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, 2008





Commission
      File Number 0-20734





**e.Digital
      Corporation**


(Exact
      name of registrant as specified in its charter)




**Delaware**
              **33-0591385**(State
                  or other jurisdiction of incorporation
                  or organization)
              (I.R.S.
                  Empl. Ident. No.)**16770
                  West Bernardo Drive, San Diego, California**
              **92127**(Address
                  of principal executive offices)
              (Zip
                  Code)
 
 **(858)
        304-3016**


(Registrant’s
      telephone number, including area code)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. YES x NO
o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, 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 o
              
              Accelerated
                  filer oNon-accelerated
                  filer     o(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 o No x





As
      of
      August 12, 2008 a total of 277,407,062 shares of the Registrant’s Common
      Stock, par value $0.001, were issued and outstanding.










**e.DIGITAL
      CORPORATION**








INDEX




Page**PART
                  I. FINANCIAL INFORMATION**Item
                  1.
              Financial
                Statements (unaudited):Consolidated
                  Balance Sheets as of June 30, 2008 and and March 31, 2008
              3Consolidated
                  Statements of Operations for the three months ended June 30, 2008
                  and
                  2007
              4Consolidated
                  Statements of Cash Flows for the three months ended June 30, 2008
                  and
                  2007
              5Notes
                  to Interim Consolidated Financial Statements
              6Item
                  2.
              Management's
                Discussion and Analysis of Financial Condition and
                Results of Operations
              17Item
                  4.
              Controls
                and Procedures
              22**PART
                  II. OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              23Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              24Item
                  3.
              Defaults
                  Upon Senior Securities
              24Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              24Item
                  5.
              Other
                  Information
              25Item
                  6.
              Exhibits
              25SIGNATURES
              25








2




**Part
        I. Financial Information**
 **Item
        1. Financial Statements:**
 **e.Digital
        Corporation and subsidiary**
 
 **CONSOLIDATED
        BALANCE SHEETS**
  **June
                  30, 2008**
              
              **March
                  31, 2008****(Unaudited)**$
              
              $**ASSETS****Current**Cash
                  and cash equivalents
              
              
              817,814
              
              
              122,116Accounts
                  receivable, trade
              
              
              104,230
              
              
              174,905Inventory
              
              
              545,901
              
              
              489,238Deposits
                  and prepaid expenses
              
              
              36,073
              
              
              34,717**Total
                  current assets**
              
              
              1,504,018
              
              
              820,976Property
                    and equipment, net of accumulated depreciation of  $489,317 and
                    $485,037, respectively
              
              
              35,781
              
              
              40,061**Total
                  assets**
              
              
              1,539,799
              
              
              861,037**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****Current**Accounts
                  payable, trade
              
              
              1,070,544
              
              
              836,217Other
                  accounts payable and accrued liabilities
              
              
              147,573
              
              
              198,210Accrued
                  employee benefits
              
              
              154,611
              
              
              149,483Customer
                  deposits
              
              
              80,000
              
              
              80,000Deferred
                  revenue
              
              
              36,500
              
              
              36,500Current
                  maturity of convertible term note, less $21,935 and $25,842 of
                  debt
                  discount
              
              
              438,684
              
              
              366,989Secured
                  promissory note, less $3,847 and $4,131 of note discount
              
              
              396,153
              
              
              445,869Promissory
                  note, less $3,627 and $-0- of note discount
              
              
              36,373
              
              
              **—**Warrant
                  derivative liability
              
              
              185,532
              
              
              **—****Total
                  current liabilities**
              
              
              2,545,970
              
              
              2,113,268Long-term
                  convertible term note, less $2,489 and $6,141 of debt
                  discount
              
              
              241,112
              
              
              381,093Deferred
                  revenue-long term
              
              
              62,500
              
              
              72,000**Total
                  long-term liabilities**
              
              
              303,612
              
              
              453,093**Total
                  liabilities**
              
              
              2,849,582
              
              
              2,566,361**Commitments
                  and Contingencies**Series
                      AA Convertible Preferred stock, $0.001 par value, 100,000 shares
                      designated: 75,000 and -0- issued and outstanding,
                      respectively. Liquidation preference of $750,308 and $-0-,
                      respectively
              
              
              481,865
              
              
              **—****Stockholders'
                  deficit**Common
                      stock, $0.001 par value, authorized 300,000,000, 276,527,941
                      and
                      272,494,867 shares and outstanding,
                      respectively
              
              
              276,528
              
              
              272,495Additional
                  paid-in capital
              
              
              80,682,619
              
              
              80,103,769Accumulated
                  deficit
              
              
              (82,750,795
              )
              
              (82,081,588
              )**Total
                  stockholders' deficit**
              
              
              (1,791,648
              )
              
              (1,705,324
              )**Total
                  liabilities and stockholders' deficit**
              
              
              1,539,799
              
              
              861,037
 
 See
        notes
        to interim consolidated financial statements




3


**e.Digital
        Corporation and subsidiary**
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
 
 **For
                  the three months ended****June
                  30,****2008**
              
              **2007****Revenues:**
              
              $
              
              $Products
              
              
              234,298
              
              
              1,189,630Services
              
              
              143,429
              
              
              115,004377,727
              
              
              1,304,634**Cost
                  of revenues:**Products
              
              
              193,484
              
              
              1,021,850Services
              
              
              70,186
              
              
              36,669263,670
              
              
              1,058,519Gross
                  profit
              
              
              114,057
              
              
              246,115**Operating
                  expenses:**Selling and administrative
              
              
              538,895
              
              
              471,097Research and related expenditures
              
              
              146,651
              
              
              280,312Total
                  operating expenses
              
              
              685,546
              
              
              751,409Operating
                  income (loss)
              
              
              (571,489
              )
              
              (505,294
              )**Other
                  income (expense):**Interest and other income
              
              
              5,055
              
              
              159Interest expense
              
              
              (48,594
              )
              
              (68,672
              )Other expense
              
              
              (54,179
              )
              
              (19,599
              )Other
                  expense
              
              
              (97,718
              )
              
              (88,112
              )**Loss
                  and comprehensive loss for the period**
              
              
              (669,207
              )
              
              (593,406
              )Accrued
                  and deemed dividends on preferred stock
              
              
              (1,411
              )
              
              (27,225
              )**Loss
                  attributable to common stockholders**
              
              
              (670,618
              )
              
              (620,631
              )**Loss
                  per common share - basic and diluted**
              
              
              (0.00
              )
              
              (0.00
              )**Weighted
                  average common shares outstanding**
              
              
              274,497,647
              
              
              244,411,088


See
      notes
      to interim consolidated financial statements


4




**e.Digital
        Corporation and subsidiary**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 **For
                  the three months ended****June
                  30,****2008**
              
              **2007****OPERATING
                  ACTIVITIES**
              
              $
              
              $Loss
                  for the period
              
              
              (669,207
              )
              
              (593,406
              )Adjustments
                  to reconcile loss to net cash used in operating
                  activities:Depreciation and amortization
              
              
              4,280
              
              
              4,600Accrued interest and accretion of discount relating to promissory
                  notes
              
              
              13,016
              
              
              8,665Interest paid with common stock
              
              
              14,155
              
              
              25,768Warranty
                  provision
              
              
              10,080
              
              
              44,893Stock-based
                  compensation
              
              
              14,721
              
              
              34,853Warrant
                  derivative revaluation
              
              
              50,759
              
              
              **—**Changes
                  in assets and liabilities:Accounts receivable, trade
              
              
              70,675
              
              
              (801,653
              )Inventories
              
              
              (56,663
              )
              
