 14.9% $ .69
Investors in IPO........ 4,830,000 25.3 24,150,000 43.6 $ 5.00
Investors in this
Offering............... 2,300,000 12.1 23,000,000 41.5 $10.00
---------- ----- ----------- -----
Total................. 19,088,572 100.0% $55,429,930 100.0%
========== ===== =========== =====
</TABLE>
- --------

(1) Prior to the deduction of costs of issuance. Does not include the issuance
and sale of the Acquisition Shares or 221,667 shares of Common Stock
issued subsequent to the IPO through September 30, 1996 pursuant to the
exercise of outstanding options under the 1993 Option Plan or otherwise.

As of the date of this Prospectus, there were certain options and warrants
to purchase shares of the Common Stock at prices below the price per share of
the Common Stock included in the Units, including, without limitation, options
to purchase a total of 2,516,687 shares of Common Stock outstanding under the
1993 Option Plan at prices ranging from $.14 to $3.50 per share and additional
options and warrants to purchase 205,990 shares at prices ranging from $5.00
to $8.38 per share. To the extent such options or warrants are exercised in
the future, there will be additional dilution to the investors in the
Offering. See "Management--Stock Option Plans" and "Description of
Securities."

20
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
September 30, 1996; (ii) pro forma as of September 30, 1996 to give effect to
the ViComp Acquisition; and (iii) pro forma, as adjusted, as of September 30,
1996 to give effect to the ViComp Acquisition and the sale by the Company of
the 23,000 Units offered hereby (assuming no exercise of the Underwriter's
over-allotment option) and the receipt of the net proceeds therefrom. See "Use
of Proceeds." This table should be read in conjunction with "Pro Forma
Financial Information" and the financial statements of the Company and the
notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PRO FORMA,
AS ADJUSTED(3)(4)
--------------------------
ACTUAL PRO FORMA(3) MINIMUM MAXIMUM
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Stockholders' equity:
Preferred Stock, $.0001
par value, 5,000,000
shares authorized,
none issued and
outstanding........... $ -- $ -- $ -- $ --
Common Stock, $.0001
par value, 60,000,000
shares authorized,
17,009,640 shares
issued and
outstanding, actual;
17,500,893 shares
issued and
outstanding, pro
forma; and a minimum
of 19,110,893 and a
maximum of 19,800,893
shares issued and
outstanding, pro forma
as adjusted(1)(2)..... 1,701 1,750 1,911 1,980
Additional paid in
capital............... 29,800,775 31,557,240 51,760,079 51,760,010
Accumulated deficit.... (12,267,320) (14,025,719) (14,025,719) (14,025,719)
Foreign currency
translation
adjustments........... (45,437) (45,437) (45,437) (45,437)
Deferred compensation.. (45,240) (93,240) (93,240) (93,240)
------------ ------------ ------------ ------------
Total stockholders'
equity and
capitalization......... $ 17,444,479 $ 17,394,594 $ 37,597,594 $ 37,597,594
============ ============ ============ ============
</TABLE>
- --------

(1) Excludes (i) up to 3,970,357 shares of Common Stock issuable upon exercise
of stock options that may be issued pursuant to the 1993 Stock Option Plan
and 1996 Stock Option Plan, of which options to purchase 2,547,687 shares
of Common Stock have been granted under such plans and were outstanding as
of September 30, 1996; (ii) other options and warrants to purchase 200,000
shares of Common Stock at September 30, 1996; (iii) 14,958,260 shares of
Common Stock issuable on exercise of the IPO Warrants and the 234,130
Class A Warrants issued to certain bridge financing investors in
connection with the IPO that have been resold by such investors and the
Class B Warrants underlying the Class A Warrants; (iv) a minimum of
966,000 and a maximum of 1,380,000 shares of Common Stock issuable upon
exercise of the Underwriter's over-allotment option and underlying the SPO
Warrants included in the Units included in the over-allotment option;
(v) 1,680,000 shares of Common Stock issuable upon exercise of the IPO
Unit Purchase Options and the Warrants underlying such option; (vi) a
minimum of 644,000 and a maximum of 920,000 shares of Common Stock
issuable upon exercise of the Unit Purchase Option and the Warrants
underlying the Unit Purchase Option; (vii) a minimum of 4,830,000 and a
maximum of 6,900,000 shares of Common Stock issuable upon exercise of the
SPO Warrants underlying the Units; and (viii) 6,531,740 shares of Common
Stock issuable upon exercise of the Bridge Warrants and the Class B
Warrants underlying the Bridge Warrants. Also excludes the following
securities issued subsequent to September 30, 1996: (i) 32,198 shares of
Common Stock issued upon exercise of stock options and otherwise; and (ii)
warrants to purchase 5,990 shares of Common Stock. See "Management--Stock
Option Plans," "Management--Employment and Consulting Agreements,"
"Description of Securities" and "Underwriting."

(2) As of September 30, 1996, includes 7,957,857 Escrow Shares of the
7,978,114 shares that have been deposited into escrow as of the date of
this Prospectus. See "Principal Shareholders--Escrow Securities."
(3) Pro forma to give effect to the ViComp Acquisition. See "Pro Forma
Financial Information."
(4) Adjusted to give effect to the sale of 23,000 Units pursuant to the
Offering and the receipt of the net proceeds therefrom.

21
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and with "Pro Forma
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
The statement of operations data for the two years in the period ended
December 31, 1995 are derived from the audited financial statements of the
Company included elsewhere in this Prospectus. In June 1996, the Company
changed its fiscal year end from December 31 to March 31. The statement of
operations data for the nine-month periods ended September 30, 1995 and 1996
and the balance sheet data at September 30, 1996 are derived from the
unaudited interim financial statements of the Company included elsewhere in
this Prospectus and include, in the opinion of the Company, all adjustments
consisting of all normal recurring adjustments necessary for a fair
presentation of the Company's results of operations for those periods and
financial position at that date.

STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
PRO FORMA
YEARS ENDED NINE-MONTH PERIOD NINE-MONTH
DECEMBER 31, ENDED SEPTEMBER 30, PERIOD ENDED
------------------------ ------------------------ SEPTEMBER 30,
1994 1995 1995 1996 1996(3)
----------- ----------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue....... $ 6,553,987 $ 1,927,015 $ 1,320,252 $ 3,108,049 $ 3,108,049
Development and
service revenue...... 1,254,646 1,021,816 653,355 156,839 156,839
Component revenue..... -- 572,000 -- 1,630,626 1,630,626
----------- ----------- ----------- ----------- -----------
Total revenue......... 7,808,633 3,520,831 1,973,607 4,895,514 4,895,514
Cost of product revenue. 5,963,959 2,274,638 1,450,376 3,704,212 3,704,212
Cost of development and
service revenue........ 954,531 585,282 321,713 263,298 263,298
Cost of component reve-
nue.................... -- 495,000 -- 1,598,500 1,598,500
----------- ----------- ----------- ----------- -----------
Gross profit (loss)..... 890,143 165,911 201,518 (670,496) (670,496)
Operating expenses:
Research and
development.......... 1,550,248 1,257,833 981,930 1,048,324 1,820,889
Sales and marketing... 602,818 548,573 426,274 784,900 784,900
General and
administrative....... 859,129 1,513,636 1,228,014 2,011,494 2,027,699
----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 3,012,195 3,320,042 2,636,218 3,844,718 4,633,488
----------- ----------- ----------- ----------- -----------
Loss from operations.... (2,122,052) (3,154,131) (2,434,700) (4,515,214) (5,303,984)
Other income (expense),
net.................... 35,154 (80,312) (45,447) (463,577) (448,520)
Gain (loss) on
investments in
affiliates (1994 gain
was from a related
party)................. 350,000 (1,248,868) -- -- --
----------- ----------- ----------- ----------- -----------
Net loss before benefit
for income taxes and
extraordinary item..... (1,736,898) (4,483,311) (2,480,147) (4,978,791) (5,752,504)
Benefit for income tax-
es..................... (83,237) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss before
extraordinary item..... (1,653,661) (4,483,311) (2,480,147) (4,978,791) (5,752,504)
Extraordinary item(1)... -- -- -- (1,263,796) (1,263,796)
----------- ----------- ----------- ----------- -----------
Net loss................ $(1,653,661) $(4,483,311) $(2,480,147) $(6,242,587) $(7,016,300)
=========== =========== =========== =========== ===========
Net loss per share...... $ (.39) $ (.84) $ (.46) $ (.81) $ (.89)
=========== =========== =========== =========== ===========
Shares used in
computation of net loss
per share (2).......... 4,195,148 5,337,668 5,353,284 7,675,792 7,885,525
=========== =========== =========== =========== ===========
</TABLE>

22
<PAGE>

BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------
(UNAUDITED)
<S> <C>
Working capital.............................................. $ 16,827,685
Total assets................................................. 18,606,499
Total liabilities............................................ 1,162,020
Accumulated deficit.......................................... (12,267,320)
Total stockholders' equity................................... 17,444,479
</TABLE>
- --------

(1) The nine-month period ended September 30, 1996 includes a non-cash charge
of approximately $1,264,000 relating to the repayment of the Bridge Notes.

(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the computation of weighted average number of shares of
Common Stock used in computing net loss per share. Excludes the Escrow
Shares. The net loss per share for the pro forma nine-month period ended
September 30, 1996 also reflects the shares issued in the ViComp
Acquisition (excluding the Escrow Acquisition Shares issued to Dr. Sun).
See "Principal Shareholders--Escrow Securities" and Note 11 of Notes to
Financial Statements.

(3) The pro forma statement of operations data combines the Company's statement
of operations data for the nine-month period ended September 30, 1996, with
ViComp's statement of operations data for the period from its inception
(August 21, 1995) to August 31, 1996 as if the ViComp Acquisition had
occurred as of January 1, 1996. See "Pro Forma Financial Information."

23
<PAGE>

PRO FORMA FINANCIAL INFORMATION

In October 1996, the Company completed the ViComp Acquisition for a purchase
price consisting of 491,253 shares of the Company's Common Stock. The Company
also granted options to purchase 189,557 additional shares of the Company's
common stock to certain of the shareholders of ViComp who were previously
employed by ViComp and who continued to be employed by ViComp after the ViComp
Acquisition. The Chairman and Chief Executive Officer of the Company was a co-
founder of ViComp and owned approximately 57% of ViComp's outstanding capital
stock at the time of the ViComp Acquisition. The shares issued to this related
party will be subject to cancellation under certain conditions pursuant to the
terms of the ViComp Acquisition or in connection with the Offering. See
"Business--ViComp Acquisition." The value of these shares subject to
cancellation have not been included in the purchase price at the date of the
ViComp Acquisition due to the uncertainty of their ultimate release from
escrow. The Company will, in the event of the release of the Escrow Securities
or Dr. Sun's Escrow Acquisition Shares escrowed in connection with the
Offering, recognize, during the period that the conditions for such release
are met, a substantial non-cash charge to earnings that would increase the
Company's loss or reduce or eliminate earnings, if any, at such time. In the
event of release of Dr. Sun's Escrow Acquisition Shares escrowed in connection
with the ViComp Acquisition, the Company will recognize such a charge to
earnings either during the period that the conditions for such release are met
or will recognize such charge to earnings over future periods. The purchase
method of accounting has been used to account for the ViComp Acquisition.

The unaudited pro forma combined condensed balance sheet and statement of
operations reflects the following: (i) the combination of the financial
statements of the Company and ViComp; and (ii) the issuance of the Acquisition
Shares (other than Dr. Sun's shares). The unaudited pro forma combined
condensed balance sheet was prepared as if the ViComp Acquisition had occurred
at September 30, 1996, and the unaudited pro forma combined condensed
statements of operations combine the Company's statements of operations for
the year ended December 31, 1995 and the nine-month period ended September 30,
1996 with ViComp's statement of operations for the period from inception
(August 21, 1995) through August 31, 1996 and reflects the ViComp Acquisition
as if it had occurred as of the beginning of the periods presented.

The historical balance sheet and statements of operations of ViComp are
presented to coincide with the nine-month period ended September 30, 1996 and
the twelve-month period ended December 31, 1995 of the Company and the fiscal
year of ViComp, respectively.

In the opinion of the Company's management, all adjustments necessary to
present fairly such pro forma combined condensed financial statements have
been made in the terms and structure of the ViComp Acquisition.

The unaudited pro forma combined condensed balance sheet and statements of
operations are not necessarily indicative of the actual results had the ViComp
Acquisition occurred as of September 30, 1996, January 1, 1996 or January 1,
1995, as the case may be, nor do they purport to indicate the results of
future operations of the Company.

These unaudited pro forma combined condensed financial statements should be
read in connection with the accompanying notes and the historical financial
statements and notes thereto of the Company and ViComp included in this
Prospectus. See "Index to Financial Statements."

24
<PAGE>

DIGITAL VIDEO SYSTEMS, INC. AND
VICOMP TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------
DIGITAL VIDEO VICOMP PRO FORMA
SYSTEMS, INC. TECHNOLOGY, INC. ----------------------------
SEPTEMBER 30, AUGUST 31, PRO FORMA
1996 1996 ADJUSTMENTS COMBINED
------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 14,638,889 $ 159,943 $ -- $ 14,798,832
Accounts receivable,
net.................. 1,194,143 -- -- 1,194,143
Inventories........... 1,488,454 1,488,454
Prepaid expenses and
other current assets. 668,219 -- -- 668,219
------------ ---------- ----------- ------------
Total current
assets............. 17,989,705 159,943 -- 18,149,648
Property and
equipment, net....... 499,921 217,988 (56,172)(a) 661,737
Purchase research and
technology........... -- -- 1,758,399 (a)
-- -- (1,758,399)(b) --
Other assets.......... 116,873 -- -- 116,873
------------ ---------- ----------- ------------
Total assets........ $ 18,606,499 $ 377,931 $ (56,172) $ 18,928,258
============ ========== =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 694,034 $ 93,958 $ -- $ 787,992
Accrued liabilities... 467,986 27,686 250,000 (a) 745,672
------------ ---------- ----------- ------------
Total current
liabilities........ 1,162,020 121,644 250,000 1,533,664
Stockholders' equity
Convertible preferred
stock................ -- 3,000 (3,000)(c) --
Common stock.......... 1,701 3,000 (3,000)(c)
49 (a) 1,750
Additional paid-in
capital.............. 29,800,775 1,072,000 (1,072,000)(c)
1,756,465 (a) 31,557,240
Accumulated deficit... (12,267,320) (773,713) 773,713 (c)
(1,758,399)(b) (14,025,719)
Foreign currency
translation
adjustments.......... (45,437) -- -- (45,437)
Deferred compensation. (45,240) (48,000) -- (93,240)
------------ ---------- ----------- ------------
Total stockholders'
equity............. 17,444,479 256,287 (306,172) 17,394,594
------------ ---------- ----------- ------------
Total liabilities
and stockholders
equity............. $ 18,606,499 $ 377,931 $ (56,172) $ 18,928,258
============ ========== =========== ============
</TABLE>

25
<PAGE>

DIGITAL VIDEO SYSTEMS, INC. AND
VICOMP TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------
VICOMP
DIGITAL VIDEO TECHNOLOGY, INC. PRO FORMA
SYSTEMS, INC. AUGUST 21, 1995 ------------------------
NINE MONTHS ENDED (INCEPTION) PRO FORMA
SEPTEMBER 30, 1996 TO AUGUST 31, 1996 ADJUSTMENTS COMBINED
------------------ ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Total revenue........... $ 4,895,514 $ -- $ -- $ 4,895,514
Cost of revenue......... 5,566,010 -- -- 5,566,010
----------- --------- -------- -----------
Gross profit.......... (670,496) -- -- (670,496)
Operating expenses:
Research and
development.......... 1,048,324 772,565 -- 1,820,889
Sales and marketing... 784,900 -- -- 784,900
General and
administrative....... 2,011,494 16,205 -- 2,027,699
----------- --------- -------- -----------
Total operating
expenses........... 3,844,718 788,770 -- 4,633,488
----------- --------- -------- -----------
Loss from operations.... (4,515,214) (788,770) -- (5,303,984)
Other income (expenses),
net.................... (463,577) 15,057 -- (448,520)
----------- --------- -------- -----------
Net loss before
extraordinary items.... (4,978,791) (773,713) -- (5,752,504)
Extraordinary item--loss
on early extinguishment
of bridge notes........ (1,263,796) -- -- (1,263,796)
----------- --------- -------- -----------
Net loss................ $(6,242,587) $(773,713) $ -- $(7,016,300)
=========== ========= ======== ===========
Net loss per share...... $ (.81) $ (.89)
=========== ===========
Shares used in the
computation of net loss
per share.............. 7,675,792 209,733(d) 7,885,525
=========== ======== ===========
</TABLE>

26
<PAGE>

DIGITAL VIDEO SYSTEMS, INC. AND
VICOMP TECHNOLOGY, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
HISTORICAL
------------------------------------
VICOMP
DIGITAL VIDEO TECHNOLOGY, INC. PRO FORMA
SYSTEMS, INC. AUGUST 21, 1995 ------------------------
YEAR ENDED (INCEPTION) PRO FORMA
DECEMBER 31, 1995 TO AUGUST 31, 1996 ADJUSTMENTS COMBINED
----------------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Total revenue........... $ 3,520,831 $ -- $ -- $ 3,520,831
Cost of revenue......... 3,354,920 -- -- 3,354,920
----------- --------- -------- -----------
Gross profit.......... 165,911 -- -- 165,911
Operating expenses:
Research and
development.......... 1,257,833 772,565 -- 2,030,398
Sales and marketing... 548,573 -- -- 548,573
General and
administration....... 1,513,636 16,205 -- 1,529,841
----------- --------- -------- -----------
Total operating
expenses........... 3,320,042 788,770 -- 4,108,812
----------- --------- -------- -----------
Loss from operations.... (3,154,131) (788,770) -- (3,942,901)
Other income (expense),
net.................... (80,312) 15,057 -- (65,255)
Loss on investment in
affiliate.............. (1,248,868) -- -- (1,248,868)
----------- --------- -------- -----------
Net loss................ $(4,483,311) $(773,713) $ -- $(5,257,024)
=========== ========= ======== ===========
Net loss per share...... $ (.84) $ (.95)
=========== ===========
Shares used in the
computation of net loss
per share.............. 5,337,668 209,733(d) 5,547,401
=========== ======== ===========
</TABLE>

27
<PAGE>

DIGITAL VIDEO SYSTEMS, INC. AND
VICOMP TECHNOLOGY, INC.

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCED SHEET AND STATEMENT
OF OPERATIONS

The following pro forma adjustments are required to allocate the purchase
price and acquisition cost to the assets acquired from ViComp Technology, Inc.
based on their fair value, as determined by an independent appraisal and to
reflect the write-off of purchased research and development identified in the
purchase price allocation.

(a) Reflects the allocation of the purchase price, based on fair market
values, to the historical balance sheet.

(b) Reflects the write-off of purchased research and development identified in
the purchase price allocation. The pro forma statements of operations
exclude the write-off of purchased research and development due to its
non-recurring nature.

(d) Reflects an increase in common stock for the shares issued in connection
with the purchase price of ViComp for the net assets acquired. Does not
include 281,520 shares issued to a related party that are subject to
cancellation. See "Business--ViComp Acquisition." Inclusion of these
shares in the pro forma weighted average common shares outstanding
calculation would be anti-dilutive.

28
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 that involve risks and uncertainties including, without
limitation, statements with respect to the Company's strategy, proposed sales
of the Company's products, markets for the Company's products and the
development of the Company's products, including integrated circuit products.
The Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include,
but are not limited to, the uncertainty of market acceptance of Video CD
players and components, planned rapid growth of the Company's business, the
risks relating to the ViComp Acquisition, conducting business in foreign
countries and the competitive market for the Company's products and those
discussed below and in "Business" and "Risk Factors," as well as those
discussed elsewhere in this Prospectus and any document incorporated herein by
reference. The following discussion should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Prospectus.

GENERAL

The Company was founded in October 1992 by Dr. Edmund Y. Sun to develop
digital video compression and decompression systems. In the first quarter of
1993, the Company entered into agreements with Hyundai Electronics Industries
Co., Ltd. ("Hyundai") to develop karaoke-related digital video products and
the Company entered into a joint venture called Anhui Wanyan Electronic
Systems, Co. Ltd. ("Wyan") for the purpose of developing, producing and
selling digital audiovisual products. These collaborations with Hyundai and
Wyan provided a portion of the funding for the Company's development of its
consumer and commercial Video CD players.

The Company generated approximately $6,410,000 of revenues from product
sales, primarily Video CD players, to related parties that included Hyundai
and Wyan in the year ended December 31, 1994 ("1994"). In the year ended
December 31, 1995 ("1995"), the Company recorded product revenues of
approximately $490,000 to related parties. The Company does not expect to
record significant product revenues from these related parties in the future
due to the shift in the Company's focus since 1995 to marketing Video CD
players to unaffiliated third parties. Product revenue from sales of Video CD
players and (to a lesser extent from sales of Video CD encoding systems), to
unaffiliated third parties increased from approximately $144,000 in 1994 to
approximately $1,437,000 in 1995.

The Company has shifted its focus since 1995 to production and sale of
commercial products in an attempt to meet the significant growth in demand for
digital video products. However, as a result, at least in part, of
insufficient working capital to expand its operations to meet such demand, the
Company has recognized limited revenues from sales of its products to date.
Having significantly increased its working capital by completing the IPO in
May 1996 and having thereafter expanded its marketing and production
activities, the Company believes that the continued increase in the demand for
digital video products may enable it to generate revenue growth in the balance
of the Company's fiscal year ending March 31, 1997. There can be no assurance,
however, that sales of the Company's products will ever generate significant
revenue growth. The Company expects its revenues in the current fiscal year to
be derived largely from sales of its Video CD players and components, sales of
MPEG encoding board sets, the marketing of which commenced in the first
quarter of the current fiscal year, and sales of network video systems
released during the first quarter of the current fiscal year.

The Company expects to incur a substantial operating loss for the balance of
the current fiscal year, which will also include a non-cash charge to
operations of approximately $1,758,000 in the three-month period ending
December 31, 1996 in connection with the ViComp Acquisition. Results of
operations may vary significantly from quarter to quarter depending on, among
other things, the progress, if any, of the Company's research and development
efforts, including the development of the ViComp MPEG-I Chip and other
integrated circuits by ViComp, and the results of the Company's marketing
efforts for its current and future products. See "Business--ViComp
Acquisition." The Company anticipates that it will incur substantially higher
research and development expenses during the balance of the current fiscal
year and the fiscal year ending March 31, 1998, primarily in

29
<PAGE>

connection with ViComp's activities. There can be no assurance that sales of
the Company's products will ever generate significant revenue or that the
Company will generate positive cash flow from its operations or attain or
thereafter sustain profitability in any future period.

In June 1996, the Company elected to change its year end from December 31 to
March 31. Accordingly, the Company's current fiscal year will end March 31,
1997.

In October 1996, the Company determined that its previously reported
operating results and balance sheet data for the three-month periods ended
March 31, 1995 and June 30, 1995 and for the three-month period ended June 30,
1996 required restatement. The revisions to the March 31, 1995 and June 30,
1995 quarters were made to more accurately reflect certain previously recorded
year-end adjustments in the appropriate 1995 quarterly periods. The revisions
to the June 30, 1996 quarter related primarily to (a) the Company's
determination that certain development revenues previously recognized in this
quarter (approximately $225,000) should not have been recognized, and (b) data
errors caused by improper installation of a new manufacturing accounting
system for the Company's Taiwan operation. Pending proper installation of a
new accounting system for the Taiwan operation, the Company continues to use
the system it has used in prior accounting periods, which the Company believes
is an accurate system. The foregoing revisions did not require any restatement
of the Company's previously reported audited financial statements for the year
ended December 31, 1995, and the Company believes that the restated quarterly
financial results (which are reflected in this Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in the
Prospectus) do not represent a material change in the aggregate from the
results as previously reported.

RESULTS OF OPERATIONS

NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 1995

The Company incurred an operating loss and a net loss of approximately
$4,515,000 and $6,243,000, respectively, for the nine months ended September
30, 1996, as compared to an operating loss and a net loss of approximately
$2,435,000 and $2,480,000, respectively, for the nine months ended September
30, 1995.

NET REVENUES AND COSTS OF REVENUES. Total revenues increased approximately
$2,922,000 or 148% from approximately $1,974,000 in the nine months ended
September 30, 1995 to approximately $4,896,000 in the nine months ended
September 30, 1996. This increase was due to increases in unit sales of Video
CD players and components. The gross margin percentage for the nine months
ended September 30, 1996 was negative, as compared to the positive gross
margin for the nine months ended September 30, 1995 of 10%. This decline was
due in part to increased product price competition and increased product
recalls in the nine months ended September 30, 1996. In addition, the gross
margin percentage for development and service revenue was positively impacted
in the nine months ended September 30, 1995 due to timing differences with
respect to the recognition of revenue and associated costs. The gross margins
in both periods were adversely affected by the Company's inability to produce
products in quantities that could result in greater economies of scale. There
can be no assurance, however, that unit costs will decrease if Video CD
players and components, and to a lesser extent, MPEG encoding board sets, are
produced in greater quantities.

OPERATING EXPENSES. Total operating expenses increased by approximately
$1,209,000 or 46% from approximately $2,636,000 in the nine months ended
September 30, 1995 to approximately $3,845,000 in the nine months ended
September 30, 1996. This increase resulted from the Company's increased
research and development, sales and marketing and general and administrative
expenses in the nine months ended September 30, 1996 described below.

Research and development expenses consist primarily of personnel and
equipment costs required to conduct the Company's development efforts. The
Company believes that investments in research and development are required to
remain competitive. These expenses increased approximately $66,000 or 7% from
approximately $982,000 in the nine months ended September 30, 1995 to
approximately $1,048,000 in the nine months ended

30
<PAGE>

September 30, 1996. This increase was related primarily to increased personnel
and consulting costs, offset in part by reduced development expenditures for
Video CD players in the nine months ended September 30, 1996. As a percentage
of net sales, however, research and development expenses decreased from 50%
during the nine months ended September 30, 1995 to 21% during the nine months
ended September 30, 1996 due to the increase in sales in the nine months ended
September 30, 1996 compared to the nine months ended September 30, 1995.

Sales and marketing expenses consist primarily of personnel and consulting
costs involved in the sales process, including sales commissions. Sales and
marketing expenses increased 84% in the nine months ended September 30, 1996
to approximately $785,000 as compared to approximately $426,000 in the nine
months ended September 30, 1995. This increase was primarily due to the
increase in sales and marketing personnel as well as trade shows activities
for the 1996 period being compared. The Company intends to increase its
investment in sales and marketing and expects these expenses to increase in
absolute dollars and as a percentage of revenues during the remainder of the
fiscal year ending March 31, 1997.

General and administrative expenses, which consist of administrative
salaries and benefits, insurance and other business support costs, increased
approximately $783,000 or 64% to approximately $2,011,000 in the nine months
ended September 30, 1996 as compared to approximately $1,228,000 in the nine
months ended September 30, 1995. This increase was due to increases in
salaries and related expenses, which resulted from hiring additional
administrative personnel, increases in liability insurance costs, increased
legal and accounting fees and strategic business consulting fees, costs
associated with the Company's Class A Warrant exchange and redemption offer
(which was subsequently abandoned due to market conditions) and an increase in
facility costs. As a percentage of net sales, general and administrative
expenses decreased from 62% in the nine months ended September 30, 1995 to 41%
in the nine months ended September 30, 1996 due to an increase in sales in the
nine months ended September 30, 1996. The Company expects further increases in
these expenses during the remainder of the fiscal year ending March 31, 1997.

OTHER INCOME (EXPENSES), NET. Other expenses increased to approximately
$464,000 in the nine months ended September 30, 1996 as compared to
approximately $45,000 in the nine months ended September 30, 1995. This
increase was primarily due to charges to interest expense and financing
charges related to the Company's Bridge Financing.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

NET REVENUES AND COSTS OF REVENUES. Total revenues decreased approximately
$4,288,000 or 55% from approximately $7,809,000 in 1994 to approximately
$3,521,000 in 1995. This decrease was due to the decrease in product revenues
generated from sales to related parties, which decreased from approximately
$6,410,000 in 1994 to approximately $490,000 in 1995 as these related parties
increased the production capability at their own manufacturing facilities.
This decrease was partially offset by increases in product revenues generated
from sales to unaffiliated third parties, which represented approximately
$144,000 of total product revenues in 1994 as compared to approximately
$1,437,000 in 1995, as well as an increase in component revenue from none in
1994 to approximately $572,000 in 1995.

Product revenues, including revenues from sales of Video CD players and
Video CD encoding systems, decreased by approximately $4,627,000 or 71% from
approximately $6,554,000 in 1994 to approximately $1,927,000 in 1995. This
decrease was attributable to the decrease in sales made to Hyundai and Wyan in
1995 compared to sales to these entities in 1994 as described above. The cost
of such revenues decreased by approximately $3,689,000 or 62% from
approximately $5,964,000 in 1994 to approximately $2,275,000 in 1995, due to
reduced product revenues. However, the cost of product revenues did not
decrease to the same extent as the decrease in product revenues, because the
Company was required to increase its manufacturing expenses. Such expenses
increased in connection with the introduction of a new Video CD player due to
start-up manufacturing costs associated with the production of such players.
In addition, the Company was not able to produce products in quantities which
could result in greater economies of scale.

