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 September 30, 2008





Commission
      File Number 0-20734





**e.Digital
      Corporation**


(Exact
      name of registrant as specified in its charter)


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





**(858)
      304-3016**


(Registrant’s
      telephone number, including area code)








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





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




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





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





As
      of
      November 10, 2008 a total of 279,157,128 shares of the Registrant’s Common
      Stock, par value $0.001, were issued and outstanding.














**e.DIGITAL
      CORPORATION**








INDEX


Page**PART
                  I. FINANCIAL INFORMATION**Item
                  1. Financial Statements (unaudited):Consolidated
                  Balance Sheets as of September 30, 2008 and and March 31,
                  2008
              3Consolidated
                  Statements of Operations for the three and six months ended September
                  30,
                  2008 and 2007
              4Consolidated
                  Statements of Cash Flows for the six months ended September 30,
                  2008 and
                  2007
              5Notes
                  to Interim Consolidated Financial Statements
              6Item
                  2. Management's Discussion and Analysis of Financial Condition
                  and Results
                  of Operations
              19Item
                  4. Controls and Procedures
              26**PART
                  II. OTHER INFORMATION**Item
                  1. Legal Proceedings
              27Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              28Item
                  3. Defaults Upon Senior Securities
              29Item
                  4. Submission of Matters to a Vote of Security Holders
              29Item
                  5. Other Information
              29Item
                  6. Exhibits
              29SIGNATURES
              30
  2
 
 **Part
                      I. Financial Information****Item
                      1. Financial Statements:****e.Digital
                      Corporation and
                      subsidiary**
 **CONSOLIDATED
            BALANCE SHEETS**
 **September
                      30,**
                  
                  **March
                      31,****2008**
                  
                  **2008****(Unaudited)**
                    **$**
                  
                  **$****ASSETS****Current**Cash
                      and cash equivalents
                  
                  
                  137,340
                  
                  
                  122,116Accounts
                      receivable, trade
                  
                  
                  1,759,689
                  
                  
                  174,905Inventory
                  
                  
                  551,562
                  
                  
                  489,238Deposits
                      and prepaid expenses
                  
                  
                  38,652
                  
                  
                  34,717**Total
                      current assets**
                  
                  
                  2,487,243
                  
                  
                  820,976Property
                      and equipment, net of accumulated depreciation of$493,265
                      and $485,037, respectively
                  
                  
                  31,833
                  
                  
                  40,061**Total
                      assets**
                  
                  
                  2,519,076
                  
                  
                  861,037**LIABILITIES
                      AND STOCKHOLDERS' DEFICIT****Current**Accounts
                      payable, trade
                  
                  
                  1,580,573
                  
                  
                  836,217Other
                      accounts payable and accrued liabilities
                  
                  
                  69,594
                  
                  
                  198,210Accrued
                      employee benefits
                  
                  
                  130,940
                  
                  
                  149,483Customer
                      deposits
                  
                  
                  134,900
                  
                  
                  80,000Deferred
                      revenue
                  
                  
                  36,500
                  
                  
                  36,500Current
                      maturity of convertible term note, less $17,140 and $25,842
                      of debt
                      discount
                  
                  
                  542,545
                  
                  
                  366,989Secured
                      promissory note, less $1,836 and $4,131 of note discount
                  
                  
                  398,164
                  
                  
                  445,869Promissory
                      note, less $2,400 and $-0- of note discount
                  
                  
                  37,600
                  
                  
                  **-**Accrued
                      foreign taxes
                  
                  
                  264,000
                  
                  
                  **-****Total
                      current liabilities**
                  
                  
                  3,194,816
                  
                  
                  2,113,268Long-term
                      convertible term note, less $358 and $6,141 of debt
                      discount
                  
                  
                  96,900
                  
                  
                  381,093Deferred
                      revenue-long term
                  
                  
                  45,000
                  
                  
                  72,000**Total
                      long-term liabilities**
                  
                  
                  141,900
                  
                  
                  453,093**Total
                      liabilities**
                  
                  
                  3,336,716
                  
                  
                  2,566,361**Commitments
                      and Contingencies****Stockholders'
                      deficit**Series
                      AA Convertible Preferred stock, $0.001 par value, 100,000shares
                      designated: 75,000 and -0- issued and outstanding, respectively.Liquidation
                      preference of $759,760 and $-0-, respectively
                  
                  
                  525,148
                  
                  
                  **-**Common
                      stock, $0.001 par value, authorized 350,000,000,278,561,580
                      and 272,494,867 shares and outstanding, respectively
                  
                  
                  278,561
                  
                  
                  272,495Additional
                      paid-in capital
                  
                  
                  81,158,279
                  
                  
                  80,103,769Accumulated
                      deficit
                  
                  
                  (82,779,628
                  )
                  
                  (82,081,588
                  )**Total
                      stockholders' deficit**
                  
                  
                  (817,640
                  )
                  
                  (1,705,324
                  )**Total
                      liabilities and stockholders' deficit**
                  
                  
                  2,519,076
                  
                  
                  861,037
  See
            notes
            to interim consolidated financial statements
 3
 
 **e.Digital
              Corporation and subsidiary**
 **CONSOLIDATED
                      STATEMENTS OF OPERATIONS****(UNAUDITED)**
 **For
                        the three months ended**
                    
                    **For
                        the six months ended****September
                        30,**
                    
                    **September
                        30,****2008**
                    
                    **2007**
                    
                    **2008**
                    
                    **2007**(as
                        restated)
                    
                    
                    
                    (as
                        restated)**Revenues:**
                    
                    
                    **$**
                    
                    
                    **$**
                    
                    
                    **$**
                    
                    
                    **$**Products
                    
                    
                    1,683
                    
                    
                    2,108,082
                    
                    
                    235,981
                    
                    
                    3,297,712Services
                    
                    
                    172,747
                    
                    
                    207,699
                    
                    
                    316,176
                    
                    
                    322,703Patent
                        license
                    
                    
                    1,600,000
                    
                    
                    **-**
                    
                    
                    1,600,000
                    
                    
                    **-**1,774,430
                    
                    
                    2,315,781
                    
                    
                    2,152,157
                    
                    
                    3,620,415**Cost
                        of revenues:**Products
                    
                    
                    13,975
                    
                    
                    1,684,679
                    
                    
                    207,459
                    
                    
                    2,706,529Services
                    
                    
                    42,022
                    
                    
                    33,704
                    
                    
                    112,208
                    
                    
                    70,373Patent
                        license
                    
                    
                    561,326
                    
                    
                    **-**
                    
                    
                    561,326
                    
                    
                    **-**617,323
                    
                    
                    1,718,383
                    
                    
                    880,993
                    
                    
                    2,776,902Gross
                        profit
                    
                    
                    1,157,107
                    
                    
                    597,398
                    
                    
                    1,271,164
                    
                    
                    843,513**Operating
                        expenses:**Selling
                        and administrative
                    
                    
                    627,497
                    
                    
                    471,995
                    
                    
                    1,166,392
                    
                    
                    943,092Research
                        and related expenditures
                    
                    
                    129,099
                    
                    
                    215,935
                    
                    
                    275,750
                    
                    
                    496,247Total
                        operating expenses
                    
                    
                    756,596
                    
                    
                    687,930
                    
                    
                    1,442,142
                    
                    
                    1,439,339Operating
                        income (loss)
                    
                    
                    400,511
                    
                    
                    (90,532
                    )
                    
                    (170,978
                    )
                    
                    (595,826
                    )**Other
                        income (expense):**Interest
                        and other income
                    
                    
                    678
                    
                    
                    25,940
                    
                    
                    5,733
                    
                    
                    26,099Interest
                        expense
                    
                    
                    (42,114
                    )
                    
                    (62,996
                    )
                    
                    (90,708
                    )
                    
                    (131,668
                    )Other
                        income (expense)
                    
                    
                    (123,908
                    )
                    
                    (30,152
                    )
                    
                    (178,087
                    )
                    
                    (49,751
                    )Other
                        income (expense)
                    
                    
                    (165,344
                    )
                    
                    (67,208
                    )
                    
                    (263,062
                    )
                    
                    (155,320
                    )**Income
                        (loss) before income taxes**
                    
                    
                    235,167
                    
                    
                    (157,740
                    )
                    
                    (434,040
                    )
                    
                    (751,146
                    )(Provision)
                        for income taxes
                    
                    
                    (264,000
                    )
                    
                    **-**
                    
                    
                    (264,000
                    )
                    
                    **-****Loss
                        for the period**
                    
                    
                    (28,833
                    )
                    
                    (157,740
                    )
                    
                    (698,040
                    )
                    
                    (751,146
                    )Accrued
                        and deemed dividends on preferred stock
                    
                    
                    (43,283
                    )
                    
                    (27,525
                    )
                    
                    (44,694
                    )
                    
                    (54,750
                    )**Loss
                        attributable to common stockholders**
                    
                    
                    (72,116
                    )
                    
