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, 2009





Commission
File Number 0-20734





e.Digital
Corporation


(Exact
name of registrant as specified in its charter)








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





(858)
304-3016


(Registrant’s
telephone number, including area code)





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    ̈ Yes    ̈ No  (not
required)





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      Accelerated Filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈ (Do not check if a smaller
      reporting company)
              Smaller
      reporting company x





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





As of
August 10, 2009 a total of 284,834,758 shares of the Registrant’s Common Stock,
par value $0.001, were issued and outstanding.





e.DIGITAL
CORPORATION





INDEX




PagePART
      I. FINANCIAL INFORMATIONItem
      1.
                                        Financial
      Statements (unaudited):Consolidated
      Balance Sheets as of June 30, 2009and
      March 31, 2009
                                        3Consolidated
      Statements of Operations for the threemonths
      ended June 30, 2009 and 2008
                                        4Consolidated
      Statements of Cash Flows for the threemonths
      ended June 30, 2009 and 2008
                                        5Notes
      to Interim Consolidated Financial Statements
                                        6Item
      2.
                                        Management's
      Discussion and Analysis of FinancialCondition
      and Results of Operations
                                        14Item
      4.
                                        Controls
      and Procedures
                                        18PART
      II. OTHER INFORMATIONItem
      1.
                                        Legal
      Proceedings
                                        19Item
      2.
                                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                                        20Item
      3.
                                        Defaults
      Upon Senior Securities
                                        20Item
      4.
                                        Submission
      of Matters to a Vote of Security Holders
                                        20Item
      5.
                                        Other
      Information
                                        20Item
      6.
                                        Exhibits
                                        20SIGNATURES
                                        21


2





e.Digital
Corporation and subsidiary





CONSOLIDATED
BALANCE SHEETS





June 30,2009
                                        
                                        
                                        March 31,(Unaudited)
                                        
                                        
                                        2009$
                                        
                                        
                                        
                                        $ASSETSCurrentCash
      and cash equivalents
                                        
                                        
                                        3,073,779
                                        
                                        
                                        
                                        3,813,990Accounts
      receivable
                                        
                                        
                                        218,539
                                        
                                        
                                        
                                        93,771Inventory
                                        
                                        
                                        519,327
                                        
                                        
                                        
                                        517,163Deposits
      and prepaid expenses
                                        
                                        
                                        31,196
                                        
                                        
                                        
                                        26,108Total
      current assets
                                        
                                        
                                        3,842,841
                                        
                                        
                                        
                                        4,451,032Property,
      equipment and intangibles, net of accumulated depreciationand
      amortization of $170,506 and $165,449, respectively
                                        
                                        
                                        21,581
                                        
                                        
                                        
                                        26,638Total
      assets
                                        
                                        
                                        3,864,422
                                        
                                        
                                        
                                        4,477,670LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrentAccounts
      payable, trade
                                        
                                        
                                        356,820
                                        
                                        
                                        
                                        202,900Accrued
      and other liabilities
                                        
                                        
                                        385,958
                                        
                                        
                                        
                                        589,814Current
      maturity of convertible term note, net of $2,489 and $6,141 of debt
      discount
                                        
                                        
                                        241,112
                                        
                                        
                                        
                                        381,093Total
      current liabilities
                                        
                                        
                                        983,890
                                        
                                        
                                        
                                        1,173,807Deferred
      revenue - long term
                                        
                                        
                                        8,000
                                        
                                        
                                        
                                        24,000Total
      long-term liabilities
                                        
                                        
                                        8,000
                                        
                                        
                                        
                                        24,000Total
      liabilities
                                        
                                        
                                        991,890
                                        
                                        
                                        
                                        1,197,807Commitments
      and ContingenciesStockholders'
      equityPreferred
      stock, $0.001 par value; 5,000,000 shares authorizedSeries
      AA Convertible Preferred stock, $0.001 par value, 100,000shares designated: 75,000 and 75,000 issued and outstanding,
      respectivelyLiquidation
      preference of $787,808 and $778,459, respectively
                                        
                                        
                                        653,587
                                        
                                        
                                        
                                        610,774Common
      stock, $0.001 par value, authorized 350,000,000,283,320,838
      and 282,124,564 shares issued and outstanding,
respectively
                                        
                                        
                                        283,321
                                        
                                        
                                        
                                        282,125Additional
      paid-in capital
                                        
                                        
                                        81,652,302
                                        
                                        
                                        
                                        81,534,566Accumulated
      deficit
                                        
                                        
                                        (79,716,678
                                        )
                                        
                                        
                                        (79,147,602
                                        )Total
      stockholders' equity
                                        
                                        
                                        2,872,532
                                        
                                        
                                        
                                        3,279,863Total
      liabilities and stockholders' equity
                                        
                                        
                                        3,864,422
                                        
                                        
                                        
                                        4,477,670


See notes
to interim consolidated financial statements


3





e.Digital
Corporation and subsidiary





CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





For the three months endedJune 302009
                              
                              
                              2008Revenues:
                              
                              $
                              
                              
                              
                              $Products
                              
                              
                              14,075
                              
                              
                              
                              234,298Services
                              
                              
                              208,955
                              
                              
                              
                              143,429Patent
      license
                              
                              
                              -
                              
                              
                              
                              -223,030
                              
                              
                              
                              377,727Cost
      of revenues:Products
                              
                              
                              49,004
                              
                              
                              
                              193,484Services
                              
                              
                              71,974
                              
                              
                              
                              70,186Patent
      license
                              
                              
                              -
                              
                              
                              
                              -120,978
                              
                              
                              
                              263,670Gross
      profit
                              
                              
                              102,052
                              
                              
                              
                              114,057Operating
      expenses:Selling
      and administrative
                              
                              
                              576,672
                              
                              
                              
                              538,895Research
      and related expenditures
                              
                              
                              79,581
                              
                              
                              
                              146,651Total
      operating expenses
                              
                              
                              656,253
                              
                              
                              
                              685,546Operating
      loss
                              
                              
                              (554,201
                              )
                              
                              
                              (571,489
                              )Other
      income (expense):Interest
      and other income
                              
                              
                              -
                              
                              
                              