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Development and service revenues, primarily from the development of
customized Video CD encoding and decoding systems, decreased by approximately
$233,000 or 19% from approximately $1,255,000 in 1994 to approximately
$1,022,000 in 1995. The cost of such revenues decreased by approximately
$370,000 or 39% from approximately $955,000 in 1994 to approximately $585,000
in 1995. This decrease was primarily the result of the Company incurring a
significant portion of the costs associated with achieving certain milestones
in 1994 under the Company's agreements with Hyundai, with the related
development revenue recognized in 1995 upon completion of such milestones.
Development and service revenues in 1994 were generated primarily from a
development agreement with Wyan pursuant to which the Company helped establish
an assembly plant in China and from the delivery to Wyan of a customized Video
CD encoding system. In 1995, the development and service revenue recorded was
primarily from agreements with Hyundai in which the Company achieved certain
product development milestones. See "Business--Agreements with Hyundai."

Component revenues derived from sales of certain inventory parts in excess
of current manufacturing needs were approximately $572,000 in 1995, and were
made to generate working capital. No such sales were made in 1994.

OPERATING EXPENSES. Total operating expenses increased by approximately
$308,000 or 10% from approximately $3,012,000 in 1994 to approximately
$3,320,000 in 1995. This increase resulted primarily from the Company's
increased general and administrative expenses in 1995 described below. The
increase in total operating expenses was partially offset by decreases in
research and development and sales and marketing expenses.

Research and development expenses decreased by approximately $292,000 or 19%
from approximately $1,550,000 in 1994 to approximately $1,258,000 in 1995
primarily as a result of expenses incurred in 1994 for the development of the
CDV340 Video CD player, which was completed in May 1995.

Sales and marketing expenses decreased 9% from approximately $603,000 for
1994 to approximately $549,000 for 1995. This decrease is attributable to a
reduction in the sales force in 1995 as a result of the decrease in sales
activity in 1995 as compared to 1994.

General and administrative expenses increased in 1995 over the same period
in 1994 primarily due to an increase in personnel at the Company's facilities
in Taiwan.

OTHER INCOME (EXPENSE), NET. Other income (expense), net represents interest
earned by the Company on its cash and cash equivalents, offset by interest
expense primarily from shareholder notes payable.

INVESTMENTS IN AFFILIATES. Investments in affiliates consist of the
investments made by the Company in Wyan and Excodi Limited ("Excodi") for the
purpose of establishing manufacturing capability in mainland China. During
1993 and 1994, the Company made investments totaling approximately $920,000 in
these companies.

During 1994, the Company sold an equity interest in Wyan to Hyundai for
approximately $350,000 and recognized this revenue as a gain on investment in
affiliate. The Company abandoned its investments in Wyan and Excodi in 1995
due to the lack of working capital and other funding sources available to
these enterprises and, to a lesser extent, the working capital deficiency of
the Company. As a result, the Company wrote off an aggregate of approximately
$920,000 of investments in affiliates and an aggregate of approximately
$327,000 in receivables from Wyan and Excodi in 1995. The Company will
continue to seek opportunities to manufacture its products through
subcontractors and, as a result, the Company may make additional investments
in companies and joint ventures located in the Asia-Pacific region. See Note 8
of Notes to Financial Statements.

BENEFIT FOR INCOME TAXES. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The Company incurred a net loss and
consequently paid no federal or state income taxes in 1995. In 1994, the
Company recorded a benefit for

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income taxes as a result of the refundability of taxes that were paid in
previous years. At December 31, 1995, the Company had approximately $3,440,000
in federal net operating loss carryforwards and approximately $550,000 in
state net operating loss carryforwards which expire in various years beginning
in calendar year 1999 if not utilized.

Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
the availability of the Company's net operating loss carryforwards will be
subject to an annual limitation in future periods if a change of ownership for
income tax purposes should occur over a three year period, which could
substantially limit the eventual tax utilization of these carryforwards.

The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluates on a quarterly basis the recoverability of the deferred
tax assets and the level of the valuation allowance. If it is determined that
it is more likely than not that deferred tax assets are realizable, then at
such time the valuation allowance will be appropriately reduced. See Note 5 of
Notes to Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

From its inception until May 1996, the Company funded its operations and
investments primarily through the private sale of equity securities and
borrowings from Dr. Sun, the Company's founder, and Hyundai. Financing
activities in 1994 provided the Company with approximately $4,148,000,
primarily from funds borrowed from, and preferred stock sold to, Hyundai.
Financing activities in 1995 provided the Company with approximately
$3,475,000, primarily from funds borrowed from Dr. Sun, which loans were
subsequently converted to preferred stock, and from preferred stock sold to
Hyundai. See "Certain Transactions." Net cash used in operating activities was
approximately $3,158,000 and approximately $2,482,000 during 1994 and 1995,
respectively. For such periods, net cash used in operating activities resulted
primarily from net losses and in 1994 from repayment of advances from a
related party. Net cash used in investing activities was approximately
$1,167,000 and approximately $114,000 in 1994 and 1995, respectively. Net cash
used in investing activities in 1994 was primarily from acquisitions of
property and equipment and investments in affiliates and net cash used in
investing activities in 1995 was primarily from acquisitions of property and
equipment. Additionally, cash and cash equivalents increased as a result of
the release of restricted cash used to secure a line of credit that expired in
June 1995.

In March 1996, the Company completed the Bridge Financing and received
aggregate proceeds of $6,055,000, net of issuance costs. The proceeds from the
Bridge Financing have been used for inventory and working capital purposes,
including general and administrative expenses and expenses of the IPO. In May
1996, the Company completed the IPO (including exercise of the Underwriter's
over-allotment option), which consisted of 4,830,000 IPO Units. The Company
received net offering proceeds from the sale of IPO Units of approximately
$20,714,000 after deducting underwriting discounts and commissions and other
expenses of the offering. In May 1996, the Company repaid in full the Bridge
Notes and related expenses with a portion of the proceeds received from the
IPO.

As of September 30, 1996 the Company had working capital of approximately
$16,828,000 as compared to working capital of approximately $1,442,000 as of
December 31, 1995. The increase in working capital resulted from the proceeds
of the IPO, net of the repayment of the Bridge Notes. Net cash used in
operations was approximately $6,286,000 for the nine-month period ended
September 30, 1996 as compared to approximately $1,788,000 net cash used in
operations in the comparable period in 1995. Net cash provided by financing
activities was approximately $19,813,000 for the nine-month period ended
September 30, 1996 as compared to approximately $1,974,000 for the comparable
period in 1995.

Except for existing facility and office equipment operating lease
obligations that will require total payments of approximately $490,000 in
calendar years 1996 and 1997, the Company has no material capital expenditure
commitments.

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The Company anticipates, based on currently proposed plans and assumptions
relating to its present operations, that its existing working capital,
together with the net proceeds of the Offering, will be sufficient to satisfy
the Company's contemplated cash requirements for at least the next 24 months.
If the Company's estimates prove incorrect, the Company may have to seek
alternative sources of financing during such period, including debt or equity
financing, and may need to reduce operating costs or curtail growth plans. No
assurance can be given that such financing could be obtained by the Company on
favorable terms, if at all, and if the Company is unable to obtain needed
financing, the Company's business would be materially and adversely affected.

CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROWED SECURITIES

In the event the Company attains any of the earnings or stock price
thresholds required for the release of all or a portion of the Escrow
Securities and 140,760 of Dr. Sun's Escrow Acquisition Shares deposited into
an escrow pursuant to the Offering, the release of such securities to Company
officers, directors, employees or consultants will be treated, for financial
reporting purposes, as compensation expense of the Company. In the event that
the other 140,760 of the Escrow Acquisition Shares owned by Dr. Sun that have
been escrowed in connection with the ViComp Acquisition are released from
escrow, the Company will record additional purchase price for the ViComp
Acquisition at the time of such release, which will either be (i) expensed at
that time or (ii) amortized over future periods. Accordingly, the Company
will, in the event of the release of the Escrow Securities or Dr. Sun's Escrow
Acquisition Shares escrowed in connection with the Offering, recognize, during
the period that the conditions for such release are met, a substantial non-
cash charge to earnings that would increase the Company's loss or reduce or
eliminate the Company's net income, if any, for financial reporting purposes
for the period or periods during which such securities are, or become probable
of being, released from escrow. The amount of this charge will be equal to the
fair market value of such securities on the date of release from escrow. In
the event of the release of Dr. Sun's Escrow Acquisition Shares escrowed in
connection with the ViComp Acquisition, the Company will recognize such charge
to earnings either during the period that the conditions for such release are
met or will recognize such charge to earnings over future periods. Although
the amount of expense recognized by the Company will not affect the Company's
total shareholders' equity, it may have a depressive effect on the market
price of the Company's securities. See Note 11 of Notes to Financial
Statements.

SEASONALITY

The Company's business in China and Taiwan is somewhat seasonal, with demand
for consumer products generally being higher in the fourth calendar quarter
and lower in January and February due to the Chinese New Year.

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BUSINESS

The discussion in this "Business" section contains forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties
including, without limitation, statements with respect to the Company's
strategy, proposed sales of the Company's products, markets for the Company's
products and the development of the Company's products, including integrated
circuit products. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, the uncertainty of market
acceptance of Video CD players and components, planned rapid growth of the
Company's business, the risks relating to the ViComp Acquisition, conducting
business in foreign countries and the competitive market for the Company's
products and those discussed in this "Business" section and in "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations," as well as those discussed elsewhere in this Prospectus and
any document incorporated herein by reference.

OVERVIEW

The Company develops, manufactures and markets digital video compression and
decompression hardware and software for entertainment, business and
educational uses. The Company has developed proprietary digital video
compression and decompression technology that it believes will enable it to
offer products with a wide range of features at competitive prices. The
Company's current focus is on the marketing of key electronic components for a
Video CD player that incorporates the Company's proprietary technology. The
Company markets these Video CD components primarily to consumer electronics
manufacturers in China and other countries in the Far East. A significant
market for Video CD players recently has developed in China and the Company
believes is likely to develop in other developing countries as the recent
reductions in selling prices for the players have made them more affordable
and a large amount of entertainment software in Video CD format has become
available in languages indigenous to the developing countries.

INDUSTRY BACKGROUND

Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats such as video tape. Digital video, however,
unlike analog video, can be compressed, which allows for increased storage
capability and transmission efficiencies as well as the ability to reproduce
and transmit video images without perceptible image degradation. Digital video
also permits superior editing capabilities because of its greater
compatibility with computers.

Because a standard for video compression is required in order for compressed
video to be shared among various products, a number of industry leaders in
consumer electronics, computers and communications joined together through the
International Standards Organization (the "ISO") to define a standard for
compression of audio and video to CD-ROM called MPEG (Motion Picture Experts
Group)-I. MPEG-I was adopted by the ISO in 1991. In 1994, the ISO adopted a
standard for compression of audio and video to broadcast systems called MPEG-
II. MPEG-II permits better picture resolution than MPEG-I, but requires about
four times as much data. Video CDs store information in MPEG format. They are
the same size as audio CDs, about 120 millimeters in diameter and 1.2
millimeters in thickness, but allow up to 74 minutes of video and audio
storage. Although the picture quality of the current generation of Video CDs
produced in accordance with MPEG-I standards is not as good as that of laser
discs (and is about comparable to that of video cassette tapes), the smaller
discs (i) allow superior interactive multimedia features because the machine
players can more quickly find the desired audio and video segments; and (ii)
can be produced more cost effectively in large quantities than laser discs or
video cassettes, with current production costs of approximately $0.50 per
Video CD (two Video CD's are required for most movie title), versus $9.00 per
laser disc and $2.00 per video cassette. Moreover, the new generation of MPEG-
II compression technology is expected to allow the picture quality of Video
CDs to be comparable to that of laser discs.

In December 1995, a new video disc format was agreed to by those
manufacturers and entertainment companies aligned with Sony Electronics, Inc.
("Sony") and Philips on the one side and Toshiba Corporation ("Toshiba") and
Time Warner on the other. This new disc, sometimes called a Digital Video Disc
or Digital

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Versatile Disc ("DVD"), will be the same size as a current Video CD, but will
be based on the new MPEG-II compression technology and will hold about seven
to eight times as much information on a single-sided, single-layer DVD as a
current Video CD and deliver such information eight times as rapidly. DVD is
expected to provide enough storage space to allow up to approximately 135
minutes of video and audio in MPEG-II format and will cost approximately $1.50
per disc to produce. However, the final standards for DVD have not yet been
released to the public, and the commercial viability of DVD has not yet been
established particularly since most of the major studios have not yet agreed
to the recording of their films on DVD.

The quantity of entertainment media available in the Video CD format,
including movies, karaoke and games, has increased from several hundred titles
in 1994 to more than 5,000 titles worldwide in 1996, although only
approximately 200 titles are available in the United States.

VIDEO CD PLAYER MARKET

A Video CD player looks like an audio CD player except that it plays both
video and audio. Like a video cassette recorder ("VCR") and laser disc player,
a Video CD player, in addition to the basic play feature, generally has
special effects capabilities such as slow motion, fast forward and reverse.
For markets in Asia, Video CD players are also often equipped with karaoke
features such as digital "echo" and the ability to change the key in which the
music is played. As with a laser disc player, a Video CD player can play video
and audio, and can access tracks randomly, but unlike a VCR, currently
marketed Video CD players cannot record material.

The Video CD player market has grown rapidly in China in the last two years,
and the Company believes significant markets for Video CD players are likely
to emerge in other such developing countries as India and Malaysia. The price
of the Video CD player has declined as manufacturing capacity has begun to
exceed demand and the price of key components recently has fallen
significantly with the increased competition among suppliers of these
components. The cost of the MPEG-I decoder chip, which is the most expensive
single chip in the Video CD player, has begun to decline, and several
companies, including Sony and Toshiba, have announced that they intend to
introduce proprietary MPEG-I decoder chips to the market in late 1996, which
may contribute to further price erosion. The Company has recently secured from
an Asian manufacturer a source of MPEG-I decoder chips that are substantially
equivalent to the C-Cube chip that has been used in the Company's Video CD
products at significantly lower prices. However, the Company and that
manufacturer have not yet completed the integration of this chip into the
Company's Video CD board. No assurances can be given that such integration
will be successfully completed in time to enable the Company to utilize such
chips prior to the end of calendar year 1996 or that a sufficient quantity of
such chips will be made available to the Company. In addition, if ViComp
successfully develops the ViComp MPEG-I Chip, the Company would have a lower
cost alternative than either the C-Cube chip or the replacement chip described
above. See "--ViComp Acquisition."

The consumer market for Video CD players in the United States is currently
not significant. The Company believes that this is due to the fact that few
motion picture titles are available on Video CD format and, consequently, few
U.S. consumers have an incentive to acquire a Video CD player. Moreover, the
VCR is firmly entrenched, with most households with sufficient income already
owning one. Because the image quality of the Video CD and the VHS tape is
similar, the Video CD player offers no qualitative advantage over the VCR
(which also can record material) to the U.S. consumer, even though both
players are comparably priced.

Because a large market for consumer entertainment uses of Video CD players
does not exist in the United States, the Company's initial marketing focus in
the United States will be for the use of its products in educational and
business applications.

VIDEO ENCODING/AUTHORING MARKET

Video encoding is the process of compressing audio and video data and
recording the resulting MPEG data into files for storage, such as on a Video
CD. The video and audio material can be from analog sources such as video
cassettes or from other digital sources. A mainframe or personal computer
("PC") is used in conjunction with MPEG encoding hardware to compress audio
and video into an MPEG-formatted file. The authoring process consists of
ordering, organizing, and editing one or more MPEG files, together with
control and other information into a coherent Video CD title. The resulting
files are then copied onto a recordable Video CD with a Video CD

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recorder. In order to mass produce Video CD titles, a pre-master CD is made by
recording a gold CD. A glass master CD is then made from the pre-master and
taken to a company that presses Video CDs, such as 3M or Sanyo, for mass
production.

A Video CD encoding system generally costs at least $20,000 and can encode
in real time (i.e., encoding one hour of material takes about one hour), which
allows about three Video CDs to be encoded in an eight-hour workday (including
time to check the compressed material prior to recording it onto a Video CD).
As owners of materials displayed on video cassettes and laser discs are
realizing that such materials also can be sold in Video CD format, the demand
for video encoding is growing in China and Japan.

COMPANY PRODUCTS

The Company's current products are based upon MPEG-I compression. The
Company, however, is in the process of developing additional products based on
MPEG-II compression, as well as its MPEG-II 1/2-D1 encoding board set.

VIDEO CD PLAYERS

CONSUMER. The Company currently markets Video CD players and player
components, including individual decoding circuit boards and complete kits
containing substantially all of the parts necessary to assemble a Video CD
player. The Company sells these components primarily to manufacturers of Video
CD players. See "--Manufacturing." The Company or such manufacturers then
produce the Video CD players and resell such players to dealers or end users
under the Company's "DVS" label or other private manufacturer labels.
Additionally, the Company intends to begin manufacturing Video CD players in
China for domestic sales as well as export. The Company's current model Video
CD player (the CDV350) has features that include karaoke functions, the
ability to play audio CDs in addition to Video CDs, on-screen control
features, the ability to access tracks randomly, surround sound, slow motion
and frame-by-frame advance, shuffle/program track playback, time search and a
computer interface (a feature currently available only with the Company's
Video CD player).

COMMERCIAL. The Company's CDV3300 and 3600 Commander Juke Box Systems are
each a combination of a Video CD changer controller and a Video CD player
designed for sale to bars, restaurants and cafes for karaoke. The market for
karaoke machines in Asia is currently estimated to be several billion dollars
per year. The CDV3300 controls a Video CD autochanger that has a 100-disc
capacity. The CDV3600 has a 360-disc capacity and has a second player that
allows the queuing of Video CDs and selection of song titles. The CDV3300 and
CDV3600 can be upgraded to handle multiple changer units for increased
capacity.

VIDEO CD ENCODING SYSTEMS

The Company's encoding systems are PC-based MPEG compression systems
designed to provide turnkey solutions for all of the hardware and software
required to edit and compress video material and encode Video CDs.

MPEG ENCODING BOARD SET. The Company has developed a video encoding board
set that is compatible with certain PCs and allows the user to encode video
material without purchasing an entire encoding system. This encoding board set
is targeted for sale to original equipment manufacturers and distributors who
will integrate it with other parts of an encoding system. The Company
commenced marketing the encoding board set in the second quarter of calendar
1996, but has generated only limited sales of this product to date.

ENC50 ENCODING SYSTEM. The ENC50 encoding system is a turnkey system which
features digital video and audio inputs, advanced video preprocessing and
compression, real-time video/audio MPEG-I compression and multiplexing
(linking together video and audio), Video CD track composition, disc pre-
mastering and master disc writing. This system is targeted at quality-
conscious video producers who are converting large quantities of

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video material to Video CD. These include movie studios, karaoke producers,
educational institutions, and corporate and other video production studios.
The Company, however, has sold only a limited number of these systems since
1995.

VIDEO CD ENCODING KIOSK. The Company's Video CD encoding kiosk ("Encoding
Kiosk") is a customer-operated Video CD authoring system packaged in an
automatic teller machine-type kiosk enclosure. Through a simple touch-screen
interface, a photoshop operator or the walk-up customer is provided with
instructions in order to produce Video CDs. This product has custom
application software and system configurations for each application. The
application software eliminates the need for an experienced multimedia
production operator and enables a customer to generate an interactive Video CD
to take home. The Encoding Kiosk can be used in karaoke bars, photoshops and
video studios for conversion of live and pre-recorded video and still
photography into Video CDs. The Company recently began marketing its current
version of the Encoding Kiosk at the Multimedia Show in Beijing in April 1996
but has only sold a limited number of these kiosks to date.

NETWORK VIDEO SYSTEMS

The Company's Multimedia-On-Demand ("MOD") systems provide interactive
networked video services across a high-bandwidth network and can be designed
for use in entertainment, education and business. The core of each system is a
low-cost, real-time video server which delivers video and other information to
users across a network. In addition to supporting a library of immediately
accessible video items on the server, the system supports one or more 360-disc
Video CD jukebox systems which allow for large amounts of additional video
material to be stored and accessed as required.

The MOD systems were specifically designed by the Company to be flexible. By
changing the video content and modifying the user interface, the MOD system
can easily be changed for different applications (e.g., movies and karaoke for
entertainment purposes; video training materials, research materials and
interactive testing for educational purposes; and video training materials,
research materials, internet access, and archiving for business purposes).

The Company began preliminary marketing activities for its current MOD
system in the United States at the convention for the National Association of
Broadcasters and in Beijing at the Multimedia Show, both in April 1996, but
has yet to sell any of these systems.

A management server controls and manages the video server. The management
server runs in conjunction with a standard world-wide web server and provides
the ability to create and maintain databases and graphical user interfaces.
The user can access the network video system through a PC-compatible platform
using the Company's proprietary browser. Menus and other user pages are
displayed on a television or a PC monitor. The user can use a remote control
device, keyboard or bar-code reader to make selections. The existing system is
designed to operate over local area networks using Ethernet (a hardware and
software protocol for a type of networking). In addition, because the
Company's video server is functionally compatible with Internet World Wide Web
servers and browsers and uses Hyper Text Markup Language (HTML), which is the
most commonly used language on the Internet, as the basis for all control and
management functions, the Company anticipates that it will be able to adapt
its system for uses over the Internet, although there can be no assurances
that it will be able to do so. In the future the Company intends to develop
additional networking capability to enable its product to work over digital
cable TV systems and Asynchronous Transfer Mode networks.

The Company has developed and is further enhancing the capabilities of its
multiroom karaoke video system. The multiroom karaoke video system provides a
multimedia delivery system for commercial karaoke establishments. It enables
up to 20 rooms to share a common song library of over 10,000 songs. The system
is based around a single multimedia server which controls access to a Video CD
jukebox, video delivery and song selection. In each room there is a user
terminal for song catalog browsing, song selection and video delivery. The
user terminals are connected to the server through Ethernet connections that
provide communications for

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both song selection and video delivery. This system is being developed in
connection with a contract that the Company has entered into with Hyundai. See
"--Agreements with Hyundai."

MPEG-II PRODUCTS

The Company is currently under contract with Hyundai to develop an MPEG-II
compressor for encoding titles, a DVD authoring system, and an MPEG-II
Transport Multiplexor which reformats MPEG elementary streams for broadcast
channels. However, none of these development projects can be completed until
the Company receives the final specifications for the DVD format from Toshiba.
See "--Agreements with Hyundai."

ViComp's integrated circuit design and development capabilities may
potentially give the Company the ability to develop an MPEG-II decoder that
could present opportunities for the Company in the DVD and digital set-top box
markets, since products in these two markets will utilize an MPEG-II decoder
to translate compressed video signals into an image that can be viewed on a
television screen. An MPEG-II decoder is in the very early stage of
development and there can be no assurance that ViComp will successfully
develop an MPEG-II decoder or any other product utilizing the MPEG-II format.
See "--ViComp Acquisition."

CUSTOMIZED SYSTEMS

The Company plans to continue to customize and combine aspects of its
digital video systems for specific applications. The specific adaptations of a
system depend on the needs and uses of the specific customer or strategic
partner. Such customer or partner may have concerns about security of video
material, ability to measure use and ease of accessibility among other things.
The Company has contemplated or is customizing some of its systems for
educational uses, kitchen products, entertainment delivery for hotels and
cruise ships, karaoke, video delivery over the Internet and corporate
training.

VICOMP ACQUISITION

In October 1996, the Company acquired all of the outstanding capital stock
of ViComp in exchange for 491,253 shares of the Company's Common Stock (the
"Acquisition Shares"). ViComp is engaged in the design and development of
integrated circuits to decode MPEG-I signals. The Company anticipates that the
ViComp MPEG-I Chip under development by ViComp, which the Company plans to
incorporate into its Video CD products and which the Company may market to
other manufacturers of Video CD products, will be available for production in
commercial quantities by the second half of calendar year 1997. However, there
can be no assurance that the design and development of the MPEG-I Chip by
ViComp will be successfully completed within the foregoing time schedule
(which could be delayed due to unexpected design problems, loss of key ViComp
personnel or other factors), or at all. Further, if the costs to commercially
produce the ViComp MPEG-I Chip in commercial quantities is higher than
currently anticipated, such product may be noncompetitive based on the selling
prices of other functionally equivalent chips that may then be available. In
addition, the Company intends to use the ViComp integrated circuit design and
development to create other chips, such as an MPEG-II decoder chip for use in
products currently under consideration by the Company.

ViComp was founded in August 1995 by Dr. Edmund Y. Sun, the Chairman of the
Board and Chief Executive Officer of the Company, and James Kirkpatrick Jr.,
who had previously been employed by C-Cube as its Vice President of
Engineering and by Hyundai as a Vice President and the General Manager of its
Digital Media Division. Mr. Kirkpatrick served as ViComp's Chief Executive
Officer prior to the ViComp Acquisition and will continue to serve in a full-
time capacity as ViComp's Chief Technical Officer. ViComp's current staff
includes two additional engineers who had been employed by ViComp prior to the
ViComp Acquisition, and the Company anticipates employing additional
engineering and support staff at ViComp to expand its design and development
activities. See "Management--Key Employees."

Dr. Sun received 281,520 of the Acquisition Shares in exchange for his
shares of ViComp capital stock, all of which shares have been deposited in
escrow (the "Sun Escrow Acquisition Shares"). A total of 140,760 of the Sun
Escrow Acquisition Shares deposited into an escrow pursuant to the terms of
the ViComp Acquisition

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<PAGE>

will be cancelled in the event that (a) the ViComp MPEG-I Chip is not ready
for commercial production by July 1, 1997; (b) ViComp's cost to manufacture
the ViComp MPEG-I Chip is not at least $3 per chip less than the cost for the
Company to purchase the lowest-priced chips that are functionally
substantially equivalent to the ViComp MPEG-I Chip from other manufacturers at
the time the ViComp MPEG-I Chip is ready for commercial production; or (c) the
Company's cost to obtain the ViComp MPEG-I Chip in commercial quantities
exceeds $10 per chip. The other 140,760 of the Sun Escrow Acquisition Shares
have been deposited in escrow in connection with the Offering and will be
subject to cancellation upon the same terms and conditions as the arrangement
with respect to the Escrow Shares as described under "Principal Shareholders--
Escrow Shares." In the event of the release of the Sun Escrow Acquisition
Shares that have been escrowed in connection with the Offering, the Company
will incur a substantial non-cash charge to earnings equal to the aggregate
market value of such shares at the time of release from escrow. In the event
of the release of the Sun Escrow Acquisition Shares that have been escrowed in
connection with the ViComp Acquisition, the Company will either (i) incur such
a charge at the time of release from escrow or (ii) capitalize and amortize
such amount over future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Charge to Income in the Event
of Release of Escrowed Securities" and Note 11 of Notes to Financial
Statements. A total of 20,973 of the Acquisition Shares issued to the other
ViComp shareholders in the ViComp Acquisition were deposited into an escrow
and are subject to cancellation in the event of a breach of certain
representations and warranties made by these shareholders to the Company in
connection with the ViComp Acquisition.

In connection with the ViComp Acquisition, Mr. Kirkpatrick and the two other
ViComp shareholders who continue to be employed by ViComp after the ViComp
Acquisition were granted options to purchase a total of 189,557 shares of the
Company's Common Stock for a ten-year period at a price of $8.38 per share
under the Company's 1996 Option Plan, which Plan is subject to shareholder
approval. These options will vest over a five-year period commencing one year
from the date of grant. Pursuant to the terms of the ViComp Acquisition, the
holders of the Acquisition Shares have been granted demand and unlimited
piggyback registration rights following the Offering. None of such rights
require the Company to file a registration statement for such shares prior to
May 1997.

STRATEGY

The Company's strategy is to continue to develop, market and sell key
electronic components for Video CD players in China and other developing
countries such as India and Malaysia. In addition, the Company intends to
develop, market and sell key electronic components for use in MPEG-II systems
such as DVD, digital set top boxes and high definition television. See "--
Industry Background." A further objective of the Company is to exploit market
niches that have not been broadly developed by the major consumer electronic
manufacturers. For example, the Company intends to pursue business and
educational applications for the Video CD player market. Similarly, the
Company may develop niche applications for its network multimedia system, such
as video-on-demand for the hospitality industry. To implement its strategy,
the Company has assembled a highly experienced engineering and research and
development team. In addition, the Company may seek to enter into strategic
partnerships or other collaborative arrangements to develop and market these
new products.

The Company's goal is to become a technology leader in rapidly growing
digital video markets by continuing to develop novel uses for digital video
technology, while reducing the cost of existing uses in order to remain
competitive. The combination of the encoding of a sufficient number of
entertainment titles on Video CD and the reduction of the cost of Video CD
players to be comparable with video cassette players has made such Video CD
players a competitive product in certain foreign markets, such as China,
Korea, Japan and Taiwan. As a result, the Video CD player market has become
the first rapidly growing digital video market, and the Company will attempt
to increase its sales in this market. In order to remain a competitive
supplier of products for this market, the Company will strive to reduce its
cost of producing Video CD players and components. The acquisition of ViComp's
integrated circuit design and development capability is a key element in this
strategy.

The Company's proprietary technology for a Video CD player is incorporated
into the decoder board and its design and not in the Video CD drive, the
casing of the Video CD player or other parts of a Video CD player.

40
<PAGE>

Accordingly, in order to maximize the economic return on its proprietary
technology and reduce its internal manufacturing requirements for Video CD
players, the Company's goal is to ultimately sell only decoder boards to other
manufacturers, who will obtain the rest of the parts of the Video CD player
from other suppliers and manufacture such players. The Company may also
utilize this manufacturing and marketing strategy for other products that it
develops, where appropriate.

The Company's product development efforts attempt to adapt digital video
technology to satisfy an existing need with a product that is superior in
either features, cost effectiveness or some combination of the two, which then
provides the consumer with a greater perceived value than the alternative
products. For example, the Company believes that it can provide the same
services as many existing information kiosks at a lower cost. Because many
such kiosks currently use computers, they employ hardware with excess
capability. By using equipment that serves only the required purposes of an
information kiosk, the Company believes it can provide the same service at a
lower initial cost, with higher reliability and with lower support costs.

