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 June 30, 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
      August 10, 2007 a total of 246,091,809 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 June 30, 2007 and and March 31, 2007
              3Consolidated
                  Statements of Operations for the three months ended June 30, 2007
                  and
                  2006
              4Consolidated
                  Statements of Cash Flows for the three months ended June 30, 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
              18Item
                  4. Controls and Procedures
              18**PART
                  II. OTHER INFORMATION**Item
                  1.          Legal
                  Proceedings
              18Item
                  1A.       Risk Factors
              19Item
                  2.          Unregistered
                  Sales of Equity Securities and Use of Proceeds
              27Item
                  3.          Defaults Upon
                  Senior Securities
              28Item
                  4.          Submission of
                  Matters to a Vote of Security Holders
              28Item
                  5.          Other
                  Information
              28Item
                  6.         
                  Exhibits
              28SIGNATURES
              29




2




**Part
                  I. Financial Information****Item
                  1. Financial Statements:****e.Digital
                  Corporation and subsidiary****CONSOLIDATED
                  BALANCE SHEETS**
  **June
                  30, 2007**
              
              **March
                  31, 2007****(Unaudited)**$
              
              $**ASSETS****Current**Cash
                  and cash equivalents
              
              
              744,554
              
              
              694,757Accounts
                  receivable, trade
              
              
              838,682
              
              
              37,029Inventory
              
              
              173,635
              
              
              309,392Deposits
                  and prepaid expenses
              
              
              49,477
              
              
              50,999**Total
                  current assets**
              
              
              1,806,348
              
              
              1,092,177Property
                  and equipment, net of accumulated depreciation of$476,663
                  and $472,063, respectively
              
              
              32,057
              
              
              36,206Prepaid
                  transaction costs
              
              
              308,584
              
              
              628,584**Total
                  assets**
              
              
              2,146,989
              
              
              1,756,967**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****Current**Accounts
                  payable, trade
              
              
              939,579
              
              
              687,132Other
                  accounts payable and accrued liabilities
              
              
              159,931
              
              
              131,107Accrued
                  employee benefits
              
              
              197,903
              
              
              149,528Dividends
              
              
              491,250
              
              
              464,025Customer
                  deposits
              
              
              703,346
              
              
              118,850Current
                  maturity of convertible term note, less $32,894 and $34,000 of
                  debt
                  discount
              
              
              203,551
              
              
              138,902Secured
                  promissory note, less $6,930 and $-0- of debt discount
              
              
              743,070
              
              
              750,000**Total
                  current liabilities**
              
              
              3,438,630
              
              
              2,439,544Long-term
                  convertible term note, less $24,424 and $31,983 of debt
                  discount
              
              
              679,796
              
              
              748,082Deferred
                  revenue - long term
              
              
              6,000
              
              
              6,000**Total
                  long-term liabilities**
              
              
              685,796
              
              
              754,082**Total
                  liabilities**
              
              
              4,124,426
              
              
              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: 91,000issued
                  and outstanding, each period. Liquidation preferenceof
                  $1,401,250 and $1,347,099, respectively
              
              
              910,000
              
              
              910,000Common
                  stock, $0.001 par value, authorized 300,000,000,245,415,499
                  and 243,453,037 shares and outstanding, respectively
              
              
              245,416
              
              
              243,453Additional
                  paid-in capital
              
              
              78,314,324
              
              
              78,236,434Dividends
              
              
              (491,250
              )
              
              (464,025
              )Accumulated
                  deficit
              
              
              (80,955,927
              )
              
              (80,362,521
              )**Total
                  stockholders' deficit**
              
              
              (1,977,437
              )
              
              (1,436,659
              )**Total
                  liabilities and stockholders' deficit**
              
              
              2,146,989
              
              
              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****June
                  30****2007**
              
              **2006**$
              
              $**Revenues:**Products
              
              
              1,189,630
              
              
              21,105Services
              
              
              115,004
              
              
              **-**1,304,634
              
              
              21,105**Cost
                  of revenues:**Products
              
              
              1,021,850
              
              
              16,612Services
              
              
              36,669
              
              
              **-**1,058,519
              
              
              16,612Gross
                  profit
              
              
              246,115
              
              
              4,493**Operating
                  expenses:**Selling
                  and administrative
              
