UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q





QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      quarterly period ended December 31, 2007





Commission
      File Number 0-20734





**e.Digital
      Corporation**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            **33-0591385**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Empl. Ident. No.)




**16770
                  West Bernardo Drive, San Diego, California**
              **92127**(Address
                  of principal executive offices)
              (Zip
                  Code)




**(858)
      304-3016**


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 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 large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.




Large
      Accelerated Filer o
      Accelerated filer o
      Non-accelerated filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes o No x





As
      of
      February 8, 2008 a total of 270,644,410 shares of the Registrant’s Common
      Stock, par value $0.001, were issued and outstanding.
















**e.DIGITAL
      CORPORATION**




INDEX


Page**PART
                  I. FINANCIAL INFORMATION**Item
                  1. Financial Statements (unaudited):Consolidated
                  Balance Sheets as of December 31, 2007 and and March 31,
                  2007
              
              
              3Consolidated
                  Statements of Operations for the three and nine months ended December
                  31,
                  2007 and 2006
              
              
              4Consolidated
                  Statements of Cash Flows for the nine months ended December 31,
                  2007 and
                  2006
              
              
              5Notes
                  to Interim Consolidated Financial Statements
              
              
              6Item
                  2. Management's Discussion and Analysis of Financial Condition
                  and Results
                  of Operations
              
              
              14Item
                  3. Quantitative and Qualitative Disclosure about Market
                  Risk
              
              
              21Item
                  4. Controls and Procedures
              
              
              21PART
                  II. OTHER INFORMATIONItem
                  1. Legal Proceedings
              
              
              22Item
                  1A. Risk Factors
              
              
              23Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              
              
              31Item
                  3. Defaults Upon Senior Securities
              
              
              31Item
                  4.Submission of Matters to a Vote of Security Holders
              
              
              31Item
                  5.Other Information
              
              
              31Item
                  6. Exhibits
              
              
              31SIGNATURES
              
              
              32
  2




**Part
                      I. Financial Information****Item
                      1. Financial Statements:****e.Digital
                      Corporation and subsidiary****CONSOLIDATED
                      BALANCE SHEETS****December
                      31, 2007**
                  
                  **March
                      31, 2007****$**
                  
                  **$****(Unaudited)****ASSETS****Current**Cash
                      and cash equivalents
                  
                  
                  278,968
                  
                  
                  694,757Accounts
                      receivable, trade
                  
                  
                  168,829
                  
                  
                  37,029Inventory
                  
                  
                  257,669
                  
                  
                  309,392Deposits
                      and prepaid expenses
                  
                  
                  41,243
                  
                  
                  50,999**Total
                      current assets**
                  
                  
                  746,709
                  
                  
                  1,092,177Property
                      and equipment, net of accumulated depreciation of$484,679
                      and $472,063, respectively
                  
                  
                  30,757
                  
                  
                  36,206Prepaid
                      transaction costs
                  
                  
                  **-**
                  
                  
                  628,584**Total
                      assets**
                  
                  
                  777,466
                  
                  
                  1,756,967**LIABILITIES
                      AND STOCKHOLDERS' DEFICIT****Current**Accounts
                      payable, trade
                  
                  
                  521,295
                  
                  
                  687,132Other
                      accounts payable and accrued liabilities
                  
                  
                  186,559
                  
                  
                  131,107Accrued
                      employee benefits
                  
                  
                  199,090
                  
                  
                  149,528Customer
                      deposits
                  
                  
                  80,000
                  
                  
                  118,850Deferred
                      revenue
                  
                  
                  48,000
                  
                  
                  **-**Dividends
                  
                  
                  **-**
                  
                  
                  464,025Current
                      maturity of convertible term note, less $28,901 and $34,000
                      of debt
                      discount
                  
                  
                  327,398
                  
                  
                  138,902Secured
                      promissory note, less $8,607 and $-0- of note discount
                  
                  
                  441,393
                  
                  
                  750,000**Total
                      current liabilities**
                  
                  
                  1,803,735
                  
                  
                  2,439,544Long-term
                      convertible term note, less $11,240 and $31,983 of debt
                      discount
                  
                  
                  516,967
                  
                  
                  748,082Deferred
                      revenue-long term
                  
                  
                  70,000
                  
                  
                  6,000**Total
                      long-term liabilities**
                  
                  
                  586,967
                  
                  
                  754,082**Total
                      liabilities**
                  
                  
                  2,390,702
                  
                  
                  3,193,626**Commitments
                      and Contingencies****Stockholders'
                      deficit**Preferred
                      stock, $0.001 par value; 5,000,000 shares authorizedSeries
                      D Convertible Preferred stock 250,000 shares designated: -0-
                      and 91,000issued
                      and outstanding, respectively. Liquidation preferenceof
                      $-0- and $1,347,099, respectively
                  
                  
                  **-**
                  
                  
                  910,000Common
                      stock, $0.001 par value, authorized 300,000,000,268,770,758
                      and 243,453,037 shares and outstanding, respectively
                  
                  
                  268,771
                  
                  
                  243,453Additional
                      paid-in capital
                  
                  
                  79,629,031
                  
                  
                  78,236,434Dividends
                  
                  
                  **-**
                  
                  
                  (464,025
                  )Accumulated
                      deficit
                  
                  
                  (81,511,038
                  )
                  
                  (80,362,521
                  )**Total
                      stockholders' deficit**
                  
                  
                  (1,613,236
                  )
                  
                  (1,436,659
                  )**Total
                      liabilities and stockholders' deficit**
                  
                  
                  777,466
                  
                  
                  1,756,967
  See
          notes
          to interim consolidated financial statements
  3
  **e.Digital
                    Corporation and subsidiary****CONSOLIDATED
                    STATEMENTS OF OPERATIONS****(UNAUDITED)****For
                    the three months ended**
                
                **For
                    the nine months ended****December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006****Revenues:**
                
                $
                
                $
                
                $
                
                $Products
                
                
                1,068,885
                
                
                1,302,312
                
                
                4,470,597
                
                
                1,336,434Services
                
                
                184,362
                
                
                **-**
                
                
                507,065
                
                
                **-**1,253,247
                
                
                1,302,312
                
                
                4,977,662
                
                
                1,336,434**Cost
                    of revenues:**Products
                
                
                810,929
                
                
                362,768
                
                
                3,621,458
                
                
                391,978Services
                
                
                45,967
                
                
                **-**
                
                
                116,340
                
                
                **-**856,896
                
                
                362,768
                
                
                3,737,798
                
                
                391,978Gross
                    profit
                
                
                396,351
                
                
                939,544
                
                
                1,239,864
                
                
                944,456**Operating
                    expenses:**Selling
                    and administrative
                
                
                484,252
                
                
                366,559
                
                
                1,427,344
                
                
                1,179,613Research
                    and related expenditures
                
                
                243,345
                
                
                346,982
                
                
                739,592
                
                
                1,101,231Total
                    operating expenses
                
                
                727,597
                
                
                713,541
                
                
                2,166,936
                
                
                2,280,844Operating
                    income (loss)
                
                
                (331,246
                )
                
                226,003
                
                
                (927,072
                )
                
                (1,336,388
                )**Other
                    income (expense):**Interest
                    and other income
                
                
                11,679
                
                
                1,431
                
                
                37,778
                
                
                11,928Interest
                    expense
                
                
                (56,115
                )
                
                (373,170
                )
                
                (187,783
                )
                
                (1,319,135
                )Other
                    expense
                
                
                (21,689
                )
                
                (10,697
                )
                
                (71,440
                )
                
                (241,876
                )Other
                    expense
                
                
                (66,125
                )
                
                (382,436
                )
                
                (221,445
                )
                
                (1,549,083
                )**Loss
                    and comprehensive loss for the period**
                
                
                (397,371
                )
                
                (156,433
                )
                
                (1,148,517
                )
                
                (2,885,471
                )Accrued
                    dividends on preferred stock
                
                
                (27,225
                )
                
                (29,313
                )
                
                (81,975
                )
                
                (95,937
                )**Loss
                    attributable to common stockholders**
                
                
                (424,596
                )
                
                (185,746
                )
                
                (1,230,492
                )
                
                (2,981,408
                )**Loss
                    per common share - basic and diluted**
                
                
                (0.00
                )
                
                (0.00
                )
                
                (0.00
                )
                
                (0.01
                )**Weighted
                    average common shares outstanding**
                
                
                249,097,860
                
                
                220,870,444
                
                
                246,631,374
                
                
                209,257,848
  See
          notes
          to interim consolidated financial statements
  4
  **e.Digital
                      Corporation and subsidiary****CONSOLIDATED
                      STATEMENTS OF CASH FLOWS****(UNAUDITED)****For
                      the nine months ended****December
                      31,****2007**
                  
                  **2006****OPERATING
                      ACTIVITIES**
                  
                  **$**
                  
                  **$**Loss
                      for the period
                  
                  
                  (1,148,517
                  )
                  
                  (2,885,471
                  )Adjustments
                      to reconcile loss to net cash used in operating
                      activities:Depreciation
                      and amortization
                  
                  
                  12,616
                  
                  
                  40,260Accrued
                      interest and accretion of discount relating to promissory
                      notes
                  
                  
                  21,893
                  
                  
                  72,198Interest
                      paid with common stock
                  
                  
                  77,381
                  
                  
                  **-**Value
                      assigned to inducement warrants
                  
                  
                  **-**
                  
                  
                  230,709Amortization
                      of interest from warrants and common stockissued
                      with promissory notes
                  
                  
                  **-**
                  
                  
                  1,105,876Warranty
                      provision
                  
                  
                  185,602
                  
                  
                  **-**Stock-based
                      compensation
                  
                  
                  129,209
                  
                  
                  163,227Changes
                      in assets and liabilities:Accounts
                      receivable, trade
                  
                  
                  (131,800
                  )
                  
                  2,670Inventories
                  
                  
                  51,723
                  
                  
                  (145,452
                  )Prepaid
                      expenses and other
                  
                  
                  9,756
                  
                  
                  (50,029
                  )Accounts
                      payable
                  
                  
                  (165,837
                  )
                  
                  499,396Other
                      accounts payable and accrued liabilities
                  
                  
                  (57,246
                  )
                  
                  (43,029
                  )Customer
                      deposits
                  
                  
                  (38,850
                  )
                  
                  (710,976
                  )Accrued
                      employee benefits
                  
                  
                  49,562
                  
                  
                  59,195Deferred
                      revenue
                  
                  
                  112,000
                  
                  
                  **-**Warranty
                      reserve
                  
                  
                  (81,904
                  )
                  
                  **-**Cash
                      used in operating activities
                  
                  
                  (974,412
                  )
                  
                  (1,661,426
                  )**INVESTING
                      ACTIVITIES**Purchase
                      of property and equipment
                  
                  
                  (7,167
                  )
                  
                  **-**Cash
                      used in investing activities
                  
                  
                  (7,167
                  )
                  
                  **-****FINANCING
                      ACTIVITIES**Sale
                      of common stock
                  
                  
                  640,000
                  
                  
                  **-**Proceeds
                      from exercise of stock options
                  
                  
                  11,310
                  
                  
                  **-**Proceeds
                      from exercise of warrants
                  
                  
                  214,480
                  
                  
                  919,639Payment
                      on secured promissory note
                  
                  
                  (300,000
                  )
                  
                  **-**Payments
                      on unsecured promissory notes
                  
                  
                  **-**
                  
                  
                  (12,337
                  )Cash
                      provided by financing activities
                  
                  
                  565,790
                  
                  
                  907,302**Net
                      decrease in cash and cash equivalents**
                  
                  
                  (415,789
                  )
                  
                  (754,124
                  )Cash
                      and cash equivalents, beginning of period
                  
                  
                  694,757
                  
                  
                  1,058,723**Cash
                      and cash equivalents, end of period**
                  
                  
                  278,968
                  
                  
                  304,599**Supplemental
                      disclosures of cash flow information:**Cash
                      paid for interest
                  
                  
                  88,509
                  
                  
                  105,337**Supplemental
                      schedule of noncash investing and financing
                      activities:**Deemed
                      dividends on preferred stock
                  
                  
                  81,975
                  
                  
                  95,937Common
                      stock issued on conversion of preferred stock
                  
                  
                  1,456,000
                  
                  
                  361,154Term
                      note payments paid in common stock
                  
                  
                  120,000
                  
                  
                  **-**Financing
                      fee paid in common stock
                  
                  
                  21,500
                  
                  
                  **-**Stock-based
                      compensation expense
                  
                  
                  129,209
                  
                  
                  163,227Value
                      assigned to inducement warrants
                  
                  
                  **-**
                  
                  
                  230,709Unsecured
                      notes exchanged for convertible term note
                  
                  
                  **-**
                  
                  
                  970,752Common
                      stock issued on note exchange
                  
                  
                  **-**
                  
                  
                  77,500
  See
          notes
          to interim consolidated financial statements
  5











**1.
      NATURE OF OPERATIONS AND BASIS OF PRESENTATION**




e.Digital
      Corporation is a holding company that operates through a wholly-owned California
      subsidiary of the same name and is incorporated under the laws of Delaware.
      The
      Company has innovated a proprietary secure digital video/audio technology
      platform ("DVAP") and markets the eVUTM mobile entertainment device for the
      travel and recreational industries. The Company also owns its Flash-RTM portfolio
      of patents related to the use of flash memory in portable devices and has
      commenced activities to license the portfolio.





These
      unaudited consolidated financial statements have been prepared by management
      in
      accordance with accounting principles generally accepted in the United States
      and with the instructions to Form 10-Q and Article 10 of Regulation S-X on
      a
      going concern basis, which contemplates the realization of assets and the
      discharge of liabilities in the normal course of business for the foreseeable
      future. These interim consolidated financial statements do not include all
      of
      the information and footnotes required by accounting principles generally
      accepted in the United States for complete financial statements. In the opinion
      of management, the unaudited consolidated financial statements reflect all
      adjustments considered necessary for a fair statement of the Company's financial
      position at December 31, 2007, and the results of operations and cash flows
      for
      the periods presented, consisting only of normal and recurring adjustments.
      All
      significant intercompany transactions have been eliminated in consolidation.
      Operating results for the nine months ended December 31, 2007 are not
      necessarily indicative of the results that may be expected for the fiscal year
      ending March 31, 2008. For further information, refer to the Company's
      consolidated financial statements and footnotes thereto for the year ended
      March
      31, 2007 filed on Form 10-K. Certain amounts reported in prior periods have
      been
      reclassified to be consistent with the current period presentation.