                              5,055Interest
      expense
                              
                              
                              (10,047
                              )
                              
                              
                              (48,594
                              )Warrant
      and other finance expenses
                              
                              
                              (4,828
                              )
                              
                              
                              (54,179
                              )Other
      expense
                              
                              
                              (14,875
                              )
                              
                              
                              (97,718
                              )Loss
      before provision for income taxes
                              
                              
                              (569,076
                              )
                              
                              
                              (669,207
                              )Provision
      for income taxes
                              
                              
                              -
                              
                              
                              
                              -Loss
      for the period
                              
                              
                              (569,076
                              )
                              
                              
                              (669,207
                              )Accrued
      and deemed dividends on preferred stock
                              
                              
                              (42,813
                              )
                              
                              
                              (1,411
                              )Loss
      attributable to common stockholders
                              
                              
                              (611,889
                              )
                              
                              
                              (670,618
                              )Loss
      per common share - basic and diluted
                              
                              $
                              (0.00
                              )
                              
                              $
                              (0.00
                              )Weighted
      average common shares outstanding
                              
                              
                              282,507,374
                              
                              
                              
                              274,497,647


See notes
to interim consolidated financial statements


4





e.Digital
Corporation and subsidiary





CONSOLIDATED
STATEMENTS OF CASH FLOWS


[See
Note 1 - Nature of Operations and Basis of Presentation]





For
      the three months endedJune
      302009
                              
                              
                              2008$
                              
                              
                              
                              $OPERATING
      ACTIVITIESLoss
      for the period
                              
                              
                              (569,076
                              )
                              
                              
                              (669,207
                              )Adjustments
      to reconcile loss to net cash used in operating
activities:Depreciation
      and amortization
                              
                              
                              5,057
                              
                              
                              
                              4,280Accretion
      related to promissory notes
                              
                              
                              3,652
                              
                              
                              
                              13,016Warrant
      modification and warrant derivative revaluation
                              
                              
                              -
                              
                              
                              
                              50,759Interest
      paid with common stock
                              
                              
                              6,367
                              
                              
                              
                              14,155Warranty
      provision
                              
                              
                              11,872
                              
                              
                              
                              10,080Stock-based
      compensation
                              
                              
                              11,745
                              
                              
                              
                              14,721Changes
      in assets and liabilities:Accounts
      receivable, trade
                              
                              
                              (124,768
                              )
                              
                              
                              70,675Inventories
                              
                              
                              (2,164
                              )
                              
                              
                              (56,663
                              )Prepaid
      expenses and other
                              
                              
                              (5,088
                              )
                              
                              
                              (1,356
                              )Accounts
      payable, trade
                              
                              
                              153,920
                              
                              
                              
                              284,327Accrued
      and other liabilities
                              
                              
                              (193,080
                              )
                              
                              
                              (48,721
                              )Accrued
      employee benefits
                              
                              
                              (21,168
                              )
                              
                              
                              5,128Warranty
      reserve
                              
                              
                              (9,889
                              )
                              
                              
                              (15,996
                              )Deferred
      revenue
                              
                              
                              (7,591
                              )
                              
                              
                              (9,500
                              )Cash
      used in operating activities
                              
                              
                              (740,211
                              )
                              
                              
                              (334,302
                              )FINANCING
      ACTIVITIESProceeds
      from sale of common stock
                              
                              
                              -
                              
                              
                              
                              340,000Proceeds
      from sale of preferred stock
                              
                              
                              -
                              
                              
                              
                              700,000Payments
      on secured promissory note
                              
                              
                              -
                              
                              
                              
                              (50,000
                              )Proceeds
      from unsecured promissory note
                              
                              
                              -
                              
                              
                              
                              40,000Cash
      provided by financing activities
                              
                              
                              -
                              
                              
                              
                              1,030,000Net
      increase (decrease) in cash and cash equivalents
                              
                              
                              (740,211
                              )
                              
                              
                              695,698Cash
      and cash equivalents, beginning of period
                              
                              
                              3,813,990
                              
                              
                              
                              122,116Cash
      and cash equivalents, end of period
                              
                              
                              3,073,779
                              
                              
                              
                              817,814Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                              
                              
                              28
                              
                              
                              
                              20,250Cash
      paid for taxes
                              
                              
                              160,000
                              
                              
                              
                              -Supplemental
      schedule of noncash investing and financing activities:Accounts
      payable exchanged for preferred stock
                              
                              
                              -
                              
                              
                              
                              50,000Accrued
      and deemed dividends on preferred stock
                              
                              
                              42,813
                              
                              
                              
                              1,411Term
      note payments paid in common stock
                              
                              
                              150,000
                              
                              
                              
                              90,000Financing
      fees paid in common stock
                              
                              
                              -
                              
                              
                              
                              4,800


See
accompanying notes to 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 obtains revenue from
licensing its Flash-RTM portfolio of patents related to the use of flash memory
in portable devices.





Unaudited Interim Financial
Statements


These
unaudited consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States
and with the instructions to Form 10-Q and Article 10 of Regulation S-X on a
going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future. These interim consolidated financial statements do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, the unaudited consolidated financial statements reflect all
adjustments considered necessary for a fair statement of the Company's financial
position at June 30, 2009, and the results of its operations and cash flows for
the periods presented, consisting only of normal and recurring adjustments. All
significant intercompany transactions have been eliminated in consolidation.
Operating results for the three months ended June 30, 2009 are not necessarily
indicative of the results that may be expected for the fiscal year ending March
31, 2010. For further information, refer to the Company's consolidated financial
statements and footnotes thereto for the year ended March 31, 2009 filed on Form
10-K.





Going
Concern


Until the
fiscal year ended March 31, 2009 (fiscal 2009), the Company incurred significant
losses and negative cash flow from operations and has an accumulated deficit of
$79,716,678 at June 30, 2009. The Company’s profitability for the prior year
resulted from one-time patent licensing revenues and there is no assurance of
future licensing revenues from new licensees. Accordingly, the Company could
continue to incur losses in the future until product, service and/or licensing
revenues are sufficient to sustain continued profitability. Until the Company
can demonstrate sustained profitability its ability to continue as a going
concern is in doubt and may be dependent upon obtaining additional financing in
the future. These consolidated financial statements do not give effect to any
adjustments 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 financial
statements.