              
              471,097
              
              
              335,569Research
                  and related expenditures
              
              
              280,312
              
              
              352,609Total
                  operating expenses
              
              
              751,409
              
              
              688,178Operating
                  profit (loss)
              
              
              (505,294
              )
              
              (683,685
              )**Other
                  income (expense):**Interest
                  income
              
              
              159
              
              
              7,989Interest
                  expense
              
              
              (68,672
              )
              
              (447,410
              )Other
              
              
              (19,599
              )
              
              (470
              )Other
                  income (expense)
              
              
              (88,112
              )
              
              (439,891
              )**Loss
                  and comprehensive loss for the period**
              
              
              (593,406
              )
              
              (1,123,576
              )Accrued
                  dividends on Preferred stock
              
              
              (27,225
              )
              
              (33,708
              )**Loss
                  attributable to common stockholders**
              
              
              (620,631
              )
              
              (1,157,284
              )**Loss
                  per common share - basic and diluted**
              
              
              (0.00
              )
              
              (0.01
              )**Weighted
                  average common shares outstanding**
              
              
              244,411,088
              
              
              200,431,000


See
        notes
        to interim consolidated financial statements




4




**e.Digital
                  Corporation and subsidiary****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(UNAUDITED)**
  **For
                    the three months ended****June
                    30****2007**
                
                **2006**$
                
                
                $**OPERATING
                    ACTIVITIES**Loss
                    for the period
                
                
                (593,406
                )
                
                (1,123,576
                )Adjustments
                    to reconcile loss to net cash used in
                  operating
                    activities:Depreciation
                    and amortization
                
                
                4,600
                
                
                12,448Accrued
                    interest and accretion of discount relating
                  to
                    promissory notes
                
                
                8,665
                
                
                28,125Interest
                    paid with common stock
                
                
                25,768
                
                
                **-**Amortization
                    of debt discount in connection with
                  repricing
                    of conversionand
                    warrants related to 12% convertible subordinated
                  promissory
                    notes
                
                
                **-**
                
                
                367,677Warranty
                    provision
                
                
                44,893
                
                
                **-**Stock-based
                    compensation
                
                
                34,853
                
                
                56,437Changes
                    in assets and liabilities:Accounts
                    receivable, trade
                
                
                (801,653
                )
                
                2,670Inventories
                
                
                135,757
                
                
                **-**Prepaid
                    expenses and other
                
                
                1,522
                
                
                (37,111
                )Accounts
                    payable, trade
                
                
                252,447
                
                
                108,054Other
                    accounts payable and accrued liabilities
                
                
                (11,357
                )
                
                (22,159
                )Customer
                    deposits
                
                
                584,496
                
                
                19,670Accrued
                    employee benefits
                
                
                48,375
                
                
                35,912Warranty
                    reserve
                
                
                (4,712
                )
                
                **-**Cash
                    (used in) operating activities
                
                
                (269,752
                )
                
                (551,853
                )**INVESTING
                    ACTIVITIES**Purchase
                    of property and equipment
                
                
                (451
                )
                
                **-**Cash
                    (used in) investing activities
                
                
                (451
                )
                
                **-****FINANCING
                    ACTIVITIES**Sale
                    of common stock
                
                
                320,000
                
                
                **-**Payment
                    on 15% Unsecured Note
                
                
                **-**
                
                
                (3,891
                )Cash
                    (used in) provided by financing activities
                
                
                320,000
                
                
                (3,891
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                49,797
                
                
                (555,744
                )Cash
                    and cash equivalents, beginning of period
                
                
                694,757
                
                
                1,058,723Cash
                    and cash equivalents, end of period
                
                
                744,554
                
                
                502,979**Supplemental
                    schedule of noncash investing and financing
                    activities:**Cash
                    paid for interest
                
                
                16,541
                
                
                51,608Deemed
                    dividends on Preferred Stock
                
                
                27,225
                
                
                33,708Discount
                    amortization and accretion on Promissory Notes
                