The
      Company has incurred significant losses and negative cash flow from operations
      in each of the last three years and has an accumulated deficit of $81.5 million
      at December 31, 2007. At December 31, 2007, the Company had a working capital
      deficiency of $1,057,026. Substantial portions of the losses are attributable
      to
      marketing costs for new products and substantial expenditures on research and
      development of technologies. The Company's operating plans require additional
      funds that may take the form of debt or equity financings. There can be no
      assurance that any additional funds will be available. The Company's ability
      to
      continue as a going concern is in substantial doubt and is dependent upon
      achieving a profitable level of operations and obtaining additional
      financing.





Management
      has undertaken steps as part of a plan to improve operations with the goal
      of
      sustaining operations for the next twelve months and beyond. These steps include
      (a) expanding sales and marketing to new customers and new markets; (b)
      executing a strategy to monetize the Flash-R patent portfolio; (c) controlling
      overhead and expenses; and (c) raising additional capital and/or obtaining
      financing. The Company obtained $640,000 of equity proceeds pursuant to a common
      stock purchase agreement with Fusion Capital Fund II, LLC (“Fusion”) during the
      nine months ended December 31, 2007. The Company may have access to up to $1.38
      million of additional funding pursuant to this agreement (or a maximum of $7.36
      million at higher stock prices). Future availability under the Fusion agreement
      is subject to many conditions, some of which are predicated on events that
      are
      not within the Company’s control. There can be no assurance this capital
      resource will be available or be sufficient.





There
      can
      be no assurance the Company will achieve a profitable level of operations and
      obtain additional financing pursuant to the Fusion financing agreement or
      otherwise. There can be no assurance that any additional financings will be
      available to the Company on satisfactory terms and conditions, if at all.





In
      the
      event the Company is unable to continue as a going concern, it may elect or
      be
      required to seek protection from creditors by filing a voluntary petition in
      bankruptcy or may be subject to an involuntary petition in bankruptcy. To date,
      management has not considered this alternative, nor does management view it
      as a
      likely occurrence.





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities,
      and
      disclosures of contingent assets and liabilities at the date of the financial
      statements, and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates. These
      consolidated financial statements do not give effect to any adjustments which
      would be necessary should the Company be unable to continue as a going concern
      and therefore be required to realize its assets and discharge its liabilities
      in
      other than the normal course of business and at amounts different from those
      reflected in the accompanying consolidated interim financial
      statements.




6





**2.
      RECENT ACCOUNTING PRONOUNCEMENTS**




In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards (SFAS) No. 157, *Fair
      Value Measurements* .
      This
      standard defines fair value, establishes a framework for measuring fair value
      in
      accounting principles generally accepted in the United States of America, and
      expands disclosure about fair value measurements. In February 2007, the FASB
      issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      Amendment of FASB Statement No. 115* ,
      which
      will permit the option of choosing to measure certain eligible items at fair
      value at specified election dates and report unrealized gains and losses in
      earnings. SFAS Nos. 157 and 159 will become effective for us for fiscal year
      2009, and interim periods within those fiscal years. The Company is currently
      evaluating the requirements of SFAS Nos. 157 and 159, and has not yet determined
      the likely, if any, impact on its future financial statements.





In
      December 2007, the Financial Accounting Standards Board (“ FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business
      Combinations” (“SFAS No. 141R”). SFAS 141R retains the fundamental requirements
      in SFAS 141 that the acquisition method of accounting (which SFAS 141 called
      the *purchase
      method* )
      be used
      for all business combinations and for an acquirer to be identified for each
      business combination. SFAS 141R also establishes principles and requirements
      for
      how the acquirer: (a) recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, and any noncontrolling
      interest in the acquiree; (b) improves the completeness of the information
      reported about a business combination by changing the requirements for
      recognizing assets acquired and liabilities assumed arising from contingencies;
      (c) recognizes and measures the goodwill acquired in the business combination
      or
      a gain from a bargain purchase; and (d) determines what information to disclose
      to enable users of the financial statements to evaluate the nature and financial
      effects of the business combination. SFAS No. 141R applies prospectively to
      business combinations for which the acquisition date is on or after the
      beginning of the first annual reporting period beginning on or after December
      15, 2008 (for acquisitions closed on or after April 1, 2009 for the Company).
      Early application is not permitted. The Company has not yet determined the
      impact, if any, SFAS No. 141R will have on its consolidated financial
      statements.





**3.
      LOSS PER SHARE**




Stock
      options, warrants and convertible debt exercisable into 16,440,928 shares of
      common stock were outstanding as at December 31, 2007. These securities were
      not
      included in the computation of diluted loss per share because they are
      antidilutive, but they could potentially dilute earnings per share in future
      periods.





The
      loss
      attributable to common stockholders was increased during the nine months ended
      December 31, 2007 and 2006 by accrued dividends of $81,975 and $95,937,
      respectively.




**4.
      INVENTORIES**




Inventories
      are stated at the lower of cost, which approximates actual costs on a first
      in,
      first out cost basis, or market.




Inventories
      consisted of the following:


**December
                  31,**
              ****
              **March
                  31,**
              ********
              ****
              **2007**
              ****
              **2007**
              ********
              ****
              **$**
              ****
              **$**(unaudited)Raw
                  materials
              
              
              46,592
              
              
              -Work
                  in process
              
              
              1,732
              
              
              -Finished
                  goods
              
              
              209,345
              
              
              309,392Ending
                  balance
              
              
              257,669
              
              
              309,392




7




5.
      STOCK-BASED COMPENSATION
      COSTS




The
      Company accounts for stock-based compensation under the provisions of Statement
      of Financial Accounting Standards No. 123(R), *Share-Based
      Payment* (SFAS
      123R). SFAS 123R requires measurement of all employee stock-based awards using
      a
      fair-value method and recording of related compensation expense in the
      consolidated financial statements over the requisite service period. Further,
      as
      required under SFAS 123R, we estimate forfeitures for share based awards that
      are not expected to vest. The Company recorded stock-based compensation in
      its
      consolidated statements of operations for the relevant periods as
      follows:


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****December
                  31,**
              
              **December
                  31,****2007**
              
              **2006**
              
              **2007**
              
              **2006****$**
              ****
              **$**
              ****
              **$**
              ****
              **$****(unaudited)**
              
              **(unaudited)**Cost
                  of revenues
              
              
              4,310
              
              
              -
              
              
              13,442
              
              
              -Research
                  and development
              
              
              15,282
              
              
              13,943
              
              
              30,349
              
              
              52,890Selling
                  and administrative
              
              
              37,445
              
              
              44,316
              
              
              85,418
              
              
              110,337Total
                  stock-based compensation expense
              
              
              57,037
              
              
              58,259
              
              
              129,209
              
              
              163,227




As
      of
      December 31, 2007 total estimated compensation cost of options granted but
      not
      yet vested was approximately $89,000 and is expected to be recognized over
      the
      weighted average period of 1.1 years.





The
      following table sets forth the weighted-average key assumptions and fair value
      results for stock options granted during the nine-month periods ended December
      31, 2007 and 2006 (annualized percentages):


**Nine
                  Months Ended****December
                  31,****2007**
              
              **2006**Volatility
              
              
              78
              %
              
              82%-91
              %Risk-free
                  interest rate
              
              
              4.1%-5.0
              %
              
              4.4%-4.7
              %Forfeiture
                  rate
              
              
              5.0
              %
              
              0.0
              %Dividend
                  yield
              
              
              0.0
              %
              
              0.0
              %Expected
                  life in years
              
              
              3
              
              
              4-5Weighted-average
                  fair value of options granted
              
              $
              0.10
              
              $
              0.09


The
      dividend yield of zero is based on the fact that the Company has never paid
      cash
      dividends and has no present intention to pay cash dividends. Expected
      volatility is based on the historical volatility of the common stock over the
      period commensurate with the expected life of the options. The Company has
      a
      small number or option grants and limited exercise history and accordingly
      has
      for all new option grants applied the simplified method prescribed by SEC Staff
      Accounting Bulletin 110 to estimate expected life (computed as vesting term
      plus
      contractual term divided by two). The expected forfeiture rate is estimated
      based on historical experience. Additional expense is recorded when the actual
      forfeiture rates are lower than estimated and a recovery of prior expense will
      be recorded if the actual forfeitures are higher than estimated.





See
      Note
      8 for further information on outstanding stock options.





**6.
      WARRANTY RESERVE**




Details
      of the estimated warranty liability are as follows:


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****December
                  31,**
              
              **December
                  31,****2007**
              
              **2006**
              
              **2007**
              
              **2006****$**
              
              **$**
              ****
              **$**
              ****
              **$****(unaudited)**
              
              
              **(unaudited)**Beginning
                  balance
              
              
              137,900
              
              
              15,789
              
              
              40,072
              
              
              15,789Warranty
                  provision
              
              
              52,638
              
              
              -
              
              
              185,602
              
              
              -Warranty
                  deductions
              
              
              (46,768
              )
              
              -
              
              
              (81,904
              )
              
              -Ending
                  balance
              
              
              143,770
              
              
              15,789
              
              
              143,770
              
              
              15,789




8




**7.
      NOTES**





**7.5%
      Convertible Subordinated Term Note**




On
      December 12, 2006 the Company issued a 7.5% Convertible Subordinated Term Note
      in the principal amount of $970,752 due November 30, 2009 in exchange for prior
      notes. The note provides for monthly principal and interest installments of
      $15,000, increased to $30,000 in December 2007 and increasing to $50,000
      starting in December 2008 with maturity November 30, 2009. The Company may,
      subject to certain limitations, elect to make such installment payments either
      in cash or in shares of common stock (“Monthly Installment Shares”). Monthly
      Installment Shares are valued at the arithmetic average of the closing prices
      for the last five trading days of the applicable month without discount.
      Installment note payments must be paid in cash if the computed average price
      is
      less than $0.10 per share. Subject to certain notice periods and other
      limitations, the balance of the note is convertible by the holder at $0.30
      per
      common share and the Company may elect to call the note for mandatory conversion
      if the closing sale price of the Company’s common stock is at least $0.40 per
      share for ten consecutive trading days. The Company may also prepay the note
      in
      full or in minimum parts of $50,000 on ten-day notice. The note may be
      subordinate to certain future senior indebtedness.





**18%
      Secured Promissory Note**




In
      March
      2007 the Company obtained $750,000 in short-term purchase order financing from
      a
      commercial lender pursuant to an 18% secured promissory note with interest
      payable monthly for any full or partial month the principal is outstanding
      subject to a security agreement providing a security interest in substantially
      all of the Company’s assets. The Company has made principal reductions of
      $300,000. Effective with the latest amendment dated December 23, 2007, the
      remaining $450,000 balance of the note was extended to June 23, 2008. The note,
      as amended and restated, contains no prepayment fee and provides customary
      late
      payment penalties and default provisions. On April 2, 2007 the Company paid
      a
      $15,000 finance charge by issuing 73,385 restricted shares of common stock
      with
      such finance charge being amortized over the original note term. On October
      9,
      2007 the Company paid an additional $6,500 finance charge by issuing 34,537
      restricted shares of common stock. On December 23, 2007 the Company became
      obligated for an additional $9,000 finance charge that was paid on January
      18,
      2008 by issuing 69,659 restricted shares of common stock.





**8.
      STOCKHOLDERS’ EQUITY**




The
      following table summarizes stockholders’ equity transactions during the
      nine-month period ended December 31, 2007:





Preferred
                stock
            
            Common
                stock
            
            Additional
                Paid-in
            
            
            
            AccumulatedShares
            
            Amounts
            
            Shares
            
            Amounts
            
            Capital
            
            Dividends
            
            DeficitBalance,
                March 31, 2007
            
            
            91,000
            
            $
            910,000
            
            
            243,453,037
            
            $
            243,453
            
            $
            78,236,434
            
            $
            (464,025
            )
            $
            (80,362,521
            )Accrued
                dividends on preferred stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (81,975
            )
            
            -Conversion
                of Series D preferred stock
            
            
            (91,000
            )
            
            (910,000
            )
            
            18,200,000
            
            
            18,200
            
            
            891,800
            
            
            546,000Stock
                options exercised for cash
            
            
            -
            
            
            -
            
            
            76,166
            
            
            76
            
            
            11,234
            
            
            -
            
            
            -Warrants
                exercised for cash
            
            
            -
            
            
            -
            
            
            2,681,000
            
            
            2,681
            
            
            211,779
            
            
            -
            
            
            -Stock
                -based compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            129,209
            
            
            -
            
            
            -Shares
                issued for cash (1)
            
            
            -
            
            
            -
            
            
            3,579,716
            
            
            3,580
            
            
            7,836
            
            
            -
            
            
            -Shares
                issued for term debt payments
            
            
            -
            
            
            -
            
            
            672,917
            
            
            673
            
            
            119,327
            
            
            -
            
            
            -Shares
                issued for debt financing fees
            
            
            -
            
            
            -
            
            
            107,922
            
            
            108
            
            
            21,392
            
            
            -
            
            
            -Loss
                for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,148,517
            )Balance,
                December 31, 2007
            
            
            -
            
            $
            -
            
            
            268,770,758
            
            $
            268,771
            
            $
            79,629,031
            
            $
            -
            
            $
            (81,511,038
            )




(1)
      Sales
      of shares to Fusion at an average price of $0.179 per common share, net of
      prepaid transaction costs of $628,584.