              135,757Prepaid expenses and other
              
              
              (1,356
              )
              
              1,522Accounts payable
              
              
              284,327
              
              
              252,447Other accounts payable and accrued liabilities
              
              
              (48,721
              )
              
              (11,357
              )Customer deposits
              
              
              **—**
              
              
              584,496Accrued employee benefits
              
              
              5,128
              
              
              48,375Deferred revenue
              
              
              (9,500
              )
              
              **—**Warranty reserve
              
              
              (15,996
              )
              
              (4,712
              )Cash
                  used in operating activities
              
              
              (334,302
              )
              
              (269,752
              )**INVESTING
                  ACTIVITIES**Purchase
                  of property and equipment
              
              
              **—**
              
              
              (451
              )Cash
                  used in investing activities
              
              
              **—**
              
              
              (451
              )**FINANCING
                  ACTIVITIES**Sale
                  of common stock
              
              
              340,000
              
              
              320,000Proceeds
                  from sale of preferred stock
              
              
              700,000
              
              
              **—**Payment
                  on secured promissory note
              
              
              (50,000
              )
              
              **—**Proceeds
                  from unsecured promissory note
              
              
              40,000
              
              
              **—**Cash
                  provided by financing activities
              
              
              1,030,000
              
              
              320,000**Net
                  increase in cash and cash equivalents**
              
              
              695,698
              
              
              49,797Cash
                  and cash equivalents, beginning of period
              
              
              122,116
              
              
              694,757**Cash
                  and cash equivalents, end of period**
              
              
              817,814
              
              
              744,554**Supplemental
                  disclosures of cash flow information:**Cash paid for interest
              
              
              20,250
              
              
              16,541**Supplemental
                  schedule of noncash investing and financing
                  activities:**Accounts payable exchanged for preferred stock
              
              
              50,000
              
              
              **—**Accrued and deemed dividends on preferred stock
              
              
              1,411
              
              
              27,225Term note payments paid in common stock
              
              
              90,000
              
              
              30,000Financing fee paid in common stock
              
              
              4,800
              
              
              15,000


See
        notes
        to interim consolidated financial statements




5




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


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





These
      unaudited consolidated financial statements have been prepared by management
      in
      accordance with accounting principles generally accepted in the United States
      and with the instructions to Form 10-Q and Article 10 of Regulation S-X on
      a
      going concern basis, which contemplates the realization of assets and the
      discharge of liabilities in the normal course of business for the foreseeable
      future. These interim consolidated financial statements do not include all
      of
      the information and footnotes required by accounting principles generally
      accepted in the United States for complete financial statements. In the opinion
      of management, the unaudited consolidated financial statements reflect all
      adjustments considered necessary for a fair statement of the Company's financial
      position at June 30, 2008, and the results of operations and cash flows for
      the
      periods presented, consisting only of normal and recurring adjustments. All
      significant intercompany transactions have been eliminated in consolidation.
      Operating results for the three months ended June 30, 2008 are not necessarily
      indicative of the results that may be expected for the fiscal year ending March
      31, 2009. For further information, refer to the Company's consolidated financial
      statements and footnotes thereto for the year ended March 31, 2008 filed on
      Form
      10-K. Certain amounts reported in prior periods have been reclassified to be
      consistent with the current period presentation.





As
      more
      fully described in Note 15 to the Company’s consolidated financial statements
      and footnotes thereto for the year ended March 31, 2008 filed on Form 10-K,
      the
      Company restated the two quarters ended September 30, 2007 and December 31,
      2007
      due to an overstatement of both sales and cost of sales of $104,000 and $62,400
      for the quarters, respectively, due to a misclassification of supplier material
      transfers with no effect on gross profit, operating loss or net loss in either
      quarter or for the fiscal year ended March 31, 2008. There was no change for
      the
      quarter ended June 30, 2007.





The
      Company has incurred significant losses and negative cash flow from operations
      in each of the last three years and has an accumulated deficit of $82.8 million
      at June 30, 2008. At June 30, 2008, the Company had a working capital deficiency
      of $1,041,952. Substantial portions of the losses are attributable to marketing
      costs for new products and expenditures on research and development of
      technologies. The Company's operating plans require additional funds that may
      take the form of debt or equity financings. There can be no assurance that
      any
      additional funds will be available. The Company's ability to continue as a
      going
      concern is in substantial doubt and is dependent upon obtaining additional
      financing and achieving a profitable level of operations.





Management
      has undertaken steps as part of a plan to improve operations with the goal
      of
      sustaining operations for the next twelve months and beyond. These steps include
      (a) expanding sales and marketing to new customers and new markets; (b)
      executing a strategy to monetize the Flash-R patent portfolio; (c) controlling
      overhead and expenses; and (d) raising additional capital and/or obtaining
      financing. In addition to a sale of $750,000 of preferred stock, the Company
      obtained $340,000 of equity proceeds pursuant to a common stock purchase
      agreement with Fusion Capital Fund II, LLC (“Fusion”) during the three months
      ended June 30, 2008. The Company may have access to up to $0.58 million of
      additional funding pursuant to this agreement (or a maximum of $6.7 million
      at
      higher stock prices). Future availability under the Fusion agreement is subject
      to many conditions, some of which are predicated on events that are not within
      the Company’s control. There can be no assurance this capital resource will be
      available or be sufficient.





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





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





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





6


**2.
      RECENT ACCOUNTING PRONOUNCEMENTS**


On
      April
      1, 2008, the Company adopted certain provisions of Financial Accounting
      Standards Board (“FASB”) Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements” (“SFAS 157”), which establishes a single authoritative
      definition of fair value, sets out a framework for measuring fair value and
      expands on required disclosures about fair value measurement. The provisions
      of
      SFAS 157 adopted on April 1, 2008 relate to financial assets and liabilities
      as
      well as other assets and liabilities carried at fair value on a recurring basis
      and did not have a material impact on the Company’s consolidated financial
      statements. The provisions of SFAS 157 related to other nonfinancial assets
      and
      liabilities will be effective for the Company on April 1, 2009, and will be
      applied prospectively. The Company is currently evaluating the impact that
      these
      additional SFAS 157 provisions will have on the Company’s consolidated financial
      statements. See Note 10 - Fair Value Measurements.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities.” Under SFAS No. 159, companies may
      elect to measure certain financial instruments and certain other items at fair
      value. The standard requires that unrealized gains and losses on items for
      which
      the fair value option has been elected be reported in earnings. SFAS No. 159
      is
      effective for fiscal years beginning after November 15, 2007. The Company
      adopted SFAS No. 159 for fiscal 2009. However the Company did not elect to
      apply
      the fair value option to any financial instruments or other items upon adoption
      of SFAS No. 159 or during the three months ended June 30, 2008. Therefore,
      the
      adoption of SFAS No. 159 did not impact the Company’s consolidated financial
      position, results of operations or cash flows.





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





In
      December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in
      Consolidated Financial Statements an amendment of ARB No. 51” (“SFAS 160”). SFAS
      160 establishes new standards for the accounting for and reporting of
      non-controlling interests (formerly minority interests) and for the loss of
      control of partially owned and consolidated subsidiaries. SFAS 160 does not
      change the criteria for consolidating a partially owned entity. SFAS 160 is
      effective for fiscal years beginning after December 15, 2008. The provisions
      of
      SFAS 160 will be applied prospectively upon adoption except for the presentation
      and disclosure requirements which will be applied retrospectively. The Company
      does not expect the adoption of SFAS 160 will have a material impact on its
      consolidated financial statements.