The Company may also seek to develop complementary technologies in order to
exploit synergies between markets for its products. For example, the Company
believes that the encoding products it has produced have helped create more
titles on Video CDs. This, in turn, has led to increased sales of Video CD
players.

The Company has in the past utilized, and will seek in the future to enter
into, strategic partnerships or other collaborative arrangements with other
companies to develop and market specific new applications for digital video
technology. See "--Agreements with Hyundai."

MANUFACTURING

The bulk of the Company's current manufacturing consists of producing Video
CD players. A Video CD player generally is composed in part of a decoder
board, a Video CD drive which spins and reads the Video CD, casing for the
Video CD player and a connector to a power source. The Company uses a number
of subcontractors in Taiwan to manufacture most of the decoder boards. The
Company then adds an MPEG-I decoder chip to such board in order to complete
its manufacture. See "--Suppliers." The Company primarily obtains its Video CD
drives, directly or indirectly, from Philips. Although the Company has not had
and does not anticipate having difficulty obtaining Video CD drives in the
future, the Company has modified its Video CD player to be compatible with
Video CD drives produced by Sony. The Company purchases the other parts of the
Video CD player from third-party vendors and assembles the Video CD players at
its facilities in Taiwan. The Company intends to shift assembly of Video CD
players to a contract manufacturer in China, where costs are lower than
Taiwan.

The Company primarily sells key decoder board components to Video CD player
manufacturers. As a result, the Company does not anticipate a need to
significantly expand its manufacturing capability even if orders for its Video
CD player products increase substantially. The Company anticipates that it
will continue to subcontract out virtually all of its large-scale
manufacturing by engaging manufacturing subcontractors. Because the Company
anticipates that a substantial portion of its sales of Video CD players and
components for the foreseeable future will occur in China, the Company is
currently considering the use of one or more subcontractors in Shenzhen,
China. In the event ViComp successfully completes the development of the
ViComp MPEG-1 Chip or any other chip, the Company anticipates that it will
subcontract out the manufacture of these chips. The Company has made no
arrangements to date for such manufacturing but does not anticipate
encountering any significant difficulty in securing a suitable arrangement in
the future.

The design work, prototype manufacturing and the assembly of integrated
products such as network multimedia systems and the Video CD encoding systems
and kiosks, as well as commercial Video CD players, occur at the Company's
headquarters in Santa Clara, California. Because most of these products have a
short enough production cycle relative to a customer's need for such products,
the Company manufactures them as orders are received. Accordingly, the Company
generally does not maintain inventory for such products or have a backlog of
orders.

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<PAGE>

MARKETING AND DISTRIBUTION

The Company's representatives attend trade and industry shows to try to
increase awareness of and interest in digital video technology and the
Company's products. The Company also employs six full-time sales
representatives who are based in Santa Clara, California, Taipei, Taiwan,
Tokyo, Japan, Shanghai, China and Hong Kong to sell its products and
anticipates that it will hire additional sales personnel as required to
support the Company's business plan. With respect to sales of its Video CD
players, the Company either licenses the right to manufacture the players and
sells component parts (with the licensed manufacturers then selling the
assembled Video CD players to dealers or end users) or sells assembled players
directly to dealers. The majority of the Company's customers for Video CD
players and components are manufacturers of related products, such as audio
compact disc players, and none of the Company's customers accounted for more
than 10% of the Company's revenues in 1995 or for the nine-month period ended
September 30, 1996 (other than Hyundai in 1995). The Company distributes its
encoding systems through independent sales representatives who sell them
directly to end users. The Company intends to use a portion of the proceeds
from the Offering to expand its marketing activities, including adding
additional sales and support offices in China.

SUPPLIERS

Programmable decoder or encoder chips are an integral part of the Company's
products. The Company currently obtains all of such chips from C-Cube. The
Company has no contractual right to obtain or obligation to purchase any
specified number of chips from C-Cube. Although C-Cube substantially increased
its capacity to supply chips in April 1996, there can be no assurance that the
Company's allocation from C-Cube will increase sufficiently to meet the
Company's future needs. The Company has recently secured from an Asian
manufacturer a source of MPEG-I decoder chips that are substantially
equivalent to the C-Cube chip that has been used in the Company's Video CD
products, but are available at significantly lower prices. The Company is
currently working with the manufacturer to integrate the chip into the
Company's Video CD board. No assurances can be given that such integration
will be completed in time to enable the Company to utilize the chips prior to
the end of calendar year 1996 or that the Company will be able to obtain a
sufficient quantity of these chips from the manufacturer.

In recent months, several companies have announced their intention to
introduce MPEG-I decoder chips to the Video CD market, including Sony, NEC,
and Toshiba. Any increase in the supply of chips may allow the Company's
existing competitors to produce more competing products or encourage new
competitors to produce Video CD products and may allow the Company's
competitors to produce products at lower costs than those incurred by the
Company. See "--Competition."

AGREEMENTS WITH HYUNDAI

In March 1993, the Company and Hyundai entered into two five-year agreements
(the "1993 Hyundai Agreements") pursuant to which the Company agreed to
deliver to Hyundai (i) a consumer karaoke Video CD player with the technical
information for the Korean market by August 1993, in exchange for $300,000 and
3% of net sales; (ii) a karaoke Video CD jukebox with all technical
information for the Korean market by October 1993, in exchange for $350,000
and 3% of net sales; (iii) a complete set of encoding machines by July 1993 in
exchange for $700,000; and (iv) a karaoke network system for 20 rooms with
technical information by the end of 1993 in exchange for $300,000. The 1993
Hyundai Agreements granted Hyundai (i) the exclusive right to manufacture,
use, sell and otherwise transfer or dispose of the karaoke-related products in
Korea; and (ii) the non-exclusive right to do so in other countries. Between
1993 and 1995, the Company delivered to Hyundai karaoke players, karaoke
jukeboxes and an encoding machine in exchange for total payments of $1,250,000
pursuant to the 1993 Hyundai Agreements. Delivery of the karaoke network
system was not made pursuant to the 1993 Hyundai Agreements and is now covered
by an agreement entered into in 1995 between the Company and Hyundai that is
described below. Hyundai has not paid the Company any royalties to date under
the 1993 Hyundai Agreements.

During 1994, the Company manufactured 6,000 consumer karaoke players for
Hyundai for an aggregate purchase price that included the 3% royalty relating
to such players provided for in the 1993 Hyundai

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Agreements. In 1994, the Company and Hyundai amended the 1993 Hyundai
Agreements and agreed to a manufacturing relationship whereby the Company
granted Hyundai the right to manufacture a karaoke jukebox commander and
cancelled the Company's right to receive the 3% royalty relating to sales of
the karaoke jukebox under the 1993 Hyundai Agreements in exchange for Hyundai
agreeing to sell such karaoke jukebox commanders to the Company at a
preferential price. Hyundai thereafter redesigned the consumer karaoke player
to reduce the size of its boards and utilized a new chip from C-Cube. Hyundai
has taken the position that its redesigned consumer karaoke Video CD players
are not subject to the royalty provisions of the 1993 Hyundai Agreements. The
Company is evaluating Hyundai's position with respect to such players.

In April 1995, the Company and Hyundai entered into a second Technical
Assistance and License Agreement (the "1995 Hyundai Technical Assistance and
License Agreement") pursuant to which the Company granted Hyundai an
exclusive, perpetual royalty-free right to manufacture, use, sell and
otherwise transfer or dispose of an MPEG-II compressor and a network video
distribution system in Korea and a non-exclusive, perpetual royalty-free right
to use, lease, sell and otherwise transfer or dispose of the MPEG-II
compressor and network video distribution system in other countries in
exchange for $1,500,000. Pursuant to the 1995 Hyundai Technical Assistance and
License Agreement, Hyundai paid the Company $750,000 in May 1995. Such
agreement provided for additional progress payments aggregating up to $750,000
if products relating to MPEG-II compression (and related products including a
DVD player) and network video distribution systems were delivered by certain
specified dates. Such agreement provided for penalties which would reduce the
amounts due to the Company if certain schedules were not met. As a result of
delays in meeting the schedule for delivery of the network video distribution
system, the total purchase price for this product, which the Company recently
delivered, may be subject to reduction. The Company and Hyundai mutually
agreed to renegotiate the agreement as it relates to the delivery of the MPEG-
II compression products, based upon the delay of the release of DVD
specifications.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company has previously used confidentiality and non-disclosure
agreements with its employees, suppliers and distributors to protect its
proprietary products and has integrated a majority of its intellectual
property into complex devices to help protect against reverse engineering. The
Company recently filed patent applications in the United States and other
countries covering certain of the technologies that relate to its network
video systems. There can be no assurance, however, that patents will be
granted for any of these technologies or that any patent claims allowed will
be sufficiently broad so as to provide meaningful patent protection for the
Company or that even if obtained, that such patent claims will be enforced,
especially in foreign jurisdictions such as China. There are few barriers to
entry into the market for the Company's products. There can be no assurance,
therefore, that any of the Company's competitors, many of whom have far
greater resources than the Company, will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. Further, the Company distributes its products in countries where
intellectual property laws are not well developed or are poorly enforced.
Legal protections of the Company's rights may be ineffective in such
countries, and software developed in such countries may not be protectable in
jurisdictions where protection is ordinarily available. Software piracy and
ineffective legal protection of the Company's software in foreign
jurisdictions, such as China, may cause substantial losses of sales by the
Company, which could have a material adverse effect on the Company's operating
results and financial condition.

Although the Company has taken and will continue to take steps that it
considers appropriate to protect its proprietary products, the Company
believes its future success will be dependent primarily on its ability to
rapidly bring to market products incorporating technological advances and then
reducing the cost of producing these products rather than on establishing
patent protection for these products.

RESEARCH AND DEVELOPMENT

Since its inception, the Company has devoted a substantial portion of its
resources to research and product development focusing on digital video
compression and decompression hardware and software systems. During the years
ended December 31, 1994 and 1995 and the nine months ended September 30, 1996,
the Company incurred research and development expenses of $1,550,000,
$1,258,000 and $1,048,000, respectively.

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The Company currently anticipates that during the next twelve months its
research and development efforts will focus on reducing the costs of its
products, particularly the components of the Video CD players, completing the
development of the ViComp MPEG-I Chip, developing specific uses for its
network video systems and through ViComp, developing novel MPEG-II integrated
circuits. The Company also anticipates that some of its research and product
development personnel will be utilized to support the sales and marketing
efforts of the Company in connection with customizing product applications for
specific customers. There can be no assurance, however, that research and
development efforts with respect to such products will progress as
anticipated, that the Company will be able to reduce costs sufficiently to be
able to compete with others marketing similar products or that new uses for
network video will be able to be developed on a timely basis, if at all.

COMPETITION

The Company's products compete with products marketed by other manufacturers
of Video CD players and their components as well as with alternative methods
of displaying audio and video such as video cassette players, laser discs,
multimedia computers and game machines, as well as with other companies'
products that use similar technologies. Although the large video entertainment
markets of the United States and other industrial nations are currently served
primarily by VHS video cassettes (an analog format) and laser discs, the
Company believes that Video CDs and digital video discs ("DVD") will
effectively compete for these markets in the future. The Company believes that
the Video CD is likely to be the initial format of choice in developing
countries, such as China, India and Malaysia, because (i) the penetration by
VHS video cassette players ("VCRs") is much smaller on a relative basis in
these countries than in the major consumer electronics markets represented by
the United States, Western Europe and Japan; (ii) the Video CD player is
priced comparably to a VCR; (iii) the cost to produce a movie title on a
compact disc is approximately one-half the cost to produce the same title on a
video cassette; and (iv) significantly more entertainment software is
currently available in languages indigenous to the developing countries. Most
of the Company's competitors and potential competitors, such as Sony, C-Cube
and Toshiba, are substantially larger in size and have far greater financial,
technical, marketing, customer service and other resources than the Company.

Certain of the Company's potential competitors may have technological
capabilities or other resources that would allow them to develop alternative
products which could compete with the Company's products. Potential
competitors may begin operations or expand their existing operations into the
Company's proposed markets before the Company is able to successfully market
its products. There can be no assurance that future technological advances
will not result in improved products or services that could adversely affect
the Company's business. Competition in the electronics industry also extends
to attracting and retaining qualified technical and marketing personnel, and
there can be no assurance that the Company will be successful in attracting
and retaining such qualified personnel.

As part of its business strategy to focus on niche markets not yet broadly
developed by the major consumer electronics manufacturers and to compete at
least in part on the basis of product price, the Company has in the past and
will likely in the future have a more limited range of products than many of
its competitors who will offer more products that attempt to cater to a number
of price points for customers. This may adversely affect the Company's ability
to compete for product sales.

With respect to the sale of Video CD players, the Company competes with
numerous companies, including large consumer electronics companies with strong
brand name recognition, such as Hyundai (which funded a portion of the
development of the Company's products and made a substantial equity investment
in the Company), Samsung, Panasonic and Sony. In addition, many of these
companies manufacture Video CD players on a larger scale than the Company and
accordingly may be able to better take advantage of the lower costs associated
therewith. However, the Company avoids competing directly with these larger
electronics companies by generally attempting to sell components of Video CD
players to manufacturers instead of end users. Nevertheless, the Company still
indirectly competes with these larger electronics companies for sales of Video
CD players to end users. Such competition generally occurs on the basis of
price and features. There can be no assurance that such other electronics
companies will not price their Video CD players below the price of players

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offered by manufacturers who are customers of the Company or offer products
with more desirable features, thereby reducing demand for the Company's
products. Moreover, in recent months manufacturers of Video CD player
components have substantially reduced the selling prices of these components
and further reductions in those prices can be expected, which will require the
Company to reduce its production costs in order to remain competitive in the
Video CD player and component market. Although the Company has been reducing
its costs of production for these products, there can be no assurance that it
will be able to remain competitive or that its operating margins will not be
materially adversely affected should competitors substantially reduce their
prices in the future.

Although CD-ROM equipped computers are capable of playing Video CDs, they
require the addition of an MPEG decoder in either software or hardware form in
order to enable playback. The Company believes that computers and interactive
games on CD are more likely to contribute to the overall market growth rather
than compete with Video CD players because they encourage the creation of more
material that can be used with Video CD players.

The Company's competition in the area of encoding systems includes
Microboards, Inc. of America ("Microboards"), FutureTel, Inc., Optibase, Inc.,
Sigma Designs, Inc., IPC Technologies, Inc., Smart & Friendly, High Technology
Distributing, Inc., and Optivision, Inc. Microboards, in particular, offers a
Video CD authoring capability that competes favorably with the authoring
capability that is part of the Company's ENC50 encoding system. However, the
Company's ENC50 provides a complete system for encoding, whereas the
Microboards authoring system still requires the user to purchase other
components used in the encoding process and put them together (i.e., the user
must handle compatibility problems between components). The Company depends on
its existing product performance features and price advantages in competing
with other system level product manufacturers, and a failure to maintain such
advantages could have a material adverse effect upon the Company's ability to
continue to compete in this area.

In the area of networked multimedia-on-demand systems, the Company competes
with Starlight Networks, Inc. and the Network Connection as well as other
sources for networked systems. The Company competes with these other companies
based on cost quality, reliability and speed of video delivered. There can be
no assurance that the Company will be able to compete favorably against
products offered by its competitors in the future.

FACILITIES

The Company's corporate headquarters are located in Santa Clara, California,
where it subleases approximately 13,566 square feet of general office space
from an unaffiliated lessor. The term of the sublease expires in December
1997. However, if the master lease is terminated for any reason pursuant to
its terms, the Company's sublease will also terminate. The annual rent is
currently approximately $155,000 and will increase to approximately $164,000
in December 1996. In addition, the Company pays a ratable share (currently
approximately $24,000 annually) of property taxes, insurance premiums,
maintenance and other common area expenses of the premises. All such amounts
are payable monthly. The Company has a right to request an extension on the
lease for an additional six months upon terms substantially similar to those
of the existing lease. ViComp leases approximately 1,700 square feet of
general office space in San Jose, California from an unaffiliated lessor. The
annual rent for the lease is approximately $37,000, and the lease expires in
December 1997 but may be extended by ViComp for an additional six months at
the then current prevailing market rates.

The Company has a branch office in Taipei, Taiwan, where it leases
approximately 12,000 square feet of office and manufacturing space from an
unaffiliated lessor. The lease expired in September 1996 and the Company is
currently negotiating a new lease. The annual rent is currently approximately
$128,000. In addition, the Company pays a ratable share of property taxes,
maintenance and other common area expenses of the premises. All such amounts
are payable monthly.

The Company has a sales representative office in Hong Kong, where it leases
approximately 862 square feet of general office space from an unaffiliated
lessor. The lease expires in May 1998 and currently provides for

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<PAGE>

annual rent of approximately $15,000. In addition, the Company pays a ratable
share of property taxes, maintenance and other common area expenses on the
premises. All such amounts are payable monthly. On October 1, 1996, the
Company leased an additional 1,360 square feet of office and warehouse space
in Hong Kong from an unaffiliated lessor. The annual rent is approximately
$22,000 per year and the associated management fee is approximately $10,000
per year.

In August 1996, the Company leased approximately 4,200 square feet of office
and storage space in Shanghai, China under a two-year lease at approximately
$12,200 per month.

The Company has excess space available to it in its United States and Taiwan
current facilities, which the Company believes will allow for substantial
expansion of its business and be sufficient for at least the next 24 months.
The Company believes it has sufficient space leased in Hong Kong and in
Shanghai, China for its currently contemplated operations and that additional
space can be readily obtained by the Company in those areas should such space
be needed.

EMPLOYEES

As of September 30, 1996, the Company had 68 full-time employees (31 in
Santa Clara, 32 in Taiwan, four in Hong Kong and one in China), of whom seven
were management personnel, 41 were research and development personnel, six
were marketing representatives, seven were operations personnel and seven were
accounting personnel. The Company believes that its relations with its
employees are good. The Company is not a party to any collective bargaining
agreement. Competition for employees in the Company's industry is intense, and
there can be no assurance that the Company will be able to attract or retain
other highly qualified personnel in the future.

LEGAL PROCEEDINGS

The Company is not a party to any material litigation. See "Management--
Directors and Executive Officers" for a description of certain claims asserted
against the Company by the Company's former Vice President and Chief Financial
Officer.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following are the executive officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Edmund Y. Sun 48 Chairman of the Board and Chief Executive Officer
Robert B. Pfannkuch 61 President and Director
Chief Financial Officer, Vice President and
Arvin S. Erickson 53 Secretary
Janis P. Gemignani 48 Director
Sung Hee Lee 42 Director
Sanford Sigoloff 66 Director
Philip B. Smith 60 Director
Joseph F. Troy 58 Director
</TABLE>

EDMUND Y. SUN has served as the Company's Chairman of the Board and Chief
Executive Officer since its inception in October 1992 and is the founder of
the Company. Dr. Sun served as President of the Company from October 1992 to
May 1996. Dr. Sun founded C-Cube Microsystems Inc., a public company involved
in the development of full-color still and motion picture compression
technology, and was its Chief Executive Officer from March 1989 to September
1991, and Chairman of the Board from August 1988 until April 1993. Dr. Sun was
also a founder, Vice President, and Chief Technical Officer of Weitek
Corporation, a public company involved in high-speed three-dimensional shaded
graphics systems and the use of high speed chips in various computer
applications. Dr. Sun is a director of CSS Laboratories, Inc., a privately-
held company involved in computer hardware. Dr. Sun has a Ph.D. in Applied
Physics, and an M.S. in Electrical Engineering from the California Institute
of Technology, and a B.S. in Electrophysics from the National Chiao-Tung
University in Taiwan.

ROBERT B. PFANNKUCH has served as the President and a director of the
Company since May 1996. From March 1996 to May 1996 he served as a consultant
to the Company. Mr. Pfannkuch has been the President of Telefuture Partners, a
consulting firm, since January 1990. He was the Chairman and Chief Executive
Officer of Rank Video Services America (formerly Bell & Howell/Columbia
Pictures/Paramount Video Services) from 1981 to January 1990. From 1974 to
1981, he was the President of Bell & Howell Video Group and Vice President of
Bell & Howell. Mr. Pfannkuch received a B.S. from the University of
Connecticut.

ARVIN S. ERICKSON has served as the Chief Financial Officer, Vice President
and Secretary of the Company since October 1996. Mr. Erickson served as the
Vice President and Chief Financial and Administrative Officer of InterActive
Partners, a group of start-up companies in California since May 1994. From
August 1992 to May 1994, Mr. Erickson worked in various capacities, including
financial management, at Paramount Communications, Inc. From February 1984 to
August 1992, Mr. Erickson provided management consulting services to various
corporate clients. Mr. Erickson received a B.A. from California State
University and an M.B.A. from the University of Southern California.

JANIS P. GEMIGNANI has been a director of the Company since August 1995 and
served as the Chief Financial Officer, Vice President and Secretary of the
Company from August 1995 until October 1996. Ms. Gemignani was a co-founder
and from 1984 to August 1995, Chief Financial Officer of Vertical Software,
Inc., a value-added reseller of computer hardware and software located in
Houston, Texas. Mrs. Gemignani earned her B.A. degree with honors from the
University of West Florida. Ms. Gemignani is a Certified Public Accountant.

SUNG HEE LEE has been a director of the Company since March 1994. Mr. Lee
founded and has been the Director of the Multimedia Business Division of
Hyundai since March 1993. From May 1991 until March 1993,

47
<PAGE>

Mr. Lee served as a Senior Manager of the Marketing Department of Hyundai's
Information Systems Business Sector. From January 1989 until May 1991, he
served as a Senior Manager of Hyundai's Computer Export Department. He was
also responsible for establishing the Hyundai Electronics America subsidiary
in the United States. Mr. Lee is a member of the Board of Directors of Wanyan
Electronics Co., Ltd., in China. He received his M.S. in Industrial
Engineering from the Korea Advanced Institute of Science & Technology.

SANFORD C. SIGOLOFF has served as a director of the Company since June 1996.
Mr. Sigoloff has been Chairman of the Board, President and Chief Executive
Officer of Sigoloff & Associates, Inc. (a management consulting company) since
1989. He served as Chief Executive Officer of L.J. Hooker Corporation (a
retail conglomerate) from August 1989 to June 1992. From March 1982 until
1988, Mr. Sigoloff served as Chairman of the Board, President and Chief
Executive Officer of Wickes Companies, Inc. (a furniture retail chain).
Mr. Sigoloff is a director of Sun America, Inc., Kaufman and Broad Home
Corporation, ChatCom, Inc. and Movie Gallery, Inc. which are public companies.
Mr. Sigoloff is an adjunct full professor at the John E. Anderson Graduate
School of Management at the University of California at Los Angeles.

PHILIP B. SMITH has served as a director of the Company since November 1995.
Mr. Smith has been a Vice Chairman of the Board of Spencer Trask Securities
Incorporated since 1991. He was formerly a Managing Director of Prudential
Securities in their merchant banking division from 1985 to 1991. Mr. Smith is
a founding General Partner of Lawrence Venture Associates, a venture capital
limited partnership headquartered in New York City and was the General Partner
from 1984 to 1985. From 1981 to 1984, he served as Executive Vice President
and Group Executive of the international banking and worldwide corporations
group at Irving Trust Company. Prior to joining Irving Trust Company, he was
at Citibank for 15 years, where he founded Citicorp Venture Capital and was
its President and Chief Executive Officer. Since 1988, Mr. Smith has also been
the managing general partner of Private Equity Partnership, L.P. Mr. Smith is
a director of Movie Gallery, Inc., DenAmerica Corp., ChatCom, Inc. and KLS
Enviro Resources, Inc., all publicly-held companies. Mr. Smith is an adjunct
professor at Columbia University Graduate School of Business. He holds a
B.S.E. from Princeton University and a M.B.A. from Harvard University.

JOSEPH F. TROY has served as a director of the Company since May 1996. Mr.
Troy is the founder and has been a member of the law firm of Troy & Gould
Professional Corporation since May 1970. He is a director of Movie Gallery,
Inc., a publicly-held company. Mr. Troy holds a B.A. from Yale University and
an LL.B. from Harvard University.

Directors serve until the next annual meeting or until their successors are
elected or appointed. Officers are elected by and serve at the discretion of
the Board of Directors. There are no family relationships among the officers
or directors of the Company.

In October 1996, the Company removed Janis Gemignani as the Company's
Vice President, Secretary and Chief Financial Officer. The Company currently
is attempting to negotiate the terms under which Ms. Gemignani will continue
to provide services to the Company or will receive severance payments from the
Company. There can be no assurance, however, that the Company will be able to
negotiate such an arrangement with Ms. Gemignani, who has advised the Company
that she has claims against the Company in connection with her employment by
the Company and that she intends to formally assert those claims. Although the
Company has not been served with any litigation by Ms. Gemignani, based on a
preliminary review of the relevant facts, the Company does not believe that
any of the claims she may have against the Company have merit. In the event a
lawsuit is filed against the Company, however, the costs to defend the
lawsuit, and any damages the Company might be required to pay should Ms.
Gemignani prevail, could have a material adverse effect on the Company.

KEY EMPLOYEES:

The following individuals are key employees of the Company:

JAMES A. MUNRO has served as the Director of Engineering of the Company
since July 1995. From 1978 to July 1995, Mr. Munro served in a number of
different managerial positions with Wyse Technology, Inc. in San Jose,
California, the most recent being as product marketing manager for X-
Terminals. From 1978 to 1983, he

48
<PAGE>

was a Marketing Manager and Director of Engineering at Zentec Corporation,
which was a publicly-traded computer hardware company in Santa Clara,
California. He holds a B.S.E.E. from Manchester University in England.

ED MARTINI has served as the Project Manager of Network Video for the
Company since January 1993. Mr. Martini was previously the engineering liaison
to C-Cube from Sun Microsystems, Inc. and worked in various engineering
capacities with Sun Microsystems, Inc. from May 1987 to January 1993. Mr.
Martini has a B.S. from California Polytechnic State University at San Luis
Obispo.

JAMES KIRKPATRICK, JR. has served as ViComp's Chief Technical Officer since
the ViComp Acquisition. He was the co-founder and from August 1995 to October
1996 served as a director and the Chief Executive Officer of ViComp. From June
1993 to May 1995, Mr. Kirkpatrick was a Vice President of Hyundai and the
General Manager of its Digital Media Division. Mr. Kirkpatrick was an
independent consultant on chip development from February 1992 to June 1993. He
held various positions at C-Cube from September 1988 to February 1992,
including Vice President of Engineering. Mr. Kirkpatrick has a B.B.E. and a
Master of Science degree from Ohio State University and an M.B.A. from the
University of Santa Clara.

BOARD COMMITTEES AND DESIGNATED DIRECTORS

The Board of Directors has the following committees: Compensation, Audit and
Risk Management. The Compensation Committee makes recommendations to the Board
concerning salaries and incentive compensation for officers and employees of
the Company. The members of the Compensation Committee are Dr. Sun, Mr. Smith
and Mr. Troy. The Audit Committee reviews the results and scope of the audit
and other accounting related matters. The members of the Audit Committee are
Mr. Sigoloff, Mr. Smith and Mr. Troy. The Risk Management Committee
establishes systems and policies to supervise and manage the Company's risk of
doing business outside the United States. The members of the Risk Management
Committee are Mr. Smith and Ms. Gemignani.

The Company has agreed for a period of five years commencing on May 9, 1996,
if requested by the Underwriter, to nominate a designee of the Underwriter who
is reasonably acceptable to the Company to the Company's Board of Directors.
To date, the Underwriter has not designated a director.

Sung Hee Lee serves as the representative of Hyundai on the Company's Board
of Directors.

DIRECTOR COMPENSATION

Directors (other than directors who are employees of the Company and who
receive no compensation for serving on the Board of Directors) receive $15,000
per year as compensation for serving on the Board of Directors and are also
entitled to participate in the Company's stock option plans and from time to
time to receive grants of options thereunder to purchase shares of the
Company's Common Stock.

EXECUTIVE COMPENSATION

The following table sets forth the cash compensation paid by the Company for
its fiscal year ended December 31, 1995 to Dr. Edmund Y. Sun, Chief Executive
Officer and then President of the Company. (Robert Pfannkuch became President
of the Company in May 1996.) No other executive officer of the Company
received salary and bonus in excess of $100,000 in such fiscal year:

<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
-------------------------------
FISCAL YEAR ENDED
NAME AND PRINCIPAL POSITION DECEMBER 31, ANNUAL SALARY
--------------------------- ----------------- -------------
<S> <C> <C>
Dr. Edmund Y. Sun, Chairman of the
Board, Chief Executive Officer and
President............................. 1995 $125,485
</TABLE>
- --------
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits received by the
foregoing executive officer which are available generally to all employees
of the Company and certain perquisites and other personal benefits
received by the foregoing executive officer of the Company, the value of
which did not exceed the lesser of $50,000 or 10% of the executive
officer's cash compensation in the table.

49
<PAGE>

EMPLOYMENT AND CONSULTING AGREEMENTS

The Company entered into an employment agreement (the "Sun Employment
Agreement") with Dr. Sun, the Company's founder, Chairman of the Board and
Chief Executive Officer, in March 1996. The term of the Sun Employment
Agreement commenced in May 1996 and will expire on March 31, 2001; provided,
however, that the Sun Employment Agreement can be terminated by either party
after March 31, 1999, if all of the Escrow Securities have been released. The
Sun Employment Agreement provides that in consideration for Dr. Sun's
services, he is to be paid a salary of $160,000 during the first year of the
agreement. In addition, he will receive increases in salary and bonuses as
deemed appropriate by the Board of Directors.