9





**Fusion
      Capital Equity Purchase Agreement**




On
      January 2, 2007, the Company entered into an agreement with Fusion Capital
      Fund
      II, LLC (“Fusion”) pursuant to which the Company has the right, subject to
      certain conditions and limitations, to sell to Fusion up to $8.0 million worth
      of additional common stock, at the Company’s election, over a two year period at
      prices determined based upon the market price of the Company’s common stock at
      the time of each sale, without any fixed discount to the market price as defined
      in the agreement. Common stock may be sold in $80,000 increments every fourth
      business day, with additional $100,000 increments available every third business
      day if the market price of the common stock is $0.10 or higher. This $100,000
      increment may be further increased at graduated levels up to $1.0 million if
      the
      market price increases from $0.10 to $0.80. If the price of the stock is below
      $0.08 per share, no sales shall be made under the agreement. During the nine
      months ended December 31, 2007, the Company sold 3,579,716 common shares to
      Fusion under the agreement for cash of $640,000. Assuming a purchase price
      of
      $0.121 per share (the closing sale price of the common stock on December 31,
      2007) the maximum remaining under the common stock purchase agreement was an
      additional $1.38 million. Upon occurrence of certain events of default as
      defined, Fusion may terminate the stock purchase agreement. The Company does
      not
      believe a default event has occurred and no termination has been noticed by
      Fusion. The Company may terminate the agreement at any time.





Subsequent
      to December 31, 2007 the Company sold 1,327,803 common shares to Fusion under
      the agreement for cash of $160,000.





**Options**




The
      following table summarizes stock option activity for the period:


**Shares**
              
              **Weighted
                    average**
                  **exercise
                    price**
              
              **Weighted**
                  **average
                    life**
              
              **Aggregate**
                  **intrinsic
                    value****#**
              ****
              **$**
              ****
              **(years)**
              ****
              **$**Outstanding
                  March 31, 2007
              
              
              11,034,666
              
              
              0.17Granted
              
              
              880,000
              
              
              0.18Canceled/expired
              
              
              (677,500
              )
              
              0.50Exercised
              
              
              (76,166
              )
              
              0.15Outstanding
                  December 31, 2007 (1)
              
              
              11,161,000
              
              
              0.16
              
              
              2.1
              
              
              46,500Exercisable
                  at December 31, 2007
              
              
              8,308,077
              
              
              0.16
              
              
              2.0
              
              
              46,500


(1)
            Options
                outstanding are exercisable at prices ranging from $0.09 to $0.44
                and
                expire over the period from 2007 to 2011.


(2)
            Aggregate
                intrinsic value is based on the closing price of our common stock
                on
                December 31, 2007 of $0.121 and excludes the impact of options that
                were
                not in-the-money.





Cash
      received from the exercise of stock options was $11,310 and $-0- for the
      nine-month periods ended December 31, 2007 and 2006, respectively. The Company
      did not realize any actual tax benefit from the tax deductions for stock option
      exercises during the nine-month periods due to the full valuation allowance
      on
      the Company’s U.S. deferred tax assets.





**Share
      warrants**




The
      following table summarizes information on warrant activity during the nine
      months ended December 31, 2007:


**Weighted
                  average**
              ********
              ****
              **Shares**
              ****
              **exercise
                  price**
              ********
              ****
              **#**
              ****
              **$**Outstanding
                  March 31, 2007
              
              
              5,177,572
              
              
              0.11Granted
              
              
              -
              
              
              -Canceled/expired
              
              
              (165,000
              )
              
              0.08Exercised
              
              
              (2,681,000
              )
              
              0.08Outstanding
                  December 31, 2007
              
              
              2,331,572
              
              
              0.15


10


The
      Company has outstanding share warrants as of December 31, 2007, as follows
      (exercise prices subject to certain antidilution price protection):





**Number
      of** **Exercise Price**


**Description**
              
              **Number
                  of Common Shares**
              ****
              **Exercise
                  Price Per Share $**
              ****
              **Expiration
                  Date**Warrants
              
              
              2,331,572
              
              
              0.15
              
              
              August
                  31, 2009




**9.
      PREFERRED STOCK**




On
      December 30, 2002, the Company issued 205,000 shares of 12% Series D
      non-redeemable convertible preferred stock (the "Series D Stock") with a stated
      value of $10 per share. Dividends of 12% per annum were payable, with certain
      exceptions, either in cash or in shares of common stock at the Company's
      election. The remaining 91,000 shares of Series D Stock and accumulated
      dividends was subject to and automatically converted to 18,200,000 shares of
      common stock at $0.08 per share on December 31, 2007. At December 31, 2007
      the
      Company had no shares of preferred stock outstanding.





**10.
      LITIGATION**




In
      May
      2006, the Company announced that a complaint had been filed against the Company
      and certain of its officers and employees by digEcor, Inc. in the Third Judicial
      District Court of Utah, County of Salt Lake. The complaint alleged breaches
      of
      contract, unjust enrichment, breaches of good faith and fair dealing, fraud,
      negligent misrepresentation, and interference with prospective economic
      relations. digEcor sought, among other things, an injunction to prevent the
      Company from selling or licensing certain digital rights management technology
      and “from engaging in any competition with digEcor until after 2009.” digEcor
      also sought “actual damages” of $793,750 and “consequential damages...not less
      than an additional $1,000,000.” This action was related to a purchase order the
      Company placed for this customer in the normal course of business on November
      11, 2005 for 1,250 digEplayersTM with a contract manufacturer, Maycom Co., Ltd.
      Maycom was paid in full for the order by both e.Digital and digEcor by March
      2006, but Maycom failed to timely deliver the order. The Company recorded an
      impairment charge of $603,750 in March 2006 for deposits paid to Maycom due
      to
      the uncertainty of obtaining future delivery. In October 2006 the Company
      received delivery from Maycom of the delayed 1,250-unit digEplayer order and
      delivered the order to digEcor. The Company recognized $713,750 of revenue
      from
      this order and reversed an impairment charge of $603,750 in its third fiscal
      2007 quarter.





The
      Company has answered the complaint. The case is currently in the discovery
      phase. In January 2007, the Court ruled on certain motions of the parties.
      In
      its ruling, the Court dismissed digEcor’s unjust enrichment, fraud, negligent
      misrepresentation, tortuous interference and punitive damage claims. The Court
      further acknowledged the delivery of the 1,250-unit order and a partial
      settlement between the parties reducing digEcor’s claim for purchase-price or
      actual damages from $793,750 to $94,846 with such amount still being disputed
      by
      e.Digital. digEcor’s contract and damages claims remain in dispute, and the
      Court provided some interpretation of the contracts at issue in its ruling.
      digEcor subsequently amended its Complaint to assert an alternative breach
      of
      contract claim, and claims for federal, state and common law unfair competition,
      and sought an injunction prohibiting the Company “from engaging in any
      competition with digEcor until after 2013.”  In April
      2007 digEcor filed a motion for summary judgment seeking enforcement of an
      alleged noncompete provision and an injunction prohibiting the Company from
      competing with digEcor. In October 2007 the Court denied, without prejudice,
      digEcor’s motion for partial summary judgment and a request for injunction. The
      foregoing and other findings of the Court may be subject to appeal by either
      party.





The
      Company believes it has substantive and multiple defenses and intends to
      vigorously challenge this matter. Due to the uncertainties inherent in any
      litigation, however, there can be no assurance whether the Company will or
      will
      not prevail in its defense against digEcor’s remaining claims. The Company is
      also unable to determine at this time the impact this complaint and matter
      may
      have on its financial position or results of operations. The Company has an
      accrual of $80,000 as an estimate of a deposit obligation related to the
      remaining general damage claim and the Company intends to seek restitution
      from
      Maycom for any damages it may incur but recovery from Maycom is not assured.
      Maycom is not involved in the design, tooling or production of the Company’s
      proprietary eVU mobile product. Moreover, the Company does not presently plan
      or
      expect to produce or sell digEplayer models to digEcor or other customers in
      the
      future.





In
      May
      2007 the Company filed a second amended counterclaim in the United States
      District Court of Utah seeking a declaratory judgment confirming the status
      of
      prior agreements between the parties, alleging breach of e.Digital’s
      confidential information and trade secrets by digEcor, seeking an injunction
      against digEcor’s manufacture and sale of a portable product based on the
      Company’s technology, alleging breach of duty to negotiate regarding revenue
      sharing dollars the Company believes it has the right to receive and tortious
      interference by digEcor in the Company’s contracts with third parties. The
      Company intends to vigorously prosecute these counterclaims. There can be no
      assurance, however, that the Company will prevail on any of its
      counterclaims.




11





**11.
      COMMITMENTS AND CONTINGENCIES**





**Commitment
      Related to Legal Services**




On
      March
      23, 2007 the Company entered into an agreement for legal services and a
      contingent fee arrangement with Duane Morris LLP. The agreement provides that
      Duane Morris will be the Company’s exclusive legal counsel in connection with
      the assertion of the Company’s flash memory related patents against infringers
      (“Patent Enforcement Matters’).





Duane
      Morris has agreed to handle the Company’s Patent Enforcement Matters and certain
      related appeals on a contingent fee basis. Duane Morris also has agreed to
      advance certain costs and expenses including travel expenses, court costs and
      expert fees. The Company has agreed to pay Duane Morris a fee equal to 40%
      of
      any license or litigation recovery related to Patent Enforcement Matters, after
      recovery of expenses, and 50% of recovery if appeal is necessary.





In
      the
      event the Company is acquired or sold or elects to sell the covered patents
      or
      upon certain other corporate events or in the event the Company terminates
      the
      agreement for any reason, then Duane Morris shall be entitled to collect accrued
      costs and a fee equal to three times overall time and expenses accrued in
      connection with the agreement and a fee of 15% of a good faith estimate of
      the
      overall value of the covered patents. The Company has provided Duane Morris
      a
      lien and a security interest in the covered patents to secure its obligations
      under the agreement.





**Contract
      Manufacturers and Suppliers**




The
      Company depends on contract manufacturers and suppliers to (i) allocate
      sufficient capacity to its manufacturing needs, (ii) produce acceptable quality
      products at agreed pricing and (iii) deliver on a timely basis. If a
      manufacturer is unable to satisfy these requirements, the Company's business,
      financial condition and operating results may be materially and adversely
      affected. Any failure in performance by either of these manufacturers for any
      reason could have a material adverse affect on the Company's business.
      Production and pricing by such manufacturers is subject to the risk of price
      fluctuations and periodic shortages of components. The Company does not have
      supply agreements with component suppliers and, accordingly, it is dependent
      on
      the future ability of its manufacturers to purchase components. Failure or
      delay
      by suppliers in supplying necessary components could adversely affect the
      Company's ability to deliver products on a timely and competitive basis in
      the
      future.





At
      December 31, 2007 the Company had outstanding unfilled purchase orders and
      was
      committed to a contract manufacturers and component suppliers for approximately
      $946,000 of future deliveries. Purchase commitments for product and components
      are generally subject to modifications as to timing, quantities and scheduling
      and in certain instances may be cancelable without penalty.





**Facility
      Lease**




In
      March
      2006 the Company entered into a sixty-two month lease, commencing June 1, 2006,
      for approximately 4,800 square feet with an aggregate payment of $5,805 per
      month excluding utilities and costs. The aggregate payments adjust annually
      with
      maximum aggregate payments totaling $6,535 in the fifty-first through the
      sixty-second month. Future lease commitments aggregated $270,304 at December
      31,
      2007.





**Royalties**




In
      connection with a prior note financing, the Company is obligated to pay a
      royalty of $20.00 for each entertainment device sold through December 31, 2008.
      During the three and nine months ended December 31, 2007 the Company incurred
      royalties of $21,640 and $69,620, respectively.





**1** **2.
      MAJOR CUSTOMERS**




The
      Company operates in one major line of business, the development, manufacture
      and
      marketing of electronic products. Sales to three customer comprised 37%, 26%
      and
      20% of revenue for the nine months ended December 31, 2007. Sales to two
      customers comprised 53% and 46% of revenue for the nine months ended December
      31, 2006.




12





**13.
      INCOME TAX**




In
      July
      2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
      in
      Income Taxes — An Interpretation of FASB Statement No. 109 (FIN 48), 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 a tax return. Under FIN 48, the tax benefit from uncertain tax
      positions may be recognized only if it is more likely than not that the tax
      position will be sustained, based solely on its technical merits, with the
      taxing authority having full knowledge of all relevant information. After
      initial adoption of FIN 48, deferred tax assets and liabilities for temporary
      differences between the financial reporting basis and the tax basis of the
      Company’s assets and liabilities along with net operating loss and tax credit
      carryovers are recognized only for tax positions that meet the more likely
      than
      not recognition criteria. Additionally, recognition and derecognition of tax
      benefits from uncertain tax positions are recorded as discrete tax adjustments
      in the first interim period that the more likely than not threshold is
      met.





The
      adoption of FIN 48 did not impact our financial condition, results of operations
      or cash flows. The Company recognizes interest and penalties related to
      unrecognized tax benefits as part of the provision for income taxes. Since
      a
      full valuation allowance was recorded against the Company’s net deferred tax
      assets and the unrecognized tax benefits determined under FIN 48 would not
      result in a tax liability, the Company has not accrued for any interest and
      penalties relating to these unrecognized tax benefits.




13




**Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**





THE
      FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
      COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
      FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON
      A
      VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING,
      "BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
      YEAR
      ENDED MARCH 31, 2007.





***Cautionary
      Note on Forward Looking Statements***





In
      addition to the other information in this report, the factors listed below
      should be considered in evaluating our business and prospects. This prospectus
      contains a number of forward-looking statements that reflect our current views
      with respect to future events and financial performance. These forward-looking
      statements are subject to certain risks and uncertainties, including those
      discussed below and elsewhere herein, that could cause actual results to differ
      materially from historical results or those anticipated. In this report, the
      words “anticipates,” “believes,” “expects,” “intends,” “future” and similar
      expressions identify forward-looking statements. Readers are cautioned to
      consider the specific factors described below and not to place undue reliance
      on
      the forward-looking statements contained herein, which speak only as of the
      date
      hereof. We undertake no obligation to publicly revise these forward-looking
      statements, to reflect events or circumstances that may arise after the date
      hereof.