                    (185,265
                    )
                    
                    (742,734
                    )
                    
                    (805,896
                    )**Loss
                        per common share - basic and diluted**
                    
                    
                    (0.00
                    )
                    
                    (0.00
                    )
                    
                    (0.00
                    )
                    
                    (0.00
                    )**Weighted
                        average common shares outstanding**
                    
                    
                    277,082,261
                    
                    
                    246,361,041
                    
                    
                    275,797,016
                    
                    
                    245,391,392
  See
            notes
            to interim consolidated financial statements
 4
 
 **e.Digital
                        Corporation and subsidiary****CONSOLIDATED
                        STATEMENTS OF CASH FLOWS****(UNAUDITED)**
 **For
                          the six months ended****September
                          30,****2008**
                      
                      **2007**(as
                          restated)**OPERATING
                          ACTIVITIES**
                      
                      **$**
                      
                      **$**Loss
                          for the period
                      
                      
                      (698,040
                      )
                      
                      (751,146
                      )Adjustments
                          to reconcile loss to net cash used in operating
                          activities:Depreciation
                          and amortization
                      
                      
                      8,228
                      
                      
                      8,608Accrued
                          interest and accretion of discount relating to promissory
                          notes
                      
                      
                      23,180
                      
                      
                      15,000Interest
                          paid with common stock
                      
                      
                      22,477
                      
                      
                      52,162Warranty
                          provision
                      
                      
                      (35,600
                      )
                      
                      125,764Stock-based
                          compensation
                      
                      
                      32,257
                      
                      
                      72,172Warrant
                          modification and warrant derivative revaluation
                      
                      
                      174,667
                      
                      
                      **-**Changes
                          in assets and liabilities:Accounts
                          receivable, trade
                      
                      
                      (1,584,784
                      )
                      
                      (881,007
                      )Inventories
                      
                      
                      (62,324
                      )
                      
                      (53,715
                      )Prepaid
                          expenses and other
                      
                      
                      (3,935
                      )
                      
                      (950
                      )Accounts
                          payable
                      
                      
                      794,356
                      
                      
                      534,083Other
                          accounts payable and accrued liabilities
                      
                      
                      (53,353
                      )
                      
                      733Customer
                          deposits
                      
                      
                      54,900
                      
                      
                      (38,850
                      )Accrued
                          employee benefits
                      
                      
                      (18,543
                      )
                      
                      12,333Deferred
                          revenue
                      
                      
                      (27,000
                      )
                      
                      120,000Accrued
                          income taxes
                      
                      
                      264,000
                      
                      
                      **-**Warranty
                          reserve
                      
                      
                      (39,663
                      )
                      
                      (27,936
                      )Cash
                          used in operating activities
                      
                      
                      (1,149,177
                      )
                      
                      (812,749
                      )**INVESTING
                          ACTIVITIES**Purchase
                          of property and equipment
                      
                      
                      -
                      
                      
                      (1,857
                      )Cash
                          used in investing activities
                      
                      
                      -
                      
                      
                      (1,857
                      )**FINANCING
                          ACTIVITIES**Sale
                          of common stock
                      
                      
                      500,000
                      
                      
                      640,000Proceeds
                          from sale of preferred stock
                      
                      
                      700,000
                      
                      
                      **-**Proceeds
                          from exercise of stock options
                      
                      
                      **-**
                      
                      
                      9,704Payment
                          on convertible term note
                      
                      
                      (25,599
                      )
                      
                      **-**Payment
                          on secured promissory note
                      
                      
                      (50,000
                      )
                      
                      (100,000
                      )Proceeds
                          from unsecured promissory note
                      
                      
                      40,000
                      
                      
                      **-**Cash
                          provided by financing activities
                      
                      
                      1,164,401
                      
                      
                      549,704**Net
                          increase (decrease) in cash and cash equivalents**
                      
                      
                      15,224
                      
                      
                      (264,902
                      )Cash
                          and cash equivalents, beginning of period
                      
                      
                      122,116
                      
                      
                      694,757**Cash
                          and cash equivalents, end of period**
                      
                      
                      137,340
                      
                      
                      429,855**Supplemental
                          disclosures of cash flow information:**Cash
                          paid for interest
                      
                      
                      45,051
                      
                      
                      64,506**Supplemental
                          schedule of noncash investing and financing
                          activities:**Accounts
                          payable exchanged for preferred stock
                      
                      
                      50,000
                      
                      
                      **-**Accrued
                          and deemed dividends on preferred stock
                      
                      
                      44,694
                      
                      
                      54,750Term
                          note payments paid in common stock
                      
                      
                      120,000
                      
                      
                      90,000Financing
                          fees paid in common stock
                      
                      
                      9,800
                      
                      
                      15,000Warrant
                          derivative liability reclassified to equity
                      
                      
                      132,315
                      
                      
                      **-**Stock-based
                          compensation expense
                      
                      
                      32,257
                      
                      
                      72,172
  See
            notes
            to interim consolidated financial statements
 5




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


e.Digital
      Corporation is a holding company incorporated under the laws of Delaware that
      operates through a wholly-owned California subsidiary of the same name. The
      Company has innovated a proprietary secure digital video/audio technology
      platform ("DVAP") and markets the eVUTM mobile entertainment device for the
      travel and recreational industries. The Company also obtains revenue from
      licensing and enforcing 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 September 30, 2008, and the results of operations and cash flows
      for
      the periods presented, consisting only of normal and recurring adjustments.
      All
      significant intercompany transactions have been eliminated in consolidation.
      Operating results for the three and six months ended September 30, 2008 are
      not
      necessarily indicative of the results that may be expected for the fiscal year
      ending March 31, 2009. For further information, refer to the Company's
      consolidated financial statements and footnotes thereto for the year ended
      March
      31, 2008 filed on Form 10-K.





Prior
      Period Presentation


As
      more
      fully described in Note 15 to the Company’s consolidated financial statements
      and footnotes thereto for the year ended March 31, 2008 filed on Form 10-K,
      the
      Company restated the two quarters ended September 30, 2007 and December 31,
      2007
      due to an overstatement of both sales and cost of sales of $104,000 and $62,400
      for the quarters, respectively, due to a misclassification of supplier material
      transfers with no effect on gross profit, operating loss or net loss in either
      quarter or for the fiscal year ended March 31, 2008. The results for September
      30, 2007 included herein reflect such restatement. Certain other amounts
      reported in prior periods have been reclassified to be consistent with the
      current period presentation.





History
      of Losses and Going Concern


The
      Company has incurred significant losses and negative cash flow from operations
      in each of the last three years and has an accumulated deficit of $82.8 million
      at September 30, 2008. At September 30, 2008, the Company had a working capital
      deficiency of $707,573. Substantial portions of the losses are attributable
      to
      marketing costs for new products and expenditures on research and development
      of
      technologies. The Company's operating plans require additional funds that may
      take the form of debt or equity financings. There can be no assurance that
      any
      additional funds will be available. The Company's ability to continue as a
      going
      concern is in doubt and is dependent upon obtaining additional financing or
      achieving a profitable level of operations.





Management
      has undertaken steps as part of a plan to improve operations with the goal
      of
      sustaining operations for the next twelve months and beyond. These steps include
      (a) monetizing our Flash-R patent portfolio through licensing and enforcement;
      (b) expanding product sales and marketing to new customers and new markets;
      (c)
      controlling overhead and expenses, and (d) raising additional capital and/or
      obtaining financing. In addition to a sale of $750,000 of preferred stock,
      the
      Company obtained $500,000 of equity proceeds pursuant to a common stock purchase
      agreement with Fusion Capital Fund II, LLC (“Fusion”) during the six months
      ended September 30, 2008. The Company may have access to up to $527,000 of
      additional funding pursuant to this agreement (or a maximum of up to $6.5
      million at significantly higher stock prices). Future availability under the
      Fusion agreement is subject to many conditions, some of which are predicated
      on
      events that are not within the Company’s control. There can be no assurance this
      capital resource will be available or be sufficient.





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





6


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





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





**2.
      RECENT ACCOUNTING PRONOUNCEMENTS**


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




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





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





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





7


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





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





**3.
      LOSS PER SHARE**


Stock
      options, warrants and convertible preferred stock and debt exercisable into
      29,911,984 shares of common stock were outstanding at September 30, 2008. These
      securities were not included in the computation of diluted income (loss) per
      share because they are antidilutive for all periods presented, but they could
      potentially dilute earnings per share in future periods.





The
      loss
      attributable to common stockholders was increased by accrued and deemed
      dividends during the six months ended September 30, 2008 and 2007 of $44,694
      and
      $54,750, respectively.