On
      March
      19, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities, an amendment of FASB Statement No. 133
      (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s
      derivative and hedging activities. These enhanced disclosures will discuss
      (a)
      how and why an entity uses derivative instruments, (b) how derivative
      instruments and related hedged items are accounted for under Statement 133
      and
      its related interpretations, and (c) how derivative instruments and related
      hedged items affect an entity’s financial position, financial performance, and
      cash flows. SFAS No. 161 is effective for financial statements issued for fiscal
      years and interim periods beginning after November 15, 2008. The Company has
      not
      determined the impact, if any SFAS No. 161 will have on its consolidated
      financial statements.




7


In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
      accounting principles and the framework for selecting the principles used in
      the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (the
      GAAP
      hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval
      of the Public Company Accounting Oversight Board amendments to AU Section 411,
      “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
      Principles.” The Company does not currently expect the adoption of SFAS 162 to
      have a material effect on its consolidated results of operations and financial
      condition.





**3.
      LOSS PER SHARE**


Stock
      options, warrants and convertible preferred stock and debt exercisable into
      29,975,052 shares of common stock were outstanding as at June 30, 2008. These
      securities were not included in the computation of diluted loss per share
      because they are antidilutive, but they could potentially dilute earnings per
      share in future periods.





The
      loss
      attributable to common stockholders was increased by accrued and deemed
      dividends during the three months ended June 30, 2008 and 2007 of $1,411 and
      $27,225, respectively.







**4.
      INVENTORIES**


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


Inventories
      consisted of the following:


**June
                  30,**
              
              **March
                  31,****2008**
              
              **2008**$
              
              $Raw
                  materials
              
              
              34,609
              
              
              41,354Work
                  in process
              
              
              335,389
              
              
              217,820Finished
                  goods
              
              
              175,903
              
              
              230,064545,901
              
              
              489,238


**5.
      STOCK-BASED COMPENSATION COSTS**


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


**Three
                    Months Ended****June
                    30,****2008**
                
                **2007**$
                
                $Research
                    and development
                
                
                —
                
                
                13,943Selling
                    and administrative
                
                
                14,721
                
                
                20,910Total
                    stock-based compensation expense
                
                
                14,721
                
                
                34,853




As
      of
      June 30, 2008 total estimated compensation cost of options granted but not
      yet
      vested was approximately $84,000 and is expected to be recognized over the
      weighted average period of 1.4 years.





The
      following table sets forth the weighted-average key assumptions and fair value
      results for stock options granted during the three-month periods ended June
      30,
      2008 and 2007 (annualized percentages):




8


**Three
                  Months Ended****June
                  30,****2008**
              
              **2007**Volatility
              
              
              70.5
              %
              
              77
              %Risk-free
                  interest rate
              
              
              2.5
              %
              
              4.6%-5.2
              %Forfeiture
                  rate
              
              
              0.0
              %
              
              5.0
              %Dividend
                  yield
              
              
              0.0
              %
              
              0.0
              %Expected
                  life in years
              
              
              3.5
              
              
              4Weighted-average
                  fair value of options granted
              
              $
              0.06
              
              $
              0.11




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





See
      Note
      8 for further information on outstanding stock options.





**6.
      WARRANTY RESERVE**





Details
      of the estimated warranty liability included in other accounts payable and
      accrued liabilities are as follows:


**Three
                    Months Ended****June
                    30,****2008**
                
                **2007**$
                
                $Beginning
                    balance
                
                
                109,138
                
                
                40,072Warranty
                    provision
                
                
                10,080
                
                
                44,893Warranty
                    deductions
                
                
                (15,996
                )
                
                (4,712
                )Ending
                    balance
                
                
                103,222
                
                
                80,253




**7.
      PROMISSORY NOTES**





The
      following table summarizes outstanding promissory notes at June 30,
      2008:




**Principal
                      Due****at June
                    30,****2008**
              
              **Less**
                  **Unamortized**
                  **Discount**
              
              **Net****at
                    June
                    30,****2008**
              
              **Long-Term****Portion****Description
                  and Rate**
              
              **Maturity**
              
              $
              
              $
              
              $
              
              $
              
              **Collateral**
              
              **Conversion**18%
                  Secured Promissory Note
              
              Interest
                  monthly, principal at December 23, 2008
              
              400,000
              
              (3,847
              )
              396,153
              
              **—**
              
              Security
                  interest in substantially all assets
              
              Not
                  applicable12%
                  Promissory Note
              
              Principal
                  and interest due April 3, 2009
              
              40,000
              
              (3,627
              )
              36,373
              
              **—**
              
              None
              
              Not
                  applicable7.5%
                  Convertible Term Note
              
              Principal
                  and interest in monthly installments of $30,000 increasing to $50,000
                  per
                  month in December 2008 through maturity in November 2009
              
              704,220
              
              (24,424
              )
              679,796
              
              241,112
              
              None
              
              At
                  $.30 per share at holder option and callable for conversion at
                  market of
                  $0.40 per common share1,144,220
              
              (31,898
              )
              1,112,322
              
              241,112


In
      April
      2008 the Company issued 40,000 shares of common stock as payment of a $4,800
      finance fee on the $40,000 12% promissory note. In June 2008 the Company
      incurred a $4,000 finance fee on a six-month renewal of the $400,000 18% Secured
      Promissory Note after a $50,000 principal reduction. This finance fee is
      expected to be paid by issuing 40,404 shares of common stock. Note financing
      fees paid to the creditor are recorded as a debt discount and amortized over
      the
      term of each note using the interest method.





9


The
      Company has the option, subject to certain limitations, to elect to make
      installment payments on the 7.5%
      Convertible Term Note either in cash or in shares of common stock (“Monthly
      Installment Shares”). Monthly Installment Shares are valued at the arithmetic
      average of the closing prices for the last five trading days of the applicable
      month without discount. Payments must be paid in cash if the computed average
      price is less than $0.10 per share. During the three months ended June 30,
      2008
      the Company made three monthly installment payments aggregating $90,000 through
      the issuance of 811,083 shares of common stock.





**8.
      STOCKHOLDERS’ EQUITY**


The
      following table summarizes stockholders’ equity transactions during the
      three-month period ended June 30, 2008:


**Additional****Preferred
                    stock**
              **Common
                    stock**
              
              **paid-in**
              
              
              **Accumulated****Shares**
              
              
              **Amount**
              
              
              **Shares**
              
              
              **Amount**
              
              
              **capital**
              
              
              **deficit****Balance,
                  March 31, 2008**
              
              
              **-**
              
              
              **-**
              
              
              **272,494,867**
              
              
              **272,495**
              
              
              **80,103,769**
              
              
              **(82,081,588**
              **)**Sale
                  of Series AA preferred stock and warrantsnet
                  of $134,773 recorded as warrant liability (1)
              
              
              75,000
              
              
              615,227
              
              
              **-**
              
              
              **-**
              
              
              -
              
              
              **-**Record
                  $134,773 beneficial conversionrelated
                  to Series AA preferred stock (1)
              
              
              **-**
              
              
              (134,773
              )
              
              **-**
              
              
              **-**
              
              
              134,773
              
              
              **-**Dividends
                  on Series AA preferred stock
              
              
              **-**
              
              
              308
              
              
              
              
              
              
              
              
              (308
              )
              
              **-**Accretion
                  of discount on Series AA preferredstock
                  (1)
              
              
              **-**
              
              
              1,103
              
              
              **-**
              
              
              **-**
              
              
              (1,103
              )
              