The Company entered into a Consulting and Employment Agreement dated as of
March 15, 1996 with Robert B. Pfannkuch, pursuant to which Mr. Pfannkuch
became a director and the President of the Company in May 1996. Upon entering
into such agreement, Mr. Pfannkuch received five-year options to purchase
750,000 shares of Common Stock at $3.50 per share, of which options to
purchase 500,000 shares are Escrow Securities. See "Principal Shareholders--
Escrow Securities." One-fourth of such options will vest and become
exercisable after Mr. Pfannkuch has been the President of the Company for one
year, and the balance will vest and become exercisable at the rate of 11,719
per month, subject to acceleration of this vesting schedule or forfeiture of
these options under certain circumstances. Mr. Pfannkuch receives an annual
salary of $150,000 as President of the Company. He is allowed to serve as a
consultant to other companies if the terms of any such agreements are
disclosed to the Company's Board of Directors, and the Board determines that
such other companies do not compete in any manner with the business of the
Company. Mr. Pfannkuch's employment as President is renewable on a yearly
basis by mutual agreement of the parties.

In February 1996, the Company entered into a consulting agreement with
Intermarkt (U.S.A.) LLC ("Intermarkt") and a principal and consultant to
Intermarkt. The agreement expires on January 31, 1998. Pursuant to the
agreement, such principals will perform certain consulting services, for a
minimum of one week per month, for the Company, including without limitation,
executive recruiting, searches for strategic partners, foreign distribution
arrangement searches, and licensees for the Company's technology and services
and other operations and market research activities. The agreement provides
that the Company will pay Intermarkt $10,000 per month in consideration for
consulting services and additional contingent success fees. Pursuant to the
consulting agreement and as additional consideration for the consulting
services, the Company entered into a Stock Option Agreement dated February 1,
1996 with Intermarkt, whereby the Company granted Intermarkt an option to
purchase up to 200,000 shares of Common Stock at an exercise price of $5.00
per share, which option is exercisable for five years commencing February 1,
1996. All such options are Escrow Options. See "Principal Shareholders--Escrow
Securities."

In September 1996, the Company entered into an agreement with Sitrick and
Company ("Sitrick") pursuant to which Sitrick will provide investor and public
relations services to the Company for an initial period of six months, which
may be extended upon mutual agreement of the parties. The agreement provides
that the Company will pay Sitrick a retainer (against time billed) of $10,000
plus 599 shares of Common Stock per month. Excess fees above $15,000 per month
are to be paid 65% in cash and 35% in Common Stock, valued at $8.375 per
share. In addition, each month during the term of the agreement, the Company
will issue Sitrick a five-year warrant to purchase 2,995 shares of Common
Stock with an exercise price of $8.38 per share plus a warrant to purchase
five shares of Common Stock for each share of Common Stock issued as excess
fees. Sitrick has been granted piggyback registration rights with respect to
shares of Common Stock received under the agreement.

STOCK OPTION PLANS

In October 1993, the Board of Directors approved the Company's 1993 Stock
Option Plan, which plan was subsequently approved by the Company's
shareholders in March 1994. In April 1996, the Board of Directors and the
shareholders of the Company approved the 1993 Amended and Restated Stock
Option Plan (as amended, the "1993 Option Plan"), which effected certain
amendments to the 1993 Stock Option Plan. The 1993 Option

50
<PAGE>

Plan provides for the grant of options to officers, directors, other key
employees and consultants of the Company to purchase up to an aggregate of
3,762,530 shares of Common Stock. The 1993 Option Plan is administered by the
Board of Directors or a committee of the Board and is currently administered
by the Board of Directors, which has complete discretion to select the
optionees and to establish the terms and conditions of each option, subject to
the provisions of the 1993 Option Plan. Options granted under the 1993 Option
Plan may be "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
options, and will be designated as such.

The exercise price of incentive stock options may not be less than 100% of
the fair market value of the Company's Common Stock as of the date of grant
(110% of the fair market value if the grant is to an employee who owns more
than 10% of the total combined voting power of all classes of capital stock of
the Company). The Code currently limits to $100,000 the aggregate value of
Common Stock that may be acquired in any one year pursuant to incentive stock
options under the 1993 Option Plan or any other option plan adopted by the
Company. Nonqualified options may be granted under the 1993 Option Plan at an
exercise price less than the fair market value of the Common Stock on the date
of grant. Nonqualified options also may be granted without regard to any
restriction on the amount of Common Stock that may be acquired pursuant to
such options in any one year.

In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination would immediately terminate, and any options that are exercisable
would terminate 90 days (six months in the case of termination by reason of
death or disability) following termination of employment.

Options may not be exercised more than ten years after the grant (five years
after the grant if the grant is an incentive stock option to an employee who
owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). Options granted under the 1993 Option Plan are
not transferable and may be exercised only by the respective grantees during
their lifetime or by their heirs, executors or administrators in the event of
death. Under the 1993 Option Plan, shares subject to cancelled or terminated
options are reserved for subsequently granted options. The number of options
outstanding and the exercise price thereof are subject to adjustment in the
case of certain transactions such as mergers, recapitalizations, stock splits
or stock dividends. The 1993 Option Plan is effective for ten years, unless
sooner terminated or suspended.

As of the date of this Prospectus, options to purchase 2,516,687 shares were
outstanding at exercise prices ranging from $.14 to $3.50 per share, options
to purchase 823,175 shares had been exercised at $.14 per share and options to
purchase 422,670 shares were available for grant under the 1993 Option Plan.

In September 1996, the Company's Board of Directors approved the Company's
1996 Stock Option Plan (the "1996 Option Plan"), which is subject to
subsequent shareholder approval. The 1996 Option Plan provides for the grant
of options to officers, directors, other key employees and consultants of the
Company to purchase up to an aggregate of 1,000,000 shares of Common Stock.
The 1996 Option Plan, which is administered by the Board of Directors or a
committee of "non-employee directors" (as defined in the Exchange Act) and is
currently administered by the Board of Directors, has terms and conditions
substantially identical to those of the 1993 Option Plan. The Company has
granted options to purchase a total of 189,559 shares of Common Stock under
the 1996 Option Plan to James Kirkpatrick, Jr. and the two other ViComp
engineers who have continued to be employed by ViComp following completion of
the ViComp Acquisition at an exercise price of $8.375 per share, subject to
shareholder approval of the 1996 Option Plan.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Amended and Restated Certificate of Incorporation eliminates
in certain circumstances the liability of directors of the Company for
monetary damages for breach of their fiduciary duty as directors. This
provision does not eliminate the liability of a director (i) for breach of the
director's duty of loyalty to the Company or its shareholders; (ii) for acts
or omissions by the director not in good faith or which involve

51
<PAGE>

intentional misconduct or a knowing violation of law; (iii) for willful or
negligent declaration of an unlawful dividend, stock purchase or redemption;
or (iv) for transactions from which the director derived an improper personal
benefit. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission.

The Company believes that it is the position of the Commission that insofar
as the foregoing provision may be invoked to disclaim liability for damages
arising under the Securities Act, the provision is against public policy as
expressed in the Securities Act and is therefore unenforceable. Such
limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or rescission.

The Company has entered into indemnification agreements ("Indemnification
Agreement(s)") with each of its directors and officers. Each such
Indemnification Agreement provides that the Company will indemnify the
indemnitee against expenses, including reasonable attorneys' fees, judgements,
penalties, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or
officer. Such indemnification is available if the indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company, and, with respect to any criminal action, had
no reasonable cause to believe his conduct was unlawful. The Indemnification
Agreements also require that the Company indemnify the director or other party
thereto in all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement permits the director or officer that is party
thereto to bring suit to seek recovery of amounts due under the
Indemnification Agreement and to recover the expenses of such a suit if he is
successful.

52
<PAGE>

CERTAIN TRANSACTIONS

In October 1996, the Company completed the ViComp Acquisition. Dr. Edmund Y.
Sun, the Company's Chairman of the Board and Chief Executive Officer, was a
co-founder of ViComp and owned 57.3% of the outstanding capital stock of
ViComp (for which he had paid a total of $1,000,000 in September 1995 and
January 1996) at the time of the ViComp Acquisition. The Company issued to Dr.
Sun 281,520 shares of the Company's Common Stock for his ViComp capital stock
in the ViComp Acquisition (57.3% of the total 491,253 shares of Common Stock
issued in the ViComp Acquisition).

All of the Acquisition Shares issued to Dr. Sun and 10% of the Acquisition
Shares issued to the other former ViComp stockholders have been deposited in
escrow and are subject to forfeiture and cancellation under certain
circumstances. Dr. Sun and the other holders of the Acquisition Shares were
granted certain demand and piggyback registration rights under a registration
rights agreement pursuant to the terms of the ViComp Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Charge to Income in the Event of Release of Escrowed Securities"
and "Business--ViComp Acquisition."

The ViComp Acquisition was unanimously approved by the disinterested members
of the Company's Board of Directors, and the Company's Board of Directors was
advised by the Sutter Securities Incorporated that the ViComp Acquisition is
fair from a financial point of view to the Company's shareholders other than
Dr. Sun.

During 1993, the Company invested $250,000 in Anhui Wanyan Electronic
Systems, Co., Ltd. ("Wyan"), a company located in the People's Republic of
China. Wyan was formed for the purpose of developing, manufacturing, and
marketing digital audiovisual products. The Company had the right to make an
additional $2,000,000 cash investment in Wyan. In connection therewith, in
September 1994, the Company sold its right to purchase a $1,650,000 interest
in Wyan to Hyundai for $350,000. At the time of such sale, Hyundai owned
3,247,473 shares of the Company's then outstanding Series A Preferred Stock.

The Company also purchased approximately $1,900,000, $809,000 and $2,760,000
of inventory from C-Cube during 1994, 1995 and the nine-month period ended
September 30, 1996, respectively. The Company acquired fixed assets from C-
Cube for total payments of approximately $8,000 in 1994. Dr. Edmund Y. Sun, is
the founder and a significant shareholder of C-Cube.

In July 1993, the Company advanced $108,000 to Dr. Edmund Y. Sun, of which
$54,000 was repaid in July 1993. The balance was repaid in September 1994
through an offset against a total of $60,000 in commissions owed to Dr. Sun
for the sale of a $700,000 encoding system to Hyundai. The percentage amount
of this commission was no more than the amount given to the Company's other
salespeople.

In December 1994, the Company purchased all of the assets of Sunny Rich
Enterprises, Ltd. ("Sunny Rich") which owned a majority of the Company's
outstanding Common Stock at that time. Sunny Rich was wholly owned by Dr.
Edmund Y. Sun. The Company issued 6,215,751 shares of its Common Stock to
Sunny Rich as consideration for such assets, which principally consisted of
6,199,720 shares of the Company's Common Stock. Sunny Rich then liquidated and
Dr. Sun became the owner of all such shares.

In February 1995, the Company borrowed $500,000 from Dr. Edmund Y. Sun. The
loan was secured by the assets of the Company and bore interest at the prime
rate plus 1% per annum. In October 1995, the Company amended the terms of the
loan to allow for additional borrowings of $1,500,000 at the same interest
rate. In December 1995, Dr. Sun converted the $2,000,000 of principal plus
approximately $57,000 of accrued interest into 1,335,949 shares of Series B
Preferred Stock of the Company at $1.54 per share. These shares were converted
into 1,335,949 shares of Common Stock upon the closing of the IPO in May 1996.

Hyundai purchased 3,247,473 shares of Series A Preferred Stock for
approximately $5,000,000 and 649,526 shares of Series B Preferred Stock for
approximately $1,000,000 from the Company in January 1994 and April 1995,
respectively. In connection with such purchases, Hyundai was given the right
to designate a director, a right of first refusal relating to sales of the
Company's securities and certain registration rights. Such right of

53
<PAGE>

first refusal terminated in connection with the IPO and Hyundai waived its
registration rights for 13 months following the closing of the IPO in May
1996. See "Description of Securities--Registration Rights." Hyundai's Series A
Preferred Stock and the Series B Preferred Stock were converted into 3,896,999
shares of Common Stock upon the closing of the IPO.

Hyundai and the Company entered into the 1993 Hyundai Agreements relating to
the Company's development of a consumer karaoke player, a karaoke jukebox,
encoding machines and a karaoke network system. The 1993 Hyundai Agreements
were subsequently amended in 1994 in connection with the Company and Hyundai
agreeing to a manufacturing relationship for karaoke jukebox players. The
Company and Hyundai subsequently entered into the 1995 Hyundai Technical
Assistance and License Agreement which subsumed part of the agreements entered
into in 1993 and obligated the Company to develop MPEG-II compressor products.
See "Business--Agreements with Hyundai."

In March 1996, the Company entered into an employment agreement with Dr.
Edmund Y. Sun and a consulting and employment agreement with Robert Pfannkuch.
See "Management--Employment and Consulting Agreements."

In July 1995, the Company granted Janis Gemignani, formerly Chief Financial
Officer of the Company, options to purchase 238,646 shares of Common Stock at
$.14 per share under the Option Plan. In October 1995, the Company granted
Phil Smith, a director of the Company, options to purchase 136,608 shares of
Common Stock at $.14 per share under the Option Plan. In March 1996, the
Company granted Robert Pfannkuch, a director and President of the Company,
options to purchase 750,000 shares of Common Stock at $3.50 per share under
the Option Plan and in April 1996, the Company granted Joseph F. Troy, a
director of the Company, options to purchase 136,608 shares of Common Stock at
$3.50 per share.

The Company anticipates that the above transactions were, and any future
transactions between the Company and any affiliate thereof will be, on terms
no less favorable to the Company than those that are generally available from
unaffiliated third parties.

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<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, and
as adjusted to reflect the sale of the Units offered hereby, by (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock; and (ii) each of the Company's directors
and executive officers; and (iii) all officers and directors of the Company as
a group.

<TABLE>
<CAPTION>
PERCENT PERCENT
AMOUNT AND OF OF
NATURE OF OWNERSHIP OWNERSHIP
BENEFICIAL BEFORE AFTER
NAME AND ADDRESS(1) OWNERSHIP(2) OFFERING OFFERING
------------------- ------------ --------- ---------
<S> <C> <C> <C>
Edmund Y. Sun.............................. 7,822,418(3) 44.4% 39.5%
Robert B. Pfannkuch........................ 2,250(4) * *
Sung Hee Lee............................... 0(5) 0 0
Philip B. Smith............................ 39,844(6) * 0
Arvin S. Erickson.......................... 0 0 0
Janis Gemignani............................ 91,742(7) * *
Sanford Sigoloff........................... 0 0 0
Joseph F. Troy............................. 0(8) 0 0
Hyundai Electronics Industries Company,
Ltd. ..................................... 3,896,999(9) 22.1 19.6
10th Floor, Boram Building
705-19, Yeeksam-dong
Kongnam-Ku, Seoul, Korea
All executive officers and directors as
a group (8 persons)....................... 7,956,254 45.5 40.2
</TABLE>
- --------
* Less than one percent.
(1) Except as otherwise indicated, the address of each principal shareholder
is c/o the Company at 2710 Walsh Avenue, Santa Clara, California 95051.
(2) Includes the Escrow Securities of such individual or entity. See "--Escrow
Securities." Nature of beneficial ownership of securities is direct and
arises from sole voting power and sole investment power, subject to
community property laws where applicable. Shares underlying options to
purchase Common Stock exercisable within 60 days are deemed to be
outstanding for purposes of calculating the number of shares owned by the
holders of such options.
(3) Includes 281,520 shares of Common Stock acquired by Dr. Sun in the ViComp
Acquisition, all of which have been deposited in escrow and are subject to
cancellation in certain circumstances. See "Business--ViComp Acquisition."
Also includes 280,334 shares owned by Dr. Sun's sons and 21,564 shares
owned by Dr. Sun's sister.
(4) Excludes options to purchase 750,000 shares of Common Stock which are not
exercisable within 60 days.
(5) Although Mr. Lee serves as Hyundai's representative on the Company's Board
of Directors, he does not have any right to vote or dispose of such
shares.

(6) Represents options to purchase 39,844 shares of Common Stock. Excludes
options to purchase 96,764 shares of Common Stock which are not
exercisable within 60 days.

(7) Includes options to purchase 89,492 shares of Common Stock. Excludes
options to purchase 149,154 shares of Common Stock which are not
exercisable within 60 days.
(8) Excludes options to purchase 136,608 shares of Common Stock which are not
exercisable within 60 days.
(9) Mong Hun Chung is the Chairman and largest individual shareholder of
Hyundai and may be considered a beneficial owner of such shares.

ESCROW SECURITIES

In connection with the IPO, the holders of the Company's Common Stock and
options to purchase Common Stock have placed 7,978,114 shares and options to
purchase 1,854,019 shares and the Company has placed

55
<PAGE>

options issuable under the 1993 Option Plan to purchase 267,867 shares of
Common Stock into escrow pursuant to an escrow agreement ("Escrow Agreement")
with American Stock Transfer and Trust, as escrow agent. The Escrow Securities
are not assignable or transferable; however, the Escrow Shares may be voted.
Holders of any options in escrow may exercise their options prior to their
release from escrow; however, the shares issuable upon any such exercise will
continue to be held in escrow as Escrow Shares pursuant to the Escrow
Agreement.

All or a portion of the Escrow Securities may be released from escrow based
on the Company's Minimum Pretax Income amounts (as defined and set forth
below) or the trading price of the Company's Common Stock. The Minimum Pretax
Income amounts (i) shall be calculated exclusively of any extraordinary
earnings, including, but not limited to, any charge to income resulting from
the release of the Escrow Securities; and (ii) shall be increased from the
amounts established at the time of the IPO proportionately, with certain
limitations, in the event additional shares of Common Stock or securities
convertible into, exchangeable for or exercisable into Common Stock are issued
after the IPO (including, without limitation, the Acquisition Shares and the
shares of Common Stock included in the Units and underlying the SPO Warrants).
The Minimum Pretax Income amounts as originally established at the time of the
IPO are described below.

Of the Escrow Securities, one-half (representing 5,050,000 shares of issued
or issuable shares of Common Stock) will be released from escrow, on a pro
rata basis, if, and only if, one or more of the following conditions are met:

(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings as audited and determined by the
Company's independent public accountants (the "Minimum Pretax Income")
amounts to at least $10.0 million for the fiscal year ending March 31,
1997;

(ii) the Minimum Pretax Income amounts to at least $15.0 million for the
fiscal year ending March 31, 1998;

(iii) the Minimum Pretax Income amounts to at least $23.0 million for the
fiscal year ending March 31, 1999;

(iv) the Minimum Pretax Income amounts to at least $31.0 million for the
fiscal year ending on March 31, 2000;

(v) the Minimum Pretax Income amounts to at least $39.0 million for the
fiscal year ending on March 31, 2001;

(vi) commencing on May 9, 1996 and ending 18 months thereafter, the bid
price of the Company's Common Stock averages in excess of $24.00 per share
(subject to adjustment in the event of any reverse stock splits or other
similar events) for 60 consecutive business days;

(vii) commencing November 9, 1997 and ending 36 months thereafter, the
bid price of the Company's Common Stock averages in excess of $48.00 per
share (subject to adjustment in the event of any reverse stock splits or
other similar events) for 90 consecutive business days; or

(viii) during the periods specified in (vi) or (vii) above, the Company
is acquired by or merged into another entity in a transaction in which the
value of the per share consideration received by the shareholders of the
Company on the date of such transaction or at any time during the
applicable period set forth in (vi) or (vii), respectively, equals or
exceeds the applicable levels set forth in (vi) or (vii), respectively.

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The remaining Escrow Securities (representing 5,050,000 shares of issued or
issuable shares of Common Stock) will be released from escrow, on a pro rata
basis, if, and only if, one or more of the following conditions is met:

(i) the Minimum Pretax Income amounts to at least $15.0 million for the
fiscal year ending on March 31, 1997;

(ii) the Minimum Pretax Income amounts to at least $21.0 million for the
fiscal year ending on March 31, 1998;

(iii) the Minimum Pretax Income amounts to at least $32.0 million for the
fiscal year ending on March 31, 1999;

(iv) the Minimum Pretax Income amount to at least $42.0 million for the
fiscal year ending on March 31, 2000;

(v) the Minimum Pretax Income amount to at least $53.0 million for the
fiscal year ending on March 31, 2001;

(vi) commencing on May 9, 1996 and ending 18 months thereafter, the bid
price of the Company's Common Stock averages in excess of $48.00 per share
(subject to adjustment in the event of any reverse stock splits or other
similar events) for 60 consecutive business days;

(vii) commencing November 9, 1997 and ending 36 months thereafter, the
bid price of the Company's Common Stock averages in excess of $96.00 per
share (subject to adjustment in the event of any reverse stock splits or
other similar events) for 90 consecutive business days; or

The bid price amounts set forth above are subject to adjustment in the event
of any stock splits, reverse stock splits or other similar events.

Holders of Escrow Securities have agreed not to sell, transfer, hypothecate,
negotiate, pledge, assign, encumber or otherwise dispose of any or all of the
Escrow Securities unless and until (A) the Company shall have given notice
that the conditions for the release of the Escrow Securities set forth in
Paragraphs (a) and (b) above are met; or (B) such disposition is (i) proposed
in connection with an agreement by which the Company is to be acquired by or
merged into another entity in which the consideration paid by the acquiror per
share of the Company's stock is no less than 80% of the minimum consideration
required by Paragraphs (a)(vi) and (vii) above as to a disposition of up to
50% of the Escrow Securities or by Paragraphs (b)(vi) and (vii) above as to a
disposition of up to 100% of the Escrow Securities and (ii) approved by at
least 80% of the votes cast, in person or by proxy, by holders of the Common
Stock eligible to vote on such matter excluding the shares held by the holders
of the Escrow Securities, provided that the holders of at least 50% of the
Common Stock (excluding the shares held by the holders of the Escrow
Securities) actually vote on such matter, in person or by proxy, or are
present, in person or by proxy, at the meeting at which the vote takes place.
If the Company is acquired by or merges into another company that thereafter
owns all of the outstanding stock of the Company except for the Escrow
Securities, at any time from and after the consummation of the merger or
acquisition, holders of Escrow Securities desiring to dispose of their Escrow
Securities will be permitted to do so if the acquiror gives notice as to
conditions being met in Paragraphs (a) and (b) above or consents in writing to
the disposition, but no vote or consent of the former shareholders of the
Company will be required.

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Any money, securities, rights or property distributed in respect of the
Escrow Securities, including any property distributed as dividends or pursuant
to any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the
Escrow Securities. If none of the applicable Minimum Pretax Income or bid
price levels set forth above have been met by July 15, 2001, the Escrow
Securities, as well as any dividends or other distributions made with respect
thereto, will be cancelled and contributed to the capital of the Company. The
Company expects that the release of the Escrow Securities to officers,
directors, employees and consultants of the Company will be deemed
compensatory and, accordingly, will result in a substantial charge to
reportable earnings, which would equal the fair market value of such shares on
the date of release. Such charge could substantially increase the loss or
reduce or eliminate the Company's net income for financial reporting purposes
for the period or periods during which such shares are, or become probable of
being, released from escrow. Although the amount of compensation expense
recognized by the Company will not affect the Company's total shareholders'
equity, it may have a negative effect on the market price of the Company's
securities.

The Minimum Pretax Income and bid price levels set forth above were
determined by negotiation between the Company and the Underwriter prior to the
IPO and should not be construed to imply or predict any future earnings by the
Company or any increase in the market price of its securities.

CONCURRENT OFFERINGS

The Registration Statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering of (i) 5,064,130 shares of
Common Stock and 5,064,130 Class B Warrants of the Company that are issuable
upon exercise of the 4,830,000 Class A Warrants issued in the IPO and the
234,130 Class A Warrants issued to certain Selling Securityholders (defined
below) in connection with the IPO that have been resold by such Selling
Securityholders; (ii) 5,064,130 shares of Common Stock issuable upon exercise
of the Company's Class B Warrants that are issuable upon exercise of the
Company's outstanding Class A Warrants; (iii) 4,830,000 shares of Common Stock
issuable upon exercise of the Company's outstanding Class B Warrants issued in
the IPO; and (iv) 420,000 shares of Common Stock, Class A Warrants and Class B
Warrants issuable upon exercise of the unit purchase options received by the
Underwriter and its designees in connection with the IPO, 420,000 shares of
Common Stock and Class B Warrants issuable upon exercise of said Class A
Warrants and 840,000 shares of Common Stock issuable upon exercise of all of
said Class B Warrants.

The Registration Statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering of (i) an additional
3,265,870 Class A Warrants (the "Bridge Warrants") held by the holders thereof
(the "Selling Securityholders"); (ii) 3,265,870 Class B Warrants (the "Selling
Securityholder Class B Warrants") underlying the Bridge Warrants; and
(iii) 6,531,740 shares of Common Stock underlying the Bridge Warrants and the
Selling Securityholder Class B Warrants, all for resale from time to time by
the Selling Securityholders. See "Shares Eligible for Future Sale."

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DESCRIPTION OF SECURITIES

The following description of the capital stock of the Company and certain
provisions of the Company's Amended and Restated Certificate of Incorporation
and Bylaws is a summary and is qualified in its entirety by the provisions of
the Amended and Restated Certificate of Incorporation and Bylaws, which have
been incorporated by reference as exhibits to the Company's Registration
Statement, of which this Prospectus is a part.

The authorized capital stock of the Company currently consists of 60,000,000
shares of Common Stock, $.0001 par value, and 5,000,000 shares of Preferred
Stock, $.0001 par value. As of the date of this Prospectus, there were
17,533,091 shares of Common Stock outstanding.

UNITS

Each Unit consists of a minimum of 70 and a maximum of 100 IPO Units.

IPO UNITS

Each IPO Unit consists of one share of Common Stock, one Class A Warrant and
one Class B Warrant. Each Class A Warrant entitles the holder thereof to
purchase one share of Common Stock and one Class B Warrant, and each Class B
Warrant entitles the holder thereof to purchase one share of Common Stock. The
Common Stock and Warrants included in the IPO Units are immediately
transferable separately upon issuance.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority shareholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any shares of Preferred Stock issued in
the future, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefore. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any then outstanding Preferred Stock.
Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and all shares of Common Stock to be outstanding upon
exercise of any Class A Warrants or Class B Warrants will be, fully paid and
nonassessable.

REDEEMABLE WARRANTS

The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects
by reference to the actual text of the Warrant Agreement between the Company,
the Underwriter and American Stock Transfer and Trust Company (the "Transfer
and Warrant Agent"). A copy of the Warrant Agreement, as amended, has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part.

CLASS A WARRANTS

The holder of each Class A Warrant is entitled, upon payment of the exercise
price of $6.50, to purchase one share of Common Stock and one Class B Warrant.
Unless previously redeemed, the Class A Warrants are exercisable at any time
after issuance until May 9, 2001, provided that at such time a current
prospectus relating to the underlying Common Stock and the Class B Warrants is
in effect and the underlying Common Stock and the Class B Warrants are
qualified for sale or exempt from qualification under applicable state
securities laws.

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The Class A Warrants are immediately transferable separately from the Common
Stock and the Class B Warrants issued with such Class A Warrants as part of
the Units and the IPO Units. The Class A Warrants are subject to redemption,
as described below.

CLASS B WARRANTS

The holder of each Class B Warrant is entitled, upon payment of the exercise
price of $8.75, to purchase one share of Common Stock. Unless previously
redeemed, the Class B Warrants are exercisable at any time after issuance
until May 9, 2001, provided that at such time a current prospectus relating to
the underlying Common Stock is then in effect and the underlying Common Stock
is qualified for sale or exempt from qualification under applicable state
securities laws. The Class B Warrants are transferable separately from the
Common Stock, and the Class B Warrants underlying the Class A Warrants will be
transferable separately from the Common Stock received upon exercise of the
Class A Warrants. The Class B Warrants are subject to redemption, as described
below.

REDEMPTION

The Class A Warrants currently are subject to redemption by the Company,
upon 30 days written notice, at a price of $.05 per Warrant, if the average
closing bid price of the Common Stock for any 30 consecutive trading days
ending within 15 days of the date on which the notice of redemption is given
shall have exceeded $9.10 per share. The Class B Warrants are subject to
redemption by the Company commencing May 9, 1997, upon 30 days written notice,
at a price of $.05 per Warrant, if the average closing bid price of the Common
Stock for any 30 consecutive trading days ending within 15 days of the date on
which the notice of redemption is given shall have exceeded $12.25 per share.
Holders of Warrants will automatically forfeit their rights to purchase the
shares of Common Stock issuable upon exercise of such Warrants unless the
Warrants are exercised before the close of business on the business day
immediately prior to the date set for redemption. All of the outstanding
Warrants of a class, except for those underlying the Unit Purchase Option and
the IPO Unit Purchase Option, must be redeemed if any of that class are
redeemed. A notice of redemption shall be mailed to each of the registered
holders of the Warrants by first class mail, postage prepaid, upon 30 days'
notice before the date fixed for redemption. The notice of redemption shall
specify the redemption price, the date fixed for redemption, the place where
the Warrant certificates shall be delivered, and that the right to exercise
the Warrants shall terminate at 5:00 p.m. (New York City time) on the business
day immediately preceding the date fixed for redemption.

GENERAL

The Warrants may be exercised upon surrender of the certificate or
certificates therefore on or prior to the expiration or the redemption date
(as explained above) at the offices of the Company's warrant agent (the
"Warrant Agent") with the form of "Election to Purchase" on the reverse side
of the certificate or certificates completed and executed as indicated,
accompanied by payment (in the form of a certified or cashier's check payable
to the order of the Company) of the full exercise price for the number of
Warrants being exercised. Shares issued upon exercise of Warrants will be
fully paid and non-assessable.

