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 December 31, 2006





Commission
      File Number 0-20734





**e.Digital
      Corporation**


(Exact
      name of registrant as specified in its charter)




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





**(858)
      304-3016**


(Registrant’s
      telephone number, including area code)








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





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




Large
      Accelerated Filer o Accelerated
      filer o Non-accelerated filer x





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





As
      of
      February 7, 2007 a total of 243,298,578 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 December 31, 2006 and March 31, 2006
            3Consolidated
                Statements of Operations for the three and ninemonths ended December 31, 2006 and 2005
            4Consolidated
                Statements of Cash Flows for the ninemonths ended December 31, 2006 and 2005
            5Notes
                to Interim Consolidated Financial Statements
            6Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            14Item
                3. Quantitative and Qualitative Disclosure about Market
                Risk
            20Item
                4. Controls and Procedures
            20




**PART
      II. OTHER INFORMATION**





Item
                1.
            Legal
                Proceedings
            21Item
                1A.
            Risk
                Factors
            21Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            27Item
                3.
            Defaults
                Upon Senior Securities
            28Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            28Item
                5.
            Other
                Information
            28Item
                6.
            Exhibits
            28SIGNATURES
            
            29





2




**Part
                  I. Financial Information****Item
                  1. Financial Statements:****e.Digital
                  Corporation and subsidiary**
  **CONSOLIDATED
                  BALANCE SHEETS****(Unaudited)**
  **December
                  31, 2006**
              
              **March
                  31, 2006****(Unaudited)**$
              
              $**ASSETS****Current**Cash
                  and cash equivalents
              
              
              304,599
              
              
              1,058,723Accounts
                  receivable, trade
              
              
              -
              
              
              2,670Inventory
              
              
              145,452
              
              
              -Deposits
                  and prepaid expenses
              
              
              81,696
              
              
              31,667**Total
                  current assets**
              
              
              531,747
              
              
              1,093,060Property
                    and equipment, net of accumulated depreciation of$633,526
                    and $593,266, respectively
              
              
              22,248
              
              
              62,508**Total
                  assets**
              
              
              553,995
              
              
              1,155,568**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****Current**Accounts
                  payable, trade
              
              
              760,592
              
              
              261,196Other
                  accounts payable and accrued liabilities
              
              
              64,116
              
              
              107,145Accrued
                  lease liability
              
              
              515,000
              
              
              515,000Accrued
                  employee benefits
              
              
              176,303
              
              
              117,108Dividends
              
              
              437,099
              
              
              402,305Customer
                  deposits
              
              
              82,774
              
              
              793,750Current
                  maturity of convertible term note, less $34,514 of debt
                  discount
              
              
              81,798
              
              
              -Convertible
                  subordinated promissory notes, less $1,103,031 for debt
                  discount
              
              
              -
              
              
              396,969Unsecured
                  promissory notes
              
              
              -
              
              
              1,015,954**Total
                  current liabilities**
              
              
              2,117,682
              
              
              3,609,427Long-term
                  convertible term note, less $40,142 of debt discount
              
              
              814,298
              
              
              -**Total
                  liabilities**
              
              
              2,931,980
              
              
              3,609,427**Commitments
                  and Contingencies****Stockholders'
                  deficit**Preferred
                  stock, $0.001 par value; 5,000,000 shares authorizedSeries
                    D Convertible Preferred stock 250,000 shares designated:91,000
                    and 96,000 issued and outstanding, respectively. Liquidation
                    preference
                    of  $1,347,099 and $1,334,321, respectively
              
              
              910,000
              
              
              960,000Series
                  EE Convertible and Redeemable Preferred stock 20,000 shares designated:0
                    and 2,500 issued and outstanding, respectively. Liquidation preference
                    of
                    $0 and $277,342 respectively
              
              
              -
              
              
              250,000Common
                    stock, $0.001 par value, authorized 300,000,000, 235,275,662
                    and 200,431,000 shares outstanding,
                    respectively
              
              
              235,276
              
              
              200,431Additional
                  paid-in capital
              
              
              77,032,555
              
              
              73,710,110Dividends
              
              
              (437,099
              )
              
              (402,305
              )Accumulated
                  deficit
              
              
              (80,118,717
              )
              
              (77,172,095
              )**Total
                  stockholders' deficit**
              
              
              (2,377,985
              )
              
              (2,453,859
              )**Total
                  liabilities and stockholders' deficit**
              
              
              553,995
              
              
              1,155,568




See notes to interim consolidated financial
      statements




3




**e.Digital
                  Corporation and subsidiary**
  **CONSOLIDATED
                  STATEMENTS OF OPERATIONS****(UNAUDITED)**
  **For
                  the three months ended**
                  **December
                    31**
              
              **For
                  the nine months ended**
                  **December
                    31****2006**
              
              **2005**
              
              **2006**
              
              **2005****Revenues:**
              
              $
              
              $
              
              $
              
              $Products
              
              
              1,302,312
              
              
              106,362
              
              
              1,336,434
              
              
              3,056,111Services
              
              
              **-**
              
              
              8,334
              
              
              **-**
              
              
              46,9331,302,312
              
              
              114,696
              
              
              1,336,434
              
              
              3,103,044**Cost
                  of revenues:**Products
              
              
              362,768
              
              
              105,550
              
              
              391,978
              
              
              2,506,450Services
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              4,875362,768
              
              
              105,550
              
              
              391,978
              
              
              2,511,325Gross
                  profit
              
              
              939,544
              
              
              9,146
              
              
              944,456
              
              
              591,719**Operating
                  expenses:**Selling
                  and administrative
              
              
              366,559
              
              
              205,383
              
              
              1,179,613
              
              
              940,767Research
                  and related expenditures
              
              
              346,982
              
              
              318,358
              
              
              1,101,231
              
              
              968,602Total
                  operating expenses
              
              
              713,541
              
              
              523,741
              
              
              2,280,844
              
              
              1,909,369Operating
                  profit (loss)
              
              
              226,003
              
              
              (514,594
              )
              
              (1,336,388
              )
              
              (1,317,650
              )**Other
                  income (expense):**Interest
                  income
              
              
              1,431
              
              
              317
              
              
              11,928
              
              
              7,764Interest
                  expense
              
              
              (373,170
              )
              
              (141,909
              )
              
              (1,319,135
              )
              
              (374,901
              )Other
              
              
              (10,697
              )
              
              (300
              )
              
              (241,876
              )
              
              (1,600
              )Other
                  income (expense)
              
              
              (382,436
              )
              
              (141,892
              )
              
              (1,549,083
              )
              
              (368,737
              )**Loss
                  and comprehensive loss for the period**
              
              
              (156,433
              )
              
              (656,486
              )
              
              (2,885,471
              )
              
              (1,686,387
              )Accrued
                  dividends on the Series D and EE Preferred stock
              
              
              (29,313
              )
              
              (42,586
              )
              
              (95,937
              )
              
              (128,271
              )**Loss
                  attributable to common stockholders**
              
              
              (185,746
              )
              
              (699,072
              )
              
              (2,981,408
              )
              
              (1,814,658
              )**Loss
                  per common share - basic and diluted**
              
              
              (0.00
              )
              
              (0.00
              )
              
              (0.01
              )
              
              (0.01
              )**Weighted
                  average common shares outstanding**
              
              
              220,870,444
              
              
              175,260,876
              
              
              209,257,848
              
              
              175,192,603
  See notes to
      interim consolidated financial statements


4


**e.Digital
                  Corporation and subsidiary**
  **CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(UNAUDITED)**
  **For
                  the nine months ended**
                  **December
                    31****2006**
              
              **2005****OPERATING
                  ACTIVITIES**
              
              $
              
              $Loss
                  for the period
              
              
              (2,885,471
              )
              
              (1,686,387
              )Adjustments
                  to reconcile loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              40,260
              
              
              47,330Accrued
                  interest related to unsecured promissory notes
              
              
              72,198
              
              
              84,375Value
                  assigned to inducement warrants
              
              
              230,709
              
              
              **-**Amortization
                    of interest from warrants and common stockissued
                    in connection with promissory notes
              
              
              1,105,876
              
              
              178,106Gain
                  on settlement of accounts payable debt
              
              
              **-**
              
              
              (84,270
              )Stock-based
                  compensation
              
              
              163,227
              
              
              **-**Changes
                  in assets and liabilities:Accounts
                  receivable, trade
              
              
              2,670
              
              
              44,547Inventory
              
              
              (145,452
              )
              
              **-**Prepaid
                  expenses and other
              
              
              (50,029
              )
              
              92,581Accounts
                  payable, trade
              
              
              499,396
              
              
              85,410Other
                  accounts payable and accrued liabilities
              
              
              (43,029
              )
              
              (75,002
              )Customer
                  deposits
              
              
              (710,976
              )
              
              (149,375
              )Accrued
                  employee benefits
              
              
              59,195
              
              
              (1,679
              )Cash
                  (used in) operating activities
              
              
              (1,661,426
              )
              
              (1,464,364
              )**FINANCING
                  ACTIVITIES**Payment
                  on 15% Unsecured Note
              
              
              (12,337
              )
              
              (15,764
              )Proceeds
                  from 12% Convertible Subordinated Promissory Notes
              
              
              **-**
              
              
              350,000Proceeds
                  from exercise of warrants
              
              
              919,639
              
              
              **-**Cash
                  (used in) provided by financing activities
              
              
              907,302
              
              
              334,236Net
                  increase (decrease) in cash and cash equivalents
              
              
              (754,124
              )
              
              (1,130,128
              )Cash
                  and cash equivalents, beginning of period
              
              
              1,058,723
              
              
              1,289,253Cash
                  and cash equivalents, end of period
              
              
              304,599
              
              
              159,125**Supplemental
                  Disclosures of Cash Flow Information:**Cash
                  paid during the period for interest and debt expense
              
              
              105,337
              
              
              112,424**Supplemental
                  schedule of noncash investing and financing
                  activities:**Deemed
                  dividends on Series D and EE preferred stock
              
              
              95,937
              
              
              128,271Stock
                  based compensation expense
              
              
              163,227
              
              
              **-**Value
                  assigned to inducement warrants
              
              
              230,709
              
              
              **-**Common
                  stock issued on conversion of preferred stock
              
              
              361,154
              
              
              905,823Unsecured
                  notes exchanged for convertible term note
              
              
              970,752Common
                  stock issued on note exchange
              
              
              77,500




See notes to interim consolidated financial
      statements




5




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


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





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 December 31, 2006, 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 nine months ended December 31, 2006 are
      not
      necessarily indicative of the results that may be expected for the fiscal year
      ending March 31, 2007. For further information, refer to the Company's
      consolidated financial statements and footnotes thereto for the year ended
      March
      31, 2006 filed on Form 10-K.