Estimates


The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from
those estimates.





2.
RECENT ACCOUNTING PRONOUNCEMENTS


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 No. 141R retains the fundamental
requirements in SFAS No. 141 that the acquisition method of accounting (which
SFAS No. 141 called the purchase method) be used for
all business combinations and for an acquirer to be identified for each business
combination. SFAS No. 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.


6


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 are applied prospectively upon adoption except for the presentation and
disclosure requirements which are applied retrospectively. The Company has no
non-controlling interests and accordingly the adoption of SFAS 160 on April 1,
2009 did not have a material impact on the Company’s 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 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 currently has no
derivatives or hedging activities and the adoption of SFAS 161on April 1, 2009
did not have a material impact on the Company’s consolidated financial
statements.





In
November 2007, the EITF issued EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property”. Companies may enter into arrangements with other
companies to jointly develop, manufacture, distribute, and market a product.
Often the activities associated with these arrangements are conducted by the
collaborators without the creation of a separate legal entity (that is, the
arrangement is operated as a “virtual joint venture”). The arrangements
generally provide that the collaborators will share, based on contractually
defined calculations, the profits or losses from the associated activities.
Periodically, the collaborators share financial information related to product
revenues generated (if any) and costs incurred that may trigger a sharing
payment for the combined profits or losses. The consensus requires collaborators
in such an arrangement to present the result of activities for which they act as
the principal on a gross basis and report any payments received from (made to)
other collaborators based on other applicable GAAP or, in the absence of other
applicable GAAP, based on analogy to authoritative accounting literature or a
reasonable, rational, and consistently applied accounting policy election. EITF
Issue No. 07-1 is effective for collaborative arrangements in place at the
beginning of the annual period beginning after December 15, 2008. The Company
does not have any such collaborative arrangements and the adoption of EITF Issue
No. 07-1 on April 1, 2009 did not have a material impact on the Company’s
consolidated financial statements.





In June
2008, the FASB issued Emerging Issues Task Force No. 07-5 (“EITF 07-5”),
“Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock”.  EITF 07-5 requires entities to evaluate whether
an equity-linked financial instrument (or embedded feature) is indexed to its
own stock by assessing the instrument’s contingent exercise provisions and
settlement provisions.  Instruments not indexed to their own stock
fail to meet the scope exception of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph
11(a), and should be classified as a liability and
marked-to-market.  The statement is effective for fiscal years
beginning after December 15, 2008 and is to be applied to outstanding
instruments upon adoption with the cumulative effect of the change in accounting
principle recognized as an adjustment to the opening balance of retained
earnings.  The Company evaluated its various convertible securities
and determined that no change in accounting was required related to this EITF at
April 1, 2009 or for the period ended June 30, 2009.





In April
2009, the Financial Accounting Standards Board (“FASB”) issued FASB staff
position FAS No. 107-1, “Interim Disclosures About Fair Value of Financial
Instruments” (“FSP SFAS No. 107-1”). FSP SFAS No. 107-1 amends SFAS No. 107,
“Disclosures about Fair Value of Financial Instruments”, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. FSP SFAS
No. 107-1 also amends APB Opinion No. 28, “Interim Financial Reporting”, to
require those disclosures in summarized financial information at interim
reporting periods. This Statement became effective for interim and annual
reporting periods ending after June 15, 2009. The implementation of this
Statement did not have a material impact on the Company’s consolidated financial
position, results of operation or cash flows.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. SFAS 165 was effective for fiscal years and interim
periods ending after June 15, 2009. The implementation of this standard did not
have a material impact on the Company’s consolidated financial statements. (See
Note 14).


7


In June
2009, the FASB confirmed that the FASB Accounting Standards Codification (the
"Codification") will become the single official source of authoritative US GAAP
(other than guidance issued by the SEC), superseding existing FASB, American
Institute of Certified Public Accountants, Emerging Issues Task Force ("EITF"),
and related literature. After that date, only one level of authoritative US GAAP
will exist. All other literature will be considered non-authoritative. The
Codification does not change US GAAP; instead, it introduces a new structure
that is organized in an easily accessible, user-friendly online research system.
The Codification becomes effective for interim and annual periods ending on or
after September 15, 2009. The Company will apply the Codification beginning in
the second quarter of fiscal 2010.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants, and
the United States Securities and Exchange Commission are not expected by
management to have a material impact on future consolidated financial
statements.





3.
LOSS PER SHARE


Stock
options, warrants and convertible preferred stock and debt exercisable into
26,572,157 shares and 29,975,052 of common stock were outstanding as at June 30,
2009 and 2008, respectively. 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.




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 31,2009
                                      
                                      
                                      2009$
                                      
                                      
                                      $Raw
      materials
                                      
                                      
                                      45,504
                                      
                                      
                                      
                                      35,330Work
      in process
                                      
                                      
                                      313,800
                                      
                                      
                                      
                                      316,734Finished
      goods
                                      
                                      
                                      160,023
                                      
                                      
                                      
                                      165,099519,327
                                      
                                      
                                      
                                      517,163





5.
STOCK-BASED COMPENSATION COSTS


The
Company accounts for stock-based compensation under the provisions of SFAS 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, the Company estimates
forfeitures for stock-based awards that are not expected to vest. The Company
recorded stock-based compensation of $11,745 and $14,721as selling and administrative costs during the three months
ended June 30, 2009 and 2008, respectively.





As of
June 30, 2009 total estimated compensation cost of stock options granted but not
yet vested was $27,547 and is expected to be recognized over the weighted
average period of 1.3 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,
2009 and 2008 (annualized percentages). No options were granted for the most
recent period.


