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Confidential

The Digital Home Theater

The Digital Home Theater (c) Copyright 2004 AiLibrary, Inc.
Confidential May 31, 2004

Executive Summary

What is Digital Home Theater?

The Digital Home Theater is a high-end home/office theater customized for HD video as
well as a seamless integration with Broad Band Internet data access. Its unique features
include the use of WiFi components to make it easy to decorate with in the home or
office, and a web based interface (AiHome™) allowing the use of the best components
currently available with an easy way to control them. The video and other large amounts
of user data are quickly accessed via a server system optimized for high bandwidth video
manipulation with RAID storage allowing increments of 3.5 Terabytes of user disk space.

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Why is it needed?

The Digital Home Theater is designed to fill what is believed to be a unique new market
opportunity. The huge consumer demand for HDTV and Home Theater is converging
with the equally huge demand for Broadband Internet access. The result is a new
consumer need to be able to enjoy all the technologies in one usable environment. Our

solution is the Digital Home Theater.

In Section One of the Digital Home Theater White Paper, a detailed and insightful
analysis is presented that shows how this new market opportunity came about. It also
shows how a firm with expertise in home video equipment is uniquely situated to take
full advantage of this lucrative new market.

In Section Two, the Digital Home Theater White Paper provides a good description of
the components, both hardware and software, needed to produce the product. The product
is actually an integration of off-the-shelf software and hardware, carefully chosen to be
the best for their purposes, and controlled with an innovative web based user interface
that allows for maximum ease of use and capabilities. Finally, a Demo Digital Home
Theater is described. It serves to attract customers and also demonstrate its capabilities.

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White Paper

Author: Gordon Kraft
Revised: Gordon Kraft,
Daniel Delgado

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White Paper

-Table of Contents-

Section One: Introduction

Section Two: The Opportunity

Section Three: The Product

Section Four: Conclusion

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Section One: Introduction

The fundamental purpose of this white paper is to show how a retail chain can increase its
cash flow. To do so requires progressively larger monthly sales - such is the nature of
business. This white paper shows a path that leads to a way to increase both the number
of potential customers and the volume of sales. This path is possible because of one of

those new, swift, and certain changes in the marketplace that has opened up a lucrative
new customer base.

This paper describes how the current technology markets for both HDTV and home video
theaters are combining with that of broadband Internet data access. It examines how
current marketing and product efforts from Microsoft and Apple, such as Windows XP
Media Center, XBOX, and the Digital Media Hub (Apple) are taking over capabilities
traditionally done by the audiovisual industry.

The result is an opportunity for a new product using a carefully chosen ensemble of
components available now for high-end home/office theaters. These are packaged into
one system using an innovative Web based user interface, AiHome™, described in this

paper. The resultant product will contain network gaming capabilities (XBOX), and
wireless (WiFi) control of HDTV displays, Internet browsers, and sound systems. The
result is a quot;Value Addedquot; product that leverages into a new marketplace dealing with the

control and display of massive amounts of digital information from broadband Internet
media, video feeds, and HDTV sources.

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Section Two: The Opportunity

The future of Home Theater will be that of a Digital Theater, and it will be
controlled by Microsoft and Apple. Crestron and the rest of the audiovisual
industry will follow. TIVO and Phillips already are inline.

The Future of Home Theater
We know the convergence of the PC with the AV industries has begun. Home Theater
equipment is now sold by low-end, mass-sales retailers such as Gateway, Fry’s, Circuit
City, and Best Buy, to name a few. Consider that they also sell the XBOX.

XBOX for HDTV

The XBOX (also on cover) will be a major factor to consider because it will have an
effect on home theater sales and products designs today. It is Microsoft’s connection to
their conception of a Digital Home Theater. Consequently they worked hard with the
audiovisual industry to control basic standards so as to put Media Player 9.0 as the video
gateway into your home from the Internet. Microsoft now has Microsoft Home
Magazine, Microsoft TV, Microsoft MSNBC, Microsoft XBOX, and Microsoft
Longhorn (the next OS after XP and it contains software like Apples iLife Media Hub
software).

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Microsoft Home Media Center

More, much more is coming. Retailers such as Gateway and Fry's Electronics sell both
PC and AV product, and their interconnection has now begun with the recent introduction
of Microsoft's Home Media Center feature of Windows XP.

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As the Microsoft PC shipments with the newest Home Media Center flow into homes in
high quantity, and the software industry follows up with applications growing from this

option, the Home Theater industry can expect these PC’s to begin taking away the
marketplace of traditional AV Control Systems such as currently enjoyed by Crestron.