**General**




We
      are a
      holding company that operates through our wholly-owned California subsidiary
      of
      the same name and is incorporated under the laws of Delaware. We have innovated
      a proprietary secure digital video/audio technology platform (“DVAP”) that can
      be applied to produce complex portable electronic products. In 2003 our DVAP
      was
      applied to an in-flight entertainment (“IFE”) device, the digEplayerTM, for one
      customer. In February 2006 we introduced a new and improved DVAP device, the
      eVUTM mobile entertainment device targeted at the IFE and additional markets. We
      commenced eVU customer trials in the late 2006 and commercial shipments to
      customers in the third quarter of fiscal 2007.




We
      believe we are the leading producer of dedicated portable IFE products
      delivering over 13,000 units since 2003 for airline use. Our latest model,
      eVU,
      features sharp images on a 7” or 8” high resolution LCD screen, a 40 GB
      (gigabyte) to 200 GB of rugged and reliable storage, high audio fidelity, dual
      stereo headphone jacks, a full feature graphical user interface, patent-pending
      hardware security technology, and up to 20 hours of high resolution video
      playback on a single battery charge. We also have the capability to include
      features such as an embedded credit card reader/processor, touch screen
      capabilities and we can further customize the product for target markets or
      select customers.




We
      also
      own an important portfolio of patents related to the use of flash memory in
      portable devices (our Flash-RTM portfolio) and we are actively engaged in a
      strategy to monetize our patent portfolio. We have an over 19 year record of
      innovation and significant investment in our intellectual property asset base
      which includes being the first company to employ and patent important aspects
      of
      the use of removable flash memory in portable recording devices. In June 2006
      we
      engaged an intellectual property consultant to investigate, document and develop
      the portfolio and to liaison with outside legal counsel. In March 2007 we
      selected and engaged the international legal firm Duane Morris LLP to handle
      certain patent enforcement matters on a contingent fee basis. We, and our
      advisors, have performed certain due diligence on our patents and we believe
      we
      have strong intellectual property rights that can be licensed. During the second
      quarter of fiscal 2008 we commenced enforcement action with respect to our
      patent portfolio. We expect to bring additional patent enforcement actions
      during this fiscal year.





Our
      strategy is to market our eVU products and services to a growing base of U.S.
      and international companies in the airline, healthcare, military, and other
      travel and leisure industries which desire to market eVU to consumers at their
      facilities. We employ both direct sales to customers and sales through value
      added distributors (VARs) that provide marketing, logistic and/or content
      services to customers.





14




Our
      revenue is derived from the sale of DVAP products and accessories to customers,
      warranty and technical support services and content fees and related services.
      We also are experienced and available to customize DVAP products for customers
      with special applications. We also expect that we can obtain revenue from our
      Flash-R patent portfolio.





Our
      business and technology is high risk in nature. There can be no assurance we
      can
      achieve sufficient eVU revenues to become profitable or produce future revenues
      from our patent portfolio or from new products or services. We continue to
      be
      subject to the risks normally associated with any new business activity,
      including unforeseeable expenses, delays and complications. Accordingly, there
      is no guarantee that we can or will report operating profits in the
      future.





**Overall
      Performance and Trends**




We
      have
      incurred significant operating losses and negative cash flow from operations
      in
      the current period and in each of the last three fiscal years and these losses
      have been material. We have an accumulated deficit of $81.5 million and a
      working capital deficit of $1,057,026 at December 31, 2007. Our operating plans
      require additional funds which may take the form of debt or equity financings.
      There can be no assurance that any additional funds will be available to our
      company on satisfactory terms and conditions, if at all. Our company’s ability
      to continue as a going concern is in substantial doubt and is dependent upon
      achieving a profitable level of operations and obtaining additional financing.





Management
      has undertaken steps as part of a plan to improve operations with the goal
      of
      sustaining operations for the next twelve months and beyond. These steps include
      (a) expanding sales and marketing to new customers and new markets; (b)
      monetizing the Flash-R patent portfolio; (c) controlling overhead and expenses;
      and (c) raising additional capital and/or obtaining financing. We obtained
      $640,000 of equity proceeds pursuant to a common stock purchase agreement with
      Fusion Capital Fund II, LLC (“Fusion”) during the nine months ended December 31,
      2007. We may have access to up to $1.38 million of additional funding pursuant
      to this agreement (or a maximum of $7.36 million at higher stock prices). Future
      availability under the Fusion agreement is subject to many conditions, some
      of
      which are predicated on events that are not within our control. The availability
      of additional funding under the Fusion agreement is subject to many conditions,
      some of which are predicated on events that are not within our control. There
      can be no assurance this capital resource will be available or be
      sufficient.





Although
      we have had limited resources and personnel to build our business, we are
      experiencing growing acceptance and success from our eVU product line. Last
      year
      we were transitioning from our prior product version to the new eVU product
      that
      was introduced in the third quarter. Our revenues for the nine months ended
      December 31, 2007 were $4,977,662 compared to $1,336,434 for the comparable
      prior period reflecting acceptance of the eVU product by customers.





Sales
      to
      three customers accounted for 37%, 26% and 20% of our first nine-month revenues
      and our results are dependent on the timing and quantity of eVU orders by a
      limited number of airline customers. We have not yet developed a sufficient
      customer base to provide a consistent order flow. The failure to obtain future
      eVU orders or delays of future orders could have a material impact on our
      operations. We expect our quarterly results will vary significantly due to
      the
      timing and amount of order deliveries and recent quarterly revenue results
      should not be relied on as a trend for future quarters due to the early nature
      of our eVU market development and penetration.





Our
      current year to date gross profit of $1,239,864 along with reduced operating
      expenses and other non-cash expenses has resulted in a significant reduction
      in
      net loss compared to the prior year. Our net loss decreased to $1,148,517 for
      the first nine months of the current year from $2,885,471 for the comparable
      period of the prior year ended December 31, 2006. Due to the uncertainty of
      revenues and variability in margins and costs there is significant uncertainty
      regarding this trend to lower losses in the current year compared to the prior
      year. Management’s goal is to expand business with existing customers and
      develop new customers to increase revenues while improving product margins
      and
      controlling operating costs to achieve future profitability.





We
      recently commenced enforcement actions of our Flash-RTM patent portfolio. Our
      international legal firm Duane Morris LLP is handling our patent enforcement
      matters on a contingent fee basis. It is too early to evaluate the likelihood
      of
      success or timing of results of our enforcement actions.





Our
      monthly cash operating costs have been on average approximately $225,000 per
      month for the period ending December 31, 2007. However, we may increase
      expenditure levels in future periods to support and expand our revenue
      opportunities and continue advanced product and technology research and
      development. Accordingly, our losses are expected to continue until such time
      as
      we are able to realize revenues and margins sufficient to cover our costs of
      operations. We may also face unanticipated technical or manufacturing obstacles
      and face warranty and other risks in our business. See Part II, Item 1A (Risk
      Factors) below.




15





**Critical
      Accounting Policies**




Management's
      Discussion and Analysis of Financial Condition and Results of Operations is
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of our financial statements requires us to make estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues,
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, estimates are evaluated, including those related to revenue
      recognition, allowance for doubtful accounts, and intangible assets, taxes,
      impairment of long-lived assets, product warranty, stock-based compensation,
      and
      contingencies and litigation. These estimates are based on historical experience
      and on various other assumptions that we believe to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates. Additional
      information about our critical accounting policies and estimates is provided
      in
      our Form 10-K for March 31, 2007. As our revenues from both products and
      services related to our eVU product line have increased we refined and expanded
      our critical accounting policy titled “Revenue Recognition” as
      follows:





**Revenue
      recognition**




The
      Company recognizes product revenue upon shipment of a product to the customer,
      FOB shipping point, or upon acceptance by the customer depending on the specific
      contract terms, if a signed contract exists, the fee is fixed and determinable,
      collection of resulting receivables is probable and there are no resulting
      obligations. Research and development contract revenues on short-term projects
      or service revenue is recognized once the services or product has been
      delivered, the fee is fixed and determinable, collection of the resulting
      receivable is probable and there are no resulting obligations. If all of the
      service or product has been delivered and there is one element that is more
      than
      perfunctory to the services or product that has not been delivered, revenue
      will
      be recognized evenly over the remaining term of the undelivered
      element.





The
      Company enters into arrangements that include multiple elements such as hardware
      and content and other services. Revenue from these arrangements is allocated
      based on the fair value of each element. The Company defers revenue for any
      undelivered elements, and recognizes revenue when the product is delivered
      or
      over the period in which the service is performed, in accordance with the
      Company’s revenue recognition policy for such element. If the Company cannot
      objectively determine the fair value of any undelivered element included in
      a
      multiple-element arrangement, revenue is deferred until all elements are
      delivered and/or services have been performed, or until the Company can
      objectively determine the fair value of all remaining undelivered elements.





Revenue
      from separately priced extended warranty or product replacement arrangements
      is
      deferred and recognized to income on a straight-line basis over the contract
      period. The Company evaluates these arrangements to determine if there are
      excess costs greater than future revenues to be recorded as a loss.





Funds
      received in advance of meeting the criteria for revenue recognition are deferred
      and are recorded as revenue as they are earned.





In
      June
      2006 the Financial Standards Accounting Board, or FASB, issued Interpretation
      No. 48, or FIN 48 *Accounting
      for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
      109* .
      As a
      result of our adoption of FIN 48 on April 1, 2007, our critical accounting
      policy titled “Income Taxes” has been revised and restated as
      follows:





**Income
      taxes**




The
      Company follows the liability method of accounting for income taxes. Under
      this
      method, deferred tax assets and liabilities are determined based on the
      difference between the financial reporting and tax bases of assets and
      liabilities using enacted tax rates that will be in effect for the year in
      which
      the differences are expected to reverse. The Company provides a full valuation
      reserve related to its substantial net deferred tax assets. In the future,
      if
      sufficient evidence of an ability to generate sufficient future taxable income
      in certain tax jurisdictions becomes apparent, the Company may be required
      to
      reduce the valuation allowances, resulting in income tax benefits in the
      consolidated statement of operations. The Company evaluates the realizability
      of
      the deferred tax assets and assess the need for valuation allowance quarterly.
      The utilization of the net operating loss carry forwards could be substantially
      limited due to restrictions imposed under federal and state laws upon a change
      in ownership.




16




In
      July
      2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
      in
      Income Taxes — An Interpretation of FASB Statement No. 109 (FIN 48), 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 a tax return. Under FIN 48, the tax benefit from uncertain tax
      positions may be recognized only if it is more likely than not that the tax
      position will be sustained, based solely on its technical merits, with the
      taxing authority having full knowledge of all relevant information. After
      initial adoption of FIN 48, deferred tax assets and liabilities for temporary
      differences between the financial reporting basis and the tax basis of the
      Company’s assets and liabilities along with net operating loss and tax credit
      carryovers are recognized only for tax positions that meet the more likely
      than
      not recognition criteria. Additionally, recognition and derecognition of tax
      benefits from uncertain tax positions are recorded as discrete tax adjustments
      in the first interim period that the more likely than not threshold is
      met.





The
      Company recognizes interest and penalties related to unrecognized tax benefits
      as part of the provision for income taxes.





The
      adoption of FIN 48 did not impact our financial condition, results of operations
      or cash flows. Since a full valuation allowance was recorded against the
      Company’s net deferred tax assets and the unrecognized tax benefits determined
      under FIN 48 would not result in a tax liability, the Company has not accrued
      for any interest and penalties relating to these unrecognized tax
      benefits.





**Results
      of Operations**





Three
      months ended December 31, 2007 compared to the three months ended December
      31,
      2006


Three
                  Months Ended December 31,2007
              
              
              
              2006%
                  of
              
              
              
              %
                  of
              
              ChangeDollars
              
              Revenue
              
              Dollars
              
              Revenue
              
              Dollars
              
              %Revenues:Product
                  revenues
              
              
              1,068,885
              
              
              85.3
              %
              
              1,302,312
              
              
              100.0
              %
              
              (233,427
              )Service
                  revenues
              
              
              184,362
              
              
              14.7
              %
              
              -
              
              
              0.0
              %
              
              184,3621,253,247
              
              
              100.0
              %
              
              1,302,312
              
              
              100.0
              %
              
              (49,065
              )Gross
                  Profit:Product
                  gross profit
              
              
              257,956
              
              
              20.6
              %
              
              939,544
              
              
              72.1
              %
              
              (681,588
              )Service
                  gross profit
              
              
              138,395
              
              
              11.0
              %
              
              -
              
              
              0.0
              %
              
              138,395396,351
              
              
              31.6
              %
              
              939,544
              
              
              72.1
              %
              
              (543,193
              )Operating
                  Expenses:Selling
                  and administrative
              
              
              484,252
              
              
              38.6
              %
              
              366,559
              
              
              
              
              
              117,693
              
              
              32.1
              %Research
                  and related
              
              
              243,345
              
              
              19.4
              %
              
              346,982
              
              
              
              
              
              (103,637
              )
              
              (29.9
              %)727,597
              
              
              58.1
              %
              
              713,541
              
              
              
              
              
              14,056
              
              
              2.0
              %Other
                  expenses
              
              
              (66,125
              )
              
              (5.3
              %)
              
              (382,436
              )
              
              
              
              
              316,311
              
              
              (82.7
              %)Loss
                  and comprehensive loss
              
              
              (397,371
              )
              
              (31.7
              %)
              
              (156,433
              )
              
              
              
              
              (240,938
              )
              
              154.0
              %





*Loss
      and Comprehensive Loss*




We
      showed
      a net loss of $397,371 for the three months ended December 31, 2007 compared
      to
      a loss of $156,433 for the comparable period of the prior year. The prior year
      results included the recognition of $713,750 of older digEplayer revenue where
      the product costs of $613,750 had been previously recorded as an impairment
      expense in the previous year (fiscal 2006).




