SecProbe.io

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                               M E M O R A N D U M

              FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

Item 15. Controls and Procedures.  Page 77
         ---------------------------------

1.       YOU STATE THAT SINCE THE EVALUATION PERFORMED IN CONNECTION WITH THE
         EFFECTIVENESS OF THE COMPANY'S DISCLOSURE CONTROLS AND PROCEDURES AS OF
         DECEMBER 31, 2004, "THERE HAVE BEEN NO 'SIGNIFICANT CHANGES' IN OUR
         INTERNAL CONTROLS OR IN FACTORS THAT COULD SIGNIFICANTLY AFFECT OUR
         INTERNAL CONTROLS..." PLEASE NOTE THAT RULE 13A-15(D) REQUIRES THE
         DISCLOSURE OF "ANY" CHANGE IN YOUR INTERNAL CONTROLS. TELL US WHETHER
         THERE WERE CHANGES IN YOUR INTERNAL CONTROL OVER FINANCIAL REPORTING
         THAT OCCURRED DURING THE APPLICABLE PERIOD THAT HAVE MATERIALLY
         AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, YOUR INTERNAL
         CONTROL OVER FINANCIAL REPORTING.

The Company confirms that there were no changes in its internal controls during
the period covered by the annual report that have materially affected, or are
reasonably likely to materially affect, its internal control over financial
reporting. The Company also wishes to advise the Staff supplementally that there
has been no change in the Company's internal control over financial reporting
that occurred in 2005 to date, that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.

2.       YOU STATE THAT SINCE THE EVALUATION PERFORMED IN CONNECTION WITH THE
         EFFECTIVENESS OF THE COMPANY'S DISCLOSURE CONTROLS AND PROCEDURES AS OF
         DECEMBER 31, 2004, "THERE HAVE BEEN NO 'SIGNIFICANT CHANGES' IN OUR
         INTERNAL CONTROLS OR IN FACTORS THAT COULD SIGNIFICANTLY AFFECT OUR
         INTERNAL CONTROLS..." PLEASE NOTE THAT ITEM 15(D) OF FORM 20-F REQUIRES
         THAT YOU PROVIDE INFORMATION CONCERNING CHANGES IN INTERNAL CONTROLS
         THAT ARE IDENTIFIED IN CONNECTION WITH THE EVALUATION OF THE
         EFFECTIVENESS OF THE FILER'S DISCLOSURE CONTROLS AND PROCEDURES THAT
         "OCCURRED DURING THE PERIOD COVERED BY THE ANNUAL REPORT". PLEASE TELL
         AS WHETHER THERE WERE ANY CHANGES IN INTERNAL CONTROLS THAT OCCURRED
         DURING THE YEAR ENDED DECEMBER 31, 2004. IN PREPARING FUTURE PERIODIC
         FILINGS, PLEASE GIVE APPROPRIATE CONSIDERATION TO THESE REQUIREMENTS.

As noted above, the Company confirms that there were no changes in its internal
controls during the period covered by the annual report that have materially
affected, or are reasonably likely to materially affect, its internal control
over financial reporting. The Company notes the Staff's comment with respect to
future periodic filings and shall endeavor to provide the required disclosure.

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Exhibits 12.1 and 12.2
----------------------

3.       THE CERTIFICATIONS SIGNED BY MESSRS. MORAN AND MAOR CONTAIN LANGUAGE
         THAT HAS BEEN ALTERED FROM THE LANGUAGE REQUIRED BY SECTION 302 OF THE
         SARBANES-OXLEY ACT OF 2002 AND OUR RULES UNDER THAT SECTION. WE
         SPECIFICALLY REFER YOU TO THE USE OF THE TERMS "COMPANY" AND "ANNUAL
         REPORT." THE LANGUAGE OF THE CERTIFICATIONS REQUIRED BY SECTION 302 OF
         SARBANES-OXLEY AND THE RELATED RULES SHALL NOT BE ALTERED. REFER TO
         ITEM 601(B)(31) OF REGULATION S-K, WHICH STATES THAT THE CERTIFICATION
         MUST BE PROVIDED EXACTLY AS STATED THEREIN. SEE ALSO RELEASE NO.
         3446427 (AUG. 28, 2002) AND STAFF ALERT (MAR. 5 2005). PLEASE ENSURE
         THAT CERTIFICATIONS DO NOT VARY FROM THE REQUIRED FORMAT.

The Company notes the Staff's comment and will ensure that all future filings
contain the correct form of certification.

