**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-QSB**





(Mark
      One)





x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


FOR
      THE
      QUARTERLY PERIOD ENDED **September
      30, 2007**





o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT


FOR
      THE
      TRANSITION PERIOD FROM __________ TO __________





COMMISSION
      FILE NUMBER **000-33067**








**DIGICORP,
      INC.**


(Exact
      name of small business issuer in its charter)





**DELAWARE**
              (State
                or other jurisdiction of incorporation or organization)
            
            **87-0398271**
              (I.R.S.
                Employer Identification No.)




**4143
      Glencoe Avenue** , **Unit B, Marina Del Rey, CA 90292**


(Address
      of principal executive offices)





Issuer’s
      telephone Number: **(310)
      728-1450**





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No x





**APPLICABLE
      ONLY TO CORPORATE ISSUERS**





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: As of September 30, 2007, the issuer had
      39,545,104 outstanding
      shares of Common Stock, $.001 par value.





Transitional
      Small Business Disclosure Format (check one): Yes o No x









**TABLE
      OF CONTENTS**




**PART
                      I - FINANCIAL INFORMATION**PageItem
                      1. Financial Statements
                  1Item
                      2. Management’s Discussion and Analysis or Plan of
                      Operation
                  11Item
                      3. Controls and Procedures
                  23**PART
                      II - OTHER INFORMATION**Item
                      1. Legal Proceedings
                  24Item
                      2. Unregistered Sales of Equity Securities and Use of
                      Proceeds
                  24Item
                      3. Defaults Upon Senior Securities
                  24Item
                      4. Submission of Matters to a Vote of Security Holders
                  24Item
                      5. Other Information
                  24Item
                      6. Exhibits
                  24**SIGNATURES**
                  25





**PART
      I - FINANCIAL INFORMATION**





**Item
      1.****Financial
      Statements.**





**DIGICORP,
                INC.****Consolidated
                Balance Sheets (Unaudited)**


**September
                30,**
            
            **December
                31,****2007**
            
            **2006****ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            14,057
            
            $
            3,350Accounts
                receivable, net
            
            
            178,049
            
            
            58,539Inventories
            
            
            46,055
            
            
            50,705Other
                current assets
            
            
            30,888
            
            
            29,159**TOTAL
                CURRENT ASSETS**
            
            
            269,049
            
            
            141,753Property
                and equipment, net
            
            
            192,300
            
            
            253,855Intangible
                assets, net
            
            
            431,146
            
            
            527,780**TOTAL
                ASSETS**
            
            $
            892,495
            
            $
            923,388**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            362,000
            
            $
            360,481Accrued
                liabilities
            
            
            498,843
            
            
            295,400Revolving
                credit line - related party
            
            
            —
            
            
            50,000Note
                payable - related party
            
            
            952,000
            
            
            473,000Deferred
                revenue
            
            
            69,672
            
            
            69,672**TOTAL
                CURRENT LIABILITIES**
            
            
            1,882,515
            
            
            1,248,553**LONG
                TERM LIABILITIES**Convertible
                note payable - related party
            
            
            556,307
            
            
            556,307Debt
                discount - beneficial conversion feature
            
            
            (125,902
            )
            
            (154,955
            )**TOTAL
                LONG TERM LIABILITIES**
            
            
            430,405
            
            
            401,352**TOTAL
                LIABILITIES**
            
            
            2,312,920
            
            
            1,649,905**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS'
                EQUITY (DEFICIT)**Preferred
                stock, $0.001 par value: 1,000,000 shares authorized;zero
                shares issued and outstanding at September 30, 2007 andDecember
                31, 2006
            
            
            —
            
            
            —Common
                stock, $0.001 par value: 60,000,000 shares authorized;39,545,104
                shares issued and outstanding at September 30, 2007;37,239,002
                shares issued and outstanding at December 31, 2006
            
            
            39,545
            
            
            37,239Paid-in
                capital
            
            
            5,995,348
            
            
            4,714,900Accumulated
                deficit
            
            
            (7,455,318
            )
            
            (5,478,656
            )**TOTAL
                STOCKHOLDERS' EQUITY (DEFICIT)**
            
            
            (1,
                420,425
            )
            
            (726,517
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)**
            
            $
            892,495
            
            $
            923,388




The
                accompanying notes are an integral part of these consolidated interim
                financial statements.







Page
          1











**DIGICORP,
                INC.****C****onsolidated
                Statements of Operations (Unaudited)**


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****Sept
                  30,**
              
              **Sept
                  30,**
              
              **Sept
                  30,**
              
              **Sept
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****REVENUE**Sales
              
              $
              143,919
              
              $
              88,043
              
              $
              346,534
              
              $
              755,791Licensing
                  Revenue
              
              
              —
              
              
              7,779
              
              
              —
              
              
              7,779**Total
                  revenue**
              
              
              143,919
              
              
              95,822
              
              
              346,534
              
              
              763,570**OPERATING
                  EXPENSES**Cost
                  of sales
              
              
              32,298
              
              
              65,526
              
              
              105,479
              
              
              484,659Selling,
                  general and administrative expenses
              
              
              494,647
              
              
              1,302,713
              
              
              2,073,223
              
              
              3,889,639**Total
                  operating expenses**
              
              
              526,945
              
              
              1,368,239
              
              
              2,178,702
              
              
              4,374,298**Operating
                  Loss**
              
              
              (383,026
              )
              
              (1,272,417
              )
              
              (1,832,168
              )
              
              (3,610,728
              )**Interest
                  Expense**
              
              
              34,295
              
              
              22,425
              
              
              142,894
              
              
              56,898**LOSS
                  BEFORE INCOME TAXES**
              
              
              (417,321
              )
              
              (1,294,842
              )
              
              (1,975,062
              )
              
              (3,667,626
              )**PROVISION
                  FOR INCOME TAXES**
              
              
              —
              
              
              —
              
              
              1,600
              
              
              800**NET
                  LOSS**
              
              $
              (417,321
              )
              $
              (1,294,842
              )
              $
              (1,976,662
              )
              $
              (3,668,426
              )**BASIC
                  AND DILUTED NET LOSS PER COMMON SHARE**
              
              $
              (0.01
              )
              $
              (0.03
              )
              $
              (0.05
              )
              $
              (0.10
              )**WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING**
              
              
              39,277,655
              
              
              37,239,002
              
              
              38,245,435
              
              
              37,118,319


The
                accompanying notes are an integral part of these consolidated financial
                statements.




Page
          2




**DIGICORP,
                INC.****Consolidated
                Statements of Cash Flows (Unaudited)**


Nine
                  Months EndedSept
                  30,
              
              Sept
                  30,2007
              
              2006**Cash
                  flows from operating activities:****Net
                  loss**
              
              **$**
              **(1,976,662**
              **)**
              **$**
              **(3,668,426**
              **)****Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:**Depreciation
              
              
              64,322
              
              
              4,660Amortization
                  of licenses
              
              
              108,634
              
              
              72,465Amortization
                  of debt discount
              
              
              29,054
              
              
              29,054Stock-based
                  compensation to employees and directors
              
              
              962,143
              
              
              2,429,313Stock-based
                  compensation to consultants
              
              
              —
              
              
              8,242**Changes
                  in operating assets and liabilities:**Accounts
                  receivable
              
              
              (119,510
              )
              
              17,515Inventories
              
              
              4,650
              
              
              53,496Other
                  current assets
              
              
              (1,729
              )
              
              202,294Other
                  long term assets
              
              
              —
              
              
              48,922Accounts
                  payable and accrued liabilities
              
              
              204,962
              
              
              238,275Deferred
                  revenue
              
              
              —
              
              
              (7,779
              )**Net
                  cash used in operating activities**
              
              
              **(724,136**
              **)**
              
              **(571,969**
              **)****Cash
                  flows from investing activities:**Purchases
                  of licenses and developed content
              
              
              (12,000
              )
              
              (119,600
              )Proceeds
                  from disposal of licenses
              
              
              —
              
              
              140,000Purchases
                  of property and equipment
              
              
              (2,767
              )
              
              (27,617
              )**Net
                  cash used in investing activities**
              
              
              **(14,767**
              **)**
              
              **(7,217**
              **)****Cash
                  flows from financing activities:**Proceeds
                  from issuance of common stock
              
              
              270,610
              
              
              273,400Proceeds
                  from revolving credit line - related party
              
              
              —
              
              
              50,000Proceeds
                  from related party note
              
              
              479,000
              
              
              220,000**Net
                  cash provided by financing activities**
              
              
              **749,610**
              
              
              **543,400**Net
                  increase (decrease) in cash and cash equivalents
              
              
              10,707
              
              
              (35,786
              )**Cash
                  and cash equivalents at beginning of period**
              
              
              **3,350**
              
              
              **54,518****Cash
                  and cash equivalents at end of period**
              
              **$**
              **14,057**
              
              **$**
              **18,732**Supplemental
                  disclosures of cash flow information:Income
                  taxes
              
              $
              1,600
              
              $
              1,200Non-cash
                  investing and financing activity:Beneficial
                  conversion feature
              
              $
              50,000Acquisition
                  of intangible assets for common stock
              
              $
              —
              
              $
              (160,000
              )Acquisition
                  of fixed assets for common stock
              
              $
              —
              
              $
              (152,000
              )


The
                accompanying notes are an integral part of these consolidated financial
                statements.





Page
          3




**DIGICORP,
      INC.**


**Notes
      to Consolidated Interim Financial Statements - Unaudited**


**September
      30, 2007**




**1.
      DESCRIPTION OF BUSINESS**





Digicorp,
      Inc. (“the Company”) a Delaware corporation was originally organized under the
      laws of the State of Utah on July 19, 1983. On July 1, 1995, the Company became
      a development stage enterprise as defined in Statements of Financial Accounting
      Standards ( ***“SFAS”*** ) No. 7
      when it sold its assets and changed its business plan. On December 29, 2005,
      the
      Company ceased being a development stage enterprise when it acquired all of
      the
      issued and outstanding capital stock of Rebel Crew Films, Inc., a California
      corporation (“Rebel Crew Films”), pursuant to a recapitalization transaction
      (see note 4).