17





*Revenues*




Revenues
      of $1,253,247 in the third quarter of fiscal 2008 compared to $1,302,312 for
      the
      comparable prior period (which included recognition of $713,750 from one final
      delayed digEplayer order). During the prior year’s third quarter we introduced
      our new eVU product. Product revenues in the most recent quarter were $1,068,885
      from selling eVU players and related equipment for use by airline customers.
      Service revenues for the third quarter were $184,362. These revenues are from
      content and support services provided to airline customers.





*Gross
      Profit*




Gross
      profit for the third quarter of fiscal 2008 was $396,351 or 31.6% of revenues.
      The gross profit for the prior year’s third quarter was 72.1% including the
      $613,750 impairment reversal benefit described above or 25% on an adjusted
      comparable basis.





*Operating
      Expenses*




Selling
      and administrative costs for the three months ended December 31, 2007, was
      $484,252 compared to $366,559 for the third quarter of fiscal 2007. The increase
      was due to patent research and consulting costs and increased personnel costs
      to
      support increased overall revenues.





Research
      and related expenditures for the three months ended December 31, 2007 were
      $243,345, as compared
      to $346,982 for the three months ended December 31, 2006. The decrease resulted
      primarily to reassigning engineers and technicians to customer support and
      service roles during the most recent quarter.





*Other
      Expenses*




Net
      other
      expenses were $66,125 for the third quarter. Other income of $11,679 consisted
      primarily of foreign exchange gains. Other expenses included interest of
      $56,115, of which $32,112 was non-cash interest from the amortization of debt
      discount, and $21,640 of financing royalties. Other expenses for the third
      quarter of prior fiscal 2007 were $382,436 and included $373,170 of interest
      expense ($321,497 for non-cash amortization of debt discount).





Nine
      months ended December 31, 2007 compared to the nine months ended December 31,
      2006


Nine
                  Months Ended December 31,2007
              
              
              
              2006%
                  of
              
              
              
              %
                  of
              
              ChangeDollars
              
              Revenue
              
              Dollars
              
              Revenue
              
              Dollars
              
              %Revenues:Product
                  revenues
              
              
              4,470,597
              
              
              89.8
              %
              
              1,336,434
              
              
              100.0
              %
              
              3,134,163Service
                  revenues
              
              
              507,065
              
              
              10.2
              %
              
              -
              
              
              0.0
              %
              
              507,0654,977,662
              
              
              100.0
              %
              
              1,336,434
              
              
              100.0
              %
              
              3,641,228Gross
                  Profit:Product
                  gross profit
              
              
              849,139
              
              
              17.1
              %
              
              944,456
              
              
              70.7
              %
              
              (95,317
              )Service
                  gross profit
              
              
              390,725
              
              
              7.8
              %
              
              -
              
              
              0.0
              %
              
              390,7251,239,864
              
              
              24.9
              %
              
              944,456
              
              
              70.7
              %
              
              295,408Operating
                  Expenses:Selling
                  and administrative
              
              
              1,427,344
              
              
              28.7
              %
              
              1,179,613
              
              
              
              
              
              247,731
              
              
              21.0
              %Research
                  and related
              
              
              739,592
              
              
              14.9
              %
              
              1,101,231
              
              
              
              
              
              (361,639
              )
              
              (32.8
              %)2,166,936
              
              
              43.5
              %
              
              2,280,844
              
              
              
              
              
              (113,908
              )
              
              (5.0
              %)Other
                  expenses
              
              
              (221,445
              )
              
              (4.4
              %)
              
              (1,549,083
              )
              
              
              
              
              1,327,638
              
              
              (85.7
              %)Loss
                  and comprehensive loss
              
              
              (1,148,517
              )
              
              (23.1
              %)
              
              (2,885,471
              )
              
              
              
              
              1,736,954
              
              
              (60.2
              %)





*Loss
      and Comprehensive Loss*




The
      net
      loss of $1,148,517 for the nine months ended December 31, 2007 was a $1,736,954
      decrease from the loss of $2,885,471 for the comparable period of the prior
      year. The improved financial results are the result of current year eVU product
      and service revenues and related product margins. We have also contained costs
      with operating expenses reduced from the comparable prior year period while
      supporting increased revenues. Other expenses were $1,327,638 less due to
      decreased non-cash debt amortization resulting from prior year debt and
      decreased warrant inducement costs.




18




*Revenues*




Revenues
      increased to $4,977,662 for the first nine months of fiscal 2008 compared to
      $1,336,434 for the comparable prior period. Product revenues were $4,470,597
      from selling eVU players and related equipment for use by airline customers.
      Content and support service revenues for the nine-month period were $507,065.
      We
      are reliant on a limited number of customers with three
      customers accounting for 37%, 26% and 20% of our first nine-month revenues.
      Our
      revenues are dependent on the timing and quantity of eVU orders by a limited
      number of airline customers. We have not yet developed a sufficient customer
      base to provide a consistent order flow. The failure to obtain future eVU orders
      or delays of future orders could have a material impact on our operations and
      we
      expect our quarterly results will vary significantly due to the timing and
      amount of order deliveries.





*Gross
      Profit*




Gross
      profit for the first nine months of fiscal 2008 was $1,239,864 or 24.9% of
      revenues. The gross profit for the prior year’s third quarter was 70.7%
      including the $613,750 impairment reversal benefit described above or 25% on
      an
      adjusted comparable basis. The timing and amount of orders and the amount of
      customer support required can dramatically affect future gross margins and
      current results are not indicative of future quarters. Management’s goal is to
      improve gross margins over time from higher revenues, improved economies of
      scale and improvements in customer support activities.





*Operating
      Expenses*




Selling
      and administrative costs for the nine months ended December 31, 2007, were
      $1,427,344 compared to the $1,179,613 for the first nine months of fiscal 2007.
      We incurred increases in patent research and consulting costs, marketing
      expenses and sales commissions and personnel costs for new personnel to support
      increased revenues.





Research
      and related expenditures for the nine months ended December 31, 2007 were
      $739,592, as compared
      to $1,101,231 for the nine months ended December 31, 2006. The decrease resulted
      primarily to reassigning engineers and technicians to customer support and
      service roles during the current period. The prior year’s period also included
      approximately $97,000 of eVU development related costs.





*Other
      Expenses*




Net
      other
      expenses were $221,445 for the most recent nine month period. Other income
      consisted of $20,000 from the sale of trademark rights and $17,778 of interest
      and foreign exchange income. Other expenses included interest of $187,783,
      of
      which $99,274 was non-cash interest from the amortization of debt discount,
      and
      $69,620 of financing royalties. Other expenses for the first nine months of
      prior fiscal 2007 were $1,549,083 and included $1,319,135 of interest expense
      ($1,105,876 for non-cash amortization of debt discount) and $230,709 of warrant
      inducement charges for the value of new warrants issued as an inducement to
      exercise warrants.





*Loss
      Attributable to Common Stockholders*




The
      loss
      attributable to common stockholders included the net loss for each period plus
      accrued dividends on convertible preferred stock of $27,225 and $81,975 for
      the
      three and nine months ended December 31, 2007, respectively. The preferred
      stock
      and related accumulated dividends was converted on December 31, 2007 ceasing
      future dividend requirements and extinguishing the accumulated $546,000 dividend
      liability.





**Liquidity
      and Capital Resources**




At
      December 31, 2007, we had a working capital deficit of $1,057,026 compared to a
      working capital deficit of $1.3 million at March 31, 2007. At December 31,
      2007,
      we had cash on hand of $278,968.





*Operating
      Activities*




Cash
      used
      in operating activities of $974,412 for the nine months period ended December
      31, 2007 included the
      $1,148,517 loss decreased by non-cash expenses of $426,701. Other major
      components providing operating cash was deferred revenue of $112,000, an
      increase of $49,562 in accrued employee benefits and a $51,723 reduction in
      inventory. Components using operating cash included a decrease of $165,837
      in
      accounts payable and an increase of $131,800 in accounts receivable. We have
      negotiated terms with our contract suppliers reducing advance production
      payments required prior to product delivery. Our terms to customers vary but
      we
      often require payment prior to shipment of product and any such payments are
      recorded as deposits. We expect certain airline customers to demand commercial
      terms such as 30 or 60 days in the future and this could increase our need
      for
      working capital.





19




Cash
      used
      in operating activities during the nine months ended December 31, 2006 were
      $1,661,426. The $687,014 improvement in the most recent period resulted
      primarily from the reduced net loss. However, individual working capital
      components can change dramatically from quarter to quarter due to timing of
      sales and shipments and corresponding receivable, inventory and payable
      balances. Accordingly operating cash requirements vary significantly from period
      to period.





*Investing
      Activities*




The
      Company’s efforts are primarily on operations and currently has no significant
      investing capital needs. The Company purchased $7,167 of equipment during the
      first nine months of fiscal 2008. We have no commitments requiring investment
      capital.





*Financing
      Activities*




For
      the
      nine months ended December 31, 2007, cash provided by financing activities
      was $565,790.
      This included $640,000 from
      the
      sale of common stock to Fusion pursuant to our purchase agreement. We obtained
      $225,790 from the exercise of warrants and stock options. We reduced our
      unsecured note balance by $300,000. During the first nine months of the prior
      year we obtained $919,639 from the exercise of warrants.





At
      December 31, 2007 a total of $546,000 of dividends payable included in current
      liabilities was converted into equity upon the automatic conversion of Series
      D
      preferred stock to common stock.





*Debt
      Commitments*




We
      currently have a secured note for $450,000 due on June 23, 2008 and unsecured
      convertible term debt with a principal amount of $884,506. We made $120,000
      of
      term note principal and interest payments through the issuance of common shares
      during the first nine months. Our plans are to make future principal and
      interest payments with shares of common stock, subject to maintaining the $0.10
      minimum share price and other covenants of the term loan.





*Cash
      Requirements*




Other
      than cash on hand, accounts receivable and the Fusion Capital financing
      commitment, we have no material unused sources of liquidity at this time. Based
      on our cash position at December 31, 2007 assuming (a) continuation of existing
      business, and (b) current planned expenditures and level of operation, we
      believe we will require approximately $1.0 million of additional capital
      resources for the next twelve months. Actual results could differ significantly
      from management plans. We believe we may be able to obtain additional funds
      from
      future product margins from increased product sales but actual future margins
      to
      be realized, if any, and the timing of shipments and the amount and quantities
      of shipments, orders and reorders are subject to many factors and risks, many
      outside our control. Accordingly we will need equity or debt financing in the
      next twelve months for working capital and we may need equity or debt financing
      for payment of existing debt obligations and other obligations.





Our
      operating plans require additional funds and should additional funds not be
      available, we may be required to curtail or scale back staffing or operations.
      Failure to obtain additional financings will have a material adverse affect
      on
      our Company. Our company’s ability to continue as a going concern is in
      substantial doubt and is dependent upon achieving a profitable level of
      operations and until then obtaining additional financing. Potential sources
      of
      such funds in addition to our common stock purchase agreement with Fusion
      Capital include exercise of outstanding warrants and options, or debt financing
      or additional equity offerings. However, there is no guarantee that warrants
      and
      options will be exercised or that debt or equity financing will be available
      when needed. Any future financing may be dilutive to existing stockholders.





In
      the
      future, if our operations increase significantly, we may require additional
      funds. We also may require additional capital to finance future developments,
      acquisitions or expansion of facilities. We currently have no plans,
      arrangements or understandings regarding any acquisitions.





20




*Commitments*




As
      of
      December 31, 2007, our contractual obligations and commercial commitments are
      summarized below:





**Cash
                Contractual Obligations by Period**
            
            **Total**
            
            **Less
                than 1 year**
            
            **1
                - 2 years**
            
            **2
                - 3 years**
            
            **Over
                3 years**18%
                Secured Promissory Note and interest
            
            $
            490,500
            
            $
            490,500
            
            $
            -
            
            $
            -
            
            $
            -7.5%
                Convertible Term Note
            
            
            958,165
            
            
            410,000
            
            
            548,165
            
            
            -
            
            
            -Purchase
                commitments(1)
            
            
            946,000
            
            
            946,000
            
            
            -
            
            
            -
            
            
            -Operating
                Lease(2)
            
            
            270,304
            
            
            72,655
            
            
            74,833
            
            
            77,078
            
            
            45,738Total
                cash obligations
            
            $
            2,664,969
            
            $
            1,919,155
            
            $
            622,998
            
            $
            77,078
            
            $
            45,738





(1)
            Purchase
                commitments for product and components are generally subject to
                modifications as to timing, quantities and scheduling and in certain
                instances may be cancelable without
                penalty.


(2)
            Office
                lease agreement.





Our
      legal
      firm Duane Morris is handling Patent Enforcement Matters and certain related
      appeals on our Flash-RTM patent portfolio on a contingent fee basis. Duane Morris
      also has agreed to advance certain costs and expenses including travel expenses,
      court costs and expert fees. We have agreed to pay Duane Morris a fee equal
      to
      40% of any license or litigation recovery related to Patent Enforcement Matters,
      after recovery of expenses, and 50% of recovery if appeal is necessary.





In
      the
      event we are acquired or sold or elect to sell the covered patents or upon
      certain other corporate events or in the event we terminate the agreement for
      any reason, then Duane Morris shall be entitled to collect accrued costs and
      a
      fee equal to three times overall time and expenses accrued in connection with
      the agreement and a fee of 15% of a good faith estimate of the overall value
      of
      the covered patents. Duane Morris has a lien and a security interest in the
      covered patents to secure its obligations under the agreement.





**Item
      3. Quantitative and Qualitative Disclosure about Market
      Risk**




Market
      risk represents the risk of loss that may impact our financial position, results
      of operations or cash flows due to adverse changes in market prices, including
      interest rate risk and other relevant market rate or price risks.





