From the 10-K

We offer developers of electronic products a portfolio of services within the

broad categories of design services, development services, manufacturing

services, and customer service. Our revenue has been, and is expected to be,

derived from a combination of fees from licensing, engineering services,

manufacturing services, warranty services, industrial design services, technical

support services and unit royalty payments. Our revenues also result from the

sale of products when we arrange for turnkey production and delivery of products

to customers.

When developers of electronic products lack the experience or resources to work

with portable storage media or to do their own design work, our design services

help perform component and product design. We offer design services in areas

such as circuit design, the design and incorporation of custom digital signal

processing solutions, wireless communication, computer and Internet connectivity

and product design. We have expertise in embedded systems, digital and analog

integrated circuit design, wireless, multimedia, Internet and computer

connectivity, DSP customization, flash memory interface and related fields.

In addition to design, our engineers can perform product development and

engineering services aimed to convert designs into functional reference designs,

prototypes and/or end products. The engineering services we offer include custom

hardware and firmware (an instruction set programmed into a chip which

determines the product`s functionality and user interface), software

development, technology platform development and product design.

We also arrange for manufacturing services including factory hand-off and

development of test procedures. The manufacturing services we provide range from

startup through order fulfillment services and post production quality and

warranty services.

Our business customers license or purchase our product reference designs or our

technology platforms to embed in or integrate with their product design allowing

them to accelerate the product development process.

MICROOS(TM)

Our proprietary MicroOS(TM) operating system serves as the foundation for our

Personal Digital Video, Digital Audio and Wireless Technology Platforms. MicroOS

was originally developed by us for use in digital voice recorder technology, but

because of its inherent flexibility, has grown and been adapted to support audio

and video storage and playback and wireless utilities. MicroOS is compact and

dynamic, responding to a variety of user interfaces. MicroOS manages the volume

and equalizer functions, the LCD drivers and interfaces, decodes a wide variety

of audio and video files, interacts with a variety of digital rights management

schemes and supports today`s most popular media storage formats including hard

disk drives, compact and embedded flash and others.

MicroOS manages multiple functions within a single device, utilizing less power,

space and operating capacity than many alternative solutions. The life cycle of

consumer electronics products is very short and continues to accelerate. With

MicroOS we believe we are able to complete new product design and development

projects faster and more economical than many competitors. The use of MicroOS

shortens the development cycle and MicroOS` flexibility provides the same lead

time benefits to subsequent generations of each MicroOS based product.

DIGITAL VIDEO/AUDIO TECHNOLOGY PLATFORM

We have designed and developed a Digital Video/Audio Technology Platform based

on our proprietary MicroOS core. Our Digital Video/Audio Platform (``DVAP``)

accommodates various third party video compression encoded material, proprietary

security measures and allows for other customizable options. The DVAP supports

screen sizes from 2.5 to 10.4`` and is capable of achieving better than DVD

quality video. The 7`` version was first released in 2003 for use on commercial

airline flights as an Inflight Entertainment (IFE) device.

Our first commercial release of our DVAP was accomplished through business

customer Airline Protective Systems (``APS``) branding and distribution of the

digEplayer 5500(TM) IFE product to Alaska Airlines. The first units were

provided to Alaska Airlines passengers in October 2003. In 2004, we received

follow-on orders for commercial quantities of IFE units. The units are loaded

with content by APS from partners such as 20th Century Fox, DreamWorks SKG,

Warner Brothers and DMX. The large 7`` screen delivers better than DVD quality

video - a key competitive factor to others evaluating opportunities in the

market.

APS (a division of Wencor West, Inc., herein referred to as APS/Wencor)

continues to market the digEplayer to airlines worldwide and other companies

within the travel and leisure industry. While we anticipate continued commercial

success of the digEplayer, we remain active in pursuit of others seeking

personal video platforms for their own branding purposes. We believe there are

opportunities for new and next generation applications of this device.

Our proprietary DVAP is flexible and we believe we can address markets beyond

IFE with products customized for niche customers for travel and leisure,

medical, education, government and military use. We are modifying our DVAP

technology to incorporate the latest LCD screen, media storage, video

processing, battery and other components to address specific needs of the

medical and travel and leisure segments of the market.