                
                8,665
                
                
                367,677Term
                    note payments paid in common stock
                
                
                30,000
                
                
                **-**Financing
                    fee paid in common stock
                
                
                15,000
                
                
                **-**
  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 a 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 June 30, 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 three months ended June 30, 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 $80,955,927
      at
      June 30, 2007. At June 30, 2007, the Company had a working capital deficiency
      of
      $1,632,282. Substantial portions of the losses are attributable to marketing
      costs for new technology 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 memory-related patent portfolio;
      (c)
      controlling overhead and expenses; and (c) raising additional capital and/or
      obtaining financing. The Company may have access to up to $8 million of
      additional funding pursuant to a common stock purchase agreement with Fusion
      Capital Fund II, LLC (“Fusion”). The Company obtained $320,000 of equity
      proceeds pursuant to this agreement in the first quarter ended June 30, 2007.
      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 FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS No.
      157”). SFAS No. 157 defines fair value, establishes a framework for measuring
      fair value in generally accepted accounting principles (GAAP), expands
      disclosures about fair value measurements, and applies to other accounting
      pronouncements that require or permit fair value measurements. SFAS No. 157
      does
      not require any new fair value measurements. However, the FASB anticipates
      that
      for some entities, the application of SFAS No. 157 will change current practice.
      SFAS No. 157 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007. The Company is currently evaluating the
      impact of SFAS No. 157.





In
      February 2007, the FASB issued Statement No. 159 “The Fair Value
      Option for Financial Assets and Financial Liabilities” (SFAS 159).
      SFAS 159 permits entities to choose to measure certain financial
      instruments and certain other items at fair value for those financial assets
      and
      liabilities not currently required to be measured at fair value. SFAS 159
      is effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      Company is currently evaluating the impact of adopting SFAS 159 on its
      consolidated financial statements.





**3.
      LOSS PER SHARE**




Stock
      options, warrants, convertible debt and convertible preferred stock exercisable
      into 37,460,919 shares of common stock were outstanding as at June 30, 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 three months ended
      June 30, 2007 and 2006 by accrued dividends of $27,225 and $33,708,
      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:


**June
                  30,**
              
              **March
                  31,****2007**
              
              **2007****$**
              
              **$**Raw
                  materials
              
              
              22,562
              
              
              -Finished
                  goods
              
              
              151,073
              
              
              309,392Ending
                  balance
              
              
              173,635
              
              
              309,392




**5.
      STOCK -BASED COMPENSATION**




The
      Company adopted SFAS No. 123 (Revised 2004), “Share -Based Payment”, effective
      April 1, 2006. SFAS 123R requires the recognition of fair value of stock
      compensation as an expense in the calculation of net income. The Company
      recognizes stock compensation expense ratably over the vesting period of
      individual option grants. The Company has no employee awards with market or
      performance conditions. All stock compensation recorded during the period ended
      June 30, 2007 has been accounted for as an equity instrument. Prior to April
      1,
      2006 the Company followed the Accounting Principles Board (“APB”) Opinion 25,
“Accounting for Stock Issued to Employees”, and related interpretations for
      stock compensation.





Options
      or stock awards issued to non-employees who are not directors of the Company
      are
      recorded at their estimated fair value at the measurement date in accordance
      with SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments
      That Are Issued to Other Than Employees for Acquiring or in Conjunction with
      Selling Goods or Services, and are periodically revalued as the options vest
      and
      are recognized as expense over the related service period on a graded vesting
      method. Stock options issued to consultants with performance conditions are
      measured and recognized when the performance is complete.





7




The
      Company elected the modified prospective transition method for adopting SFAS
      123R. Under this method, the provisions of SFAS 123R apply to all stock-based
      awards granted or other awards granted that are subsequently reclassified into
      equity. The fair values of options issued in prior periods are not revised
      for
      comparative purposes and the financial statements of prior interim and fiscal
      periods do not reflect any restated amounts. The unrecognized expense of awards
      not yet vested as of April 1, 2006, the date of SFAS 123R adoption, is now
      being
      recognized as an expense in the calculation of net income using the same
      valuation method (Black-Scholes) and assumptions disclosed in the Company’s
      previous filings.





In
      November, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position No. SFAS 123(R)-3, “Transition Election Related to Accounting for
      Tax Effects of Share-Based Payment Awards”. The Company is considering whether
      to adopt the alternative transition method provided in the FASB Staff Position
      for calculating the tax effects of stock-based compensation pursuant to SFAS
      123(R). The alternative transition method includes simplified methods to
      establish the beginning balance of the additional paid-in capital pool (APIC
      pool) related to the tax effects of employee stock-based compensation, and
      to
      determine the subsequent impact on the APIC pool and statements of cash flows
      of
      the tax effects of employee stock-based compensation awards that are outstanding
      upon adoption of SFAS 123(R).