WiFi versus Crestron

Obviously, Crestron is aware of this threat and is taking product-planning paths to

coexist. But when the majority of audio entertainment products like Sony, Phillips,
Pioneer, etc. begin bringing out remote network interfaces, then your PC or Mac will
have the ability to take over control of your television, just like in the show Outer Limits.
TIVO (via the TIVO Home Media Control System) gives you that capability right now
with WiFi. It has a USB port that you can simply plug in a LinkSYS 802.11b WiFi tiny
antenna. Think how you can now use the WiFi connectivity to use your MP3 Music
Library (iTunes) and your Photo Album (iPhoto) residing on your PC/Mac. Yes, you now

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can display your High Definition slide show with background music of your choice. The
interconnectivity demonstrated with a TIVO will certainly characterize most if not all of

future technology innovations designed for home entertainment. The home environment
requires it, and the customers, who for the most part will be PC literate, already expect
that they will be in control.

The result is a tremendous amount of versatility that simply will not be
controlled by traditional AV companies like Crestron. Imagine the
possibilities…
MPEG4 Streaming HD Video over the Internet

The introduction of MPEG4 has allowed products that can stream full screen HD Videos
over DSL to the home. Now the Internet Connected Digital Home Theater can display
HD Photos in a slide show with MP3/MP4 Audio background music on your Krell THX2
Audio System in full surround sound. You can watch not only home movies in
QuickTime or DVD formats from your PC/Mac on your new HDTV, but also watch the
Internet Broadband connection MPEG4 PPV movies. Currently, the new MPEG4
streaming movie market is growing slowly because of the high bandwidth required. This
limitation, of course, disappears with a broadband connection. The hardware is available
now, for example the XBOX WiFi option runs at 54mbs with 802.11g and outputs
component video to the HDTV, and Digital Audio.

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What does this emergence of the PC industry mean to you?

It means that the beginning of the convergence of the traditional audiovisual industry and

the massive PC industry are beginning to merge with control of, and the distribution of
content material. The winner will undoubtedly be the PC who will emerge as the
dominant leader who dictates the direction of the new audiovisual technology and
interconnection and control interfaces. This years NAB show in Las Vegas has clearly
shown that the creation, post-production and distribution of the content will be digital,
and it will be HD.

The Apple Factor

Apple had the largest booth we have ever seen at NAB. It was to introduce its complete
Digital HD Video system, allowing for the creation, edit, and post production of HD
content with the massive disk storage systems necessary to handle the extreme size and
data rates necessary to run and edit HD in real time. The software, called quot;FinalCut Pro
HDquot; is a consumer software product that is also used by Hollywood post-production
studios. The software and hardware together serve as an ideal package to use as the heart
of the Digital Home Theater.

A company can enter this market with the standard software and PCs and
evolve into a high-end/professional level store.

A niche market as an Apple VAR

We believe that the retail Apple vendors will sell their basic products, but that high-end
retail stores would be needed for the professional level product sales. This would include
selling massive disk storage systems and UNIX MAC OSX software, which happens to

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be the easiest to run and manage, as well as products from the entire PC industry. A
company will also be able to sell the related medium/high range HD DVCAM Video

Cameras, the associated software, plus the typical DV cameras.

Currently, there are few true real high-end Home Theater Stores in the USA, maybe one
or two per large city in this top-level retail group (please see the addendum regarding
Best Buy and Magnolia). The next level down is the more electronics/computer type store
style like Best Buy and Circuit City, and they are selling substantial quantity of Plasma
TV’s and THX 5.1 Dolby Audio Systems. In business it is the profitability of the sale that

determines the long-term growth, and these large electronic chains operate on small
margins and high volume. The high-end retailers sell for much higher profit margins and
much of it is in the addition of installation and service and the associated wiring,
programming, etc. This group has both the infrastructure and the customers necessary to
build a profitable product like the Digital Home.

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Section Three: The Product

The Digital Home Theater is a high-end home/office theater customized for HD video as
well as a seamless integration with Broad Band Internet data access. Its unique features
include the use of WIFI components to make it easy to decorate with in the home or

office, and a web based interface (AiHome™) allowing the use of the best components
currently available with an easy way to control them. The video and other large amounts
of user data are quickly accessed via a server system optimized for high bandwidth video.

ANY technology and/or product that displays on a HD Screen is to be considered as
possible part of the Digital Home Theater. For it is the SCREEN that captivates the
buyer. And the more they can do with the SCREEN, the more valuable the Home Theater
is. The current configuration is made up of the most effective hardware/software products

to allow for the best display and ease of use.

The Hardware

The basic hardware consists of the new Apple new high-end video server (Xserve, Xsan)
combined with RAID storage allowing increments of 3.5 Terabytes. This server is
preferred because of its optimization for video manipulation (see the topic: Software

regarding Final Cut Pro). The other hardware consist of WiFi controllable home theater
components such as the HDTV display and Internet displays such as on an attached
workstation or wireless laptop.