The
      Company has incurred significant losses and negative cash flow from operations
      in each of the last three years and has an accumulated deficit of $80,118,717
      at
      December 31, 2006. At December 31, 2006, the Company had a working capital
      deficiency of $1,585,935. Substantial portions of the losses are attributable
      to
      marketing costs for new technology and substantial expenditures on research
      and
      development of technologies. The Company's operating plans require additional
      funds that may take the form of debt or equity financings. There can be no
      assurance that any additional funds will be available. The Company's ability
      to
      continue as a going concern is in substantial doubt and is dependent upon
      achieving a profitable level of operations and obtaining additional
      financing.





Management
      has undertaken steps as part of a plan to improve operations with the goal
      of
      sustaining our operations for the next twelve months and beyond. These steps
      include (a) controlling overhead and expenses; (b) expanding sales and marketing
      to new business customers and new markets and (c) raising, if necessary,
      additional capital and/or obtaining third party financing.





There
      can
      be no assurance the Company can successfully accomplish these steps and it
      is
      uncertain it will achieve a profitable level of operations and obtain additional
      financing. There can be no assurance that any additional financings will be
      available to the Company on satisfactory terms and conditions, if at all. In
      the
      event the Company is unable to continue as a going concern, management 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
      September 13, 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. (“SAB 108”) which provides interpretive guidance on how
      the effects of the carryover or reversal of prior year misstatements should
      be
      considered in quantifying a current year misstatement. The guidance is
      applicable for our fiscal 2007. We are not yet in a position to determine what,
      if any, effects SAB No. 108 will have on our financial statements.




6




In
      June
      2006, the EITF reached a consensus on EITF 06-3, “How Taxes Collected from
      Customers and Remitted to Governmental Authorities Should Be Presented in the
      Income Statement” (“EITF 06-3”). EITF 06-3 provides that taxes imposed by a
      governmental authority on a revenue producing transaction between a seller
      and a
      customer should be shown in the income statement on either a gross or a net
      basis, based on the entity’s accounting policy, which should be disclosed
      pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” If such
      taxes are significant, and are presented on a gross basis, the amounts of those
      taxes should be disclosed. EITF 06-3 will be effective beginning with our fourth
      quarter of current year fiscal 2007. We are currently evaluating the impact
      EITF
      06-3 will have on the presentation of our financial statements.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS No.
      157”). SFAS No. 157 defines fair value, establishes a framework for measuring
      fair value in generally accepted accounting principles (GAAP), expands
      disclosures about fair value measurements, and applies to other accounting
      pronouncements that require or permit fair value measurements. SFAS No. 157
      does
      not require any new fair value measurements. However, the FASB anticipates
      that
      for some entities, the application of SFAS No. 157 will change current practice.
      SFAS No. 157 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007. The Company is currently evaluating the
      impact of SFAS No. 157.





In
      June
      2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes—an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in a
      company's financial statements in accordance with SFAS No. 109, "Accounting
      for
      Income Taxes." FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 is effective
      for
      fiscal years beginning after December 15, 2006. The Company is currently
      reviewing this new standard to determine its effects, if any, on results of
      operations or financial position.





**3.
      LOSS PER SHARE**


Stock
      options, warrants, convertible debt and convertible preferred stock exercisable
      into 33,899,228 shares of common stock were outstanding as at December 31,
      2006.
      These securities were not included in the computation of diluted loss per share
      because they are antidilutive, but they could potentially dilute earnings per
      share in future periods.





The
      loss
      attributable to common stockholders was increased during the nine months ended
      December 31, 2006 and 2005 by accrued dividends of $95,937 and $128,271,
      respectively. The loss attributable to common stockholders was increased during
      the three months ended December 31, 2006 and 2005 by accrued dividends of
      $29,313 and $42,586, respectively.





**4.
      STOCK -BASED COMPENSATION**


The
      Company has adopted stock plans as summarized in Note 5 below. The Company
      adopted SFAS No. 123 (Revised 2004), “Share -Based Payment”, effective April 1,
      2006. SFAS 123R requires the recognition of fair value of stock compensation
      as
      an expense in the calculation of net income. The Company recognizes stock
      compensation expense ratably over the vesting period of individual option
      grants. The Company has no employee awards with market or performance
      conditions. All stock compensation recorded during the period ended December
      31,
      2006 has been accounted for as an equity instrument. Prior to April 1, 2006
      the
      Company followed the Accounting Principles Board (“APB”) Opinion 25, “Accounting
      for Stock Issued to Employees”, and related interpretations for stock
      compensation.





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





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




7




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





The
      Company’s stock options have various restrictions that reduce option value,
      including vesting provisions and restrictions on transfer, among others, and
      are
      often exercised prior to their contractual maturity. The Company plans to issue
      shares on each option exercise and has no plans to repurchase option shares.
      The
      Company recorded $58,259 and $163,227 of stock compensation expense in its
      unaudited Statement of Operations for the three and nine months ended December
      31, 2006, respectively. A total of $44,316 and $110,337 was included in selling
      and administrative costs and $13,943 and $52,890 was included in research and
      related expenditures for the three and nine months ended December 31, 2006,
      respectively. A total of $42,440 and $146,114 for the three and nine months
      ended December 31, 2006, respectively, of this expense relates to prior year
      awards vesting after April 1, 2006. For the three and nine months ended December
      31, 2006, $15,819 and 17,113 relates to options granted after the adoption
      of
      SFAS 123R to consultants. No options were granted to employees during the nine
      months ended December 31, 2006. The weighted-average estimated fair value of
      unvested options was $0.07 at April 1, 2006 and the weighted-average estimated
      fair value of options granted during the nine months ended December 31, 2006
      was
      $0.09 per share, using the Black-Scholes option pricing model with the following
      weighted average assumptions (annualized percentages):





Three
                and Nine
              Months
                Ended
              December
                31, 2006Volatility
            82%
                - 91.0%Risk-free
                interest rate
            4.4%
                - 4.7%Forfeiture
                rate
            0.0%Dividend
                yield
            0.0%Expected
                life in years
            4
                -
                5





The
      dividend yield of zero is based on the fact that the Company has never paid
      cash
      dividends and has no present intention to pay cash dividends. Expected
      volatility is based on the historical volatility of the common stock over the
      period commensurate with the expected life of the options. The expected life
      is
      based on observed and expected time to post-vesting exercise. The expected
      forfeiture rate is zero for consultant options.





Since
      the
      Company has a net operating loss carryforward as of December 31, 2006, no excess
      tax benefit for the tax deductions related to stock-based awards was recognized
      for the three and the nine months ended December 31, 2006. Additionally,
      no incremental tax benefits were recognized from stock options exercised in
      the
      three and nine months ended December 31, 2006 which would have resulted in
      a
      reclassification to reduce net cash provided by operating activities with an
      offsetting increase in net cash provided by financing activities.





As
      of
      December 31, 2006 total estimated compensation cost of options granted but
      not
      yet vested was approximately $201,000 and is expected to be recognized over
      the
      weighted average period of 1.1 years.




SFAS
      123R
      requires the Company to present pro forma information for the comparative period
      prior to the adoption as if the Company had accounted for all employee stock
      options under the fair value method of the original SFAS 123. The following
      table illustrates the effect on net loss and loss per share if the Company
      had
      applied the fair value recognition provisions of SFAS 123 to stock-based
      employee compensation to the prior-year periods.




8








Three
                Months
              Ended
              December
                31,
              2005
            
            Nine
                Month
              Ended
              December
                31,
              2005Net
                loss attributable to common shareholders
            
            $
            (656,486
            )
            $
            (1,686,387
            )Plus:
                Stock-based employee compensation expense included in reported net
                loss
            
            
            -
            
            
            -Less:
                Total stock-based employee compensation expense determined usingfair
                value based method
            
            
            21,199
            
            
            98,346Pro
                forma net loss attributable to common stockholders
            
            $
            (677,685
            )
            $
            (1,784,733
            )Net
                loss per common share - basic and diluted - pro forma
            
            
            ($0.00
            )
            
            ($0.01
            )Net
                loss per common share - basic and diluted - as reported
            
            
            ($0.00
            )
            
            ($0.01
            )





During
      the three and nine months ended December 31, 2005, under APB 25, the Company
      estimated the fair value of each stock award at the grant date by using the
      Black-Scholes option-pricing model with the following weighted average
      assumptions used for grants in 2005: dividend yield of zero percent for
      each period; expected volatility of 75 percent; risk-free interest rates of
      3.9
      percent; and expected life of 2.5 years.





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





**5.
      OPTIONS AND WARRANTS**


**Options**


The
      Company has stock options outstanding under two stock option plans. The 1994
      Stock Option Plan entitled certain directors, key employees and consultants
      of
      the Company to purchase common shares of the Company. The 1994 Plan covered
      a
      maximum aggregate of 14,000,000 shares, as amended and expired on August 18,
      2004. At December 31, 2006 there were options outstanding on 3,636, 666 common
      shares pursuant to the 1994 Plan.





The
      2005
      Equity-Based Compensation Plan was approved by the stockholders on August 5,
      2005 and covers a maximum of 10,000,000 common shares. The Company may grant
      incentive options, nonstatutory options, stock appreciation rights or restricted
      stock awards to employees, directors or consultants. At December 31, 2006 there
      were options outstanding on 8,090,000 common shares pursuant to the 2005 Plan
      with options on 1,910,000 shares available for future grant under the 2005
      Plan.





The
      following table summarizes stock option activity for the period:





Shares
            
            Weighted
                average
              exercise
                price#
            
            $Outstanding
                March 31, 2006
            
            
            11,071,666
            
            
            0.19Granted
                (2)
            
            
            900,000
            
            
            0.16Canceled/expired
            
            
            (245,000
            )
            
            0.81Exercised
            
            
            -
            
            
            -Outstanding
                December 31, 2006 (1)
            
            
            11,726,666
            
            
            0.17Exercisable
                at December 31, 2006
            
            
            6,298,330
            
            
            0.20





(1)
            Options
                outstanding are exercisable at prices ranging from $0.09 to $0.55
                and
                expire over the period from 2006 to 2011 with an average life of
                3.4
                years.


(2)
            Includes
                750,000 shares exercisable at $0.16 per share to an intellectual
                property
                consultant assisting in monetizing the Company’s patent portfolio. A total
                of 100,000 options vested at grant and the balance of 650,000 are
                performance based vesting only on the achievement of milestones including
                significant patent license fees.




9




**Share
      warrants**


The
      following table summarizes information about warrant activity during the period
      ended December 31, 2006:


Shares
            
            Weighted
                average
              exercise
                price#
            
            $Outstanding
                March 31, 2006
            
            
            14,082,500
            
            
            0.09Warrants
                issued
            
            
            2,331,572
            
            
            0.15Warrants
                canceled/expired
            
            
            -
            
            
            -Warrants
                exercised
            
            
            (11,080,250
            )
            
            0.09Outstanding
                December 31, 2006
            
            
            5,333,822
            
            
            0.11





In
      August
      and September 2006, as an inducement for early warrant exercise, the Company
      offered to holders of outstanding “A” and “B” Warrants a new warrant exercisable
      for 25% of the shares issued exercisable at $.15 per share through August 31,
      2009 (“New Warrant”). A total of 9,218,750 warrants were exercised for cash
      proceeds of $786,719 and debt reduction of $89,062 and the Company issued
      2,304,692 New Warrants.