Rebel
      Crew Films operates as a wholly-owned operating subsidiary of the Company.
      Rebel
      Crew Films was organized under the laws of the State of California on August
      7,
      2002 to distribute Latino home entertainment products.  Rebel Crew Films
      distributes Spanish language films and serves wholesale, retail, catalog, and
      e-commerce accounts.  Rebel Crew Film’s titles are sold via the internet
      and can be found at major retail outlets and independent video outlets across
      the United States of America and Canada.





The
      Company, including its operating subsidiary, generated revenue through the
      direct sales of its licensed content. The Company’s sales force focuses on
      direct sales of what we expect to be the more profitable large wholesalers
      and
      retailers which require a much smaller infrastructure to support.  The
      Company is organized in a single operating segment. All of the Company’s
      revenues are generated in the United States, and the Company has no long-lived
      assets outside the United States.





**2.
      BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of Presentation**





The
      accompanying consolidated financial statements do not include all the
      information and disclosures required by accounting principles generally accepted
      in the United States of America. The preparation of financial statements in
      conformity with accounting principles generally accepted in the U.S. requires
      management to make estimates and assumptions that affect the amounts reported
      in
      the financial statements and accompanying notes. The actual results may differ
      from management’s estimates.




The
      interim consolidated financial information is unaudited, but reflects all normal
      adjustments that are, in the opinion of management, necessary to provide a
      fair
      statement of results for the interim periods presented. The consolidated balance
      sheet as of December 31, 2006, was derived from the Company’s audited financial
      statements. Operating results for the interim periods presented are not
      necessarily indicative of the results to be expected for the fiscal year ending
      December 31, 2007. The interim consolidated financial statements should be
      read
      in connection with the Company’s audited financial statements for the year ended
      December 31, 2006.





**Principles
      of Consolidation**





The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly-owned subsidiary, Rebel Crew Films. All significant
      intercompany accounts and transactions have been eliminated in
      consolidation.




Page
          4


**DIGICORP,
      INC.**


**Notes
      to Consolidated Interim Financial Statements - Unaudited
      (continued)**


**September
      30, 2007**




**Going
      Concern**





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern which contemplates the realization of assets
      and satisfaction of liabilities in the normal course of business. At September
      30, 2007 the Company has an accumulated deficit of $7.5 million and a working
      capital deficit of $1.6 million which includes a deferred revenue balance of
      $70,000, as discussed below. During the nine months ended September 30, 2007,
      the Company incurred a loss of $2.0 million. During the nine months ended
      September 30, 2007, the Company primarily relied upon revenues generated from
      the direct sales of its Latino home entertainment content and on debt and equity
      investments to fund its operations. These conditions raise substantial doubt
      about the Company’s ability to continue as a going concern. Management is
      actively seeking sources of additional financing in order to maintain and
      potentially expand the Company’s operations and to fund its debt repayment
      obligations. There can be no assurance that the Company will be able to obtain
      such additional funding on terms acceptable to the Company, if at all. The
      accompanying financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.





**3.
      ACCOUNTS RECEIVABLE**





Accounts
      receivable are recorded at the invoice amount and do not bear interest. Accounts
      receivable at September 30, 2007 and December 31, 2006 are presented net of
      an
      allowance for doubtful accounts of $5,000.





**4.
      RECAPITALIZATION**





On
      December 29, 2005, the Company completed the acquisition of Rebel Crew Films.
      Pursuant to the stock purchase agreement, the Company acquired all of the
      outstanding equity stock of Rebel Crew Films from the Rebel Crew Films
      Shareholders. As consideration for the acquisition the Company agreed to issue
      21,207,080 shares of the Company’s common stock (the “Purchase Price”) to the
      shareholders of Rebel Crew Films.




Following
      completion of the acquisition the Company’s previous shareholders owned
      15,530,104 common shares and Rebel Crew Films shareholders owned 21,207,080,
      or
      approximately 57.7% of the outstanding shares of the Company’s common stock. For
      accounting purposes the transaction is considered to be a recapitalization
      where
      Digicorp is the surviving legal entity, and Rebel Crew Films is considered
      to be
      the accounting acquirer. Accordingly, the historical financial statements prior
      to December 29, 2005 are those of Rebel Crew Films. Following the acquisition,
      Digicorp changed its fiscal year end from September 30 to December
      31.





**5.
      INTANGIBLE ASSETS**




Intangible
      assets consist of capitalized license fees for licensed content the Company
      acquired from owners including producers, studios and distributors as well
      as
      the Company’s Perreoradio suite of websites and internet properties and all
      related intellectual property (the “Perreoradio Assets”).





The
      Perreoradio suite of websites consists of the following Internet domain names
      and all materials, intellectual property, goodwill and records in connection
      therewith: Perreoradio.com, Radioperreo.com, Perreomobile.com, Perreotv.com,
      Puroperreo.com, Puroreggaeton.com, Purosandungueo.com, Sandungueoradio.com,
      Machetemusic.net, Machetemusic.org, Machetemusica.com and Musicamachete.com.
      As
      consideration for the Perreoradio Assets, the Company issued an aggregate of
      100,000 shares of its common stock valued at $160,000.





The
      Perreoradio Assets were determined to have an indefinite useful life based
      primarily on the renewability of the proprietary domain names. Intangible assets
      with an indefinite life are not subject to amortization, but will be subject
      to
      periodic evaluation for impairment




Page
          5





**DIGICORP,
      INC.**


**Notes
      to Consolidated Interim Financial Statements - Unaudited
      (continued)**


**September
      30, 2007**




Licensed
      content acquired is capitalized at the time of purchase. The term of the
      licensed content agreements usually vary between one to five years (the ***“Title
      Term”*** ).
      At the
      end of the Title Term, the Company generally has the option of discontinuing
      distribution of the title or extending the Title Term.




The
      Company amortizes the capitalized license fees, on a straight line basis over
      the Title Term. During the nine months ended September 30, 2007 and 2006,
      amortization expense related to the licensed content was $109,000 and $73,000,
      respectively.





Intangible
      assets and accumulated amortization at September 30, 2007 and December 31,
      2006
      are comprised of the following:




**September
                30,**
              **2007**
            
            **December
                31,**
              **2006**Perreoradio
                Assets
            
            $
            160,000
            
            $
            160,000Licensed
                and developed content
            
            
            677,599
            
            
            665,599Less:
                accumulated amortization
            
            
            (406,453
            )
            
            (297,819
            )Intangible
                assets, net
            
            $
            431,146
            
            $
            527,780





**6.
      INCOME (LOSS) PER COMMON SHARE**





Income
      (loss) per common share is based on the weighted average number of common shares
      outstanding. The Company complies with SFAS No. 128, *“Earnings
      Per Share,”* which
      requires dual presentation of basic and diluted earnings per share on the face
      of the statements of operations. Basic per share earnings or loss excludes
      dilution and is computed by dividing income (loss) available to common
      stockholders by the weighted-average common shares outstanding for the period.
      Diluted per share earnings or loss reflects the potential dilution that could
      occur if convertible preferred stock or debentures, options and warrants were
      to
      be exercised or converted or otherwise resulted in the issuance of common stock
      that then shared in the earnings of the entity.





Options
      and warrants issued pursuant to our Stock Option Plan and warrants that were
      issued outside our Stock Option Plan which were outstanding as of September
      30,
      2007 to purchase 9,128,833 and 550,000 shares of common stock, respectively,
      and
      500,000 shares issuable upon conversion of an outstanding convertible note
      were
      not included in the computation of diluted net loss per common share for the
      nine months ended September 30, 2007, as their inclusion would have been
      antidilutive.





Options
      and warrants issued pursuant to our Stock Option Plan and warrants that were
      issued outside our Stock Option Plan which were outstanding as of September
      30,
      2006 to purchase 8,762,500 and 550,000 shares of common stock, respectively,
      and
      500,000 shares issuable upon conversion of an outstanding convertible note
      were
      not included in the computation of diluted net loss per common share for the
      six
      months ended September 30, 2006, as their inclusion would have been
      antidilutive.





Page
          6


**DIGICORP,
      INC.**


**Notes
      to Consolidated Interim Financial Statements - Unaudited
      (continued)**


**September
      30, 2007**




**7.
      ACCRUED LIABILITIES**





Accrued
      liabilities at September 30, 2007 and December 31, 2006 are comprised of the
      following:




**September
                30,**
              **2007**
            
            **December
                31,**
              **2006**Obligations
                on license agreements
            
            $
            47,595
            
            $
            55,095Accrued
                salaries
            
            
            314,615
            
            
            189,736Accrued
                interest
            
            
            100,143
            
            
            41,913Other
            
            
            36,490
            
            
            8,656Total
                Accrued Liabilities
            
            $
            498,843
            
            $
            295,400





**8.
      CONVERTIBLE NOTE PAYABLE - RELATED PARTY**





In
      connection with the acquisition of Rebel Crew Films on December 29, 2005, the
      Company entered into a Securities Purchase Agreement with one of the
      shareholders of Rebel Crew Films, Rebel Holdings, LLC, a California limited
      liability company ( ***"Rebel
      Holdings"*** ),
      pursuant to which the Company purchased a $556,000 principal amount loan
      receivable owed by Rebel Crew Films to Rebel Holdings, LLC in exchange for
      the
      issuance of a $556,000 principal amount secured convertible note to Rebel
      Holdings, LLC. The secured convertible note accrues simple interest at the
      rate
      of 4.5%, matures on December 29, 2010 and is secured by all of the Company’s
      assets now owned or hereafter acquired. The secured convertible note is
      convertible into 500,000 shares of the Company’s common stock at the rate of
      $1.112614 per share. Jay Rifkin, the Company’s Chief Executive Officer and a
      director, is the sole managing member of Rebel Holdings, LLC.