Consolidated Financial Statements
---------------------------------

Consolidated Statements of Operations-page 5
--------------------------------------------

4.       WE NOTE THAT YOU HAVE PRESENTED INCOME FROM THE VENTURE AS REVENUE IN
         THE CONSOLIDATED STATEMENTS OF OPERATIONS. TELL US WHY YOU BELIEVE THIS
         PRESENTATION IS APPROPRIATE. THE STAFF BELIEVES THAT AN INVESTOR'S
         EQUITY IN INCOME OR LOSS OF THE INVESTEE SHOULD NOT BE INCLUDED IN
         REVENUE OR AS A SEPARATE ITEM IN A REVENUE SUBTOTAL. SEE SEC REGULATION
         COMMITTEE MINUTES SECTION XI(B) DATED MARCH 11, 2003. RULE 5-03 OF
         REGULATION S-X REQUIRES EQUITY METHOD EARNINGS TO BE PRESENTED BELOW
         THE INCOME TAX LINE. HOWEVER, THE STAFF ALSO BELIEVES THAT EQUITY
         EARNINGS MAY BE PRESENTED IN OPERATING INCOME IF INTEGRAL TO
         OPERATIONS.

The Company supplementally advises the Staff as follows:

a.       The Venture is a legal entity that only operates between Toshiba and
         the Company and is essentially an extension of the Company's flash
         sourcing arrangements for manufacture of DiskOnKey ("DOK") products. As
         such, the Venture's operations are integral to the Company's
         operations.

         Toshiba has a long historical relationship with the Company, beginning
         in the mid-nineties, primarily as one of the Company's principal flash
         memory component suppliers, and specifically as a supplier of
         components for the Company's DOK product since the Company began to
         sell the product in 2001. In 2003, the Company and Toshiba decided to
         expand their relationship and established a joint venture in the form
         of a limited partnership. The Venture was formed for the mutual benefit
         of both members, with each member sharing the risks and rewards in the

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         operations of the Venture - namely the manufacture and sale of DOK
         products. DOK is a thumb-sized flash drive for the storage and transfer
         of data files, manufactured utilizing (1) a standard silicon memory
         chip (flash memory), representing the substantial majority of the cost
         of each DOK unit, (2) a controller component that manages the data, (3)
         other minor electronic components, and (4) a plastic shell. The Venture
         sources the flash memory component solely from Toshiba and the
         controller component through the Company. The Venture then manufactures
         the DOK using contract manufacturers (who also act as contract
         manufacturers for the Company's activities outside of the Venture) and
         sells DOK units only to the Company and Toshiba. The accumulated
         profits of the Venture are equally divided between the Company and
         Toshiba. The Venture does not have any employees. Essentially, the
         Venture is a separate entity designed as an extension of the Company's
         flash sourcing arrangements for DOK products with Toshiba and its other
         flash vendors, whereby the Company sources flash memory components from
         these vendors, adds a controller component and manufactures the DOK
         units using contract manufacturers. As such, the Venture operates in a
         manner that is essentially the same as the Company's ordinary course
         method of operation.

         Since (i) the Venture operates in a manner that is essentially the same
         as the Company's ordinary course method of operation (i.e., the Venture
         buys the essential components from Toshiba and from the Company and
         sells the finished products to Toshiba and to the Company) and (ii) the
         Venture has no other customers, selling only to the Company and
         Toshiba, the Company believes that the Venture's operations are
         integral to the Company's operations. Consequently, equity earnings
         resulting from the Venture are presented as part of the Company's
         operating income.

b.       The Company presents its statement of operations using a single-step
         form.

         The Staff has stressed the importance of evaluating whether amounts in
         the statement of operations are appropriately classified according to
         their character or nature, as specified by Rule 5-03 of Regulation S-X.

         The Staff observed in the 2002 AICPA Conference on Current SEC
         Developments that in certain circumstances the presentation of gross
         margin might be misleading, including, for example:

         o        Instances where there is no cost of sales related to a
                  particular revenue source (i.e. royalties, license fees,
                  etc.); and

         o        Instances where for a particular revenue source separating the
                  cost of sales from operating expenses is impracticable.

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         Based on the above, the Company believes that in its case, where it has
         sources of revenues with no related cost of revenues (including
         licensing fees and royalties), it would be more appropriate in
         accordance with the Staff's guidance to exclude the measure of gross
         profit, thus presenting its statement of operations using the
         single-step form, rather than the multi-step form.

         Under the single-step form, as no gross profit is presented, all
         operating income sources and all operating expenses are each presented
         within one group, with a sub total of operating income presented
         thereafter. Accordingly, since the Company follows the single-step
         form, all of the Company's operating income sources, including income
         from the Venture (which, as described above, is integral to the
         business as a whole) are presented under a single group titled
         "revenues".

         The Company further advises the Staff that the Company's operating
         income sources are product sales, royalties, licensing fees and equity
         earnings from the Venture that are integral to its operations.

Notes to the Consolidated Financial Statement
---------------------------------------------

Note 2-Significant Accounting Policies
--------------------------------------

Revenue Recognition-page 14
---------------------------

5.       WE NOTE YOUR DISCLOSURE ON PAGE 20 OF THE FILING THAT INDICATES THAT
         THE MARKETING STRATEGY FOR THE DISKONCHIP RELIES ON YOUR SOFTWARE BEING
         INCLUDED IN THE MAJOR OPERATING SYSTEMS. WE ALSO NOTE FROM YOUR PRESS
         RELEASE DATED SEPTEMBER 6, 2005 THAT MIGO SOFTWARE IS INCLUDED WITH
         SEVERAL PRODUCTS. TELL US HOW YOU CONSIDERED THE GUIDANCE IN EITF 03-05
         AND PARAGRAPH 2 OF SOP 97-2 IN DETERMINING THE APPLICABLE AUTHORITATIVE
         LITERATURE FOR REVENUE RECOGNITION. FOOTNOTE 2 OF PARAGRAPH 2 OF SOP
         97-2 INDICATES THAT IF THE SOFTWARE IS A SIGNIFICANT FOCUS OF THE
         MARKETING EFFORT THAT COULD BE AN INDICATION THAT THE SOFTWARE IS
         INCIDENTAL TO THE PRODUCT AS A WHOLE.