**4.
      INVENTORIES**




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


Inventories
      consisted of the following:


**September
                  30,**
              
              **March
                  31,****2008**
              
              **2008****$**
              
              **$**Raw
                  materials
              
              
              27,063
              
              
              41,354Work
                  in process
              
              
              350,800
              
              
              217,820Finished
                  goods
              
              
              173,699
              
              
              230,064551,562
              
              
              489,238


**5.
      STOCK-BASED COMPENSATION COSTS**


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





8
 
 **Three
                    Months Ended**
                
                **Six
                    Months Ended****September
                    30,**
                
                **September
                    30,****2008**
                
                **2007**
                
                **2008**
                
                **2007****$**
                
                **$**
                
                **$**
                
                **$**Cost
                    of revenues
                
                
                -
                
                
                9,132
                
                
                -
                
                
                9,132Research
                    and development
                
                
                -
                
                
                1,124
                
                
                -
                
                
                15,067Selling
                    and administrative
                
                
                17,536
                
                
                27,063
                
                
                32,257
                
                
                47,973Total
                    stock-based compensation expense
                
                
                17,536
                
                
                37,319
                
                
                32,257
                
                
                72,172


As
      of
      September 30, 2008 total estimated compensation cost of options granted but
      not
      yet vested was approximately $71,335 and is expected to be recognized over
      the
      weighted average period of 1.2 years.





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


**Six
                  Months Ended****September
                  30,****2008**
              
              **2007**Volatility
              
              
              71
              %
              
              77
              %Risk-free
                  interest rate
              
              
              2.5
              %
              
              4.6%-5.2
              %Forfeiture
                  rate
              
              
              0.0
              %
              
              5.0
              %Dividend
                  yield
              
              
              0.0
              %
              
              0.0
              %Expected
                  life in years
              
              
              3.5
              
              
              4Weighted-average
                  fair value of options granted
              
              $
              0.05
              
              $
              0.11


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





See
      Note
      8 for further information on outstanding stock options.





**6.
      WARRANTY RESERVE**





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


**Three
                  Months Ended**
              
              **Six
                  Months Ended****September
                  30,**
              
              **September
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****$**
              
              **$**
              
              **$**
              
              **$**Beginning
                  balance
              
              
              103,222
              
              
              80,253
              
              
              109,138
              
              
              40,072Warranty
                  provision
              
              
              (45,680
              )
              
              80,871
              
              
              (35,600
              )
              
              125,764Warranty
                  deductions
              
              
              (23,667
              )
              
              (23,224
              )
              
              (39,663
              )
              
              (27,936
              )Ending
                  balance
              
              
              33,875
              
              
              137,900
              
              
              33,875
              
              
              137,900




9





**7.
      PROMISSORY NOTES**


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


**Principal
                  Due**
              
              **Less**
              
              **Net****at
                  September 30,**
              
              **Unamortized**
              
              **at
                  September 30,**
              
              **Long-Term****2008**
              
              **Discount**
              
              **2008**
              
              **Portion****Description
                  and Rate**
              
              **Maturity**
              
              $
              
              $
              
              $
              
              $
              
              **Collateral**
              
              **Conversion**18%
                  Secured Promissory Note
              
              Interest
                  monthly, principal at December 23, 2008
              
              400,000
              
              (1,836)
              
              398,164
              
              **-**
              
              Security
                  interest in substantially all assets
              
              Not
                  applicable12%
                  Promissory Note
              
              Principal
                  and interest due April 3, 2009
              
              40,000
              
              (2,400)
              
              37,600
              
              **-**
              
              None
              
              Not
                  applicable7.5%
                  Convertible Term Note
              
              Principal
                  and interest in monthly installments of $30,000 increasing to $50,000
                  per
                  month in December 2008 through maturity in November 2009
              
              656,943
              
              (17,498)
              
              639,445
              
              96,900
              
              None
              
              At
                  $.30 per share at holder option and callable for conversion at
                  market of
                  $0.40 per common share1,096,943
              
              (21,734)
              
              1,075,209
              
              96,900




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





The
      Company has the option, subject to certain limitations, to elect to make
      installment payments on the 7.5%
      Convertible Term Note either in cash or in shares of common stock (“Monthly
      Installment Shares”). Monthly Installment Shares are valued at the arithmetic
      average of the closing prices for the last five trading days of the applicable
      month without discount. Payments must be paid in cash if the computed average
      price is less than $0.10 per share. During the six months ended September 30,
      2008 the Company made four monthly installment payments aggregating $120,000
      through the issuance of 1,036,308 shares of common stock and made two payments
      in cash of $60,000 (one payment for $30,000 made in October 2008).





**8.
      STOCKHOLDERS’ EQUITY**


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


**Preferred
                  stock**
              
              **Common
                  stock**
              
              **Additional**
              
              **Accumulated****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **paid-in
                  capital**
              
              **deficit****Balance,
                  March 31, 2008**
              
              
              **-**
              
              
              **-**
              
              
              **272,494,867**
              
              
              **272,495**
              
              
              **80,103,769**
              
              
              **(82,081,588**
              **)**Sale
                  of Series AA preferred stock and warrants net of $134,773 recorded
                  as
                  warrant liability (1)
              
              
              75,000
              
              
              615,227
              
              
              **-**
              
              
              **-**
              
              
              -
              
              
              **-**Record
                  $134,773 beneficial conversion related to Series AA preferred stock
                  (1)
              
              
              **-**
              
              
              (134,773
              )
              
              **-**
              
              
              **-**
              
              
              134,773
              
              
              **-**Reclassification
                  of warrant liability to equity (2)
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              132,315
              
              
              **-**Value
                  assigned to modification of Seriess AA warrants (2)
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              177,125
              
              
              **-**Dividends
                  on Series AA preferred stock
              
              
              **-**
              
              
              9,760
              
              
              **-**
              
              
              **-**
              
              
              (9,760
              )
              
              **-**Accretion
                  of discount on Series AA preferred stock (1)
              
              
              **-**
              
              
              34,934
              
              
              **-**
              
              
              **-**
              
              
              (34,934
              )
              
              **-**Shares
                  issued for term debt payments
              
              
              **-**
              
              
              **-**
              
              
              1,036,308
              
              
              1,036
              
              
              118,964
              
              
              **-**Shares
                  issued for debt financing fees
              
              
              **-**
              
              
              **-**
              
              
              80,404
              
              
              80
              
              
              8,720
              
              
              **-**Proceeds
                  from sale of common stock at an average price of $0.101 per
                  share
              
              
              **-**
              
              
              **-**
              
              
              4,950,001
              
              
              4,950
              
              
              495,050
              
              
              **-**Stock-based
                  compensation
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              32,257
              
              
              **-**Loss
                  for the period
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              (698,040
              )**Balance,
                  September 30, 2008**
              
              
              **75,000**
              
              
              **525,148**
              
              
              **278,561,580**
              
              
              **278,561**
              
              
              **81,158,279**
              
              
              **(82,779,628**
              **)**




(1)
            The
                $134,773 allocated as the value of detachable warrants and the beneficial
                conversion feature of $134,773 is treated as a discount to the value
                of
                the Series AA Stock (see Note 9) and is being accreted as a deemed
                dividend over the term of the preferred stock. Due to the accumulated
                deficit this charge is recorded to paid-in capital.


(2)
            See
                Note 9.





10


**Fusion
      Capital Equity Purchase Agreement**


On
      January 2, 2007, the Company entered into an agreement with Fusion Capital
      Fund
      II, LLC (“Fusion”) pursuant to which the Company has the right, subject to
      certain conditions and limitations, to sell to Fusion up to $8.0 million worth
      of additional common stock, at the Company’s election, over a two year period at
      prices determined based upon the market price of the Company’s common stock at
      the time of each sale, without any fixed discount to the market price as defined
      in the agreement. Common stock may be sold in $80,000 increments every fourth
      business day, with additional $100,000 increments available every third business
      day if the market price of the common stock is $0.10 or higher. This $100,000
      increment may be further increased at graduated levels up to $1.0 million if
      the
      market price increases from $0.10 to $0.80. If the price of the stock is below
      $0.08 per share, no sales shall be made under the agreement. During the six
      months ended September 30, 2008, the Company sold 4,950,001 common shares to
      Fusion under the agreement for cash of $500,000. Assuming a purchase price
      of
      $0.14 per share (the closing sale price of the common stock on September 30,
      2008) the maximum remaining under the common stock purchase agreement was an
      additional $527,000. Upon occurrence of certain events of default as defined,
      Fusion may terminate the stock purchase agreement. The Company does not believe
      a default event has occurred and no termination has been noticed by Fusion.
      The
      Company may terminate the agreement at any time.





Subsequent
      to September 30, 2008 the Company sold 595,548 common shares to Fusion under
      the
      agreement for cash of $80,000.





