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, 2010
 
 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
                (I.R.S.
      Empl. Ident. No.)incorporation
      or organization)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  ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    ̈
Yes    ̈ No  (not
required)
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      Accelerated Filer  ̈
                Accelerated
      filer  ̈Non-accelerated
      filer     ̈ (Do not check if a smaller
      reporting company)
                Smaller
      reporting company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  ̈ No x
 
 As
      of August 3, 2010 a total of 293,003,158 shares of the Registrant’s Common
      Stock, par value $0.001, were issued and outstanding.
 e.DIGITAL
CORPORATION
 
 INDEX
 
 PagePART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements (unaudited):Condensed
      Consolidated Balance Sheets as of June 30, 2010 and March 31,
      2010
                                            3Condensed
      Consolidated Statements of Operations for the three months ended June
      30, 2010 and 2009
                                            4Condensed
      Consolidated Statements of Cash Flows for the three months ended June
      30, 2010 and 2009
                                            5Notes
      to Interim Consolidated Financial Statements
                                            6Item
      2. Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                                            14Item
      4. Controls and Procedures
                                            18PART
      II. OTHER INFORMATIONItem
      1.  Legal Proceedings
                                            19Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                                            19Item
      3.  Defaults Upon Senior Securities
                                            19Item
      4. (Removed and Reserved)
                                            20Item
      5. Other Information
                                            20Item
      6.  Exhibits
                                            20SIGNATURES
                                            20
  2
 
 Part
I. Financial Information
 Item
1. Financial Statements:
 e.Digital
Corporation and subsidiary
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 June 30,2010
                        
                        
                        March 31,(Unaudited)
                        
                        
                        2010$
                        
                        
                        $ASSETSCurrentCash
      and cash equivalents
                        
                        
                        2,544,661
                        
                        
                        
                        2,818,727Accounts
      receivable
                        
                        
                        162,371
                        
                        
                        
                        108,749Inventory
                        
                        
                        291,972
                        
                        
                        
                        347,078Deposits
      and prepaid expenses
                        
                        
                        23,743
                        
                        
                        
                        59,072Total
      current assets
                        
                        
                        3,022,747
                        
                        
                        
                        3,333,626Property,
      equipment and intangibles, net of accumulated depreciation and
      amortization of $187,086 and $184,382, respectively
                        
                        
                        9,489
                        
                        
                        
                        11,090Total
      assets
                        
                        
                        3,032,236
                        
                        
                        
                        3,344,716LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrentAccounts
      payable, trade
                        
                        
                        118,226
                        
                        
                        
                        51,997Accrued
      and other liabilities
                        
                        
                        193,665
                        
                        
                        
                        315,948Total
      current liabilities
                        
                        
                        311,891
                        
                        
                        
                        367,945Total
      liabilities
                        
                        
                        311,891
                        
                        
                        
                        367,945Commitments
      and ContingenciesStockholders'
      equityPreferred
      stock, $0.001 par value; 5,000,000 shares authorized Series AA Convertible
      Preferred stock, $0.001 par value, 100,000shares designated: -0- and
      55,000 issued and outstanding, respectively Liquidation
      preference of $-0- and $598,370, respectively
                        
                        
                        -
                        
                        
                        
                        573,830Common
      stock, $0.001 par value, authorized 350,000,000, 293,003,158 and
      286,950,900 shares issued and outstanding, respectively
                        
                        
                        293,003
                        
                        
                        
                        286,951Additional
      paid-in capital
                        
                        
                        82,734,556
                        
                        
                        
                        82,073,012Accumulated
      deficit
                        
                        
                        (80,307,214
                        )
                        
                        
                        (79,957,022
                        )Total
      stockholders' equity
                        
                        
                        2,720,345
                        
                        
                        
                        2,976,771Total
      liabilities and stockholders' equity
                        
                        
                        3,032,236
                        
                        
                        
                        3,344,716
 
 See notes
to interim consolidated financial statements
  3
 
 e.Digital
Corporation and subsidiary
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 
 For the three months endedJune 30,2010
                                            
                                            
                                            2009$
                                            
                                            
                                            $Revenues:Products
                                            
                                            
                                            298,615
                                            
                                            
                                            
                                            14,075Services
                                            
                                            
                                            188,519
                                            
                                            
                                            
                                            208,955Patent
      license
                                            
                                            
                                            25,264
                                            
                                            
                                            
                                            -512,398
                                            
                                            
                                            
                                            223,030Cost
      of revenues:Products
                                            
                                            
                                            241,685
                                            
                                            
                                            
                                            49,004Services
                                            
                                            
                                            86,003
                                            
                                            
                                            
                                            71,974Patent
      license
                                            
                                            
                                            10,106
                                            
                                            
                                            
                                            -337,794
                                            
                                            
                                            
                                            120,978Gross
      profit
                                            
                                            
                                            174,604
                                            
                                            
                                            
                                            102,052Operating
      expenses:Selling
      and administrative
                                            
                                            
                                            366,125
                                            
                                            
                                            
                                            576,672Research
      and related expenditures
                                            
                                            
                                            158,671
                                            
                                            
                                            
                                            79,581Total
      operating expenses
                                            
                                            
                                            524,796
                                            
                                            
                                            
                                            656,253Operating
      income (loss)
                                            
                                            
                                            (350,192
                                            )
                                            
                                            
                                            (554,201
                                            )Other
      income (expense):Interest
      expense
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (10,047
                                            )Other
      income (expense) - net
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (4,828
                                            )Other
      income (expense)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (14,875
                                            )Income
      (loss) before provision for income taxes
                                            
                                            
                                            (350,192
                                            )
                                            
                                            
                                            (569,076
                                            )Income
      tax (provision) benefit
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Income
      (loss) for the period
                                            
                                            
                                            (350,192
                                            )
                                            
                                            
                                            (569,076
                                            )Accrued
      and deemed dividends on preferred stock
                                            
                                            
                                            (31,396
                                            )
                                            
                                            
                                            (42,813
                                            )Income
      (loss) attributable to common stockholders
                                            
                                            
                                            (381,588
                                            )
                                            