8





Three
      Months EndedJune
      30,2009
                    
                    
                    2008Volatility
                    
                    
                    -
                    
                    
                    
                    70.5
                    %Risk-free
      interest rate
                    
                    
                    -
                    
                    
                    
                    2.5
                    %Forfeiture
      rate
                    
                    
                    -
                    
                    
                    
                    0.0
                    %Dividend
      yield
                    
                    
                    -
                    
                    
                    
                    0.0
                    %Expected
      life in years
                    
                    
                    -
                    
                    
                    
                    3.5Weighted-average
      fair value of options granted
                    
                    
                    -
                    
                    
                    $
                    0.06





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,
                                        
                                        2009
                                        
                                        
                                        2008$
                                        
                                        
                                        
                                        $Beginning
      balance
                                        
                                        
                                        14,155
                                        
                                        
                                        
                                        109,138Warranty
      provision
                                        
                                        
                                        11,872
                                        
                                        
                                        
                                        10,080Warranty deductions
                                        
                                        
                                        (9,889
                                        )
                                        
                                        
                                        (15,996
                                        )Ending balance
                                        
                                        
                                        16,138
                                        
                                        
                                        
                                        103,222





7.
PROMISSORY NOTE


The
Company has the option, subject to certain limitations, to elect to make monthly
$50,000 installment payments on the 7.5% Convertible Subordinated 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, 2009 the Company made the
three monthly installment payments aggregating $150,000 through the issuance of
1,196,274 shares of common stock. Subsequent to June 30, 2009 the Company made
the July 2009 note payment through the issuance of 458,715 shares of common
stock.





8.
STOCKHOLDERS’ EQUITY


The
following table summarizes stockholders’ equity transactions during the
three-month period ended June 30, 2009:





Preferred stock
                                        
                                        
                                        Common stock
                                        
                                        
                                        Additional
                                        
                                        
                                        AccumulatedAmount
                                        
                                        
                                        Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        paid-in capital
                                        
                                        
                                        deficit
                                        
                                        
                                        TotalBalance,
      March 31, 2009
                                        
                                        
                                        610,774
                                        
                                        
                                        
                                        282,124,564
                                        
                                        
                                        
                                        282,125
                                        
                                        
                                        
                                        81,534,566
                                        
                                        
                                        
                                        (79,147,602
                                        )
                                        
                                        
                                        3,279,863Dividends
      on Series AA preferred stock
                                        
                                        
                                        9,349
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (9,349
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Accretion
      of discount on Series AA preferredstock
                                        
                                        
                                        33,464
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (33,464
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Shares
      issued for term debt payments
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,196,274
                                        
                                        
                                        
                                        1,196
                                        
                                        
                                        
                                        148,804
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        150,000Stock-based
      compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        11,745
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        11,745Loss
      and comprehensive loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (569,076
                                        )
                                        
                                        
                                        (569,076
                                        )Balance,
      June 30, 2009
                                        
                                        
                                        653,587
                                        
                                        
                                        
                                        283,320,838
                                        
                                        
                                        
                                        283,321
                                        
                                        
                                        
                                        81,652,302
                                        
                                        
                                        
                                        (79,716,678
                                        )
                                        
                                        
                                        2,872,532


9





Options


The
following table summarizes stock option activity for the period:





Weighted average
                  
                  
                  AggregateShares
                  
                  
                  exercise price
                  
                  
                  Intrinsic Value#
                  
                  
                  
                  $
                  
                  
                  
                  $Outstanding
      March 31, 2009
                  
                  
                  8,050,500
                  
                  
                  
                  0.16Granted
                  
                  
                  -Exercised
                  
                  
                  -Canceled/expired
                  
                  
                  -Outstanding
      June 30, 2009
                  
                  
                  8,050,500
                  
                  
                  
                  0.16
                  
                  
                  
                  4,000Exercisable
      at June 30, 2009
                  
                  
                  6,829,665
                  
                  
                  
                  0.16
                  
                  
                  
                  1,333





(1)
            Options
      outstanding are exercisable at prices ranging from $0.09 to $0.28 and
      expire over the period from 2009 to
2013.


(2)
            Aggregate
      intrinsic value is based on the closing price of our common stock on June
      30, 2009 of $0.115 and excludes the impact of options that were not
      in-the-money.





Share
warrants


No
warrants were issued and none were cancelled, expired or exercised during the
three months ended June 30, 2009. The Company has outstanding share warrants as
of June 30, 2009, as follows:





Number of
                                                          
                                                          Exercise PriceDescription
                                                          
                                                          Common Shares
                                                          
                                                          Per Share $
                                                          
                                                          Expiration DateWarrants
                                                          
                                                          2,331,572
                                                          
                                                          0.15
                                                          
                                                          August
      31, 2009Warrants
                                                          
                                                          7,500,000
                                                          
                                                          0.10
                                                          
                                                          June
      30, 20119,831,572





9.
PREFERRED STOCK


On June
27, 2008 the Company issued 75,000 shares of 5% Series AA Convertible Preferred
Stock (the “Series AA Stock”) with a stated value of $10 per share. Dividends of
5% per annum 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.





The loss
attributable to common stockholders was increased by accrued and deemed
dividends on the Series AA Stock  during the three months ended June
30, 2009 and 2008 of $42,813 and $1,411, respectively.





Subsequent
to June 30, 2009 the Company issued 1,055,205 shares of common stock upon the
conversion of 10,000 shares of Series AA Stock.





10.
FAIR VALUE MEASUREMENTS


The
carrying amounts of cash and cash equivalents, accounts receivables, accounts
payable, accrued liabilities and convertible term debtapproximate their
fair values due to the short-term maturities of these instruments.





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.


10


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, 2009, 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. The fair value of these assets and liabilities was determined using
the following inputs in accordance with SFAS 157 at June 30, 2009:





Fair Value Measurement as of June 30, 2009Total
                            
                            
                            Level 1
                            
                            
                            Level 2
                            
                            
                            Level 3Description
                            
                            
                            $
                            
                            
                            
                            $
                            
                            
                            
                            $
                            
                            
                            
                            $Cash
      and cash equivalents (1)
                            
                            
                            3,073,779
                            
                            
                            
                            3,073,779
                            
                            
                            
                            -
                            
                            
                            
                            -





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





11.
SEGMENT INFORMATION


SFAS No.
131, “Disclosures About Segments of an Enterprise and Related Information,”
(“SFAS No. 131”) provides annual
and interim reporting standards for an enterprise’s business segments and
related disclosures about its products, services, geographical areas and major
customers. With the inception of patent license revenue in the current year, the
Company determined that it has two operating segments: (1) products and services
and (2) patent licensing. Products and services consist of sales of the
Company’s electronic eVU mobile entertainment device and related content
services and patent licensing consists of intellectual property revenues from
the Flash-R patent portfolio.