              **-**Shares
                  issued for term debt payments
              
              
              **-**
              
              
              **-**
              
              
              811,083
              
              
              811
              
              
              89,189
              
              
              **-**Shares
                  issued for debt financing fees
              
              
              **-**
              
              
              **-**
              
              
              40,000
              
              
              40
              
              
              4,760
              
              
              **-**Proceeds
                  from sale of common stock at an averageprice
                  of $0.107
              
              
              **-**
              
              
              **-**
              
              
              3,181,991
              
              
              3,182
              
              
              336,818
              
              
              **-**Stock-based
                  compensation
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              14,721
              
              
              **-**Loss
                  and comprehensive loss
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              (669,207
              )**Balance,
                  June 30, 2008**
              
              
              **75,000**
              
              
              **481,865**
              
              
              **276,527,941**
              
              
              **276,528**
              
              
              **80,682,619**
              
              
              **(82,750,795**
              **)**





(1)
            The
                $134,773 allocated as the value of detachable warrants and the beneficial
                conversion feature of $134,773 is treated as a discount to the value
                of
                the Series AA preferred stock (see Note 9) and is being accreted
                as a
                deemed dividend over the term of the preferred stock. Due to the
                accumulated deficit this charge is recorded to paid-in capital. This
                charge is also a deemed dividend in determining the net loss attributable
                to common stockholders for the period ended June 30,
                2008.




**Fusion
      Capital Equity Purchase Agreement**


On
      January 2, 2007, the Company entered into an agreement with Fusion Capital
      Fund
      II, LLC (“Fusion”) pursuant to which the Company has the right, subject to
      certain conditions and limitations, to sell to Fusion up to $8.0 million worth
      of additional common stock, at the Company’s election, over a two year period at
      prices determined based upon the market price of the Company’s common stock at
      the time of each sale, without any fixed discount to the market price as defined
      in the agreement. Common stock may be sold in $80,000 increments every fourth
      business day, with additional $100,000 increments available every third business
      day if the market price of the common stock is $0.10 or higher. This $100,000
      increment may be further increased at graduated levels up to $1.0 million if
      the
      market price increases from $0.10 to $0.80. If the price of the stock is below
      $0.08 per share, no sales shall be made under the agreement. During the three
      months ended June 30, 2008, the Company sold 3,181,991 common shares to Fusion
      under the agreement for cash of $340,000. Assuming a purchase price of $0.105
      per share (the closing sale price of the common stock on June 30, 2008) the
      maximum remaining under the common stock purchase agreement was an additional
      $0.58 million. Upon occurrence of certain events of default as defined, Fusion
      may terminate the stock purchase agreement. The Company does not believe a
      default event has occurred and no termination has been noticed by Fusion. The
      Company may terminate the agreement at any time.




Subsequent
      to June 30, 2008 the Company sold 879,121 common shares to Fusion under the
      agreement for cash of $80,000.




10





**Options**


The
      following table summarizes stock option activity for the period:


**Weighted
                    average**
                
                **Weighted**
                
                **Aggregate****Shares**
                
                **exercise
                    price**
                
                **average
                    life**
                
                **intrinsic
                    value (2)**#
                
                **$**
                
                **(years)**
                
                $Outstanding
                    March 31, 2008
                
                
                10,897,167
                
                
                0.16Granted
                
                
                700,000
                
                
                0.11Canceled/expired
                
                
                (1,304,167
                )
                
                0.16Exercised
                
                
                —
                
                
                —Outstanding
                    June 30, 2008 (1)
                
                
                10,293,000
                
                
                0.15
                
                
                2.0
                
                
                22,500Exercisable
                    at June 30, 2008
                
                
                8,748,248
                
                
                0.15
                
                
                1.8
                
                
                22,500






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


(2)
            Aggregate
                intrinsic value is based on the closing price of our common stock
                on June
                30, 2008 of $0.105 and excludes the impact of options that were not
                in-the-money.





**Share
      warrants**


The
      following table summarizes information on warrant activity during the three
      months ended June 30, 2008:


**Shares**
              
              **Weighted
                    average**
                    **exercise
                      price**#
              
              $Outstanding
                  March 31, 2008
              
              
              2,331,572
              
              
              0.15Granted
              
              
              7,500,000
              
              
              0.10Canceled/expired
              
              
              —
              
              
              —Exercised
              
              
              —
              
              
              —Outstanding
                  June 30, 2008
              
              
              9,831,572
              
              
              0.11


The
      Company has outstanding share warrants as of June 30, 2008, as
      follows:


**Description**
                
                **Number
                    of**
                  **Common
                    Shares**
                
                **Exercise
                    Price**
                  **Per
                    Share $**
                
                **Expiration
                    Date**Warrants
                    (1)
                
                
                2,331,572
                
                
                0.15
                
                
                August
                    31, 2009Warrants
                    (2)
                
                
                7,500,000
                
                
                0.10
                
                
                June
                    30, 2011


(1)
            exercise
                price subject to certain antidilution price
                protection.


(2)
            holders
                have certain redemption rights as described in Note
                9.





**9.
      PREFERRED STOCK**


On
      December 30, 2002, the Company issued 205,000 shares of 12% Series D
      non-redeemable convertible preferred stock (the "Series D Stock") with a stated
      value of $10 per share. Dividends of 12% per annum were payable, with certain
      exceptions, either in cash or in shares of common stock at the Company's
      election. The remaining 91,000 shares of Series D Stock and accumulated
      dividends automatically converted to 18,200,000 shares of common stock at $0.08
      per share on December 31, 2007. Dividends accrued during the three months ended
      June 30, 2007 totaled $27,225 and increased the loss attributable to common
      stockholders.





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 are 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
      Series AA Stock has voting rights of ten votes per share and a liquidation
      preference equal to $10.00 per share plus accrued and unpaid dividends. The
      stated value plus accrued dividends on Series AA Stock is convertible into
      common stock at $0.10 per common share with automatic conversion on June 30,
      2010 subject to certain limitations. The Company may call the Series AA Stock
      for conversion if the common stock market price is at least $0.25 per share
      for
      ten consecutive trading days.





11


The
      Series AA Stock was issued for aggregate proceeds of $750,000 including $700,000
      of cash and conversion of $50,000 of vendor debt. Purchasers were also issued
      warrants to purchase an aggregate of 7,500,000 shares of common stock
      exercisable at $0.10 per common share until June 30, 2011 (“Series AA
      Warrants”). One officer/director purchased for $100,000 cash 10,000 shares of
      Series AA Stock and was issued warrants to purchase 1,000,000 shares of common
      stock on the same terms as unaffiliated investors.





At
      the
      holder’s option the Series AA Stock is redeemable at June 30, 2009 should
      sufficient shares of common stock not be authorized and reserved for conversion
      of all shares of Series AA Stock by such date. The cash redemption price shall
      be the greater of (i) $20.00 per share of Series AA Stock plus a sum equal
      to
      all accrued but unpaid dividends, or (ii) the five day average closing price
      immediately preceding June 30, 2009 multiplied by the number of shares of Common
      Stock that could be obtained on conversion of the Series AA Stock. The Series
      AA
      Warrants are also redeemable at June 30, 2009 at the holder’s option should
      sufficient shares of common stock not be authorized and reserved for exercise
      of
      all the warrants by such date. The cash redemption price shall be the greater
      of
      (i) $0.01 per share of common stock underlying the warrants, or (ii) the five
      day average closing price immediately preceding June 30, 2009 multiplied by
      the
      number of shares of common stock that could be obtained on a net exercise basis,
      if any.