The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of
shares issuable upon exercise thereof upon the occurrence of certain events,
including issuances of Common Stock (or securities convertible, exchangeable
or exercisable into Common Stock) at less than market value, stock dividends,
stock splits, mergers, sale of substantially all of the Company's assets, and
for other extraordinary events; provided, however, that no such adjustment
shall be made upon, among other things, (i) the issuance or exercise of
options or other securities under the Company's 1993 Option Plan or other
employee benefit plans or (ii) the sale or exercise of certain outstanding
options or warrants or the Warrants offered hereby.

The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof will make a cash payment based upon the current market value
of such fractional shares. The holder of the Warrants will not possess any
rights as a shareholder of the Company unless and until he exercises the
Warrants.

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The Warrants do not confer upon holders any voting or any other rights as
shareholders of the Company.

PREFERRED STOCK

Shares of Preferred Stock may be issued without shareholder approval. The
Board of Directors is authorized to issue such shares in one or more series
and to fix the rights, preferences, privileges, qualifications, limitations
and restrictions thereof, including dividend rights and rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the
designation of such series, without any vote or action by the shareholders. No
shares of Preferred Stock are currently outstanding and the Company has no
present intention to issue any shares of Preferred Stock. Any Preferred Stock
to be issued could rank prior to the Common Stock with respect to dividend
rights and rights on liquidation. The Board of Directors, without shareholder
approval, may issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of holders of Common Stock and
discourage, delay or prevent a change in control of the Company.

UNIT PURCHASE OPTION

Upon the closing of the Offering, the Company has agreed to grant to the
Underwriter the Unit Purchase Option to purchase up to 2,300 Units. The Units
issuable upon exercise of the Unit Purchase Option will, when so issued, be
identical to the Units offered hereby. The Unit Purchase Option cannot be
transferred, sold, assigned or hypothecated for two years, except to any
officer of the Underwriter or members of the selling group or their officers.
The Unit Purchase Option is exercisable during the three-year period
commencing two years from the date of this Prospectus at an exercise price of
$1,300 per Unit (130% of the Unit offering price) subject to adjustment in
certain events. The holders of the Unit Purchase Option will have certain
demand and piggyback registration rights. See "Underwriting."

IPO UNIT PURCHASE OPTIONS

In connection with the IPO, the Company granted to the Underwriter and its
designees the IPO Unit Purchase Options to purchase up to 420,000 IPO Units.
The IPO Units issuable upon exercise of the IPO Unit Purchase Option will,
when so issued, be identical to the IPO Units. The IPO Unit Purchase Option
cannot be transferred, sold, assigned or hypothecated for two years, except to
any officer of the Underwriter or members of the selling group or their
officers. The IPO Unit Purchase Options are exercisable during the three-year
period commencing on May 9, 1998, at an exercise price of $6.50 per IPO Unit
subject to adjustment in certain events. The holders of the IPO Unit Purchase
Options have certain demand and piggyback registration rights. See "--
Registration Rights."

REGISTRATION RIGHTS

The Company has granted certain demand and piggyback registration rights to
Hyundai, with respect to the 3,896,999 shares of Common Stock issued upon
conversion of the shares of Preferred Stock owned by Hyundai upon the closing
of the IPO in May 1996. Such rights have been waived by Hyundai for a period
of 13 months following completion of the IPO. The holders of the IPO Unit
Purchase Options have, and the holders of the Unit Purchase Options will have,
demand and piggyback registration rights relating to their options and the
underlying securities. In addition, the holders of the Acquisition Shares have
demand and piggyback registration rights (which do not apply to the Offering
and which will not require the Company to file a registration statement for
such shares prior to May 1997) and the holder of 1,198 shares of Common Stock
and warrants to purchase 5,990 shares of Common Stock has piggyback
registration rights, which have been waived in connection with the Offering.
See "Business--ViComp Acquisition" and "Management--Employment and Consulting
Agreements."

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TRANSFER AGENT AND WARRANT AGENT

American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.

BUSINESS COMBINATION PROVISIONS

The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested shareholders," defined as persons who
have acquired at least 15% of a corporation's stock. Under the law, a
corporation may not engage in any business combination with any interested
shareholder for a period of three years from the date such person became an
interested shareholder unless certain conditions are satisfied. The statute
contains provisions enabling a corporation to avoid the statute's
restrictions.

The Company has not sought to "elect out" of the Delaware statute and,
therefore, the restrictions imposed by such statute will apply to the Company.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
(excluding outstanding options and warrants) 19,833,091 shares of Common Stock
(assuming each Unit consists of the maximum number of IPO Units) and
19,143,091 shares of Common Stock (assuming each Unit consists of the minimum
number of IPO Units). Of these shares, all of the shares issued in the
Offering and the 4,830,000 shares sold in the IPO are freely transferable
without restriction or registration under the Securities Act, unless held by
persons deemed to be "affiliates" of the Company (as that term is defined in
Rule 144 under the Securities Act ("Rule 144")). The remaining outstanding
12,703,091 shares of Common Stock are "restricted securities" within the
meaning of Rule 144 (the "Restricted Shares") and may not be sold unless they
are registered under the Securities Act or sold pursuant to Rule 144 or
another exemption from registration. Pursuant to Rule 144, 9,573,326 of these
restricted shares became eligible for resale commencing August 8, 1996.
However, all of the executive officers and directors of the Company and a
shareholder holding 3,896,999 shares of Common Stock have agreed that they
will not sell any of the Company's securities owned by them prior to 13 months
from the date of the Offering without the consent of the Underwriter.

Holders of Restricted Shares must comply with the requirements of Rule 144
in order to sell their shares in the open market without violating the
Securities Act. In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated), including an affiliate of the
Company, who has beneficially owned shares for at least two years is entitled
to sell in the open market within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then-outstanding shares of
the Company's Common Stock or (ii) the average weekly public trading volume
during the four calendar weeks preceding such sale. The holding period of
shares of a non-affiliate for this purpose includes the holding period of all
prior non-affiliate holders, provided that if an affiliate has held such
shares at any time, the holding period shall commence upon the sale to a non-
affiliate by the last affiliate to hold the shares. Sales under Rule 144 are
also subject to certain limitations on the manner of sale, notice
requirements, and availability of current public information about the
Company. A non-affiliate who holds restricted securities and who has not been
affiliated with the Company during the three-month period preceding the
proposed sale thereof may sell such securities without regard to the
conditions imposed by Rule 144 if at least three years have elapsed from the
sale of such securities by the Company or any affiliate. As defined in Rule
144, an "affiliate" of an issuer is a person that directly or indirectly
controls, or is controlled by, or is under common control with the issuer of
the securities. The foregoing is a summary of the provisions of Rule 144 and
is not intended to be complete.

Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to May 9, 1996 became entitled to sell such
shares after August 8, 1996 in reliance on Rule 144, without having

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to comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144. Affiliates are subject to Rule
144 restrictions after this 90-day period, but without a holding period. If
all the requirements of Rule 701 are met, an aggregate of 681,055 shares
subject to outstanding vested stock options are currently eligible to be sold
pursuant to such rule.

In addition, in connection with the IPO, the Company registered for resale
on behalf of certain holders the Bridge Warrants and the securities issuable
upon exercise of the Bridge Warrants, subject to the contractual restriction
that such holders agreed (i) not to exercise the Bridge Warrants until May 9,
1997 unless such securities are subject to a notice of redemption delivered by
the Company, and (ii) not to sell any of the Bridge Warrants until after
August 12, 1996, and during the period from August 13, 1996 to February 8,
1997 to only sell certain specified percentages of such Bridge Warrants.

The Underwriter and its designee also has demand and piggyback registration
rights with respect to the securities underlying the IPO Unit Purchase Option
and the Unit Purchase Option. The Company has granted demand and piggyback
registration rights to the holder of 3,896,999 shares of Common Stock (which
cannot be exercised prior to June 1997), demand and piggyback registration
rights to the holders of the Acquisition Shares (which do not apply to the
Offering and which will not require the Company to file a registration
statement for such shares prior to May 1997) and piggyback registration rights
to the Company's public relations firm for up to 7,188 shares of Common Stock
currently owned or covered by warrants issued to date to that firm for
services (which rights have been waived in connection with the Offering). See
"Business--ViComp Acquisition," "Management--Employment and Consulting
Agreements" and "Description of Securities--Registration Rights."

No predictions can be made of the effect, if any, that sales of Common Stock
or the availability of Common Stock for sale will have on the market price of
such securities prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market could adversely
affect prevailing market prices.

UNDERWRITING

D.H. Blair Investment Banking Corp., the Underwriter, has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase the 23,000
Units offered hereby from the Company on a "firm commitment" basis, if any are
purchased. It is expected that Blair & Co. will distribute as a selling group
member substantially all of the Units offered hereby. Blair & Co. is owned by
a corporation that is substantially owned by family members of J. Morton
Davis. Mr. Davis is the sole shareholder of the Underwriter.

The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus. The Underwriter may allow to selected dealers who are members of
the National Association of Securities Dealers, Inc. (the "NASD") concessions
not in excess of $ per Unit, of which not in excess of $ per Unit may be
reallowed to other dealers who are members of the NASD. After commencement of
the Offering, the public offering price, concession and the reallowance may be
changed by the Underwriter.

The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter a nonaccountable expense allowance of 3%
of the gross proceeds derived from the sale of the Units offered hereby,
including any Units purchased pursuant to the Underwriter's over-allotment
option, $40,000 of which has been paid as of the date of this Prospectus.

The Company has granted to the Underwriter an option, exercisable during the
30-day period commencing on the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts and
commissions, up to 3,450 additional Units for the purpose of covering over-
allotments, if any.

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The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 2,300 Units
substantially identical to the Units being offered hereby, except that the
Warrants included therein are subject to redemption by the Company for $.05 at
any time after the Unit Purchase Option has been exercised and the underlying
warrants are outstanding. The Unit Purchase Option will be exercisable during
the three-year period commencing two years from the date of this Prospectus at
an exercise price of $1,300 per Unit, subject to adjustment in certain events
and the Unit Purchase Option and the underlying securities are not
transferable for a period of two years from the date of this Prospectus except
to officers of the Underwriter or to members of the Underwriter's selling
group. The Company has agreed to register the securities issuable upon
exercise thereof under the Securities Act on two separate occasions (the first
at the Company's expense and the second at the expense of the holders of the
Unit Purchase Option) during the four-year period commencing one year from the
date of this Prospectus. The Unit Purchase Option includes a provision
permitting the holder to elect a cashless exercise of the Option. The Company
has also granted certain piggyback rights to holders of the Unit Purchase
Option.

All of the Company's executive officers and directors and all shareholders
of the Company known by the Company to beneficially own 5% or more of the
outstanding Common Stock have agreed not to sell, assign or transfer any of
the Company's securities for a 13-month period from the closing of the
Offering without the prior written consent of the Underwriter.

During the five-year period from the closing of the Offering, in the event
the Underwriter originates financing or a merger, acquisition, or transaction
to which the Company is a party, the Underwriter will be entitled to receive a
finder's fee in consideration for origination of such transaction. The fee is
based on a percentage of the consideration paid in the transaction, ranging
from 6% of the first $5,000,000 to 2% of any consideration in excess of
$13,000,000.

The Underwriter has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the IPO,
although it has not yet selected any such designee. Such designee may be a
director, officer, partner, employee or affiliate of the Underwriter.

Pursuant to the Warrant Agreement the Company has agreed not to solicit
Warrant exercises other than through the Underwriter, unless the Underwriter
declines to make such solicitation. Upon any exercise of the Class A or Class
B Warrants after one year from the date of this Prospectus, the Company will
pay the Underwriter a fee of 5% with respect to the Class A Warrants and 8%
with respect to the Class B Warrants, of the aggregate exercise price (the
"Warrant Fee") for Warrant exercises solicited by the Underwriter or its
representatives or agents, if (i) the market price of the Company's Common
Stock on the date the Warrant is exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrant was solicited in
writing by a member of the NASD; (iii) the Warrant is not held in a
discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the offering and at the time of exercise of the Warrants;
and (v) the solicitation of exercise of the Warrant was not in violation of
Rule 10b-6 promulgated under the Exchange Act, provided however, that (a) no
Warrant Fee will be payable prior to May 9, 1997 and (b) in the event Warrants
are exercised after May 9, 1997 but prior to the first anniversary of the date
of this Prospectus, the Underwriter only shall be entitled to receive the
Warrant Fee with respect to the IPO Warrants and the Bridge Warrants. For
purposes of determining which Warrants have been exercised, it will be assumed
that the first 8,330,000 Class A Warrants and 13,160,000 Class B Warrants
(which include the 8,330,000 Class B Warrants that may be issued on exercise
of the Class A Warrants) exercised were those issued in connection with the
IPO.

Rule 10b-6 may prohibit Blair & Co. from engaging in any market making
activities with regard to the Company's securities for the period from two to
nine business days (or such other applicable period as

64
<PAGE>

Rule 10b-6 may provide) prior to any solicitation by the Underwriter of the
exercise of Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right that the
Underwriter may have to receive a fee for the exercise of Warrants following
such solicitation. As a result, Blair & Co. may be unable to provide a market
for the Company's securities during certain periods while the Warrants are
exercisable.

The Underwriter and certain selling group members that currently act as
market makers for the Company's securities may engage in "passive market
making" in the Company's securities on Nasdaq in accordance with Rule 10b-6A
under the Exchange Act. Rule 10b-6A permits, upon the satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
In general, under Rule 10b-6A, any underwriter or selling group member engaged
in passive market making in the Company's securities (i) may not effect
transactions in, or display bids for, such securities at a price that exceeds
the highest bid for such securities displayed on Nasdaq by a market maker that
is not participating in the distribution of such securities; (ii) may not have
net daily purchases of such Company's securities that exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months immediately preceding the filing date of the Registration
Statement of which this Prospectus forms a part; and (iii) must identify its
bids made by a passive market maker.

The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's and Blair &
Co.'s compliance with the federal securities laws and compliance with the
federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and
that it is cooperating with the investigation. The Underwriter cannot predict
whether this investigation will ever result in any type of formal enforcement
action against the Underwriter or Blair & Co. or, if so, whether any such
action might have an adverse effect on the Underwriter or the securities
offered hereby. The Company has been advised that Blair & Co. will make a
market in the securities following the Offering. An unfavorable resolution of
the Commission's investigation could have the effect of limiting such firm's
ability to make a market in the Company's securities, which could adversely
affect the liquidity or price of such securities.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Troy & Gould Professional Corporation, Los Angeles, California.
Certain legal matters will be passed upon for the Underwriter by Bachner,
Tally, Polevoy & Misher LLP, New York, New York. Joseph F. Troy, a member of
Troy & Gould Professional Corporation, became a director of the Company in May
1996 and received options to purchase 136,608 shares of Common Stock at $3.50
per share. Troy & Gould Professional Corporation owns 10,000 Units, and
certain shareholders of that firm own in the aggregate 400 shares of Common
Stock, 600 Class A Warrants and 1,000 Class B Warrants.

EXPERTS

The financial statements of Digital Video Systems, Inc. at December 31, 1995
and for each of the two years in the period ended December 31, 1995, and the
financial statements of ViComp Technology, Inc. at August 31, 1996 and for the
period from inception (August 21, 1995) through August 31, 1996, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

65
<PAGE>

ADDITIONAL INFORMATION

The Company has filed a Registration Statement on Form SB-2 under the
Securities Act with the Commission in Washington, D.C. with respect to the
securities offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. For further information with
respect to the Company and the Securities offered hereby, reference is hereby
made to the Registration Statement and such exhibits, which may be inspected
without charge at the office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located
at Seven World Trade Center, 13th Floor, New York, New York 10048 and at 500
West Madison (Suite 1400), Chicago, Illinois 60661. Copies of such material
may also be obtained at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference.

The Company is subject to the reporting requirements of the Exchange Act,
and in accordance therewith files reports and other information with the
Commission. Reports and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at the following addresses: New York Regional
Office, Seven World Trade Center, New York, New York 10048; and Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
the Commission's World Wide Web site is http://www.sec.gov. The Common Stock,
Class A Warrants and Class B Warrants are quoted on the Nasdaq National Market
and the IPO Units are quoted on the Nasdaq Small Cap Market. Reports, proxy
statements and other information concerning the Company may be inspected at
the National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.

66
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Digital Video Systems, Inc.
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Balance Sheet........................................................... F-3
Statements of Operations................................................ F-4
Statements of Stockholders' Equity...................................... F-5
Statements of Cash Flows................................................ F-6
Notes to Financial Statements........................................... F-7
ViComp Technology, Inc.
Report of Ernst & Young LLP, Independent Auditors....................... F-19
Balance Sheet........................................................... F-20
Statement of Operations................................................. F-21
Statement of Shareholders' Equity....................................... F-22
Statement of Cash Flows................................................. F-23
Notes to Financial Statements........................................... F-24
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Digital Video Systems, Inc.

We have audited the accompanying balance sheet of Digital Video Systems,
Inc. as of December 31, 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 financial statements referred to above present fairly,
in all material respects, the financial position of Digital Video Systems,
Inc. at December 31, 1995, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

Walnut Creek, California Ernst & Young LLP
October 31, 1996

F-2
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,218,920 $ 14,638,889
Accounts receivable, net of allowance for doubtful
accounts of $0 and $372,789, respectively........ 169,185 1,194,143
Inventories....................................... 673,775 1,488,454
Prepaid expenses and other current assets......... 300,407 668,219
----------- ------------
Total current assets............................ 2,362,287 17,989,705
Property and equipment, net......................... 558,087 499,921
Other assets........................................ 49,295 116,873
----------- ------------
Total assets.................................... $ 2,969,669 $ 18,606,499
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 414,344 $ 694,034
Accrued liabilities............................... 506,118 467,986
----------- ------------
Total current liabilities....................... 920,462 1,162,020
Commitments and Contingencies
Stockholders' equity:
Convertible preferred stock, $0.0001 par value:
10,232,948 shares authorized, 5,232,948 shares
issued and outstanding at December 31, 1995;
aggregate liquidation preference of $8,058,739;
5,000,000 shares authorized and none issued or
outstanding at
September 30, 1996--unaudited.................... $ 524 $ --
Common stock, $0.0001 par value:
60,000,000 shares authorized, 6,627,688 and
17,009,640 shares issued and outstanding at
December 31, 1995 and September 30, 1996--
unaudited, respectively.......................... 662 1,701
Additional paid-in capital......................... 8,265,120 29,800,775
Accumulated deficit................................ (6,024,733) (12,267,320)
Foreign currency translation adjustments........... (30,616) (45,437)
Deferred compensation.............................. (161,750) (45,240)
----------- ------------
Total stockholders' equity...................... 2,049,207 17,444,479
----------- ------------
Total liabilities and stockholders' equity...... $ 2,969,669 $ 18,606,499
=========== ============
</TABLE>

See accompanying notes.

F-3
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Product revenue
(including $6,410,000,
$490,000, $490,000 and
$0 from related parties
and affiliates for the
years ended December 31,
1994 and 1995, and the
nine-month periods ended
September 30, 1995 and
1996, respectively)...... $ 6,553,987 $ 1,927,015 $ 1,320,252 $ 3,108,049
Development and services
revenue, (including
$636,000, $1,000,000,
$637,000 and $150,000
from affiliates and
related parties for the
years ended December 31,
1994 and 1995, and the
nine-month periods ended
September 30, 1995 and
1996, respectively)...... 1,254,646 1,021,816 653,355 156,839
Component revenue......... -- 572,000 -- 1,630,626
----------- ----------- ----------- -----------
Total revenue........... 7,808,633 3,520,831 1,973,607 4,895,514
Cost of product revenue
(including $1,900,000,
$224,000, $134,000 and
$800,000 purchased from a
related party for the
years ended December 31,
1994 and 1995 and the
nine-month periods ended
September 30, 1995 and
1996, respectively)....... 5,963,959 2,274,638 1,450,376 3,704,212
Cost of development and
services revenue.......... 954,531 585,282 321,713 263,298
Cost of component revenue
purchased from related
party..................... -- 495,000 -- 1,598,500
----------- ----------- ----------- -----------
Gross profit (loss)........ 890,143 165,911 201,518 (670,496)
Operating expenses:
Research and development.. 1,550,248 1,257,833 981,930 1,048,324
Sales and marketing....... 602,818 548,573 426,274 784,900
General and
administrative........... 859,129 1,513,636 1,228,014 2,011,494
----------- ----------- ----------- -----------
Total operating
expenses............... 3,012,195 3,320,042 2,636,218 3,844,718
----------- ----------- ----------- -----------
Loss from operations....... (2,122,052) (3,154,131) (2,434,700) (4,515,214)
Interest expense........... (17,055) (99,248) -- (759,102)
Interest income and other.. 52,209 18,936 (45,447) 295,525
Gain (loss) on investments
in affiliates (1994 gain
was from a related party). 350,000 (1,248,868) -- --
----------- ----------- ----------- -----------
Net loss before benefit for
income taxes and
extraordinary item........ (1,736,898) (4,483,311) (2,480,147) (4,978,791)
Benefit for income taxes... (83,237) -- -- --
----------- ----------- ----------- -----------
Net loss before
extraordinary item........ (1,653,661) (4,483,311) (2,480,147) (4,948,791)
Extraordinary item--loss on
early extinguishment of
bridge notes.............. -- -- -- (1,263,796)
----------- ----------- ----------- -----------
Net loss................... $(1,653,661) $(4,483,311) $(2,480,147) $(6,242,587)
=========== =========== =========== ===========
Net loss per share before
extraordinary item........ $ (.39) $ (.84) $ (.46) $ (.65)
=========== =========== =========== ===========
Net loss per share......... $ (.39) $ (.84) $ (.46) $ (.81)
=========== =========== =========== ===========
Shares used in computing
net loss per share........ 4,195,148 5,337,668 5,353,284 7,675,792
=========== =========== =========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
CONVERTIBLE RETAINED NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE RECEIVABLE
------------------ ------------------ PAID-IN (ACCUMULATED TRANSLATION FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS STOCKHOLDER COMPENSATION
---------- ------ ---------- ------ ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993............ -- $-- 6,199,720 $ 620 $ 380 $ 112,239 $ (5,048) $ -- $ --
Sale of Series A
preferred
stock, net of
issuance costs. 3,247,473 325 -- -- 4,976,520 -- -- -- --
Issuance of
common stock
for acquisition
of Sunny Rich
assets......... -- -- 6,215,751 -- -- -- -- -- --
Shares of common
stock
reacquired and
canceled in
conjunction
with
acquisition of
Sunny Rich
assets......... -- -- (6,199,720) -- -- -- -- -- --
Sale of common
stock for cash
and note
receivable..... -- -- 118,085 13 16,415 -- -- (15,000) --
Translation
adjustment..... -- -- -- -- -- -- 7,261 -- --
Net loss........ -- -- -- -- -- (1,653,661) -- -- --
---------- ---- ---------- ------ ----------- ------------ -------- -------- --------
Balance at
December 31,
1994............ 3,247,473 325 6,333,836 633 4,993,315 (1,541,422) 2,213 (15,000) --
Sale of Series B
preferred
stock, net of
issuance costs. 1,985,475 199 -- -- 3,056,608 -- -- -- --
Exercise of
common stock
options........ -- -- 355,086 35 49,365 -- -- -- --
Repayment on
note receivable
from
stockholder.... -- -- -- -- -- -- -- 6,482 --
Cancellation of
common stock
and note
receivable..... -- -- (61,234) (6) (8,512) -- -- 8,518 --
Translation
adjustment..... -- -- -- -- -- -- (32,829) -- --
Deferred
compensation
resulting from
grants of
options........ -- -- -- -- 174,344 -- -- -- (174,344)
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- 12,594
Net loss........ -- -- -- -- -- (4,483,311) -- -- --
---------- ---- ---------- ------ ----------- ------------ -------- -------- --------
Balance at
December 31,
1995............ 5,232,948 524 6,627,688 662 8,265,120 (6,024,733) (30,616) 0 (161,750)
Exercise of
common stock
options
(unaudited).... -- -- 319,004 32 44,321 -- -- -- --
Warrants issued
in connection
with bridge
notes
(unaudited).... -- -- -- -- 875,000 -- -- -- --
Reduction in
deferred
compensation
for options
placed in
escrow
(unaudited).... -- -- -- -- (97,026) -- -- -- 97,026
Sale of IPO
Units, net of
issuance costs
(unaudited).... -- -- 4,830,000 483 20,713,360 -- -- -- --
Conversion of
preferred stock
in connection
with IPO
(unaudited).... (5,232,948) (524) 5,232,948 524 -- -- -- -- --
Translation
adjustment
(unaudited) -- -- -- -- -- -- (14,821) -- --
Amortization of
deferred
compensation
(unaudited).... -- -- -- -- -- -- -- -- 19,484
Net loss
(unaudited).... -- -- -- -- -- (6,242,587) -- -- --
---------- ---- ---------- ------ ----------- ------------ -------- -------- --------
Balance at
September 30,
1996
(unaudited)..... 0 $ 0 17,009,640 $1,701 $29,800,775 $(12,267,320) $(45,437) $ 0 $(45,240)
========== ==== ========== ====== =========== ============ ======== ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at
December 31,
1993............ $ 108,191
Sale of Series A
preferred
stock, net of
issuance costs. 4,976,845
Issuance of
common stock
for acquisition
of Sunny Rich
assets......... --
Shares of common
stock
reacquired and
canceled in
conjunction
with
acquisition of
Sunny Rich
assets......... --
Sale of common
stock for cash
and note
receivable..... 1,428
Translation
adjustment..... 7,261
Net loss........ (1,653,661)
-------------
Balance at
December 31,
1994............ 3,440,064
Sale of Series B
preferred
stock, net of
issuance costs. 3,056,807
Exercise of
common stock
options........ 49,400
Repayment on
note receivable
from
stockholder.... 6,482
Cancellation of
common stock
and note
receivable..... --
Translation
adjustment..... (32,829)
Deferred
compensation
resulting from
grants of
options........ --
Amortization of
deferred
compensation... 12,594
Net loss........ (4,483,311)
-------------
Balance at
December 31,
1995............ 2,049,207
Exercise of
common stock
options
(unaudited).... 44,353
Warrants issued
in connection
with bridge
notes
(unaudited).... 875,000
Reduction in
deferred
compensation
for options
placed in
escrow
(unaudited).... --
Sale of IPO
Units, net of
issuance costs
(unaudited).... 20,713,843
Conversion of
preferred stock
in connection
with IPO
(unaudited).... --
Translation
adjustment
(unaudited) (14,821)
Amortization of
deferred
compensation
(unaudited).... 19,484
Net loss
(unaudited).... (6,242,587)
-------------
Balance at
September 30,
1996
(unaudited)..... $17,444,479
=============
</TABLE>

See accompanying notes.

F-5
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................... $(1,653,661) $(4,483,311) $(2,480,147) $(6,242,587)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............ 190,038 249,364 202,094 165,142
Amortization of deferred
compensation............ -- 12,594 4,245 19,484
Deferred financing
charges and accretion
related to bridge notes. -- -- -- 1,820,000
Interest expense on
convertible notes
payable................. -- 56,807 -- --
Loss on disposition of
property and equipment.. 21,977 8,418 -- --
Increase (decrease) in
accumulated translation
adjustments............. 7,261 (32,829) (85,245) (14,821)
Loss on write-off of
investments in
affiliate............... -- 1,248,868 -- --
Changes in operating
assets and liabilities:
Accounts receivable..... (174,130) (39,195) 244,548 (1,024,958)
Accounts receivable from
affiliate.............. 413,133 -- -- --
Inventories............. (18,768) 384,408 93,134 (814,679)
Prepaid expenses and
other current assets... (62,358) (96,788) (65,581) (367,812)
Deferred income taxes... 57,054 -- -- --
Other assets............ (17,849) 11,312 (10,401) (67,578)
Accounts payable........ (152,298) (57,619) (158,264) 279,690
Accrued liabilities..... 69,682 255,914 104,198 (38,132)
Advances from related
party.................. (1,212,976) -- -- --
Deferred revenue from
related party.......... (451,143) -- 363,347 --
Income taxes payable.... (173,821) -- -- --
----------- ----------- ----------- -----------
Net cash used in operating
activities................ (3,157,859) (2,482,057) (1,788,072) (6,286,251)
INVESTING ACTIVITIES
Acquisition of property and
equipment................. (576,050) (114,487) (120,620) (106,976)
Proceeds from disposition
of property and equipment. 78,866 -- -- --
Investments in affiliates.. (670,000) -- -- --
----------- ----------- ----------- -----------
Net cash used in investing
activities................ (1,167,184) (114,487) (120,620) (106,976)
FINANCING ACTIVITIES
Proceeds from initial
public offering of Units.. -- -- -- 20,713,843
Proceeds from line of
credit.................... 600,000 -- -- --
Repayment on line of
credit.................... -- (600,000) (600,000) --
Increase (decrease) in
restricted cash........... (930,414) 1,018,990 1,018,990 --
Proceeds from issuance of
common stock.............. 1,428 49,400 48,944 44,353
Proceeds from note payable
to stockholder............ 1,000,000 2,000,000 500,000 --
Proceeds from sale of
preferred stock, net of
notes payable converted to
preferred stock and of
issuance costs............ 3,476,845 1,000,000 1,000,000 --
Proceeds from note
receivable from
stockholder............... -- 6,482 6,482 --
Proceeds from bridge notes. -- -- -- 6,055,000
Repayment of bridge notes.. -- (7,000,000)
----------- ----------- ----------- -----------
Net cash provided by
financing activities...... 4,147,859 3,474,872 1,974,416 19,813,196
----------- ----------- ----------- -----------
Net (decrease) increase in
cash and cash equivalents. (177,184) 878,328 65,724 13,419,969
Cash and cash equivalents
at beginning of period.... 517,776 340,592 340,592 1,218,920
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period.......... $ 340,592 $ 1,218,920 $ 406,316 $14,638,889
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
NONCASH
INVESTING/FINANCING
ACTIVITIES
Conversion of notes payable
to preferred stock........ $ 1,500,000 $ 2,056,807 -- --
Deferred financing fees on
bridge notes.............. -- -- -- $ 875,000
Warrants issued pursuant to
bridge notes.............. -- -- -- $ 945,000
</TABLE>

See accompanying notes.

