UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
quarterly period ended September 30, 2010





Commission
File Number 0-20734









e.Digital
Corporation


(Exact
name of registrant as specified in its charter)





Delaware
              33-0591385(State
      or other jurisdiction of
              (I.R.S.
      Empl. Ident. No.)incorporation
      or organization)





16770
      West Bernardo Drive, San Diego, California
              92127(Address
      of principal executive offices)
              (Zip
      Code)





(858)
304-3016


(Registrant’s
telephone number, including area code)





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





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





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





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





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





As of
November10, 2010 a total of 293,003,158 shares of the Registrant’s Common Stock,
par value $0.001, were issued and outstanding.





e.DIGITAL
CORPORATION


INDEX


PagePART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements (unaudited):Condensed
      Consolidated Balance Sheets as of September 30, 2010and March 31,
      2010
                                                  
                                                  3Condensed
      Consolidated Statements of Operations for the three and sixmonths
      ended September 30, 2010 and 2009
                                                  
                                                  4Condensed
      Consolidated Statements of Cash Flows for the sixmonths ended
      September 30, 2010 and 2009
                                                  
                                                  5Notes
      to Interim Consolidated Financial Statements
                                                  
                                                  6Item
      2. Management's Discussion and Analysis of FinancialCondition
      and Results of Operations
                                                  
                                                  14Item
      4. Controls and Procedures
                                                  
                                                  20




PART
      II. OTHER INFORMATIONItem
      1.Legal
      Proceedings
                                              
                                              21Item
      2.Unregistered Sales of Equity Securities
      and Use of Proceeds
                                              
                                              21Item
      3.Defaults Upon Senior
      Securities
                                              
                                              21Item
      4.(Removed and
      Reserved)
                                              
                                              21Item
      5.Other
      Information
                                              
                                              21Item
      6.Exhibits
                                              
                                              22SIGNATURES
                                              
                                              22




2


Part I. Financial Information


Item
1. Financial Statements:


e.Digital
Corporation and subsidiary





CONDENSED
CONSOLIDATED BALANCE SHEETS





September
      30,2010
                  
                  
                  March
      31,(Unaudited)
                  
                  
                  2010$
                  
                  
                  $ASSETSCurrentCash
      and cash equivalents
                  
                  
                  2,144,904
                  
                  
                  
                  2,818,727Accounts
      receivable
                  
                  
                  169,418
                  
                  
                  
                  108,749Inventory,
      net
                  
                  
                  298,145
                  
                  
                  
                  347,078Deposits
      and prepaid expenses
                  
                  
                  45,568
                  
                  
                  
                  59,072Total
      current assets
                  
                  
                  2,658,035
                  
                  
                  
                  3,333,626Property,
      equipment and intangibles, net of accumulated depreciation and
      amortization of $189,661 and $184,382, respectively
                  
                  
                  6,914
                  
                  
                  
                  11,090Total
      assets
                  
                  
                  2,664,949
                  
                  
                  
                  3,344,716LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrentAccounts
      payable, trade
                  
                  
                  107,359
                  
                  
                  
                  51,997Accrued
      and other liabilities
                  
                  
                  103,036
                  
                  
                  
                  315,948Total
      current liabilities
                  
                  
                  210,395
                  
                  
                  
                  367,945Total
      liabilities
                  
                  
                  210,395
                  
                  
                  
                  367,945Commitments
      and ContingenciesStockholders'
      equityPreferred
      stock, $0.001 par value; 5,000,000 shares authorized Series AA Convertible
      Preferred stock, $0.001 par value, 100,000 shares designated: -0- and
      55,000 issued and outstanding, respectively. Liquidation preference of
      $-0- and $598,370, respectively
                  
                  
                  -
                  
                  
                  
                  573,830Common
      stock, $0.001 par value, authorized 350,000,000, 293,003,158 and
      286,950,900 shares issued and outstanding, respectively
                  
                  
                  293,003
                  
                  
                  
                  286,951Additional
      paid-in capital
                  
                  
                  82,740,954
                  
                  
                  
                  82,073,012Accumulated
      deficit
                  
                  
                  (80,579,403
                  )
                  
                  
                  (79,957,022
                  )Total
      stockholders' equity
                  
                  
                  2,454,554
                  
                  
                  
                  2,976,771Total
      liabilities and stockholders' equity
                  
                  
                  2,664,949
                  
                  
                  
                  3,344,716





See notes
to interim consolidated financial statements


3





e.Digital Corporation and subsidiary





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





For the three months ended
                  
                  
                  For the six months endedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $
                  
                  
                  $Revenues:Products
                  
                  
                  54,212
                  
                  
                  