Accounting
policies for each of the operating segments are the same as on a consolidated
basis. The Company had no licensing revenues or expenses for the three months
ended June 30, 2009 or 2008.




Our
reportable segment information for the three months ended June 30, 2009 and 2008
is as follows:





Three
      months ended June 30,
                                      
                                      2009
                                      
                                      
                                      2008$
                                      
                                      
                                      
                                      $REVENUES:Products
      and services
                                      
                                      
                                      223,030
                                      
                                      
                                      
                                      377,727Patent
      licensing
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Total
      revenue
                                      
                                      
                                      223,030
                                      
                                      
                                      
                                      377,727GROSS
      PROFIT:Products
      and services
                                      
                                      
                                      102,052
                                      
                                      
                                      
                                      114,057Patent
      licensing
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Total
      gross profit
                                      
                                      
                                      102,052
                                      
                                      
                                      
                                      114,057RECONCILIATION:Total
      segment gross profit
                                      
                                      
                                      102,052
                                      
                                      
                                      
                                      114,057Operating
      expenses
                                      
                                      
                                      (656,253
                                      )
                                      
                                      
                                      (685,546
                                      )Other
      income (expense)
                                      
                                      
                                      (14,875
                                      )
                                      
                                      
                                      (97,718
                                      )Income
      (loss) before provision for income taxes
                                      
                                      
                                      (569,076
                                      )
                                      
                                      
                                      (669,207
                                      )


11





The
Company does not have significant assets employed in the patent license segment
and does not track capital expenditures or assets by reportable segment.
Consequently it is not practical to show this information.





Revenue
by geographic region is determined based on the location of the Company’s direct
customers or distributors for product sales and services. Patent license revenue
is considered United States revenue as payments are for licenses for United
States operations irrespective of the location of the licensee’s home domicile.
All revenues were international revenues for the three months ended June 30,
2009 and 2008. Revenues from three customers comprised 35%, 24% and 12% of
revenue for the three months ended June 30, 2009. Sales to three customer
comprised 52%, 16% and 11% of revenue for the three months ended June 30,
2008.





12.
COMMITMENTS AND CONTINGENCIES





Legal
Matters





Business
Litigation


In May
2006, the Company announced that a complaint had been filed against it 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 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 the
Company placed for this customer in the normal course of business on November
11, 2005 for 1,250 digEplayers with its 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. 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 answered digEcor's complaint and
pursued certain counterclaims and each party subsequently supplemented their
various claims.





In
January 2007, March 2009 and April 2009 the Court ruled on certain motions of
the parties substantially limiting the issues for trial and each party has
voluntarily dismissed additional claims and specific defendants.  In its
rulings, the Court has dismissed digEcor's unjust enrichment, fraud, negligent
misrepresentation, tortious interference, non-competition, punitive damage and
certain unfair competition claims. The Court has 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 the Company.





The bulk
of the bench trial related to digEcor’s claims for breaches of three contracts
and associated damages, and one claim for injunctive relief was completed in May
2009 followed by the parties filing Proposed Findings of Fact and Conclusions of
Law and final arguments in July 2009. The Company presented multiple substantive
defenses at trial and is awaiting the final findings and decision by the Court.
There can be no assurance the Company will prevail. The Court’s prior rulings
and final verdict may also be subject to appeal by either party. The Company is
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 related to a deposit made by digEcor and at March 31, 2009 accrued an
additional $100,000 as an estimate of its obligation related to the remaining
general damage claim based on a settlement offer made by the Company. The
Company intends to seek restitution from Maycom for any damages it may incur.
Recovery from Maycom is not assured.





Intellectual Property
Litigation


In
September 2007 and March 2008, the Company filed complaints against eight
electronic product manufacturers in the U.S. District Court for the Eastern
District of Texas asserting that products made by the companies infringe four of
the Company's U.S. patents covering the use of flash memory technology. These
patents are part of the Company’s Flash-R patent portfolio. By March 31, 2009
the Company had licensed and settled the litigation with six of the
manufacturers and suspended the complaint against one defendant currently in
bankruptcy. Litigation is still pending against one remaining defendant. The
Company intends to pursue its claims vigorously. Although most fees, costs and
expenses of the litigation are covered under the Company’s arrangement with
Duane Morris LLP as described below, the Company may incur support and related
expenses for this litigation that may become material.


12


Commitment Related to
Intellectual Property Legal Services


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





Duane
Morris has agreed to handle the Company’s Patent Enforcement Matters and certain
related appeals on a contingent
fee basis. Duane Morris also has agreed to advance certain costs and expenses
including travel expenses, c ourt
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


At June
30, 2009 the Company had outstanding unfilled purchase orders and was committed
to a contract manufacturer and component suppliers for approximately $158,000 of
future deliveries.





Facility
Lease


In March
2006 the Company entered into a sixty-two month lease, commencing June 1, 2006,
for approximately 4,800 square feet with an aggregate payment of $6,159 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 $160,700 at June 30,
2009.





Concentration
of Credit Risk and Sources of Supply


Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash and cash equivalents and trade receivables. The
Company at June 30, 2009 had substantially all of its cash and cash equivalents
at one financial institution in a non-interest bearing account. Effective
October 14, 2008, Federal Deposit Insurance Corporation deposit insurance
was changed to provide full deposit insurance coverage for non-interest bearing
deposit transaction accounts through December 31, 2009.





Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
number and  nature of customers comprising the Company’s customer base
and their geographic dispersion. The Company has not incurred any significant
credit related losses.





The
Company relies on one third-party contract manufacturer to produce its eVU
mobile entertainment product and generally relies on single suppliers for
batteries, charging stations and other components. The Company also currently
relies on one legal firm to represent it in patent licensing
matters.





13.
INCOME TAXES


There is
no income tax provision for the three months ended June 30, 2009 or 2008 due to
net operating losses for which there is no benefit currently
available.