In
      August
      and September 2006, as an inducement for early warrant exercise of Series EE
      Warrants, the Company offered holders a New Warrant equal to 12% of the shares
      issued upon exercise. A total of 224,000 warrants were exercised for cash
      proceeds of $17,920 and the Company issued 26,880 New Warrants.





The
      Company recorded a non-cash other expense in the statement of operations for
      $230,709 representing the fair value of the 2,331,572 New Warrants issued as
      an
      inducement for early exercise. Fair value was determine using the Black-Scholes
      option pricing model assuming no expected dividends, 120% volatility, expected
      life of 3 years and a risk-free interest rate of 4.85%.





During
      the period ended December 31, 2006 a total of 1,637,500 other warrants were
      exercised for cash proceeds of $115,000 and debt reduction of $16,000. No
      inducement was granted in connection with these warrant exercises.


The
      Company has outstanding share warrants as of December 31, 2006, granted in
      connection with private placements entitling the holders to purchase one common
      share for each warrant held as follows (subject to certain future antidilution
      price protection):





Description
            Number
                of
              Common
                Shares
            Exercise
                Price
              Per
                Share $
            Expiration
                DateWarrant
            2,846,000
            0.08
            November
                30, 2007Warrant
            78,125
            0.10
            February
                28, 2009Warrant
            78,125
            0.09
            February
                4, 2007Warrant
            2,331,572
            0.15
            August
                31, 2009Total
            5,333,822
            0.11
            Average





**6.
      PROMISSORY NOTES**


**12%
      Convertible Subordinated Promissory Notes**


In
      October 2005, the Company’s 12% Subordinated Promissory Notes were modified by
      extending the maturity date to December 31, 2006 and to increase the maximum
      allowable note amount from $1,000,000 to $1,500,000 and all $500,000 of
      additional notes were sold. Noteholders acquiring 12% Subordinated Promissory
      Notes on or after October 26, 2005 receive a royalty equal to (i) the principal
      of the 12% Subordinated Promissory Note purchased divided by (ii) $500,000
      multiplied by (iii) Twenty Dollars ($20.00) for each eVU device sold during
      the
      calendar years of 2006, 2007 and 2008. The outstanding 12% Subordinated
      Promissory Notes were also amended such that the principal amount was
      convertible and on February 24, 2006 the conversion price was adjusted from
      $0.19 per share to $0.08 per share pursuant to an antidilution adjustment.
      A
      debt discount of $1,225,590 was recorded to reflect the value of the reduced
      conversion price of the debt and the value of repricing 2,000,000 warrants
      and
      was amortized over the remaining term of the notes or accelerated on note
      conversion.





During
      the period September through December 2006, the $1,300,000 balance of notes
      was
      converted into 16,250,000 common shares.





The
      Company recorded in other income and expenses royalty expense related to the
      $500,000 of notes as described above of $9,880 for both the three and nine
      months ended December 31, 2006.




10




**Unsecured
      Promissory Notes**


At
      March
      31, 2006 the Company had two short-term 15% unsecured promissory notes
      outstanding. The following table summarized activity for the nine months ended
      December 31, 2006:





Balance
                  at March 31, 2006 (notes amended effective June 30, 2006 to be
                  due on
                  December 31, 2006)
            
            $
            1,015,954Principal
                exchanged in August 2006 as exercise price of warrants
            
            
            (105,062
            )Principal
                payments
            
            
            (12,337
            )Accrued,
                unpaid interest
            
            
            72,198Balance
                exchanged for new three year term note (1)
            
            
            (970,752
            )$
            -





(1)
      On
      December 12, 2006 the Company exchanged the balance of the two short-term 15%
      Unsecured Promissory Notes due December 31, 2006 for (i) a new 7.5% Convertible
      Subordinated Term Note, with principal and interest payable monthly, in the
      principal amount of $970,752 due November 30, 2009 and (ii) 500,000 shares
      of
      common stock representing consideration for extending the maturity date and
      reducing the interest rate from 15% to 7.5%. As a consequence of the exchange,
      the previously outstanding 15% Unsecured Promissory Notes due December 31,
      2006
      were cancelled.





**7.5%
      Convertible Subordinated Term Note**


On
      December 12, 2006 the Company issued a new 7.5% Convertible Subordinated Term
      Note in the principal amount of $970,752 due November 30, 2009 in exchange
      for
      the 15% Unsecured Promissory Notes described above. The note provides for
      monthly principal and interest installments of $6,000 starting December 2006,
      increasing to $15,000 starting in February 2007, $30,000 starting in December
      2007 and $50,000 starting in December 2008 with maturity November 30, 2009.
      Commencing with the February 2007 installment payment, the Company may, subject
      to certain limitations, elect to make such installment payments either in cash
      or in shares of common stock (“Monthly Installment Shares”). Monthly Installment
      Shares will be valued at the arithmetic average of the closing prices for the
      last five trading days of the applicable month without discount. Installment
      note payments must be paid in cash if the computed average price is less than
      $0.10 per share. Subject to certain notice periods and other limitations, the
      balance of the note is convertible by the holder at $0.30 per common share
      beginning February 1, 2007 and the Company may elect to call the note for
      mandatory conversion if the closing sale price of the Company’s common stock is
      at least $0.40 per share for ten consecutive trading days. The Company may
      also
      prepay the note in full or in minimum parts of $50,000 on ten-day notice. The
      note may be subordinate to certain future senior indebtedness.





The
      Company evaluated the note exchange under FASB No. 15 “Accounting
      by Debtors and Creditors for Troubled Debt Restructurings” and determined that
      no gain or loss should be recorded as a result of the exchange. The fair value
      of the 500,000 shares issued of $77,500 is a debt discount being amortized
      over
      the term of the note using the interest method.





The
      following table summarizes the balance of the note at December 31,
      2006:





7.5%
                convertible subordinated term note
            
            $
            970,752Less
                unamortized debt discount
            
            
            (74,656
            )Subtotal
            
            
            896,096Less
                current portion
            
            
            (81,798
            )$
            814,298








11




**7.
      STOCKHOLDERS’ EQUITY**


The
      following table summarizes stockholders’ equity transactions during the
      nine-month period ended December 31, 2006:




AdditionalPreferred
                stock
            
            Common
                stock
            
            Paid-in
            
            
            
            AccumulatedShares
            
            Amounts
            
            Shares
            
            Amounts
            
            Capital
            
            Dividends
            
            DeficitBalance,
                March 31, 2006
            
            
            98,500
            
            $
            1,210,000
            
            
            200,431,000
            
            $
            200,431
            
            $
            73,710,110
            
            $
            (402,305
            )
            $
            (77,172,095
            )Accrued
                dividends on Series D Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (85,737
            )
            
            -Accrued
                dividends on Series EE Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (10,210
            )
            
            -Non-cash
                stock based compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            163,227
            
            
            -
            
            
            -Conversion
                of Preferred Stock
            
            
            (7,500
            )
            
            (300,000
            )
            
            4,514,412
            
            
            4,514
            
            
            356,640
            
            
            61,153
            
            
            (61,153
            )Stock
                issued on exercise of warrants
            
            
            -
            
            
            -
            
            
            11,080,250
            
            
            11,080
            
            
            1,013,620
            
            
            -
            
            
            -Stock
                issued on conversion of debt
            
            
            -
            
            
            -
            
            
            18,750,000
            
            
            18,750
            
            
            1,481,250
            
            
            -
            
            
            -Stock
                issued in connection with note addendum
            
            
            -
            
            
            -
            
            
            500,000
            
            
            500
            
            
            77,000
            
            
            -
            
            
            -Value
                assigned to inducement warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            230,709
            
            
            -
            
            
            -Loss
                for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,885,471
            )Balance,
                December 31, 2006
            
            
            91,000
            
            
            910,000
            
            
            235,275,662
            
            $
            235,275
            
            $
            77,032,555
            
            $
            (437,099
            )
            $
            (80,118,717
            )





**8.
      PREFERRED STOCK**


**Convertible
      Non-Redeemable Series D**


On
      December 30, 2002, the Company issued 205,000 shares of 12% Series D
      non-redeemable convertible preferred stock (the "Series D Stock") with a stated
      value of $10 per share. Dividends of 12% per annum are payable, with certain
      exceptions, either in cash or in shares of common stock at the Company's
      election. The conversion price for each share of Series D Stock is $0.08 subject
      to certain adjustments if the Company issues shares at prices lower than $0.08.
      The Series D Stock shall be subject to automatic conversion on December 31,
      2007. As of December 31, 2006 the 91,000 shares of the Series D Stock would
      have
      been convertible into 16,838,740 shares common stock. The Series D stock shall
      be subject to automatic conversion on December 31, 2007.





**Convertible
      Redeemable Series EE**


On
      November 30, 2004, the Company issued 18,500 shares of 8% Series EE Convertible
      Preferred Stock (the "Series EE Stock") at a per share price of $100 for an
      aggregate amount of $1,850,000. The Series EE Stock was subject to automatic
      conversion in November 2006 and no shares were outstanding at December 31,
      2006.
      During the nine months ended December 31, 2006 a total of 2,500 shares of Series
      EE Stock were converted into 3,607,289 shares of common stock.





**9.
      LITIGATION**


In
      May
      2006, the Company announced that a complaint had been filed against the Company
      and certain of its officers and employees by digEcor, Inc. in the Third Judicial
      District Court of Utah, County of Salt Lake. The complaint alleged breaches
      of
      contract, unjust enrichment, breaches of good faith and fair dealing, fraud,
      negligent misrepresentation, and interference with prospective economic
      relations. digEcor sought, among other things, an injunction to prevent 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 digEplayersTM with our contract manufacturer, Maycom Co., Ltd.
      Maycom was paid in full for the order by both e.Digital and digEcor by March
      2006, but Maycom failed to timely deliver the order. The Company recorded an
      impairment charge of $603,750 in March 2006 for deposits paid to Maycom due
      to
      the uncertainty of obtaining future delivery. In October 2006 the Company
      received delivery from Maycom of the delayed 1,250-unit digEplayer order and
      delivered the order to digEcor. The Company recognized $713,750 of revenue
      from
      this order and reversed an impairment charge of $603,750 in its third fiscal
      2007 quarter.