                  43,440
                  
                  
                  
                  352,827
                  
                  
                  
                  57,515Services
                  
                  
                  183,883
                  
                  
                  
                  218,827
                  
                  
                  
                  372,402
                  
                  
                  
                  427,782Patent
      license
                  
                  
                  -
                  
                  
                  
                  1,250,000
                  
                  
                  
                  25,264
                  
                  
                  
                  1,250,000238,095
                  
                  
                  
                  1,512,267
                  
                  
                  
                  750,493
                  
                  
                  
                  1,735,297Cost
      of revenues:Products
                  
                  
                  34,996
                  
                  
                  
                  27,789
                  
                  
                  
                  276,681
                  
                  
                  
                  76,793Services
                  
                  
                  98,929
                  
                  
                  
                  104,834
                  
                  
                  
                  184,932
                  
                  
                  
                  176,808Patent
      license
                  
                  
                  15,158
                  
                  
                  
                  443,000
                  
                  
                  
                  25,264
                  
                  
                  
                  443,000149,083
                  
                  
                  
                  575,623
                  
                  
                  
                  486,877
                  
                  
                  
                  696,601Gross
      profit
                  
                  
                  89,012
                  
                  
                  
                  936,644
                  
                  
                  
                  263,616
                  
                  
                  
                  1,038,696Operating
      expenses:Selling
      and administrative
                  
                  
                  273,788
                  
                  
                  
                  250,741
                  
                  
                  
                  639,913
                  
                  
                  
                  827,413Research
      and related expenditures
                  
                  
                  87,413
                  
                  
                  
                  126,749
                  
                  
                  
                  246,084
                  
                  
                  
                  206,330Total
      operating expenses
                  
                  
                  361,201
                  
                  
                  
                  377,490
                  
                  
                  
                  885,997
                  
                  
                  
                  1,033,743Operating
      income (loss)
                  
                  
                  (272,189
                  )
                  
                  
                  559,154
                  
                  
                  
                  (622,381
                  )
                  
                  
                  4,953Other
      income (expense):Interest
      expense
                  
                  
                  -
                  
                  
                  
                  (5,787
                  )
                  
                  
                  -
                  
                  
                  
                  (15,834
                  )Other
      income (expense) - net
                  
                  
                  -
                  
                  
                  
                  1,269
                  
                  
                  
                  -
                  
                  
                  
                  (3,559
                  )Other
      income (expense)
                  
                  
                  -
                  
                  
                  
                  (4,518
                  )
                  
                  
                  -
                  
                  
                  
                  (19,393
                  )Income
      (loss) before provision for income taxes
                  
                  
                  (272,189
                  )
                  
                  
                  554,636
                  
                  
                  
                  (622,381
                  )
                  
                  
                  (14,440
                  )Income
      tax (provision) benefit
                  
                  
                  -
                  
                  
                  
                  (206,250
                  )
                  
                  
                  -
                  
                  
                  
                  (206,250
                  )Income
      (loss) for the period
                  
                  
                  (272,189
                  )
                  
                  
                  348,386
                  
                  
                  
                  (622,381
                  )
                  
                  
                  (220,690
                  )Accrued
      and deemed dividends on preferred stock
                  
                  
                  -
                  
                  
                  
                  (55,888
                  )
                  
                  
                  (31,396
                  )
                  
                  
                  (98,701
                  )Income
      (loss) attributable to common stockholders
                  
                  
                  (272,189
                  )
                  
                  
                  292,498
                  
                  
                  
                  (653,777
                  )
                  
                  
                  (319,391
                  )Income
      (loss) per common share - basic and diluted
                  
                  
                  (0.00
                  )
                  
                  
                  0.00
                  
                  
                  
                  (0.00
                  )
                  
                  
                  (0.00
                  )Weighted
      average common shares outstandingBasic
                  
                  
                  293,003,158
                  
                  
                  
                  284,407,839
                  
                  
                  
                  289,993,565
                  
                  
                  
                  283,462,799Diluted
                  
                  
                  293,003,158
                  
                  
                  
                  286,048,464
                  
                  
                  
                  289,993,565
                  
                  
                  
                  283,462,799





See notes
to interim consolidated financial statements


4




e.Digital Corporation and subsidiary





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


For the six months endedSeptember 30,2010
                  
                  
                  2009$
                  
                  
                  $OPERATING
      ACTIVITIESLoss
      for the period
                  
                  
                  (622,381
                  )
                  
                  
                  (220,690
                  )Adjustments
      to reconcile loss to net cash used in operating
activities:Depreciation
      and amortization
                  
                  
                  5,279
                  
                  
                  