The
        proceeds of $750,000 was allocated between the fair value of the Series AA
        Stock
        ($615,227) with the value of the Series AA Warrants ($134,773) treated as
        a
        discount to the Series AA Stock. The Company determined the fair value of
        the
        Series AA Warrants using the Black-Scholes option pricing model with the
        following assumptions: no dividend yield; weighted average risk free rate
        of
        2.93%; volatility of 60.6% and a term of one year. Because the redemption
        event
        is not certain to occur but is outside the Company’s control, the Company
        recorded the portion of the proceeds attributable to the stock as mezzanine
        equity pursuant to EITF Topic D-98, Classification and Measurement of Redeemable
        Securities after determining the guidance in FAS 150, Accounting for Certain
        Financial Instruments with Characteristics of both Liabilities and Equity
        did
        not apply.
 
 Additionally,
        the Company evaluated whether the embedded conversion feature in the preferred
        stock required bifurcation and determined that the economic characteristics
        and
        risks of the embedded conversion feature in the stock were clearly and closely
        related to the stock and concluded that bifurcation was not required under
        SFAS
        133. The Company calculated the intrinsic value of the beneficial conversion
        feature as $134,773 pursuant to the guidance in EITF 00-27, Application of
        Issue
        No. 98-5 to Certain Convertible Instruments. The total discount to the Series
        AA
        Stock of $269,546, consisting of the value of the Series AA Warrants and
        the
        amount of the beneficial conversion feature, is being accreted as a deemed
        dividend over the term of the Series AA Stock. A total of $1,103 of the discount
        was accreted as a deemed dividend for the period ended June 30, 2008 by a
        charge
        to paid-in capital. The deemed dividend is also used in determining the net
        loss
        attributable to common stockholders for the period ended June 30,
        2008.
 
 The
        stated 5% dividend accrues to the carrying value of the Series AA Stock.
        The
        Company has agreed to use its reasonable best efforts to obtain an increase
        in
        its authorized shares and has scheduled a stockholder’s meeting on September 17,
        2008 to vote on an increase in authorized common stock that if approved would
        negate any redemption option on the preferred stock or related warrants.
        Historically the Company has successfully petitioned shareholders on three
        occasions to increase authorized common stock.
  The
        Company determined that the warrants meet the definition of a derivative
        instrument as defined in SFAS 133, Accounting for Derivative Instruments
        and
        Hedging Activities, and should be treated as a liability due to the lack
        of
        sufficient authorized shares of common stock. Accordingly, the Company recorded
        a liability of $134,773 for the value of the warrants. As a derivative liability
        this amount is evaluated for reclassification and if a derivative liability
        adjusted at each reporting period based on the current market price. At June
        30,
        2008 the Company increased the derivative liability to $185,532 recording
        a
        $50,759 non-cash charge in other expense.




12


**10.
      FAIR VALUE MEASUREMENTS**


On
      April
      1, 2008, the Company adopted SFAS No. 157 which defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      SFAS 157 does not require any new fair value measurements, but provides guidance
      on how to measure fair value by providing a fair value hierarchy used to
      classify the source of the information. In February 2008, the FASB deferred
      the
      effective date of SFAS 157 by one year for certain non-financial assets and
      non-financial liabilities, except those that are recognized or disclosed at
      fair
      value in the financial statements on a recurring basis (at least annually).
      The
      Company adopted the provisions of SFAS 157, except as it applies to those
      nonfinancial assets and nonfinancial liabilities for which the effective date
      has been delayed by one year.





SFAS
      No. 157 establishes a three-level valuation hierarchy of valuation
      techniques that is based on observable and unobservable inputs. Classification
      within the hierarchy is determined based on the lowest level of input that
      is
      significant to the fair value measurement. The first two inputs are considered
      observable and the last unobservable, that may be used to measure fair value
      and
      include the following:


Level 1
      - Quoted prices in active markets for identical assets or liabilities.


Level 2
      - Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities; quoted
      prices in markets that are not active; or other inputs that are observable
      or
      can be corroborated by observable market data for substantially the full term
      of
      the assets or liabilities.


Level 3
      - Unobservable inputs that are supported by little or no market activity and
      that are significant to the fair value of the assets or
      liabilities.





As
      of
      June 30, 2008, the Company held certain assets and liabilities that are required
      to be measured at fair value on a recurring basis, including its cash and cash
      equivalents and its derivative instruments related to its Series AA Warrants
      (Note 9). The fair value of these assets and liabilities was determined
      using the following inputs in accordance with SFAS 157 at June 30,
      2008:


**Fair
                  Value Measurement as of June 30, 2008****Total**
              
              **Level
                  1**
              
              **Level
                  2**
              
              **Level
                  3****Description**
              
              
              $
              
              
              $
              
              
              $
              
              
              $Cash
                  and cash equivalents (1)
              
              
              817,814
              
              
              817,814
              
              
              —
              
              
              —Warrant
                  derivative liability (2)
              
              
              185,532
              
              
              —
              
              
              —
              
              
              185,532


(1)
            Included
                in cash and cash equivalents on the accompanying consolidated balance
                sheet.


(2)
            Represents
                Series AA Warrants issued in June 2008 and valued using the income
                approach using the Black-Scholes option pricing model (see Note 9).
                Included as a current liability on the accompanying consolidated
                balance
                sheet.





The
      following table reconciles the warrant derivative liability measured at fair
      value on a recurring basis using significant unobservable inputs (Level 3)
      for
      the quarter ended June 30, 2008:


**Warrant****Derivative****Liability****$**Balance
                  at April 1, 2008
              
              
              —Issuance
                  of warrant derivative (1)
              
              
              134,773Adjustment
                  to fair value included in net loss (2)
              
              
              50,759Balance
                  at June 30, 2008
              
              
              185,532




(1)
            Represents
                Series AA Warrants issued in June 2008 (see Note
                9).


(2)
            The
                warrant derivative liability is revalued at the end of each reporting
                period and the resulting difference is included in the results of
                operations. The June 30, 2008 revaluation resulted in loss of $50,759
                and
                is included in “Other expense” on the accompanying consolidated statement
                of operations.





13


**11.
      COMMITMENTS AND CONTINGENCIES**





**Legal
      Matters**





Business
      Litigation


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





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





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





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





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 will be the Company’s exclusive legal counsel in connection with
      the assertion of the Company’s flash memory related patents against infringers
      (“Patent Enforcement Matters’). ****





14


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





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





**Contract
      Manufacturers and Suppliers**


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





At
      June
      30, 2008 the Company had outstanding unfilled purchase orders and was committed
      to a contract manufacturers and component suppliers for approximately $150,000
      of future deliveries. Purchase commitments for product and components are
      generally subject to modifications as to timing, quantities and scheduling
      and
      in certain instances may be cancelable without penalty.





**Facility
      Lease**


In
      March
      2006 the Company entered into a sixty-two month lease, commencing June 1, 2006,
      for approximately 4,800 square feet with an aggregate payment of $5,805 per
      month excluding utilities and costs. The aggregate payments adjust annually
      with
      maximum aggregate payments totaling $6,535 in the fifty-first through the
      sixty-second month. Future lease commitments aggregated $234,428 at June 30,
      2008.





**Royalties**


In
      connection with a prior note financing, the Company is obligated to pay a
      royalty of $20.00 for each entertainment device sold through December 31, 2008.
      During the three months ended June 30, 2008 and 2007 the Company incurred
      royalties of $3,420 and $18,780, respectively.