**Options**


The
      following table summarizes stock option activity for the period:


**Shares**
                **#**
              
              **Weighted
                  average**
                **exercise
                  price**
                **$**
              
              **Weighted**
                **average
                  life**
                **(years)**
              
              **Aggregate**
                **intrinsic
                  value (2)**
                **$**Outstanding
                  March 31, 2008
              
              
              10,897,167
              
              
              0.16Granted
              
              
              800,000
              
              
              0.11Canceled/expired
              
              
              (1,304,167
              )
              
              0.16Exercised
              
              
              -
              
              
              -Outstanding
                  September 30, 2008 (1)
              
              
              10,393,000
              
              
              0.15
              
              
              1.9
              
              
              99,000Exercisable
                  at September 30, 2008
              
              
              8,754,298
              
              
              0.15
              
              
              1.6
              
              
              75,000




(1)
            Options
                outstanding are exercisable at prices ranging from $0.09 to $0.44
                and
                expire over the period from 2009 to
                2013.


(2)
            Aggregate
                intrinsic value is based on the closing price of our common stock
                on
                September 30, 2008 of $0.14 and excludes the impact of options that
                were
                not in-the-money.





**Share
      warrants**


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


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





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


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


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




11




**9.
      PREFERRED STOCK**


On
      December 30, 2002, the Company issued 205,000 shares of 12% Series D
      non-redeemable convertible preferred stock (the "Series D Stock") with a stated
      value of $10 per share. Dividends of 12% per annum were payable, with certain
      exceptions, either in cash or in shares of common stock at the Company's
      election. The remaining 91,000 shares of Series D Stock and accumulated
      dividends automatically converted to 18,200,000 shares of common stock at $0.08
      per share on December 31, 2007. Dividends accrued during the six months ended
      September 30, 2007 totaled $54,750 and increased the loss attributable to common
      stockholders.





On
      June
      27, 2008 the Company issued 75,000 shares of 5% Series AA Convertible Preferred
      Stock (the “Series AA Stock”) with a stated value of $10 per share. Dividends of
      5% per annum are payable in shares of common stock or at the Company’s election
      additional shares of Series AA Stock or under certain circumstances in cash.
      The
      Series AA Stock has voting rights of ten votes per share and a liquidation
      preference equal to $10.00 per share plus accrued and unpaid dividends. The
      stated value plus accrued dividends on Series AA Stock is convertible into
      common stock at $0.10 per common share with automatic conversion on June 30,
      2010 subject to certain limitations. The Company may call the Series AA Stock
      for conversion if the common stock market price is at least $0.25 per share
      for
      ten consecutive trading days.





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





At
      the
      holder’s option the Series AA Stock and the Series AA Warrants were redeemable
      for cash at June 30, 2009 should sufficient shares of common stock not be
      authorized and reserved for conversion of all underlying shares by such date.
      This redemption right was terminated effective September 17, 2008 with the
      shareholders authorizing additional shares of common stock and the Board of
      Directors reserving sufficient shares for future conversions of the Series
      AA
      Stock and exercise of the Series AA Warrants.





The
      proceeds of $750,000 was allocated between the fair value of the Series AA
      Stock
      ($615,227) with the value of the Series AA Warrants ($134,773) treated as a
      discount to the Series AA Stock. The Company determined the fair value of the
      Series AA Warrants using the Black-Scholes option pricing model with the
      following assumptions: no dividend yield; weighted average risk free rate of
      2.93%; volatility of 60.6% and a term of one year. Because the redemption event
      was not certain to occur but was outside the Company’s control, the Company
      recorded the portion of the proceeds attributable to the stock as mezzanine
      equity pursuant to EITF Topic D-98, Classification and Measurement of Redeemable
      Securities after determining the guidance in FAS 150, Accounting for Certain
      Financial Instruments with Characteristics of both Liabilities and Equity did
      not apply. Upon termination of the redemption right on September 17, 2008 the
      value of the stock was reclassified as permanent equity.





Additionally, the
      Company evaluated whether the embedded conversion feature in the preferred
      stock
      required bifurcation and determined that the economic characteristics and risks
      of the embedded conversion feature in the stock were clearly and closely related
      to the stock and concluded that bifurcation was not required under SFAS 133. The
      Company calculated the intrinsic value of the beneficial conversion feature
      as
      $134,773 pursuant
      to the guidance in EITF 00-27, Application of Issue No. 98-5 to Certain
      Convertible Instruments .
      The
      total discount to the Series AA Stock of $269,546, consisting of the value
      of
      the Series AA Warrants and the amount of the beneficial conversion feature,
      is
      being accreted as a deemed dividend over the term of the Series AA Stock. A
      total of $34,934 of the discount was accreted as a deemed dividend for the
      six
      month period ended September 30, 2008 by a charge to paid-in capital. The
      stated 5% dividend also accrues to the carrying value of the Series AA Stock. The
      deemed and stated dividends are also used in determining the net loss
      attributable to common stockholders for the respective periods.





The
      Company determined that the warrants met the definition of a derivative
      instrument at issuance as defined in SFAS 133, Accounting for Derivative
      Instruments and Hedging Activities, and was treated as a liability due to the
      lack of sufficient authorized shares of common stock. The Company recorded
      a
      liability of $134,773 for the value of the warrants. As a derivative liability
      this amount was evaluated for reclassification and if a derivative liability
      adjusted at each reporting period based on the current market price. At June
      30,
      2008 the Company increased the derivative liability to $185,532 recording a
      $50,759 non-cash charge in other expense in the first quarter. Upon the
      authorization and reservation of shares of common stock for exercise of the
      warrants on September 17, 2008, the Company determined the warrants were no
      longer a derivative liability. The value at that date of $132,315 was
      reclassified to paid-in capital and a non-cash gain of $53,217 was recorded
      in
      other income (expense) for the quarter ended September 30, 2008. The
      Company also determined that the termination of the warrant redemption rights
      was an effective modification of the warrant term and calculated the fair value
      of the warrants immediately prior to the modification compared to the value
      immediately after the modification and recorded the difference in warrant value
      of $177,125 as a financing expense in other expenses.





12


**10.
      FAIR VALUE MEASUREMENTS**


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





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


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


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


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





As
      of
      September 30, 2008, the Company held certain assets and liabilities that are
      required to be measured at fair value on a recurring basis, including its cash
      and cash equivalents. The fair value of these assets and liabilities was
      determined using the following inputs in accordance with SFAS 157 at September
      30, 2008:


**Fair
                  Value Measurement as of September 30, 2008****Total**
              
              **Level
                  1**
              
              **Level
                  2**
              
              **Level
                  3****Description**
              
              **$**
              
              **$**
              
              **$**
              
              **$**Cash
                  and cash equivalents (1)
              
              
              137,340
              
              
              137,340
              
              
              -
              
              
              -Warrant
                  derivative liability (2)
              
              
              -
              
              
              -
              
              
              -
              
              
              -





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


(2)
            Represents
                Series AA Warrants issued in June 2008 and valued using the income
                approach using the Black-Scholes option pricing model (see Note 9).
                A
                liability of $185,532 at June 30, 2008 was revalued to $132,315 at
                September 17, 2008 and reclassified as equity (see Note
                9).




13




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


**Warrant****Derivative****Liability****$**Balance
                  at April 1, 2008
              
              
              -Issuance
                  of warrant derivative (1)
              
              
              134,773Adjustment
                  to fair value included in net loss (2)
              
              
              (2,458
              )Reclassification
                  to equity (2)
              
              
              (132,315
              )Balance
                  at September 30, 2008
              
              
              -


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


(2)
            The
                warrant derivative liability was revalued at the end of each reporting
                period until reclassification as equity and the resulting difference
                was
                included in the results of operations in “Other expense”.





**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 quarter ended
      September 30, 2008, 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 however the Company has only recently commenced receiving patent license
      revenue. The Company recognizes revenue from patent license agreements when
      (i)
      the patent license agreement is executed, (ii) the amounts due are fixed,
      determinable, and billable, (iii) the customer has been provided rights to
      the
      licensed technology and (iv) collection of the resulting receivable, if any,
      is
      probable. At the time the Company enters into a contract and provides the
      customer with the licensed technology the Company has performed all of its
      obligations under contract, the rights to the Company’s technology have been
      transferred and no significant performance obligations remain. License
      revenue to date consists of one-time fully paid-up licenses requiring no future
      performance. The Company values nonexclusive cross licenses received
      only if directly used in operations. Patent
      license costs of revenues include contingency legal and other direct costs
      associated with patent licensing.