F-6
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

The Company

Digital Video Systems, Inc. (the "Company") develops, manufactures and
markets digital video compression and decompression hardware and software for
entertainment, business and educational uses.

The Company currently buys its compression and decompression computer chips,
an important component of its products, from one supplier which is a related
party. The Company has designed its products contemplating the use of this
supplier's chips, and there can be no assurance that any other company will be
able to create chips that are substantially equivalent or that any such chips
can be successfully integrated into the Company's product. The Company's
inability to obtain a sufficient quantity of chips would affect operating
results adversely.

Interim Financial Information

The financial statements for the nine-month periods ended September 30, 1995
and 1996 are unaudited. In the opinion of management, the statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for
the fair statement of the results of interim periods. Operating results for
the nine-month periods ended September 30, 1995 and 1996 are not necessarily
indicative of the results that may be expected for any future periods.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. The Company is
exposed to credit risk in the event of default by the financial institutions
to the extent of amounts recorded on the balance sheet.

In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company has classified its investments in a money market fund and certificates
of deposits as available-for-sale. Available-for-sale securities are carried
at fair value, with unrealized gains and losses reported as a separate
component of shareholders' equity when material. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in interest income and expense.

Revenue Recognition

Revenues from product and component sales are recognized upon shipment.

The Company also has development agreements under which it receives fees for
certain rights to technology and product prototypes developed. The Company
recognizes revenue under these agreements based upon the completion of
specified milestones in accordance with the agreement terms typically as costs
are incurred. Revenues recognized under development agreements were
approximately $636,000 and $1,000,000, for the years

F-7
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

ended December 31, 1994 and 1995, respectively and $637,000 and $150,000 for
the nine-month periods ended September 30, 1995 and 1996, respectively. Costs
related to development revenues totaled approximately $266,000 and $585,000
for the years ended December 31, 1994 and 1995, respectively, and $281,000 and
$235,000 for the nine-month periods ended September 30, 1995 and 1996,
respectively and are included in cost of development and service revenues in
the accompanying statements of operations.

Service revenues are recognized ratably over the contractual period or as
the services are performed.

Inventories

Inventories are comprised principally of raw materials and work in progress
and are stated at the lower of actual cost (first-in, first-out method) or
market.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the assets estimated useful lives of two to five years.

Foreign Currency Translation

The Company uses the New Taiwan dollar as its functional currency for the
Company's Taiwan branch operations. Translation adjustments, which result from
the process of translating foreign currency financial statements into U.S.
dollars, are included as a separate component of stockholders' equity.

Income Taxes

The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109, the
liability method is used to account for income taxes. Under this method,
deferred tax assets and liabilities are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.

Concentration of Credit Risk

The Company primarily sells its products to original equipment manufacturers
and product distribution companies located in the Far East. The Company
performs ongoing credit evaluations of its customers' financial position and
generally requires no collateral. The Company maintains reserves for potential
credit losses, and such losses have been within management's expectations.

Software Development Costs

Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." The Company's
products include a software component. The Company has expensed all software
development costs to date as such development costs have been incurred prior
to the Company's products attaining technological feasibility.

F-8
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 "Accounting for Stock-Based Compensation." The statement is effective
for fiscal years beginning after December 15, 1995. Under Statement No. 123,
stock-based compensation expense is measured using either the intrinsic-value
method as prescribed by Accounting Principle Board Opinion No. 25 or the fair
value method described in Statement No. 123. Companies choosing the intrinsic-
value method will be required to disclose the pro forma impact of the fair
value method on net income and earnings per share. The Company plans to
implement the standard in 1996 using the intrinsic-value method; there will be
no effect of adopting the standard on the Company's financial position and
results of operations.

Net Loss Per Share

Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common stock equivalent shares from convertible
preferred stock and from stock options are not included as the effect is anti-
dilutive. In accordance with Securities and Exchange Commission Staff
Accounting Bulletins, common stock and common stock equivalent shares issued
by the Company at prices below the initial public offering price during the
period beginning one year prior to the initial public offering have been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method and the estimated initial public
offering price). The weighted average number of common shares used in the net
loss per share calculation was reduced by the common stock, preferred stock
convertible into common stock, and outstanding options placed in escrow in
connection with the Company's initial public offering.

Net loss per share has been computed as described above and also gives
effect, pursuant to SEC policy, to common equivalent shares from convertible
preferred stock issued more than 12 months from the initial public offering
date that will automatically convert upon completion of the offering (using
the if-converted method) from the original date of issuance.

Stock Split

In January 1996, the Board of Directors approved a stock split of 1.078-for-
1 of all outstanding shares of common stock. All share and per share
information has been adjusted to give effect to the stock split in the
accompanying financial statements.

Current Year Presentation

Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation. The statement of
operations for the year ended December 31, 1994 reflects the effect of the
restatement of the Company's ending inventory balance as of December 31, 1993.
The effect of this restatement was to decrease cost of goods sold by $92,299
for the period ending December 31, 1994.

F-9
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 2 -- BALANCE SHEET COMPONENTS

Inventories, property and equipment, and accrued liabilities consist of the
following at December 31, 1995 and September 30, 1996:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Inventories:
Raw materials................................. $657,153 $1,059,643
Work in progress.............................. -- 328,978
Finished goods................................ 16,622 99,833
-------- ----------
$673,775 $1,488,454
======== ==========
Property and equipment:
Machinery and computer equipment.............. $697,819 $ 702,282
Furniture and fixtures........................ 221,194 230,327
-------- ----------
919,013 932,609
Accumulated depreciation...................... (360,926) (432,688)
-------- ----------
$558,087 $ 499,921
======== ==========
Accrued liabilities:
Accrued warranty and related expenses......... $101,376 $ --
Payroll and related expenses.................. 89,227 68,845
Accrued expenses.............................. 315,515 399,141
-------- ----------
$506,118 $ 467,986
======== ==========
</TABLE>

NOTE 3 -- COMMITMENTS

The Company leases its facilities and certain office equipment under
noncancelable leases which require the Company to pay operating costs,
including property taxes, insurance and maintenance. Future minimum lease
payments under these operating leases at December 31, 1995 are as follows:

Rent expense charged to operations was approximately $181,000, $182,000,
$131,000 and $231,000 for the years ended December 31, 1994 and 1995 and the
nine-month periods ended September 30, 1995 and 1996, respectively.

NOTE 4 -- NOTES PAYABLE TO STOCKHOLDERS

In February 1995, the Company entered into a secured promissory note
agreement ("Agreement") with its president and the Company's majority
stockholder ("purchaser"). The purchaser agreed to lend the Company the
principal sum of $500,000 at prime plus 1% per annum. In October 1995, the
Company amended the Agreement to allow for additional borrowings of
$1,500,000, at prime rate plus 1%. In December 1995, the Company exchanged
1,335,949 shares of Series B convertible preferred stock at $1.54 per share
for settlement of the $2,000,000 in shareholder notes plus accrued interest of
approximately $57,000.

F-10
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 4 -- NOTES PAYABLE TO STOCKHOLDERS--(CONTINUED)

During 1993, the Company issued $500,000 of convertible notes payable to
Hyundai Electronics Industries Co., Ltd. (Hyundai). In addition, the Company
issued two convertible notes payable to Hyundai for a total of $1,000,000
during fiscal 1994. In March 1994, the Company sold 3,247,473 shares of Series
A convertible preferred stock to Hyundai at a price of $1.54 per share,
resulting in gross proceeds of approximately $5,000,000. The convertible notes
payable totaling $1,500,000 plus accrued interest of approximately $17,000
were converted into preferred stock.

NOTE 5 -- INCOME TAXES

For financial reporting purposes, loss before benefit for income taxes
includes the following components for December 31:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
United States...................................... $ 750,447 $2,776,978
Foreign............................................ 986,451 1,706,333
---------- ----------
Total.............................................. $1,736,898 $4,483,311
========== ==========

The benefit for income taxes at December 31 consists of the following:

<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Federal:
Current.......................................... $ (140,291) $ --
Deferred......................................... 36,769 --
---------- ----------
Foreign:
Deferred......................................... 20,285 --
---------- ----------
Total.............................................. $ (83,237) $ --
========== ==========
</TABLE>

The differences between the benefit for income taxes and the amount computed
at the U.S. statutory income tax rate at December 31 are as follows:

<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Tax at U.S. statutory rate....................... $(590,545) $(1,524,326)
Investment valuation............................. -- 312,800
Change in valuation allowance.................... 495,222 1,291,117
Other, net....................................... 12,086 (79,591)
--------- -----------
Benefit for income taxes......................... $ (83,237) $ --
========= ===========
</TABLE>

F-11
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 5 -- INCOME TAXES--(CONTINUED)

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, 1994 and 1995 are as
follows:

<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 240,531 $ 1,202,610
Inventory valuation accounts................... 161,742 248,444
Reserves and other accrued expenses not yet
deductible for taxes.......................... 123,682 268,118
Other.......................................... 21,192 119,092
--------- -----------
Total deferred tax assets...................... 547,147 1,838,264
Valuation allowance for deferred tax assets.... (547,147) (1,838,264)
--------- -----------
Net deferred tax assets........................ $ -- $ --
========= ===========
</TABLE>

For federal and state tax purposes, the Company has net operating loss
carryforwards as of December 31, 1995 of approximately $3,440,000 and
$550,000, respectively, which will expire in various years beginning with 1999
if not utilized.

Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
the availability of the Company's net operating loss and credit carryforwards
will be subject to an annual limitation in future periods if a change of
ownership of more than 50% should occur over a three year period. Such a
change could substantially limit the eventual tax utilization of these
carryforwards.

NOTE 6 -- STOCKHOLDERS' EQUITY

Convertible Preferred Stock

Authorized and outstanding preferred stock and its principal terms are as
follows at December 31, 1995:

<TABLE>
<CAPTION>
PER SHARE
----------------------
DIVIDEND LIQUIDATION
SERIES AUTHORIZED OUTSTANDING PREFERENCE PREFERENCE
------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
A 3,247,473 3,247,473 $.123 $1.540
B 1,985,475 1,985,475 .123 $1.540
Undesignated 5,000,000 -- -- --
---------- ---------
10,232,948 5,232,948
========== =========
</TABLE>

The stockholders of the Series A and B convertible preferred stock were
entitled to annual noncumulative dividends when and if declared by the Board
of Directors in preference and in priority to the payment of dividends on
shares of common stock. No dividends had been declared through December 31,
1995.

If liquidation occurs, any remaining assets subsequent to the distribution
of the liquidation preference on the preferred stock would be distributed pro
rata between the common and preferred shares on an as-converted basis after
the holders of common stock receive an amount per share equal to $1,500,000
divided by the number of shares of common stock then outstanding.

F-12
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 6 -- STOCKHOLDERS' EQUITY--(CONTINUED)

All outstanding preferred stock automatically converted into common stock,
as a result of the initial public offering of the Company's Units. See
Note 11.

Stock Option Plan

The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the
granting of incentive stock options and nonstatutory stock options to
employees, directors, and consultants of the Company at prices ranging from
85% to 110% (depending on the type of grant) of the fair value of the common
stock on the grant date as determined by the Board of Directors. Shares will
generally vest ratably over a four-year period commencing as of the date of
grant. The Company has reserved 2,970,357 shares of common stock for issuance
under the 1993 Plan. The options granted under the 1993 Plan are exercisable
over a maximum term of ten years from the date of grant and are subject to
various restrictions as to resale and right of repurchase by the Company.

During fiscal 1995 the Company issued options to purchase shares of common
stock and recorded deferred compensation of approximately $174,000 for
financial reporting purposes with respect to such option grants to reflect the
difference between the exercise price and deemed fair value, for financial
statement presentation purposes, of the Company's common shares. Deferred
compensation is being amortized over the vesting period (approximately $13,000
for the year ended December 31, 1995 and approximately $19,000 for the nine-
month period ended September 30, 1996, respectively).

Information with respect to the 1993 Plan is summarized as follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
---------- --------- ----------
<S> <C> <C> <C>
Balance at December 31, 1993............ 2,695,530 -- $--
Decrease in shares authorized......... (333,732) -- $--
Options granted....................... (2,018,926) 2,018,926 $0.14
Options exercised..................... -- (118,085) $0.14
Options canceled...................... 309,500 (309,500) $0.14
---------- ---------
Balance at December 31, 1994............ 652,372 1,591,341 $0.14
Increase in shares authorized......... 1,250,734 -- $--
Options granted....................... (997,379) 997,379 $0.14
Options exercised..................... -- (355,086) $0.14
Options canceled...................... 319,464 (319,464) $0.14
---------- ---------
Balance at December 31, 1995............ 1,225,191 1,914,170 $0.14
Increase in shares authorized......... 150,000 -- $--
Options granted....................... (1,154,108) 1,154,108 $0.14-3.50
Options exercised..................... -- (319,004) $0.14
Options canceled...................... 201,587 (201,587) $0.14
---------- --------- ----------
Balance at September 30, 1996........... 422,670 2,547,687 $0.14-3.50
========== ========= ==========
</TABLE>

As of September 30, 1996, 530,291 options were vested.

F-13
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 6 -- STOCKHOLDERS' EQUITY--(CONTINUED)

On February 1, 1996, the Board of Directors authorized a grant of 200,000
common stock options to a consultant. The options, which are not included in
the above Plan, have an exercise price of $5.00 per share and vest 50% each
year after the grant date.

NOTE 7 -- ASSET ACQUISITION FROM SUNNY RICH ENTERPRISES, LTD.

The Company was established as a wholly owned subsidiary of Sunny Rich
Enterprises, Ltd. (Sunny Rich), a holding company owned by the president of
the Company. Effective December 29, 1994, the Company acquired all of the
assets of Sunny Rich in exchange for 6,215,751 shares of its common stock. The
assets of Sunny Rich acquired by the Company principally comprised 6,199,720
outstanding shares of the Company's common stock. The Company did not assume
any of Sunny Rich's debts, liabilities, or obligations. Sunny Rich was then
liquidated, and the common stock was distributed to the stockholders' of Sunny
Rich. The net effect of the above transaction was a transfer of shares from
Sunny Rich to the Company's president thus making the Company's president the
majority stockholder.

NOTE 8 -- INVESTMENTS IN AFFILIATES

During 1993, the Company made a $250,000 investment in Anhui Wanyan
Electronic Systems, Co., Ltd. (Wyan), a company located in the People's
Republic of China, which was formed for the purpose of developing,
manufacturing, and marketing digital audiovisual products. During 1994, the
Company sold a subscription to purchase additional shares of Wyan's common
stock to another related party for $350,000 and recognized a corresponding
gain on the sale of the subscription investment. The Company invested this
$350,000 along with an additional $250,000 into Wyan in 1994. The investment
represented less than a 20% ownership of Wyan's equity and was recorded at
cost. The Company was also to receive an additional equity interest in Wyan in
exchange for technology to be transferred in connection with the development
of several products.

The Company did not transfer any technology and in March 1995, Wyan and the
Company agreed to terminate the technology exchange. As a result of the
Company's decision to discontinue financial and technical support to Wyan and
Wyan's insufficient working capital, management wrote off its entire
investment in Wyan and related accounts receivable of approximately $850,000
and $23,000, respectively.

The Company recognized revenues from Wyan of approximately $4,058,000 and
$636,000 for product sales and development and services, respectively, during
1994. The Company also had accounts receivable from Wyan for inventory
purchased of approximately $347,000 at December 31, 1994.

During 1994, the Company invested $70,000 in a joint venture agreement for
the purpose of manufacturing and distributing certain of its products in the
Far East. Included in product revenues is $2,000 and $365,000
from sales to this affiliate in 1994 and 1995, respectively. In 1995, due to
the joint venture's lack of working capital, the Company's investment in this
venture and related accounts receivable of approximately $306,000 were written
off and charged to operations as a loss on investment in affiliate.

NOTE 9 -- RELATED PARTY TRANSACTIONS

The Company purchased approximately $1,900,000, $809,000, $134,000 and
$2,760,000 of inventory from a company that is a related party in the year
ended December 31, 1994 and 1995 and the nine-month periods ended September
30, 1995 and 1996, respectively. The Company also acquired fixed assets from
this company

F-14
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 9 -- RELATED PARTY TRANSACTIONS--(CONTINUED)

for total payments of approximately $8,000 in 1994. The Chairman and Chief
Executive Officer of the Company is a significant stockholder of this company.

During April 1995, the Company entered into a technical development and
assistance agreement with Hyundai (see Note 4) with a maximum value of
$1,500,000. The agreement requires the Company to develop and deliver certain
prototypes and applications to Hyundai based on the delivery schedule
specified in the agreement. The Company received an initial payment of
$750,000 from the contract in May 1995, and will receive additional amounts
based on the achievement of certain milestones identified in the contract.
During 1995, the Company recognized development revenues of $1,000,000 and
product revenues of $125,000 from sales to Hyundai ($2,350,000 in product
revenues in 1994).

During July 1995, the Company sold 649,526 shares of Series B convertible
preferred stock to Hyundai at a price per share of $1.54 resulting in gross
proceeds to the Company of approximately $1,000,000.

NOTE 10 -- SEGMENT INFORMATION

The Company operates in one business segment, which includes developing,
producing, and marketing digital video systems. The following table summarizes
the Company's operations from its headquarters located in Santa Clara,
California ("United States") and its branch office in Taipei, Taiwan
("Taiwan"):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------
UNITED ADJUSTMENTS/
STATES TAIWAN ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue from unaffiliated
customers................. $ 329,996 $ 433,163 $ -- $ 763,159
Revenue from related
parties and affiliates.... 619,250 6,426,224 -- 7,045,474
----------- ----------- --------- -----------
Total revenue.............. $ 949,246 $ 6,859,387 $ -- $ 7,808,633
=========== =========== ========= ===========
Loss from operations....... $(1,132,744) $ (989,308) $ -- $(2,122,052)
=========== =========== ========= ===========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
UNITED ADJUSTMENTS/
STATES TAIWAN ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue from unaffiliated
customers................. $ 743,680 $ 1,286,708 $ -- $ 2,030,388
Revenue from related
parties and affiliates.... 1,124,810 365,633 -- 1,490,443
----------- ----------- --------- -----------
Total revenue.............. $ 1,868,490 $ 1,652,341 $ -- $ 3,520,831
=========== =========== ========= ===========
Loss from operations....... $(1,448,546) $(1,705,585) $ -- $(3,154,131)
=========== =========== ========= ===========
Identifiable assets........ $ 910,491 $ 2,251,412 $(192,234) $ 2,969,669
=========== =========== ========= ===========
</TABLE>

Export sales, representing sales from the United States to customers in
foreign countries, were approximately $328,000 and $674,000 of total United
States revenue from unaffiliated customers and $619,250 and $1,124,810 from
related parties and affiliates for the years ended December 31, 1994 and 1995,
respectively.

F-15
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 11 -- SUBSEQUENT EVENTS

Private Placement

In March 1996, the Company completed a $7,000,000 private placement of 140
bridge units at $50,000 per unit. Each bridge unit consisted of a $50,000 face
value promissory note bearing 10% interest and due in January and March 1997,
and 25,000 warrants ("Bridge Warrants") which initially enabled the holder to
purchase shares of common stock at $4.00 per share. The Company received net
proceeds of approximately $6,055,000 after deducting selling commissions and
expenses of $945,000. The $7,000,000 was allocated $875,000 to the 3,500,000
Bridge Warrants issued and $6,125,000 to bridge notes payable. The debt
discount and selling commissions and expenses will be expensed using the
interest method over the terms of the notes.

The Bridge Warrants included in the private placement converted on a one-to-
one basis into Class A Warrants upon the closing of the Company's initial
public offering ("IPO") of Units. See "Initial Public Offering of Units and
Related Matters" for a description of the terms of Class A Warrants.

Initial Public Offering of Units and Related Matters

In February 1996, the Board of Directors authorized management of the
Company to file a registration statement for its IPO of Units with the
Securities and Exchange Commission and authorized the amendment and
restatement of the Company's Certificate of Incorporation. During May 1996,
the Company closed the IPO which consisted of 4,830,000 IPO Units, each
consisting of one share of Common Stock, one Class A Warrant and one Class B
Warrant, priced at $5.00 per Unit. Additionally, the Company agreed to grant
an option to purchase 420,000 Units to an underwriter which is exercisable at
a price of $6.50 per Unit during a three year period commencing in May 1998.
The Company received approximately $20,714,000 of net offering proceeds after
deducting underwriting discounts and commissions and other expenses of the
IPO.

Each Class A Warrant entitles the holder to purchase at an exercise price of
$6.50, subject to adjustment, one share of Common Stock and one Class B
Warrant. Each Class B Warrant entitles the holder to purchase, at an exercise
price of $8.75, subject to adjustment, one share of Common Stock. The Class A
Warrants and the Class B Warrants included in the Units are exercisable at any
time after issuance until May 9, 2001. The Class A Warrants are subject to
immediate redemption and the Class B Warrants, are subject to redemption
commencing in May 1997, by the Company at $.05 per Warrant, upon 30 days'
written notice, if the average closing bid price of the Company's Common Stock
has equalled or exceeded $9.10 per share with respect to the Class A Warrants
and $12.25 per share with respect to the Class B Warrants (subject to
adjustment in each case) for 30 consecutive trading days ending within 15 days
of the date the Warrants are called for redemption.

Assuming full conversion of all outstanding A and B Warrants, and the option
to purchase 420,000 Units issued to an Underwriter (and the underlying common
stock and Class A and Class B Warrants) an additional 23,170,000 shares of
Common Stock would be outstanding.

Escrow Securities

In April 1996, the holders of the Company's common and preferred stock, and
holders of options to purchase common stock pursuant to the Company's 1993
stock option plan, placed, on a pro rata basis, 7,812,948 of their shares and
options to purchase 1,852,697 shares of common stock, respectively, into
escrow, and a holder of an option to purchase 200,000 shares of Common Stock
outside the Company's 1993 stock option plan placed all of such options into
escrow. Additionally, 234,355 options reserved for future grant under the
Company's

F-16
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 11 -- SUBSEQUENT EVENTS--(CONTINUED)

1993 Stock Option Plan were subject to escrow upon grant. The common stock and
options will be released to the stockholders on a pro rata basis, in the event
specified levels of pretax income of the Company for the years ended March 31,
1997 to 2001 are achieved, or the market price of the Company's common stock
attains specified targets during a 36-month period commencing from the
effective date of the registration statement relating to the Company's public
offering. Any shares or options remaining in escrow on July 15, 2001 will be
forfeited, which shares and options will then be contributed to the Company's
capital. The pretax income levels are subject to proportionate adjustment upon
the issuance of certain securities subsequent to the Company's IPO.

Based on the terms of the escrow agreement, 7,957,857 shares of the
Company's common stock and 1,874,276 outstanding options to purchase common
stock outstanding as of September 30, 1996 were in escrow. Additionally, at
September 30, 1996, 267,867 options available for future grant were subject to
escrow upon grant.

In the event that the foregoing earnings or market price levels are attained
and the Escrow Securities released, the Securities and Exchange Commission has
adopted the position that the release of Escrow Securities to officers,
directors, employees and consultants of the Company will be compensatory and,
accordingly, will result in compensation expense for financial reporting
purposes. The expense will equal the fair market value of the Escrow
Securities on the date of release and will result in a material charge to
operations.

Secondary Offering of Units with Underwriter

In October 1996, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
for the registration of up to 26,450 Units at $1,000 per unit. Each Unit will
consist of a minimum of 70 and a maximum of 100 units which are identical to
the Units issued in the Company's initial public offering of Units as
described in Note 11. Additionally the Board of Directors authorized the
issuance of an additional option which will allow the Company's underwriter to
purchase up to 2,300 Units (each consisting of a minimum of 70 and a maximum
of 100 units identical to the ones issued in the IPO) at an exercise price of
$1,300 per Unit, exercisable over a period of three years commencing two years
from the date of such Offering.

Business Combination with Related Party

In October 1996 the Company acquired ViComp Technology, Inc. ("ViComp"), a
development stage company that designs integrated circuits for use in video CD
players. Pursuant to such acquisition, the Company issued 491,253 shares of
its Common Stock for all the outstanding ViComp capital stock and granted
options to certain ViComp shareholders exercisable for 189,557 shares of the
Company's Common Stock. The Company's Chairman and Chief Executive Officer
owned approximately 57% of the outstanding capital stock of ViComp at the time
of its acquisition by the Company. Of the 281,520 shares of the Company to be
received by this related

party, 140,760 shares are subject to an escrow having substantially identical
terms to the escrow agreement described in Note 11. These shares have not been
included in the purchase price as they are subject to forfeiture in the event
specified levels of pretax income or market price are not achieved. An
additional 140,760 shares are held in a separate performance escrow and may be
released to this related party in the event that certain performance
milestones are reached by July 1997. Since the shares are subject to
forfeiture, they also have not been included in the purchase price. The
transaction will be accounted for as a purchase and, accordingly, the initial
purchase price and acquisition costs will be allocated to the identifiable
assets and liabilities, including

F-17
<PAGE>

DIGITAL VIDEO SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS

ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

NOTE 11 -- SUBSEQUENT EVENTS--(CONTINUED)

in-process research and development which will be immediately expensed.
Additional consideration paid upon the achievement of the performance
milestones (equal to the fair market value of the 140,760 shares released from
the performance escrow), if any, will be recorded as additional purchase price
at such time.

The following unaudited pro forma information assumes the acquisition of
ViComp was consummated on January 1, 1996 after giving effect to the
amortization and depreciation of acquired assets. The unaudited pro forma
information combines the Company's operations data for the nine-month period
ending September 30, 1996 with ViComp's August 21, 1995 (inception) to August
31, 1996 operations data. The pro forma information does not reflect addition
consideration, if any, which may be paid upon the achievement of certain
performance milestones.

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED
SEPTEMBER 30,
1996
-----------------
<S> <C>
Total revenue........................................... $ 4,895,514
Net loss ............................................... $(7,016,300)
Net loss per common share............................... $ (.89)
</TABLE>

1996 Stock Option Plan

In September 1996, the Company's Board of Directors approved the Company's
1996 Stock Option Plan (the "1996 Option Plan"), which is subject to
subsequent shareholder approval. The 1996 Option Plan provides for the grant
of options to purchase up to an aggregate of 1,000,000 shares of the Company's
Common Stock. The 1996 Option Plan has terms and conditions substantially
identical to those of the 1993 Option Plan.

Employee Matter

In October 1996, the Company removed Janis Gemignani as the Company's
Vice President, Secretary and Chief Financial Officer. The Company currently
is attempting to negotiate the terms under which Ms. Gemignani will continue
to provide services to the Company or will receive severance payments from the
Company. There can be no assurance, however, that the Company will be able to
negotiate such an arrangement with Ms. Gemignani, who has advised the Company
that she has claims against the Company in connection with her employment by
the Company and that she intends to formally assert those claims. Although the
Company has not been served with any litigation by Ms. Gemignani, based on its
preliminary review of the relevant facts, the Company does not believe that
any of the claims she may have against the Company have merit. In the event a
lawsuit is filed against the Company, however, the costs to defend the
lawsuit, and any damages the Company might be required to pay should Ms.
Gemignani prevail, could have a material adverse effect on the Company.

F-18
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
ViComp Technology, Inc.

We have audited the accompanying balance sheet of ViComp Technology, Inc. (a
development stage company) as of August 31, 1996, and the related statements
of operations, shareholders' equity, and cash flows for the period from
inception (August 21, 1995) to August 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ViComp Technology, Inc. (a
development stage company) at August 31, 1996, and the results of its
operations and its cash flows for the period from inception (August 21, 1995)
to August 31, 1996, in conformity with generally accepted accounting
principles.

Walnut Creek, California Ernst & Young LLP
October 18, 1996

F-19
<PAGE>

VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET

<TABLE>
<CAPTION>
AUGUST 31,
1996
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 159,943
Property and equipment, net........................................ 217,988
----------
$ 377,931
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 93,958
Accrued payroll and related........................................ 27,686
----------
Total current liabilities........................................ 121,644
Shareholders' equity:
Convertible preferred stock, issuable in series: $0.001 par value,
4,000,000 shares authorized, 3,000,000 shares issued and
outstanding; aggregate liquidation preference of $1,000,000....... 3,000
Common stock, $0.001 par value, 16,000,000 shares authorized,
3,000,000 shares issued and outstanding........................... 3,000
Additional paid-in capital......................................... 1,072,000
Deficit accumulated during the development stage................... (773,713)
Deferred compensation.............................................. (48,000)
----------
Total shareholders' equity....................................... 256,287
----------
$ 377,931
==========
</TABLE>

See accompanying notes.

F-20
<PAGE>

VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF OPERATIONS

PERIOD FROM INCEPTION (AUGUST 21, 1995) TO AUGUST 31, 1996

<TABLE>
<S> <C>
Operating costs and expenses:
Research and development........................................... $ 772,565
General and administration......................................... 16,205
---------
Total operating costs and expenses............................... 788,770
---------
Loss from operations................................................. (788,770)
Interest income...................................................... 15,057
---------
Net loss......................................................... $(773,713)
=========
</TABLE>

See accompanying notes.