At June
30, 2009, the Company had deferred tax assets associated with federal net
operating losses (“NOLs”), related state NOLs, foreign tax credits and certain
Federal and California research and development tax credits but recorded a
corresponding full valuation allowance as it is more likely than not that some
portion or all of the deferred tax assets will not be realized. In spite of
state NOLs the Company may be subject to California state taxes during fiscal
2010 if it generates sufficient taxable income due to the California suspension
of the net operating loss (“NOL”) carryforwards to the 2008 and 2009 tax
years.


13




14.
SUBSEQUENT EVENTS




The
subsequent events have been evaluated through August 13, 2009, which was the
date the Financial Statements were issued (see notes 7, 9 and 12).





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, 2009.





Cautionary
Note on Forward Looking Statements





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





General


We are a
holding company incorporated under the laws of Delaware that operates
through a wholly-owned California subsidiary of the same name.  We
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 and are licensing our Flash-RTM portfolio of
patents related to the use of flash memory in portable devices.





Our
strategy is to market our eVU products and services to a growing base of U.S.
and international companies for use in the airline, healthcare, and other travel
and leisure industries. We employ direct sales and sales through value added
resellers (VARs) that provide marketing, logistic and/or content services to
corporate customers.





We are
commercializing our Flash-R patent portfolio through licensing and we are
aggressively pursuing enforcement by litigating against targeted parties who we
believe may be infringing our patents. The international law firm of Duane
Morris LLP is handling our patent enforcement matters on a contingent fee basis.
In September 2007 and March 2008 we filed a first tranche of patent infringement
litigation against eight defendants. In September 2008 we recorded our first
patent license revenue and recognized additional license revenue through the
fiscal year ended March 31, 2009. We recognized no patent revenue in the first
quarter ended June 30, 2009. We anticipate bringing additional patent
enforcement actions in the current fiscal year and while we expect additional
patent licenses in future periods there can be no assurance of the timing or
amounts of any related license revenue.





Our
business is high risk in nature. There can be no assurance we can achieve
sufficient eVU or patent license revenues to sustain profitability. We continue
to be subject to the risks normally associated with any new business activity,
including unforeseeable expenses, delays and complications. Accordingly, there
is no guarantee that we can or will report operating profits in future
periods.





Overall
Performance and Trends


Until the
fiscal year ended March 31, 2009 (fiscal 2009), we incurred significant losses
and negative cash flow from operations. Our fiscal 2009 profitability resulted
from one-time patent licensing revenues and there is no assurance of future
licensing revenues from new licensees. Accordingly, we could incur losses in the
future until product, service and/or licensing revenues are sufficient to
sustain continued profitability. Our ability to continue as a going concern is
in doubt and is dependent upon achieving a profitable level of operations and if
necessary obtaining additional financing.


14





eVU sales
activity has been slow due to airline industry economics and industry credit
concerns resulting in airlines curtailing expansion and new projects. We are
aggressively pursuing new business but our results will be dependent on the
timing and quantity of eVU orders and any additional patent licenses. We seek to
expand and diversify our customer base both in the IFE space and other markets.
The failure to obtain additional patent license revenues or eVU orders or delays
of orders or production delays could have a material adverse impact on our
operations.





For the
three months ended June 30, 2009 we recognized a net loss of $569,076 compared
to a net loss of $669,207 for the comparable period of the prior fiscal year.
Our revenues were $223,030 for the first three months of fiscal 2010 compared to
$377,727 for the prior year’s first three months. We recognized no patent
license revenue in either period. We reported reduced operating expenses of
$656,253 in the first quarter compared to $685,546 in the comparable period
prior in spite of an increase of $157,000 in legal fees primarily related to
litigation.





Exclusive
of litigation costs our monthly cash operating costs average approximately
$150,000 per month. However, we may increase expenditure levels in future
periods to support and expand our revenue opportunities and continue advanced
product and technology research and development.





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, 2009. 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.


15


Results
of Operations





Three months ended June 30,
2009 compared to the three months ended June 30, 2008





Three Months Ended June 30,2009
                                  
                                  
                                  
                                  
                                  
                                  2008% of
                                  
                                  
                                  
                                  
                                  
                                  % of
                                  
                                  
                                  ChangeDollars
                                  
                                  
                                  Revenue
                                  
                                  
                                  Dollars
                                  
                                  
                                  Revenue
                                  
                                  
                                  Dollars
                                  
                                  
                                  %Revenues:Products
                                  
                                  
                                  14,075
                                  
                                  
                                  
                                  6
                                  %
                                  
                                  
                                  234,298
                                  
                                  
                                  
                                  62
                                  %
                                  
                                  
                                  (220,223
                                  )
                                  
                                  
                                  (94
                                  )%Services
                                  
                                  
                                  208,955
                                  
                                  
                                  
                                  94
                                  %
                                  
                                  
                                  143,429
                                  
                                  
                                  
                                  38
                                  %
                                  
                                  
                                  65,526
                                  
                                  
                                  
                                  46
                                  %Patent
      license
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  -223,030
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  
                                  377,727
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  
                                  (154,697
                                  )
                                  
                                  
                                  (41
                                  )%Gross
      Profit:Product
      gross profit
                                  
                                  
                                  (34,929
                                  )
                                  
                                  
                                  (16
                                  )%
                                  
                                  
                                  40,814
                                  
                                  
                                  
                                  11
                                  %
                                  
                                  
                                  (75,743
                                  )
                                  
                                  
                                  (186
                                  )%Service
      gross profit
                                  
                                  
                                  136,981
                                  
                                  
                                  
                                  61
                                  %
                                  
                                  
                                  73,243
                                  
                                  
                                  
                                  19
                                  %
                                  
                                  
                                  63,738
                                  
                                  
                                  
                                  87
                                  %Patent
      license
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  -102,052
                                  
                                  
                                  
                                  46
                                  %
                                  
                                  
                                  114,057
                                  
                                  
                                  
                                  30
                                  %
                                  
                                  
                                  (12,005
                                  )
                                  
                                  
                                  (11
                                  )%Operating
      Expenses:Selling
      and administrative
                                  
                                  
                                  576,672
                                  
                                  
                                  