The
      Company has answered the complaint and is pursuing certain counterclaims. The
      case is currently in the discovery phase. In January 2007, the Court ruled
      on
      certain motions of the parties. In its ruling, the Court dismissed digEcor’s
      unjust enrichment, fraud, negligent misrepresentation, tortuous interference
      and
      punitive damage claims. The Court further acknowledged the delivery of the
      1,250-unit order and a partial settlement between the parties reducing digEcor’s
      claim for purchase-price or actual damages from $793,750 to $94,846 with such
      amount still being disputed by e.Digital. digEcor’s contract and damages claims
      remain in dispute, and the Court provided some interpretation of the contracts
      at issue in its ruling. The foregoing and other findings of the Court may be
      subject to appeal by either party. The Company believes it has substantive
      and
      multiple defenses and intends to vigorously challenge the remaining matters
      and
      pursue existing and possible additional counterclaims. Due to the uncertainties
      inherent in any litigation, however, there can be no assurance whether the
      Company will or will not prevail in its defense against digEcor’s remaining
      claims. The Company is also unable to determine at this time the impact this
      complaint and matter may have on its financial position or results of
      operations. The Company does not expect this litigation to affect its eVU
      business. The Company has an accrual of $80,000 as an estimate of our obligation
      related to the remaining general damage claim and the Company intends to seek
      restitution from Maycom for any damages it may incur but recovery from Maycom
      is
      not assured. Maycom is not involved in the design, tooling or production of
      our
      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.




12




**10.
      COMMITMENTS AND CONTINGENCIES**


The
      Company depends on contract manufacturers 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.





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
      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.





**1** **1.
      MAJOR CUSTOMERS AND SUPPLIERS**


The
      Company operates in one major line of business, the development, manufacture
      and
      marketing of electronic products. Sales to two customer comprised 53% and 46%
      of
      revenue for the nine months ended December 31, 2006. Sales to one customer
      comprised 99% of revenue for the nine months ended December 31, 2005.





The
      Company currently has one contract manufacturer for its eVU mobile entertainment
      device and depends on this manufacturer to (i) allocate sufficient capacity
      to
      meet 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. Production and
      pricing by such manufacturer 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 ability of
      its
      manufacturer to purchase components. Failure or delay by component suppliers
      could adversely affect the Company’s ability to deliver products on a timely and
      competitive basis in the future.





**12.
      INCOME TAX**


At
      December 31, 2006, a 100% valuation allowance has been provided to offset the
      net deferred tax assets arising from available net operating loss carryforwards
      as management believes it is not more likely than not that the deferred tax
      asset will be realized.





The
      Company has U.S. federal net operating loss carryforwards available at March
      31,
      2006 of approximately $55,250,000 [2005 - $53,300,000] which will begin to
      expire in 2006. The Company has state net operating loss carryforwards of
      $17,600,000 [2005 - $16,400,000] which will begin to expire in 2006. The
      difference between federal and state net operating loss carryforwards is due
      to
      certain percentage limitations of California loss carryforwards and to expired
      California carryforwards.





**13.
      SUBSEQUENT EVENT**


On
      January 2, 2007, the Company entered into a common stock purchase agreement
      with
      Fusion Capital Fund II, LLC, an Illinois limited liability company. Under the
      agreement, Fusion Capital is obligated, under certain conditions, to purchase
      shares from the Company in an aggregate amount of $8.5 million from time to
      time
      over a 25 month period. The Company sold 4,166,666 shares of common stock to
      Fusion Capital under the agreement at a purchase price of $0.12 per share for
      total proceeds of $500,000. Under the terms of the common stock purchase
      agreement, Fusion Capital received a commitment fee consisting of 3,500,000
      shares and an expense reimbursement of 200,000 shares of our common stock.





13




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





THE
      FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
      COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
      FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON
      A
      VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING,
      "BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
      YEAR
      ENDED MARCH 31, 2006.





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





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





**General**


We
      are a
      holding company that operates through our wholly-owned California subsidiary
      of
      the same name and is incorporated under the laws of Delaware. We have innovated
      a proprietary secure digital video/audio technology platform (“DVAP”) that can
      be applied to produce complex portable electronic products. In 2003 our DVAP
      was
      applied to an in-flight entertainment (“IFE”) device, the digEplayer(TM), for
      one customer. Through December 31, 2006 we had delivered over 9,250 digEplayers
      for airline use. In February 2006 we introduced a new and improved DVAP device,
      the eVU (TM) mobile entertainment device. We commenced initial eVU trials with
      target customers in the first quarter of fiscal 2007 and in the third quarter
      of
      fiscal 2007 we began shipping commercial quantities to customers.





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 who desire to market eVU to consumers at their
      facilities. We employ both direct sales to customers and sales through value
      added distributors (VARs) that provide marketing, logistic and/or content
      services to customers.





We
      also
      believe we have a potentially important portfolio of patents for licensing
      related to the use of flash memory in portable devices and we are investigating
      monetizing our patent portfolio. We have engaged an intellectual property
      consultant and are consulting with outside legal firms and are evaluating the
      licensing potential of our patents to the cell phone, PDA/Pocket PC, portable
      A/V recorder, digital camera, camcorder and other portable device
      industries.





Our
      future revenue is expected to be derived from the sale or lease of DVAP products
      and accessories to customers, warranty and technical support services and
      content fees and related services. We also are experienced and available to
      customize DVAP products for customers with special applications. We also expect
      that we can obtain license revenue in the future from our flash memory patent
      portfolio.





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




14




As
      of
      January 31, 2007 we had an order backlog of approximately $0.5 million for
      eVU
      units and accessories. We believe the majority of the backlog will ship to
      customers in the fourth quarter ending March 31, 2007. Backlog orders are
      subject to modification, cancellation or rescheduling by our customers. Future
      shipments may also be delayed due to production delays, component shortages
      and
      other production and delivery related issues.





**Overall
      Performance**


We
      have
      incurred significant operating losses and negative cash flow from operations
      in
      the current period and in each of the last three fiscal years and these losses
      have been material. We have an accumulated deficit of $80,118,717 and a working
      capital deficit of $1,585,935 at December 31, 2006. Our operating plans require
      additional funds which may take the form of debt or equity financings. There
      can
      be no assurance that any additional funds will be available to our company
      on
      satisfactory terms and conditions, if at all. Our company’s ability to continue
      as a going concern is in substantial doubt and is dependent upon achieving
      a
      profitable level of operations and obtaining additional financing.





Management
      of our company has undertaken steps as part of a plan to improve operations
      with
      the goal of sustaining our operations for the next twelve months and beyond.
      These steps include (a) controlling overhead and expenses; (b) expanding sales
      and marketing to business customers and markets and (c) raising additional
      capital and/or obtaining third party financing.





We
      improved our financial position in the most recent quarter ended December 31,
      2006 through:





·
            The
                conversion in the third quarter of fiscal 2007 of the $1,300,000
                balance
                of our 12% Subordinated Promissory Notes due December 31, 2006 into
                16,250,000 shares of common stock. One director converted $50,000
                of the
                Subordinated Notes into 625,000 shares. At December 31, 2006 no such
                notes
                remained outstanding.





·
            The
                exchange on December 12, 2006 of two short-term 15% Unsecured Promissory
                Notes due December 31, 2006 with Davric Corporation for (i) a new
                7.5%
                Convertible Subordinated Term Note, with principal and interest payable
                monthly, in the principal amount of $970,752 due November 30, 2009
                and
                (ii) 500,000 shares of common stock representing consideration for
                extending the maturity date and reducing the interest rate from 15%
                to
                7.5%. As a consequence of the exchange, the previously outstanding
                15%
                Unsecured Promissory Notes due December 31, 2006 were
                cancelled.





·
            Delivery
                of a delayed 1,250 unit digEplayer order resulting in $713,750 of
                revenue
                through the reduction of $713,750 in our customer deposit obligations
                and
                reversal of a $603,750 impairment charge recorded in March
                2006.





For
      the
      nine months ended December 31, 2006:





·
            Our
                revenues were $1,336,434. Sales to two customer accounted for 53%
                and 46%
                of our revenues and our results have been highly dependent on the
                timing
                and quantity of eVU orders by this customer and the potential of
                other
                airline customers. During the quarter we recognized $0.7 million
                in
                digEplayer revenue [see Note 9 Litigation]. Although we expect growing
                orders for eVU players in future quarters we do not expect future
                digEplayer orders. The failure to obtain eVU orders or delays of
                future
                orders could have a material impact on our
                operations.





·
            We
                recorded a gross profit of $944,456 compared to a gross profit of
                $591,719
                for the comparable nine months of the prior year. Gross profit increased
                due to the shipment of eVU units accompanied with the recognition
                of the
                digEplayer revenue where the costs were previously recorded as an
                impairment expense in the prior year. We anticipate improved eVU
                margins
                once the product is in full production with our contract manufacturer
                and
                volumes of scale are realized.





·
            Operating
                expenses were $2.3 million, an increase from $1.9 million for the
                first
                nine months of fiscal 2006 consisting primarily from the adoption
                of SFAS
                123R in which the company recognized approximately $163,227 as stock-based
                compensation expense and approximately $177,863 for preproduction
                and
                engineering costs incurred in the development of the eVU
                product.




15




·
            Other
                income and expenses were a net expense of $1.5 million consisting
                primarily of non-cash interest of $1.1 million related to amortization
                of
                warrants issued with debt and $230,709 as warrant inducement
                expense.





·
            Our
                net loss increased to $2.9 million from $1.8 million for the prior
                nine
                months ended December 31, 2005.





Our
      monthly cash operating costs have been on average approximately $185,000 per
      month for the period ending December 31, 2006. 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. The introduction of the eVU will also require additional
      expenditures, the amount and timing not currently estimable by management.
      Accordingly, our losses are expected to continue until such time as we are
      able
      to realize revenues and margins sufficient to cover our costs of operations.
      We
      may also face unanticipated technical or manufacturing obstacles and face
      warranty and other risks in our business See Part II, Item 1A (Risk Factors)
      below.





**Critical
      Accounting Policies**


Management's
      Discussion and Analysis of Financial Condition and Results of Operations is
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of our financial statements requires us to make estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues,
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, estimates are evaluated, including those related to revenue
      recognition, allowance for doubtful accounts, and intangible assets, taxes,
      impairment of long-lived assets, product warranty, stock-based compensation,
      and
      contingencies and litigation. These estimates are based on historical experience
      and on various other assumptions that we believe to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates. There has been
      no
      material change to our critical accounting policies and estimates from the
      information provided in our Form 10-K for March 31, 2006, except for the
      adoption of SFAS No. 123(R).





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





**Results
      of Operations**





**Nine
      months ended December 31, 2006 compared to nine months ended December 31,
      2005**


For
      the
      nine months ended December 31, 2006, we reported total revenues of $1,336,434,
      a
      57% decrease from total revenues of $3,103,044 for the nine months of fiscal
      2006. Product revenues for nine months ending December 31, 2006 were also
      $1,336,434 , a
      56% decrease
      from product revenues of $3,056,111 for the nine months ending December 31,
      2005. The decrease in product revenue for the first nine months ending December
      31, 2006, resulted from the digEplayer order delay described further in Note
      9
      above, no new orders for digEplayers and limited revenues from eVU due to its
      very recent introduction. We expect growing orders for eVU players in future
      quarters but do not expect future digEplayer orders as our customer has
      announced an alternative supplier has been selected for a replacement
      product.