As
      the
      effective conversion price of the note on the date of issuance was below the
      fair market value of the underlying common stock, the Company recorded debt
      discount in the amount of $194,000 based on the intrinsic value of the
      beneficial conversion feature of the note. The debt discount recorded as a
      result of the beneficial conversion feature will be amortized as non-cash
      interest expense over the term of the debt. During the nine months ended
      September 30, 2007 and 2006, interest expense of $29,100 has been recorded
      from
      the debt discount amortization, and as of September 30, 2007, the remaining
      debt
      discount balance attributable to the beneficial conversion feature was
      $125,902.





**9.
      REVOLVING LINE OF CREDIT AGREEMENT - RELATED PARTY**





*Revolving
      Line of Credit Agreement*





During
      the period March 23, 2006 through September 28, 2006, the Company was a party
      to
      a Revolving Line of Credit Agreement (the ***“Revolving
      Line of Credit”*** )
      with
      Ault Glazer Bodnar Acquisition Fund, LLC ( ***“AGB
      Acquisition Fund”*** ).
      The
      Revolving Line of Credit allowed the Company to request advances totaling an
      aggregate of up to $150,000 from AGB Acquisition Fund. At September 30, 2007,
      the Company had borrowed $50,000 against the Revolving Line of Credit and
      incurred interest expense of $3,000 for the nine months then ended. Amounts
      borrowed against the Revolving Line of Credit are evidenced by Convertible
      Secured Promissory Notes (the ***“Convertible
      Notes”*** ) which
      allow for the conversion of all or any part of the outstanding principal balance
      of the Convertible Notes including any accrued interest thereon, to shares
      of
      the Company’s common stock at a price equal to the lesser of the closing price
      of the Company’s common stock on March 23, 2006 or the share price of the
      Company’s common stock offered in the Company’s next round of financing in a
      private placement offering completed while the principal balance of the
      Convertible Notes are outstanding. The Company’s former Chief Financial Officer
      was also the Chief Financial Officer of AGB Acquisition Fund.





The
      Revolving Line of Credit contained a beneficial conversion feature which
      resulted in additional debt discount of $50,000.  The beneficial conversion
      amount was measured using the excess of the aggregate fair value of the common
      stock into which the debt is convertible over the proceeds allocated to the
      security. The Company amortized the beneficial conversion feature to interest
      expense.  For the nine months ended September 30, 2007, the Company
      recorded the $50,000 as interest expense.





On
      September 30, 2007, AGB Acquisition Fund converted $50,000, which constituted
      all of the outstanding principal balance of the Convertible Notes including
      accrued interest, to 556,102 shares of the Company’s common stock in accordance
      with their conversion rights.





Page
          7




**DIGICORP,
      INC.**


**Notes
      to Consolidated Interim Financial Statements - Unaudited
      (continued)**


**September
      30, 2007**




**10.
      STOCK BASED COMPENSATION**





Effective
      July 20, 2005, the Board of Directors of the Company approved the 2005 Stock
      Option and Restricted Stock Plan (the ***“2005
      Plan”*** ).
      The
      Plan reserves 15,000,000 shares of common stock for grants of incentive stock
      options, nonqualified stock options, warrants and restricted stock awards to
      employees, non-employee directors and consultants performing services for the
      Company. Options and warrants granted under the Plan have an exercise price
      equal to or greater than the fair market value of the underlying common stock
      at
      the date of grant and become exercisable based on a vesting
      schedule determined at the date of grant. The options expire 10 years
      from the date of grant whereas warrants generally expire 5 years from the date
      of grant. Restricted stock awards granted under the Plan are subject to a
      vesting period determined at the date of grant.





The
      Company accounts for stock-based compensation awards in accordance with the
      provisions of SFAS No. 123(R), *Share-Based
      Payment* ,
      which
      addresses the accounting for employee stock options. SFAS 123(R) requires that
      the cost of all employee stock options, as well as other equity-based
      compensation arrangements, be reflected in the financial statements over the
      vesting period based on the estimated fair value of the awards. The Company
      adopted SFAS 123(R) as of January 1, 2005. Prior to the adoption date, there
      were no stock options or other equity-based compensation awards
      outstanding.





A
      summary
      of stock option activity for the nine months ended September 30, 2007 is
      presented below:




**Outstanding
                Options****Shares
                Available for Grant**
            
            **Number
                of Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life (years)**
            
            **Aggregate
                Intrinsic Value****December
                31, 2006**
            
            
            **5,279,167**
            
            
            **9,720,833**
            
            **$**
            **0.73**
            
            
            **7.92**Grants
            
            
            (1,570,000
            )
            
            1,570,000
            
            **$**
            **0.12**
            
            
            **9.58**Cancellations
            
            
            2,162,500
            
            
            (2,162,500
            )
            $
            **0.55**
            
            
            **4.15****September
                30, 2007**
            
            
            **5,871,667**
            
            
            **9,128,333**
            
            **$**
            **0.67**
            
            
            **8.37**
            
            **$**
            **—**Options
                exercisable at:December
                31, 2006
            
            
            
            
            
            4,204,167
            
            $
            0.58
            
            
            6.51
            
            **$**
            **—**September
                30, 2007
            
            
            
            
            
            4,325,000
            
            $
            0.76
            
            
            7.91
            
            **$**
            **—**





The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (i.e., the difference between our closing stock price on
      September 30, 2007 and the exercise price, times the number of shares) that
      would have been received by the option holders had all option holders exercised
      their options on September 30, 2007. There have not been any options exercised
      during the nine months ended September 30, 2007 or year ended December 31,
      2006.





All
      outstanding stock-based compensation awards were granted by the Company at
      the
      per share fair market value on the grant date. The fair value of each option
      grant is estimated on the date of grant using the Black-Scholes option-pricing
      model. For options granted during the nine months ended September 30, 2007,
      the
      following assumptions were used: volatility 146%; expected life 5 years;
      risk-free interest rate 4.50%; dividend yield 0%.





During
      the nine months ended September 30, 2007 and 2006 stock-based compensation
      totaling $962,000 and $2,429,000, respectively, was recorded by the
      Company.





Page
          8




**DIGICORP,
      INC.**


**Notes
      to Consolidated Interim Financial Statements - Unaudited
      (continued)**


**September
      30, 2007**




**11.
      EQUITY TRANSACTIONS**





During
      the second quarter of 2007, the Company entered into a subscription agreement
      with several accredited investors in a private placement exempt from the
      registration requirements of the Securities Act of 1933, as amended (the ***“Securities
      Act”*** ).
      The
      Company issued and sold to these accredited investors an aggregate of 2,150,000
      shares of its common stock. These issuances resulted in aggregate gross proceeds
      to the Company of $215,000.





Pursuant
      to the stock purchase agreement (see Note 4) the Company agreed to escrow
      400,000 shares of its common stock pending satisfaction of performance
      milestones. During the three months ended September 30, 2007 the pending
      performance milestones were not satisfied and consequently the 400,000 shares
      held in escrow were canceled.





**12.
      WARRANTS**





During
      2005, the Company issued a total of 550,000 warrants, outside of its 2005 Plan,
      to purchase shares of common stock at prices ranging from $0.145 to $0.65 per
      share to consultants. No warrants, other than warrants that were issued pursuant
      to the 2005 Plan, were issued by the Company during the nine months ended
      September 30, 2007.





The
      following table summarizes information about common stock warrants outstanding
      at September 30, 2007:




Outstanding
            
            ExercisableExercise
              Price
            
            Number
              Outstanding
            
            Weighted
                Average
              Remaining
                Contractual
              Life
                (Years)
            
            Weighted
              Average
              Exercise
              Price
            
            Number
              Exercisable
            
            Weighted
                Average Exercise Price$
                0.10 - 0.25
            
            
            250,000
            
            
            3.25
            
            $
            0.145
            
            
            250,000
            
            $
            0.145$
                0.50 - 0.75
            
            
            300,000
            
            
            3.00
            
            
            0.65
            
            
            300,000
            
            
            0.65$
                0.10 - 0.75
            
            
            550,000
            
            
            3.11
            
            $
            0.42
            
            
            550,000
            
            $
            0.42





**13.
      RELATED PARTY TRANSACTIONS**





At
      September 30, 2007, the Company has a liability of $73,000 due to the sole
      member of Rebel Holdings, LLC, a California limited liability company ( ***"Rebel
      Holdings"*** ), an
      entity whose sole managing member is the Company’s Chief Executive Officer that
      owned approximately 54% of the outstanding shares of the Company’s common stock
      at September 30, 2007. In connection with the borrowings, the Company issued
      a
      promissory note in the amount of $73,000 to the member (the ***"Note”)*** on
      December 29, 2005. The monies loaned by the member to the Company were utilized
      to pay for certain capitalized license agreements and operating expenses of
      the
      Company. The Note was due on September 30, 2006 with 5.0% simple
      interest.




From
      January 10, 2007 through September 30, 2007, Jay Rifkin, the Company’s Chairman
      and Chief Executive Officer, and other related parties to him, loaned the
      Company a total of $479,000. Such loans are due on demand and bear interest
      at a
      rate equal to the prime rate, as published in *The
      Wall Street Journal* from
      time to time, plus one percentage point to the date of payment in full. Mr.
      Rifkin and the other related parties have loaned the Company $952,000 as of
      September 30, 2007.




Page
          9




**DIGICORP,
      INC.**


**Notes
      to Consolidated Interim Financial Statements - Unaudited
      (continued)**


**September
      30, 2007**




Other
      current assets at September 30, 2007 includes $11,000 owed to the Company by
      Ault Glazer Bodnar & Company, Inc. ( ***“AGB
      & Company”*** ) based
      on an agreement to reimburse the Company for salaries paid in connection with
      the recapitalization of the Company. The Company’s former Chief Financial
      Officer was also the Chief Financial Officer of AGB & Company.





**14.
      SUBSEQUENT EVENTS**





During
      October 2007, Mr. Rifkin loaned the Company an additional $50,000. As
      consideration for the loans, the Company issued Mr. Rifkin a demand promissory
      note at a rate equal to the prime rate, as published in *The
      Wall Street Journal* from
      time to time, plus one percentage point to the date of payment in
      full.