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The Digital Home Theater Server:

The Final Cut Pro HD Video Editing System from Apple

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The Software

AiHome™ is the creation of AiLibrary, Inc.; it is a Web based Digital Home Theater

User Interface (UI) that simply and transparently handles the process of hooking the
home up to the Internet as well as connecting the electronics in the home. The software,
being Web based, can allow the user to control his home anywhere he can access a
browser, including from his laptop or even a smart cell phone. The AiHome™ software
runs on the Digital Home Theater Server. Since a large amount of the user data will be
HD video, another important piece of software is quot;FinalCut Pro HDquot;, a consumer based
HD video editing package made by Apple and packaged with the server.

The Capabilities

The main purpose of the Digital Home Theater is straightforward. The user relaxes in
his/her Digital Home Theater and uses it to watch videos/multimedia and have access to a
Broadband Internet. The video may not necessarily be an entertainment film or a home
video. The Digital Home Theater is also ideal as a corporate presentation room, so the
user could be watching a corporate training or multimedia presentation. Regardless, the
function itself is simply to allow the user of the Digital Home Theater to interact with the
information in an efficient, convenient, and comfortable manner.

Simplicity is difficult to design, as many user interface designers have painfully learned.
However such interfaces can be found, many on well-cited Internet Web sites. The
Digital Home Theater uses a proven but innovative Web style interface, called
AiHome™ that allows the simplicity that the user finds so critical for comfort. The Web
interface incorporates a QuickTime VR wraparound theme (which can be customized by
the user) which graphically represent the components of the Digital Home Theater and

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allows their control via familiar hot spot navigation, such as done when surfing the
Internet.

Because the Digital Home Theater software (AiHome™) is Web-based and the displays
are WiFi addressable, the possibilities for user ease and control are great. The next
section, The Digital Home Demo Theater, describes the in detail. However, note that
the Web interface coupled with Internet addressable components allows for some
interesting scenarios as to how useful and capable that combination can be.

For example in the home, as users build continually more impressive Digital Home
Theaters, the family will come together in the new quot;family roomquot; (if it was not already
designed for that purpose). The family room in most new homes is more of the extended
eating area with another large screen television. With a connected home and two HDTVs
just think of the family gaming possibilities. You could even add a few remote friends in
multi-player gaming applications via the broadband Internet connection

Now as the PC continues to encroach on the traditional TV in the home, the users will
become used to having several display screens throughout the home. The home
eventually will know which room the user is in, and changes the content on the screen to
what the user was watching, if desired. The Eye Toy is an example of cheap new camera

technology that can do this, via visual user input to the display screen and a resulting
reaction from the content (game, dancing, boxing) on the screen. This means that the user
will be able to view multiple content streams simultaneously displayed on the screen.
This is the convergence, the convergence of diverse information where you are at in the
home or office, or even on the road.

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The Digital Home Demo Theater

The Digital Home Theater is envisioned as a new and exciting live Internet connected

Home Digital Theater demo room. It is described in this white paper both as a
specification of a useful sales tool for company marketing Digital Home Theaters, and
also as a way of describing the current specifications. Its capabilities should awaken the
high-end buyer's interest after seeing the multitude of applications that the Digital Home
Theater can grow into as his/her Internet connected home theater.

A Digital Home Theater Demo will have the following:

Home Video Security Systems with home web cam images transmitted via the
Internet to the owners cell phone or PDA or WiFi Laptop while at Starbucks, or
his company computer.

Personal Photo Albums viewable over the Internet, with Slideshow capability to
the Digital Home Theater HD screen or any video screen or PC screen in the
house, as well as home chat capability.

Personal/Corporate Video Albums viewable over the Internet, with streaming
video capability in the Digital Home Theater HD screen or any video screen or
PC screen in the house.

Personal MP3 Music Library that plays via your Digital Home Theater sound
system.

The Digital Home Theater Digital Media Hub with full scan, fire wire or WiFi

connection, edit software, and even a DVD burner that plays on any DVD player
in the house or elsewhere.

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A Digital Home Theater makes use of WiFi

Why? Because of simplicity The new WiFi wireless IP connected products reduce the

need for the wiring jobs currently needed for theater installations, and in fact will allow
the user to install their own Digital Home Theater. This ease in installation coupled with
its efficiency (The speed of the new WiFi network is typically running a 11 MB 802.11b
with a new 54 MB 802.11g now available in wireless form) will facilitate increased sales
for most Digital Home Theater vendors.