We
      had no
      service revenues for the nine months ended December 31, 2006 as we focused
      on
      our internally developed eVU product. We had services revenues of $46,933 for
      the comparable nine months of the prior year.





Cost
      of
      sales includes manufacturing costs for products sold, operation costs associated
      with product support and other costs associated with the delivery of engineering
      support and services. Cost of sales for the nine months ended December 31,
      2006
      consisted of $391,798 of product costs and $0 of service costs, consisting
      primarily of manufacturing costs associated with the production of eVU units
      that were shipped in the period. In fiscal 2006, the company recorded an
      impairment charge related to the cost paid for digEplayers not received.
      Subsequently the units have been shipped and accepted by our customer digEcor.
      However, since the cost of this was previously recorded as impairment there
      are
      no cost of sales for those units in the current period. Cost of sales for the
      nine months ended December 31, 2005 consisted of $2,506,450 of product costs
      and
      $4,875 of service costs, consisting mostly of research and development labor
      funded in part by OEM development agreements.




16




Gross
      profit for the first nine months of fiscal 2007 was $944,456 compared to a
      gross
      profit of $591,719 for the first nine months of fiscal 2006. Gross profit as
      a
      percent of sales for the first nine months of fiscal 2007 was 71% compared
      to
      19% for the same period last year. The increase in the gross profit is due
      in
      part to the recognition of the digEplayers as revenue which was previously
      classified as impaired in fiscal year 2006. Gross profit percentage is highly
      dependent on sales, price, volume, purchasing costs and overhead allocations.
      Gross margins may vary significantly from period to period. At the present
      time,
      warranty costs are not significant.





Selling,
      general and administrative expenses include payroll, employee benefits, and
      other costs associated with financing, customer support functions, facilities,
      stock-based compensation and depreciation expenses. Selling, general and
      administrative costs for the nine months ended December 31, 2006, was $1,179,613
      compared to $940,767 for the first nine months of fiscal 2006. The increase
      of
      $238,846 can be attributed to an increase of stock-based compensation expense
      of
      $110,337 and an increase of $143,340 in legal services. Recent quarterly selling
      and administrative expenses have been relatively constant as we maintained
      staffing levels and had no significant outside selling costs. However in the
      future we may incur additional legal costs associated with current litigation
      and additional costs to comply with Section 404 of the Sarbanes-Oxley Act.
      We
      anticipate quarterly selling and administrative expenses to be constant as
      we
      are focused on business customer opportunities.




Research
      and development expenses include payroll, employee benefits, and other costs
      associated with product development. Research and development expenses also
      include third-party development and programming costs. Research and related
      expenditures for the nine months ended December 31, 2006 were $1,101,231,
      as compared
      to $968,602 for the nine months ended December 31, 2005. The increase of
      $132,629 can be attributed to the increase in preproduction costs of $24,335,
      an
      increase of $35,613 for consulting and engineering services, an increase of
      $52,890 for stock-based
      compensation and an increase of $17, 750 in postage and shipping costs
      associated with the production of the eVU product. Research
      and development costs are subject to significant quarterly variations depending
      on the use of outside services, the assignment of engineers to development
      projects, reimbursement by OEM contracts and the availability of financial
      resources.





We
      reported an operating loss of
      $1,336,388 for the nine
      months ended December 31, 2006 as compared to an operating loss of $1,317,650
      for the nine months ended December 31, 2005. The increase in operating loss
      resulted from the increase in gross profit for the nine month period offset
      by
      the increase of $371,475 in operating expenses. We believe, but we cannot
      guarantee, that our strategy of investing in digital video/audio platform
      developments with supply or royalty provisions will provide positive margins
      in
      future periods. The timing and amount of product sales and the recognition
      of
      contract service revenues impact our operating losses. Accordingly, there is
      uncertainty about future operating results and the results for the nine months
      are not necessarily indicative of operating results for future periods or the
      fiscal year.





We
      reported a loss for the nine months of the current fiscal year of $2,885,471
      as
      compared to a loss of $1,686,387 for the prior year’s nine months. For the nine
      months ended December 31, 2006, we incurred interest expense of $1,319,135
      as compared
      to $374,901 for the comparable period in the prior year. This included non-cash
      amortization of debt discount of $1,105,876 and $178, 107 for the nine months
      ended December 31, 2006 and 2005, respectively. We also recorded a warrant
      inducement expense for $230,709 representing the fair value of the 2,331,572
      New
      Warrants issued as an inducement for early exercise.





The
      loss
      available to common stockholders for the nine months ended December 31, 2006
      and
      2005 was $2,981,408
      and $1,814,658 respectively. Included in the loss available to common stockholders
      for the nine months ending December 31, 2006 and 2005 was accrued dividends
      of
      $95,937 and $128,271 respectively on preferred stock.





**Three
      months ended December 31, 2006 compared to three months ended December 31,
      2005**


For
      the
      third quarter of fiscal 2007, we reported total revenues of $1,302,312 a 1,035%
      increase from total revenues of $114,696 for the third quarter of fiscal 2006.
      Included in the third quarter revenue are the 1,250 digEplayers which were
      shipped and accepted by digEcor [See Note 9. Litigation]. Product revenues
      for
      the quarter ending December 31, 2006 increased to $ 1,302,312 compared
      to $106,362
      for the third quarter ending December 31, 2005.




Service
      revenues for the third quarter of fiscal 2007 were $0 compared to $8,334 for
      the
      comparable period of the prior year.





Cost
      of
      sales for the three months ended December 31, 2006 consisted of $362,768 of
      product costs primarily for manufacturing costs associated with the production
      of in-flight entertainment devices that were shipped in the period. Cost of
      sales for the three months ended December 31, 2005 consisted of $105,550 of
      product costs and $0 of service costs.




17




Gross
      profit for the third quarter of fiscal 2007 was $939,544 compared to a gross
      profit of $9,146 for the third quarter of fiscal 2006. Gross profit as a percent
      of sales for the first quarter of fiscal 2007 was 72% compared to 8% for the
      same period last year. The gross profit increase was due primarily due to the
      digEcor sale as described above where costs of the product were expensed in
      fiscal 2006.





Selling,
      general and administrative costs for the three months ended December 31, 2006,
      was $366,559 compared to $205,383 for the third quarter of fiscal 2006. The
      $161,176 increase can be attributed to an increase of $44,316 for stock-based
      compensation expense, an increase of $40,758 in professional services, an
      increase of $12,355 in travel and entertainment. Included in the third quarter
      of fiscal 2006 was a decrease of $84,270 for accounts payable write offs. No
      write offs were generated in for the comparable period of fiscal 2007.





Research
      and related expenditures for the three months ended December 31, 2006 were
      $346,982, as compared
      to $318,358 for the three months ended December 31, 2005.





We
      reported an operating profit of
      $226,003 for the
      three months ended December 31, 2006, as compared to an operating loss of
      $514,594 for the three months ended December 31, 2005. The 144% decrease in
      operating loss resulted primarily from the increase of revenue from the
      digEplayer order in which an impairment was recorded in the prior year offset
      by
      an increase in total operating expense.





We
      reported interest expense of $373,170 for the three months ended December 31,
      2006 versus $141,909 for the prior comparable period. This
      included non-cash amortization of debt discount of $321,497 and $60,031 for
      the
      three months ended December 31, 2006 and 2005, respectively.





We
      reported a loss for the third quarter of fiscal 2007 of $156,433 as compared
      to
      a loss of $656,486 for the prior third quarter of fiscal 2006 .
      The
      loss attributable to common stockholders for the three months ended December
      31,
      2006 and 2005 was $185,746 and $699,072 ,
      respectively. Included in the loss available to common stockholders for the
      period ending December 31, 2006 were accrued dividends on the preferred stock
      of
      $29,313. Included in the loss available to common stockholders for the period
      ending December 31, 2005 were accrued dividends on the preferred stock of
      $42,586.





**Liquidity
      and Capital Resources**


At
      December 31, 2006, we had a working capital deficit of $1,585,935
      compared to a
      working capital deficit of $2,516,367 at March 31, 2006. Cash used in operating
      activities for the nine month period ended December 31, 2006 was
      $1,661,426 resulting primarily from the $2,885,471 loss for the period, a decrease of
      $2,670 in accounts receivable, an increase of $50,029 in prepaid expenses,
      an
      increase of $145,452 in inventory, an increase of $499,396 in accounts payable,
      a decrease of $43,029 in other accounts payable and accrued liabilities and
      a
      decrease of $710,976 in customer deposits.





During
      the nine months ended December 31, 2006, we purchased
      no additional property
      and equipment.





For
      the
      nine months ended December 31, 2006 and 2005, cash provided by and used in
      financing activities was $907,302
      and $334,236, respectively with cash provided from
      the
      exercise of warrants and used for principal payments on notes.





We
      normally secure payment prior to delivery so accounts receivables have not
      been
      significant during the current year. However we may grant terms in the future
      and therefore receivables may vary dramatically due to the timing of product
      shipments and contract arrangements.





At
      December 31, 2006, we had cash and cash equivalents of $304,599. Other than
      cash
      and cash equivalents, we have no material unused sources of liquidity at this
      time. We have no material commitments for capital expenditures or resources.
      Based on our cash position and assuming currently planned expenditures and
      level
      of operation, we believe we will require approximately $1.5 million of
      additional funds for the next twelve months of operations. Actual results could
      differ significantly from management plans. We believe we may be able to obtain
      some additional funds from future product margins from product sales but actual
      future margins to be realized, if any, and the timing of shipments and the
      amount and quantities of shipments, orders and reorders are subject to many
      factors and risks, many outside our control. Accordingly we will need to seek
      equity or debt financing in the next twelve months for working capital and
      we
      may need to seek equity or debt financing for payment of existing debt
      obligations and other obligations reflected on our balance sheet.




18




On
      January 2, 2007, we entered into a common stock purchase agreement with Fusion
      Capital Fund II, LLC, an Illinois limited liability company. Under the
      agreement, Fusion Capital is obligated, under certain conditions, to purchase
      shares from us in an aggregate amount of $8.5 million from time to time over
      a
      25 month period. We have sold 4,166,666 shares of common stock to Fusion Capital
      under the agreement at a purchase price of $0.12 per share for total proceeds
      of
      $500,000. Under the terms of the common stock purchase agreement, Fusion Capital
      received a commitment fee consisting of 3,500,000 shares and an expense
      reimbursement of 200,000 shares of our common stock.