                                  259
                                  %
                                  
                                  
                                  538,895
                                  
                                  
                                  
                                  143
                                  %
                                  
                                  
                                  37,777
                                  
                                  
                                  
                                  7
                                  %Research
      and related
                                  
                                  
                                  79,581
                                  
                                  
                                  
                                  36
                                  %
                                  
                                  
                                  146,651
                                  
                                  
                                  
                                  39
                                  %
                                  
                                  
                                  (67,070
                                  )
                                  
                                  
                                  (46
                                  )%656,253
                                  
                                  
                                  
                                  294
                                  %
                                  
                                  
                                  685,546
                                  
                                  
                                  
                                  181
                                  %
                                  
                                  
                                  (29,293
                                  )
                                  
                                  
                                  (4
                                  )%Other
      expenses
                                  
                                  
                                  (14,875
                                  )
                                  
                                  
                                  (7
                                  )%
                                  
                                  
                                  (97,718
                                  )
                                  
                                  
                                  (26
                                  )%
                                  
                                  
                                  82,843
                                  
                                  
                                  
                                  (85
                                  )%Loss
      before provision for income taxes
                                  
                                  
                                  (569,076
                                  )
                                  
                                  
                                  (255
                                  )%
                                  
                                  
                                  (669,207
                                  )
                                  
                                  
                                  (177
                                  )%
                                  
                                  
                                  100,131
                                  
                                  
                                  
                                  (15
                                  )%





Loss
before provision for income taxes


We
reported a net loss before income taxes of $569,076 for the three months ended
June 30, 2009 compared to a net loss of $669,207 for the comparable period of
the prior year. The $100,131 improvement was the result of reduced operating and
other expenses that offset a decline in eVU product and service revenues and
related gross profit.





Revenues


Revenues
of $223,030 in the first quarter of fiscal 2010 compared to $377,727 for the
comparable prior period. The revenue mix was significantly different each
period. During the prior year’s first quarter revenues consisted of $234,298
from selling eVU players and related equipment for use by airline customers and
$143,429 from service revenues for content and support services. Recent eVU
product sales activity has been slow due to airline industry economics and
industry credit concerns resulting in airlines curtailing expansion and new
projects. Our most recent quarter’s revenues consisted of $14,075 of eVU product
and $208,955 of service revenues. Our service revenues have grown as result of
prior year customer additions but as service arrangements and terms vary with
each customer there is no assurance in the current airline environment that our
service revenues will continue at comparable levels for the balance of the
fiscal year. We are pursuing new business but our results will continue to be
dependent on the timing and quantity of eVU orders or the timing of any patent
licensing arrangements.





Gross
Profit


Gross
profit for the first quarter of fiscal 2010 was $102,052 or 46% of
revenues.  The gross profit for the prior year’s first quarter was
$114,057 or 30% of revenues. The improved gross profit percentage resulted from
higher margin service revenues partially offset by a loss on very limited
product revenues due to related overhead absorption. Gross profit margins are
highly dependent on revenue mix, prices charged, volume of orders, and for
patent licensing the amounts of contingency legal fees and
costs.


16


Operating
Expenses


Selling
and administrative costs for the three months ended June 30, 2009, were $576,672
compared to $538,895 for the first quarter of the prior year. While most cost
categories were comparable we have experienced an increase in litigation related
legal expenses of $157,000, offset by a $78,000 reduction in staffing costs due
to reduced personnel.





Research
and related expenditures for the three months ended June 30, 2009 were $79,581,
compared to $146,651 for the three months ended June 30, 2008. The decrease
resulted from reduced personnel costs of $48,000 and outside engineering costs
of $15,000.





Other
Income (Expenses)


Net other
expenses of $14,875 for the first quarter of fiscal 2010 included $10,047 of
interest expense ($10,019 of noncash interest). Net other expenses for the first
quarter of the prior year of $97,718 included other income of $5,055 primarily
from foreign exchange gains and other expenses including interest of $48,594
($28,344 was non-cash interest) and $50,759 from revaluation of a warrant
derivative liability.





Provision
for Income Taxes


There was
no income tax provision or benefit for the first quarter of fiscal 2010 or 2009
due to net losses.





Loss
Attributable to Common Stockholders


The loss
attributable to common stockholders for the most recent first quarter included
the net loss after taxes of $569,076 increased by accrued  and deemed
dividends on convertible preferred stock of $42,813 or a net loss attributable
to common stockholders of $611,889. The net loss after tax for the prior
comparable first quarter was $669,207 increased by accrued and deemed dividends
of $1,411 for a net loss attributable to common stockholders of
$670,618.





Liquidity
and Capital Resources


At June
30, 2009, we had working capital of $2,858,951 compared to a working capital of
$3,277,225 at March 31, 2009. At June 30, 2009 we had cash on hand of
$3,073,779.





Operating
Activities


Cash used
in operating activities was $740,211 for the three months ended June 30, 2009.
Cash used in operating activities included the net loss of $569,076 reduced by
net non-cash expenses of $38,693. Major components also providing operating cash
was an increase of $153,920 in accounts payable. Major components using
operating cash included an increase of $124,768 in accounts receivable and a
$193,080 reduction in accrued and other liabilities. This reduction included
payment of $157,500 accrued at March 31, 2009 for California state income taxes
due to the suspension of state NOLs.





Our terms
to customers vary but we often require payment prior to shipment of product and
any such payments are recorded as deposits. Patent license payments are normally
due at signing of the license or within 30-45 days.





Cash used
in operating activities during the three months ended June 30, 2008 was $334,302
resulting from the $669,207 net loss offset by a $284,327 increase in accounts
payable. Individual working capital components can change dramatically from
period to period due to timing of sales and shipments and corresponding
receivable, inventory and payable balances. Accordingly operating cash
requirements vary significantly from period to period.





Investing
Activities


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





Financing
Activities


For the
three months ended June 30, 2009 we had no 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 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.


17





Debt
and Other Commitments


We
currently have unsecured convertible term debt with a principal amount of
$243,601. 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. Aggregate principal and interest payments due
to mature in November 2009 are $248,165 with the July and August 2009 payments
of $50,000 each paid in shares of common stock rather than cash.