Our
      exposure to market risk for changes in interest rates relates primarily to,
      our
      investment in cash and cash equivalents. We do not use derivative financial
      instruments in our investment portfolio and due to the nature of our
      investments, do not expect our operating results or cash flows to be
      significantly affected by potential changes in interest rates. At December
      31,
      2007, the market value of these investments, which were all classified as cash
      and cash equivalents and debt approximated cost. ****





In
      fiscal
      2007 and prior periods we invoiced our customers in U.S. dollars for all
      products and purchase our products from our suppliers in U.S. dollars. To date
      the foreign currency exchange risk has not been material. We have not entered
      into hedging transactions or activities. In fiscal 2008 we have contracts
      denominated in foreign currencies subject to exchange risk. We do not currently
      plan to enter into hedging transactions or activities.





**Item
      4. Controls and Procedures**




We
      maintain disclosure controls and procedures [as defined in Rules 13a-15(e)
      and
      15d-15(e) under the Securities Exchange Act of 1934, as amended the "Exchange
      Act] that are designed to ensure that information required to be disclosed
      in
      our reports filed under the Exchange Act, is recorded, processed, summarized
      and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms, and that such information is accumulated and
      communicated to our management, including our Chief Executive Officer and
      Interim Chief Accounting Officer, as appropriate, to allow timely decisions
      regarding required disclosure. In designing and evaluating the disclosure
      controls and procedures, management recognized that any controls and procedures,
      no matter how well designed and operated, can provide only reasonable assurance
      of achieving the desired control objectives, and management necessarily was
      required to apply its judgment in evaluating the cost-benefit relationship
      of
      possible controls and procedures.





We
      carried out an evaluation under the supervision and with the participation
      of
      management, including our Chief Executive Officer and Interim Chief Accounting
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures as of December 31, 2007, the end of the period covered
      by this report. Based on that evaluation, our Chief Executive Officer and
      Interim Chief Accounting Officer concluded that our disclosure controls and
      procedures were effective at the reasonable assurance level as of December
      31,
      2007.





21




There
      have been no changes in our internal control over financial reporting (as
      defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
      quarter ended December 31, 2007 that materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.





We
      are a
      non-accelerated filer and are required to comply with the internal control
      reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley
      Act
      for fiscal years ending on or after December 15, 2007. Although we are working
      to comply with these requirements, we have only twenty-one employees and these
      employees work at one location. The small number of employees is expected to
      make compliance with Section 404 - especially with segregation of duty control
      requirements - very difficult and cost ineffective, if not impossible. Our
      auditors have previously advised us regarding a material weakness in internal
      control regarding segregation of duties and if not corrected or mediated in
      the
      future may result in management and our auditors being unable to make an
      unqualified assessment regarding the effectiveness of our internal controls
      over
      financial reporting. The Securities and Exchange Commission and the Public
      Company Accounting Oversight Board (PCAOB) have issued new supplementary
      regulations for public registrants and their auditors intending to ease the
      burden of Section 404 requirements for small entities like us. We are currently
      evaluating these new pronouncements and the effect they will have on our
      compliance with Section 404.





**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**




In
      May
      2006, we announced that a complaint had been filed against our company and
      certain of our officers and employees by digEcor, Inc. in the Third Judicial
      District Court of Utah, County of Salt Lake. The complaint alleged breaches
      of
      contract, unjust enrichment, breaches of good faith and fair dealing, fraud,
      negligent misrepresentation, and interference with prospective economic
      relations. digEcor sought, among other things, an injunction to prevent our
      company from selling or licensing certain digital rights management technology
      and “from engaging in any competition with digEcor until after 2009.” digEcor
      also sought “actual damages” of $793,750 and “consequential damages...not less
      than an additional $1,000,000.” This action was related to a purchase order we
      placed for this customer in the normal course of business on November 11, 2005
      for 1,250 digEplayersTM with our contract manufacturer, Maycom Co., Ltd.. Maycom
      was paid in full for the order by both e.Digital and digEcor by March 2006,
      but
      Maycom failed to timely deliver the order. We recorded an impairment charge
      of
      $603,750 in March 2006 for deposits paid to Maycom due to the uncertainty of
      obtaining future delivery. In October 2006 we received delivery from Maycom
      of
      the delayed 1,250-unit digEplayer order and delivered the order to digEcor.
      We
      recognized $713,750 of revenue from this order and reversed an impairment charge
      of $603,750 in our third fiscal 2007 quarter.




We
      have
      answered the complaint and are pursuing certain counterclaims. The
      case
      is currently in the discovery phase. In January 2007, the Court ruled on certain
      motions of the parties. In its ruling, the Court dismissed digEcor’s unjust
      enrichment, fraud, negligent misrepresentation, tortious interference and
      punitive damage claims. The Court further acknowledged the delivery of the
      1,250-unit order and a partial settlement between the parties reducing digEcor’s
      claim for purchase-price or actual damages from $793,750 to $94,846 with such
      amount still being disputed by e.Digital. digEcor’s contract and damages claims
      remain in dispute, and the Court provided some interpretation of the contracts
      at issue in its ruling. The foregoing and other findings of the Court may be
      subject to appeal by either party. digEcor has since amended its Complaint
      to
      assert an alternative breach of contract claim, and claims for federal, state
      and common law unfair competition, and digEcor seeks an injunction prohibiting
      e.Digital “from engaging in any competition with digEcor until after 2013.” In
      April 2007 digEcor filed a motion for summary judgment seeking enforcement
      of an
      alleged noncompete provision and an injunction prohibiting e.Digital from
      competing with digEcor. In October 2007 the Court denied, without prejudice,
      digEcor’s motion for partial summary judgment and a request for injunction. The
      foregoing and other findings of the Court may be subject to appeal by either
      party.




We
      believe we have substantive and multiple defenses and intend to vigorously
      challenge the pending summary judgment motion and all remaining matters. Due
      to
      the uncertainties inherent in any litigation, however, there can be no assurance
      whether we will or will not prevail in our defense against digEcor’s remaining
      claims. We are also unable to determine at this time the impact this complaint
      and matter may have on our financial position or results of operations. We
      have
      an accrual of $80,000 as an estimate of a deposit obligation related to the
      remaining general damage claim and we intend to seek restitution from Maycom
      for
      any damages we may incur but recovery from Maycom is not assured. Maycom is
      not
      involved in the design, tooling or production of our proprietary eVU mobile
      product. Moreover, we do not presently plan or expect to produce or sell
      digEplayer models to digEcor or other customers in the future.





22




In
      May
      2007 we filed a second amended counterclaim in the United States District Court
      of Utah seeking a declaratory judgment confirming the status of prior agreements
      between the parties, alleging breach of our confidential information and trade
      secrets by digEcor, seeking an injunction against digEcor’s manufacture and sale
      of a portable product based on our company’s technology, alleging breach of duty
      to negotiate regarding revenue sharing dollars our company believes it has
      the
      right to receive and tortious interference by digEcor in our contracts with
      third parties. We intend to vigorously prosecute these counterclaims. There
      can
      be no assurance, however, that we will prevail on any of our
      counterclaims.





**Item
      1A. Risk Factors**




Set
      forth
      below and elsewhere in this report and in other documents we file with the
      Securities and Exchange Commission are risks and uncertainties that could cause
      our actual results to differ materially from the results contemplated by the
      forward-looking statements contained in this report and other public statements
      we make. See "Cautionary Note on Forward Looking Statements" within this
      document. If any of the following risks actually occurs, our business, financial
      condition, or results of operations could suffer. In that case, the trading
      price of our common stock could decline, and you may lose all or part of your
      investment.





The
      risk
      factors described below do not contain any material changes from the Risk
      Factors described under Item 1A of Part I of our Annual Report on Form 10-K
      for
      March 31, 2007, except as follows:





·
            We
                updated our risk factors for financial information through the third
                quarter of fiscal 2008 ended December 31,
                2007.


·
            We
                segregated the risk factor related to customer litigation that was
                previously combined with reliance on
                customers.


·
            We
                are actively pursuing our business strategy of monetizing our Flash-RTM
                patent portfolio. As we commenced enforcement and intend to aggressively
                pursue additional patent enforcement actions during fiscal 2008,
                we have
                added a separate section of risk factors related to this business
                strategy.





**Financial
      Risks**





***We
      Have a History of Losses and May Incur Future Losses*** .
      We have
      incurred significant operating losses in prior fiscal years and as of the period
      ended and December 31, 2007 we had an accumulated deficit of $81.5 million.
      We
      had losses of approximately $3.1 million, $3.1 million and $2.4 million in
      fiscal years 2007, 2006 and 2005, respectively and $1,146,469 for the nine
      months ended December 31, 2007. To date, we have not achieved profitability
      and
      given the level of operating expenditures and the uncertainty of revenues and
      margins, we will continue to incur losses and negative cash flows in future
      periods. The failure to obtain sufficient revenues and margins to support
      operating expenses could harm our business.





***Unless
      We Obtain Adequate Financing and Increase Our Revenues We May Be Unable to
      Continue as a Going Concern.*** We have
      suffered recurring losses from operations using substantial cash and current
      revenues and margins are insufficient to cover operating costs. This factor,
      in
      combination with (i) reliance upon debt and new equity financing to fund the
      continuing losses from operations and cash flow deficits, (ii) material net
      losses and cash flow deficits from operations during fiscal year 2008 to date,
      during fiscal 2007 and in prior years and (iii) the possibility that we may
      be
      unable to meet our debts as they come due, raise substantial doubt about our
      ability to continue as a going concern. Our company’s ability to continue as a
      going concern is dependent upon our ability to obtain adequate financing and
      achieve a level of revenues, adequate to support our capital and operating
      requirements, as to which no assurance can be given. In the event we are unable
      to continue as a going concern, we may elect or be required to seek protection
      from our creditors by filing a voluntary petition in bankruptcy or may be
      subject to an involuntary petition in bankruptcy. To date, management has not
      considered this alternative, nor does management view it as a likely occurrence.
      Our auditors have included in their report an explanatory paragraph describing
      conditions that raise substantial doubt about our ability to continue as a
      going
      concern.





23




***We
      Need to Obtain Additional Financing to Continue Operating our
      Business*** *.* We
      had an
      operating cash flow deficit of $974,412 for the first nine months of fiscal
      2008
      and $2.5 million for the year ended March 31, 2007. We believe that cash on
      hand
      and proceeds from existing development and production contracts and product
      sales, are not sufficient to meet cash requirements for the next
      twelve ** months.
      We anticipate the need to raise additional funds to:





·
            Finance
                working capital requirements


·
            Pay
                for increased operating expenses or shortfalls in anticipated
                revenues


·
            Fund
                research and development costs


·
            Develop
                new technology, products or services


·
            Respond
                to competitive pressures


·
            Support
                strategic and industry relationships


·
            Fund
                the production and marketing of our products and
                services


·
            Meet
                our debt obligations as they become
                due





We
      cannot
      guarantee that the common stock purchase agreement with Fusion Capital Fund
      II,
      LLC (“Fusion Capital”) will be sufficient or available to fund our ongoing
      operations. We only have the right to receive $80,000 every four business days
      under the agreement with Fusion Capital unless our stock price equals or exceeds
      $0.10, in which case we can sell greater amounts to Fusion Capital as the price
      of our common stock increases. Fusion Capital does not have the right nor the
      obligation to purchase any shares of our common stock on any business day that
      the market price of our common stock is less than $0.08. We registered
      19,166,666 shares for sale by Fusion Capital from time to time. We sold
      4,166,666 shares to Fusion Capital in January 2007 for proceeds of $500,000
      and
      an additional 3,579,716 shares through December 31, 2007 for additional proceeds
      of $640,000. Accordingly, the selling price of the common stock that may be
      sold
      to Fusion in the balance of fiscal 2008 and to the term of the common stock
      purchase agreement will have to average at least $0.64 per share for us to
      receive the maximum remaining proceeds of $7.36 million as of December 31,
      2007.
      Assuming a purchase price of $0.121 per share (the closing sale price of the
      common stock on December 31, 2007) and the purchase by Fusion of the remaining
      shares under the common stock purchase agreement at that date, proceeds to
      us
      would only be an additional $1.38 million.





The
      extent we rely on Fusion Capital as a source of funding will depend on a number
      of factors including, the prevailing market price of our common stock and the
      extent to which we are able to secure working capital from other sources, such
      as through the sale of our products or services or the licensing of our
      intellectual property. Specifically, Fusion Capital does not have the right
      nor
      the obligation to purchase any shares of our common stock on any business days
      that the market price of our common stock is less than $0.08. Fusion Capital
      may
      also terminate the arrangement for reasons including our failure to maintain
      effectiveness of the registration statement. If obtaining sufficient financing
      from Fusion Capital was to prove unavailable or prohibitively dilutive and
      if we
      are unable to raise additional funds through the sale of our products or
      services or the licensing of our intellectual property, we will need to secure
      another source of funding in order to satisfy our working capital needs. Even
      if
      we are able to access the sufficient financing under the common stock purchase
      agreement with Fusion Capital, we may still need additional capital to fully
      implement our business, operating and development plans.





We
      cannot
      assure you that such additional financing will be available on terms favorable
      to us, or at all. If adequate funds are not available to us then we may not
      be
      able to continue operations or take advantage of opportunities. If we raise
      additional funds through the sale of equity, including common stock, the
      percentage ownership of our stockholders will be reduced.





***We
      do not Anticipate Paying Dividends*** .
      We have
      never paid any cash dividends on our common stock and do not anticipate paying
      any cash dividends in the foreseeable future. We currently intend to retain
      any
      future earnings to fund the development and growth of our business. An
      investment in our common stock, therefore, may be more suitable for an investor
      that is seeking capital appreciation rather than current yield and, as a
      consequence, may be more speculative. Accordingly, investors should not purchase
      our common stock with an expectation of receiving regular dividends.