Page
          10




**Item
      2.****Management’s
      Discussion and Analysis or Plan of Operation.**





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our financial statements and
      the
      related notes thereto contained elsewhere in this Form 10-QSB. This
      discussion contains forward-looking statements that involve risks and
      uncertainties. All statements regarding future events, our future financial
      performance and operating results, our business strategy and our financing
      plans
      are forward-looking statements. In many cases, you can identify forward-looking
      statements by terminology, such as “may,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or
“continue” or the negative of such terms and other comparable terminology. These
      statements are only predictions. Known and unknown risks, uncertainties and
      other factors could cause our actual results to differ materially from those
      projected in any forward-looking statements. In evaluating these statements,
      you
      should specifically consider various factors, including, but not limited to,
      those set forth under "Risk Factors" appearing at the end of this Management’s
      Discussion and Analysis (* ***“MD&A”*** *).*





*The
      following "Overview" section is a brief summary of the significant issues
      addressed in this MD&A. Investors should read the relevant sections of the
      MD&A for a complete discussion of the issues summarized below. The entire
      MD&A should be read in conjunction with Item 1. Financial
      Statements*





**OVERVIEW**





We
      are an
      aggregator and distributor of programming content and a developer of multi-media
      technologies with operations concentrated primarily in the internet and home
      video business segments.





Together
      with our subsidiary, we are primarily engaged in the business of developing
      and
      distributing programming content, multi-media technologies, and advertising
      via
      the internet. We expect that within the next 12 months we will expand our
      advertising areas further into online as well as other alternative music and
      video programming formats, including video-on-demand (“VOD”) in the United
      States and internationally. We will focus a significant amount of our available
      resources to obtain the exclusive distribution rights for additional content
      through development, acquisition or licensing arrangements.





We
      currently generate revenue through either sub-licensing agreements with third
      parties that distribute our licensed content or through direct sales. Our
      typical licensing agreement consists of a three to five-year contract that
      carries a 15% - 50% royalty on gross sales of licensed product. We are currently
      focusing on the manufacture and distribution of our own licensed content and
      have seen a significant shift in revenues from sub-licensing agreements to
      direct sales.





We
      believe that opportunities exist in the VOD space to reach a larger customer
      base for the distribution of our content and to generate advertising revenue.
      We
      will actively pursue this potential source of revenue in the form of licensing
      our content in digital format.





Our
      primary operations are conducted through our wholly owned subsidiary, Rebel
      Crew
      Films, Inc. In addition, we have focused and will continue to focus development
      efforts in our internally created ViraCast software. We are organized in a
      single operating segment with no long-lived assets outside of the United States
      of America. All of our revenues to date have been generated in the United
      States, but, with the development of ViraCast and PerreoRadio.com (described
      below), we expect that a portion of our future revenues will be from other
      countries. Revenue sources could be from distribution of content, advertising
      and licensing.





**REBEL
      CREW FILMS, INC.**





Rebel
      Crew Films, Inc. was founded in 2001 and our goal is to become a leading
      distributor of Latino home entertainment products.  Developed to target
      Spanish speaking consumers who increasingly demand new Latino content and
      classic Spanish language movies, we offer producers and content-providers a
      flexible option to the larger Hollywood studio distributors and have emerged
      as
      a company that attracts premiere home entertainment products.




Page
          11




Our
      specialty orientation provides our content partners with focused attention
      not
      accessible from major Hollywood studios or rental product distributors. We
      currently maintain and distribute approximately 200 Spanish language films,
      of
      which we control the exclusive distribution rights to approximately 52. The
      films in which we control the exclusive distribution rights are expected to
      provide us with greater profit margins as we expand our direct sales. Our
      content library currently consists of approximately 130 titles for which we
      exclusively control the distribution rights. As we expand our direct sales
      and
      increase the number of customers that purchase exclusive content directly from
      us, we believe that sales of our exclusive content will begin to represent
      a
      larger percentage of the total numbers of films that we distribute.





Our
      titles can be found at Wal-Mart, Best Buy, Blockbuster, K-Mart, and hundreds
      of
      independent video outlets across the United States of America and Canada. Our
      diverse Spanish language programming includes: new releases, classic Mexican
      cinema, animation, cult, sports, martial arts, family entertainment, and
      more.





**PERREORADIO.COM**





On
      February 7, 2006, we entered into an asset purchase agreement with Matthew
      B.
      Stuart pursuant to which we purchased the following Internet domain names and
      all materials, intellectual property, goodwill and records in connection
      therewith (the ***“Assets”*** ):
      PerreoRadio.com, Radioperreo.com, Perreomobile.com, Perreotv.com,
      Puroperreo.com, Puroreggaeton.com, Purosandungueo.com, Sandungueoradio.com,
      Machetemusic.net, Machetemusic.org, Machetemusica.com and
      Musicamachete.com.





In
      accordance with the purchase of the Assets, we entered a three-year employment
      agreement with Mr. Stuart. As consideration for the Assets, we issued Mr. Stuart
      and his nominees an aggregate of 100,000 shares of common stock. All such shares
      of common stock are subject to lock up agreements as follows: 25,000 shares
      are
      subject to a lock up agreement for one year; 25,000 shares are subject to a
      lock
      up agreement for two years; and 50,000 shares are subject to a lock up agreement
      for three years.





PerreoRadio.com
      is a Latino based community website that offers online radio shows from some
      of
      the top DJ’s in the Reggaeton genre. Our intent is to become a recognized leader
      in the Spanish-language and Hispanic-targeted markets by capturing the top
      DJ’s
      in this area and expanding into 12 - 15 markets to syndicate the shows.
      Currently, we operate in five markets: San Francisco, Los Angeles, Chicago,
      Boston and New York City.





**ICODEMEDIA**





On
      September 19, 2005, upon entering into an asset purchase agreement with Philip
      Gatch, we completed the initial transaction to transform the company from that
      of a development stage enterprise to a digital media and content delivery
      company. The assets purchased consisted of the iCodemedia URL’s and all related
      intellectual property (the ***“iCodemedia
      Assets”*** ).
      The
      iCodemedia URL’s consist of: www.icodemedia.com, www.iplaylist.com,
      www.tunecast.com, www.tunebucks.com, www.podpresskit.com and
      www.tunespromo.com.




Ultimately,
      we intend to develop our iCodemedia Assets as a software publishing solution
      for
      iTunes and the Apple iPod. , Sony Playstation and multimedia enabled mobile
      phones.





**VIRACAST**





We
      are
      developing a suite of patent pending applications and services that allow for
      the enterprise workflow management, processing, distribution and control of
      content for next generation devices and emerging content delivery platforms.
      Our
      proprietary ViraCast technology provides content producers, advertisers, and
      marketers new revenue models built around these emerging platforms with enhanced
      user data, reporting, and accountability.




Page
          12




Our
      strategy for ViraCast is to pinpoint unexploited and unrealized market
      opportunities that emerge from the evolving media and advertising landscapes
      and
      build solutions around them. In particular, the company is focusing on new
      markets that arise from the following sources:





**·**
            ***Podcasting***(the distribution of audio or video files over the Internet for listening
                or viewing on mobile devices and personal computers);**·**
            ***Online
                Advertising***;
                and**·**
            ***Viral
                Marketing***(marketing and advertising techniques that use pre-existing social
                networks to produce increases in brand awareness through self-replicating
                viral processes).





We
      will
      work with content developers, entertainment companies, advertising agencies,
      music talent, labels, representatives, distributors, as well as software and
      engineering companies to address the needs and requirements of the next
      generation of ad supported and paid content delivery technologies.





The
      company has successfully utilized its ViraCast technology to enhance and
      distribute online radio shows from PerreoRadio.com. We intend to employ this
      technology to distribute assets from our library of Spanish language films,
      while also marketing and offering the technology to a variety of third-party
      content owners and distributors seeking a digital delivery
      solution.





**INTELLECTUAL
      PROPERTY AND TECHNOLOGY DEVELOPMENT**





We
      have
      numerous United States and international patents pending that are directed
      to
      important and innovative aspects of our technology. As the technology evolves we
      intend to continue seeking patent protection where appropriate. We will seek
      to
      enhance our ViraCast product suite and content library through internal
      development and acquisition opportunities.





Our
      development and production teams are located in Marina Del Rey, CA.  We
      intend that our facilities in Marina Del Rey will house our content library,
      programming, sales and administrative personnel.





**CUSTOMERS**





For
      direct home video DVD sales, our sales associates focus on the largest retail
      chains in the country, including Wal-Mart and Blockbuster, via Anderson
      Merchandisers and other such sub-distributors. Currently, the sales force
      manages more than 100 active retail store customers. Besides our direct selling
      effort through telemarketing, we market our products by placing print ads in
      a
      variety of Latino trade magazines as well as through our website. We have a
      dedicated 1-800 toll free number for sales inquiries. For licensing activities,
      there are two companies: BCI Eclipse LLC, which has licensed approximately
      20
      titles: and VAS Entertainment/Rise Above Entertainment ( ***"VAS/RA"*** ), which
      has licensed approximately 20 titles from us. They function as manufacturers
      for
      our DVD inventory for those titles, as well as distributors. The agreements
      with
      these companies consist of a term of three to five years granting the companies
      the right to manufacture, promote, and distribute the licensed movies for a
      15%
      - 50% royalty on gross sales, depending on title. The company intends to expand
      its licensing activities into the broadcast, satellite and cable
      markets.


Page
          13




The
      target customers for our media software are:





·
            ***Premium
                Advertisers and Content Owners***,
                including advertising agencies like WPP, Omnicom and Interpublic;
                content
                owners with their own advertising, such as NBC, CBS, ABC and The
                New York
                Times; and infomercial creators, like QVC and Williams
                Group;·
            ***Independent***producers, artists, designers and filmmakers who own untapped content;
                and·
            ***Advertising
                Networks***,
                including Advertising.com, ValueClick, ClickBooth, CJ.com and
                Zedo.