The
      Company’s stock options have various restrictions that reduce option value,
      including vesting provisions and restrictions on transfer, among others, and
      are
      often exercised prior to their contractual maturity. The Company plans to issue
      shares on each option exercise and has no plans to repurchase option shares.
      The
      Company recorded $34,853 and $56,437 of stock compensation expense in its
      unaudited Statement of Operations for the three months ended June 30, 2007
      and
      2006, respectively. A total of $20,910 and $31,433 was included in selling
      and
      administrative costs and $13,943 and $25,004 was included in research and
      related expenditures for the three months ended June 30, 2007 and 2006,
      respectively. A total of $29,152 and $56,437 for the three months ended June
      30,
      2007 and 2006, respectively, of this expense relates to prior year awards
      vesting after April 1, 2006. The weighted-average estimated fair value of
      options granted during the three months ended June 30, 2007 was $0.11 per share,
      using the Black-Scholes option pricing model with the following weighted average
      assumptions (annualized percentages):


ThreeMonths
                  EndedJune
                  30, 2007Volatility
              
              
              77
              %Risk-free
                  interest rate
              
              
              4.6%
                  - 5.2
              %Forfeiture
                  rate
              
              
              5.0
              %Dividend
                  yield
              
              
              0.0
              %Expected
                  life in years
              
              
              4




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 expected life
      is
      based on observed and expected time to post-vesting exercise. The expected
      forfeiture rate is estimated based on historical experience.





Since
      the
      Company has a net operating loss carryforward as of June 30, 2007, no excess
      tax
      benefit for the tax deductions related to stock-based awards was recognized
      for
      the three months ended June 30, 2007.


Additionally,
      no incremental tax benefits were recognized from stock options exercised in
      the
      three months ended June 30, 2007 that would have resulted in a reclassification
      to reduce net cash provided by operating activities with an offsetting increase
      in net cash provided by financing activities.





As
      of
      June 30, 2007 total estimated compensation cost of options granted but not
      yet
      vested was approximately $165,000 and is expected to be recognized over the
      weighted average period of 0.9 years.





The
      amortization of stock compensation under SFAS 123R for the period after its
      adoption, and under APB 25 or SFAS 123 (pro forma disclosure) for the period
      prior to the adoption of SFAS 123R was done in accordance with FASB
      Interpretation (“FIN”) No. 28.




8





**6.
      WARRANTY RESERVE**





Details
      of the estimated warranty liability are as follows:


**Period
                  Ended June 30,****2007**
              
              **2006**$
              
              $Beginning
                  balance
              
              
              40,072
              
              
              15,789Warranty
                  provision
              
              
              44,893
              
              
              -Warranty
                  deductions
              
              
              (4,712
              )
              
              -Ending
                  balance
              
              
              80,253
              
              
              15,789




**7.
      OPTIONS AND WARRANTS**





**Options**




The
      Company has stock options outstanding under two stock option plans. The 1994
      Stock Option Plan entitled certain directors, key employees and consultants
      of
      the Company to purchase common shares of the Company. The 1994 Plan covered
      a
      maximum aggregate of 14,000,000 shares, as amended and expired on August 18,
      2004. At June 30, 2007 there were options outstanding on 3,434,166 common shares
      pursuant to the 1994 Plan.





The
      2005
      Equity-Based Compensation Plan was approved by the stockholders on August 5,
      2005 and covers a maximum of 10,000,000 common shares. The Company may grant
      incentive options, nonstatutory options, stock appreciation rights or restricted
      stock awards to employees, directors or consultants. At June 30, 2007 there
      were
      options outstanding on 6,498,000 common shares pursuant to the 2005 Plan with
      options on 3,502,000 shares available for future grant under the 2005
      Plan.





The
      Company has granted options outside the above plans as inducements to new
      employees and for the continued service of key employees. At June 30, 2007
      there
      were options outstanding on 1,750,000 common shares from grants outside the
      stock option plans.