14




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


**For
                  the three months ended**
              
              **For
                  the six months ended****September
                  30,**
              
              **September
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****$**
              
              **$**
              
              **$**
              
              **$**REVENUES:Products
                  and services
              
              
              174,430
              
              
              2,315,781
              
              
              552,157
              
              
              3,620,415Patent
                  licensing
              
              
              1,600,000
              
              
              -
              
              
              1,600,000
              
              
              -Total
                  revenue
              
              
              1,774,430
              
              
              2,315,781
              
              
              2,152,157
              
              
              3,620,415GROSS
                  PROFIT:Products
                  and services
              
              
              118,433
              
              
              597,398
              
              
              232,490
              
              
              843,513Patent
                  licensing
              
              
              1,038,674
              
              
              -
              
              
              1,038,674
              
              
              -Total
                  gross profit
              
              
              1,157,107
              
              
              597,398
              
              
              1,271,164
              
              
              843,513RECONCILIATION:Total
                  segment gross profit
              
              
              1,157,107
              
              
              597,398
              
              
              1,271,164
              
              
              843,513Operating
                  expenses
              
              
              (756,596
              )
              
              (687,930
              )
              
              (1,442,142
              )
              
              (1,439,339
              )Other
                  income (expense)
              
              
              (165,344
              )
              
              (67,208
              )
              
              (263,062
              )
              
              (155,320
              )Income
                  (loss) before income taxes
              
              
              235,167
              
              
              (157,740
              )
              
              (434,040
              )
              
              (751,146
              )


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




Revenue
      by geographic region is determined based on the location of the Company’s direct
      customers or distributors for product sales and services. Patent license revenue
      is considered United States revenue as payments are for licenses for United
      States operations irrespective of the location of the licensee’s home
      domicile.


**For
                  the three months ended**
              
              **For
                  the six months ended****September
                  30,**
              
              **September
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****$**
              
              **$**
              
              **$**
              
              **$**United
                  States
              
              
              1,600,000
              
              
              -
              
              
              1,600,000
              
              
              -International
              
              
              174,430
              
              
              2,315,781
              
              
              552,157
              
              
              3,620,415Total
                  revenue
              
              
              1,774,430
              
              
              2,315,781
              
              
              2,152,157
              
              
              3,620,415


Sales
      to
      two customers comprised 74% and 10% of revenue for the six months ended
      September 30, 2008. Sales to three customer comprised 33%, 32% and 22% of
      revenue for the six months ended September 30, 2007. Accounts receivable from
      one customer comprised 91% of net accounts receivable at September 30, 2008
      and
      two customers accounted for 72% and 11% of net accounts receivable at September
      30, 2007.





**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. The Company recorded an
      impairment charge of $603,750 in March 2006 for deposits paid to Maycom due
      to
      the uncertainty of obtaining future delivery. In October 2006 the Company
      received delivery from Maycom of the delayed 1,250-unit digEplayer order and
      delivered the order to digEcor. The Company recognized $713,750 of revenue
      from
      this order and reversed an impairment charge of $603,750 in its third fiscal
      2007 quarter.  The Company answered digEcor's complaint and is pursuing
      certain counterclaims.





15


In
      January 2007, the Court ruled on certain motions of the parties. In its ruling,
      the Court dismissed digEcor's unjust enrichment, fraud, negligent
      misrepresentation, tortious interference and punitive damage claims. The Court
      further acknowledged the delivery of the 1,250-unit order and a partial
      settlement between the parties reducing digEcor's claim for purchase-price
      or
      actual damages from $793,750 to $94,846 with such amount still being disputed
      by
      e.Digital. digEcor's contract and damages claims remain in dispute. digEcor
      has
      subsequently amended its Complaint to assert an alternative breach of contract
      claim, and claims for federal, state and common law unfair competition, and
      sought an injunction prohibiting us "from engaging in any competition with
      digEcor until after 2013."





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





In
      April
      2007 digEcor filed a motion for summary judgment seeking enforcement of an
      alleged non-compete provision and an injunction prohibiting the Company from
      competing with digEcor. In October 2007 the Court denied, without prejudice,
      digEcor's motion for partial summary judgment and request for injunction. The
      foregoing and other findings of the Court may be subject to appeal by either
      party.





In
      September 2008 digEcor filed their third request for a partial summary judgment
      again seeking enforcement of the alleged non-compete provision.  digEcor
      also asked the Court to rule on issues surrounding the delayed 1250-unit order
      and e.Digital's alleged breach of  a 2002 contract between the parties.





In
      September 2008 the Company filed a summary judgment motion seeking a ruling
      (i)
      that the alleged non-compete provision is unenforceable and /or superseded
      by
      the 2002 agreement between the parties, and (ii) that the Company has not
      breached any alleged non-compete provisions or the 2002 agreement.  The
      Company also asked the Court to dismiss digEcor's unfair competition claims
      and
      limit digEcor's damages claim.





The
      case
      has now completed the discovery phase. The Company believes that it has
      substantive and multiple defenses and intend to vigorously challenge the
      remaining matters and pursue all counterclaims.  However, there can be no
      assurance the Company will prevail in its counterclaims or in its defense of
      digEcor's remaining claims.





The
      Company is also unable to determine at this time the impact this complaint
      and
      matter may have on its financial position or results of operations. The Company
      has an accrual of $80,000 as an estimate of its obligation related to the
      remaining general damage claim and the Company intends to seek restitution
      from
      Maycom for any damages it may incur. Recovery from Maycom is not assured. Maycom
      is not involved in the design, tooling or production of the Company’s
      proprietary eVU mobile product. Moreover, the Company does not presently plan
      or
      expect to produce or sell digEplayer models to digEcor or other customers in
      the
      future.





Commitment
      Related to Intellectual Property Legal Services


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





16


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


is
      necessary.





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





**Contract
      Manufacturers and Suppliers**


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





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





**Facility
      Lease**


In
      March
      2006 the Company entered into a sixty-two month lease, commencing June 1, 2006,
      for approximately 4,800 square feet with an aggregate payment of $5,805 per
      month excluding utilities and costs. The aggregate payments adjust annually
      with
      maximum aggregate payments totaling $6,535 in the fifty-first through the
      sixty-second month. Future lease commitments aggregated $216,130 at September
      30, 2008.





**Royalties**


In
      connection with a prior note financing, the Company is obligated to pay a
      royalty of $20.00 for each entertainment device sold through December 31, 2008.
      During the six months ended September 30, 2008 and 2007 the Company incurred
      royalties of $3,420 and $47,980, respectively.




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




The
      Company maintains its cash accounts at several financial institutions. Certain
      of these financial institutions do not have Federal Deposit Insurance
      Corporation (“FDIC”) insurance. Those accounts covered by the FDIC are insured
      up to $250,000 or more per institution. As of September 30, 2008, the Company
      had no bank deposits that exceeded or are not covered by the FDIC
      insurance.




**13.
      INCOME TAX**


The
      Company adopted the provisions of FIN 48 on April 1, 2007 and commenced
      analyzing filing positions in the Jurisdictions
      where we are required to file income tax returns. As a result of the
      implementation of FIN 48, the Company
      recognized no adjustment for uncertain tax provisions and the total amount
      of
      unrecognized tax benefits as
      of
      April 1, 2007 was $-0-. The Tax Reform Act of 1986 (the Act) provides pursuant
      to Internal Revenue Code Sections
      382 and 383 for a limitation of the annual use of NOL and research and
      development tax credit carryforwards
      (following certain ownership changes, as defined by the Act) that could
      significantly limit the Company's
      ability to utilize these carryforwards. The Company has experienced various
      ownership changes as a


result
      of
      past financings and could experience future ownership changes. The Company's
      ability to utilize the aforementioned
      carryforwards may therefore be significantly limited. Additionally, because
      U.S.
      tax laws limit the time
      during which these carryforwards may be applied against future taxes, the
      Company may not be able to take full
      advantage of these reduced attributes for federal income tax purposes. The
      Company has not performed an analysis
      of its deferred tax assets for net operating losses or any possible research
      and
      development credits sufficient to
      meet
      the more likely than not threshold required by FIN 48. Accordingly, the deferred
      tax assets related to net operating
      losses and the offsetting valuation allowance were removed from deferred tax
      assets at April 1, 2007 until such
      an
      analysis is documented.





17


As
      discussed above, as of April 1, 2007, the Company removed its net operating
      losses from deferred tax assets and the offsetting
      valuation allowance until documented by a Section 382 analysis. During the
      quarter ended September 30, 2008 the Company provided a tax provision of
      $264,000 representing foreign taxes for which a credit (a deferred tax asset)
      may be allowable against future United States taxes subject to certain
      limitations. A full valuation allowance has been established to offset the
      remaining net deferred tax assets and the new foreign tax credit at September
      30, 2008 as realization of these assets is uncertain. As of September 30, 2008,
      management believes that it is more likely than not that the net deferred tax
      assets will not be realized based on a lack of taxable earnings. Accordingly,
      the Company has provided a full valuation allowance against its net deferred
      tax
      assets and no tax benefit has been recognized relative to its pretax losses
      or
      foreign tax credits.





18





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





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





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





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





**General**


We
      are a
      holding company incorporated under the laws of Delaware that operates through
      our wholly-owned California subsidiary of the same name. We have innovated
      a
      proprietary secure digital video/audio technology platform ("DVAP") and market
      our eVUTM mobile entertainment device for the travel and recreational industries.
      We also own and are licensing our Flash-RTM portfolio of patents related to the
      use of flash memory in portable devices. Our revenue is derived from the sale
      of
      DVAP products and accessories to customers, warranty and technical support
      services and content fees and related services. We also obtain patent license
      revenue from our Flash-R patent portfolio.