We
      cannot
      guarantee that the agreement with Fusion Capital will be sufficient or available
      to fund our ongoing operations. The extent to which we are able to rely on
      Fusion Capital as a source of funding will depend on a number of factors
      including, the prevailing market price of our common stock and the extent to
      which we are able to secure working capital from other sources, such as through
      the sale of our products or services or the licensing of our intellectual
      property. Additionally, we will not have the right to commence any additional
      sales of our shares to Fusion Capital under the common stock purchase agreement
      until after the Securities and Exchange Commission has declared the registration
      statement filed by us on January 30,2007 effective. After the Securities and
      Exchange Commission has declared such registration statement effective,
      generally we have the right but not the obligation from time to time to sell
      our
      shares to Fusion Capital in amounts between $80,000 and $1.0 million depending
      on certain conditions. If obtaining sufficient financing from Fusion Capital
      were to prove unavailable or prohibitively dilutive and if we are unable to
      raise additional funds through the sale of our products or services or the
      licensing of our intellectual property, we will need to secure another source
      of
      funding in order to satisfy our working capital needs. Even if we are able
      to
      access the full $8.5 million under the common stock purchase agreement with
      Fusion Capital, we may still need additional capital to fully implement our
      business, operating and development plans. There can be no guarantee that we
      will be able to raise additional capital, if required.





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. Potential sources of such funds include
      exercise of outstanding warrants and options, or debt financing or additional
      equity offerings. However, there is no guarantee that warrants and options
      will
      be exercised or that debt or equity financing will be available when needed.
      Any
      future financing may be dilutive to existing stockholders.





As
      of
      December 31, 2006, our contractual obligations and commercial commitments are
      summarized below:





**Cash
                Contractual Obligations by Period**
            
            **Total**
            
            **Less
                than 1 year**
            
            **1
                - 2 years**
            
            **2
                - 3 years**
            
            **Over
                3 years**7.5%
                Unsecured Promissory Notes(1)
            
            
            1,120,165
            
            
            162,000
            
            
            360,000
            
            
            598,165
            
            
            -Operating
                Lease(2)
            
            
            340,842
            
            
            17,417
            
            
            71,061
            
            
            73,192
            
            
            179,175Total
                cash obligations
            
            $
            1,461,007
            
            $
            179,417
            
            $
            431,061
            
            $
            671,357
            
            $
            179,175





(1)
            7.5%
                unsecured note and estimated future interest payments to maturity
                at
                November 30, 2009.


(2)
            Office
                sublease agreement.





**Future
      Commitments and Financial Resources**


We
      have
      an accrued lease liability of $515,000 that arose in the normal course of
      business for equipment delivered to the Company. This amount is approximately
      ten years old. The accrued lease liability reflects management’s best estimate
      of amounts due for matters in dispute. Settlement of this liability may either
      be more or less than the amount recorded in the audited consolidated financial
      statements and accordingly may be subject to measurement uncertainty in the
      near
      term.




19




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





In
      March
      2006, we entered into a sixty-two month lease, commencing June 1, 2006, for
      approximately 4,800 square feet at 16770 West Bernardo Drive, San Diego,
      California with an aggregate payment of $5,805 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.





We
      believe this facility is adequate to meet our needs for the next twelve months
      given current plans. However should we expand our operations, we may be required
      to obtain additional space or alternative space. We believe there is adequate
      availability of office space in the general vicinity to meet our future
      needs.





**Item
      3. Quantitative and Qualitative Disclosure about Market
      Risk**


Market
      risk represents the risk of loss that may impact our financial position, results
      of operations or cash flows due to adverse changes in market prices, including
      interest rate risk and other relevant market rate or price risks.





Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      investment in cash and cash equivalents of $304,599 and our debt of $970,752,
      consisting of a 7.5% Convertible Subordinated Promissory Note and accrued
      interest. We do not use derivative financial instruments in our investment
      portfolio and due to the nature of our investments, do not expect our operating
      results or cash flows to be significantly affected by potential changes in
      interest rates. At December 31, 2006, the market value of these investments,
      which were all classified as cash and cash equivalents and certificate of
      deposit, and debt approximated cost. ****





**Item
      4. Controls and Procedures**


We
      maintain disclosure controls and procedures [as defined in Rules 13a-15(e)
      and
      15d-15(e) under the Securities Exchange Act of 1934, as amended the "Exchange
      Act] that are designed to ensure that information required to be disclosed
      in
      our reports filed under the Exchange Act, is recorded, processed, summarized
      and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms, and that such information is accumulated and
      communicated to our management, including our Chief Executive Officer and
      Interim Chief Accounting Officer, as appropriate, to allow timely decisions
      regarding required disclosure. In designing and evaluating the disclosure
      controls and procedures, management recognized that any controls and procedures,
      no matter how well designed and operated, can provide only reasonable assurance
      of achieving the desired control objectives, and management necessarily was
      required to apply its judgment in evaluating the cost-benefit relationship
      of
      possible controls and procedures.





We
      carried out an evaluation under the supervision and with the participation
      of
      management, including our Chief Executive Officer and Interim Chief Accounting
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures as of December 31, 2006, the end of the period covered
      by this report. Based on that evaluation, our Chief Executive Officer and
      Interim Chief Accounting Officer concluded that our disclosure controls and
      procedures were effective at the reasonable assurance level as of December
      31,
      2006.





There
      have been no changes in our internal control over financial reporting (as
      defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
      quarter ended December 31, 2006 that materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.





We
      are a
      non-accelerated filer and are required to comply with the internal control
      reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley
      Act
      for fiscal years ending on or after July 15, 2007. Although we are working
      to
      comply with these requirements, we have only fifteen employees and these
      employees work at one location. The small number of employees is expected to
      make compliance with Section 404 - especially with segregation of duty control
      requirements - very difficult and cost ineffective, if not impossible. While
      the
      Securities and Exchange Commission had indicated it expects to issue
      supplementary regulations easing the burden of Section 404 requirements for
      small entities like us, such regulations have not yet been issued.





20




**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**


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





We
      have
      answered the complaint and are pursuing certain counterclaims. The case is
      currently in the discovery phase. In January 2007, the Court ruled on certain
      motions of the parties. In its ruling, the Court dismissed digEcor’s unjust
      enrichment, fraud, negligent misrepresentation, tortuous interference and
      punitive damage claims. The Court further acknowledged the delivery of the
      1,250-unit order and a partial settlement between the parties reducing digEcor’s
      claim for purchase-price or actual damages from $793,750 to $94,846 with such
      amount still being disputed by e.Digital. digEcor’s contract and damages claims
      remain in dispute, and the Court provided some interpretation of the contracts
      at issue in its ruling. The foregoing and other findings of the Court may be
      subject to appeal by either party. We believe we have substantive and multiple
      defenses and intend to vigorously challenge the remaining matters and pursue
      existing and possible additional counterclaims. Due to the uncertainties
      inherent in any litigation, however, there can be no assurance whether we will
      or will not prevail in our defense against digEcor’s remaining claims. We are
      also unable to determine at this time the impact this complaint and matter
      may
      have on our financial position or results of operations. We do not expect this
      litigation to affect our eVU business. We have an accrual of $80,000 as an
      estimate of our obligation related to the remaining general damage claim and
      we
      intend to seek restitution from Maycom for any damages we may incur but recovery
      from Maycom is not assured. Maycom is not involved in the design, tooling or
      production of our proprietary eVU mobile product. Moreover, we do not presently
      plan or expect to produce or sell digEplayer models to digEcor or other
      customers in the future.





**Item
      1A. Risk Factors**


Set
      forth
      below and elsewhere in this report and in other documents we file with the
      Securities and Exchange Commission are risks and uncertainties that could cause
      our actual results to differ materially from the results contemplated by the
      forward-looking statements contained in this report and other public statements
      we make. See "Cautionary Note on Forward Looking Statements" within this
      document. If any of the following risks actually occurs, our business, financial
      condition, or results of operations could suffer. In that case, the trading
      price of our common stock could decline, and you may lose all or part of your
      investment.





The
      risk
      factors described below do not contain any material changes from the Risk
      Factors described under Item 1A of Part I of our Annual Report on Form 10-K
      for
      March 31, 2006, except as follows:





§
            We
                updated our risk factor related to limited customers to reflect the
                fact
                that we do not expect future orders for the digEplayer.





§
            We
                updated our risk factor related to additional financing to reference
                the
                recent financing transaction entered into with Fusion
                Capital.





§
            We
                updated our risk factor related to reliance on manufacturers and
                component
                suppliers to reflect reliance on one manufacturer for our eVU
                product.





§
            We
                updated our risk factors related to risks of trading in our common
                stock
                to underscore the potential dilutive effects of future sales of shares
                of
                common stock by stockholders and by the Company, including Fusion
                Capital
                and subsequent sale of common stock by the holders of warrants and
                options
                and that such dilution could have an adverse effect on the market
                price of
                our shares.




21




§
            We
                added a new risk factor under "Risks Related to Intellectual Property
                and
                Government Regulation" regarding risks associated with the requirement
                to
                implement Section 404 of the Sarbanes-Oxley Act in future
                periods.





**Financial
      Risks**





***We
      Have a History of Losses and May Incur Future Losses.*** We have
      incurred significant operating losses in prior fiscal years and as of the fiscal
      year ended March 31, 2006 we had an accumulated deficit of $77.2 million. We
      had
      losses of approximately $3.1 million, $2.4 million and $2.5 million in fiscal
      years 2006, 2005 and 2004, respectively. To date, we have not achieved
      profitability and given the level of operating expenditures and the uncertainty
      of revenues and margins, we expect to continue to incur losses and negative
      cash
      flows in future periods. The failure to obtain sufficient revenues and margins
      to support operating expenses could harm our business.





*Unless
      We Obtain Adequate Financing and Increase Our Revenues We May Be Unable to
      Continue as a Going Concern* .
      We have
      experienced substantial reduction in cash, inconsistent revenues and increased
      costs that adversely affected our results of operations and cash flows. We
      have
      suffered recurring losses from operations. This factor, in combination with
      (i)
      reliance upon debt and new equity financing to fund the continuing, losses
      from
      operations and cash flow deficits, (ii) material net losses and cash flow
      deficits from operations during fiscal year 2007 to date, fiscal year 2006
      and
      in prior years and (iii) the possibility that we may be unable to meet our
      debts
      as they come due, raise substantial doubt about our ability to continue as
      a
      going concern. Our ability to continue as a going concern is dependent upon
      our
      ability to obtain adequate financing and achieve a level of revenues, adequate
      to support our capital and operating requirements, as to which no assurance
      can
      be given. In the event we are unable to continue as a going concern, we may
      elect or be required to seek protection from our creditors by filing a voluntary
      petition in bankruptcy or may be subject to an involuntary petition in
      bankruptcy. To date, management has not considered this alternative, nor does
      management view it as a likely occurrence. Our auditors have included in their
      report an explanatory paragraph describing conditions that raise substantial
      doubt about our ability to continue as a going concern.