Keep in mind also that the “Bluetooth” wireless communication architecture has found its
way into our new refrigerators, cell phones, and PDAs as a way to interconnect and
control the emerging PCAV technology. The development of additional new
interconnected products for this technology will cause a greater customer demand,
because no matter how simple it gets, people want it turnkey. In this respect the Digital
Home Theater Demo will identify and select recommended new PC and Mac products to
sell with the above mentioned WiFi series of products, and also develop software
products to learn to demo these new products at the store.

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Section Four: Conclusion

The constantly changing technical marketplace has created a new opportunity for filling a
new customer need. The number of users of home theater equipment just expanded
dramatically with the inclusion of broadband PC Internet users. Due to the marketing
strategies of major PC players like Microsoft and Apple, those multitude of PC users are
now potential customers of a product that helps them enjoy and manage the HD and high
bandwidth content they find on today's super speed Internet.

This product is a Digital Home Theater, one that allows users to comfortably view HD
video and also control and access HD broadband content found while using the Internet.
A high-end home entertainment retail chain is ideally suited to take advantage of the
situation and provide the Digital Home Theater as a Value Added Reseller (VAR).

This white paper supplies the rationale and hardware/software specifications for the
Digital Home Theater. The product is really an integration of the best components and
software suited for the task. As such it involves little development except that needed for
the versatility of the user interface, as done with AiHome™. This interface is designed to
be a Web-based customized control with good human factors and ease of use in mind.

The opportunity is here now, the timing is critical, and this white paper provides the path
to a new lucrative market based on that precious opportunity. The vehicle of success is
the innovation of the Digital Home Library.

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Addendum

The following section contains various concepts and strategies that were not needed for a
concise and direct proposal concerning the Digital Home Theaters. However they are
valid, and serve to illustrate the depth of the analyses done to support this white paper.

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Addendum: AiHome™ Technology Center (ATC)

The center will advance the technology with an innovative research and development
series of projects. It will promote the technology by demonstrating and educating the
public as to the new possibilities offered by a broadband Internet (Bi). The Technology
Center will use a constant flow of the latest PC and Audio/Video equipment and systems.
The ATC will be built inside of a typical Home Digital Theater Demo Room . The

construction will be that of a partial house with easy to visualize Smart House wiring and
controlled by AiLibrary’s Smart Home Control System (AiHome™). This configuration
will allow the ATC to serve as a retail store, a live development lab, and a classroom.

AiHome™ Technology Center - Why is it needed?

The Center is needed for one primary reason - to sell profitable future Digital AV.
systems that are Internet connected. The Center will be an environment designed to
quickly introduce new products and technologies. It takes advantage of the fact that
advances in broadband technology will soon turn the Internet into a high bandwidth
network to the home. These changes will open the door for a host of previously
impossible applications. The Center solves the problem of how to create these different
applications and it also determines if they will be profitable. It does this by building an
environment where an Internet user can use the new applications in a meaningful and
productive way, and where at the same time, we can assess their usefulness and
profitability. The Digital Home Theater environment should be available to its customers
online via a support web site.

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Addendum: Apple Digital Hub

From Apple’s latest Annual Report:

Apple is committed to bringing the best possible personal computing experience to
students, educators, creative professionals, businesses and consumers around the world
through its innovative hardware, software, peripherals, and Internet offerings, including

.Mac and the iTunes Music Store.

The company believes that the personal computing has entered a new era in which the
personal computer functions for both professionals and consumers as the digital hub for
advanced new digital devices such as the Company’s new iPod digital music players, and
other electronic devices. The attributes of the personal computer including its ability to
run complex applications, posses a high quality user interface, contain large and
relatively inexpensive storage, and easily connect to the Internet in multiple ways and at
varying speeds, can individually add value to these devices and interconnect then as well.
Apple provides innovative industrial design intuitive ease-of-use, and built-in
networking, graphics, and multimedia capabilities. The Company is uniquely positioned
to offer digital hub products and solutions.

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Addendum: Comparison Home Theater Chain

Best Buy has purchased a 22 store chain called Magnolia. This type of store, which sells
high-end home theater components, is ideally suited to enter the new marketplace for
Home Digital Theaters.

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Addendum: Digital Library Idea

Libraries were the passion of Andrew Carnegie, and it is one of the writers of this white
paper (Gordon Kraft). AiLibrary, Inc. wants to change the way the world learns by
Internet research via teaching software the “search and correlation of stuff”... The
correlation for AiLibrary, is to work towards access of the massive library called the

“Internet”, and to display it on a Home Theater HDTV, a Home Digital Library, in
addition to normal command and control applications of a Smart Home. AiLibrary, Inc.
calls their Smart Home Software AiHome™.

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