                                            
                                            (611,889
                                            )Income
      (loss) per common share - basic and diluted
                                            
                                            
                                            (0.00
                                            )
                                            
                                            
                                            (0.00
                                            )Weighted
      average common shares outstanding
                                              Basic
      and diluted
                                            
                                            
                                            287,017,408
                                            
                                            
                                            
                                            282,507,374
 
 See notes
to interim consolidated financial statements
  4
 
 e.Digital
Corporation and subsidiary
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 [See
Note 1 - Nature of Operations and Basis of Presentation]
 
 For
      the three months endedJune
      30,2010
                                        
                                        
                                        2009$
                                        
                                        
                                        $OPERATING
      ACTIVITIESLoss
      for the period
                                        
                                        
                                        (350,192
                                        )
                                        
                                        
                                        (569,076
                                        )Adjustments
      to reconcile income (loss) to net cash used in operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        2,704
                                        
                                        
                                        
                                        5,057Accretion
      related to promissory notes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,652Interest
      paid with common stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        6,367Warranty
      provision
                                        
                                        
                                        8,345
                                        
                                        
                                        
                                        11,872Stock-based
      compensation
                                        
                                        
                                        93,766
                                        
                                        
                                        
                                        11,745Changes
      in assets and liabilities:Accounts
      receivable
                                        
                                        
                                        (53,622
                                        )
                                        
                                        
                                        (124,768
                                        )Inventory
                                        
                                        
                                        55,106
                                        
                                        
                                        
                                        (2,164
                                        )Deposits
      and prepaid expenses
                                        
                                        
                                        35,329
                                        
                                        
                                        
                                        (5,088
                                        )Accounts
      payable, trade
                                        
                                        
                                        66,229
                                        
                                        
                                        
                                        153,920Accrued
      and other liabilities
                                        
                                        
                                        (130,628
                                        )
                                        
                                        
                                        (231,728
                                        )Cash
      used in operating activities
                                        
                                        
                                        (272,963
                                        )
                                        
                                        
                                        (740,211
                                        )INVESTING
      ACTIVITIESPurchase
      of equipment
                                        
                                        
                                        (1,103
                                        )
                                        
                                        
                                        -Cash
      used in investing activities
                                        
                                        
                                        (1,103
                                        )
                                        
                                        
                                        -Net
      decrease in cash and cash equivalents
                                        
                                        
                                        (274,066
                                        )
                                        
                                        
                                        (740,211
                                        )Cash
      and cash equivalents, beginning of period
                                        
                                        
                                        2,818,727
                                        
                                        
                                        
                                        3,813,990Cash
      and cash equivalents, end of period
                                        
                                        
                                        2,544,661
                                        
                                        
                                        
                                        3,073,779Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                                        
                                        
                                        -
                                        
                                        
                                        
                                        28Cash
      paid for taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        160,000Supplemental
      schedule of noncash investing and financing activities:Common
      stock issued on conversion of preferred stock
                                        
                                        
                                        605,226
                                        
                                        
                                        
                                        -Accrued
      and deemed dividends on preferred stock
                                        
                                        
                                        31,396
                                        
                                        
                                        
                                        42,813Term
      note payments paid in common stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        150,000
 
 See notes
to interim consolidated financial statements
 5
  1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 e.Digital
Corporation is a holding company incorporated under the laws of Delaware that
operates through a wholly-owned California subsidiary of the same name. The
Company markets the eVUTM mobile entertainment system for the travel and
recreational industries and licenses and enforces its Flash-RTM portfolio of
patents related to the use of flash memory in portable devices.
 
 Unaudited Interim Financial
Statements
 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, 2010, and the results of its 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, 2010 are not necessarily
indicative of the results that may be expected for the fiscal year ending March
31, 2011. For further information, refer to the Company's consolidated financial
statements and footnotes thereto for the year ended March 31, 2010 filed on Form
10-K.
 
 Going
Concern
 The
Company has incurred significant losses and negative cash flow from operations
and has an accumulated deficit of $80,307,214 at June 30, 2010.The Company has
incurred losses in the current fiscal year to date and could continue to incur
losses in the future until product, service and/or licensing revenues are
sufficient to sustain continued profitability. Until the Company can demonstrate
sustained profitability its ability to continue as a going concern is in doubt
and may be dependent upon obtaining additional financing in the future. These
consolidated financial statements do not give effect to any adjustments that
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 financial statements.
 
 Estimates
 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.
 
 2.
RECENT ACCOUNTING PRONOUNCEMENTS
 With the
exception of those discussed below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the three months
ended June 30, 2010, as compared to the recent accounting pronouncements
described in the Company’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2010, that are of significance, or potential significance to the
Company.
 
 In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic
855).” This update provides amendments to Subtopic 855-10-50-4 and related
guidance within U.S. GAAP to clarify that an SEC registrant is not required to
disclose the date through which subsequent events have been evaluated. This
change alleviates potential conflicts between Subtopic 855-10 and the SEC’s
requirements. The Company adopted this update effective June 15, 2010 and
it had no effect on our financial position.
 
 In
September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU
2009-13). It updates the existing multiple-element revenue arrangements guidance
currently included under ASC 605-25, which originated primarily from the
guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). The revised guidance primarily provides two
significant changes: 1) eliminates the need for objective and reliable evidence
of the fair value for the undelivered element in order for a delivered item to
be treated as a separate unit of accounting, and 2) eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. ASU 2009-13 will be
effective for the first annual reporting period beginning on or after June 15,
2010, with early adoption permitted provided that the revised guidance is
retroactively applied to the beginning of the year of adoption. The Company
believes this pronouncement is consistent with and will not change its revenue
recognition for patent licenses and will have no impact on its consolidated
financial statements.
  6
  In April
2010, the FASB issued ASU No. 2010-17—Revenue Recognition—Milestone Method
(Topic 605), which provides guidance on the criteria that should be met for
determining whether the milestone method of revenue recognition is appropriate.
A vendor can recognize consideration that is contingent upon achievement of a
milestone in its entirety as revenue in the period in which the milestone is
achieved only if the milestone meets all criteria to be considered substantive.
A milestone should be considered substantive in its entirety. An individual
milestone may not be bifurcated. The amendments in this Update are effective on
a prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010. The Company expects
that the adoption of the amendments in this update will not have any significant
impact on its financial position and results of operations.
  In
January 2010, the FASB issued ASU No. 2010-06—Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements.  This update amends Subtopic 820-10 that requires new
disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3
fair value measurements. This update also amends Subtopic 820-10 to clarify
certain existing disclosures. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements, which are effective for fiscal years beginning after December 15,
2010. The adoption of this update had no effect on our financial
position.
 