F-21
<PAGE>

VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF SHAREHOLDERS' EQUITY

PERIOD FROM INCEPTION (AUGUST 21, 1995) TO AUGUST 31, 1996

<TABLE>
<CAPTION>
SERIES A DEFICIT
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DURING THE TOTAL
---------------- ---------------- PAID-IN FROM DEVELOPMENT DEFERRED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS STAGE COMPENSATION EQUITY
--------- ------ --------- ------ ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock at $0.01 per
share in August 1995
for cash............. -- $ -- 3,000,000 $3,000 $ 27,000 $ -- $ -- $ -- $ 30,000
Issuance of Series A
convertible preferred
stock at $0.33 1/3
per share in
September 1995 for
cash and shareholder
notes receivable..... 3,000,000 3,000 -- -- 997,000 (500,000) -- -- 500,000
Repayment of notes
receivable from
shareholders......... -- -- -- -- -- 500,000 -- -- 500,000
Unearned compensation
related to stock
options.............. -- -- -- -- 48,000 -- -- (48,000) --
Net loss from
inception (August 21,
1995) to August 31,
1996................. -- -- -- -- -- -- (773,713) -- (773,713)
--------- ------ --------- ------ ---------- --------- --------- -------- ---------
Balances at August 31,
1996................. 3,000,000 $3,000 3,000,000 $3,000 $1,072,000 $ -- $(773,713) $(48,000) $ 256,287
========= ====== ========= ====== ========== ========= ========= ======== =========
</TABLE>

See accompanying notes.

F-22
<PAGE>

VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CASH FLOWS

PERIOD FROM INCEPTION (AUGUST 21, 1995) TO AUGUST 31, 1996

<TABLE>
<S> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss.......................................................... $ (773,713)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 63,194
Increase in accounts payable.................................... 93,958
Increase in accrued liabilities................................. 27,686
----------
Net cash used in operating activities............................. (588,875)
----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of property and equipment................................ (281,182)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of preferred stock......................... 500,000
Proceeds from issuances of common stock........................... 30,000
Repayments of notes receivable from shareholders.................. 500,000
----------
Net cash provided by financing activities......................... 1,030,000
----------
Net increase in cash and cash equivalents......................... 159,943
Cash and cash equivalents at beginning of period.................. --
----------
Cash and cash equivalents at end of period........................ $ 159,943
==========
</TABLE>

See accompanying notes.

F-23
<PAGE>

VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 1996

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

ViComp Technology, Inc. ("ViComp") was incorporated on August 21, 1995 and
develops integrated circuits for use in video CD players. The operations of
the Company from inception to August 31, 1995 were not significant and are not
separately disclosed.

On October 17, 1996, ViComp signed an Agreement and Plan of Reorganization
to effectively merge ViComp with Digital Video Systems, Inc. ("DVS"), a
related party. The holder of all of ViComp's outstanding Series A preferred
stock is a significant shareholder, Chairman and Chief Executive Officer of
DVS. All outstanding equity interests in ViComp will be exchanged for
approximately 491,253 common shares of DVS.

Cash and Cash Equivalents

ViComp maintains its cash and cash equivalents in depository and money
market accounts with one financial institution.

Income Taxes

ViComp follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109, the
liability method is used to account for income taxes. Under this method,
deferred tax assets and liabilities are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.

Use of Estimates

Stock Based Compensation

ViComp accounts for its stock option plan in accordance with the provisions
of the Accounting Principles Board's Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). In 1995, the Financial Accounting Standards
Board released the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 provides an
alternative method of accounting for stock-based compensation to APB 25 and is
effective for fiscal years beginning after December 15, 1995. ViComp expects
to continue to account for its stock-based compensation in accordance with the
provisions of APB 25. Accordingly, SFAS 123 is not expected to have any
material impact on ViComp's financial position or results of operations.

F-24
<PAGE>

VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2 -- PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the lesser of the estimated useful lives of the
respective assets, generally three years. Property and equipment consists of
the following at August 31, 1996:

<TABLE>
<S> <C>
Equipment........................................................ $ 25,738
Software......................................................... 255,444
--------
281,182
Less accumulated depreciation and amortization................... (63,194)
--------
$217,988
========
</TABLE>

In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" ("FAS 121"). FAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. FAS 121 is effective for fiscal years beginning
after December 15, 1995. Adoption of FAS 121 is not expected to have a
material impact on ViComp's financial position or results of operations.

NOTE 3 -- COMMITMENTS

Throughout fiscal 1996, ViComp occupied a facility under an operating lease.
Prior to August 31, 1996, ViComp terminated this lease. Rent expense totaled
$10,532 for the period from inception through August 31, 1996.

NOTE 4 -- SHAREHOLDERS' EQUITY

Convertible Preferred Stock and Shareholder Note Receivable

In September 1995, ViComp issued 3,000,000 shares of Series A preferred
stock at $0.33 1/3 per share in exchange for cash of $500,000 and a $500,000
note receivable from shareholder. The shareholder note receivable accrued
interest at 7% per year and was repaid in January 1996.

Authorized and outstanding convertible preferred stock and its principal
terms are as follows at August 31, 1996.

<TABLE>
<CAPTION>
LIQUIDATION
DIVIDEND PREFERENCE
DESIGNATED OUTSTANDING PER SHARE PER SHARE
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Series A...................... 3,000,000 3,000,000 $0.023 $0.33 1/3
Undesignated.................. 1,000,000 -- -- --
---------
4,000,000
=========
</TABLE>

Dividends on the convertible preferred stock are payable when and if
declared by the board of directors. The dividend requirements of the preferred
stock must be satisfied prior to payment of any dividends or distributions
with respect to ViComp's common stock. No dividends have been declared.

ViComp's board of directors has three members: holders of Series A preferred
stock and holders of common stock, each voting separately as a class, are each
entitled to elect one director. The third director shall

F-25
<PAGE>

VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4 -- SHAREHOLDERS' EQUITY--(CONTINUED)

be elected by the affirmative vote of the holders of both common and Series A
preferred shareholders. Preferred shareholders are entitled to voting rights
equivalent to the number of common shares into which their shares are
convertible. Subject to certain antidilution provisions, each share of Series
A preferred stock is convertible at any time into one common share. All
preferred shares convert automatically to common stock (3,000,000 shares if
converted at August 31, 1996) in the event of a public offering of the
Company's common stock with aggregate proceeds to ViComp of at least
$10,000,000 and a price per share of not less than $2.00 (as adjusted for any
stock dividends, stock splits or recapitalization).

Stock Option Plan

Under ViComp's 1995 stock option plan (the "Plan"), incentive and non-
qualified stock options may be granted to qualified employees, directors and
consultants to purchase a maximum of 2,400,000 common shares. The exercise
price of the option is determined by the administrator of the Plan on the date
of grant and must be at least equal to 85% in the case of a non-qualified
stock option or 100% in the case of an incentive stock option of the fair
market value of the shares on the grant date. Vesting periods are determined
by the board of directors. Options expire 10 years from the date of grant or 3
months from the date of the optionee's termination from ViComp. As of August
31, 1996, options for the purchase of 2,400,000 shares were granted and
outstanding under this plan and 550,000 of the options were exercisable.

NOTE 5 -- INCOME TAXES

At August 31, 1996, ViComp had net operating loss carryforwards for federal
and state tax purposes of approximately $780,000. The federal net operating
loss carryforwards expire in 2010 and 2011 and the state net operating loss
carryforward expires in 2023. Due to the "change of ownership" provisions and
other restrictions of the Internal Revenue Code, utilization of the net
operating loss carryforward may be limited.

As of August 31, 1996, ViComp had deferred tax assets of approximately
$330,000 relating primarily to the future tax benefits of net operating loss
carryforwards. Due to ViComp's lack of earnings history, the deferred tax
assets have been fully offset by a valuation allowance.

F-26
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

---------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Price Range of Securities................................................. 18
Dilution.................................................................. 19
Capitalization............................................................ 21
Selected Financial Data................................................... 22
Pro Forma Financial Information........................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 35
Management................................................................ 47
Certain Transactions...................................................... 53
Principal Shareholders.................................................... 55
Concurrent Offerings...................................................... 58
Description of Securities................................................. 59
Shares Eligible for Future Sale........................................... 62
Underwriting.............................................................. 63
Legal Matters............................................................. 65
Experts................................................................... 65
Additional Information.................................................... 66
Index to Financial Statements............................................. F-1
</TABLE>

---------------

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

DIGITAL VIDEO SYSTEMS, INC.

23,000
UNITS

EACH UNIT CONSISTING OF A MINIMUM OF 70 AND A MAXIMUM OF 100 IPO UNITS, EACH
CONSISTING OF ONE SHARE OF COMMON STOCK, ONE REDEEMABLE CLASS A WARRANT AND
ONE REDEEMABLE CLASS B WARRANT

---------------

PROSPECTUS

---------------

D. H. BLAIR
INVESTMENT BANKING CORP.

November , 1996

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

ALTERNATE OFFERING #2 PAGES

PROSPECTUS

DIGITAL VIDEO SYSTEMS, INC.

5,064,130 SHARES OF COMMON STOCK

AND 5,064,130 CLASS B WARRANTS
UNDERLYING REDEEMABLE CLASS A WARRANTS

9,894,130 SHARES OF COMMON STOCK
UNDERLYING REDEEMABLE CLASS B WARRANTS

This Prospectus relates to (i) 5,064,130 shares of common stock, $0.0001 par
value (the "Common Stock") and 5,064,130 redeemable Class B Warrants ("Class B
Warrants"), of Digital Video Systems, Inc., a Delaware corporation (the
"Company"), issuable upon exercise of the Company's outstanding redeemable
Class A Warrants (the "Class A Warrants"); (ii) 5,064,130 shares of Common
Stock issuable upon exercise of the Company's redeemable Class B Warrants (the
"Class B Warrants" and, together with the Class A Warrants, the "Warrants"),
which are issuable upon exercise of the Company's outstanding Class A
Warrants; and (iii) 4,830,000 shares of Common Stock issuable upon exercise of
the Company's outstanding Class B Warrants. A portion of the foregoing Class A
Warrants, together with the Company's Class B Warrants and Common Stock, were
issued as components of units (the "IPO Units") issued in connection with the
Company's initial public offering in May 1996 ("IPO"). Each IPO Unit consists
of one share of Common Stock, one Class A Warrant and one Class B Warrant. In
addition to the 4,830,000 Class A Warrants issued as components of the IPO
Units, this Prospectus relates to 234,130 Class A Warrants issued to certain
bridge financing investors in connection with the IPO that have been resold by
such investors.

Each Class A Warrant entitles the holder to purchase one share of Common
Stock and one Class B Warrant at an exercise price of $6.50, subject to
adjustment, at any time until May 9, 2001. Each Class B Warrant entitles the
holder to purchase one share of Common Stock at an exercise price of $8.75,
subject to adjustment, at any time until May 9, 2001. The Class A Warrants are
currently subject to redemption, and the Class B Warrants are subject to
redemption commencing May 9, 1997, by the Company at a redemption price of
$.05 per Warrant on 30 days' written notice, provided the closing bid price of
the Common Stock averages in excess of $9.10 per share with respect to the
Class A Warrants or $12.25 per share with respect to the Class B Warrants, for
any 30 consecutive trading days ending within 15 days of the notice of
redemption. See "Description of Securities."

The components of the IPO Units were transferrable separately immediately
upon issuance. The Common Stock, Class A Warrants and Class B Warrants are
listed on the Nasdaq National Market under the symbols "DVID," "DVIDW" and
"DVIDZ," respectively, and the IPO Units are listed on the Nasdaq SmallCap
Market under the symbol "DVIDU." The closing prices of these securities on
November 15, 1996 as reported by Nasdaq were $8, $4 3/4, $2 1/4 and $14 7/16,
respectively. See "Price Range of Securities." The exercise price and other
terms of the Class A Warrants and Class B Warrants were determined by
negotiation between the Company and D.H. Blair Investment Banking Corp. (the
"Underwriter") at the time of the IPO and do not necessarily bear a
relationship to the Company's assets, book value, results of operations, net
worth of any other recognized criteria of value.

On November 4, 1996, the Company filed a registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission relating to
a public offering (the "Second Offering") by the Company through the
Underwriter of 23,000 Units (including up to an additional 3,450 Units which
the Underwriter has an option to purchase for the purpose of covering over-
allotments), each Unit consisting of a minimum of 70 and a maximum of 100 IPO
Units.

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.

-------------------

The date of this Prospectus is November , 1996.

ALT 2-1
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
upon exercise of the Warrants will be realized only if and to the extent any
of the Warrants are exercised. The holders of the Warrants are not obligated
to exercise the Warrants, and there can be no assurance that the holders will
choose to exercise the Warrants in whole or in part. The Warrants are
redeemable under certain circumstances at the option of the Company. See
"Description of Securities." The estimated net proceeds to the Company in the
event that the 5,064,130 Class A Warrants are exercised in full would be
$31,271,002, after deducting the solicitation fee payable to D.H. Blair
Investment Banking Corp., the underwriter of the Company's IPO. In the event
that all of the 4,830,000 outstanding Class B Warrants and 5,064,130 Class B
Warrants issuable upon exercise of the outstanding Class A Warrants are
exercised, the Company would receive additional net proceeds of $79,709,000
after deducting the solicitation fee payable to D.H. Blair Investment Banking
Corp.

The Company intends to apply any net proceeds it receives from the exercise
of the Warrants to augment its working capital and for general corporate
purposes. Prior to their use, the net proceeds from the exercise of the
Warrants will be invested in short-term, high-grade interest-bearing
investments of accounts.

ALT 2-2
<PAGE>

PLAN OF DISTRIBUTION

The securities offered hereby by the Company are being offered directly by
the Company pursuant to the terms of the Warrants. Holders of outstanding
Warrants can exercise their Warrants for the applicable underlying securities
upon payment of the exercise prices therefor to the Company. The Company has
agreed not to solicit Warrant exercises other than through the Underwriter,
unless the Underwriter declines to make such solicitation. Upon any exercise
of the Warrants after May 9, 1997, the Company will pay the Underwriter a fee
of 5% of the aggregate exercise price with respect to the Class A Warrants and
8% of the aggregate exercise price with respect to the Class B Warrants if (i)
the market price of the Company's Common Stock on the date the Warrants are
exercised is greater than the then exercise price of the Warrants; (ii) the
exercise of the Warrants was solicited by a member of the NASD; (iii) the
Warrants are not held in a discretionary account; (iv) disclosure of
compensation arrangements was made both at the time of the offering and at the
time of exercise of the Warrants; and (v) the solicitation of exercise of the
Warrant was not in violation of Rule 10b-6 promulgated under the Securities
Exchange Act of 1934, as amended.

The Company is aware that Blair & Co. ("Blair & Co."), which is
substantially owned by family members of J. Morton Davis, the sole stockholder
of the Underwriter, currently makes a market in the Company's securities. Rule
10b-6 may prohibit Blair & Co. from engaging in any market making activities
with regard to the Company's securities for the period from nine business days
(or such other applicable period as Rule 10b-6 may provide) prior to any
solicitation by the Underwriter of the exercise of Warrants until the later of
the termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of Warrants following such solicitation. As a result, Blair & Co. may
be unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable.

The Underwriter has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the IPO.
Such designee may be a director, officer, partner, employee or affiliate of
the Underwriter. The Underwriter has not to date selected any such designee.

During the five-year period from the closing of the Second Offering, in the
event the Underwriter originates a financing or a merger, acquisition or
transaction to which the Company is a party, the Underwriter will be entitled
to receive a finder's fee in consideration for origination of such
transaction. The fee is based on a percentage of the consideration paid in the
transaction, ranging from 6% of the first $5,000,000 to 2% of any
consideration in excess of $13,000,000.

The Underwriter acted as placement agent in connection with the Bridge
Financing in January and March 1996 and received a placement agent fee of
$700,000 and a non-accountable expense allowance of $210,000. The Underwriter
also acted as underwriter of the Company's IPO and received a 6% commission of
$1,444,000 and a non-accountable expense allowance of $724,500 in connection
with such offering. The Underwriter is acting as underwriter in connection
with the sale by the Company of 23,000 Units (including an additional 3,450
Units which the Underwriter has an option to purchase for the purpose of
covering over-allotments), each Unit consisting of a minimum of 70 and a
maximum of 100 units of the Company's securities (the "IPO Units"). Each IPO
Unit consists of one share of Common Stock, one Class A Warrant and one Class
B Warrant. The IPO Units are identical to the units sold in the IPO, which was
completed in May 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

In connection with the IPO, the Company sold to D.H. Blair Investment
Banking Corp. and its designees, for nominal consideration, the IPO Unit
Purchase Options to purchase up to 420,000 units substantially identical to
the units sold in the IPO, except that the warrants included therein are not
subject to redemption by the Company unless, on the redemption date, the IPO
Unit Purchase Options have been exercised and the underlying warrants are
outstanding. The IPO Unit Purchase Options are exercisable during the three-
year period commencing May 9, 1998 at an exercise price of $6.50 per Unit,
subject to adjustment in certain events, and the IPO Unit Purchase Options and
the underlying securities are not transferable until May 9, 1998, except to
officers

ALT 2-3
<PAGE>

of the Underwriter or to members of the selling group. The IPO Unit Purchase
Options include a provision permitting the Underwriter or its designees to
elect a cashless exercise. The Company has agreed to register during the
three-year period commencing May 9, 1997, on two separate occasions, the
securities issuable upon exercise thereof under the Securities Act, the
initial such registration to be at the Company's expense and the second at the
expense of the holders. The Company has also granted certain "piggy-back"
registration rights to holders of the IPO Unit Purchase Options.

In connection with the Second Offering, the Company has agreed to sell to
the Underwriter and its designees, for nominal consideration, a Unit Purchase
Option to purchase up to 2,300 Units substantially identical to the Units
being offered pursuant to the Second Offering, except that the Warrants
included therein are subject to redemption by the Company for $.05 at any time
after the Unit Purchase Option has been exercised and the underlying warrants
are outstanding. The Unit Purchase Option will be exercisable during the
three-year period commencing two years from the date of this Prospectus at an
exercise price of $1,300 per Unit, subject to adjustment in certain events and
the Unit Purchase Option and the underlying securities are not transferable
for a period of two years from the date of this Prospectus except to officers
of the Underwriter or to members of the Underwriter's selling group. The
Company has agreed to register the securities issuable upon exercise thereof
under the Securities Act on two separate occasions (the first at the Company's
expense and the second at the expense of the holders of the Unit Purchase
Option) during the four-year period commencing one year from the date of this
Prospectus. The Unit Purchase Option includes a provision permitting the
holder to elect a cashless exercise of the Option. The Company has also
granted certain piggyback rights to holders of the Unit Purchase Option.

The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's and Blair &
Co.'s compliance with the Federal securities laws and compliance with the
Federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and
that it is cooperating with the investigation. The Underwriter cannot predict
whether this investigation will ever result in any type of formal enforcement
action against the Underwriter or Blair & Co. or, if so, whether any such
action might have an adverse effect on Blair or the securities offered hereby.
The Company has been advised that Blair & Co. will make a market in the
securities following this offering. An unfavorable resolution of the
Commission's investigation could have the effect of limiting such firm's
ability to make a market in the Company's securities, which could affect the
liquidity or price of such securities.

ALT 2-4
<PAGE>

CONCURRENT OFFERINGS

The Underwriter is acting as underwriter in connection with the sale by the
Company of 23,000 Units (including up to an additional 3,450 Units which the
Underwriter has an option to purchase for the purpose of covering over-
allotments), each Unit consisting of a minimum of 70 and a maximum of 100 IPO
Units. Each IPO Unit consists of one share of Common Stock, one Class A
Warrant and one Class B Warrant.

The Company has registered for resale by certain securityholders (the
"Selling Securityholders") 3,265,870 Class A Warrants (the "Selling
Securityholders' Warrants") and the Common Stock and Class B Warrants
underlying the Selling Securityholders' Warrants and the Common Stock issuable
upon exercise of such Class B Warrants. Sales of the Selling Securityholder
Warrants, the Units or the underlying securities, or the potential of such
sales, may have an adverse effect on the market price of the securities
offered hereby.

ALT 2-5
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.

---------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Prospectus Summary..................................................... 3
Risk Factors........................................................... 7
Use of Proceeds........................................................ 17
Dividend Policy........................................................ 18
Price Range of Securities.............................................. 18
Dilution............................................................... 19
Capitalization......................................................... 21
Selected Financial Data................................................ 22
Pro Forma Financial Information........................................ 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 29
Business............................................................... 35
Management............................................................. 47
Certain Transactions................................................... 53
Principal Shareholders................................................. 55
Concurrent Offerings................................................... 58
Description of Securities.............................................. 59
Shares Eligible for Future Sale........................................ 62
Underwriting........................................................... 63
Legal Matters.......................................................... 65
Experts................................................................ 65
Additional Information................................................. 66
Index to Financial Statements.......................................... F-1
Use of Proceeds........................................................ ALT 2-2
Plan of Distribution................................................... ALT 2-3
Concurrent Offerings................................................... ALT 2-5
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

DIGITAL VIDEO SYSTEMS, INC.

5,064,130 SHARES OF COMMON STOCK

AND 5,064,130 REDEEMABLE CLASS B WARRANTS
UNDERLYING REDEEMABLE CLASS A WARRANTS

9,894,130 SHARES OF COMMON STOCK
UNDERLYING REDEEMABLE CLASS B WARRANTS

NOVEMBER , 1996

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

ALTERNATE OFFERING #3 PAGES

PROSPECTUS

DIGITAL VIDEO SYSTEMS, INC.

3,265,870 REDEEMABLE CLASS A WARRANTS

3,265,870 SHARES OF COMMON STOCK AND

3,265,870 REDEEMABLE CLASS B WARRANTS ISSUABLE UPON
EXERCISE OF THE REDEEMABLE CLASS A WARRANTS AND

3,265,870 SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THE REDEEMABLE CLASS B WARRANTS

This Prospectus relates to 3,265,870 redeemable Class A Warrants (the
"Selling Securityholder Warrants" or the "Class A Warrants") of Digital Video
Systems, Inc., a Delaware corporation (the "Company"), held by approximately
185 holders (the "Selling Securityholders"), the 3,265,870 shares of Common
Stock, $0.0001 par value ("Common Stock"), and 3,265,870 redeemable Class B
Warrants of the Company ("Class B Warrants") issuable upon the exercise of the
Selling Securityholder Warrants, and 3,265,870 shares of the Company's Common
Stock issuable upon exercise of such Class B Warrants. The Selling
Securityholder Warrants and the Class B Warrants are referred to herein
collectively as the "Warrants" and the securities issuable upon exercise of
the Warrants, together with the Warrants, are sometimes collectively referred
to herein as the "Selling Securityholder Securities." The Selling
Securityholder Warrants were issued to the Selling Securityholders in exchange
for warrants they received in a private placement by the Company in January
and March 1996 (the "Bridge Financing"). See "Selling Securityholders" and
"Plan of Distribution." Each Selling Securityholder Warrant entitles the
holder to purchase one share of Common Stock and one Class B Warrant, at an
exercise price of $6.50, subject to adjustment, at any time until May 9, 2001.
Each Class B Warrant entitles the holder to purchase one share of Common
Stock, at an exercise price of $8.75, subject to adjustment, at any time until
May 9, 2001. The Selling Securityholders have agreed not to exercise the
Selling Securityholder Warrants until May 9, 1997 unless the Company has
delivered a notice of redemption with respect to such warrants. See "Plan of
Distribution." The Class A Warrants are currently subject to redemption, and
the Class B Warrants are subject to redemption commencing May 9, 1997 by the
Company for $.05 per Warrant, upon 30 days' written notice, if the average
closing bid price of the Common Stock exceeds $9.10 per share with respect to
the Class A Warrants or $12.25 per share with respect to the Class B Warrants
(subject to adjustment in each case) for 30 consecutive trading days ending
within 15 days of the date of the notice of redemption. See "Description of
Securities."

The securities offered by the Selling Securityholders by this Prospectus may
be sold from time to time by the Selling Securityholders; provided, however,
that until February 8, 1997, only certain specified percentages of the Class A
Warrants may be sold by the Selling Securityholders. The distribution of the
Class A Warrants, Common Stock and Class B Warrants offered hereby by the
Selling Securityholders may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary brokers'
transactions, privately negotiated transactions or through sales to one or
more dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders.

The Selling Securityholders, and intermediaries through whom the Selling
Securityholder Securities are sold, may be deemed underwriters within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered, and any profits realized or commissions
received may be deemed underwriting compensation. The Company has agreed to
indemnify the Selling Securityholders against certain liabilities, including
liabilities under the Securities Act.

ALT 3-1
<PAGE>

The Company will not receive any of the proceeds from the sale of securities
by the Selling Securityholders. In the event all of the Class A Warrants and
Class B Warrants are exercised, the Company will receive gross proceeds from
such exercises of $21,228,155 and $28,576,362, respectively. See "Selling
Securityholders" and "Plan of Distribution."

The Company's Class A Warrants and Class B Warrants described below were
issued in connection with the Company's initial public offering (the "IPO")
which was underwritten by D.H. Blair Investment Banking Corp. (the
"Underwriter"). On May 14, 1996, the Company completed the IPO which consisted
of 4,200,000 Units (the "Units"), each Unit consisting of one share of Common
Stock, one Class A Warrant and one Class B Warrant. On May 22, 1996, the
Company completed the sale of an additional 630,000 Units upon the Underwriter
exercising its over-allotment option to purchase these Units. The components
of the Units were transferrable separately upon issuance. The Common Stock,
Class A Warrants and Class B Warrants are listed on the Nasdaq National Market
under the symbols "DVID," "DVIDW" and "DVIDZ," respectively, and the Units are
listed on the Nasdaq SmallCap Market under the symbol "DVIDU."

As part of the registration statement of which this Prospectus forms a part,
the Company has registered (i) 5,064,130 shares of Common Stock and 5,064,130
Class B Warrants of the Company issuable upon exercise of the Company's Class
A Warrants; (ii) 5,064,130 shares of Common Stock issuable upon exercise of
the Company's Class B Warrants that are issuable upon exercise of the
Company's Class A Warrants; and (iii) 4,830,000 shares of Common Stock
issuable upon exercise of the Company's outstanding Class B Warrants.

---------------------

The date of this Prospectus is November , 1996.

ALT 3-2
<PAGE>

SELLING SECURITYHOLDERS

An aggregate of up to 3,265,870 Class A Warrants, 3,265,870 shares of Common
Stock and 3,265,870 Class B Warrants issuable upon exercise of such Class A
Warrants and 3,265,870 shares of Common Stock issuable upon exercise of such
Class B Warrants may be offered for resale by investors who received their
Class A Warrants in exchange for warrants received in the Bridge Financing.

The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering the Selling
Securityholder Securities for resale to the public. (Footnotes 2 through 20 to
this table list the beneficial owners of the securities.) The Company will not
receive any of the proceeds from the sale of such securities. There are no
material relationships between any of the Selling Securityholders and the
Company, nor have any such material relationships existed within the past
three years. None of the Selling Securityholders own any other securities of
the Company.

