We have five issued U.S. patents covering our MicroOSTM file management software

and certain technology related to portable digital devices. Our software is also

protected by copyrights. We rely primarily on a combination of patents,

copyright and trade secret protection together with licensing arrangements and

nondisclosure and confidentiality agreements to establish and protect our

proprietary rights.

We have designed and developed proprietary hardware encryption technology for

content protection. This technology has been incorporated into APS/Wencor`s

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.

The patent position of any item for which we have filed a patent application is

uncertain and may involve complex legal and factual issues. Although we are

currently pursuing trademark applications with the U.S. Patent and Trademark

Office and also have filed certain U.S. and international patent applications,

we do not know whether any of these applications will result in the issuance of

patents or trademarks, or, for any patents already issued or issued in the

future, whether they will provide significant proprietary protection or will be

circumvented or invalidated. Additionally, since an issued patent does not

guarantee the right to practice the claimed invention, there can be no assurance

others will not obtain patents that we would need to license or design around in

order to practice our patented technologies, or that licenses that might be

required would be available on reasonable terms. Further there can be no

assurance that any unpatented manufacture, use, or sale of our technology or

products will not infringe on patents or proprietary rights of others. We have

made reasonable efforts in the design and development of our products not to

infringe on other known patents.

7

We also rely on trade secret laws for protection of our intellectual property,

but there can be no assurance others will not independently develop

substantially equivalent proprietary information and techniques or otherwise

gain access to our trade secrets or disclose such technology, or that we can

protect our rights to unpatented trade secrets.

We have also filed a number of trademark applications with the U.S. Patent and

Trademark Office. We have received notification of allowance from the United

States Patent Office for use of e.Digital(TM), MicroOS(TM), Smart Solutions for

a Digital World (Service Mark), VoiceNav(R), Music Explorer(R), MXP(TM),

Flashback(R), Hold That Thought(R), Fumble Free(R) and SoundClip(R) as

registered trade names. We intend to make every reasonable effort to protect our

proprietary rights to make it difficult for competitors to market equivalent

competing products without being required to conduct the same lengthy testing

and development conducted by us and not to use any of our innovative and novel

solutions to overcome the many technical obstacles involved in developing

portable devices using Flash and other portable storage formats.