At June
30, 2009 we were committed to approximately $158,000 as purchase commitments for
product and components. These orders are generally subject to modification as to
timing, quantities and scheduling and in certain instances may be cancelable
without penalty.





We are
also committed for our office lease as more fully described in our interim
consolidated financial statements.





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





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





Cash
Requirements


Other
than cash on hand and accounts receivable, we have no material unused sources of
liquidity at this time.  Based on our cash position at June 30, 2009
and (a) current planned expenditures and level of operation, and (b) no cash
debt service (assuming convertible term debt payments are made in shares of
common stock) we believe we have sufficient capital resources for the next
twelve months. Actual results could differ significantly from management plans.
We believe we may be able to obtain additional funds from future patent
licensing and eVU product sales and services but the timing of licenses and
shipments and the amount and quantities of shipments, orders and reorders are
subject to many factors and risks, many outside our control.





Since we
have not demonstrated sustainable profitability, our company’s ability to
continue as a going concern is in doubt and is dependent upon achieving
sustained profitability and if necessary obtaining additional financing. We
currently have no plans, arrangements or understandings regarding any
acquisitions.





Item
4. Controls and Procedures


Based on
an evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended)
required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of June 30, 2009,
our President and CEO (“Principal Executive Officer” or “PEO”) and Interim Chief
Accounting Officer (“Principal Financial Officer” or “PFO”) have concluded that
our disclosure controls and procedures were not effective 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.





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, 2009. 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, 2009, there was a
material weakness in our internal control over financial reporting: the lack of
independent oversight by an audit committee of independent members of the Board
of Directors. In light of this material weakness, management concluded that, as
of March 31, 2009, we did not maintain effective internal control over financial
reporting. As defined by the Public Company Accounting Oversight Board Auditing
Standard No. 5, a material weakness is a deficiency or a combination of
deficiencies, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management has concluded
that with certain management oversight controls that are in place, the risks
associated with the lack of independent audit committee oversight is not
sufficient to justify the costs of adding additional directors and independent
audit committee members at this time. Management will periodically reevaluate
this situation. If we secure sufficient capital or sustain our improved
operating results it is our intention to change the composition and/or size of
the Board of Directors with emphasis on recruiting qualified independent audit
committee members.


18





In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the relationship between the benefit of desired controls and
procedures and the cost of implementing new controls and
procedures.





CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING


There
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, 2009.





PART
II.       OTHER INFORMATION





Item
1. Legal Proceedings





Business
Litigation


In May
2006, we announced that a complaint had been filed against the 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 us 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 digEplayers 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. In October 2006 we received delivery
from Maycom of the delayed 1,250-unit digEplayer order and delivered the order
to digEcor. We answered digEcor's complaint and pursued certain counterclaims
and each party subsequently supplemented their various claims.





In
January 2007, March 2009 and April 2009 the Court ruled on certain motions of
the parties substantially limiting the issues for trial and each party has
voluntarily dismissed additional claims and specific defendants.  In its
rulings, the Court has dismissed digEcor's unjust enrichment, fraud, negligent
misrepresentation, tortious interference, non-competition, punitive damage and
certain unfair competition claims. The Court has 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 us.





The bulk
of the bench trial related to digEcor’s claims for breaches of three contracts
and associated damages, and one claim for injunctive relief was completed in May
2009 followed by the parties filing Proposed Findings of Fact and Conclusions of
Law and final arguments in July 2009. We presented multiple substantive defenses
at trial and are awaiting the final findings and decision by the Court. There
can be no assurance we will prevail. The Court’s prior rulings and final verdict
may also be subject to appeal by either party. We are 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 related to a
deposit made by digEcor and at March 31, 2009 accrued an additional $100,000 as
an estimate of our obligation related to the remaining general damage claim
based on a settlement offer made by us. We intend to seek restitution from
Maycom for any damages we may incur. Recovery from Maycom is not
assured.





Intellectual Property
Litigation


In
September 2007 and March 2008, we filed complaints against eight electronic
product manufacturers in the U.S. District Court for the Eastern District of
Texas asserting that products made by the companies infringe four of our U.S.
patents covering the use of flash memory technology. These patents are part of
our Flash-R patent portfolio. By March 31, 2009 we had licensed and settled the
litigation with six of the manufacturers and suspended the complaint against one
defendant currently in bankruptcy. Litigation is still pending against one
remaining defendant. We intend to pursue our claims vigorously. Although most
fees, costs and expenses of the litigation are covered under our arrangement
with Duane Morris LLP, we may incur support and related expenses for this
litigation that may become material.


19





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


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





·
            On
      April 30, 2009 the Company issued 377,358 shares of common stock to Davric
      Corporation in consideration of a $50,000 monthly payment on its 7.5% term
      note. The shares were sold upon the exemption provided by Section 4(2)
      under the Securities Act of 1933, no commissions were paid and a
      restrictive legend was placed on the shares
  issued.





·
            On
      May 29, 2009 the Company issued 369,276 shares of common stock to Davric
      Corporation in consideration of a $50,000 monthly payment on its 7.5% term
      note. The shares were sold upon the exemption provided by Section 4(2)
      under the Securities Act of 1933, no commissions were paid and a
      restrictive legend was placed on the shares
  issued.





·
            On
      June 30, 2009 the Company issued 449,640 shares of common stock to Davric
      Corporation in consideration of a $50,000 monthly payment on its 7.5% term
      note. The shares were sold upon the exemption provided by Section 4(2)
      under the Securities Act of 1933, no commissions were paid and a
      restrictive legend was placed on the shares
  issued.





(b)
            NONE


(c)
            NONE





Item
3. Defaults Upon Senior Securities


NONE





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


NONE





Item
5. Other Information


(a)
NONE


(b)
NONE





Item
6. Exhibits


Exhibit
31.1 – Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, signed by Alfred H. Falk,
President and CEO (Principal Executive Officer).





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





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


20





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
      13, 2009
                        By:
                        /s/ ROBERT PUTNAMRobert
      Putnam, Interim Chief Accounting Officer(Principal
      Accounting and Financial Officer and duly authorized to sign on behalf of
      the
Registrant)


21