 There
have been no other recent accounting pronouncements or changes in accounting
pronouncements during the period ended June 30, 2010, or subsequently thereto,
that we believe are of potential significance to our financial
statements.
 
 3.
LOSS PER SHARE
 Basic
loss per common share is computed by dividing loss attributable to common
shareholders by the weighted-average number of shares of common stock
outstanding during the period. The loss to common stockholders was increased by
accrued and deemed dividends on preferred stock during the three months ended
June 30, 2010 of $6,856 and $24,540 respectively (three months ended June 30,
2009 by $9,349 and $33,464 respectively). Diluted earnings per common share is
computed by dividing loss attributable to common shareholders by the
weighted-average number of shares of common stock outstanding during the period
increased to include the number of additional shares of common stock that would
have been outstanding if the potentially dilutive securities had been issued.
Potentially dilutive securities included outstanding convertible preferred
stock, stock options, and warrants. These securities were not
included in the computation of diluted loss per sharefor the periodsbecause they
are antidilutive, but they could potentially dilute earnings per share in future
periods.
  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
      31,2010
                          
                          
                          2010$
                          
                          
                          $Raw
      materials
                          
                          
                          84,307
                          
                          
                          
                          111,399Work
      in process
                          
                          
                          18,662
                          
                          
                          
                          19,033Finished
      goods
                          
                          
                          189,003
                          
                          
                          
                          216,646291,972
                          
                          
                          
                          347,078
  The
foregoing is net of an aggregate lower-of-cost-or-market inventory adjustment of
$47, 157 and $65,459 at June 30, 2010  and March 31, 2010,
respectively.
  7
  5.
STOCK-BASED COMPENSATION COSTS
  The
Company accounts for stock-based compensation under the provisions of ASC 718,
Share-Based Paymentand
ASC 505-50, Equity-Based
Payments to Non-Employees.ASC 718 requires measurement of all employee
stock-based awards using a fair-value method and recording of related
compensation expense in the consolidated financial statements over the requisite
service period. Further, as required under ASC 718, the Company estimates
forfeitures for stock-based awards that are not expected to vest. The Company
recorded stock-based compensation in its consolidated statements of operations
for the relevant periods as follows:
 
 Three
      Months EndedJune 30,2010
                    
                    
                    2009$
                    
                    
                    $Research
      and development
                    
                    
                    18,034
                    
                    
                    
                    -Selling
      and administrative
                    
                    
                    75,732
                    
                    
                    
                    11,745Total
      stock-based compensation expense
                    
                    
                    93,766
                    
                    
                    
                    11,745
 
 As of
June 30, 2010 total estimated compensation cost of stock options granted but not
yet vested was $20,986 and is expected to be recognized over the weighted
average period of 1.0 years.
 
 The
following table sets forth the weighted-average key assumptions and fair value
results for stock options granted during the three-month period ended June 30,
2010 (annualized percentages). No options were granted during the three months
ended June 30, 2009.
 
 Three
      Months EndedJune 30,2010
                        
                        
                        2009Volatility
                        
                        
                        76
                        %
                        
                        
                        n/aRisk-free
      interest rate
                        
                        
                        0.43
                        %
                        
                        
                        n/aForfeiture
      rate
                        
                        
                        0.0
                        %
                        
                        
                        n/aDividend
      yield
                        
                        
                        0.0
                        %
                        
                        
                        n/aExpected
      life in years
                        
                        
                        2.0
                        
                        
                        
                        n/aWeighted-average
      fair value of options granted
                        
                        $
                        0.04
                        
                        
                        
                        n/a
 
 The
dividend yield of zero is based on the fact that the Company has never paid cash
dividends and has no present intention to pay cash dividends. Expected
volatility is based on the historical volatility of the common stock over the
period commensurate with the expected life of the options. The Company has a
small number or option grants and limited exercise history and accordingly has
for all new option grants applied the simplified method prescribed by SEC Staff
Accounting Bulletin 110, Share-Based Payment: Certain
Assumptions Used in Valuation Methods - Expected Term, to estimate
expected life (computed as vesting term plus contractual term divided by two).
The expected
forfeiture rate is estimated based on historical and expected experience for
determined option groups and is zero for options vesting on grant. Additional
expense is recorded when the actual forfeiture rates are lower than estimated
and a recovery of prior expense will be recorded if the actual forfeitures are
higher than estimated.
 
 See Note
7 for further information on outstanding stock options.
  8
  6.
WARRANTY RESERVE
 
 Details
of the estimated warranty liability included in other accounts payable and
accrued liabilities are as follows:
 
 Three
      Months EndedJune 30,2010
                    
                    
                    2009$
                    
                    
                    $Beginning
      balance
                    
                    
                    5,262
                    
                    
                    
                    14,155Warranty
      provision
                    
                    
                    8,345
                    
                    
                    
                    11,872Warranty
      deductions
                    
                    
                    -
                    
                    
                    
                    (9,889
                    )Ending
      balance
                    
                    
                    13,607
                    
                    
                    
                    16,138
 
 7.
STOCKHOLDERS’ EQUITY
 The
following table summarizes stockholders’ equity transactions during the
three-month period ended June 30, 2010:
 
 Preferred
      stock
                          
                          
                          Common
      stock
                          
                          
                          Additional
                          
                          
                          Accumulated
                          
                          
                          Total
      stockholders'Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          paid-in
      capital
                          
                          
                          deficit
                          
                          
                          equity$
                          
                          
                          
                          
                          
                          $
                          
                          
                          $
                          
                          
                          $
                          
                          
                          $Balance, April 1, 2010
                          
                          
                          573,830
                          
                          
                          