The
      following table summarizes stock option activity for the period:


Weighted
                  averageShares
              
              exercise
                  price#
              
              $Outstanding
                  March 31, 2007
              
              
              11,034,666
              
              
              0.17Granted
              
              
              850,000
              
              
              0.18Canceled/expired
              
              
              (202,500
              )
              
              0.43Exercised
              
              
              -
              
              
              -Outstanding
                  June 30, 2007 (1)
              
              
              11,682,166
              
              
              0.17Exercisable
                  at June 30, 2007
              
              
              8,394,167
              
              
              0.18




(1)
            Options
                outstanding are exercisable at prices ranging from $0.09 to $0.52
                and
                expire over the period from 2007 to 2011 with an average life of
                2.5
                years.





**Share
      warrants**




There
      were no warrants issued, exercised, cancelled or that expired during the three
      months ended June 30, 2007. The Company has outstanding share warrants as of
      June 30, 2007, as follows (exercise prices subject to certain antidilution
      price
      protection):


Number
                  of
              
              Exercise
                  PriceDescription
              
              Common
                  Shares
              
              Per
                  Share $
              
              Expiration
                  DateWarrant
              
              
              2,846,000
              
              
              0.08
              
              
              November
                  30, 2007Warrant
              
              
              2,331,572
              
              
              0.15
              
              
              August
                  31, 2009Total
              
              
              5,177,572


9




**8.
      NOTES**





**7.5%
      Convertible Subordinated Term Note**




On
      December 12, 2006 the Company issued a new 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, increasing to $30,000 starting in December 2007 and $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 note is due the earlier of September 23, 2007
      or within two business days of receipt by the Company of final payments from
      certain purchase orders, 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
      no registration rights with the finance charge being amortized over the note
      term.





**9.
      STOCKHOLDERS’ EQUITY**




The
      following table summarizes stockholders’ equity transactions during the
      three-month period ended June 30, 2007:





Preferred
                stock
            
            Common
                stock
            
            Additional
            
            
            
            AccumulatedShares
            
            Amounts
            
            Shares
            
            Amounts
            
            Paid-in
                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 Series D Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (27,225
            )
            
            -Stock
                -based compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            34,853
            
            
            -
            
            
            -Shares
                issued for cash (1)
            
            
            -
            
            
            -
            
            
            1,735,796
            
            
            1,736
            
            
            (1,736
            )
            
            -
            
            
            -Shares
                issued for term debt payments
            
            
            -
            
            
            -
            
            
            153,281
            
            
            154
            
            
            29,846
            
            
            -
            
            
            -Shares
                issued for debt financing fee
            
            
            -
            
            
            -
            
            
            73,385
            
            
            73
            
            
            14,927
            
            
            -
            
            
            -Loss
                for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (593,406
            )Balance,
                June 30, 2007
            
            
            91,000
            
            $
            910,000
            
            
            245,415,499
            
            $
            245,416
            
            $
            78,314,324
            
            $
            (491,250
            )
            $
            (80,955,927
            )




(1)
      Sales
      of shares to Fusion at an average price of $0.184 per common share, net of
      prepaid transaction costs.





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. Assuming a purchase
      price of $0.18 per share (the closing sale price of the common stock on June
      29,
      2007) the maximum remaining under the common stock purchase agreement was an
      additional $2.38 million.





10




Under
      a
      related registration rights agreement a total of 15,000,000 shares were
      registered for sale, accordingly the Company is limited to selling the lesser
      of
      15,000,000 shares or $8 million. The Company is required to maintain
      effectiveness of the registration statement until the earlier of the date that
      Fusion may sell the shares without restriction pursuant to Rule 144(k) or the
      date that Fusion has sold all registered shares and no available unpurchased
      shares remain under the agreement. Upon occurrence of certain events of default
      as defined, including lapse of effectiveness of the registration statement
      for
      10 or more consecutive business days or for 30 or more business days within
      a
      365-day period, suspension of trading for 3 consecutive business days, delisting
      of the shares from the principal market on which they are traded, failure by
      the
      stock transfer agent to issue shares within 5 business days, or other material
      breaches, Fusion may terminate the stock purchase agreement. The Company may
      terminate the agreement at any time.