***We
      Expect Our Operating Results to Fluctuate
      Significantly*** **** -
      Our
      quarterly and annual operating results have fluctuated significantly in the
      past
      and we expect that they will continue to fluctuate in the future. This
      fluctuation is a result of a variety of factors, including the
      following:




·
              Unpredictable
                  demand and pricing for our contract development
                  services
 ·
              Market
                  acceptance of our business customers’ products by end
                  users
 ·
              Uncertainties
                  with respect to future customer product orders, their timing and
                  the
                  margins to be received, if any
 ·
              Fluctuations
                  in operating costs
 ·
              Changes
                  in research and development
                  costs




24




·
              Changes
                  in general economic conditions
 ·
              Changes
                  in technology
 ·
              Short
                  product lifecycles




***We
      May Experience Product Delays, Cost Overruns and Errors Which Could Adversely
      Affect our Operating Performance and Ability to Remain
      Competitive.*** ** We
      have
      experienced development delays and cost overruns associated with contract
      development services in the past. We may experience additional delays and cost
      overruns on current projects or future projects. Future delays and cost overruns
      could adversely affect our financial results and could affect our ability to
      respond to technological changes, evolving industry standards, competitive
      developments or customer requirements. Our technology, the results of our
      contract services and the products produced for our customers could contain
      errors that could cause delays, order cancellations, contract terminations,
      adverse publicity, reduced market acceptance of products, or lawsuits by our
      customers or others who have acquired our products, including customers branded
      products.





**Risks
      Related to Sales, Marketing and Competition**





***We
      May Be Unable to Successfully Compete in the Electronic Products Market Which
      is
      Highly Competitive and Subject to Rapid Technological
      Change*** *.* We
      compete in the market for electronics products which is intensely competitive
      and subject to rapid technological change. The market is also impacted by
      evolving industry standards, rapid price changes and rapid product obsolescence.
      Our competitors include a number of large foreign companies with U.S. operations
      and a number of domestic companies, many of which have substantially greater
      financial, marketing, personnel and other resources. Our current competitors
      or
      new market entrants could introduce new or enhanced technologies or products
      with features that render the company’s technology or products obsolete or less
      marketable, or could develop means of producing competitive products at a lower
      cost. Our ability to compete successfully will depend in large measure on our
      ability to maintain our capabilities in connection with upgrading products
      and
      quality control procedures and to adapt to technological changes and advances
      in
      the industry. Competition could result in price reductions, reduced margins,
      and
      loss of contracts, any of which could harm our business. There can be no
      assurance that we will be able to keep pace with the technological demands
      of
      the marketplace or successfully enhance our products or develop new products
      that are compatible with the products of the electronics industry.





***We
      Rely on a Limited Number of Customers for Revenue*** *.* Historically,
      a substantial portion of our revenues has been derived primarily from a limited
      number of customers. Three customers accounted for 83% of our revenues for
      the
      nine months ended December 31, 2007 and two customers accounted for 92% of
      revenues in the year ended March 31, 2007. The failure to receive orders for
      and
      produce products or a decline in the economic prospects of our customers or
      the
      products we may produce for sale may have a material adverse effect on our
      operations.





***Customer
      Litigation.*** In May
      2006, the company and certain of its officers were sued by former customer
      digEcor. We are unable to determine at this time the impact this litigation
      and
      matter may have on our financial position or results of operations. An adverse
      ruling by the court could have a material adverse effect on our financial
      position and results of operations. See “Legal Proceedings.”





***If
      We Are Unsuccessful in Achieving Market Acceptance of Our Products, It Could
      Harm Our Business*** *.* Sales
      and
      marketing strategy contemplates sales of developed products to the electronics
      and computer software market by our customers. The failure of our customers
      to
      penetrate their projected markets would have a material adverse effect upon
      our
      operations and prospects. Market acceptance of our products and those of our
      customers will depend in part upon our ability to demonstrate and maintain
      the
      advantages of our technology over competing products.





***We
      Have Limited Marketing Capabilities and Resources Which Makes It Difficult
      For
      Us to Create Awareness of and Demand for Our Products and
      Technology.*** ** We
      have
      limited marketing capabilities and resources and are primarily dependent upon
      in-house executives for the marketing of our products, as well as our licensing
      business. Selling products and attracting new business customers requires
      ongoing marketing and sales efforts and expenditure of funds to create awareness
      of and demand for our technology. We cannot assure that our marketing efforts
      will be successful or result in future development contracts or other
      revenues.





25




***The
      Success of Our Business Depends on Emerging Markets and New Products.*** ** In
      order
      for demand for our technology, services and products to grow, the markets for
      portable digital devices, such as digital recorders and digital video/music
      players and other portable consumer devices must develop and grow. If sales
      for
      these products do not grow, our revenues could decline. To remain competitive,
      we intend to develop new applications for our technology and develop new
      technology and products. If new applications or target markets fail to develop,
      or if our technology, services and products are not accepted by the market,
      our
      business, financial condition and results of operations could
      suffer.





***Development
      of New or Improved Products, Processes or Technologies May Render Our Technology
      Obsolete and Hurt Our Business.*** The
      electronics, contract manufacturing and computer software markets are
      characterized by extensive research and development and rapid technological
      change resulting in very short product life cycles. Development of new or
      improved products, processes or technologies may render our technology and
      developed products obsolete or less competitive. We will be required to devote
      substantial efforts and financial resources to enhance our existing products
      and
      methods of manufacture and to develop new products and methods. There can be
      no
      assurance we will succeed with these efforts. Moreover, there can be no
      assurance that other products will not be developed which may render our
      technology and products obsolete.





**Risks
      Related to Operations**





***We
      Depend On a Limited Number of Contract Manufacturers and Suppliers and Our
      Business Will Be Harmed By Any Interruption of Supply or Failure of
      Performance*** *.* We
      rely
      on one major supplier for manufacturing our in-flight entertainment, eVU
      product. We depend on our contract manufacturer to (i) allocate sufficient
      capacity to our manufacturing needs, (ii) produce acceptable quality products
      at
      agreed pricing and (iii) deliver on a timely basis. If a manufacturer is unable
      to satisfy these requirements, our business, financial condition and operating
      results may be materially and adversely affected. Any failure in performance
      by
      our manufacturer for any reason could have a material adverse affect on our
      business. Production and pricing by such manufacturer is subject to the risk
      of
      price fluctuations and periodic shortages of components. We have no supply
      agreements with component suppliers and, accordingly, we are dependent on the
      future ability of our manufacturer to purchase components. Failure or delay
      by
      suppliers in supplying necessary components could adversely affect our ability
      to deliver products on a timely and competitive basis in the
      future.





***If
      We Lose Key Personnel or Are Unable to Attract and Retain Additional Highly
      Skilled Personnel Required For the Expansion of Our Activities Our Business
      Will
      Suffer*** *.* Our
      future success depends to a significant extent on the continued service of
      our
      key technical, sales and senior management personnel and their ability to
      execute our strategy. The loss of the services of any of our senior level
      management, or certain other key employees, may harm our business. Our future
      success also depends on our ability to attract, retain and motivate highly
      skilled employees. Competition for employees in our industry is intense. We
      may
      be unable to retain our key employees or to attract, assimilate and retain
      other
      highly qualified employees in the future. We have from time to time in the
      past
      experienced, and we expect to continue to experience in the future, difficulty
      in hiring and retaining highly skilled employees with appropriate
      qualifications.





***Because
      Some of Our Management are Part-Time and Have Certain Conflicts of Interest,
      Our
      Business Could Be Harmed*** **.** Our
      Senior Vice President, Robert Putnam, also performs investor relations for
      American Technology Corporation. As a result of his involvement with American
      Technology Corporation, Mr. Putnam has in the past, and is expected in the
      future to devote a substantial portion of his time to other endeavors and only
      part-time services to e.Digital. Certain conflicts of interest now exist and
      will continue to exist between e.Digital and Mr. Putnam due to the fact that
      he
      has other employment or business interests to which he devotes some attention
      and he is expected to continue to do so. It is conceivable that the respective
      areas of interest of e.Digital and American Technology Corporation could overlap
      or conflict.





**Our
      Patent Enforcement Strategy is Subject to Numerous Risks From Outside
      Influences**





***Enforcement
      of Our Patented Technologies is Untested and We Face Uncertain Revenue Prospects
      or Market Value.*** Our
      portfolio of flash memory patents and technologies have yet to be licensed
      nor
      be the subject of any patent enforcement litigation. The licensing demand for
      our patent portfolio is untested and is subject to fluctuation based upon the
      rate at which target infringers agree to pay royalties or settle enforcement
      actions, if any. There can be no assurance of revenues from our strategy of
      enforcing our flash memory patent portfolio.





26




***Our
      Fee Arrangement with Patent Enforcement Counsel Subjects Us To Certain Risks
      and
      Substantial Costs and Fees Could Limit our Net Proceeds From Any Successful
      Patent Enforcement Actions.*** Our
      agreement for legal services and a contingent fee arrangement with Duane Morris
      LLP provides that Duane Morris is our exclusive legal counsel in connection
      with
      the assertion of our flash memory related patents against infringers (“Patent
      Enforcement Matters’). Duane Morris is advancing certain costs and expenses
      including travel expenses, court costs and expert fees. We have agreed to pay
      Duane Morris a fee equal to 40% of any license or litigation recovery related
      to
      Patent Enforcement Matters, after recovery of expenses, and 50% of recovery
      if
      appeal is necessary. We are not in control of the timing, costs and fees, which
      could be substantial and could limit our share of proceeds, if any, from future
      patent enforcement actions. There can be no assurance Duane Morris will
      diligently and timely pursue patent enforcement actions on our behalf. In the
      event we are acquired or sold or we elect to sell the covered patents or upon
      certain other corporate events or in the event we terminate the agreement with
      Duane Morris for any reason, then Duane Morris shall be entitled to collect
      accrued costs and a fee equal to three times overall time and expenses and
      a fee
      of 15% of a good faith estimate of the overall value of the covered patents.
      We
      have provided Duane Morris a lien and a security interest in the covered patents
      to secure this obligation. Should any of the aforementioned events occur, the
      fees and costs owed to Duane Morris could be substantial and limit our
      revenues.





***New
      Legislation, Regulations or Rules Related To Enforcing Patents Could
      Significantly Decrease Our Prospect for Revenue and Increase the Time and Costs
      Associated with Patent Enforcement.*** **** If new
      legislation, regulations or rules are implemented either by Congress, the United
      States Patent and Trademark Office, or the courts that impact the patent
      application process, the patent enforcement process or the rights of patent
      holders, these changes could negatively affect our revenue prospects and
      increase the costs of enforcement. For example, new rules regarding the burden
      of proof in patent enforcement actions could significantly increase the cost
      of
      our enforcement actions, and new standards or limitations on liability for
      patent infringement could negatively impact revenue derived from such
      enforcement actions. While we are not aware that any such changes are likely
      to
      occur in the foreseeable future that impact our current patens, we cannot assure
      that such changes will not occur.





***Should
      Litigation Be Required To Enforce Our Patents, Trial Judges And Juries Often
      Find It Difficult To Understand Complex Patent Enforcement Litigation, And
      As A
      Result, We May Need To Appeal Adverse Decisions By Lower Courts In Order To
      Successfully Enforce Our Patents.*** It is
      difficult to predict the outcome of patent enforcement litigation at the trial
      level. It is often difficult for juries and trial judges to understand complex,
      patented technologies, and as a result, there is a higher rate of successful
      appeals in patent enforcement litigation than more standard business litigation.
      Such appeals are expensive and time consuming, resulting in increased costs
      and
      delayed revenue. Although we intend to diligently pursue enforcement litigation
      if necessary to monetize our patents, we cannot predict with significant
      reliability the decisions made by juries and trial courts.





***Federal
      Courts Are Becoming More Crowded, And As A Result, Patent Enforcement Litigation
      Is Taking Longer.*** Any
      patent enforcement actions we may be required to take to monetize our patents
      will most likely be prosecuted in federal court. Federal trial courts that
      hear
      patent enforcement actions also hear other cases that may take priority over
      any
      actions we may take. As a result, it is difficult to predict the length of
      time
      it will take to complete any enforcement actions.





***As
      Patent Enforcement Litigation Becomes More Prevalent, It May Become More
      Difficult For Us To Voluntarily License Our Patents.*** We
      believe that the more prevalent patent enforcement actions become, the more
      difficult it will be for us to voluntarily license our patents to major
      electronic firms. As a result, we may need to increase the number of our patent
      enforcement actions to cause infringing companies to license our patents or
      pay
      damages for lost royalties. This may increase the risks associated with an
      investment in our company.





27





**Risks
      Related to Intellectual Property and Government Regulation**





***Failing
      to Protect Our Proprietary Rights to Our Technology Could Harm Our Ability
      to
      Compete, as well as Our Results of Our Operations.*** ** Our
      success and ability to compete substantially depends on our internally developed
      software, technologies and trademarks, which we protect through a combination
      of
      patent, copyright, trade secret and trademark laws. Patent applications or
      trademark registrations may not be approved. Even when they are approved, our
      patents or trademarks may be successfully challenged by others or invalidated.
      If our trademark registrations are not approved because third parties own such
      trademarks, our use of these trademarks would be restricted unless we enter
      into
      arrangements with the third-party owners, which may not be possible on
      commercially reasonable terms or at all. We generally enter into confidentiality
      or license agreements with our employees, consultants and strategic and industry
      partners, and generally control access to and distribution of our software,
      technologies, documentation and other proprietary information. Despite our
      efforts to protect our proprietary rights from unauthorized use or disclosure,
      parties may attempt to disclose, obtain or use our solutions or technologies.
      The steps we have taken may not prevent misappropriation of our solutions or
      technologies, particularly in foreign countries where laws or law enforcement
      practices may not protect our proprietary rights as fully as in the United
      States. We have licensed, and we may license in the future, certain proprietary
      rights to third parties. While we attempt to ensure that our business partners
      maintain the quality of our brand, they may take actions that could impair
      the
      value of our proprietary rights or our reputation. In addition, these business
      partners may not take the same steps we have taken to prevent misappropriation
      of our solutions or technologies.