                  9,402Accretion
      related to promissory notes
                  
                  
                  -
                  
                  
                  
                  5,783Interest
      paid with common stock
                  
                  
                  -
                  
                  
                  
                  10,023Warranty
      provision
                  
                  
                  11,327
                  
                  
                  
                  8,466Stock-based
      compensation
                  
                  
                  100,164
                  
                  
                  
                  18,326Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  (60,669
                  )
                  
                  
                  (1,342,942
                  )Inventory
                  
                  
                  48,933
                  
                  
                  
                  9,169Deposits
      and prepaid expenses
                  
                  
                  13,504
                  
                  
                  
                  1,353Accounts
      payable, trade
                  
                  
                  55,362
                  
                  
                  
                  (15,207
                  )Accrued
      and other liabilities
                  
                  
                  (224,239
                  )
                  
                  
                  319,044Cash
      used in operating activities
                  
                  
                  (672,720
                  )
                  
                  
                  (1,197,273
                  )INVESTING
      ACTIVITIESPurchase
      of equipment
                  
                  
                  (1,103
                  )
                  
                  
                  -Cash
      used in investing activities
                  
                  
                  (1,103
                  )
                  
                  
                  -Net
      decrease in cash and cash equivalents
                  
                  
                  (673,823
                  )
                  
                  
                  (1,197,273
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  2,818,727
                  
                  
                  
                  3,813,990Cash
      and cash equivalents, end of period
                  
                  
                  2,144,904
                  
                  
                  
                  2,616,717Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                  
                  
                  -
                  
                  
                  
                  28Cash
      paid for taxes
                  
                  
                  -
                  
                  
                  
                  160,000Supplemental
      schedule of noncash investing and financing activities:Common
      stock issued on conversion of preferred stock
                  
                  
                  605,226
                  
                  
                  
                  105,521Accrued
      and deemed dividends on preferred stock
                  
                  
                  31,396
                  
                  
                  
                  98,701Term
      note payments paid in common stock
                  
                  
                  -
                  
                  
                  
                  300,000





See notes
to interim consolidated financial statements


5


1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION


e.Digital
Corporation is a holding company incorporated under the laws of Delaware that
operates through a wholly-owned California subsidiary of the same name. The
Company markets the eVUTM mobile entertainment system for the travel and
recreational industries and licenses and enforces its Flash-RTM portfolio of
patents related to the use of flash memory in portable devices.





Unaudited Interim Financial
Statements


These
unaudited consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States
and with the instructions to Form 10-Q and Article 10 of Regulation S-X on a
going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future. These interim consolidated financial statements do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, the unaudited consolidated financial statements reflect all
adjustments considered necessary for a fair statement of the Company's financial
position at September 30, 2010, and the results of its operations and cash flows
for the periods presented, consisting only of normal and recurring adjustments.
All significant intercompany transactions have been eliminated in consolidation.
Operating results for the six months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 2011. For further information, refer to the Company's
consolidated financial statements and footnotes thereto for the year ended March
31, 2010 filed on Form 10-K.





Going
Concern


The
Company has incurred significant losses and negative cash flow from operations
and has an accumulated deficit of $80,579,403 at September 30, 2010.The Company has incurred
losses in the current fiscal year to date and could continue to incur losses in
the future until product, service and/or licensing revenues are sufficient to
sustain continued profitability. Until the Company can demonstrate sustained
profitability its ability to continue as a going concern is in doubt and may be
dependent upon obtaining additional financing in the future. These consolidated
financial statements do not give effect to any adjustments that would be
necessary should the Company be unable to continue as a going concern and
therefore be required to realize its assets and discharge its liabilities in
other than the normal course of business and at amounts different from those
reflected in the accompanying consolidated financial statements.





Estimates


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





2.
RECENT ACCOUNTING PRONOUNCEMENTS


With the
exception of those discussed below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the six months
ended September 30, 2010, as compared to the recent accounting pronouncements
described in the Company’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2010, that are of significance, or potential significance to the
Company.





In
February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic
855). This update provides amendments to Subtopic 855-10-50-4 and related
guidance within U.S. GAAP to clarify that an SEC registrant is not required to
disclose the date through which subsequent events have been evaluated. This
change alleviates potential conflicts between Subtopic 855-10 and the SEC’s
requirements. The Company adopted this update effective June 15, 2010 and
it had no effect on its financial position.