During
      the quarter ended June 30, 2007, the Company sold 1,735,796 common shares to
      Fusion under the agreement for cash of $320,000. This amount reduced the balance
      of prepaid transaction costs associated with a 3,500,000 share commitment fee
      and related costs of the financing. The balance of prepaid transaction costs
      of
      $308,584 at June 30, 2007 will be discounted against future stock sales under
      the agreement or charged to expense if the arrangement is terminated or
      management determines it will not issue sufficient shares to offset the offering
      costs.





Subsequent
      to June 30, 2007 the Company sold an additional 480,972 common shares for cash
      of $80,000.





**10.
      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 are payable, with certain
      exceptions, either in cash or in shares of common stock at the Company's
      election. The conversion price for each share of Series D Stock is $0.08 subject
      to certain adjustments if the Company issues shares at prices lower than $0.08.
      As of June 30, 2007 the 91,000 shares of the Series D Stock would have been
      convertible into 17,515,630 shares common stock. The Series D stock is subject
      to automatic conversion on December 31, 2007.





**11.
      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.
      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 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, to which the Company responded in June 2007. The Company
      believes it has substantive and multiple defenses and intends 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 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.





11




In
      April
      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.





**12.
      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
      June
      30, 2007 the Company had outstanding unfilled purchase orders and was committed
      to a contract manufacturers and component suppliers for approximately $1.9
      million 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.





12





**1** **3.
      MAJOR CUSTOMERS**




The
      Company operates in one major line of business, the development, manufacture
      and
      marketing of electronic products. Sales to three customer comprised 69%, 17%
      and
      12% of revenue for the three months ended June 30, 2007. Sales to one customer
      comprised 100% of revenue for the three months ended June 30, 2006.





**14.
      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.




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 digEplayer(TM), for
      one customer. In February 2006 we introduced a new and improved DVAP device,
      the
      eVU (TM) 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 10,000 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 to 200
      GB of rugged and reliable storage, high audio fidelity, dual stereo headphone
      jacks, embedded credit card reader/processor, touch screen capabilities, a
      full
      feature graphical user interface, patent-pending hardware security technology,
      and 14 hours of high resolution video playback on a single battery charge.
      We
      also have the capability to add features and 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 and we are actively engaged in a strategy to monetize our
      patent portfolio. 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 first quarter of fiscal 2008 we were engaged in
      supporting the technical and legal development of the patent portfolio and
      expect patent enforcement actions to commence in the current 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.





Our
      revenue is derived from the sale or lease 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 memory patent portfolio.





14




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.





As
      of
      June 30, 2007 we had an order backlog of approximately $2.7 million for eVU
      units and accessories. We believe the majority of the backlog will ship to
      customers in the second quarter ending September 30, 2007. Backlog orders are
      subject to modification, cancellation or rescheduling by our customers. Future
      shipments may also be delayed due to production delays, component shortages
      and
      other production and delivery related issues.





**Overall
      Performance**




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 $80,955,927 and a working
      capital deficit of $1,632,282 at June 30, 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 memory-related patent portfolio; (c) controlling overhead
      and expenses; and (c) raising additional capital and/or obtaining financing.
      We
      may have access to up to $8 million of additional funding pursuant to a common
      stock purchase agreement with Fusion Capital. We obtained $320,000 of equity
      proceeds pursuant to this agreement in the first quarter ended June 30, 2007.
      The availability of additional funding under the Fusion Capital 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.





For
      the
      three months ended June 30, 2007:





·
            Our
                revenues were $1,304,634 compared to $21,105 for the comparable first
                quarter of the prior year. Sales to three customers accounted for
                69%, 17%
                and 12% of our first quarter fiscal 2008 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
                recorded a gross profit of $246,115 or 19% of revenues compared to
                $4,493
                for the comparable first quarter of the prior year. Gross profit
                increased
                due to the shipment of eVU units whereas in the prior year we were
                developing our new eVU product. We anticipate improved eVU margins
                once
                the product is in full production with our contract manufacturer
                , we
                become more efficient in our customer startup and support activities
                and
                volumes of scale are realized.





·
            Operating
                expenses were $751,409 for the three months ended June 30, 2007,
                an
                increase from $688,178 for the first three months of the year prior.
                Reduced research and development expenditures were offset by increased
                selling and administrative costs including increases in sales commissions
                and professional fees.