**SUPPLIERS**





We
      have
      three categories of suppliers - movie licensors, DVD manufacturers, and finished
      goods suppliers. Movie licensors consist of Spanish-language movie license
      holders primarily from Mexico who enter licensing agreements with us to
      manufacture and distribute their movies. We are currently in contract with
      eight
      different licensors of content. From these agreements, we have manufactured
      approximately 52 titles. Agreements with these companies consist of either
      a
      fixed license fee or a 40-60% royalty on net revenues for the right to
      manufacture, promote and distribute the films for four to five years, depending
      on title.





For
      the
      manufacture of DVDs, we use various suppliers depending price and delivery.
      We
      do not have a written agreement with these suppliers. There is no dependency
      on
      these suppliers as the supply of DVD manufacturing companies is broad and there
      are many potential firms that can be employed to supply our
      products.





**MARKETING**





We
      market
      our products and services through a broad array of programs and media formats,
      including video, internet, advertising campaigns, telemarketing, print
      advertisements, retail distribution, and web advertising. Other marketing
      strategies include online and offline cross-promotion and
      co-branding.





**COMPETITION**





We
      operate in the market for media products, services and content development
      and
      delivery, which is a highly competitive market characterized by rapid change,
      converging technologies, and increasing competition from companies offering
      communication, video, music, on-demand information and entertainment services
      integrated into other products and media properties. Globally, our most
      significant competition in the Spanish language sector is from Univision
      Communications, Inc. and Navarre Corp.





The
      principal competitive factors relating to attracting and retaining users include
      the quality and relevance of our advertising; the effectiveness and efficiency
      of our marketing services; the accessibility, integration and personalization
      of
      the online services that we offer on our website; and the creativity of the
      marketing solutions that we offer.





We
      also
      face competition from companies focused on markets where expertise in a
      particular segment of the market (e.g., radio, internet, television) may provide
      them a competitive advantage.





Although
      accurate numbers are difficult to obtain due to the hesitation of privately
      owned distribution companies to divulge sales figures, an independent study
      by
      Estrenos magazine (a Latin Entertainment Trade Journal) estimates that the
      Latino home video distribution market for the first six months of 2005 sold
      more
      than three million units in the United States. According to Estrenos magazine,
      of that number three distributors accounted for approximately 80% of those
      sales
      - Laguna Films (43%), Ventura/Studio Latino (26%), and Xenon/Televisa (13%)
      (data provided by each distributor or source). Other participants in the Latino
      home video distribution market include Image Entertainment (7%), Latin Vision
      (5%), Brentwood Home Video (3%), Pro-Active Entertainment (2%), and Vanguard
      Latino (1%) (Source: Estros magazine, September/October 2005). Based on these
      sales performance figures, our monthly sales average currently represents
      approximately 1.25% of the monthly average of DVD sales volume in the Latino
      video entertainment industry




Page
          14




Additionally,
      major U.S. movie studios have ventured into servicing the Latino home video
      market as well, selling approximately 1.5 million units in the first half of
      2005. Of that amount, approximately 60% of sales were dominated by three studios
      - MGM Home Entertainment (26%), Columbia Tri-Star (18%) and Lions Gate Films
      (16%). Other such competitors include UMVD/Visual Entertainment (12%),
      BVHE/Disney (8%), Warner Home Video (8%), and Fox Home Entertainment (3%)
      (Source: Estros magazine, September/October 2005).




We
      also
      compete with retail music and video stores, including online stores, dominated
      by large companies such as Netflix, Blockbuster, Trans World Entertainment,
      and
      Movie Gallery Inc.





We
      may
      also face competition from businesses that have announced plans to deliver
      entertainment and media content through cell phones and other wireless devices.
      Sprint Nextel, Comcast, Time Warner Cable, Cox Communications and
      Advance/Newhouse Communications recently announced they are forming a joint
      venture to work toward accelerating the convergence of video entertainment,
      wireline and wireless data and communications products and services to provide
      customers throughout the United States access to advanced integrated
      entertainment, including streaming television programming, music, video clips,
      games and pre-recorded DVR programs, communications and wireless
      products.





We
      believe that we can effectively compete in the Latino home video markets
      primarily by offering competitive prices on a wide variety of quality titles
      through direct selling efforts targeted at retail stores across the entire
      United States.





**SEASONALITY**





Our
      performance may be affected by seasonal revenue fluctuations and variation
      in
      demand between local and national advertisers. The Company's revenues may vary
      throughout the year. As is typical in the distribution of content, the first
      calendar quarter generally produces the lowest revenues.





**Critical
      Accounting Policies and Estimates**





The
      below
      discussion and analysis of our financial condition and results of operations
      is
      based upon the accompanying financial statements. The preparation of financial
      statements in conformity with accounting principles generally accepted in the
      United States of America requires management to make estimates and assumptions
      that affect the amounts reported in the financial statements. Critical
      accounting policies are those that are both important to the presentation of
      our
      financial condition and results of operations and require management's most
      difficult, complex, or subjective judgments, often as a result of the need
      to
      make estimates of matters that are inherently uncertain. Our most critical
      accounting policy relates to the valuation of our intangible assets and stock
      based compensation.





**Valuation
      of Intangible Assets**





We
      assess
      the impairment of intangible assets when events or changes in circumstances
      indicate that the carrying value of the assets or the asset grouping may not
      be
      recoverable. Factors that we consider in deciding when to perform an impairment
      review include significant under-performance of a product line in relation
      to
      expectations, significant negative industry or economic trends, and significant
      changes or planned changes in our use of the assets. Recoverability of
      intangible assets that will continue to be used in our operations is measured
      by
      comparing the carrying amount of the asset grouping to our estimate of the
      related total future net cash flows. If an asset grouping’s carrying value is
      not recoverable through the related cash flows, the asset grouping is considered
      to be impaired. The impairment is measured by the difference between the asset
      grouping’s carrying amount and its fair value, based on the best information
      available, including market prices or discounted cash flow analysis. Impairments
      of intangible assets are determined for groups of assets related to the lowest
      level of identifiable independent cash flows. Due to our limited operating
      history and the early stage of development of some of our intangible assets,
      we
      must make subjective judgments in determining the independent cash flows that
      can be related to specific asset groupings. To date we have not recognized
      impairments on any of our intangible assets.




Page
          15




**Stock-Based
      Compensation**





We
      have
      adopted the provisions of SFAS No. 123(R), *Share-Based
      Payment* ,
      effective January 1, 2005. Since we had no outstanding options as of
      December 31, 2004, SFAS 123(R) would have had no impact on our financial
      statements had we elected to adopt the provisions of SFAS 123(R) in an earlier
      period. The fair value of each option grant, nonvested stock award and shares
      issued under the employee stock purchase plan were estimated on the date of
      grant using the Black-Scholes option pricing model and various inputs to the
      model. Expected volatilities were based on historical volatility of our stock.
      The expected term represents the period of time that grants and awards are
      expected to be outstanding. The risk-free interest rate approximates the
      U.S. treasury rate corresponding to the expected term of the option, and
      dividends were assumed to be zero. These inputs are based on our assumptions,
      which include complex and subjective variables. Other reasonable assumptions
      could result in different fair values for our stock-based awards.





Stock-based
      compensation expense, as determined using the Black-Scholes option pricing
      model, is recognized on a straight line basis over the service period, net
      of
      estimated forfeitures. Forfeiture estimates are based on historical data. To
      the
      extent actual results or revised estimates differ from the estimates used,
      such
      amounts will be recorded as a cumulative adjustment in the period that estimates
      are revised.





**NEW
      ACCOUNTING PRONOUNCEMENTS**





In
      September 2006, the FASB issued FASB Interpretation No. (FIN) 48, *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109* , which
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in an income tax return. FIN 48 was effective for us beginning
      January 1, 2007. The adoption of FIN 48 did not have a material impact on
      our financial position, results of operations or cash flows.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      which
      establishes a framework for measuring fair value and requires expanded
      disclosure about the information used to measure fair value. This statement
      is
      effective for us in the first quarter of fiscal 2008. The statement applies
      whenever other statements require, or permit, assets or liabilities to be
      measured at fair value, but does not expand the use of fair value in any new
      circumstances. We do not expect the adoption of this statement to have a
      material impact on our financial condition or results of
      operations.





**LIQUIDITY
      AND CAPITAL RESOURCES**




Our
      total
      assets were $892,000 at September 30, 2007 versus $923,000 at December 31,
      2006.
      The change in total assets is primarily attributable to depreciation and
      amortization expense of $173,000 that was offset by an increase in accounts
      receivable of $120,000. The depreciation expense consisted of $64,000 in
      property and equipment whereas amortization expense consisted of $109,000 in
      intangible assets.





The
      increase in accounts receivable resulted primarily from growth in DVD sales
      of
      $61,000 during the three months ended September 30, 2007 over the preceding
      quarter ending June 30, 2007. DVD sales during the three months ended June
      30,
      2007 and September 30, 2007 were $71,000 and $132,000, respectively. DVD sales
      during the nine months ended September 30, 2007 and December 31, 2006 were
      $326,000 and $754,000, respectively. During the nine months ended September
      30,
      2007, www.Beat9.com, our Internet services business, generated $17,000 in sales
      revenue. During the three months ended March 31, June 30, and September 30,
      2007
      accounts receivable were $108,000, $116,000, and 183,000, respectively.




The
      decrease in intangible assets was due to the acquisition of additional licensed
      content and its related amortization. During the nine months ended September
      30,
      2007, we acquired $12,000 in additional licensed content which was offset by
      the
      amortization of our licensed content in the amount of $109,000. The decrease
      in
      property and equipment resulted from the depreciation expense of $64,000 of
      our
      web services software applications.