                          286,950,900
                          
                          
                          
                          286,951
                          
                          
                          
                          82,073,012
                          
                          
                          
                          (79,957,022
                          )
                          
                          
                          2,976,771Dividends
      on Series AA preferred stock
                          
                          
                          6,856
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (6,856
                          )
                          
                          
                          -
                          
                          
                          
                          -Accretion
      of discount on Series AA preferred stock
                          
                          
                          24,540
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (24,540
                          )
                          
                          
                          -
                          
                          
                          
                          -Conversion
      of Series AA preferred stock
                          
                          
                          (605,226
                          )
                          
                          
                          6,052,258
                          
                          
                          
                          6,052
                          
                          
                          
                          599,174
                          
                          
                          
                          -
                          
                          
                          
                          -Stock-based
      compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          93,766
                          
                          
                          
                          -
                          
                          
                          
                          93,766Loss and comprehensive loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (350,192
                          )
                          
                          
                          (350,192
                          )Balance, June 30, 2010
                          
                          
                          -
                          
                          
                          
                          293,003,158
                          
                          
                          
                          293,003
                          
                          
                          
                          82,734,556
                          
                          
                          
                          (80,307,214
                          )
                          
                          
                          2,720,345
 
 Options
 The
following table summarizes stock option activity for the period:
 
 Weighted average
                      
                      
                      AggregateShares
                      
                      
                      exercise price
                      
                      
                      Intrinsic Value#
                      
                      
                      $
                      
                      
                      $Outstanding
      April 1, 2010
                      
                      
                      4,965,500
                      
                      
                      
                      0.15Granted
                      
                      
                      2,320,000
                      
                      
                      
                      0.09Exercised
                      
                      
                      -Canceled/expired
                      
                      
                      -Outstanding
      June 30, 2010
                      
                      
                      7,285,500
                      
                      
                      
                      0.13
                      
                      
                      $
                      -Exercisable
      at June 30, 2010
                      
                      
                      5,981,330
                      
                      
                      
                      0.13
                      
                      
                      $
                      -
 
 (1)
              Options
      outstanding are exercisable at prices ranging from $0.09 to $0.23 and
      expire over the period from 2010 to
2014.
 (2)
              Aggregate
      intrinsic value is based on the closing price of our common stock on June
      30, 2010 of $0.09 and excludes the impact of options that were not
      in-the-money.
  9
  Share
warrants
 The
Company has outstanding share warrants as of June 30, 2010, as
follows:
 
 Number of
                        
                        
                        Exercise PriceDescription
                        
                        Common Shares
                        
                        
                        Per Share $
                        
                        Expiration DateWarrants
                        
                        
                        7,500,000
                        
                        
                        
                        0.10
                        
                        June 30,
2011
 
 No
options were granted, exercised or cancelled/expired during the three months
ended June 30, 2010.
 
 8.
PREFERRED STOCK
 On June
27, 2008 the Company issued 75,000 shares of 5% Series AA Convertible Preferred
Stock (the “Series AA Stock”) with a stated value of $10 per share. Dividends of
5% per annum were payable in shares of common stock or at the Company’s election
additional shares of Series AA Stock or under certain circumstances in cash. The
stated value plus accrued dividends on Series AA Stock was convertible into
common stock at $0.10 per common share with automatic conversion on June 30,
2010. On June 30, 2010 the Company issued 6,052,258 shares of common stock upon
the conversion of 55,000 shares of Series AA Stock and as a result no shares of
Series AA Stock remained outstanding at June 30, 2010.
 
 9.
FAIR VALUE MEASUREMENTS
 Cash and
cash equivalents are measured at fair value in the company’s financial
statements. Accounts receivable are financial assets with carrying values that
approximate fair value due to the short-term nature of these assets. Accounts
payable, deferred revenue and accrued and other liabilities are financial
liabilities with carrying values that approximate fair value due to the
short-term nature of these liabilities. Effective April 1, 2008 the Company
adopted and follows ASC 820, Fair Value Measurements and
Disclosures (“ASC 820”) which established a fair value hierarchy that
requires the company to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. A financial instruments
categorization within the hierarchy is based on the lowest level of input that
is significant to the fair value measurement.
 
 The
Company’s cash and cash equivalents are valued using unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 inputs under ASC
820).
 
 10.
SEGMENT INFORMATION
 ASC 280
Segment Reporting
provides annual and interim reporting standards for an enterprise’s business
segments and related disclosures about its products, services, geographical
areas and major customers. The Company has two operating segments: (1) products
and services and (2) patent licensing. Products and services consist of sales of
the Company’s electronic eVU mobile entertainment device and related content
services and patent licensing consists of intellectual property revenues from
the Flash-R patent portfolio.
 
 Accounting
policies for each of the operating segments are the same as on a consolidated
basis.
  10
  Our
reportable segment information for the three months ended June 30, 2010 and 2009
is as follows:
 
 For
      the three months endedJune
      30,2010
                    
                    
                    2009$
                    
                    
                    $REVENUES:Products
      and services
                    
                    
                    487,134
                    
                    
                    
                    223,030Patent
      licensing
                    
                    
                    25,264
                    
                    
                    
                    -Total
      revenue
                    
                    
                    512,398
                    
                    
                    
                    223,030GROSS
      PROFIT:Products
      and services
                    
                    
                    159,446
                    
                    
                    
                    102,052Patent
      licensing
                    
                    
                    15,158
                    
                    
                    
                    -Total
      gross profit
                    
                    
                    174,604
                    
                    
                    
                    102,052RECONCILIATION:Total
      segment gross profit
                    
                    
                    174,604
                    
                    
                    
                    102,052Operating
      expenses
                    
                    
                    (524,796
                    )
                    
                    
                    (656,253
                    )Other
      income (expense)
                    
                    
                    -
                    
                    
                    
                    (14,875
                    )Loss
      before income taxes
                    
                    
                    (350,192
                    )
                    
                    
                    (569,076
                    )
 
 The
Company does not have significant assets employed in the patent license segment
and does not track capital expenditures or assets by reportable segment.
Consequently it is not practical to show this information.
 