·
            Our
                net loss decreased to $0.6 million for the first quarter of the current
                year from $1.1 million for the comparable quarter of the prior year
                ended
                June 30, 2006.





Our
      monthly cash operating costs have been on average approximately $250,000 per
      month for the period ending June 30, 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. There has been
      no
      material change to our critical accounting policies and estimates from the
      information provided in our Form 10-K for March 31, 2007.





We
      do not
      have off-balance sheet arrangements, financings, or relationships with
      unconsolidated entities or other persons, also known as "special purposes
      entities" (SPEs).





**Results
      of Operations**





**Three
      months ended June 30, 2007 compared to the three months ended June 30,
      2006**




For
      the
      first quarter of fiscal 2008, we reported total revenues of $1,304,634 an
      increase from total revenues of $21,105 for the first quarter of fiscal 2007.
      Product revenues were $1,189,630 from selling eVU players and related equipment
      for use by airline customers. In the prior year’s first quarter we were
      transitioning from an older product to our new eVU product that was introduced
      in the third quarter of fiscal 2007.




Service
      revenues for the first quarter of fiscal 2008 were $115,004 compared to $-0-
      for
      the comparable period of the prior year. These
      revenues resulted from billable contract and support services provided to
      airline customers.





Cost
      of
      sales for the three months ended June 30, 2007 consisted of $1,021,850 of
      product costs and related installation labor and services for in-flight
      entertainment devices sold in the period. Service cost of sales of $36,669
      related to the direct costs of providing separately billed contract and support
      services to customers. Cost of sales for the three months ended June 30, 2006
      consisted of $16,612 of product costs.





Gross
      profit for the first quarter of fiscal 2008 was $246,115 compared to a gross
      profit of $4,493 for the first quarter of fiscal 2007. Gross profit as a percent
      of sales for the first quarter of fiscal 2008 was 19%. The gross profit increase
      was due primarily to the sale of eVU products in the current period whereas
      we
      had no new product for sale in the prior year.





Selling,
      general and administrative costs for the three months ended June 30, 2007,
      was
      $471,097 compared to $335,569 for the first quarter of fiscal 2007. The $135,528
      increase is attributed primarily to an increase of $100,000 in professional
      services related to litigation, patent enforcement and audits and an increase
      of
      $52,000 in sales commissions due to increased revenues.





Research
      and related expenditures for the three months ended June 30, 2007 were $280,312,
      as compared
      to $352,609 for the three months ended June 30, 2006. The decrease resulted
      primarily to reassigning engineers and technicians to customer support and
      service roles during the first quarter.





We
      reported an operating loss of
      $505,294 for the
      three months ended June 30, 2007, as compared to an operating loss of $683,685
      for the three months ended June 30, 2006. The decrease in operating loss
      resulted primarily from the increase in revenue and gross margins from eVU
      sales
      offset by an increase in total operating expenses.





We
      reported interest expense of $68,672 for the three months ended June 30, 2007
      versus $447,410 for the prior comparable period. This
      included non-cash amortization of debt discount of $16,735 and $367,677 for
      the
      three months ended June 30, 2007 and 2006, respectively. Other expenses of
      $19,599 for the most recent quarter included financing royalties of
      $18,780.





16




We
      reported a loss for the first quarter of fiscal 2008 of $593,406 as compared
      to
      a loss of $1,123,576 for the prior first quarter of fiscal 2007 .
      The
      loss attributable to common stockholders for the three months ended June 30,
      2007 and 2006 was $620,631 and $1,157,284 ,
      respectively. Included in the loss available to common stockholders for the
      periods ended June 30, 2007 and 2006 were accrued dividends on the preferred
      stock of $27,225 and $33,708, respectively.





**Liquidity
      and Capital Resources**




At
      June
      30, 2007, we had a working capital deficit of $1.6
      million compared to a
      working capital deficit of $1.3 million at March 31, 2007. Cash used in
      operating activities of $269,752 for the three months period ended June 30,
      2007 included the
      $593,406 loss decreased by non-cash expenses of $118,779 and increased by a
      $801,653 increase in accounts receivable. Cash used in operating activities
      was
      reduced by an increase of $584,496 in customer deposits, an increase of $252,447
      in accounts payable, a decrease of $135,757 in inventories and an increase
      of
      $48,375 in accrued employee benefits. We have negotiated terms with our contract
      suppliers reducing advance production payments required prior to product
      delivery. These payments are recorded as a prepaid until product has been built.
      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.