***We
      May Face Intellectual Property Infringement Claims That May Be Difficult to
      Defend and Costly to Resolve, Which Could Harm Our
      Business.*** ** Although
      we do not believe we infringe the proprietary rights of any third parties,
      we
      cannot assure you that third parties will not assert such claims against us
      in
      the future or that such claims will not be successful. We could incur
      substantial costs and diversion of management resources to defend any claims
      relating to proprietary rights, which could harm our business. In addition,
      we
      are obligated under certain agreements to indemnify the other party for claims
      that we infringe on the proprietary rights of third parties. If we are required
      to indemnify parties under these agreements, our business could be harmed.
      If
      someone asserts a claim relating to proprietary technology or information
      against us, we may seek licenses to this intellectual property. We may not
      be
      able to obtain licenses on commercially reasonable terms, or at all. The failure
      to obtain the necessary licenses or other rights may harm our
      business.





***Risks
      Related to Government Regulation, Content and Intellectual Property Government
      Regulation May Subject Us to Liability and Require Us to Change the Way We
      Do
      Business.*** ** Our
      business is subject to rapidly changing laws and regulations. Although our
      operations are currently based in California, the United States government
      and
      the governments of other states and foreign countries have attempted to regulate
      activities on the Internet. Evolving areas of law that are relevant to our
      business include privacy law, copyright law, proposed encryption laws, content
      regulation and import/export regulations. Because of this rapidly evolving
      and
      uncertain regulatory environment, we cannot predict how these laws and
      regulations might affect our business. In addition, these uncertainties make
      it
      difficult to ensure compliance with the laws and regulations governing the
      Internet. These laws and regulations could harm us by subjecting us to liability
      or forcing us to change how we do business. We are also subject to regulations
      for portable electronic devices in various countries and for the emissions
      of
      such devices in aircraft. Failure to comply with these many regulations could
      harm our business or require us to repurchase products from
      customers.





***The
      WEEE and RoHS Directives in Europe May Impact the Cost of Our Products and/or
      Our Ability to Sell products in Europe.*** ** The
      European Union (EU) has finalized the Waste Electrical and Electronic (WEEE)
      directive, which regulates the collection, recovery and recycling of waste
      from
      electrical and electronic products, and the Restrictions on the Use of Certain
      Hazardous Substances in Electrical and Electronic Equipment (RoHS) directive,
      which bans the use of certain hazardous materials including lead, mercury,
      cadmium, chromium and halogenated flame-retardants. In order to comply with
      the
      WEEE directive, we will be required to contribute to the cost of collection,
      treatment, disposal and recycling of past and future covered products. In order
      to comply with the RoHS directive, we may need to substantially alter product
      designs and/or find alternate suppliers for critical components used in those
      products. Because detailed regulations on practices and procedures related
      to
      WEEE and RoHS are evolving in member states and because we have yet to assess
      fully the ramifications to our products, we are presently unable to estimate
      the
      amount of any costs that we may incur in order to comply with WEEE and RoHS.
      Failure to achieve compliance with the RoHS directive prior to the required
      implementation date would adversely impact our ability to sell products in
      EU
      member states that have begun enforcement of the directive.





***We
      May Incur Liability from Our Requirement to Indemnify Certain Customers
      Regarding Current Litigation and Certain Intellectual Property Matters.*** Our
      contracts with major airlines are subject to future performance by us and
      product warranties and intellectual property indemnifications including certain
      remedies, ranging from modification to product substitution or refund. We are
      also required to provide similar indemnification for adverse consequences of
      the
      litigation described below in “Legal Proceedings.” Should our products be deemed
      to infringe on the intellectual property of others the costs of modification,
      substitution or refund could be material and could harm our business and
      adversely impact our operations.





28




***Failure
      to Achieve and Maintain Effective Internal Controls in accordance with Section
      404 of the Sarbanes-Oxley Act Could Have a Material Adverse Effect On Our
      Business.*** As a
      public company, we will be required to document and test our internal financial
      control procedures in order to satisfy the requirements of Section 404 of the
      Sarbanes-Oxley Act, which will require annual management assessments of the
      effectiveness of our internal controls over financial reporting and a report
      by
      our independent auditors that both addresses management’s assessments and
      provides for the independent auditor’s assessment of the effectiveness of our
      internal controls. During the course of our testing, we may identify
      deficiencies, which we may not be able to remediate in time to meet our deadline
      for compliance with Section 404, and we may also identify inaccuracies or
      deficiencies in our financial reporting that could require revisions to or
      restatement of prior period results. Testing and maintaining internal controls
      also will involve significant costs and can divert our management’s attention
      from other matters that are important to our business. We may not be able to
      conclude on an ongoing basis that we have effective internal controls over
      financial reporting in accordance with Section 404, and our independent auditors
      may not be able or willing to issue a favorable assessment of our conclusions.
      Failure to achieve and maintain an effective internal control environment could
      harm our operating results and could cause us to fail to meet our reporting
      obligations and could require that we restate our financial statements for
      prior
      periods, any of which could cause investors to lose confidence in our reported
      financial information and cause a decline, which could be material, in the
      trading price of our common stock.





**Risks
      Related to Trading in Our Common Stock**





***The
      Sale of our Common Stock to Fusion Capital May Cause Dilution and the Sale
      of
      the Shares of Common Stock Acquired by Fusion Capital Could Cause the Price
      of
      our Common Stock to Decline.*** In
      connection with entering into the common stock purchase agreement, we authorized
      the sale to Fusion Capital of up to 19,166,666 shares of our common stock.
      The
      number of shares ultimately offered for sale by Fusion Capital is dependent
      upon
      the number of shares purchased by Fusion Capital under the common stock purchase
      agreement. The purchase price for the common stock to be sold to Fusion Capital
      pursuant to the common stock purchase agreement will fluctuate based on the
      price of our common stock. All of the 19,166,666 shares in the offering are
      expected to be freely tradable. It is anticipated that the shares registered
      will be sold over the next 16 months. Depending upon market liquidity at the
      time, a sale of shares under the offering at any given time could cause the
      trading price of our common stock to decline. Fusion Capital may ultimately
      purchase all, some or none of the 11,420,284 shares of common stock not issued
      at December 31, 2007. After it has acquired the shares, it may sell all, some
      or
      none of the shares. Therefore, sales to Fusion Capital by us under the agreement
      may result in substantial dilution to the interests of other holders of our
      common stock. The sale of a substantial number of shares of our common stock
      under this offering, or anticipation of such sales, could make it more difficult
      for us to sell equity or equity-related securities in the future at a time
      and
      at a price that we might otherwise wish to effect sales. However, we have the
      right to control the timing and amount of any sales of our shares to Fusion
      Capital and the common stock purchase agreement may be terminated by us at
      any
      time at our discretion without any cost to us.





***Investing
      in a Technology Stock (Such as Ours) May Involve Greater Risk Than Other
      Investments Due to Market Conditions, Stock Price Volatility and Other
      Factors*** *.* The
      trading price of our common stock has been subject to significant fluctuations
      to date, and will likely be subject to wide fluctuations in the future due
      to:





·
            Quarter-to-quarter
                variations in operating results


·
            Announcements
                of technological innovations by us, our customers or
                competitors


·
            New
                products or significant design achievements by us or our competitors


·
            General
                conditions in the markets for the our products or in the electronics
                industry


·
            The
                price and availability of products and
                components


·
            Changes
                in operating factors including delays of shipments, orders or
                cancellations


·
            General
                financial market conditions


·
            Market
                conditions for technology stocks


·
            Litigation
                or changes in operating results or estimates by analysts or
                others


·
            Or
                other events or factors





29




In
      addition, potential dilutive effects of future sales of shares of common stock
      by stockholders and by the Company, including Fusion Capital and subsequent
      sale
      of common stock by the holders of warrants and options could have an adverse
      effect on the market price of our shares.





We
      do not
      endorse and accept any responsibility for the estimates or recommendations
      issued by stock research analysts or others from time to time or comments on
      any
      electronic chat boards. The public stock markets in general, and technology
      stocks in particular, have experienced extreme price and trading volume
      volatility. This volatility has significantly affected the market prices of
      securities of many high technology companies for reasons frequently unrelated
      to
      the operating performance of the specific companies. These broad market
      fluctuations may adversely affect the market price of our common stock in the
      future.





***Low-Price
      Stocks and Stocks Traded on the OTC Electronic Bulletin Board are Subject to
      Special Regulations and may have Increased Risk.*** ** Our
      shares of common stock are traded on the OTC Electronic Bulletin Board, an
      electronic, screen-based trading system operated by the National Association
      of
      Securities Dealers, Inc. (“NASD”). Securities traded on the OTC Electronic
      Bulletin Board are, for the most part, thinly traded and are subject to special
      regulations not imposed on securities listed or traded on the NASDAQ system
      or
      on a national securities exchange. As a result, an investor may find it
      difficult to dispose of, or to obtain accurate quotations as to the price of,
      our common stock. Sales of substantial amounts of our outstanding common stock
      in the public market could materially adversely affect the market price of
      our
      common stock. To date, the price of our common stock has been extremely volatile
      with the sale price fluctuating from a low of $0.10 to a high of $0.285 in
      the
      last twelve months. In addition, our common stock is subject to Rules
      15g-1-15g-6 promulgated under the Securities Exchange Act of 1934 that imposes
      additional sales practice requirements on broker-dealers who sell such
      securities to persons other than established customers and accredited investors
      (generally, a person with assets in excess of $1,000,000 or annual income
      exceeding $200,000 or $300,000 together with his or her spouse). For
      transactions covered by this rule, the broker-dealer must make a special
      suitability determination for the purchaser and have received the purchaser’s
      written consent to the transaction prior to sale. Consequently, the rule may
      affect the ability of broker-dealers to sell the Company’s securities and may
      affect the ability of investors to sell their securities in the secondary
      market. The Securities and Exchange Commission has also adopted regulations
      which define a “penny stock” to be any equity security that has a market price
      (as defined) of less than $5.00 per share or an exercise price of less than
      $5.00 per share, subject to certain exceptions. For any transaction involving
      a
      penny stock, unless exempt, the regulations require the delivery, prior to
      the
      transaction, of a disclosure schedule prepared by the Securities and Exchange
      Commission relating to the penny stock market. The broker-dealer must also
      disclose the commissions payable to both the broker-dealer and the registered
      representative, current quotations for the securities and, if the broker-dealer
      is the sole market maker, the broker-dealer must disclose this fact and the
      broker-dealer’s presumed control over the market. Finally, monthly statements
      must be sent disclosing recent price information for the penny stock in the
      account and information on the limited market in penny stocks.





***Important
      Factors Related to Forward-Looking Statements and Associated
      Risks*** *.* This
      prospectus contains certain forward-looking statements within the meaning of
      Section 27A of the Securities Act and Section 21E of the Securities Exchange
      Act
      of 1934 and we intend that such forward-looking statements be subject to the
      safe harbors created thereby. These forward-looking statements include our
      plans
      and objectives of management for future operations, including plans and
      objectives relating to the products and our future economic performance. The
      forward-looking statements included herein are based upon current expectations
      that involve a number of risks and uncertainties. These forward-looking
      statements are based upon assumptions that we will design, manufacture, market
      and ship new products on a timely basis, that competitive conditions within
      the
      computer and electronic markets will not change materially or adversely, that
      the computer and electronic markets will continue to experience growth, that
      demand for the our products will increase, that we will obtain and/or retain
      existing development partners and key management personnel, that future
      inventory risks due to shifts in market demand will be minimized, that our
      forecasts will accurately anticipate market demand and that there will be no
      material adverse change in our operations or business. Assumptions relating
      to
      the foregoing involve judgments with respect, among other things, to future
      economic, competitive and market conditions and future business decisions,
      all
      of which are difficult or impossible to predict accurately and many of which
      are
      beyond our control. Although we believe that the assumptions underlying the
      forward-looking statements are reasonable, any of the assumptions could prove
      inaccurate and, therefore, there can be no assurance that the results
      contemplated in forward-looking information will be realized. In addition,
      as
      disclosed above, our business and operations are subject to substantial risks
      which increase the uncertainty inherent in such forward-looking statements.
      Any
      of the other factors disclosed above could cause our net sales or net income
      (or
      loss), or our growth in net sales or net income (or loss), to differ materially
      from prior results. Growth in absolute amounts of costs of sales and selling
      and
      administrative expenses or the occurrence of extraordinary events could cause
      actual results to vary materially from the results contemplated in the
      forward-looking statements. Budgeting and other management decisions are
      subjective in many respects and thus susceptible to interpretations and periodic
      revisions based on actual experience and business developments, the impact
      of
      which may cause us to alter our marketing, capital expenditure or other budgets,
      which may in turn affect our results of operations. In light of the significant
      uncertainties inherent in the forward-looking information included herein,
      the
      inclusion of such information, should not be regarded as a representation by
      us
      or any other person that our objectives or plans will be achieved.





30




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




(a)
      The
      following common shares were issued during the fiscal quarter and not previously
      reported in a Quarterly Report on Form 10-Q or Current Report on Form
      8-K:




NONE


(b)
              NONE
 (c)
              NONE





**Item
      3. Defaults Upon Senior Securities**




NONE





**Item
      4. Submission of Matters to a Vote of Security Holders**




NONE





**Item
      5. Other Information**




(a)
            NONE


(b)
            NONE





**Item
      6. Exhibits**


Exhibit 31.1
          -
          Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
          Section
          302 of the Sarbanes-Oxley Act of 2002, signed by William Blakeley, President
          (Principal Executive Officer).





Exhibit 31.2
        -
        Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
        302 of the Sarbanes-Oxley Act of 2002, signed by Robert Putnam, Interim
        Accounting Officer (Principal Accounting Officer).





Exhibit 32.1
        -
        Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
        906 of the Sarbanes-Oxley Act of 2002, signed by William Blakeley, President
        (Principal Executive Officer) and Robert Putnam, Interim Accounting Officer
        (Principal Accounting Officer).





31





**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.




e.DIGITAL CORPORATIONDate: February
              13, 2008
            By:
            /s/ ROBERT
              PUTNAMRobert
                Putnam, Interim Chief Accounting Officer
              (Principal
                Accounting and Financial Officer
              and
                duly authorized to sign on behalf of the Registrant)




32