**Bank
      and Other Cash Equivalent Deposits in Excess of FDIC**


The
      Company maintains its cash accounts at several financial institutions. Certain
      of these financial institutions do not have Federal Deposit Insurance
      Corporation (“FDIC”) insurance. Those accounts covered by the FDIC are insured
      up to $100,000 per institution. As of June 30, 2008, the amount of bank deposits
      that exceeded or are not covered by the FDIC insurance was approximately
      $865,743.




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


The
      Company operates in one major line of business, the development, manufacture
      and
      marketing of electronic products. Sales to three customer comprised 52%, 16%
      and
      11% of revenue for the three months ended June 30, 2008. Sales to three customer
      comprised 69%, 17% and 12% of revenue for the three months ended June 30,
      2007.




15





**13.
      INCOME TAX**


The
      Company adopted the provisions of FIN 48 on April 1, 2007 and commenced
      analyzing filing positions in the Jurisdictions where we are required to file
      income tax returns. As a result of the implementation of FIN 48, the Company
      recognized no adjustment for uncertain tax provisions and the total amount
      of
      unrecognized tax benefits as of April 1, 2007 was $-0-. The Tax Reform Act
      of
      1986 (the Act) provides pursuant to Internal Revenue Code Sections 382 and
      383
      for a limitation of the annual use of NOL and research and development tax
      credit carryforwards (following certain ownership changes, as defined by the
      Act) that could significantly limit the Company's ability to utilize these
      carryforwards. The Company has experienced various ownership changes as a result
      of past financings and could experience future ownership changes. The Company's
      ability to utilize the aforementioned carryforwards may therefore be
      significantly limited. Additionally, because U.S. tax laws limit the time during
      which these carryforwards may be applied against future taxes, the Company
      may
      not be able to take full advantage of these reduced attributes for federal
      income tax purposes. The Company has not performed an analysis of its deferred
      tax assets for net operating losses or any possible research and development
      credits sufficient to meet the more likely than not threshold required by FIN
      48. Accordingly, the deferred tax assets related to net operating losses and
      the
      offsetting valuation allowance were removed from deferred tax assets at April
      1,
      2007 until such an analysis is documented.




As
      discussed above, as of April 1, 2007, the Company removed its net operating
      losses from deferred tax assets and the offsetting valuation allowance until
      documented by a Section 382 analysis. A full valuation allowance has been
      established to offset the remaining net deferred tax assets at June 30, 2008
      as
      realization of these assets is uncertain. As of June 30, 2008, management
      believes that it is more likely than not that the net deferred tax assets will
      not be realized based on future operations and reversal of deferred tax
      liabilities. Accordingly, the Company has provided a full valuation allowance
      against its net deferred tax assets and no tax benefit has been recognized
      relative to its pretax losses.




16


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





THE
      FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
      COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
      FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON
      A
      VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING,
      "BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
      YEAR
      ENDED MARCH 31, 2008.





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





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





**General**


We
      are a
      holding company incorporated under the laws of Delaware that operates through
      our wholly-owned California subsidiary of the same name. We have innovated
      a
      proprietary secure digital video/audio technology platform ("DVAP") and market
      our eVUTM mobile entertainment device for the travel and recreational industries.
      We also own our Flash-RTM portfolio of patents related to the use of flash memory
      in portable devices and we have commenced activities to license the
      portfolio.





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





Our
      revenue is derived from the sale of DVAP products and accessories to customers,
      warranty and technical support services and content fees and related services.
      We also anticipate that we can obtain license revenue in the future from our
      Flash-R patent portfolio. Our international legal firm Duane Morris LLP is
      handling our patent enforcement matters on a contingent fee basis.





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





**Overall
      Performance and Trends**


We
      have
      incurred significant operating losses and negative cash flow from operations
      in
      the current period and in each of the last three fiscal years and these losses
      have been material. We have an accumulated deficit of $82.8 million and a
      working capital deficit of $1,041,952 at June 30, 2008. Our operating plans
      require additional funds which may take the form of debt or equity financings.
      There can be no assurance that any additional funds will be available to our
      company on satisfactory terms and conditions, if at all. Our company’s ability
      to continue as a going concern is in substantial doubt and is dependent upon
      achieving a profitable level of operations and obtaining additional financing.





17


Management
      has undertaken steps as part of a plan to improve operations with the goal
      of
      sustaining operations for the next twelve months and beyond. These steps include
      (a) expanding sales and marketing to new customers and new markets; (b)
      monetizing the Flash-R patent portfolio; (c) controlling overhead and expenses;
      and (d) raising additional capital and/or obtaining financing. In
      addition to a sale of $750,000 of preferred stock, the Company obtained $340,000
      of equity proceeds pursuant to a common stock purchase agreement with Fusion
      Capital Fund II, LLC (“Fusion”) during the three months ended June 30, 2008. The
      Company may have access to up to $0.58 million of additional funding pursuant
      to
      this agreement (or a maximum of $6.7 million at higher stock prices). Future
      availability under the Fusion agreement is subject to many conditions, some
      of
      which are predicated on events that are not within the Company’s control. There
      can be no assurance this capital resource will be available or be
      sufficient.





For
      the
      quarter ended June 30, 2008:





·
            We
                obtained $750,000 from the sale of convertible preferred stock reported
                in
                our financial statements as mezzanine equity due to a contingent
                redemption feature. We also obtained $340,000 from the sale of common
                stock during the period. We expect that we will need additional financial
                resources during the next twelve months to finance our eVU business
                and
                support our Flash-R patent enforcement and licensing
                activities.





·
            Our
                revenues were $378,000 compared to $1.3 million for the prior year’s first
                quarter. The last year’s first quarter included one large sale to a
                European customer for approximately $760,000. Recent sales activity
                has
                been slow due in part to airline industry economics with airlines
                curtailing expansion and new projects. We are aggressively pursuing
                new
                business for the balance of the fiscal year but our results will
                continue
                to be dependent on the timing and quantity of eVU orders by a limited
                number of customers. We seek to expand and diversify our customer
                base
                both in the IFE space and other markets. The failure to obtain eVU
                orders
                or delays of orders or production delays could have a material adverse
                impact on our operations.





·
            Our
                gross profit for the first quarter was $114,000 or 30% of revenues
                compared to $246,000 or 19% of revenues for the prior year’s first
                quarter. Gross profit margins are highly dependent on prices charged,
                volume of orders and product mix and
                costs.





·
            Operating
                expenses were $686,000 for the first three months of fiscal 2009
                (period
                ended June 30, 2008) a reduction from $751,000 for the comparable
                prior
                year’s period. We have reduced employee count from the prior year and
                focused issues from research and development to sales, marketing
                and
                customer support.





·
            Our
                net loss for the first quarter was $669,000 compared to $593,000
                for the
                comparable period prior. The increased loss was primarily the result
                of
                reduced revenues offset by improved product margins and reduced operating
                costs.





Our
      monthly cash operating costs have been on average approximately $225,000 per
      month for the period ending June 30, 2008. However, we may increase expenditure
      levels in future periods to support and expand our revenue opportunities and
      continue advanced product and technology research and development. Accordingly,
      our losses are expected to continue until such time as we are able to realize
      revenues and margins sufficient to cover our costs of operations. We may also
      face unanticipated technical or manufacturing obstacles and face warranty and
      other risks in our business.





**Critical
      Accounting Policies**


We
      have
      identified a number of accounting policies as critical to our business
      operations and the understanding of our results of operations. These are
      described in 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, 2008. The impact and any associated risks related
      to these policies on our business operations is discussed throughout
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations when such policies affect our reported and expected financial
      results.