In
September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU
2009-13). It updates the existing multiple-element revenue arrangements guidance
currently included under ASC 605-25, which originated primarily from the
guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). The revised guidance primarily provides two
significant changes: 1) eliminates the need for objective and reliable evidence
of the fair value for the undelivered element in order for a delivered item to
be treated as a separate unit of accounting, and 2) eliminates the residual
method to allocate the arrangement consideration. In addition, the guidance also
expands the disclosure requirements for revenue recognition. ASU 2009-13 will be
effective for the first annual reporting period beginning on or after June 15,
2010, with early adoption permitted provided that the revised guidance is
retroactively applied to the beginning of the year of adoption. The Company
believes this pronouncement is consistent with and will not change its revenue
recognition for patent licenses and will have no impact on its consolidated
financial statements.


6




In April
2010, the FASB issued ASU No. 2010-17—Revenue Recognition—Milestone
Method (Topic 605), which provides guidance on the criteria that should
be met for determining whether the milestone method of revenue recognition is
appropriate. A vendor can recognize consideration that is contingent upon
achievement of a milestone in its entirety as revenue in the period in which the
milestone is achieved only if the milestone meets all criteria to be considered
substantive. The amendments in this Update are effective on a prospective basis
for milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. The Company expects that the adoption of
the amendments in this update will not have any significant impact on its
financial position and results of operations.




In
January 2010, the FASB issued ASU No. 2010-06—Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements.  This update amends Subtopic 820-10 that
requires new disclosures about transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements. This update also amends Subtopic
820-10 to clarify certain existing disclosures. The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010. The adoption of this update had no
effect on the Company’s financial position.





There
have been no other recent accounting pronouncements or changes in accounting
pronouncements during the period ended September 30, 2010, or subsequently
thereto, that the Company believes are of potential significance to its
financial statements.





3.
LOSS PER SHARE


Basic
loss per common share is computed by dividing loss attributable to common
shareholders by the weighted-average number of shares of common stock
outstanding during the period. The loss to common stockholders was increased by
accrued and deemed dividends on preferred stock during the three and six months
ended September 30, 2010 of $-0- and $31,396 respectively (three and six months
ended September 30, 2009 by $55,888 and $98,701, respectively). Diluted earnings
per common share is computed by dividing loss attributable to common
shareholders by the weighted-average number of shares of common stock
outstanding during the period increased to include the number of additional
shares of common stock that would have been outstanding if the potentially
dilutive securities had been issued. Potentially dilutive securities included
outstanding convertible preferred stock, stock options, and warrants. These
securities were not included in the computation of diluted loss per share for
the periods because they are antidilutive, but they could potentially dilute
earnings per share in future periods.




4.
INVENTORIES




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


Inventories
consisted of the following:





September 30,
                              
                              
                              March 31,2010
                              
                              
                              2010$
                              
                              
                              $Raw
      materials
                              
                              
                              87,854
                              
                              
                              
                              111,399Work
      in process
                              
                              
                              19,027
                              
                              
                              
                              19,033Finished goods
                              
                              
                              191,264
                              
                              
                              
                              216,646298,145
                              
                              
                              
                              347,078





The
foregoing is net of an aggregate lower-of-cost-or-market inventory adjustment of
$50,328 and $65,459 at September 30, 2010 and March 31, 2010,
respectively.


7




5.
STOCK-BASED COMPENSATION COSTS


The
Company accounts for stock-based compensation under the provisions of ASC
718, Share-Based Paymentand ASC 505-50, Equity-Based Payments to
Non-Employees.ASC 718requires measurement of
all employee stock-based awards using a fair-value method and recording of
related compensation expense in the consolidated financial statements over the
requisite service period. Further, as required under ASC 718, the Company
estimates forfeitures for stock-based awards that are not expected to vest. The
Company recorded stock-based compensation in its consolidated statements of
operations for the relevant periods as follows:




Three Months Ended
                        
                        
                        Six Months EndedSeptember30,
                        
                        
                        September30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009$
                        
                        
                        $
                        
                        
                        $
                        
                        
                        $Research
      and development
                        
                        
                        4,330
                        
                        
                        
                        1,037
                        
                        
                        
                        22,364
                        
                        
                        
                        1,037Selling and administrative
                        
                        
                        2,068
                        
                        
                        
                        5,544
                        
                        
                        
                        77,800
                        
                        
                        
                        17,289Total stock-based compensation
      expense
                        
                        
                        6,398
                        
                        
                        
                        6,581
                        
                        
                        
                        100,164
                        
                        
                        
                        18,326





As of
September 30, 2010 total estimated compensation cost of stock options granted
but not yet vested was $14,586 and is expected to be recognized over the
weighted average period of 0.85 years.





The
following table sets forth the weighted-average key assumptions and fair value
results for stock options granted during the six-month periods ended September
30, 2010 and 2009 (annualized percentages).