We
      had a
      working capital deficit of approximately $1.61 million on September 30, 2007
      and
      we continue to have recurring losses. In the past we have primarily relied
      upon
      loans from related parties to fund our operations and, to a lesser extent,
      revenues generated from licensing our film content, on a non-exclusive basis,
      to
      other distributors of Latino home entertainment content. These conditions raise
      substantial doubt about our ability to continue as a going concern. We are
      actively seeking sources of additional financing in order to maintain and
      potentially expand our operations and to fund our debt repayment obligations.
      Even if we are able to obtain funding, there can be no assurance that a
      sufficient level of sales will be attained to fund such operations or that
      unbudgeted costs will not be incurred. Future events, including the problems,
      delays, expenses and difficulties frequently encountered by similarly situated
      companies, as well as changes in economic, regulatory or competitive conditions,
      may lead to cost increases that could make the net proceeds of any new funding
      and cash flow from operations insufficient to fund our capital requirements.
      There can be no assurances that we will be able to obtain such additional
      funding from management or other investors on terms acceptable to us, if at
      all.




Page
          16




Operating
      activities used $724,000 of cash during the nine months ended September 30,
      2007
      compared to $572,000 during the nine months ended September 30, 2006. The change
      in cash used for operating activities resulted from a decrease in the Company’s
      cost of sales that was completely offset by a decrease in sales revenue and
      increase in rent expense. Although the Company’s cost of sales decreased
      significantly from $105,000 during the nine months ended September 30, 2007
      compared to $485,000 during the nine months ended September 30, 2006, these
      savings were more than offset by the significant decrease in sales from $758,000
      during the nine months ended September 30, 2006 compared to $347,000 during
      the
      nine months ended September 30, 2007 and the significant increase in rent
      expense from $89,000 during the nine months ended September 30, 2006 compared
      to
      $176,000 during the nine months ended September 30, 2007.





Cash
      used
      in investing activities for the nine months ended September 30, 2007 and 2006
      of
      $15,000, and $147,000, respectively, resulted almost exclusively from the
      purchase of licensed Spanish language film content that was capitalized. During
      the second quarter of 2007, the Company entered into a subscription agreement
      with several accredited investors in a private placement exempt from the
      registration requirements of the Securities Act of 1933, as amended (the ***“Securities
      Act”*** ).
      The
      Company issued and sold to these accredited investors an aggregate of 2,150,000
      shares of its common stock. These issuances resulted in aggregate gross proceeds
      to the Company of $215,000.





**RESULTS
      OF OPERATIONS**





**REVENUES**





We
      generated revenues of $347,000 and $764,000 for the nine months ended September
      30, 2007 and 2006, respectively. During the nine months ended September 30,
      2006
      almost all of our revenues were generated through sales. In the past, our
      revenue was in large part generated through licensing agreements. The licensing
      agreements provide for us to receive advance payments as consideration for
      rights granted to third parties that distribute our licensed content. The
      advance payments are initially recorded as deferred revenue and subsequently
      recognized in income as royalties are earned upon shipment of licensed content
      to customers by the sub-licensor. The deferred revenue balance of $70,000 at
      September 30, 2007 represents advance royalty payments that are expected to
      be
      earned over the subsequent twelve month period.





During
      the three months ended September 30, 2007, total sales increased by
      $67,000. Sales increased from $77,000 ** during
      the three months ended June 30, 2007 to $144,000 during the three months ended
      September 30, 2007. This increase was primarily due to increased sales to our
      existing national retail customers. One customer accounted almost exclusively
      of
      our net sales during the three months ended September 30, 2007.





During
      the nine months ended September 30, 2007, we did not recognize any licensing
      revenue. All of our $347,000 in revenue represents revenue generated through
      the
      direct sales of our licensed content and web services portal. We expect that
      direct sales, as a percentage of total revenue, will comprise the majority
      of
      revenues over the next year. Further, we will continue to focus on the general
      company strategy to manufacture and distribute product from our own library
      of
      licensed films as we continue our efforts of expanding sales to nation-wide
      retailers. Consequently, we anticipate that licensing revenues will
      significantly be reduced or eliminated in future years as we shift our focus
      away from licensing agreements with third parties and increase our national
      exposure through nation-wide retailers. This general strategy has positioned
      the
      company to reduce overhead costs and significantly increase our gross
      margin.





**EXPENSES**





Operating
      expenses were $2,179,000 and $4,374,000 during the nine months ended September
      30, 2007 and 2006, respectively. The significant component in the decrease
      in
      operating expenses during the nine months ended September 30, 2007 comprised
      of
      a decrease in stock based compensation expense from grants of nonqualified
      stock
      options to our employees and non-employee directors and a decrease in the cost
      of sales.





Cost
      of
      sales decreased from $485,000 during the nine months ended September 30, 2006
      to
      a cost of sales of $105,000 during the nine months ended September 30, 2007.
      For
      the three months ended June 30, and September 30, 2007 cost of sales were
      $32,320 and $32,290, respectively.





Stock
      based compensation expense from grants of nonqualified stock options to our
      employees and non-employee directors decreased from $2,429,000 during the nine
      months ended September 30, 2006 to $962,000 during the nine months ended
      September 30, 2007. For the three months ended June 30 and September 30, 2007,
      stock based compensation expense was $394,600 and $142,200, respectively. The
      decrease in stock based compensation expense from grants of nonqualified stock
      options in the third quarter resulted primarily from cancellations of
      nonqualified stock options to employees no longer with the Company.





Page
          17





Salaries
      and employee benefits, excluding stock based compensation expense, reflected
      a
      significant decrease from $591,000 during the nine months ended September 30,
      2006 to $426,000 during the nine months ended September 30, 2007. These
      reductions in costs reflect a shift in our revenue mix from revenue generated
      primarily through licensing agreements and the direct sales of license film
      content, which requires a large sales force, to a strategy of manufacturing
      and
      distributing product from our own library of licensed film content to
      nation-wide retailers.





The
      remaining operating expenses consisted of professional fees, rent expense,
      amortization expense and general and administrative expenses. Professional
      fees
      were approximately $273,000 less during the nine months ended September 30,
      2007
      compared to the nine months ended September 30, 2006 due to significant
      decreases in amounts paid for legal and consulting fees which were offset by
      an
      increase in accounting fees.




Legal
      expense comprised the majority of this decrease from the previous year. Legal
      fees decrease by $317,000 during the nine months ended September 30, 2007.
      During the nine months ended September 30, 2006 and 2007, legal fees were
      $375,000 and $58,000, respectively. During the nine months ended September
      30,
      2006 the majority of legal fees were related to the development of contracts
      and
      review of major company transactions. In addition, legal fees during this period
      were composed of fees paid for S.E.C. filing related matters, private placement
      agreements and in preparation for financing activities. During the nine months
      ended September 30, 2007, legal fees were almost exclusively related to patent
      and trademark filing along with S.E.C. filing related expenses.





Consulting
      fees decrease by $33,000 during the nine months ended September 30, 2007. At
      September 30, 2006 and 2007 consulting fees were $48,000 and $15,000,
      respectively. During the nine months ended September 30, 2006, the majority
      of
      consulting expense was related to the development of internal systems, such
      as
      work-flow production processes and computer and network systems. During this
      same period consulting expense also comprised of some sales contracting work.
      During the nine months ended September 30, 2007, consulting expense resulted
      from continued sales contracting work. In addition, consulting expense during
      this period included work done to further develop the Company’s accounting
      department and strengthen the Company’s accounting policies and control
      procedures.





During
      the three months ended September 30, 2007, o perating
      expenses ** decreased
      by $305,000 from the three months ended June 30, 2007. The change in operating
      expenses in the third quarter 2007 was primarily due to decrease costs
      associated with salaries and employee benefits and decreased costs associated
      with legal and accounting fees. Salaries and employee benefits during the three
      months ended June 30, 2007 and September 30, 2007 were $550,000 and $288,000,
      respectively. The change in salaries and employee benefits resulted primarily
      from a reduction of the employee workforce and from cancellations of
      nonqualified stock options to employees no longer with the Company. During
      the
      three months ended June 30, 2007 and September 30, 2007, total legal and
      accounting fees decreased from $87,000 to $29,000, respectively. The change
      in
      total legal and accounting fees resulted from decreased costs associated with
      patent & trademark work and decreased costs associated with audit and
      accounting fees.




Rent
      expense increased by approximately $87,000 during the nine months ended
      September 30, 2007 compared to the nine months ended September 30, 2006 due
      in
      part to the company’s lease of additional commercial office space in September
      2006, with base rent of $13,000 per month combined with the base rent of $7,000
      per month for the current corporate office space. The commercial office space
      was leased in anticipation of growth in the company’s web ad technology services
      software development.





General
      and administrative expense decreased by approximately $19,000 during the nine
      months ended September 30, 2007 compared to the nine months ended September
      30,
      2006 and is attributed to the strategic overall expansion of the business into
      manufacturing and distributing product from our own library of licensed film
      content.





Given
      the
      financials constraints of the Company, interest expense related to the financing
      of capital increase significantly from $57,000 during the nine months ended
      September 30, 2007 to $143,000 during the nine months ended September 30, 2007.





**NET
      LOSS**





For
      the
      nine months ended, September 30, 2006 and 2007 the Company had a net loss of
      approximately $3.67 million and $1.98 million, respectively. The Company reduced
      its operating expenses by a significant amount 2007 as compared to 2006. During
      2007 and 2006, the Company implemented strategies to reduce its cash used in
      operating activities which included a targeted reduction of the employee
      workforce, increasing the efficiency of the Company's developmental efforts,
      reducing discretionary expenditures and negotiating favorable payment
      arrangements with service providers.





Page
          18





**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      do not
      have any off balance sheet arrangements that are reasonably likely to have
      a
      current or future effect on our financial condition, revenues, results of
      operations, liquidity, or capital expenditures.





**RISK
      FACTORS**





Our
      business involves a high degree of risk. Potential investors should carefully
      consider the risks and uncertainties described below and the other information
      in this report before deciding whether to invest in shares of our common stock.
      Each of the following risks may materially and adversely affect our business,
      results of operations and financial condition. These risks may cause the market
      price of our common stock to decline, which may cause you to lose all or a
      part
      of the money you paid to buy our common stock.