 Revenue
by geographic region is determined based on the location of the Company’s direct
customers or distributors for product sales and services. Patent license revenue
is considered United States revenue as payments are for licenses for United
States operations irrespective of the location of the licensee’s home
domicile.
 
 For
      the three months endedJune
      30,2010
                    
                    
                    2009$
                    
                    
                    $United
      States
                    
                    
                    25,264
                    
                    
                    
                    -International
                    
                    
                    487,134
                    
                    
                    
                    223,030Total
      revenue
                    
                    
                    512,398
                    
                    
                    
                    223,030
 
 Revenues
from three customers comprised 44%, 18% and 14% of revenue for the three months
ended June 30, 2010, with no other customer accounting for more than 10% of
revenues. Revenues from three customers comprised 35%, 24% and 12% of revenue
for the three months ended June 30, 2009. Accounts receivable from three
customers comprised 37%, 27% and 16% of net accounts receivable at June 30,
2010.
 
 11.
COMMITMENTS AND CONTINGENCIES
 
 Legal
Matters
 
 Intellectual Property
Litigation
 In
September 2007 and March 2008, the Company filed complaints against eight
electronic product manufacturers in the U.S. District Court for the Eastern
District of Texas asserting that products made by the companies infringe four of
the Company's U.S. patents covering the use of flash memory technology. These
patents are part of the Company’s Flash-R patent portfolio. By September 30,
2009 the Company had licensed and settled the litigation with seven of the
manufacturers and suspended the complaint against one defendant in
bankruptcy.
  11
  In
November 2009 the Company filed an additional patent infringement complaint in
the United States District Court for the District of Colorado against
nineteen companies that manufacture devices using flash memory. By March
31, 2010 the Company had licensed and settled the litigation with three of the
defendants.
 
 Although
most fees, costs and expenses of intellectual property litigation are covered
under the Company’s arrangement with Duane Morris LLP as described below, the
Company may incur support and related expenses for this litigation that may
become material.
 
 Commitment Related to
Intellectual Property 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 is the Company’s 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 acontingent 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. Any such corporate event or termination
fee will only be recorded if and when such applicable event becomes probable.
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
 At June
30, 2010 the Company had outstanding unfilled purchase orders and was committed
to a contract manufacturer and component suppliers for approximately $42,000 of
future deliveries.
 
 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 $6,344 per
month excluding utilities and costs. The aggregate payments adjust annually with
maximum aggregate payments totaling $6,535 in the fifty-first through the
sixty-second month. Future lease commitments aggregated $84,755 at June 30,
2010.
 
 Concentration
of Credit Risk and Sources of Supply
 Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash and cash equivalents and trade receivables. The
Company at June 30, 2010 had substantially all of its cash and cash equivalents
at one financial institution in a non-interest bearing account. FDIC deposit
insurance has changed to provide full deposit insurance coverage for
non-interest bearing deposit transaction accounts through December 31,
2010.  The Company does not believe that it is subject to any unusual
financial risk beyond the normal risk associated with commercial banking
relationships. The Company performs periodic evaluations of the relative credit
standing of these financial institutions. The Company has not experienced any
significant losses on its cash equivalents.
 
 Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
number and nature of customers comprising the Company’s customer base and their
geographic dispersion. The Company has not incurred any significant credit
related losses.
 
 The
Company relies on one third-party contract manufacturer to produce its eVU
mobile entertainment product and generally relies on single suppliers for
batteries, charging stations and other components. The Company also relies on
one legal firm to represent it in patent licensing and enforcement
matters.
  12
  Guarantees
and Indemnifications
 The
Company enters into standard indemnification agreements in the ordinary course
of business. Some of the Company’s product sales and services agreements include
a limited indemnification provision for claims from third parties relating to
the Company’s intellectual property. Such indemnification provisions are
accounted for in accordance with ASC 450, Contingencies. The
indemnification is generally limited to the amount paid by the customer. To
date, there have been no claims under such indemnification
provisions.
 
 The
Company provides a one-year limited warranty for most of its
products.
 
 12.
INCOME TAXES
 There is
no income tax provision for the three months ended June 30, 2010 or 2009 due to
net operating losses for which there is no benefit currently
available.
 
 At June
30, 2010, the Company had deferred tax assets associated with federal net
operating losses (“NOLs”), related state NOLs, foreign tax credits and certain
Federal and California research and development tax credits but recorded a
corresponding full valuation allowance as it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
  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. SEE ALSO THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2010.
 
 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 report
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 incorporated under the laws of Delaware that operates through a
wholly-owned California subsidiary of the same name. We market our eVU mobile
entertainment system for the travel and recreational industries and license and
enforce our Flash-R portfolio of flash memory patents for use in portable
devices produced by electronic product manufacturers.
 
 With the
inception of patent license revenue in September 2008, we determined that we
have two operating segments: (1) products and services and (2) patent licensing
and enforcement. Our products and services revenue is derived from the sale of
eVU products and accessories to customers, warranty and technical support
services and content integration fees and related services. Our patent licensing
and enforcement revenue consists of intellectual property revenues from our
Flash-R patent portfolio.
 
 Our
strategy is to market our eVU products and services to a growing base of U.S.
and international companies for use in the airline, healthcare, and other travel
and leisure industries. We employ direct sales and sales through value added
resellers (VARs) that provide marketing, logistic and/or content services to
corporate customers.
 
 We are
commercializing our Flash-R patent portfolio through licensing and we are
aggressively pursuing enforcement by litigating against targeted parties that we
believe are infringing our patents. The international law firm of Duane Morris
LLP is handling our patent enforcement matters on a contingent fee basis. During
the period commencing September 2007 through March 2008, we filed complaints
against eight electronic product manufacturers and subsequently licensed and
settled the litigation with seven of the manufacturers and suspended the
complaint against one defendant that filed for bankruptcy. In November 2009 we
filed an additional patent infringement complaint against nineteen companies and
we have subsequently licensed and settled with three companies. While we expect
to file future complaints against additional companies and license additional
companies there can be no assurance of the timing or amounts of any related
license revenue.
 