The
      methods, estimates and judgments we use in applying our accounting policies,
      in
      conformity with generally accepted accounting principles in the United States,
      have a significant impact on the results we report in our financial statements.
      We base our estimates on historical experience and on various other assumptions
      that we believe to be reasonable under the circumstances. The estimates affect
      the carrying values of assets and liabilities. Actual results may differ from
      these estimates under different assumptions or conditions.





18


The
      following critical accounting policies guided our judgment and estimates used
      in
      accounting for the new issuance of convertible preferred stock in June 2008
      and
      fair value measurements:





Accounting
      for Convertible Preferred Stock


The
      Company accounts for preferred stock subject to provisions for redemption that
      are outside of its control as mezzanine equity in accordance with FAS 150
      "Accounting for Certain Financial Instruments with Characteristics of Both
      Debt
      and Equity," EITF Topic D-98 “ Classification
      and Measurement of Redeemable Securities” and SEC
      Accounting Series Release (ASR) No. 268 “Redeemable Preferred Stocks ,”
and
      is
      shown net of discounts for warrant values and beneficial conversion features.
      These securities are recorded at fair value at the date of issue
      and related discounts are accreted over the term of the
      securities.




The
      Company accounts for redeemable convertible preferred stock and the related
      common stock warrants in accordance with the provisions of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in, a Company's Own Stock,” EITF Issue No. 98-5 “Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios,” EITF Issue No. 00-27 “Application of Issue No.
      98-5 to Certain Convertible Instruments” and other related accounting guidance.
      Pursuant to this guidance, the Company has concluded that the conversion and
      redemption features of the redeemable convertible preferred stock are not
      embedded derivatives that need to be bifurcated from the host instrument and
      separately valued. In addition, the Company has accounted for its detachable
      common stock warrants as a derivative liability in accordance with the guidance
      of EITF 00-19.





Fair
      Value Measurements


The
      Company follows the provisions of SFAS No. 157, “Fair Value Measurements,” or
      SFAS 157, which defines fair value as the price that would be received to sell
      an asset or paid to transfer a liability (i.e., the exit price) in an orderly
      transaction between market participants at the measurement date. In measuring
      fair value, the Company considers the hierarchy for inputs provided in SFAS
      157
      to determine appropriate valuation approaches. Generally, valuations are based
      on quoted market prices for identical assets or liabilities which the Company
      has the ability to access, or for which significant inputs are observable either
      directly or indirectly. To the extent that valuation is based on models or
      inputs that are less observable or unobservable in the market, the determination
      of fair value requires judgment. The Company’s assumptions are set to reflect
      those that market participants would use in pricing the asset or liability
      at
      the measurement date; however, different judgments could yield different
      results. The Company’s valuation pricing models consider time value, volatility
      factors, current market and contractual prices for the underlying financial
      instruments as well as other measurements. Changes in these factors can have
      a
      significant impact on carrying values and results of operations.





19


**Results
      of Operations**




Three
      months ended June 30, 2008 compared to the three months ended June 30,
      2007




Three
                    Months Ended June 30,2008
                
                
                
                
                2007%
                    of
                
                
                
                
                %
                    of
                
                
                ChangeDollars
                
                Revenue
                
                
                Dollars
                
                Revenue
                
                
                Dollars
                
                %Revenues:Product
                    revenues
                
                
                234,298
                
                
                62.0
                %
                
                
                1,189,630
                
                
                91.2
                %
                
                
                (955,332
                )
                
                (80.3
                %)Service
                    revenues
                
                
                143,429
                
                
                38.0
                %
                
                
                115,004
                
                
                8.8
                %
                
                
                28,425
                
                
                24.7
                %377,727
                
                
                100.0
                %
                
                
                1,304,634
                
                
                100.0
                %
                
                
                (926,907
                )
                
                (71.0
                %)Gross
                    Profit:Product
                    gross profit
                
                
                40,814
                
                
                10.8
                %
                
                
                167,780
                
                
                12.9
                %
                
                
                (126,966
                )
                
                (75.7
                %)Service
                    gross profit
                
                
                73,243
                
                
                19.4
                %
                
                
                78,335
                
                
                6.0
                %
                
                
                (5,092
                )
                
                (6.5
                %)114,057
                
                
                30.2
                %
                
                
                246,115
                
                
                18.9
                %
                
                
                (132,058
                )
                
                (53.7
                %)Operating
                    Expenses:Selling
                    and administrative
                
                
                538,895
                
                
                142.7
                %
                
                
                471,097
                
                
                36.1
                %
                
                
                67,798
                
                
                14.4
                %Research
                    and related
                
                
                146,651
                
                
                38.8
                %
                
                
                280,312
                
                
                21.5
                %
                
                
                (133,661
                )
                
                (47.7
                %)685,546
                
                
                181.5
                %
                
                
                751,409
                
                
                57.6
                %
                
                
                (65,863
                )
                
                (8.8
                %)Other
                    expenses
                
                
                (97,718
                )
                
                (25.9
                %)
                
                
                (88,112
                )
                
                (6.8
                %)
                
                
                (9,606
                )
                
                10.9
                %Loss
                    and comprehensive loss
                
                
                (669,207
                )
                
                (177.2
                %)
                
                
                (593,406
                )
                
                (45.5
                %)
                
                
                (75,801
                )
                
                12.8
                %




*Loss
      and Comprehensive Loss*


We
      showed
      a net loss of $669,207 for the three months ended June 30, 2008 compared to
      a
      loss of $593,406 for the comparable period of the prior year. The $75,801
      increase in the net loss was the result of reduced revenues offset by reduced
      operating costs.





*Revenues*


Revenues
      of $377,727 in the first quarter of fiscal 2009 compared to $1,304,634 for
      the
      comparable prior period. During the prior year’s third quarter we introduced our
      new eVU product. Product revenues in the most recent quarter were $234,298
      from
      selling eVU players and related equipment for use by airline customers. Service
      revenues for the third quarter were $143,429. These revenues are from content
      and support services provided to airline customers. The
      prior
      year results included the recognition of one large European order for $760,000.
      Recent sales activity has been slow due in part to airline industry economics
      with airlines curtailing expansion and new projects. We are aggressively
      pursuing new business for the balance of the fiscal year but our results will
      continue to be dependent on the timing and quantity of eVU orders by a limited
      number of customers.





*Gross
      Profit*


Gross
      profit for the first quarter of fiscal 2009 was $114,057 or 30.2% of revenues.
      The gross profit for the prior year’s first quarter was 18.9%. The improved
      gross margin percentage resulted from a higher percentage of content services
      and improved unit costing since the prior year. Gross profit margins are highly
      dependent on prices charged, volume of orders and product mix and
      costs.





*Operating
      Expenses*


Selling
      and administrative costs for the three months ended June 30, 2008, was $538,895
      compared to $471,097 for the first quarter of fiscal 2008. The increase was
      due
      to patent research and consulting costs and increased personnel costs to support
      increased focus on sales and marketing activities.





20


Research
      and related expenditures for the three months ended June 30, 2008 were $146,651,
      as compared
      to $280,312 for the three months ended June 30, 2007. The decrease resulted
      primarily to reassigning engineers and technicians to customer support and
      service roles during the most recent quarter compared to the prior
      year.





*Other
      Expenses*


Net
      other
      expenses were $97,718 for the first quarter. Other income of $5,055 consisted
      primarily of foreign exchange gains. Other expenses included interest of
      $48,594, of which $28,344 was non-cash interest, $50,759 from revaluation of
      our
      warrant derivative liability and $3,420 of financing royalties. We reported
      interest expense of $68,672 for the three months ended June 30, 2007 including
      non-cash interest of $34,433 and other expenses of $19,599 including financing
      royalties of $18,780.