**RISKS
      RELATED TO OUR BUSINESS**





**WE
      HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE AND WHICH MAY NEGATIVELY IMPACT
      OUR
      ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES AND OUR FINANCIAL
      RESULTS.**





For
      the
      nine-month periods ended September 30, 2007 and 2006, we generated revenues
      of
      $347,000 and $764,000, respectively, and incurred net losses of $1,976,000
      and
      $3,668,000, respectively. At September 30, 2007, we had a working capital
      deficit of $1,613,000 and an accumulated deficit of $7,455,000. Our failure
      to
      increase our revenues significantly or improve our gross margins will harm
      our
      business. Even if we do achieve profitability, we may not be able to sustain
      or
      increase profitability on a quarterly or annual basis in the future. If our
      revenues grow more slowly than we anticipate, our gross margins fail to improve,
      or our operating expenses exceed our expectations, our operating results will
      suffer. If we are unable to sell or license our products at acceptable prices
      relative to our costs, or if we fail to develop and introduce on a timely basis
      new products from which we can derive additional revenues, our financial results
      will suffer.





**CONCENTRATION
      IN A SIGNIFICANT CUSTOMER**





The
      Company sells almost exclusively to one of its customers.  The customer
      owed the Company approximately $163,000 as of September 30, 2007, which is
      included in accounts receivable.





**OUR
      LICENSE REVENUES ARE DEPENDENT UPON THE REVENUES OF OUR CUSTOMERS. IF THE
      CONTENT WHICH WE LICENSE TO CUSTOMERS IS NOT USED IN VIDEOS WHICH BECOME POPULAR
      AMONG THE VIEWING PUBLIC, OUR REVENUES MAY DECLINE.**





We
      generate revenue through either licensing agreements with third parties that
      distribute our licensed content or through direct sales. Our typical licensing
      agreement consists of a three to five-year contract that carries a 15% - 50%
      royalty on gross sales of licensed product. If the content which we license
      to
      customers is not used in videos which become popular among the viewing public,
      our revenues may decline.




Page
          19




**VARIOUS
      CONDITIONS RAISE SUBSTANTIAL ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN;
      NEED FOR ADDITIONAL FINANCING.**





At
      September 30, 2007, we had an accumulated deficit of approximately $7.5 million
      and a working capital deficit of $1.6 million, which includes a deferred revenue
      balance of $70,000. During the nine months ended September 30, 2007, we incurred
      a loss of $1.98 million. During the nine months ended September 30, 2007, we
      primarily relied upon revenues generated from the direct sales of our Latino
      home entertainment content and on debt investments to fund our operations.
      These
      conditions raise substantial doubt about our ability to continue as a going
      concern.  We
      are
      actively seeking sources of additional financing in order to maintain and
      potentially expand our operations and to fund our debt repayment obligations.
      Even if we are able to obtain funding, there can be no assurance that a
      sufficient level of sales will be attained to fund such operations or that
      unbudgeted costs will not be incurred. Future events, including the problems,
      delays, expenses and difficulties frequently encountered by similarly situated
      companies, as well as changes in economic, regulatory or competitive conditions,
      may lead to cost increases that could make the net proceeds of any new funding
      and cash flow from operations insufficient to fund our capital requirements.
      There can be no assurances that we will be able to obtain such additional
      funding from management or other investors on terms acceptable to us, if at
      all.
      Additional financings, or the possible conversion of any of our debt obligations
      into equity, will result in dilution for then current stockholders.





**OUR
      OPERATING SUBSIDIARY REBEL CREW FILMS HAS A LIMITED OPERATING HISTORY AND
      THEREFORE WE CANNOT ENSURE THE LONG-TERM SUCCESSFUL OPERATION OF OUR BUSINESS
      OR
      THE EXECUTION OF OUR BUSINESS PLAN.**





Our
      operating subsidiary Rebel Crew Films was organized under the laws of the State
      of California on August 7, 2002. Because Rebel Crew Films has a limited
      operating history, our prospects must be considered in light of the risks,
      expenses and difficulties frequently encountered by growing companies in
      evolving markets, such as the Latino home video distribution market in which
      we
      operate. While to date we have not experienced these problems, we must meet
      many
      challenges including:





·
            Establishing
                and maintaining broad market acceptance of our products and converting
                that acceptance into direct and indirect sources of
                revenue;·
            Establishing
                and maintaining our brand name;·
            Timely
                and successfully developing new content and films;·
            Developing
                content that results in high popularity among the viewing
                public;·
            Developing
                and maintaining strategic relationships to enhance the distribution
                and
                features of our video content.





Our
      business strategy may be unsuccessful and we may be unable to address the risks
      we face in a cost-effective manner, if at all. If we are unable to successfully
      address these risks our business will be harmed and we may experience a decrease
      in revenues.





**IF
      WE ARE UNABLE TO LICENSE OR ACQUIRE COMPELLING CONTENT AT REASONABLE COSTS
      OR IF
      WE DO NOT DEVELOP COMPELLING CONTENT, THE NUMBER OF USERS OF OUR SERVICES MAY
      NOT GROW AS ANTICIPATED, OR MAY DECLINE, WHICH COULD HARM OUR OPERATING
      RESULTS.**





Our
      future success depends in part upon our ability to aggregate compelling content
      and deliver that content through our online and other multi-media properties
      and
      programming and delivery technologies. We distribute some of the content that
      we
      license on our online properties, such as audio and video content from third
      parties. We have been providing increasing amounts of audio and video content
      to
      our users as reflected in the increase in direct sales of our content and we
      believe that users will increasingly demand high-quality audio and video
      content, such as music, film, and other special events. Such content may require
      us to make substantial payments to third parties from whom we license or acquire
      such content. For example, our entertainment properties rely on film producers
      and distributors, and other organizations for a large portion of the content
      available on our properties. Our ability to maintain and build relationships
      with third-party content providers will be critical to our success. In addition,
      as new methods for accessing and delivering content through media formats
      becomes available, including through alternative devices, we may need to enter
      into amended content agreements with existing third-party content providers
      to
      cover the new devices. We may be unable to enter into new, or preserve existing,
      relationships with the third parties whose content we seek to obtain. In
      addition, as competition for compelling content increases both domestically
      and
      internationally, our content providers may increase the prices at which they
      offer their content to us, and potential content providers may not offer their
      content on terms agreeable to us. An increase in the prices charged to us by
      third-party content providers could harm our operating results and financial
      condition. Further, some of our content licenses with third parties may be
      non-exclusive. Accordingly, content providers and other media sources such
      as
      radio or television may be able to offer similar or identical content and
      technologies. This increases the importance of our ability to deliver compelling
      content and media technologies in order to differentiate from other businesses.
      If we are unable to license or acquire compelling content at reasonable prices,
      if other companies acquire develop and/or distribute content that is similar
      to
      or the same as that provided by us, or if we do not develop compelling content
      or media technologies, the number of users of our services may not grow as
      anticipated, or may decline, which could harm our operating
      results.




Page
          20




**WE
      MAY INCUR SUBSTANTIAL COSTS ENFORCING OUR INTELLECTUAL PROPERTY RIGHTS AND
      ANY
      DIFFICULTY WITH ENFORCING SUCH RIGHTS MAY CAUSE OUR RESULTS OF OPERATIONS AND
      FINANCIAL CONDITION TO SUFFER.**





The
      decreasing cost of electronic and computer equipment and related technology
      has
      made it easier to create unauthorized versions of audio and audiovisual products
      such as compact discs, videotapes and DVDs. Similarly, advances in Internet
      technology have increasingly made it possible for computer users to share audio
      and audiovisual information without the permission of the copyright owners
      and
      without paying royalties to holders of applicable intellectual property or
      other
      rights. Unauthorized copies and piracy of these products compete against
      legitimate sales of these products. Our revenues are derived from our licensed
      video content that is potentially subject to unauthorized copying and
      widespread, uncompensated dissemination on the Internet. If our proprietary
      video content is copied and distributed without authorization we may incur
      substantial costs enforcing our intellectual property rights. If we fail to
      obtain appropriate relief or enforcement through the judicial process, or if
      we
      fail to develop effective means of protecting our intellectual property, our
      results of operations and financial condition may suffer.





**OUR
      CONTENT ASSETS MAY NOT BE COMMERCIALLY SUCCESSFUL WHICH WOULD CAUSE OUR REVENUES
      TO DECLINE.**





Our
      revenue comes from the production and distribution of video content for use
      in
      Latino home video. The success of content offerings depends primarily upon
      their
      acceptance by the public, which is difficult to predict. The market for these
      products is highly competitive and competing products are often released into
      the marketplace at the same time. The commercial success of a video production
      depends on several variable factors, including the quality and acceptance of
      competing offerings released into the marketplace at or near the same time
      and
      the availability of alternative forms of entertainment and leisure time
      activities. Our business is particularly dependent on the success of a limited
      number of releases, and the commercial failure of just a few of these releases
      can have a significant adverse impact on results. Our failure to obtain broad
      consumer appeal in the Latino community could materially harm our business,
      financial condition and prospects for growth.





**FAILURE
      TO PROPERLY MANAGE OUR POTENTIAL GROWTH POTENTIAL WOULD BE DETRIMENTAL TO
      HOLDERS OF OUR SECURITIES.**





Since
      we
      have limited operating history and our total assets at September 30, 2007
      consisted of $14,000 in cash and total current assets of $269,000, any
      significant growth will place considerable strain on our financial resources
      and
      increase demands on our management and on our operational and administrative
      systems, controls and other resources. There can be no assurance that our
      existing personnel, systems, procedures or controls will be adequate to support
      our operations in the future or that we will be able to successfully implement
      appropriate measures consistent with our growth strategy. As part of this
      growth, we may have to implement new operational and financial systems,
      procedures and controls to expand, train and manage our employees and maintain
      close coordination among our technical, accounting, finance, marketing, sales
      and editorial staff. We cannot guarantee that we will be able to do so, or
      that
      if we are able to do so, we will be able to effectively integrate them into
      our
      existing staff and systems. We may fail to adequately manage our anticipated
      future growth. We will also need to continue to attract, retain and integrate
      personnel in all aspects of our operations. Failure to manage our growth
      effectively could hurt our business.