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





We
      are
      commercializing our Flash-R patent portfolio through licensing and we are
      aggressively pursuing enforcement by litigating against those who may be
      infringing our patents. Our international legal firm Duane Morris LLP is
      handling our patent enforcement matters on a contingent fee basis. In September
      2007 and March 2008 we filed our first tranche of patent infringement litigation
      against eight defendants. In September 2008 we recorded initial patent license
      revenue from a settlement with one of the defendants. We expect additional
      patent license revenues in future periods.





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





**Overall
      Performance and Trends**


We
      have
      incurred significant operating losses and negative cash flow from operations
      in
      the current six-month period and in each of the last three fiscal years and
      these losses have been material. We have an accumulated deficit of $82.8 million
      and a working capital deficit of $707,573 at September 30, 2008. Our operating
      plans may require additional funds that may take the form of debt or equity
      financings. There can be no assurance that any additional funds will be
      available to our company on satisfactory terms and conditions, if at all. Our
      company’s ability to continue as a going concern is in doubt and is dependent
      upon obtaining additional financing or achieving a profitable level of
      operations.





19


Management
      has undertaken steps as part of a plan to improve operations with the goal
      of
      sustaining operations for the next twelve months and beyond. These steps include
      (a) monetizing our Flash-R patent portfolio through licensing and enforcement;
      (b) expanding product sales and marketing to new customers and new markets;
      (c)
      controlling overhead and expenses; and (d) raising additional capital and/or
      obtaining financing.





For
      the
      three and six months ended September 30, 2008:





·
            We
                recognized net income before income taxes of $235,167 for the second
                fiscal quarter ended September 30, 2008. This was before income tax
                expense of $264,000 for foreign taxes. This resulted primarily from
                our
                first patent licensing revenue in September
                2008.





·
            We
                obtained $750,000 from the sale of convertible preferred stock and
                $500,000 from the sale of common stock during the six month period.
                We
                expect that we may need additional financial resources during the
                next
                twelve months to finance our eVU business and support our Flash-R
                patent
                enforcement and licensing
                activities.





·
            Our
                revenues were $2.2 million for the first six months compared to $3.6
                million for the prior year’s six months. Revenues in the first six months
                included $1.6 million of patent license revenue. Last year’s first six
                months revenues included product sales to new European IFE customers.
                Recent 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 for the
                balance of the fiscal year but our results will be dependent on the
                timing
                and quantity of additional patent licenses and eVU orders. 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.





·
            Our
                gross profit for the first six months was $1.3 million or 59% of
                revenues
                compared to $0.8 million or 23% of revenues for the prior year’s first six
                months. Results benefited from higher patent licensing gross profit
                percentages as compared to product sales. Gross profit margins are
                highly
                dependent on revenue and product mix, prices charged, volume of orders
                and
                costs.





·
            Operating
                expenses were $1.4 million for the first six months of fiscal 2009
                (year
                ending March 31, 2009) and 2008. Our operating loss was $171,000
                for the
                six months ended September 30, 2008 and a significant improvement
                compared
                to the operating loss of $596,000 for the first six months of the
                prior
                year. This resulted from initial and higher margin patent license
                revenues.





·
            Our
                net loss for the first six months of fiscal 2009 was $698,000 (including
                tax expense of $264,000) compared to $751,000 for the comparable
                period
                prior. The net loss attributable to common stockholders was $743,000
                and
                $806,000 respectively. The reduced loss was primarily the result
                of higher
                margin patent license revenues.





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





**Critical
      Accounting Policies**


We
      have
      identified a number of accounting policies as critical to our business
      operations and the understanding of our results of operations. These are
      described in our consolidated financial statements located in Item 1 of
      Part I, “Financial Statements,” and in Management’s Discussion and Analysis of
      Financial Condition and Results of Operations in our Annual Report of Form
      10-K
      for the year ended March 31, 2008. The impact and any associated risks related
      to these policies on our business operations is discussed throughout
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations when such policies affect our reported and expected financial
      results.





20


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.





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





Accounting
      for Convertible Preferred Stock


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





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





Fair
      Value Measurements


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





Patent
      License Revenue Recognition


The
      Company has only recently commenced receiving patent license revenue. The
      Company recognizes revenue from patent license agreements when (i) the patent
      license agreement is executed, (ii) the amounts due are fixed, determinable,
      and
      billable, (iii) the customer has been provided rights to the licensed technology
      and (iv) collection of the resulting receivable, if any, is probable. At the
      time the Company enters into a contract and provides the customer with the
      licensed technology the Company has performed all of its obligations under
      contract, the rights to the Company’s technology have been transferred and no
      significant performance obligations remain. License
      revenue to date consists of one-time fully paid-up licenses requiring no future
      performance. The Company will value nonexclusive cross licenses
      received only if directly used in operations.





21


Patent
      license costs of revenues include contingency legal and other direct costs
      associated with patent licensing.





**Results
      of Operations**





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


Three
                  Months Ended September 30,2008
              
              
              
              2007%
                  of
              
              
              
              %
                  of
              
              ChangeDollars
              
              Revenue
              
              Dollars
              
              Revenue
              
              Dollars
              
              %Revenues:Product
                  revenues
              
              
              1,683
              
              
              0.1
              %
              
              2,108,082
              
              
              91.0
              %
              
              (2,106,399
              )Service
                  revenues
              
              
              172,747
              
              
              9.7
              %
              
              207,699
              
              
              9.0
              %
              
              (34,952
              )Patent
                  license
              
              
              1,600,000
              
              
              90.2
              %
              
              -
              
              
              0.0
              %
              
              1,600,0001,774,430
              
              
              100.0
              %
              
              2,315,781
              
              
              100.0
              %
              
              (541,351
              )
              
              (23.4
              %)Gross
                  Profit:Product
                  gross profit
              
              
              (12,292
              )
              
              
              
              
              423,403
              
              
              
              
              
              (435,695
              )Service
                  gross profit
              
              
              130,725
              
              
              
              
              
              173,995
              
              
              
              
              
              (43,270
              )Patent
                  license gross profit
              
              
              1,038,674
              
              
              
              
              
              -
              
              
              
              
              
              1,038,6741,157,107
              
              
              65.2
              %
              
              597,398
              
              
              25.8
              %
              
              559,709
              
              
              93.7
              %Operating
                  Expenses:Selling
                  and administrative
              
              
              627,497
              
              
              35.4
              %
              
              471,995
              
              
              20.4
              %
              
              155,502
              
              
              32.9
              %Research
                  and related
              
              
              129,099
              
              
              7.3
              %
              
              215,935
              
              
              9.3
              %
              
              (86,836
              )
              
              (40.2
              %)756,596
              
              
              42.6
              %
              
              687,930
              
              
              29.7
              %
              
              68,666
              
              
              10.0
              %Other
                  income (expenses)
              
              
              (165,344
              )
              
              (9.3
              %)
              
              (67,208
              )
              
              (2.9
              %)
              
              (98,136
              )
              
              146.0
              %Income
                  (loss) before income taxes
              
              
              235,167
              
              
              13.3
              %
              
              (157,740
              )
              
              (6.8
              %)
              
              392,907
              
              
              (249.1
              %)





*Income
      (loss) before income taxes*


We
      showed
      income before income taxes of $235,167 for the three months ended September
      30,
      2008 compared to a loss of $157,740 for the comparable period of the prior
      year.
      The $392,907 improvement was the result of higher margin patent license
      revenues.





*Revenues*


Revenues
      of $1,774,430 in the second quarter of fiscal 2009 compared to $2,315,781 for
      the comparable prior period. The revenue mix was significantly different each
      period. During the prior year’s second quarter revenues consisted of $2,108,082
      from selling eVU players and related equipment for use by airline customers
      and
      $207,699 from service revenues for content and support services. In the prior
      year’s second quarter we deferred $120,000 of revenue from a multiple element
      arrangement related to the provision of future content services over thirty
      months. 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
      primarily of $1,600,000 of one-time non-recurring patent license revenue
      and $172,747 of service revenues. 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 patent licensing arrangements.





*Gross
      Profit*


Gross
      profit for the second quarter of fiscal 2009 was $1,157,107 or 65.2% of
      revenues. The gross profit for the prior year’s second quarter was $597,398 or
      25.8% of revenues. The improved gross profit percentage resulted from higher
      margin patent license revenue. Gross profit margins are highly dependent on
      revenue mix, prices charged, volume of orders and costs.





22




*Operating
      Expenses*


Selling
      and administrative costs for the three months ended September 30, 2008, were
      $627,497 compared to $471,995 for the second quarter of fiscal 2008. The
      $155,502 increase included an increase in legal expenses of $188,000 and an
      increase of $69,000 in shareholder costs primarily from holding the September
      shareholders meeting offset by a $52,000 reduction in sales commissions and
      a
      $37,000 reduction in other sales related costs both resulting from reduced
      product sales.





Research
      and related expenditures for the three months ended September 30, 2008 were
      $129,099, compared
      to $215,935 for the three months ended September 30, 2007. The decrease resulted
      primarily from reassigning engineers and technicians to customer support and
      service roles in the current year.