*Loss
      Attributable to Common Stockholders*


The
      loss
      attributable to common stockholders included the net loss for each period plus
      accrued and deemed dividends on convertible preferred stock of $1,411 and
      $27,225 for the three months ended June 30, 2008 and 2007,
      respectively.





**Liquidity
      and Capital Resources**


At
      June
      30, 2008, we had a working capital deficit of $1,041,952 compared to a
      working capital deficit of $1.3 million at March 31, 2008. At June 30, 2008
      we
      had cash on hand of $817,814.





*Operating
      Activities*


Cash
      used
      in operating activities of $334,302 for the three months period ended June
      30,
      2008 included the
      $669,207 loss decreased by non-cash expenses of $107,011. Other major components
      providing operating cash was a decrease in accounts receivable of $70,675 and
      an
      increase of $284,327 in accounts payable. Components using operating cash
      included an increase of $56,663 in inventory and a decrease of $48,721 in other
      accounts payable and accrued liabilities. We have negotiated terms with our
      contract suppliers reducing advance production payments required prior to
      product delivery. Our terms to customers vary but we often require payment
      prior
      to shipment of product and any such payments are recorded as deposits. We expect
      certain airline customers to demand commercial terms such as 30 or 60 days
      in
      the future and this could increase our need for working capital.





Cash
      used
      in operating activities during the three months ended June 30, 2007 was
      $269,752. Individual working capital components can change dramatically from
      quarter to quarter due to timing of sales and shipments and corresponding
      receivable, inventory and payable balances. Accordingly operating cash
      requirements vary significantly from period to period.





*Investing
      Activities*


The
      Company’s efforts are primarily on operations and currently we have no
      significant investing capital needs. We have no commitments requiring investment
      capital.





*Financing
      Activities*


For
      the
      three months ended June 30, 2008, cash provided by financing activities was $1,030,000.
      This included $340,000 from
      the
      sale of common stock to Fusion pursuant to our purchase agreement and $700,000
      cash from the sale of preferred stock. We reduced our secured note balance
      by
      $50,000 and obtained $40,000 in July 2008 from a new one year note. During
      the
      first three months of the prior year we obtained $320,000 from the sale of
      common stock to Fusion.





*Debt
      and Other Commitments*


We
      currently have a secured note for $400,000 due on December 23, 2008, an
      unsecured note for $40,000 due in July 2009 and an unsecured convertible term
      debt with a principal amount of $704,220. We made $90,000 of term note principal
      and interest payments through the issuance of common shares during the first
      three months. Our plans are to make future principal and interest payments
      with
      shares of common stock, subject to maintaining the $0.10 minimum share price
      and
      other covenants of the term loan.





21


At
      June
      30, 2008 we were committed to approximately $150,000 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 and for royalties on eVU product sales
      as
      more fully described in Note 10 to our interim consolidated financial
      statements.





Should
      the optional redemption related to our Series AA Stock be triggered effective
      June 30, 2009 due to insufficient shares of common stock being available, we
      could be obligated for a minimum cash redemption of $1,612,500 for the preferred
      stock and warrants or more depending on the common stock price.





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





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





*Cash
      Requirements*


Other
      than cash on hand, accounts receivable and the Fusion Capital financing
      commitment, we have no material unused sources of liquidity at this time. Based
      on our cash position at June 30, 2008 assuming (a) continuation of existing
      business, and (b) current planned expenditures and level of operation, we
      believe we will require approximately $1.5 million of additional capital
      resources for the next twelve months. Actual results could differ significantly
      from management plans. We believe we may be able to obtain additional funds
      from
      future product margins from increased product sales but actual future margins
      to
      be realized, if any, and the timing of shipments and the amount and quantities
      of shipments, orders and reorders are subject to many factors and risks, many
      outside our control. Accordingly we will need equity or debt financing in the
      next twelve months for working capital and we may need equity or debt financing
      for payment of existing debt obligations and other obligations.





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





In
      the
      future, if our operations increase significantly, we may require additional
      funds. We also may require additional capital to meet our debt and other
      commitments, finance future developments, acquisitions or expansion of
      facilities. 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)
      required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of June 30, 2008,
      our President (“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 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.





22


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, 2008. 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, 2008, there were
      material weaknesses in our internal control over financial reporting. The
      material weaknesses identified during management's assessment were (i) the
      lack
      of independent oversight by an audit committee of independent members of the
      Board of Directors, and (ii) ineffective controls over the period ending closing
      process that failed to identify a misclassification of supplier material
      transfers during the second and third quarter of fiscal 2008. In light of these
      material weaknesses, management concluded that, as of March 31, 2008, 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





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.





The
      interim consolidated financial statements as of and for the period ended June
      30, 2008 include all adjustments identified as a result of the evaluation
      performed.





**CHANGES
      IN INTERNAL CONTROL OVER FINANCIAL REPORTING**


As
      of
      June 30, 2008 we are in the process of remediating the second material weakness
      identified above which existed at March 31, 2008 by improving our period ending
      closing process. Due to our small size and limited financial resources we rely
      on part-time personnel to assist in the closing process with limited but period
      to period growing knowledge of daily operations. Also due to our size and
      limited resources it is difficult to attract qualified independent directors
      and
      qualified audit committee members. Management has concluded that with certain
      management oversight controls that are in place, the risks associated with
      the
      use of part-time personnel in the closing process and the lack of independent
      audit committee oversight are not sufficient to justify the costs of adding
      personnel, additional directors and independent audit committee members at
      this
      time. Management will periodically reevaluate this situation. If we secure
      sufficient capital or improve our operating results it is our intention to
      hire
      additional full-time accounting and reporting personnel and change the
      composition and/or size of the Board of Directors with emphasis on recruiting
      qualified independent audit committee members. We plan to be testing and
      re-evaluating our controls periodically during fiscal 2009.





Other
      than described above there were no changes in our internal controls over
      financial reporting that could significantly affect internal controls over
      financial reporting during the quarter ended June 30, 2008.





**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





Business
      Litigation


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





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





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





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





Intellectual
      Property Litigation


In
      March
      2008, we filed a complaint against Avid Technology, Casio America, LG
      Electronics USA, Nikon, Olympus America, Samsung Electronics America, and Sanyo
      North America in the U.S. District Court for the Eastern District of Texas
      asserting that products made by the listed 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. In September 2007 we filed a similar suit in
      the
      same jurisdiction against Vivitar, a wholly-owned subsidiary of Syntax-Brillian.
      We intend to pursue our claims vigorously but the litigation is in the early
      stage and there is no assurance of recovery. Although most fees, costs and
      expenses of the litigation are covered under our contingent fee 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)
              The following common shares were issued during
                the fiscal
                quarter and not previously reported in a Quarterly Report on Form
                10-Q or
                Current Report on Form 8-K: NONE (b)
              NONE
 (c)
              NONE




**Item
      3. Defaults Upon Senior Securities**


NONE





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


NONE





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**Item
      5. Other Information**


(a)
      NONE


(b)
      NONE





**Item
      6. Exhibits**


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





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





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








**SIGNATURES**





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




e.DIGITAL
              CORPORATIONDate:August
              14, 2008
            By:
            /s/ ROBERT
              PUTNAMRobert
                Putnam, Interim Chief Accounting Officer
              (Principal
                Accounting and Financial Officerand
                duly authorized to sign on behalf of the
                Registrant)




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