Six
      Months EndedSeptember
      30,2010
                        
                        
                        2009Volatility
                        
                        
                        76
                        %
                        
                        
                        71
                        %Risk-free
      interest rate
                        
                        
                        0.43
                        %
                        
                        
                        1.45
                        %Forfeiture
      rate
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %Dividend
      yield
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %Expected
      life in years
                        
                        
                        2.0
                        
                        
                        
                        2.5Weighted-average
      fair value of options granted
                        
                        $
                        0.04
                        
                        
                        $
                        0.05





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





See Note
7 for further information on outstanding stock options.


8




6.
WARRANTY RESERVE





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




Three Months Ended
                        
                        
                        Six Months EndedSeptember30,
                        
                        
                        September30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009$
                        
                        
                        $
                        
                        
                        $
                        
                        
                        $Beginning
      balance
                        
                        
                        13,607
                        
                        
                        
                        16,138
                        
                        
                        
                        5,262
                        
                        
                        
                        14,155Warranty
      provision
                        
                        
                        2,982
                        
                        
                        
                        (3,406
                        )
                        
                        
                        11,327
                        
                        
                        
                        8,466Warranty deductions
                        
                        
                        (6,466
                        )
                        
                        
                        (7,373
                        )
                        
                        
                        (6,466
                        )
                        
                        
                        (17,262
                        )Ending balance
                        
                        
                        10,123
                        
                        
                        
                        5,359
                        
                        
                        
                        10,123
                        
                        
                        
                        5,359





7.
STOCKHOLDERS’ EQUITY


The
following table summarizes stockholders’ equity transactions during the
six-month period ended September 30, 2010:




Preferred stock
                                
                                
                                Common stock
                                
                                
                                Additional
                                
                                
                                Accumulated
                                
                                
                                Total stockholders'Amount
                                
                                
                                Shares
                                
                                
                                Amount
                                
                                
                                paid-in capital
                                
                                
                                deficit
                                
                                
                                equity$
                                
                                
                                
                                
                                
                                $
                                
                                
                                $
                                
                                
                                $
                                
                                
                                $Balance,
      April 1, 2010
                                
                                
                                573,830
                                
                                
                                
                                286,950,900
                                
                                
                                
                                286,951
                                
                                
                                
                                82,073,012
                                
                                
                                
                                (79,957,022
                                )
                                
                                
                                2,976,771Dividends
      on Series AA preferred stock
                                
                                
                                6,856
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (6,856
                                )
                                
                                
                                -
                                
                                
                                
                                -Accretion
      of discount on Series AA preferredstock
                                
                                
                                24,540
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (24,540
                                )
                                
                                
                                -
                                
                                
                                
                                -Conversion
      of Series AA preferred stock
                                
                                
                                (605,226
                                )
                                
                                
                                6,052,258
                                
                                
                                
                                6,052
                                
                                
                                
                                599,174
                                
                                
                                
                                -
                                
                                
                                
                                -Stock-based
      compensation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                100,164
                                
                                
                                
                                -
                                
                                
                                
                                100,164Loss
      and comprehensive loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (622,381
                                )
                                
                                
                                (622,381
                                )Balance,
      September 30, 2010
                                
                                
                                -
                                
                                
                                
                                293,003,158
                                
                                
                                
                                293,003
                                
                                
                                
                                82,740,954
                                
                                
                                
                                (80,579,403
                                )
                                
                                
                                2,454,554





Options


The
following table summarizes stock option activity for the period:





Weighted average
                      
                      
                      AggregateShares
                      
                      
                      exercise price
                      
                      
                      Intrinsic Value#
                      
                      
                      $
                      
                      
                      $Outstanding
      April 1, 2010
                      
                      
                      4,965,500
                      
                      
                      
                      0.15Granted
                      
                      
                      2,320,000
                      
                      
                      
                      0.09Exercised
                      
                      
                      -Canceled/expired
                      
                      
                      (320,000
                      )
                      
                      
                      0.16Outstanding
      September 30, 2010
                      
                      
                      6,965,500
                      
                      
                      
                      0.13
                      
                      
                      $
                      -Exercisable
      at September 30, 2010
                      
                      
                      5,948,830
                      
                      
                      
                      0.13
                      
                      
                      $
                      -




(1)
            Options
      outstanding are exercisable at prices ranging from $0.09 to $0.23 and
      expire over the period from 2010 to
2014.


(2)
            Aggregate
      intrinsic value is based on the closing price of our common stock on
      September 30, 2010 of $0.08 and excludes the impact of options that were
      not in-the-money.