*Other
      Income (Expenses)*


Net
      other
      expenses were $165,344 for the second quarter of fiscal 2009 compared to net
      expenses of $67,208 for the second quarter of the prior year. The most recent
      quarter included a non-cash financing expense of $177,125 related to a charge
      for warrant modification, a non-cash $53,217 gain from warrant derivative
      revaluation reduced by $42,114 of interest expense including $15,471 of non-cash
      interest.





For
      the
      second quarter of fiscal 2008 other income consisted of $20,000 from the sale
      of
      trademark rights and interest income of $5,940. Other expenses included interest
      of $62,996, of which $32,729 was non-cash interest from the amortization of
      debt
      discount, and $29,200 of financing royalties.





*Provision
      for Income Taxes*


Income
      tax expense of $264,000 consists of foreign taxes payable on patent license
      revenue.





*Loss
      Attributable to Common Stockholders*


The
      loss
      attributable to common stockholders for the most recent second quarter included
      the loss after taxes of $28,833 reduced by accrued and deemed dividends on
      convertible preferred stock of $43,283 or a net loss of $72,116. The net loss
      after tax for the prior comparable second quarter was $157,740 reduced by
      accrued and deemed dividends of $27,525 for a net loss attributable to common
      stockholders of $185,265.





Six
      months ended September 30, 2008 compared to the six months ended September
      30,
      2007


Six
                  Months Ended September 30,2008
              
              
              
              2007%
                  of
              
              
              
              %
                  of
              
              ChangeDollars
              
              Revenue
              
              Dollars
              
              Revenue
              
              Dollars
              
              %Revenues:Product
                  revenues
              
              
              235,981
              
              
              11.0
              %
              
              3,297,712
              
              
              91.1
              %
              
              (3,061,731
              )Service
                  revenues
              
              
              316,176
              
              
              14.7
              %
              
              322,703
              
              
              8.9
              %
              
              (6,527
              )Patent
                  license
              
              
              1,600,000
              
              
              74.3
              %
              
              -
              
              
              0.0
              %
              
              1,600,0002,152,157
              
              
              100.0
              %
              
              3,620,415
              
              
              100.0
              %
              
              (1,468,258
              )
              
              (40.6
              %)Gross
                  Profit:Product
                  gross profit
              
              
              28,522
              
              
              
              
              
              591,183
              
              
              
              
              
              (562,661
              )Service
                  gross profit
              
              
              203,968
              
              
              
              
              
              252,330
              
              
              
              
              
              (48,362
              )Patent
                  license gross profit
              
              
              1,038,674
              
              
              
              
              
              -
              
              
              
              
              
              1,038,6741,271,164
              
              
              59.1
              %
              
              843,513
              
              
              23.3
              %
              
              427,651
              
              
              50.7
              %Operating
                  Expenses:Selling
                  and administrative
              
              
              1,166,392
              
              
              54.2
              %
              
              943,092
              
              
              26.0
              %
              
              223,300
              
              
              23.7
              %Research
                  and related
              
              
              275,750
              
              
              12.8
              %
              
              496,247
              
              
              13.7
              %
              
              (220,497
              )
              
              (44.4
              %)1,442,142
              
              
              67.0
              %
              
              1,439,339
              
              
              39.8
              %
              
              2,803
              
              
              0.2
              %Other
                  income (expenses)
              
              
              (263,062
              )
              
              (12.2
              %)
              
              (155,320
              )
              
              (4.3
              %)
              
              (107,742
              )
              
              69.4
              %Loss
                  before income taxes
              
              
              (434,040
              )
              
              (20.2
              %)
              
              (751,146
              )
              
              (20.7
              %)
              
              317,106
              
              
              (42.2
              %)





23


*Loss
      before income taxes*


We
      showed
      a loss before income taxes of $434,040 for the six months ended September 30,
      2008 compared to a loss of $751,146 for the comparable period of the prior
      year.
      The $317,106 improvement was the result of higher margin patent license
      revenues.





*Revenues*


Revenues
      of $2,152,157 for the first six months of fiscal 2009 compared to $3,620,415
      for
      the same period of the prior year. The revenue mix was different in the most
      recent six month period due to initial patent license revenue. Fiscal 2009
      six-month revenues included eVU products and service revenue of $552,157 and
      patent license revenue of $1,600,000. We are reliant on a limited number of
      customers with two customers accounting for 74% and 10% of our first six-month
      revenues. During the prior year’s first six months revenues consisted of
      $3,620,415 from selling eVU players and related 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. 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 patent licensing arrangements.





*Gross
      Profit*


Gross
      profit for the first six months of fiscal 2009 was $1,271,164 or 59.1% of
      revenues. The gross profit for the prior year’s first six months was $843,513 or
      23.3% of revenues. The improved gross profit percentage resulted from higher
      margin patent license revenue. Gross profit margins are highly dependent on
      revenue mix, prices charged, volume of orders and costs.





*Operating
      Expenses*


Selling
      and administrative costs for the six months ended September 30, 2008, were
      $1,166,392 compared to $943,092 for the first six months of fiscal 2008. The
      $223,300 increase included an increase in legal expenses of $258,000 and an
      increase of $76,000 of shareholder costs primarily related to holding the
      September shareholders meeting offset by a $103,000 reduction in sales
      commissions from reduced product sales.





Research
      and related expenditures for the six months ended September 30, 2008 were
      $275,750, compared
      to $496,247 for the six months ended September 30, 2007. The decrease resulted
      primarily from reassigning engineers and technicians to customer support and
      service roles in the current year.





*Other
      Income (Expenses)*


Net
      other
      expense was $263,062 for the six months ended September 30, 2008 compared to
      net
      expenses of $155,320 for the six months ended September 30, 2007. The most
      recent period included a non-cash financing expense of $177,125 related to
      a
      charge for warrant modification and $90,708 of interest expense including
      $43,815 of non-cash interest.





For
      the
      first six months of fiscal 2008 other income consisted of $20,000 from the
      sale
      of trademark rights and $6,099 of interest and foreign exchange income. Other
      expenses included interest expense of $131,668, of which $67,162 was non-cash
      interest from the amortization of debt discount, and $47,980 of financing
      royalties..





*Provision
      for Income Taxes*


Income
      tax expense of $264,000 consists of foreign taxes payable on patent license
      revenue.





*Loss
      Attributable to Common Stockholders*


The
      loss
      attributable to common stockholders for the six months ended September 30,
      2008
      included the loss after taxes of $698,040 reduced by accrued and deemed
      dividends on convertible preferred stock of $44,694 or a net loss of $742,734.
      The net loss after tax for the prior comparable six months was $751,146 reduced
      by accrued and deemed dividends of $54,750 for a net loss attributable to common
      stockholders of $805,896.





**Liquidity
      and Capital Resources**


At
      September 30, 2008, we had a working capital deficit of $707,573 compared to a
      working capital deficit of $1.3 million at March 31, 2008. At September 30,
      2008
      we had cash on hand of $137,340.





24




*Operating
      Activities*


Cash
      used
      in operating activities of $1,149,177 for the six months period ended September
      30, 2008 included the
      $698,040 loss decreased by non-cash expenses of $225,209. Major components
      providing operating cash was an increase of $794,356 in accounts payable and
      an
      increase of $264,000 for accrued income taxes. Major components using operating
      cash included an increase of $1,584,784 in accounts receivable and a $62,324
      increase in inventory. We have negotiated terms with our contract suppliers
      reducing advance production payments required prior to product delivery. Our
      terms to customers vary but we often require payment prior to shipment of
      product and any such payments are recorded as deposits. Patent license payments
      are normally due at signing of the license or within 30 days or less.
      Receivables associated with patent licensing of $1,600,000 were paid in October
      2008. No future payments are due under the license.





Cash
      used
      in operating activities during the six months ended September 30, 2007 was
      $812,749. 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
      six months ended September 30, 2008, cash provided by financing activities
      was $1,164,401.
      This included $500,000 from
      the
      sale of common stock to Fusion Capital Fund II, LLC (“Fusion”) pursuant to a
      purchase agreement and $700,000 cash from the sale of preferred stock. We
      reduced our secured note balance by $50,000, made term principal payments of
      $25,599 and obtained $40,000 in July 2008 from a new one year note. During
      the
      first six months of the prior year we obtained $640,000 from the sale of common
      stock to Fusion and made a secured note payment of $100,000.





We
      may
      have access to up to $527,000 of additional funding until January 2009 pursuant
      to the Fusion agreement (or a maximum of $6.5 million at significantly higher
      stock prices). Future availability under the Fusion agreement is subject to
      many
      conditions, some of which are predicated on events that are not within the
      Company’s control. There can be no assurance this capital resource will be
      available or be sufficient.