The Company supplementally advises the Staff as follows:

With respect to the disclosure on page 20 of the filing, the Company sells
DiskOnChip to its customers who integrate the chip into their products (such as
mobile telephone handsets). These products require an operating system in order
to function. The Company makes available, at no charge, software drivers to
operating system developers (such as Microsoft and Linux) in order to enable the
DiskOnChip to interoperate easily with those operating systems, reducing the
need for the Company's customers to use additional software to enable
interoperability. These software drivers are made available by the Company to
operating system developers prior to selling its products to its customers in
order to facilitate the usage of its products in the market.

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With respect to the Migo software, the Company notes that its press release
dated April 6, 2005 referred to software developed by PowerHouse Technologies,
the developer of Migo software. The Company offers its OEM customers the option
to purchase its DOK product with Migo software provided by PowerHouse
Technologies pre-loaded onto the Company's DOK product. The Company's first
sales of the DOK product together with pre-loaded Migo software occurred in
September 2005. These units are essentially a DOK with an additional feature.
The price of such DOKs does not differ significantly from other DOKs that do not
include the Migo software. Support services, if any, are provided directly
through PowerHouse Technologies to the end-user without any involvement of the
Company. Effectively, the marketing focus is on the product being a flash drive,
to which the Company can add different types of features if requested by the OEM
customer, one of which is the Migo software. The DOKs function with or without
the Migo software; Migo software is just an additional feature added to the DOK.
Accordingly, the Company concluded that the Migo software is incidental to the
product as a whole (which is the DOK) and therefore the guidance in SOP 97-2 for
revenue recognition is not applicable.

6.       WE NOTE YOUR DISCLOSURE ON PAGE 13 OF THE FILING THAT YOU CUSTOMIZE THE
         MOBILE DISKONCHIP PRODUCT TO MEET CUSTOMER DESIGN REQUIREMENTS. TELL AS
         HOW YOU RECOGNIZE REVENUE FOR ARRANGEMENTS THAT INVOLVE CUSTOMIZATION.
         YOUR RESPONSE SHOULD ADDRESS HOW YOU CONSIDERED THE GUIDANCE IN EITF
         00-21 AND SOP 81-1.

To clarify, the Company sells its Mobile DiskOnChip products to mobile handset
manufacturers. In advance of producing a particular handset model, these
manufacturers generally provide to the Company the specifications of the memory
solution that they are seeking to incorporate into the handset. At times, this
requires the Company to make some modifications to its product in order to meet
the specifications of the manufacturer. The Company refers to this in the filing
as customization. All such customization is completed in advance of the
manufacturer's actual purchase of the product from the Company, as the
manufacturer requires that the product be complete and fully tested prior to
placing a purchase order for the product. Therefore, all costs incurred prior to
the customized product being completed and tested by the customer are expensed
as incurred as part of operating expenses. Prior to placing a purchase order,
the manufacturer is under no obligation to purchase the product from the
Company. At the time the customer places a firm purchase order with the Company,
the Company has already concluded the customization of the Mobile DiskOnChip
product and the product is generally sold from the inventory accumulated by the
Company. Accordingly, sale of such products is accounted for under the guidance
of SAB 104, while EITF 00-21 and SOP 81-1 are not applicable. The Company
further advises the Staff that, in fact, the Company often builds an initial
inventory position of the customized product prior to receiving a firm purchase
order for the full amount of such inventory, exposing the Company to the risk of
holding inventory that may not be saleable to other potential customers.

7.       WE NOTE THAT YOU PROVIDE UPGRADES AND ENHANCEMENT AS WELL AS TECHNICAL
         SUPPORT FOR THE TRUEFFS FLASH MANAGEMENT SOFTWARE TO ALL OF TOSHIBA'S

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         CUSTOMERS. WE FURTHER NOTE THAT SUPPORT FEES ARE CALCULATED AS A
         PERCENTAGE OF THE XDOC REVENUE AND COMBO REVENUE AS DEFINED IN YOUR
         XDOC DEVELOPMENT AND LICENSE AGREEMENT DATED JULY 15, 2003. TELL US HOW
         YOU RECOGNIZE REVENUE FOR THE SUPPORT SERVICES AND WHAT THE
         AUTHORITATIVE GUIDANCE YOU RELIED UPON IN REACHING YOUR CONCLUSION.

Under the XDOC development and license agreement, the Company granted Toshiba a
license to use its technology for the manufactu