***We
      Need to Obtain Additional Financing to Continue Operating our
      Business.*** We
      believe that cash on hand and proceeds from existing development and production
      contracts and product sales, are not sufficient to meet cash requirements for
      the next twelve months. We anticipate the need to raise additional funds
      to:





·
            Finance
                working capital requirements


·
            Pay
                for increased operating expenses or shortfalls in anticipated
                revenues


·
            Fund
                research and development costs


·
            Develop
                new technology, products or
                services


·
            Respond
                to competitive pressures


·
            Support
                strategic and industry
                relationships


·
            Fund
                the production and marketing of our products and
                services





We
      cannot
      guarantee that the agreement with Fusion Capital will be sufficient or available
      to fund our ongoing operations. We only have the right to receive $80,000 every
      four business days under the agreement with Fusion Capital unless our stock
      price equals or exceeds $0.10, in which case we can sell greater amounts to
      Fusion Capital as the price of our common stock increases. Fusion Capital shall
      not have the right nor the obligation to purchase any shares of our common
      stock
      on any business day that the market price of our common stock is less than
      $0.08. We registered 19,166,666 shares for sale by Fusion Capital from time
      to
      time pursuant to this prospectus. We have sold 4,166,666 shares to Fusion
      capital for proceeds of $500,000. Accordingly, the selling price of our common
      stock that may yet be sold to Fusion Capital will have to average at least
      $0.53
      per share for us to receive the maximum proceeds of $8.5 million. Assuming
      a
      purchase price of $0.17 per share (the closing sale price of the common stock
      on
      January 26, 2007) and the purchase by Fusion Capital of the full 19,166,666
      shares under the common stock purchase agreement, proceeds to us would only
      be
      $3,050,000, including the $500,000 already sold to Fusion Capital.




22




The
      extent we rely on Fusion Capital as a source of funding will depend on a number
      of factors including, the prevailing market price of our common stock and the
      extent to which we are able to secure working capital from other sources, such
      as through the sale of our products or services or the licensing of our
      intellectual property. Specifically, Fusion Capital shall not have the right
      nor
      the obligation to purchase any shares of our common stock on any business days
      that the market price of our common stock is less than $0.08. If obtaining
      sufficient financing from Fusion Capital were to prove unavailable or
      prohibitively dilutive and if we are unable to raise additional funds through
      the sale of our products or services or the licensing of our intellectual
      property, we will need to secure another source of funding in order to satisfy
      our working capital needs. Even if we are able to access the full $8.5 million
      under the common stock purchase agreement with Fusion Capital, we may still
      need
      additional capital to fully implement our business, operating and development
      plans.





We
      cannot
      assure you that such additional financing will be available on terms favorable
      to us, or at all. If adequate funds are not available to us then we may not
      be
      able to continue operations or take advantage of opportunities. If we raise
      additional funds through the sale of equity, including common stock, the
      percentage ownership of our stockholders will be reduced.





*We
      do
      not Anticipate Paying Dividends* .
      We have
      never paid any cash dividends on our common stock and do not anticipate paying
      any cash dividends in the foreseeable future. We currently intend to retain
      any
      future earnings to fund the development and growth of our business. An
      investment in our common stock, therefore, may be more suitable for an investor
      that is seeking capital appreciation rather than current yield and, as a
      consequence, may be more speculative. Accordingly, investors should not purchase
      our common stock with an expectation of receiving regular
      dividends.





***We
      Expect Our Operating Results to Fluctuate
      Significantly*** .
      Our
      quarterly and annual operating results have fluctuated significantly in the
      past
      and we expect that they will continue to fluctuate in the future. This
      fluctuation is a result of a variety of factors, including the
      following:





·
            Market
                acceptance of our products by business customers and end
                users


·
            Uncertainties
                with respect to future customer product orders, their timing and
                the
                margins to be received, if any


·
            Fluctuations
                in operating costs


·
            Changes
                in research and development costs


·
            Changes
                in general economic conditions


·
            Changes
                in technology


·
            Short
                product lifecycles





***We
      May Experience Product Delays, Cost Overruns and Errors Which Could Adversely
      Affect our Operating Performance and Ability to Remain
      Competitive.*** We have
      experienced development delays and cost overruns associated with product
      development in the past. We may experience additional delays and cost overruns
      on future projects. Future delays and cost overruns could adversely affect
      our
      financial results and could affect our ability to respond to technological
      changes, evolving industry standards, competitive developments or customer
      requirements. Our technology and the products produced for our customers could
      contain errors that could cause delays, order cancellations, contract
      terminations, and adverse publicity, reduced market acceptance of products,
      or
      lawsuits by our customers or others who have acquired our products, including
      customers branded products.





***We
      Need to Obtain Additional Financing to Continue Operating our
      Business.*** We
      believe that cash on hand and proceeds from existing development and production
      contracts and product sales, are not sufficient to meet cash requirements for
      the next twelve months. We anticipate the need to raise additional funds
      to:





·
            Finance
                working capital requirements


·
            Pay
                for increased operating expenses or shortfalls in anticipated
                revenues


·
            Fund
                research and development costs


·
            Develop
                new technology, products or
                services


·
            Respond
                to competitive pressures


·
            Support
                strategic and industry
                relationships


·
            Fund
                the production and marketing of our products and
                services




23




***We
      cannot assure you that such additional financing will be available on terms
      favorable to us, or at all.*** If
      adequate funds are not available to us then we may not be able to continue
      operations or take advantage of opportunities. If we raise additional funds
      through the sale of equity, including common stock, the percentage ownership
      of
      our stockholders will be reduced.





***Unless
      We Obtain Adequate Financing and Increase Our Revenues We May Be Unable to
      Continue as a Going Concern.*** We have
      experienced substantial reduction in cash, inconsistent revenues and increased
      costs that adversely affected our results of operations and cash flows. We
      have
      suffered recurring losses from operations. This factor, in combination with
      (i)
      reliance upon debt and new equity financing to fund the continuing, losses
      from
      operations and cash flow deficits, (ii) material net losses and cash flow
      deficits from operations during fiscal year 2007 to date, fiscal year 2006
      and
      in prior years and (iii) the possibility that we may be unable to meet our
      debts
      as they come due, raise substantial doubt about our ability to continue as
      a
      going concern. Our ability to continue as a going concern is dependent upon
      our
      ability to obtain adequate financing and achieve a level of revenues, adequate
      to support our capital and operating requirements, as to which no assurance
      can
      be given. In the event we are unable to continue as a going concern, we may
      elect or be required to seek protection from our creditors by filing a voluntary
      petition in bankruptcy or may be subject to an involuntary petition in
      bankruptcy. To date, management has not considered this alternative, nor does
      management view it as a likely occurrence. Our auditors have included in their
      report an explanatory paragraph describing conditions that raise substantial
      doubt about our ability to continue as a going concern.





**Risks
      Related to Sales, Marketing and Competition**





***We
      May Be Unable to Successfully Compete in the Electronic Products Market Which
      is
      Highly Competitive and Subject to Rapid Technological
      Change.*** We
      compete in the market for electronic products which is intensely competitive
      and
      subject to rapid technological change. The market is also impacted by evolving
      industry standards, rapid price changes and rapid product obsolescence. Our
      competitors include a number of large foreign and domestic companies, many
      of
      which have substantially greater financial, marketing, personnel and other
      resources. Our current competitors or new market entrants could introduce new
      or
      enhanced technologies or products with features that render the company's
      technology or products obsolete or less marketable, or could develop means
      of
      producing competitive products at a lower cost. Our ability to compete
      successfully will depend in large measure on our ability to maintain our
      capabilities in connection with upgrading products and quality control
      procedures and to adapt to technological changes and advances in the industry.
      Competition could result in price reductions, reduced margins, and loss of
      customers or contracts, any of which could harm our business. There can be
      no
      assurance that we will be able to keep pace with the technological demands
      of
      the marketplace or successfully enhance our products or develop new products
      that are compatible with the products of the electronics industry.





***We
      Rely on a Limited Number of Customers for Revenue.*** Historically, a substantial portion of our revenues have been derived primarily
      from a limited number of customers. Two customers accounted for approximately
      53% and 46% of revenues for the period ended December 31, 2006. We do not expect
      future orders from digEcor, and if we are unable to obtain sufficient new
      customers for our new eVU product, reduced sales may have a material adverse
      effect on our operations. In May 2006, the company and certain of its officers
      were sued by digEcor. We are unable to determine at this time the impact this
      litigation and matter may have on our financial position or results of
      operations.





***If
      We Are Unsuccessful in Achieving Market Acceptance of Our Products, It Could
      Harm Our Business.*** Our
      failure and the failure of our customers to penetrate projected markets would
      have a material adverse effect upon our operations and prospects. Market
      acceptance of our products and those of our customers will depend in part upon
      our ability to demonstrate and maintain the advantages of our technology over
      competing products.





***We
      Have Limited Marketing Capabilities and Resources Which Makes It Difficult
      For
      Us to Create Awareness of and Demand for Our Products and
      Technology.*** We have
      limited marketing capabilities and resources and are primarily dependent upon
      in-house executives for the marketing of our products, as well as our licensing
      business. Selling products and attracting new business customers requires
      ongoing marketing and sales efforts and expenditure of funds to create awareness
      of and demand for our technology. We cannot assure that our marketing efforts
      will be successful or result in future development contracts or other
      revenues.




24




***The
      Success of Our Business Depends on Emerging Markets and New
      Products*** .
      In
      order for demand for our technology, services and products to grow, the markets
      for portable digital devices, such as digital recorders and digital video/music
      players and other portable consumer devices, must develop and grow. If sales
      for
      these products do not grow, our revenues could decline. To remain competitive,
      we intend to develop new applications for our technology and develop new
      technology and products. If new applications or target markets fail to develop,
      or if our technology, services and products are not accepted by the market,
      our
      business, financial condition and results of operations could
      suffer.





***Development
      of New or Improved Products, Processes or Technologies May Render Our Technology
      Obsolete and Hurt Our Business.*** The
      electronics, contract manufacturing and computer software markets are
      characterized by extensive research and development and rapid technological
      change resulting in very short product life cycles. Development of new or
      improved products, processes or technologies may render our technology and
      developed products obsolete or less competitive. We will be required to devote
      substantial efforts and financial resources to enhance our existing products
      and
      methods of manufacture and to develop new products and methods. There can be
      no
      assurance we will succeed with these efforts. Moreover, there can be no
      assurance that other products will not be developed which may render our
      technology and products obsolete.





**Risks
      Related to Operations**





***We
      Depend on One Contract Manufacturer and Various Component Suppliers and Our
      Business Has Been and Will Be Harmed By Any Interruption of Supply or Failure
      of
      Performance.*** We rely
      on one supplier for manufacturing eVU products. We do not currently anticipate
      future production of the previous digEplayer product. We depend on our contract
      manufacturer to (i) allocate sufficient capacity to our manufacturing needs,
      (ii) produce acceptable quality products at agreed pricing and (iii) deliver
      on
      a timely basis. If the manufacturer is unable to satisfy these requirements,
      our
      business, financial condition and operating results may be materially and
      adversely affected. Any failure in performance by our manufacturer for any
      reason could have a material adverse affect on our business. Production and
      pricing by such manufacturer is subject to the risk of price fluctuations and
      periodic shortages of components. We have no supply agreements with component
      suppliers and, accordingly, we are dependent on the future ability of our
      manufacturer to purchase components. Failure or delay by suppliers in supplying
      necessary components could adversely affect our ability to deliver products
      on a
      timely and competitive basis in the future. Our operations in the past have
      been
      negatively impacted by delays by manufacturers and component suppliers and
      may
      be so impacted in the future.