Content Protection Technology

We have designed and developed proprietary hardware encryption technology for

content protection. This technology has been incorporated into the digEplayer

and has been tested and approved by major Hollywood movie studios. We currently

have a patent application pending with the U.S. Patent Office for this

technology.

WIRELESS TECHNOLOGY

We have experience in developing wireless solutions for business customers and

our DVAP has applications for wireless technology. Wireless communications

between devices and hosts will benefit consumers` abilities to manage and

procure content. We are also integrating 802.11(Wi-Fi) technology as an option

for our DVAP. We have a separate Wireless Technology Platform that can also be

applied to other electronic products. We expect to support and integrate other,

new wireless technologies into our DVAP or our Wireless Technology Platform,

including WiMax, UWB and others.

RECENT DEVELOPMENTS

In March 2005, APS/Wencor`s digEplayer was awarded IFE product of the year at

the IPEC & LARA 2005 Regional Airline World and Inflight Online Awards ceremony

held in London. Alaska Airlines was awarded Airline IFE Service of the Year.

This was an important endorsement of our DVAP solution.

In February 2005, APS/Wencor placed an order for digEplayers 5500`s(TM) with a

newly developed credit card reader enhancement. In March 2005 they ordered

additional IFE units and in May 2005 ordered further units.

INDUSTRY BACKGROUND

We design and market digital technology product platforms employing portable

storage media with the major categories being digital video recorder/players,

digital music recorder/players and related mobile devices. We also have

experience developing digital automotive technology platforms and a wireless

technology platforms.

DIGITAL VIDEO RECORDER/PLAYERS

Digital video players including DVD (digital video disc) players are increasing

in popularity with consumers. According to the Consumer Electronics Association,

DVD content is a $12 billion/year market.

Video compression formats such as MPEG-4 and DivX allow the compression and

transmission of digital video files over the Internet. They also allow consumers

to download and store on their personal computer`s hard drive full-length,

two-hour, motion picture files in as little as 500 MB of storage space. These

movies can then be viewed by consumers on a computer monitor or a personal video

recorder/player.

There is also a developing market for streaming delivery of video content on the

Internet. Corporations or video production companies may use streaming video to

deliver information and entertainment to users. DivXNetworks, Inc., the creator

and provider of the DivX video compression format, reports that over 80 million

users have downloaded their video playback software. This illustrates the demand

for high-quality video in manageable file sizes. The users of DivX compression

format have been limited to viewing DivX motion picture content on their

computer monitors. We believe there will be growing demand for a system

including portable hardware that will allow consumers to select and download

movies over the Internet in digital form, then download them to a portable

player capable of feeding the video and audio signals through a home

entertainment system or built-in viewing screen and speakers.

We believe there are applications for our DVAP in broad aspects of the travel

and leisure, medical, education, government and military markets and that these

are growing markets.

IN-FLIGHT ENTERTAINMENT

IFE encompasses music, news, television programming, and motion pictures

presented through audio/video systems typically embedded into an aircraft.

Certain airlines are also beginning to incorporate satellite programming and/or

wireless Internet access for their passengers through extensive built-in

hardware in certain aircraft on certain routes. According to the Wall Street

Journal, airlines worldwide spend approximately $2 billion a year on

entertainment.

Because the costs to retrofit an aircraft with IFE equipment can be prohibitive,

we have developed an alternative IFE system. Our portable IFE player, based upon

our DVAP, is smaller than a typical laptop computer and has a high-quality color

screen and stereo headphones. Although passengers may rent or purchase portable

DVD players from outside entities, we have created the first portable video

players that can be rented to passengers by the airline. We believe this type of

system is attractive to airlines and other travel-related entities because of

its revenue potential, variety of content, and inexpensive implementation. We

work closely to support our customer APS/Wencor to develop this market.

PORTABLE STORAGE MARKET

There are two major categories of portable storage media: solid state and

miniature rotating disks including hard disk drives. We have designed our

technology to work with a wide variety of portable storage media. Our product

applications support a variety of storage media with capacities ranging from 16

Megabytes (``MB``) to 80 Gigabytes (``GB``) in portable storage formats widely

available from various vendors.