 Our
business is high risk in nature. There can be no assurance we can achieve
sufficient eVU or patent license revenues to sustain profitability. 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 future
periods.
 
 Overall
Performance and Trends
 We
focused significant efforts on developing, licensing and enforcing our patent
portfolio during the first quarter and during the fiscal years ended March 31,
2010 and 2009. We successfully completed our first round of enforcement
litigation in September 2009 when we licensed the last of the remaining original
defendants. In November 2009 we filed additional enforcement actions against
nineteen defendants, licensed our first customer from the second round in
December 2009 and by March 31, 2010 had licensed a total of three licensees from
the second round. There is a reluctance of patent infringers to negotiate and
ultimately take a patent license without at least the threat of legal action.
However, the majority of patent infringement contentions settle out of court,
based on the strength of the patent claims, validity, and persuasive evidence
and clarity that the patent is being infringed. We believe we are building a
track record of demonstrating the strength, validity and clarity of our patent
claims and that we can result in significant future revenues from our patent
portfolio.
  14
  Our eVU
IFE business has remained slow due to airline economics. While we are seeing
increased activity, we are unable to predict future sales levels in this market
as orders are sporadic from both existing and new customers. We continue to
pursue business in the airline and other markets for our eVU product
line.
 
 Management
faces challenges for fiscal 2011 to execute its plan to grow product and service
revenues and increase Flash-R patent portfolio license fees. We are in the early
stages of licensing our patents and only recently filed additional infringement
claims as described above and in Part II, Item 1 “Legal Proceedings” below.
While we expect additional patent licenses in future periods there can be no
assurance of the timing or amounts of any such license revenue. The failure to
obtain additional patent license revenues or eVU orders or delays of orders or
production delays could have a material adverse impact on our operations. Our
patent licensing business is subject to significant uncertainties as to the
timing and amount of future license revenues, if any. We may also face
unanticipated technical or manufacturing obstacles and face warranty and other
risks in our business.
 
 For the
three months ended June 30, 2010 we recognized a net loss before income taxes of
$350,192 compared to a net loss before income taxes of $569,076 for the
comparable period of the prior fiscal year. Our revenues were $512,398 for the
first three months of fiscal 2011with $25,264 of patent license revenue. This
compares to $223,030 for the prior year’s first three months with no patent
license revenue reported. We reported reduced operating expenses totaling
$524,796 in the three months ended June 30, 2010 compared to $656,253 in the
comparable period prior primarily due to reduced legal fees for litigation
concluded in the prior year.
 
 Our
monthly cash operating costs average approximately $125,000 per month. 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. Our quarterly results are highly dependent on the timing and amount
of licensing fees and accordingly quarterly results can vary dramatically from
period to period. As a result of this and other factors, past results and
expenditure levels may not be indicative of future quarters. We have incurred
losses and negative cash flow from operations during fiscal 2010 and the first
quarter of fiscal 2011. We expect to incur losses in the future until product,
service and/or licensing revenues are sufficient to sustain continued
profitability. Our ability to continue as a going concern is in doubt and is
dependent upon achieving a profitable level of operations and if necessary
obtaining additional financing.
 
 Critical
Accounting Policies
 The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements located in Item 1 of Part
I, “Financial Statements,” and in Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report of Form 10-K
for the year ended March 31, 2010. The preparation of these financial statements
prepared in accordance with accounting principles generally accepted in the
United States 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, we
evaluate our estimates, including but not limited to those related to revenue
recognition, bad debts, inventory valuation, intangible assets, financing
operations, warranty obligations, stock-based compensation, fair values,
derivatives, income taxes, contingencies and litigation.  We base our
estimates 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 under different assumptions or
conditions.
 
 We
believe that, of the significant accounting policies discussed in our
consolidated financial statements, the following accounting policies require our
most difficult, subjective or complex judgments:
 
 ·
              revenue
      recognition;
 ·
              stock-based
      compensation expense;
 ·
              derivative
      instruments and preferred stock;
and
 ·
              income
      taxes.
  15
  Historically,
our assumptions, judgments and estimates relative to our critical accounting
policies have not differed materially from actual results. There were no
significant changes or modification of our critical accounting policies and
estimates involving management valuation adjustments affecting our results for
the three months ended June 30, 2010. For further information on our critical
accounting policies, refer to Note 2 to the consolidated financial statements in
our Annual Report on Form 10-K for the year ended March 31, 2010.
 
 Results
of Operations
 
 Three months ended June 30,
2010 compared to the three months ended June 30, 2009
 Three Months Ended June 30,2010
                  
                  
                  
                  
                  
                  2009%
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  ChangeDollars
                  
                  
                  Revenue
                  
                  
                  Dollars
                  
                  
                  Revenue
                  
                  
                  Dollars
                  
                  
                  %Revenues:Products
                  
                  
                  298,615
                  
                  
                  
                  58
                  %
                  
                  
                  14,075
                  
                  
                  
                  6
                  %
                  
                  
                  284,540
                  
                  
                  2022
                  %Services
                  
                  
                  188,519
                  
                  
                  
                  37
                  %
                  
                  
                  208,955
                  
                  
                  
                  94
                  %
                  
                  
                  (20,436
                  )
                  
                  
                  (10
                  )%Patent
      license
                  
                  
                  25,264
                  
                  
                  
                  5
                  %
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  25,264512,398
                  
                  
                  
                  100
                  %
                  
                  
                  223,030
                  
                  
                  
                  100
                  %
                  
                  
                  289,368
                  
                  
                  
                  130
                  %Gross
      Profit:Product
      gross profit (loss)
                  
                  
                  56,930
                  
                  
                  
                  11
                  %
                  
                  
                  (34,929
                  )
                  
                  
                  (16
                  )%
                  
                  
                  91,859
                  
                  
                  
                  (263
                  )%Service
      gross profit
                  
                  
                  102,516
                  
                  
                  
                  20
                  %
                  
                  
                  136,981
                  
                  
                  
                  61
                  %
                  
                  
                  (34,465
                  )
                  
                  
                  (25
                  )%Patent
      license
                  
                  
                  15,158
                  
                  
                  