<TABLE>
<CAPTION>
NUMBER OF CLASS A
WARRANTS BENEFICIALLY
OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD(1)
---------------------- ---------------------
<S> <C>
Leonard J. Adams..................................... 25,000
Robert P. Adler...................................... 12,500
Alta Resource Group International(2)................. 12,500
Rosemarie J. Assini.................................. 12,500
Mark Berger.......................................... 6,250
The Frank & Brynde Berkowitz Family Foundation....... 37,500
Solomon Blisko & Carole Blisko, JTROS................ 4,688
Michael Bollag....................................... 25,000
Jacob Borenstein & Channah Borenstein, JTROS......... 6,250
Sid Borenstein....................................... 3,125
Mark H. Brafman...................................... 12,500
David James Brown.................................... 50,000
Yakov Burstein....................................... 6,250
Brian Chadroff....................................... 4,688
Norman Chalif & Rosalie Chalif, JTROS................ 12,500
Chesed Congregations of America(3)................... 50,000
Joel Confino & Lisa Alter, JTROS..................... 6,250
John M. Dalena....................................... 6,250
Donald B. Davies..................................... 12,500
Benjamin S. De Young................................. 6,250
Raymond David Drapkin................................ 25,000
Jules H. Dreyfuss.................................... 50,000
Nathan Eisen & Rose Eisen, JTROS..................... 18,750
Leonard R. Farber.................................... 12,500
Robert A. Foisie..................................... 50,000
Benjamin Frankel & Linda Frankel, JTROS.............. 6,250
William Frankel...................................... 6,250
Sal Fried & Shirley Fried, JTROS..................... 4,688
Stephen G. Friedler.................................. 25,000
James R. Gavin....................................... 6,250
Paul T. Gentile & Yvette Aguiar Gentile, JTROS....... 25,000
Roger Gimbel......................................... 12,500
Harvey Glicker Profit Sharing Trust.................. 18,750
Mitchell Gordon...................................... 6,250
Barbara Grae......................................... 25,000
David Gross.......................................... 12,500
Stuart Gruber........................................ 25,000
</TABLE>

ALT 3-3
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF CLASS A
WARRANTS BENEFICIALLY
OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD(1)
---------------------- ---------------------
<S> <C>
William E. Harris................................... 6,250
Lawrence Helfant.................................... 12,500
Tatiana Hirsu....................................... 6,250
Andrew Holder....................................... 6,250
The Samuel J. Holtzman Trust........................ 100,000
Sheela L. Idnani.................................... 6,250
Ivan H. Jacobs, M.D................................. 6,250
Joyce Johnson & James P. Johnson, JTROS............. 12,500
Jack Judge.......................................... 12,500
Neil Karnofsky & Patti Karnofsky, JTROS............. 3,126
Bruce Kashkin & Marjorie Kashkin, JTROS............. 6,250
Melvin L. Katten.................................... 12,500
Patrick J. Keogh.................................... 6,250
Jay Kestenbaum...................................... 25,000
R.E. Kirby.......................................... 50,000
Norman Kobert & Natalie Kobert, JTROS............... 6,250
Ray Kralovic........................................ 12,500
Thomas Krigas Rev. Trust 8/12/91.................... 9,400
Joseph S. Kulpa..................................... 6,250
Solomon Kurz........................................ 3,125
Charles M. Laritz................................... 6,250
Regina Lehrer....................................... 9,375
Harriet Leibowitz................................... 12,500
Lawrence I. Lerner.................................. 9,376
George Lionikis Sr.................................. 12,500
Joseph S. Littenberg................................ 9,375
Robert Lombardi & Margaret Lombardi, JTROS.......... 6,250
Ludlow Management(4)................................ 12,500
Allan B. Margolis................................... 6,250
James L. Miller..................................... 6,250
Albert Milstein..................................... 12,500
Harvey Mininberg & Susan Mininberg, JTROS........... 25,000
Momentum Enterprises Inc.(5)........................ 12,500
Edmond Nagel........................................ 12,500
Richard A. Nelson & Elaine M. Nelson, JTROS......... 62,500
Richard A. Nelson, Elaine M. Nelson, & Ross R.
Nelson, JTROS...................................... 62,500
William R. O'Neill.................................. 9,375
Shefali Patel....................................... 9,375
Ruth Peyser......................................... 12,500
Frank R. Puentes.................................... 25,000
Marc Roberts........................................ 21,876
J. Philip Rosen..................................... 6,250
The Rubin Family Foundation, Inc.(6)................ 25,000
Wayne Saker......................................... 25,000
The Chana Sasha Foundation(7)....................... 25,000
Sathe LLC........................................... 12,500
Roy Schaeffer & Marlena Schaeffer, JTROS............ 25,000
Schon Family Foundation(8).......................... 12,500
Abraham Schreiber................................... 6,250
</TABLE>

ALT 3-4
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF CLASS A
WARRANTS BENEFICIALLY
OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD(1)
---------------------- ---------------------
<S> <C>
Michael M. Seago.................................... 9,375
Perry Seamonds...................................... 12,500
Perry Seamonds & Gail G. Seamonds, JTROS............ 12,500
E. Donald Shapiro................................... 12,500
Robert J. Shilliday, Jr............................. 12,500
Gail Silberman...................................... 3,126
Paul Sirotkin....................................... 18,750
SJG Management, Inc. Profit Sharing Fund(9)......... 12,500
Steven Sklow........................................ 6,250
Tali Skoczylas & Skoczylas, Dvora JTROS............. 6,250
Charles A. Snyder................................... 6,250
Abraham Sterman, The Sterman Trust.................. 6,250
Howard Sternheim & Sharon Sternheim, JTROS.......... 4,688
Bernard Strassner & Bernice Strassner, JTROS........ 12,500
Gary J. Strauss..................................... 12,500
H. Wallace Swanstrom................................ 12,500
TCM Partners, L.P.(10).............................. 25,000
Jenner & Block Profit Sharing Plan Trust No.
053(11)............................................ 12,500
Leonard Toboroff.................................... 12,500
Donald J. Vernine................................... 12,500
Carl F.R. Weiman & Beverly J. Weiman, JTROS......... 12,500
Weingarten Family Foundation(12).................... 12,500
Benjamin S. Williams................................ 12,500
Donald Winton....................................... 9,500
Aaron Wolfson....................................... 25,000
Wolfson Equities(13)................................ 225,000
Herman L. Zeller.................................... 12,500
Agent 17 Inc.(14)................................... 12,500
Byron M. Allen...................................... 6,250
Delbert Allen and Pat Allen......................... 25,000
Amore Peppetuo, Inc.(15)............................ 62,500
Alan Bresler and Hanna Bresler...................... 3,125
Michael Cantor...................................... 14,063
Kenneth Cohen and Sherry Cohen...................... 12,500
Robert H. Cohen and Nannette C. Koryn............... 6,250
William F. Cushman, M.D............................. 6,250
Errett Deck and Evelyn Deck......................... 6,250
Robert Delserro..................................... 12,500
Isaac R. Dweck...................................... 25,000
Denis Fortin........................................ 12,500
Carlos Freyre and Holly Freyre...................... 6,250
Marc L. Friedman and Lisa L. Friedman............... 12,500
Morris Friedman..................................... 10,750
Paul Friedman....................................... 3,125
Jeffrey Goffman..................................... 12,500
Bernard J. Golan Revocable Living Trust............. 12,500
Dr. Martin Goldman.................................. 18,750
Jerome L. Grushkin, P.C. Defined Benefit Plan....... 12,500
Moise E. Hendeles................................... 25,000
</TABLE>

ALT 3-5
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF CLASS A
WARRANTS BENEFICIALLY
OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD(1)
---------------------- ---------------------
<S> <C>
Stanley Hoffman....................................... 6,250
Herman Howard......................................... 50,000
Steven R. Hurlburt.................................... 43,750
Naava Katlowitz....................................... 6,250
Christel Katz and Jack Katz JTTEN..................... 18,000
Deborah Katz.......................................... 250
Louis Katz and Irene Katz............................. 12,500
Sabina Katz........................................... 500
Leonard Keller and Eileen Keller...................... 100,000
Robert Klein, M.D. and Miriam Gluck, M.D.............. 6,250
Daniel Klugman and Miriam Klugman..................... 12,500
Naeem M. Kohli and Tahira N. Kohli.................... 9,375
Frank Lagano.......................................... 18,750
Salvatore Lauria...................................... 14,063
LCL Ltd.(16).......................................... 25,000
Reuben Mark........................................... 25,000
Jamie Massimi......................................... 18,750
MDBC Capital Corp.(17)................................ 18,750
George Y. Motonaga and Irene M. Motonaga.............. 12,500
Pervez Mussarat....................................... 12,500
Stephen W. Nagy and Louise B. Nagy.................... 6,250
The Newman Family Foundation(18)...................... 12,500
Marvin P. Nodvin...................................... 12,500
Quest Enterprises, Inc.(19)........................... 12,500
Pattabhiraman Rajendran and Pindi L. Rajendran........ 25,000
Majer Rosenfeld and Judith Rosenfeld.................. 3,125
Alan J. Rubin......................................... 12,500
Matthew C. Schilowitz................................. 37,500
Gabriel Schnurmann and Silvia Schnurmann.............. 12,500
Sterl F. Shinaberry................................... 12,500
The Silberberg Family Trust(20)....................... 3,125
Eugene Silverman...................................... 3,150
Martin Sirotkin....................................... 19,000
Jeffrey D. Smith and Susanne M. Smith................. 12,500
David W. Solana....................................... 6,250
Leonard Solomon....................................... 12,500
Dr. George Spiegel IRA................................ 43,750
Michael G. Springer and James A. Springer and
Christine M. Springer................................ 6,250
Norman Steinberg...................................... 6,250
Suan Investments(21).................................. 50,000
Michael Tornichia..................................... 25,000
Richard D. Tufo and Luella A. Tufo.................... 12,500
Lee A. Turet.......................................... 4,688
W. Ed Tyler and Vicki S. Tyler........................ 100,000
Dean Vaughan.......................................... 12,500
Eric J. Wiborg Trust.................................. 25,000
Robert I. Wier and Ann Wier........................... 6,250
Joel Wolff............................................ 25,000
Abraham Wolfson....................................... 25,000
Nancy Zachary......................................... 12,500
---------
Total............................................... 3,265,870
=========
</TABLE>

ALT 3-6
<PAGE>

- --------
(1) Does not include shares of Common Stock and Class B Warrants issuable
upon exercise of the Class A Warrants and the shares of Common Stock
issuable upon exercise of the Class B Warrants.
(2) Allen Robert Glick may be deemed the beneficial owner of such securities.
(3) Jacob Safier may be deemed the beneficial owner of such securities.
(4) Ned Hurley may be deemed the beneficial owner of such securities.
(5) Louis A. Falcigno may be deemed the beneficial owner of such securities.
(6) Liebel Rubin, Dorothy Rubin, Eugene Rubin and Dina Rubin may be deemed
the beneficial owners of such securities.
(7) Morris Wolfson may be deemed the beneficial owner of such securities.
(8) Henry A. Schon and Anna E. Schon may be deemed the beneficial owners of
such securities.
(9) Sydney J. Goldstein may be deemed the beneficial owner of such
securities.
(10) Scott J. Turkel may be deemed the beneficial owner of such securities.
(11) Theodore R. Tetzlaff may be deemed the beneficial owner of such
securities.
(12) Otto Weingarten, Rosemarie Weingarten, Heshie Weingarten and Simone
Weingarten may be deemed the beneficial owners of such securities.
(13) Aaron Wolfson may be deemed the beneficial owner of such securities.
(14) Matt Lewis and Saul Elias may be deemed the beneficial owners of such
securities.
(15) Joseph M. Anzalone may be deemed the beneficial owner of such securities.
(16) Albert L. Lord may be deemed the beneficial owner of such securities.
(17) Marc Belzberg may be deemed the beneficial owner of such securities.

(18) Dr. William Newman may be deemed the beneficial owner of such securities.

(19) Tovia Barak may be deemed the beneficial owner of such securities.

(20) Mendel Silberberg may be deemed the beneficial owner of such securities.

(21) Ernest Gottdiener may be deemed the beneficial owner of such securities.

ALT 3-7
<PAGE>

PLAN OF DISTRIBUTION

The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, through the writing of options on the
securities, a combination of such methods of sale or otherwise. Sales may be
made at fixed prices which may be changed, at market prices prevailing at the
time of sale, or at negotiated prices.

The Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the over-
the-counter market in negotiated transactions or otherwise. Such broker-
dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer
may exceed customary commissions).

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Securityholder Warrants may not
simultaneously engage in market making activities with respect to any
securities of the Company for a period of at least two (and possibly nine)
business days prior to the commencement of such distribution. Accordingly, in
the event the Underwriter or D.H. Blair & Co. Inc. ("Blair & Co.") is engaged
in a distribution of the Selling Securityholder Warrants, neither of such
firms will be able to make a market in the Company's securities during the
applicable restrictive period. However, neither the Underwriter nor Blair &
Co. have agreed to nor are either of them obliged to act as broker/dealer in
the sale of the Selling Securityholder Warrants and the Selling
Securityholders may be required, and in the event Blair & Co. is a market
maker, will likely be required, to sell such securities through another
broker/dealer. In addition, each Selling Securityholder desiring to sell
Warrants will be subject to the applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation, Rules
10b-6 and 10b-7, which provisions may limit the timing of the purchases and
sales of shares of the Company's securities by such Selling Securityholders.

The Selling Securityholders and broker-dealers, if any, acting in connection
with such sale might be deemed to be underwriters within the meaning of
Section 2(11) of the Securities Act and any commission received by them, and
any profit on the resale of the securities, might be deemed to be underwriting
discounts and commissions under the Securities Act.

ALT 3-8
<PAGE>

CONCURRENT OFFERINGS

Pursuant to the registration statement of which this Prospectus forms a
part, the Company has registered (i) 5,064,130 shares of Common Stock and
5,064,130 Class B Warrants of the Company, which are issuable upon exercise of
the Company's Class A Warrants; (ii) 5,064,130 shares of Common Stock which
are issuable upon exercise of the Company's Class B Warrants, which are
issuable upon exercise of the Company's outstanding Class A Warrants; and
(iii) 4,830,000 shares of Common Stock issuable upon exercise of the Company's
outstanding Class B Warrants.

On November 1, 1996, the Company filed a registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission relating to
a public offering (the "Second Offering") by the Company through the
Underwriter of 23,000 Units (including up to an additional 3,450 Units which
the Underwriter has an option to purchase for the purpose of covering over-
allotments), each Unit consisting of a minimum of 70 and a maximum of 100 IPO
Units.

ALT 3-9
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

---------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Prospectus Summary..................................................... 3
Risk Factors........................................................... 7
Use of Proceeds........................................................ 17
Dividend Policy........................................................ 18
Price Range of Securities.............................................. 18
Dilution............................................................... 19
Capitalization......................................................... 21
Selected Financial Data................................................ 22
Pro Forma Financial Information........................................ 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 29
Business............................................................... 35
Management............................................................. 47
Certain Transactions................................................... 53
Principal Shareholders................................................. 55
Concurrent Offerings................................................... 58
Description of Securities.............................................. 59
Shares Eligible for Future Sale........................................ 62
Underwriting........................................................... 63
Legal Matters.......................................................... 65
Experts................................................................ 65
Additional Information................................................. 66
Index to Financial Statements.......................................... F-1
Selling Securityholders................................................ ALT 3-3
Plan of Distribution................................................... ALT 3-8
Concurrent Offerings................................................... ALT 3-9
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

DIGITAL VIDEO SYSTEMS, INC.

3,265,870 REDEEMABLE CLASS A WARRANTS

3,265,870 SHARES OF COMMON STOCK AND

3,265,870 REDEEMABLE CLASS B WARRANTS
ISSUABLE UPON EXERCISE OF THE
REDEEMABLE CLASS A WARRANTS

3,265,870 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THE
REDEEMABLE CLASS B WARRANTS

NOVEMBER , 1996

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also
provide that the Registrant will indemnify its directors and officers and may
indemnify its employees and other agents to the fullest extent not prohibited
by Delaware law.

The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty
of care to the Registrant and its shareholders. These provisions do not
eliminate the directors' duty of care and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Registrant, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.

The Registrant intends to enter into agreements with its directors and
executive officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person
may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriter of the registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.

ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION

The following table sets forth an itemized statement of all expenses to be
incurred in connection with the issuance and distribution of the securities
that are the subject of this Registration Statement. All amounts set forth
below assume that each Unit consists of 100 IPO Units and that the
Underwriter's over-allotment option is exercised in full. All amounts set
forth below, other than the Securities and Exchange Commission registration
fee and the NASD and Nasdaq filing fees, are estimates only.

<TABLE>
<S> <C>
SEC registration fee.......................................... $ 29,833
NASD fee...................................................... 10,345
NASDAQ fee.................................................... 60,000
Printing and engraving expenses............................... 80,000
Accounting fees and expenses.................................. 150,000
Legal fees and expenses....................................... 175,000
Blue Sky filing fees and expenses............................. 15,000
Transfer agent's fees and expenses............................ 10,000
Representative's nonaccountable expense allowance (3%)........ 793,500
Directors and officers liability insurance.................... 125,000
Miscellaneous expenses........................................ 71,322
----------
Total......................................................... $1,520,000
==========
</TABLE>

II-1
<PAGE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

The following table sets forth all of the unregistered sales of securities by
the Company during the past three years.

<TABLE>
<CAPTION>
DATE PURCHASER SECURITIES PURCHASED CONSIDERATION
---- ------------------------ ------------------------ -------------
<C> <C> <S> <C>
January 1994 Hyundai Electronics 3,247,473 shares of $4,999,762
Industries Company, Ltd. Series A Preferred Stock
September 1994 Wei Yuan Lin 118,085 shares of Common $ 16,415(1)
Stock(2)
December 1994 Edmund Sun(3) 6,215,756 shares of (4)
Common Stock
April 1995 Hyundai Electronics 649,526 shares of Series $1,000,000
Industries Company, Ltd. B Preferred Stock
August 1995 Sian Che Chang 351,807 shares of Common $ 48,944
Stock(2)
December 1995 Van Nguyen 1,797 shares of Common $ 250
Stock(2)
December 1995 Wendy Sar 1,482 shares of Common $ 206
Stock(2)
December 1995 Edmund Sun 1,335,949 shares of (5)
Series B Preferred Stock
January and March Bridge Financing $7,000,000 principal $7,000,000
1996 amount of 10% Notes and
warrants to purchase
3,500,000 shares of
Common Stock(6)
February 1996 Dale Hitt 97,931 shares of Common $ 13,624
Stock(2)
September 1996 Yu Ming Hsu 4,379 shares of Common $ 613
Stock(2)
September 1996 Szu Ming Chen 13,813 shares of Common $ 1,934
Stock(2)
September 1996 Ya Ling Chen 3,818 shares of Common $ 534
Stock(2)
September 1996 Tusng Min Lin 75,475 shares of Common $ 10,567
Stock(2)
September 1996 Pei Chih Lei 12,130 shares of Common $ 1,698
Stock(2)
September 1996 Chen Ho Tsai 13,813 shares of Common $ 1,934
Stock(2)
September 1996 Chun Hsiung Hung 11,231 shares of Common $ 15,732
Stock(2)
September 1996 Hsiu Ling Ko 2,358 shares of Common $ 331
Stock(2)
September 1996 Jim Monroe 35,041 shares of Common $ 4,906
Stock(2)
September 1996 Oliver Hellwig 1,571 shares of Common $ 220
Stock(2)
September 1996 Ed Martini 51,258 shares of Common $ 7,176
Stock(2)
September 1996 Phil Ma 17,522 shares of Common $ 2,453
Stock(2)
October 1996 Dr. Edmund Sun 281,520 shares of Common (7)
Stock
October 1996 James W. Kirkpatrick Jr. 93,840 shares of Common (8)
Stock
October 1996 Lish Chen 46,920 shares of Common (8)
Stock
October 1996 Michael Mruzik 24,398 shares of Common (8)
Stock
October 1996 Mihailo Stojancic 20,645 shares of Common (8)
Stock
October 1996 Tai Sato 11,965 shares of Common (8)
Stock
October 1996 Francis Hung 11,965 shares of Common (8)
Stock
October 1996 Sitrick & Company 1,198 shares of Common (9)
Stock
October 1996 Charles Penn 31,000 shares of Common $ 4,340
Stock(2)
</TABLE>
- --------
(1) Including a note receivable of $15,000. During 1995, the unpaid principal
balance of such note and 61,234 shares were cancelled.
(2) Exercise of stock options issued under the 1993 Option Plan.

II-2
<PAGE>

(3) The shares of Common Stock were sold to Sunny Rich Enterprises, Ltd. which
subsequently dissolved and distributed its assets to Edmund Sun, its sole
shareholder.
(4) Assets of Sunny Rich Enterprises, Ltd., including 6,199,720 shares of the
Company's Common Stock.
(5) Conversion of $2,056,807 of outstanding principal and interest under a
convertible note.
(6) Issued solely to accredited investors in connection with a private
placement in which D.H. Blair Investment Banking Corp. acted as placement
agent and received $910,000 in fees and expenses.
(7) Shares of the Company's Common stock were issued in exchange for shares of
ViComp's Series A Convertible Preferred Stock.
(8) Shares of the Company's Common Stock were issued in exchange for shares of
ViComp's Common Stock.
(9) Issued to the Company's public relations firm for services.

The Company believes that the issuances of securities pursuant to the
foregoing transactions were exempt from registration under the Securities Act
of 1933, as amended, by virtue of Section 4(2) thereof as transactions not
involving public offerings. Except as indicated above, all securities
referenced in the preceding table were sold for cash.

ITEM 27. EXHIBITS

(a) The following exhibits, which are furnished with this Registration
Statement or incorporated herein by reference, are filed as part of this
Registration Statement:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of the
Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate.(3)
4.2 Form of Warrant Agreement (the "Warrant Agreement") by and
among the Company, American Stock Transfer & Trust Company
and the Underwriter (including forms of Class A and Class B
Warrant certificates).(3)
4.3 Form of Underwriter's Unit Purchase Option (issued in
connection with the Company's initial public offering).(1)
4.4 Warrant Agreement.(1)
4.5 Escrow Agreement dated as of April 23, 1996 among American
Stock Transfer & Trust Company, the Company and
Optionholders listed on Exhibit B thereto.(3)
4.6 Form of Subscription Agreement from the Bridge
Financing.(2)
4.7 Escrow Agreement dated as of October 17, 1996 made by and
between the Company and Dr. Edmund Y. Sun.*
4.8 Escrow Agreement dated as of October 17, 1996 made by and
among the Company, Dr. Edmund Sun and American Stock
Transfer & Trust Company.*
4.9 Escrow Agreement dated as of October 17, 1996 made by and
among the Company, the shareholders named on the signature
pages thereto and American Stock Transfer & Trust Company.*
4.10 Form of Amendment to the Warrant Agreement.*
4.11 Form of Underwriter's Unit Purchase Option (to be issued in
connection with the Offering).*
5.1 Opinion of Troy & Gould Professional Corporation.*
10.1 1993 Amended and Restated Stock Option Plan.(2)
10.2 Employment Agreement as of March 1, 1996 between the
Company and Dr. Edmund Sun.(2)
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.3 Product Agreement made March 16, 1993 between Hyundai and the
Company.(1)
10.4 Technical Assistance and License Agreement made March 16, 1993
between Hyundai and the Company.(1)
10.5 1995 Hyundai Technical Assistance and License Agreement.(1)
10.6 Consulting Agreement made as of February 1, 1996 between the Company
and Intermarkt.(1)
10.7 Sublease Agreement, dated as of November 15, 1995, between the
Company and McAfee Associates, Inc. (along with consent to sublease
and master lease agreement).(1)
10.8 House Leasing Agreements dated August 31, 1994 and September 6, 1994
for facility in Taiwan (translated).(1)
10.9 Form of Indemnity Agreement with the Company's officers and
directors.(1)
10.10 Series A Preferred Stock Purchase Agreement made as of January 21,
1994 between the Company and Hyundai.(1)
10.11 Series B Preferred Stock Purchase Agreement made as of April 1995
between the Company and Hyundai.(1)
10.12 Consulting and Employment Agreement between the Company and
Robert B. Pfannkuch entered into as of March 15, 1996.(2)
10.13 Agreement and Plan of Merger dated as of October 17, 1996 by and
between the Company, ViComp Technology, Inc. and the shareholders of
ViComp Technology, Inc.*
10.14 Registration Rights Agreement dated as of October 17, 1996 by and
between the Company and the shareholders of ViComp Technology, Inc.
named therein.*
10.15 1996 Stock Option Plan.*
10.16 Consulting Agreement made as of September 27, 1996 between the
Company and Sitrick And Company Inc.*
10.17 Office Lease Agreement commencing on October 15, 1996 between the
Company and Paulsen Office Park.*
10.18 Lease, dated July 17, 1996, between the Company and Ken Yang Real
Estate (Shanghai) Co. Ltd.*
11.1 Statement regarding computation of net loss per share.
23.1 Consents of Ernst & Young LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained in
Exhibit 5.1).*
23.3 Consent of Sutter Securities Incorporated.*
24.1 Power of Attorney.*
</TABLE>
- --------

* Previously filed.

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

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

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

II-4
<PAGE>

ITEM 28. UNDERTAKINGS

(1) The registrant hereby undertakes to file, during any period in which it
offers or sells the securities covered by this Registration Statement, a post-
effective amendment to this registration statement to:

(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;

(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and

(iii) Include any additional or changed material information on the plan
of distribution.

(2) For determining liability under the Securities Act, the undersigned will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.

(3) The registrant undertakes to file a post-effective amendment to remove
from registration any of the securities that remain unsold at the end of the
offering.

(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

(5) The registrant hereby undertakes:

(i) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as
of the time the Commission declared it effective.

(ii) For determining any liability under the Securities Act, to treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.

II-5
<PAGE>

SIGNATURES

IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS AMENDMENT
TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA CLARA, STATE OF CALIFORNIA, ON
NOVEMBER 14, 1996.

DIGITAL VIDEO SYSTEMS, INC.

By *
_____________________________________
Edmund Sun
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

By * Chairman of the Board and November 14, 1996
___________________________________ Chief Executive Officer
Edmund Sun

By /s/ Robert B. Pfannkuch President and Director November 14, 1996
____________________________________
Robert B. Pfannkuch

By * Chief Financial Officer and November 14, 1996
____________________________________ Principal Accounting Officer
Arvin S. Erickson
Director
____________________________________
Janis P. Gemignani

By * Director November 14, 1996
____________________________________
Sung Hee Lee

By * Director November 14, 1996
____________________________________
Sanford Sigoloff

By * Director November 14, 1996
____________________________________
Philip B. Smith

By * Director November 14, 1996
____________________________________
Joseph F. Troy

*By /s/ Robert B. Pfannkuch Attorney-in-Fact November 14, 1996
___________________________________
Robert B. Pfannkuch
</TABLE>

II-6
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE NO.
------- ------------------- --------
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of
the Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate.(3)
4.2 Form of Warrant Agreement (the "Warrant Agreement") by
and among the Company, American Stock Transfer & Trust
Company and the Underwriter (including forms of Class A
and Class B Warrant certificates).(3)
4.3 Form of Underwriter's Unit Purchase Option (issued in
connection with the Company's initial public
offering).(1)
4.4 Warrant Agreement.(1)
4.5 Escrow Agreement dated as of April 23, 1996 among
American Stock Transfer & Trust Company, the Company
and Optionholders listed on Exhibit B thereto.(3)
4.6 Form of Subscription Agreement from the Bridge
Financing.(2)
4.7 Escrow Agreement dated as of October 17, 1996 made by
and between the Company and Dr. Edmund Y. Sun.*
4.8 Escrow Agreement dated as of October 17, 1996 made by
and among the Company, Dr. Edmund Sun and American
Stock Transfer & Trust Company.*
4.9 Escrow Agreement dated as of October 17, 1996 made by
and among the Company, the shareholders named on the
signature pages thereto and American Stock Transfer &
Trust Company.*
4.10 Form of Amendment to the Warrant Agreement.*
4.11 Form of Underwriter's Unit Purchase Option (to be
issued in connection with the Offering).*
5.1 Opinion of Troy & Gould Professional Corporation.*
10.1 1993 Amended and Restated Stock Option Plan.(2)
10.2 Employment Agreement as of March 1, 1996 between the
Company and Dr. Edmund Sun.(2)
10.3 Product Agreement made March 16, 1993 between Hyundai
and the Company.(1)
10.4 Technical Assistance and License Agreement made March
16, 1993 between Hyundai and the Company.(1)
10.5 1995 Hyundai Technical Assistance and License
Agreement.(1)
10.6 Consulting Agreement made as of February 1, 1996
between the Company and Intermarkt.(1)
10.7 Sublease Agreement, dated as of November 15, 1995,
between the Company and McAfee Associates, Inc. (along
with consent to sublease and master lease
agreement).(1)
10.8 House Leasing Agreements dated August 31, 1994 and
September 6, 1994 for facility in Taiwan
(translated).(1)
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT EXHIBIT DESCRIPTION PAGE NO.
NUMBER ------------------- --------
-------
<C> <S> <C>
10.9 Form of Indemnity Agreement.(1)
10.10 Series A Preferred Stock Purchase Agreement made as of
January 21, 1994 between the Company and Hyundai.(1)
10.11 Series B Preferred Stock Purchase Agreement made as of
April 1995 between the Company and Hyundai.(1)
10.12 Consulting and Employment Agreement between the Company and
Robert B. Pfannkuch entered into as of March 15, 1996.(2)
10.13 Agreement and Plan of Merger dated as of October 17, 1996
by and among the Company, Digital Video Acquisition Co.,
ViComp Technology, Inc. and the shareholders of ViComp
Technology, Inc.*
10.14 Registration Rights Agreement dated as of October 17, 1996
by and between the Company and the shareholders of ViComp
Technology, Inc. named therein.*
10.15 1996 Stock Option Plan.*
10.16 Consulting Agreement made as of September 27, 1996 between
the Company and Sitrick And Company Inc.*
10.17 Office Lease Agreement commencing on October 15, 1996
between the Company and Paulsen Office Park.*
10.18 Lease, dated July 17, 1996, between the Company and Ken
Yang Real Estate (Shanghai) Co. Ltd.*
11.1 Statement regarding computation of net loss per share.
23.1 Consents of Ernst & Young LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained
in Exhibit 5.1).*
23.3 Consent of Sutter Securities Incorporated*
24.1 Power of Attorney.*
</TABLE>
- --------

* Previously filed.

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

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

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

<PAGE>

EXHIBIT 11.1

DIGITAL VIDEO SYSTEMS, INC.

STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS

<TABLE>
<CAPTION>
Nine Month Periods
Years Ended December 31, Ended September 30,
------------------------ --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss................................................. ($1,653,661) ($4,483,311) ($2,480,147) ($6,242,587)
=========== =========== =========== ===========

Weighted average common shares outstanding(1).......... 2,203,380 3,345,900 3,361,526 5,954,113

Common equivalent shares from preferred stock, warrants
and stock options issued during the twelve month period
prior to the Company's proposed initial public
offering(1)........................................... 1,991,768 1,991,768 1,991,768 1,721,679
----------- ----------- ----------- -----------

Shares used in computing net loss per share.............. 4,195,148 5,337,668 5,353,294 7,675,792
=========== =========== =========== ===========

Net loss per share....................................... ($.39) ($0.84) ($.46) ($.81)
=========== =========== =========== ===========
</TABLE>
___________________
(1) Excludes shares placed in escrow according to the "Escrow Agreement."

<PAGE>

EXHIBIT 23.1-A

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 31, 1996, in the Registration Statement
(No. 333-15471) Amendment No. 1 and the related Prospectus of Digital Video
Systems, Inc. for the registration of 26,450 units consisting of a minimum of
70 and a maximum of 100 IPO Units, each consisting of one share of common
stock, one Redeemable Class A Warrant and one Redeemable Class B Warrant.

By: /s/ Ernst & Young
----------------------------------
Ernst & Young

Walnut Creek, California

November 18, 1996
<PAGE>

EXHIBIT 23.1-B

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 18, 1996 for ViComp Technology, Inc. in
the Registration Statement (No. 333-15471) Amendment No. 1 and the related
Prospectus of Digital Video Systems, Inc. for the registration of 26,450 units
consisting of a minimum of 70 and a maximum of 100 IPO Units, each consisting
of one share of common stock, one Redeemable Class A Warrant and one
Redeemable Class B Warrant.

By: /s/ Ernst & Young
----------------------------------
Ernst & Young
Walnut Creek, California

November 18, 1996