9




Share
warrants


The
Company has outstanding share warrants as of September 30, 2010, as
follows:




Number of
                        
                        
                        Exercise PriceDescription
                        
                        Common Shares
                        
                        
                        Per Share $
                        
                        Expiration DateWarrants
                        
                        
                        7,500,000
                        
                        
                        
                        0.10
                        
                        June 30,
2011





No
warrants were granted, exercised or cancelled/expired during the six months
ended September 30, 2010.





8.
PREFERRED STOCK


On June
27, 2008 the Company issued 75,000 shares of 5% Series AA Convertible Preferred
Stock (the “Series AA Stock”) with a stated value of $10 per share. Dividends of
5% per annum were payable in shares of common stock or at the Company’s election
additional shares of Series AA Stock or under certain circumstances in cash. The
stated value plus accrued dividends on Series AA Stock was convertible into
common stock at $0.10 per common share with automatic conversion on June 30,
2010. On June 30, 2010 the Company issued 6,052,258 shares of common stock upon
the conversion of 55,000 shares of Series AA Stock and as a result no shares of
Series AA Stock remained outstanding thereafter.





9.
FAIR VALUE MEASUREMENTS


Cash and
cash equivalents are measured at fair value in the Company’s financial
statements. Accounts receivable are financial assets with carrying values that
approximate fair value due to the short-term nature of these assets. Accounts
payable, deferred revenue and accrued and other liabilities are financial
liabilities with carrying values that approximate fair value due to the
short-term nature of these liabilities. Effective April 1, 2008 the Company
adopted and follows ASC 820, Fair Value Measurements and
Disclosures (“ASC 820”) which established a fair value hierarchy that
requires the Company to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. A financial instruments
categorization within the hierarchy is based on the lowest level of input that
is significant to the fair value measurement.





The
Company’s cash and cash equivalents are valued using unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 inputs under ASC
820).





10.
SEGMENT INFORMATION


ASC 280
Segment Reporting
provides annual and interim reporting standards for an enterprise’s business
segments and related disclosures about its products, services, geographical
areas and major customers. The Company has two operating segments: (1) products
and services and (2) patent licensing. Products and services consist of sales of
the Company’s electronic eVU mobile entertainment device and related content
services and patent licensing consists of intellectual property revenues from
the Flash-R patent portfolio.





Accounting
policies for each of the operating segments are the same as on a consolidated
basis.


10




Our
reportable segment information for the three and six months ended September 30,
2010 and 2009 is as follows:





For the three months ended
                  
                  
                  For the six months endedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009$
                  
                  
                  $
                  
                  
                  $
                  
                  
                  $REVENUES:Products
      and services
                  
                  
                  238,095
                  
                  
                  
                  262,267
                  
                  
                  
                  725,229
                  
                  
                  
                  485,297Patent
      licensing
                  
                  
                  -
                  
                  
                  
                  1,250,000
                  
                  
                  
                  25,264
                  
                  
                  
                  1,250,000Total
      revenue
                  
                  
                  238,095
                  
                  
                  
                  1,512,267
                  
                  
                  
                  750,493
                  
                  
                  
                  1,735,297GROSS
      PROFIT (LOSS):Products
      and services
                  
                  
                  104,170
                  
                  
                  
                  129,644
                  
                  
                  
                  263,616
                  
                  
                  
                  231,696Patent
      licensing
                  
                  
                  (15,158
                  )
                  
                  
                  807,000
                  
                  
                  
                  -
                  
                  
                  
                  807,000Total
      gross profit
                  
                  
                  89,012
                  
                  
                  
                  936,644
                  
                  
                  
                  263,616
                  
                  
                  
                  1,038,696RECONCILIATION:Total
      segment gross profit
                  
                  
                  89,012
                  
                  
                  
                  936,644
                  
                  
                  
                  263,616
                  
                  
                  
                  1,038,696Operating
      expenses
                  
                  
                  (361,201
                  )
                  
                  
                  (377,490
                  )
                  
                  
                  (885,997
                  )
                  
                  
                  (1,033,743
                  )Other
      income (expense)
                  
                  
                  -
                  
                  
                  
                  (4,518
                  )
                  
                  
                  -
                  
                  
                  
                  (19,393
                  )Income
      (loss) before income taxes
                  
                  
                  (272,189
                  )
                  
                  
                  554,636
                  
                  
                  
                  (622,381
                  )
                  
                  
                  (14,440
                  )





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





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





For the three months ended
                    
                    
                    For the six months endedSeptember 30,
                    
                    
                    September 30,2010
                    
                    2009
                    
                    2010
                    
                    2009$
                    
                    
                    $
                    
                    
                    $
                    
                    
                    $United
      States
                    
                    
                    -
                    
                    
                    