We believe these portable storage formats are complicated to use and generally

require a sophisticated interface and file system. A file system is a software

driver used to make portable memory components more closely emulate a

traditional disk drive and allow an understood mechanism for rapidly storing and

retrieving data with the minimal overhead allowed in a portable device. Portable

storage formats may also require the use of sophisticated power management

systems to maximize battery life in portable devices, and additionally may

require robust software interfaces with personal computing platforms for

consumers` ease of use in exchanging data files (consisting of music, pictures,

movies, voice recordings, text documents, spreadsheets, or other data) with

their personal computers.

Our MicroOS operating system for storage management and experience in a variety

of portable products are key factors in marketing our services and solutions to

business customers.

OUR BUSINESS STRATEGY

We are currently focusing development, sales, marketing, and support efforts

chiefly on platform and product development opportunities for customers and

licensees in portable digital entertainment device markets. Our objective is to

have our operating systems and application designs play major roles in the

growing market for portable digital devices.

Products designed by us are marketed under a license and/or royalty fee

arrangement and through product sales by branding customers. Utilizing strategic

customers for product development and marketing results in reduced development

and manufacturing costs, provides high quality products and creates a broader

revenue base.

We offer a total solution from product design through development,

manufacturing, delivery, and support. Our strategy is to build upon our

proprietary technology to develop long-term strategic relationships with key

manufacturers in various industries. We believe we have the expertise and

experience to offer a turnkey solution to customers seeking to implement

portable digital audio and video processing. We actively seek licensing, private

label, and business customer opportunities in the digital video and audio

processing markets. Our efforts include:

1. Expanding our business by developing custom products for customers -

We seek to expand our business through sales and marketing targeted

at obtaining additional product development opportunities with

existing customers and new business customers.

2. Developing brand name recognition with business customers - This

strategy is being pursued through participation in industry

alliances, trade show participation, professional articles and

attaching our name along with customer products to the greatest

extent possible.

3. Expanding the technology base through continued enhancements of our

technologies and application - We develop in-house proprietary

designs, products, features or technologies that may be private

labeled or licensed to one or more business customers. Our

engineering team continues to enhance and update MicroOSTM and

related technology. We also devote resources to expanding our

technology to new applications. In addition to supporting music,

voice, and video processing, we believe our technology may have

applications in a wide range of products.

4. Leverage strategic industry relationships - We have established and

maintain important strategic industry relationships and associations

with a number of related companies. We seek to leverage these

relationships to offer better technology integration and solutions

to our business customers and to maximize subtle but valuable

marketing and co-promotion opportunities.

CUSTOMERS

Our revenues result from the sale of products, product royalties, fees from

engineering services, order fulfillment, technical support services, warranty

services and/or design services. In some cases, we rely on outside

subcontractors to perform services including manufacturing, testing and

certification, industrial design, and assembly.

We have revenue-producing contracts or revenue-producing licensing and marketing

arrangements with the following customers:

APS/WENCOR - We licensed our DVAP technology to APS and customized it for use in

their branded portable IFE device known as the digEplayers 5500(TM) for Alaska

Airlines. This portable IFE product has since and continues to be marketed and

sold to other airlines by APS/Wencor. We provide product to APS/Wencor pursuant

to license and supply agreement.

BANG & OLUFSEN - We licensed technology to Bang & Olufsen for use in their

branded digital audio player products. The first product developed under our

licensing agreement (the BeoSound 2 portable MP3 player) reached the retail

market in June 2002. Bang & Olufsen sells their branded products, including the

BeoSound 2, through exclusive retail stores worldwide.

OTHER CUSTOMERS

We offer developers of electronic products a portfolio of services within the

broad categories of design services, development services, manufacturing

services, and customer service. We seek and have discussions with a variety of

prospective customers on new electronic products. We also make improvements to

our existing DVAP and other technologies using our own resources to attract new

customers. Our revenue has been, and is expected to be, derived from a

combination of fees from licensing, engineering services, manufacturing

services, warranty services, industrial design services, technical support

services and unit royalty payments.