At
      June
      30, 2007, we had cash on hand of $744,554. For the three months ended June
      30,
      2007, cash provided by financing activities was $320,000 from
      the
      sale of common stock to Fusion pursuant to our $8 million purchase agreement.
      Subsequent to June 30, 2007 we sold an $80,000 of common stock under the
      agreement.





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 June 30, 2007 assuming (a) continuation of existing
      business customer arrangements, and (b) current planned expenditures and level
      of operation, we believe we will require approximately $1.2 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 reflected on our balance sheet.





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.





As
      of
      June 30, 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
            
            $
            783,750
            
            $
            783,750
            
            $
            -
            
            $
            -
            
            $
            -7.5%
                Convertible Term Note
            
            
            1,048,165
            
            
            300,000
            
            
            500,000
            
            
            248,165
            
            
            -Purchase
                commitments(1)
            
            
            1,911,000
            
            
            1,911,000
            
            
            -
            
            
            -
            
            
            -Operating
                Lease(2)
            
            
            306,010
            
            
            71,586
            
            
            73,729
            
            
            75,943
            
            
            84,752Total
                cash obligations
            
            $
            4,048,925
            
            $
            3,066,336
            
            $
            573,729
            
            $
            324,108
            
            $
            84,752





(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.




17




**Future
      Commitments and Financial Resources**




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.





**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 June 30,
      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 June 30, 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 June 30,
      2007.





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 June 30, 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 July 15, 2007. Although we are working
      to
      comply with these requirements, we have only fifteen 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. While
      the
      Securities and Exchange Commission had indicated it expects to issue
      supplementary regulations easing the burden of Section 404 requirements for
      small entities like us, such regulations have not yet been issued.





**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.




18




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, to which we responded in June 2007. 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.





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 first
                quarter of fiscal 2008 ended June 30,
                2007.


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




19




·
            We
                are actively pursuing our business strategy of monetizing our flash
                memory
                patent portfolio. As we intend to commence and aggressively pursue
                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 fiscal
      quarter ended and June 30, 2007 we had an accumulated deficit of $81 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 $593,406 for the three months
      ended June 30, 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
      experienced substantial reduction in cash, projected revenues and increased
      costs that adversely affected our results of operations and cash flows. Our
      company has suffered recurring losses from operations. 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.





***We
      Need to Obtain Additional Financing to Continue Operating our
      Business*** *.* We
      had an
      operating cash flow deficit of $269,752 for the first three 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 1,735,796 shares through June 30, 2007 for additional proceeds
      of
      $320,000. 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 $0.58 per share for us to
      receive the maximum remaining proceeds of $7.68 million. Assuming a purchase
      price of $0.18 per share (the closing sale price of the common stock on June
      29,
      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
      $2.38 million.





20




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


·
            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.





21




***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 98% of our revenues for
      the
      three months ended June 30, 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.





***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.





22




**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.





***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.





23




***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.





**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.





24




***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.





***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.





25




**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 19 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 13,264,204 shares of common stock not issued
      at June 30, 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





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.





26




***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.





**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:




·
            On
                April 2, 2007 we issued 73,385 shares of common stock to ASI Capital
                Corporation in consideration of a $15,000 financing fee on a secured
                working capital loan. No commissions were paid and a restrictive
                legend
                was placed on the shares issued.




27




·
            On
                April 30, 2007 we issued 67,567 shares of common stock to Davric
                Corporation in consideration of a $15,000 monthly payment on its
                7.5% term
                note. No commissions were paid and a restrictive legend was placed
                on the
                shares issued.


·
            On
                May 31, 2007 we issued 85,714 shares of common stock to Davric Corporation
                in consideration of a $15,000 monthly payment on its 7.5% term note.
                No
                commissions were paid and a restrictive legend was placed on the
                shares
                issued.





(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).




28




**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:August
              14, 2007
            By:
            /s/
              ROBERT PUTNAMRobert
                Putnam, Interim Chief Accounting Officer
              (Principal
                Accounting and Financial Officer
              and
                duly authorized to sign on behalf of the
                Registrant)




29