                    1,250,000
                    
                    
                    
                    25,264
                    
                    
                    
                    1,250,000International
                    
                    
                    238,095
                    
                    
                    
                    262,267
                    
                    
                    
                    725,229
                    
                    
                    
                    485,297Total
      revenue
                    
                    
                    238,095
                    
                    
                    
                    1,512,267
                    
                    
                    
                    750,493
                    
                    
                    
                    1,735,297





Revenues
from three customers comprised 31%, 27% and 12% of revenue for the six months
ended September 30, 2010, with no other customer accounting for more than 10% of
revenues. Revenues from two customers comprised 72% and 12% of revenue for the
six months ended September 30, 2009. Accounts receivable from three customers
comprised 54%, 15% and 12% of net accounts receivable at September 30,
2010.





11.
COMMITMENTS AND CONTINGENCIES




Legal
Matters




Intellectual Property
Litigation


In
September 2007 and March 2008, the Company filed complaints against eight
electronic product manufacturers in the U.S. District Court for the Eastern
District of Texas asserting that products made by the companies infringe four of
the Company's U.S. patents covering the use of flash memory technology. These
patents are part of the Company’s Flash-R patent portfolio. By September 30,
2009 the Company had licensed and settled the litigation with seven of the
manufacturers and suspended the complaint against one defendant in
bankruptcy.


11




In
November 2009 the Company filed an additional patent infringement complaint in
the United States District Court for the District of Colorado against
nineteen companies that manufacture devices using flash memory. By March
31, 2010 the Company had licensed and settled the litigation with three of the
defendants.





Although
most fees, costs and expenses of intellectual property litigation are covered
under the Company’s arrangement with Duane Morris LLP as described below, the
Company may incur support and related expenses for this litigation that may
become material.





Commitment Related to
Intellectual Property Legal Services


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





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





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





Contract
Manufacturers and Suppliers


At
September 30, 2010, the Company had outstanding unfilled purchase orders and was
committed to a contract manufacturer and component suppliers for approximately
$19,000 of future deliveries.





Facility
Lease


In March
2006, the Company entered into a sixty-two month lease, commencing June 1, 2006,
for approximately 4,800 square feet with an aggregate payment of $6,344 per
month excluding utilities and costs. The aggregate payments adjust annually with
maximum aggregate payments totaling $6,535 in the fifty-first through the
sixty-second month. Future lease commitments aggregated $65,343 at September 30,
2010.





Concentration
of Credit Risk and Sources of Supply


Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash and cash equivalents and trade receivables. The
Company at September 30, 2010 had substantially all of its cash and cash
equivalents at one financial institution in a non-interest bearing account. FDIC
deposit insurance has changed to provide full deposit insurance coverage for
non-interest bearing deposit transaction accounts through December 31,
2010.  The Company does not believe that it is subject to any unusual
financial risk beyond the normal risk associated with commercial banking
relationships. The Company performs periodic evaluations of the relative credit
standing of these financial institutions. The Company has not experienced any
significant losses on its cash equivalents.





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





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


12




Guarantees
and Indemnifications


The
Company enters into standard indemnification agreements in the ordinary course
of business. Some of the Company’s product sales and services agreements include
a limited indemnification provision for claims from third parties relating to
the Company’s intellectual property. Such indemnification provisions are
accounted for in accordance with ASC 450, Contingencies. The
indemnification is generally limited to the amount paid by the customer. To
date, there have been no claims under such indemnification
provisions.





The
Company provides a one-year limited warranty for most of its
products.





12.
INCOME TAXES


There is
no income tax provision for the three or six months ended September 30, 2010 due
to net operating losses for which there is no benefit currently
available.





At
September 30, 2010, the Company had deferred tax assets associated with federal
net operating losses (“NOLs”), related state NOLs, foreign tax credits and
certain Federal and California research and development tax credits, but
recorded a corresponding full valuation allowance as it is more likely than not
that some portion or all of the deferred tax assets will not be
realized.


13


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





THE
FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW. SEE ALSO THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2010.





Cautionary
Note on Forward Looking Statements


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





General


We are a
holding company incorporated under the laws of Delaware that operates through a
wholly-owned California subsidiary of the same name. We market our eVU mobile
entertainment system for the travel and recreational industries and license and
enforce our Flash-R portfolio of flash memory patents for use in portable
devices produced by electronic product manufacturers.





With the
inception of patent license revenue in September 2008, we determined that we
have two operating segments: (1) products and services and (2) patent licensing
and enforcement. Our products and services revenue is derived from the sale of
eVU products and accessories to customers, warranty and technical support
services and content integration fees and related services. Our patent licensing
and enforcement revenue consists of intellectual property revenues from our
Flash-R patent portfolio.