*Debt
      and Other Commitments*


We
      currently have a secured note for $400,000 due on December 23, 2008, an
      unsecured note for $40,000 due in July 2009 and an unsecured convertible term
      debt with a principal amount of $656,943. We made $120,000 of term note
      principal and interest payments through the issuance of common shares during
      the
      first six months. Our plans are to make future principal and interest payments
      with shares of common stock, subject to maintaining the $0.10 minimum share
      price and other covenants of the term loan.





At
      September 30, 2008 we were committed to approximately $150,000 as purchase
      commitments for product and components. These orders are generally subject
      to
      modification as to timing, quantities and scheduling and in certain instances
      may be cancelable without penalty.




We
      are
      also committed for our office lease and for royalties on eVU product sales
      as
      more fully described in Note 12 to 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.





25


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





*Cash
      Requirements*


Other
      than cash on hand, accounts receivable and the Fusion Capital financing
      commitment, we have no material unused sources of liquidity at this time. Based
      on our cash position at September 30, 2008 and subsequent collection of
      $1,600,000 in receivables in October and assuming (a) continuation of existing
      eVU product business, (b) current planned expenditures and level of operation,
      and (c) expected cash debt service of $418,000 (assuming convertible term debt
      payments are made in shares of common stock) we believe we will require
      approximately $1.5 million of additional capital resources for the next twelve
      months. Actual results could differ significantly from management plans. We
      believe we may be able to obtain additional funds from future patent licensing
      and product margins but actual future margins to be realized, if any, and 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. Accordingly we may need equity or debt financing in the next twelve
      months for working capital and we may need equity or debt financing for payment
      of existing debt obligations and other obligations.





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





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





**Item
      4. Controls and Procedures**


Based
      on
      an evaluation of our disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended)
      required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of June 30, 2008,
      our President (“Principal Executive Officer” or “PEO”) and Interim Chief
      Accounting Officer (“Principal Financial Officer” or “PFO”) have concluded that
      our disclosure controls and procedures were not effective in ensuring that
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in the Commission's rules and forms.





In
      connection with the preparation of our annual financial statements, our
      management performed an assessment of the effectiveness of internal control
      over
      financial reporting as of March 31, 2008. Management's assessment included
      an
      evaluation of the design of our internal control over financial reporting and
      testing of the operational effectiveness of those controls. Based on this
      evaluation, management determined that, as of March 31, 2008, there were
      material weaknesses in our internal control over financial reporting. The
      material weaknesses identified during management's assessment were (i) the
      lack
      of independent oversight by an audit committee of independent members of the
      Board of Directors, and (ii) ineffective controls over the period ending closing
      process that failed to identify a misclassification of supplier material
      transfers during the second and third quarter of fiscal 2008. In light of these
      material weaknesses, management concluded that, as of March 31, 2008, we did
      not
      maintain effective internal control over financial reporting. As defined by
      the
      Public Company Accounting Oversight Board Auditing Standard No. 5, a material
      weakness is a deficiency or a combination of deficiencies, such that there
      is a
      reasonable possibility that a material misstatement of the annual or interim
      financial statements will not be prevented or detected





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





26


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





**CHANGES
      IN INTERNAL CONTROL OVER FINANCIAL REPORTING**


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





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





**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





Business
      Litigation





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





In
      January 2007, the Court ruled on certain motions of the parties. In its ruling,
      the Court dismissed digEcor's unjust enrichment, fraud, negligent
      misrepresentation, tortious interference and punitive damage claims. The Court
      further acknowledged the delivery of the 1,250-unit order and a partial
      settlement between the parties reducing digEcor's claim for purchase-price
      or
      actual damages from $793,750 to $94,846 with such amount still being disputed
      by
      e.Digital. digEcor's contract and damages claims remain in dispute. digEcor
      has
      subsequently amended its Complaint to assert an alternative breach of contract
      claim, and claims for federal, state and common law unfair competition, and
      sought an injunction prohibiting us "from engaging in any competition with
      digEcor until after 2013."





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





27


In
      April
      2007 digEcor filed a motion for summary judgment seeking enforcement of an
      alleged non-compete provision and an injunction prohibiting us from competing
      with digEcor. In October 2007 the Court denied, without prejudice, digEcor's
      motion for partial summary judgment and request for injunction. The foregoing
      and other findings of the Court may be subject to appeal by either party.





In
      September 2008 digEcor filed their third request for a partial summary judgment
      again seeking enforcement of the alleged non-compete provision.  digEcor
      also asked the Court to rule on issues surrounding the delayed 1250-unit order
      and e.Digital's alleged breach of  a 2002 contract between the parties.





In
      September 2008 we filed a summary judgment motion seeking a ruling (i) that
      the
      alleged non-compete provision is unenforceable and /or superseded by the 2002
      agreement between the parties, and (ii) that the we have not breached any
      alleged non-compete provisions or the 2002 agreement.  We also asked the
      Court to dismiss digEcor's unfair competition claims and limit digEcor's damages
      claim.





The
      case
      has now completed the discovery phase. We believe that we have substantive
      and
      multiple defenses and intend to vigorously challenge the remaining matters
      and
      pursue all counterclaims.  However, there can be no assurance we will
      prevail in our counterclaims or in our defense of digEcor's remaining claims.





We
      are
      also unable to determine at this time the impact this complaint and matter
      may
      have on our financial position or results of operations. We have an accrual
      of
      $80,000 as an estimate of our obligation related to the remaining general damage
      claim and we intend to seek restitution from Maycom for any damages we may
      incur. Recovery from Maycom is not assured. Maycom is not involved in the
      design, tooling or production of our proprietary eVU mobile product. Moreover,
      we do not presently plan or expect to produce or sell digEplayer models to
      digEcor or other customers in the future.





Intellectual
      Property Litigation


In
      March
      2008, we filed a complaint against Avid Technology, Casio America, LG
      Electronics USA, Nikon, Olympus America, Samsung Electronics America, and Sanyo
      North America in the U.S. District Court for the Eastern District of Texas
      asserting that products made by the listed companies infringe four of our U.S.
      patents covering the use of flash memory technology. These patents are part
      of
      our Flash-R patent portfolio. In September 2007 we filed a similar suit in
      the
      same jurisdiction against Vivitar, a wholly-owned subsidiary of Syntax-Brillian.
      In September 2008 we settled and licensed LG Electronics USA and in October
      2008
      they were dismissed from the lawsuit. We intend to pursue our claims vigorously
      but the litigation is in the early stage and there is no assurance of further
      recovery. Although most fees, costs and expenses of the litigation are covered
      under our contingent fee arrangement with Duane Morris LLP, we may incur support
      and related expenses for this litigation that may become material.





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


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





On
      September 9, 2008 the Company issued 40,404 shares of Common Stock to ASI
      Technology Corporation in consideration of a $4,000 finance fee on a note
      extension. 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
      September 30, 2008 the Company issued 225,225 shares of Common Stock to Davric
      Corporation in consideration of a $30,000 monthly payment for September 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




28




**Item
      3. Defaults Upon Senior Securities**


NONE





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





At
      the
      Company’s Annual Meeting of Stockholders held on September 17, 2008, the
      following individuals, all of the members of the Board of Directors were
      elected: Alex Diaz, Allen Cocumelli, Robert Putnam and Renee Warden . For
      each elected director, the results of the voting were:








**Affirmative
                Votes**
            
            **Votes
                Withheld**Alex
                Diaz
            
            
            244,131,916
            
            
            4,857.763Allen
                Cocumelli
            
            
            243,902,840
            
            
            5,086,839Robert
                Putnam
            
            
            243,885,164
            
            
            5,104,515Renee
                Warden
            
            
            243,823,766
            
            
            5.165,913





Our
      stockholders also voted to approve an amendment to the Company’s Certificate of
      Incorporation to increase the authorized number of shares of common stock from
      300,000,000 to 350,000,000. The results of the voting on this proposal
      were:




**Affirmative
                Votes**
            
            **Negative
                Votes**
            
            **Abstentions**
            
            **Broker
                Non-Votes**230,218,478
            
            
            11,191,152
            
            
            1,080,046
            
            
            -0-





The
      foregoing proposal was approved and accordingly ratified.





Our
      stockholders also voted to ratify Singer Lewak Greenbaum & Goldstein, LLP as
      the Company’s independent auditors for the fiscal year ending March 31, 2009.
      The results of the voting on this proposal were:





**Affirmative
                Votes**
            
            **Negative
                Votes**
            
            **Abstentions**
            
            **Broker
                Non-Votes**45,918,651
            
            
            1,918,460
            
            
            1,152,567
            
            
            -0-




The
      foregoing proposal was approved and accordingly ratified.





**Item
      5. Other Information**


(a)
      NONE


(b)
      NONE





**Item
      6. Exhibits**


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





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





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




29




**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: November
              14, 2008
            By:
            /s/ ROBERT
              PUTNAMRobert
                Putnam, Interim Chief Accounting Officer
              (Principal
                Accounting and Financial Officer
              and
                duly authorized to sign on behalf of the Registrant)





30