**IF
      WE DO NOT MAINTAIN THE CONTINUED SERVICE OF OUR EXECUTIVE OFFICERS, WE MAY
      NEVER
      DEVELOP BUSINESS OPERATIONS.**





Our
      success is dependent upon the continued service of our current chief executive
      officer. To date, we have entered into a written employment agreement with
      Jay
      Rifkin, our Chief Executive Officer. We do not have key man life insurance
      on
      any of our executive officers. While none of our executive officers currently
      has any definitive plans to retire or leave our company in the near future,
      any
      of such persons could decide to leave us at any time to pursue other
      opportunities. The loss of services of Mr. Rifkin or any of our other executive
      management team could cause us to lose revenue.





Page
          21




**RISKS
      RELATED TO OUR COMMON STOCK**





**OUR
      HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR
      COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED MARKET
      FOR OUR SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT DIFFICULT
      FOR
      YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR
      INVESTMENT.**





The
      public market for our common stock has historically been very volatile. Over
      the
      past two fiscal years, the market price for our common stock as quoted on the
      OTC Bulletin Board has ranged from $0.05 to $2.05. The closing sale price for
      our common stock on November 15, 2007 was $0.065 per share. Any future market
      price for our shares is likely to continue to be very volatile. This price
      volatility may make it more difficult for you to sell shares when you want
      at
      prices you find attractive. We do not know of any one particular factor that
      has
      caused volatility in our stock price. However, the stock market in general
      has
      experienced extreme price and volume fluctuations that have often been unrelated
      or disproportionate to the operating performance of companies. Broad market
      factors and the investing public's negative perception of our business may
      reduce our stock price, regardless of our operating performance. Further, the
      market for our common stock is limited and we cannot assure you that a larger
      market will ever be developed or maintained. The average daily trading volume
      of
      our common stock has historically been insignificant. Market fluctuations and
      volatility, as well as general economic, market and political conditions, could
      reduce our market price. As a result, this may make it difficult or impossible
      for you to sell our common stock or to sell our common stock for a positive
      return on your investment.





**OUR
      COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING
      MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK
      CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR
      STOCK.**





The
      SEC
      has adopted Rule 3a51-1 which establishes the definition of a "penny stock,"
      for
      the purposes relevant to us, as any equity security that has a market price
      of
      less than $5.00 per share or with an exercise price of less than $5.00 per
      share, subject to certain exceptions. For any transaction involving a penny
      stock, unless exempt, Rule 15g-9 requires:





·
            that
                a broker or dealer approve a person's account for transactions in
                penny
                stocks; and·
            the
                broker or dealer receive from the investor a written agreement to
                the
                transaction, setting forth the identity and quantity of the penny
                stock to
                be purchased.





In
      order
      to approve a person's account for transactions in penny stocks, the broker
      or
      dealer must:





·
            obtain
                financial information and investment experience objectives of the
                person;
                and·
            make
                a reasonable determination that the transactions in penny stocks
                are
                suitable for that person and the person has sufficient knowledge
                and
                experience in financial matters to be capable of evaluating the risks
                of
                transactions in penny stocks.





The
      broker or dealer must also deliver, prior to any transaction in a penny stock,
      a
      disclosure schedule prescribed by the SEC relating to the penny stock market,
      which, in highlight form:





·
            sets
                forth the basis on which the broker or dealer made the suitability
                determination; and·
            that
                the broker or dealer received a signed, written agreement from the
                investor prior to the transaction.





Disclosure
      also has to be made about the risks of investing in penny stocks in both public
      offerings and in secondary trading and about the commissions payable to both
      the
      broker-dealer and the registered representative, current quotations for the
      securities and the rights and remedies available to an investor in cases of
      fraud in penny stock transactions. Finally, monthly statements have to be sent
      disclosing recent price information for the penny stock held in the account
      and
      information on the limited market in penny stocks.





Generally,
      brokers may be less willing to execute transactions in securities subject to
      the
      "penny stock" rules. This may make it more difficult for investors to dispose
      of
      our common stock and cause a decline in the market value of our
      stock.




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          22




**Item
      3.****Controls
      and Procedures.**





As
      of the
      end of the period covered by this report, we conducted an evaluation, under
      the
      supervision and with the participation of our chief executive officer and
      principal financial officer of our disclosure controls and procedures (as
      defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon
      this evaluation, our chief executive officer and principal financial officer
      concluded that our disclosure controls and procedures are effective to ensure
      that information required to be disclosed by us in the reports that we file
      or
      submit under the Exchange Act is: (1) accumulated and communicated to our
      management, including our chief executive officer and principal financial
      officer, as appropriate to allow timely decisions regarding required disclosure;
      and (2) recorded, processed, summarized and reported, within the time periods
      specified in the Commission's rules and forms.




On
      April
      20, 2007, William B. Horne submitted his resignation as Chief Financial Officer.
      Mr. Horne will remain a director of the Company. In addition, Mr. Horne has
      been
      appointed to the Company’s Audit Committee. Mr. Horne’s decision to resign is
      not the result of any disagreement on any matter relating to the Company’s
      operations, policies or practices, nor regarding the general direction of the
      Company. This was filed with the Commission on April 26, 2007 Form 8-K Item
      5.02.





On
      May 1,
      2007, the Company hired a full time employee with the specific tasks to
      formalize the accounting department policies and procedures and to implement
      strict financial controls related to the review and approval of transactions,
      accounting entries, journal entries, timely reconciliation of general ledger
      account activity and balances, and of all Company financial related
      matters.





These
      changes resulted primarily from the Company’s commitment to ensure that the
      proper financial procedures, policies and controls are in place to better
      position the Company for growth. Furthermore, these changes also resulted in
      part from a letter to the Company dated May 8, 2007 from our prior independent
      accountant, Squar Milner.





In
      that
      letter Squar Milner advised the Company that during its audit of the financial
      statements of the Company as of December 31, 2006, they noted the
      following significant deficiencies involving internal control and its
      operation that it considers in aggregate to be material weaknesses: Inadequate
      staffing and oversight of accounting department; Absence of appropriate
      policies, procedures and effective controls related to the review and approval
      of transactions, and timely reconciliation of general ledger account activity
      and balances; Absence of policies, procedures and effective controls
      related to the financial close process and preparation of financial statement
      and disclosures; and inadequate documentation and support for certain
      transactions. Squar Milner also noted in same letter that the above noted
      weaknesses did not result in any adjustments during the audit of the
      December 31, 2006 financial statements. The Company has made addressing such
      deficiencies or material weaknesses a high priority. The Company’s Audit
      Committee has discussed the foregoing matters with Squar Milner. The Company
      fully intends to improve our internal control over financial reporting through
      the hiring of full time accounting staff, increased independence of the
      accounting department, continued training of our accounting staff, working
      closely with independent accountants, and with the continued commitment of
      management to constantly strive for the improvement of our accounting policies,
      procedures and financial controls. Our management will work with our auditors
      and other outside advisors to ensure that our controls and procedures are
      adequate and effective. We are confident that this effort will be sufficient
      to
      fully remedy these deficiencies or material weaknesses and better position
      the
      Company for growth.





Effective
      as of May 8, 2007, the Company engaged Tarvaran, Askelson & Company, LLP as
      its principal independent accountants to audit the financial statements of
      the
      Company. The change in the Company’s independent accountants was approved by the
      Company’s Audit Committee and filed with the Commission on May 21, 2007 on Form
      8-K Item 4.01.




Page
          23




**PART
      II**





**Item
      1.****Legal
      Proceedings.**





We
      are
      not a party to any pending legal proceeding, nor is our property the subject
      of
      a pending legal proceeding, that is not in the ordinary course of business
      or
      otherwise material to the financial condition of our business. None of our
      directors, officers or affiliates is involved in a proceeding adverse to our
      business or has a material interest adverse to our business.





**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds****.**





On
      August
      29, 2007, we granted Alan Morelli, as consideration for service on our Board
      of
      Directors, options to purchase 250,000 shares of common stock with an exercise
      price of $0.14 per share, and on August 29, 2007, we granted to five other
      persons, as consideration for services on behalf of the Company, options to
      purchase an aggregate of 395,000 shares of common stock with an exercise price
      of $0.14 per share. These stock options vest annually over four years beginning
      August 29, 2007. The issuance of these stock options was exempt from
      registration requirements pursuant to Section 4(2) of the Securities Act of
      1933, as amended.





On
      September 30, 2007, we issued 556,102 shares of common stock to Ault Glazer
      Capital Partners, LLC (“Ault Glazer”) pursuant to a Termination Agreement
      entered into with Ault Glazer on September 30, 2007 pursuant to which Ault
      Glazer agreed to convert
      at $0.10 per share the principal and all interest accrued from inception of
      certain promissory notes in the aggregate amount of $55,610.24. The
      securities were issued in reliance upon the exemption from registration pursuant
      to Section 4(2) of the Securities Act of 1933, as amended.




**Item
      3.**  **Defaults
      Upon Senior Securities.**





Not
      applicable.





**Item
      4.**  **Submission
      of Matters to a Vote of Security Holder****s.**





Not
      applicable.





**Item
      5.**  **Other
      Information****.**





Not
      applicable.





**Item
                6.**
            **Exhibits.**





**Exhibit**
              **Number**
            **Description**31.1
            Certification
                by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act31.2
            Certification
                by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act32.1
            Certification
                by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code32.2
            Certification
                by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
                of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of
                the
                United States Code




Page
          24




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**DIGICORP,
                INC.**Date:
              November 19, 2007
            By:
            /s/ Jay
              RifkinJay
                Rifkin
                Chief
                  Executive Officer  Date:
                November 19, 2007
              By:
              /s/ Jay
                RifkinJay
                  Rifkin
                  Principal
                      Financial Officer


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          25