                  3
                  %
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  15,158174,604
                  
                  
                  
                  34
                  %
                  
                  
                  102,052
                  
                  
                  
                  46
                  %
                  
                  
                  72,552
                  
                  
                  
                  71
                  %Operating
      Expenses:Selling
      and administrative
                  
                  
                  366,125
                  
                  
                  
                  71
                  %
                  
                  
                  576,672
                  
                  
                  
                  259
                  %
                  
                  
                  (210,547
                  )
                  
                  
                  (37
                  )%Research
      and related
                  
                  
                  158,671
                  
                  
                  
                  31
                  %
                  
                  
                  79,581
                  
                  
                  
                  36
                  %
                  
                  
                  79,090
                  
                  
                  
                  99
                  %524,796
                  
                  
                  
                  102
                  %
                  
                  
                  656,253
                  
                  
                  
                  294
                  %
                  
                  
                  (131,457
                  )
                  
                  
                  (20
                  )%Other
      expense
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  (14,875
                  )
                  
                  
                  (7
                  )%
                  
                  
                  14,875
                  
                  
                  
                  (100
                  )%Loss
      before income taxes
                  
                  
                  (350,192
                  )
                  
                  
                  (68
                  )%
                  
                  
                  (569,076
                  )
                  
                  
                  (255
                  )%
                  
                  
                  218,884
                  
                  
                  
                  (38
                  )%
 
 Loss
Before Income Taxes
 The
$218,884 reduced loss before income taxes resulted primarily from increased
product sales and margins and reduced operating expenses.
 
 Revenues
 Revenues
increased $289,368 during the most recent fiscal quarter (Q1 of fiscal 2011)
compared to the first quarter of the prior year. While service revenues declined
by $20,436 due to customer mix, product sales increased by $284,540 primarily
from a shipment to one new customer. eVU product sales activity in recent
periods has been slow and sporadic due to airline industry economics with
airlines curtailing expansion and new projects. Our product sales in the first
quarter are not necessarily indicative of future orders and we had no
significant product backlog at June 30, 2011. Our service arrangements and terms
vary with each customer and there is no assurance in the current airline
environment that our service revenues will continue at comparable levels for the
balance of the fiscal year or in future periods.
 
 We
recognized $25,264 of patent license revenue from royalties during the most
recent quarter. We have an outstanding complaint against nineteen additional
electronics manufacturers, and while we expect additional patent licenses from
these and other companies in future periods, there can be no assurance of the
timing or amounts of future license revenue. We are pursuing new eVU and other
technology business but our results will continue to be dependent on the timing
and quantity of eVU orders and the timing and amount of any patent licensing
arrangements.
  16
  Gross
Profit
 Gross
profit for the first quarter of fiscal 2011 was $174,604 or 34% of
revenues.  The gross profit for the prior year’s first quarter was $102,052
or 46% of revenues. While our margin on service declined from 65% to 54% due to
repair and content mix, our product gross margin was positive in Q1 of fiscal
2011 due to higher product sales. Gross profit margins are highly dependent on
revenue mix, prices charged, volume of orders, and for periods with patent
licensing revenues the amounts of contingency legal fees and costs.
 
 Operating
Expenses
 Selling
and administrative costs for the three months ended June 30, 2011 declined by
$131,457 compared to the same period in the year prior. The current period also
included a $75,732 expense for noncash stock-based compensation expense compared
to $11,745 for the prior year’s first quarter. Reduced current period selling
and administrative expenses included $258,000 of reduced professional fees
primarily due to reduced business litigation costs as a result of the favorable
outcome of the digEcor litigation reported last year. Research and development
expenses in the most recent quarter included $18,034 of noncash stock-based
compensation costs. Research and development expenses also increased $40,000
related to staffing costs due to less allocation of personnel to service revenue
work due to current research projects and an increase of $20,000 in outside
engineering and consulting costs for new projects.
 
 Research
and development expenses can vary significantly from quarter to quarter based on
the allocation of time spent by personnel who work on both revenue producing
service and repair projects and on internal research projects. Such expenses
also vary based on decisions made regarding outside engineering and
consulting.
 
 Other
Income (Expense)
 We had no
other income or expenses in the current period compared to $14,875 of net other
expenses for the prior year’s first quarter.
 
 Income
Taxes
 There was
no income tax expense or benefit for either period.
 
 Loss
Attributable to Common Stockholders
 The loss
attributable to common stockholders for the most recent first quarter included
the net loss after taxes of $350,192 reduced by accrued and deemed dividends on
the Series AA Stock of $31,396 for a net loss attributable to common
stockholders of $384,247. The net loss after tax for the prior comparable first
quarter was $569,076 decreased by accrued and deemed dividends of $42,813 for
net loss attributable to common stockholders of $611,889. Since all shares of
Series AA Stock were converted into common at June 30, 2010 we will not have
further Series AA dividends or accretion in future quarters.
 
 Liquidity
and Capital Resources
 At June
30, 2010, we had working capital of $2,710,856 compared to a working capital of
$2,965,681 at March 31, 2010. At June 30, 2010 we had cash on hand of
$2,544,661.
 
 Operating
Activities
 Cash used
in operating activities was $272,963 for the three months ended June 30, 2010.
Cash used in operating activities included the net loss of $350,192 reduced by
net non-cash expenses of $104,815. Major components also providing operating
cash was a decrease of $55,106 in inventory and an increase of $66,229 in
accounts payable. Major components using operating cash included an increase of
$53,622 in accounts receivable and a $130,628 reduction in accrued and other
liabilities.
 
 Cash used
in operating activities during the three months ended June 30, 2009 was $740,211
with the larger usage caused by the larger net loss and increases in accounts
receivable and decreases in accrued and other liabilities.
 
 Our terms
to customers vary but we often require payment prior to shipment of product and
any such payments are recorded as deposits. Patent license payments are normally
due at signing of the license or within 30-45 days of settlement or end of
royalty reporting period.
  17
  Individual
working capital components can change dramatically from period to period due to
timing of sales and shipments and corresponding receivable, inventory and
payable balances. Accordingly operating cash requirements vary significantly
from period to period.
 