***If
      We Lose Key Personnel or Are Unable to Attract and Retain Additional Highly
      Skilled Personnel Required For the Expansion of Our Activities Our Business
      Will
      Suffer.*** Our
      future success depends to a significant extent on the continued service of
      our
      key technical, sales and senior management personnel and their ability to
      execute our strategy. The loss of the services of any of our senior level
      management, or certain other key employees, may harm our business. Our future
      success also depends on our ability to attract, retain and motivate highly
      skilled employees. Competition for employees in our industry is intense. We
      may
      be unable to retain our key employees or to attract, assimilate and retain
      other
      highly qualified employees in the future. We have from time to time in the
      past
      experienced, and we expect to continue to experience in the future, difficulty
      in hiring and retaining highly skilled employees with appropriate
      qualifications.





***Because
      Some of Our Management are Part-Time and Have Certain Conflicts of Interest,
      Our
      Business Could Be Harmed.*** Our Vice
      President, Robert Putnam, is also investor relations of American Technology
      Corporation. As a result of his involvement with American Technology
      Corporation, Mr. Putnam has in the past, and is expected in the future to devote
      a substantial portion of his time to other endeavors and only part-time services
      to e.Digital. Certain conflicts of interest now exist and will continue to
      exist
      between e.Digital and Mr. Putnam due to the fact that he has other employment
      or
      business interests to which he devotes some attention and he is expected to
      continue to do so. It is conceivable that the respective areas of interest
      of
      e.Digital and American Technology Corporation could overlap or
      conflict.





**Risks
      Related to Intellectual Property and Government Regulation**





***Failing
      to Protect Our Proprietary Rights to Our Technology Could Harm Our Ability
      to
      Compete, as well as Our Results of Our Operations.*** Our
      success and ability to compete substantially depends on our internally developed
      software, technologies and trademarks, which we protect through a combination
      of
      patent, copyright, trade secret and trademark laws. Patent applications or
      trademark registrations may not be approved. Even when they are approved, our
      patents or trademarks may be successfully challenged by others or invalidated.
      If our trademark registrations are not approved because third parties own such
      trademarks, our use of these trademarks would be restricted unless we enter
      into
      arrangements with the third-party owners, which may not be possible on
      commercially reasonable terms or at all. We generally enter into confidentiality
      or license agreements with our employees, consultants and strategic and industry
      partners, and generally control access to and distribution of our software,
      technologies, documentation and other proprietary information. Despite our
      efforts to protect our proprietary rights from unauthorized use or disclosure,
      parties may attempt to disclose, obtain or use our solutions or technologies.
      The steps we have taken may not prevent misappropriation of our solutions or
      technologies, particularly in foreign countries where laws or law enforcement
      practices may not protect our proprietary rights as fully as in the United
      States. We have licensed, and we may license in the future, certain proprietary
      rights to third parties. While we attempt to ensure that our business partners
      maintain the quality of our brand, they may take actions that could impair
      the
      value of our proprietary rights or our reputation. In addition, these business
      partners may not take the same steps we have taken to prevent misappropriation
      of our solutions or technologies.




25




***We
      May Face Intellectual Property Infringement Claims That May Be Difficult to
      Defend and Costly to Resolve, Which Could Harm Our
      Business.*** Although
      we do not believe we infringe the proprietary rights of any third parties,
      we
      cannot assure you that third parties will not assert such claims against us
      in
      the future or that such claims will not be successful. We could incur
      substantial costs and diversion of management resources to defend any claims
      relating to proprietary rights, which could harm our business. In addition,
      we
      are obligated under certain agreements to indemnify the other party for claims
      that we infringe on the proprietary rights of third parties. If we are required
      to indemnify parties under these agreements, our business could be harmed.
      If
      someone asserts a claim relating to proprietary technology or information
      against us, we may seek licenses to this intellectual property. We may not
      be
      able to obtain licenses on commercially reasonable terms, or at all. The failure
      to obtain the necessary licenses or other rights may harm our
      business.





***Risks
      Related To Government Regulation, Content And Intellectual Property Government
      Regulation May Subject Us to Liability and Require Us to Change The Way We
      Do
      Business*** .
      Our
      business is subject to rapidly changing laws and regulations. Although our
      operations are currently based in California, the United States government
      and
      the governments of other states and foreign countries have attempted to regulate
      activities on the Internet. Evolving areas of law that are relevant to our
      business include privacy law, copyright law, proposed encryption laws, content
      regulation and import/export regulations. Because of this rapidly evolving
      and
      uncertain regulatory environment, we cannot predict how these laws and
      regulations might affect our business. In addition, these uncertainties make
      it
      difficult to ensure compliance with the laws and regulations governing the
      Internet. These laws and regulations could harm us by subjecting us to liability
      or forcing us to change how we do business.





***Failure
      to Achieve and Maintain Effective Internal Controls in accordance with Section
      404 of the Sarbanes-Oxley Act Could Have a Material Adverse Effect On Our
      Business.*** As a
      public company, we will be required to document and test our internal financial
      control procedures in order to satisfy the requirements of Section 404 of the
      Sarbanes-Oxley Act, which will require annual management assessments of the
      effectiveness of our internal controls over financial reporting and a report
      by
      our independent auditors that both addresses management's assessments and
      provides for the independent auditor's assessment of the effectiveness of our
      internal controls. During the course of our testing, we may identify
      deficiencies which we may not be able to remediate in time to meet our deadline
      for compliance with Section 404, and we may also identify inaccuracies or
      deficiencies in our financial reporting that could require revisions to or
      restatement of prior period results. Testing and maintaining internal controls
      also will involve significant costs and can divert our management’s attention
      from other matters that are important to our business. We may not be able to
      conclude on an ongoing basis that we have effective internal controls over
      financial reporting in accordance with Section 404, and our independent auditors
      may not be able or willing to issue a favorable assessment of our conclusions.
      Failure to achieve and maintain an effective internal control environment could
      harm our operating results and could cause us to fail to meet our reporting
      obligations and could require that we restate our financial statements for
      prior
      periods, any of which could cause investors to lose confidence in our reported
      financial information and cause a decline, which could be material, in the
      trading price of our common stock.





**Risks
      Related to Trading in Our Common Stock**





***Investing
      in a Technology Stock (Such as Ours) May Involve Greater Risk Than Other
      Investments Due to Market Conditions, Stock Price Volatility and Other
      Factors.*** The
      trading price of our common stock has been subject to significant fluctuations
      to date, and will likely be subject to wide fluctuations in the future due
      to:




26




·
            Quarter-to-quarter
                variations in operating results


·
            Announcements
                of technological innovations by us, our customers or
                competitors


·
            New
                products or significant design achievements by us or our
                competitors


·
            General
                conditions in the markets for the our products or in the electronics
                industry


·
            The
                price and availability of products and
                components


·
            Changes
                in operating factors including delays of shipments, orders or
                cancellations


·
            General
                financial market conditions


·
            Market
                conditions for technology stocks


·
            Litigation
                or changes in operating results or estimates by analysts or
                others


·
            Or
                other events or factors





In
      addition, potential dilutive effects of future sales of shares of common stock
      by stockholders and by the Company, including Fusion Capital and subsequent
      sale
      of common stock by the holders of warrants and options could have an adverse
      effect on the market price of our shares.





***We
      do not endorse and accept any responsibility for the estimates or
      recommendations issued by stock research analysts or others from time to time
      or
      comments on any electronic chat boards.*** The
      public stock markets in general and technology stocks in particular, have
      experienced extreme price and trading volume volatility. This volatility has
      significantly affected the market prices of securities of many high technology
      companies for reasons frequently unrelated to the operating performance of
      the
      specific companies. These broad market fluctuations may adversely affect the
      market price of our common stock in the future.





***Low-Price
      Stocks and Stocks Traded on the OTC Electronic Bulletin Board are Subject to
      Special Regulations and may have Increased Risk*** .
      Our
      shares of common stock are traded on the OTC Electronic Bulletin Board, an
      electronic, screen-based trading system operated by the National Association
      of
      Securities Dealers, Inc. ("NASD"). Securities traded on the OTC Electronic
      Bulletin Board are, for the most part, thinly traded and are subject to special
      regulations not imposed on securities listed or traded on the NASDAQ system
      or
      on a national securities exchange. As a result, an investor may find it
      difficult to dispose of, or to obtain accurate quotations as to the price of,
      our common stock. Sales of substantial amounts of our outstanding common stock
      in the public market could materially adversely affect the market price of
      our
      common stock. To date, the price of our common stock has been extremely volatile
      with the sale price fluctuating from an intra-day low of $0.07 to a high of
      $0.22 in the last twelve months. In addition, our common stock is subject to
      Rules 15g-1-15g-6 promulgated under the Securities Exchange Act of 1934 that
      imposes additional sales practice requirements on broker-dealers who sell such
      securities to persons other than established customers and accredited investors
      (generally, a person with assets in excess of $1,000,000 or annual income
      exceeding $200,000 or $300,000 together with his or her spouse). For
      transactions covered by this rule, the broker-dealer must make a special
      suitability determination for the purchaser and have received the purchaser’s
      written consent to the transaction prior to sale. Consequently, the rule may
      affect the ability of broker-dealers to sell the Company’s securities and may
      affect the ability of investors to sell their securities in the secondary
      market. The Commission has also adopted regulations which define a "penny stock"
      to be any equity security that has a market price (as defined) of less than
      $5.00 per share or an exercise price of less than $5.00 per share, subject
      to
      certain exceptions. For any transaction involving a penny stock, unless exempt,
      the regulations require the delivery, prior to the transaction, of a disclosure
      schedule prepared by the Commission relating to the penny stock market. The
      broker-dealer must also disclose the commissions payable to both the
      broker-dealer and the registered representative, current quotations for the
      securities and, if the broker-dealer is the sole market maker, the broker-dealer
      must disclose this fact and the broker-dealer's presumed control over the
      market. Finally, monthly statements must be sent disclosing recent price
      information for the penny stock in the account and information on the limited
      market in penny stocks.





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





(a)
            NONE


(b)
            NONE


(c)
            NONE




27




**Item
      3. Defaults Upon Senior Securities**


NONE





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


NONE




**Item
      5. Other Information**


(a)
      NONE


(b)
      NONE





**Item
      6. Exhibits**


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





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





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





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**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:February 13,
              2007
            By:
            /s/ ROBERT
              PUTNAMRobert
                Putnam, Interim Chief Accounting Officer
              (Principal
                Accounting and Financial Officer
              and
                duly authorized to sign on behalf of the Registrant)




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