A system and method of creating and managing encryption keys in a data processing device generates subsequent encryption keys by combining the existing encryption key with an existing password and seed value. In the preferred embodiment, the initial encryption key is embedded during manufacture and is unknown to the user and manufacturer, thus ensuring that all subsequent encryption keys are derived from an unknown value. When a subsequent encryption key is generated, all data encrypted using the existing encryption key is decrypted using the existing encryption key and re-encrypted using the subsequent encryption key before the existing encryption key is overwritten. In a further aspect, during encryption/decryption the encryption key is combined with the sector address of the data to be encrypted/decrypted in order to generate a unique key for each sector of data to be encrypted/decrypted.