 Investing
Activities
 The
Company’s efforts are primarily on operations and currently we have no
significant investing capital needs. We have no commitments requiring investment
capital.
 
 Financing
Activities
 There
were no cash financing activities during the quarters ended June 30, 2010 or
2009. On June 30, 2010 $605,226 of preferred stock automatically converted to
common stock with no cash impact.
 
 Debt
and Other Commitments
 We
currently have no debt outstanding. At June 30, 2010 we were committed to
approximately $42,000 as purchase commitments for product and components. These
orders are generally subject to modification as to timing, quantities and
scheduling and in certain instances may be cancelable without
penalty.
 
 We are
also committed for our office lease as more fully described in our interim
consolidated financial statements.
 
 Our legal
firm Duane Morris is handling patent enforcement matters and certain related
appeals on our Flash-R patent portfolio on a contingent fee basis. Duane Morris
also has agreed to advance certain costs and expenses including travel expenses,
court costs and expert fees. We have agreed to pay Duane Morris a fee equal to
40% of any license or litigation recovery related to patent enforcement matters,
after recovery of expenses, and 50% of recovery if appeal is
necessary.
 
 In the
event we are acquired or sold or elect to sell the covered patents or upon
certain other corporate events or in the event we terminate the agreement for
any reason, then Duane Morris shall be entitled to collect accrued costs and a
fee equal to three times overall time and expenses accrued in connection with
the agreement and a fee of 15% of a good faith estimate of the overall value of
the covered patents. Duane Morris has a lien and a security interest in the
covered patents to secure its obligations under the agreement.
 
 Cash
Requirements
 Other
than cash on hand and accounts receivable, we have no material unused sources of
liquidity at this time.  Based on our cash position at June 30, 2010 and
current planned expenditures and level of operation, we believe we have
sufficient 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 patent licensing and eVU product sales and services
but the timing of licenses and shipments and the amount and quantities of
shipments, orders and reorders are subject to many factors and risks, many
outside our control.
 
 Since we
have not demonstrated sustainable profitability, our company’s ability to
continue as a going concern is in doubt and is dependent upon achieving
sustained profitability and if necessary obtaining additional financing. We
currently have no plans, arrangements or understandings regarding any
acquisitions.
 
 Item
4. Controls and Procedures
 Based on
an evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as
of June 30, 2010, our President and CEO (“Principal Executive Officer” or “PEO”)
and Interim Chief Accounting Officer (“Principal Financial Officer” or “PFO”)
have concluded that our disclosure controls and procedures were not effective at
the reasonable assurance level in ensuring that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Commission's rules and forms.
  18
  In
connection with the preparation of our annual financial statements, our
management performed an assessment of the effectiveness of internal control over
financial reporting as of March 31, 2010. Management's assessment included an
evaluation of the design of our internal control over financial reporting and
testing of the operational effectiveness of those controls. Based on this
evaluation, management determined that, as of March 31, 2010, there was a
material weakness in our internal control over financial reporting: the lack of
independent oversight by an audit committee of independent members of the Board
of Directors. In light of this material weakness, management concluded that, as
of March 31, 2010, we did not maintain effective internal control over financial
reporting. As defined by the Public Company Accounting Oversight Board Auditing
Standard No. 5, a material weakness is a deficiency or a combination of
deficiencies, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management has concluded
that with certain management oversight controls that are in place, the risks
associated with the lack of independent audit committee oversight is not
sufficient to justify the costs of adding additional directors and independent
audit committee members at this time. Management will periodically reevaluate
this situation. If we secure sufficient capital or improve operating results it
is our intention to change the composition and/or size of the Board of Directors
with emphasis on recruiting qualified independent audit committee
members.
 
 In
designing and evaluating our disclosure controls and procedures, management
recognizes 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 is required to apply its judgment in
evaluating the relationship between the benefit of desired controls and
procedures and the cost of implementing new controls and
procedures.
 
 CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 There
have been no changes in our internal control over financial reporting during our
fiscal quarter ended June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. Our process for evaluating controls and procedures is continuous and
encompasses constant improvement of the design and effectiveness of established
controls and procedures and the remediation of any deficiencies which may be
identified during this process.
 
 PART
II.       OTHER INFORMATION
 
 Item
1. Legal Proceedings
 
 Intellectual Property
Litigation
 During
the period commencing September 2007 through and including March 2008, we filed
complaints against eight electronic product manufacturers in the U.S. District
Court for the Eastern District of Texas asserting that products made by the
companies infringe four of our U.S. patents covering the use of flash memory
technology. These patents are part of our Flash-R patent portfolio. By September
30, 2009 we had licensed and settled the litigation with seven of the
manufacturers and suspended the complaint against one defendant currently in
bankruptcy.
 
 In
November 2009we filed an additional patent infringement complaint in the United
States District Court for the District of Colorado against nineteen companies
that manufacture devices using flash memory. Subsequently we have licensed and
settled with three of the defendants that agreed to payments with respect to our
U.S. Patent 5,491,774.
 
 Although
most fees, costs and expenses of the litigation are covered under our
arrangement with Duane Morris LLP, we may incur support and related expenses for
this litigation that may become material.
 
 Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 (a)
              Thefollowing
      shares of common stock 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
      June 30, 2010 we issued 6,052,258 shares of common stock upon the
      conversion of 55,000 shares of Series AA Stock sold for $550,000 on June
      27, 2008. The shares issued on exchange were issued without restrictive
      legend in reliance on Rule 144(d).
 
 (b)
              NONE
 (c)
              NONE
 
 Item
3. Defaults Upon Senior Securities
 
 NONE
  19
  Item
4. (Removed and Reserved)
 
 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 Alfred H. Falk,
President and CEO (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 Alfred H. Falk,
President and CEO (Principal Executive Officer) and Robert Putnam, Interim
Accounting Officer (Principal Accounting Officer).
 
 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 4, 2010
                  By:
                  /s/ ROBERT PUTNAMRobert
      Putnam, Interim Chief Accounting Officer(Principal
      Accounting and Financial Officerand
      duly authorized to sign on behalf of the
  Registrant)
  20