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





We are
commercializing our Flash-R patent portfolio through licensing and we are
aggressively pursuing enforcement by litigating against targeted parties that we
believe are infringing our patents. The international law firm of Duane Morris
LLP is handling our patent enforcement matters on a contingent fee basis. During
the period commencing September 2007 through March 2008, we filed complaints
against eight electronic product manufacturers and subsequently licensed and
settled the litigation with seven of the manufacturers and suspended the
complaint against one defendant that filed for bankruptcy. In November 2009, we
filed an additional patent infringement complaint against nineteen companies and
we have subsequently licensed and settled with three companies. While we expect
to file future complaints against additional companies and license additional
companies there can be no assurance of the timing or amounts of any related
license revenue.





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





Overall
Performance and Trends


We
focused significant efforts on developing, licensing and enforcing our patent
portfolio during the first six months and during the fiscal years ended March
31, 2010 and 2009. We successfully completed our first round of enforcement
litigation in September 2009 when we licensed the last of the remaining original
defendants. In November 2009 we filed additional enforcement actions against
nineteen defendants, licensed our first customer from the second round in
December 2009 and by March 31, 2010 had licensed a total of three licensees from
the second round. There is a reluctance of patent infringers to negotiate and
ultimately take a patent license without at least the threat of legal action.
However, the majority of patent infringement contentions settle out of court,
based on the strength of the patent claims, validity, and persuasive evidence
and clarity that the patent is being infringed. We believe we are building a
track record of demonstrating the strength, validity and clarity of our patent
claims that could result in significant future revenues from our patent
portfolio.


14




Our eVU
in-flight entertainment (“IFE”) business has remained slow due to airline
economics. While we are seeing increased activity, we are unable to predict
future sales levels in this market as orders are sporadic from both existing and
new customers. We continue to pursue business in the airline and other markets
for our eVU product line.





Management
faces challenges for the remainder of fiscal 2011 to execute its plan to grow
product and service revenues and increase Flash-R patent portfolio license fees.
We are in the early stages of licensing our patents and only recently filed
additional infringement claims as described above and in Part II, Item 1 “Legal
Proceedings” below.  While we expect additional patent licenses in future
periods there can be no assurance of the timing or amounts of any such license
revenue. The failure to obtain additional patent license revenues or eVU orders
or delays of orders or production delays could have a material adverse impact on
our operations. Our patent licensing business is subject to significant
uncertainties as to the timing and amount of future license revenues, if any. We
may also face unanticipated technical or manufacturing obstacles as well as
warranty and other risks in our business.





For the
six months ended September 30, 2010 we recognized a net loss before income taxes
of $622,381 compared to a net loss before income taxes of $14,440 for the
comparable period of the prior fiscal year. Our revenues were $750,493 for the
first six months of fiscal 2011 with $25,264 of patent license revenue.
This compares to $1,735,297 for the prior year’s first six months with
$1,250,000 of patent license revenue reported. We reported reduced operating
expenses totaling $885,997 in the six months ended September 30, 2010 compared
to $1,033,743 in the comparable period prior primarily due to reduced legal fees
for litigation concluded in the prior year.





Our
monthly cash operating costs average approximately $125,000 per month. However,
we may increase expenditure levels in future periods to support and expand our
revenue opportunities and continue advanced product and technology research and
development. Our quarterly results are highly dependent on the timing and amount
of licensing fees and accordingly quarterly results can vary dramatically from
period to period. As a result of this and other factors, past results and
expenditure levels may not be indicative of future quarters. We have incurred
losses and negative cash flow from operations during fiscal 2010 and the first
half of fiscal 2011. We expect to incur losses in the future until product,
service and/or licensing revenues are sufficient to sustain continued
profitability. Our ability to continue as a going concern is in doubt and is
dependent upon achieving a profitable level of operations and if necessary
obtaining additional financing.





Critical
Accounting Policies


The
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements located in Item 1 of Part
I, “Financial Statements,” and in Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report of Form 10-K
for the year ended March 31, 2010. The preparation of these financial statements
prepared in accordance with accounting principles generally accepted in the
United States requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities.  On an on-going
basis, we evaluate our estimates, including but not limited to those related to
revenue recognition, bad debts, inventory valuation, intangible assets,
financing operations, warranty obligations, stock-based compensation, fair
values, derivatives, income taxes, contingencies and litigation.  We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.  Actual
results may differ from these estimates under different assumptions or
conditions.





We
believe that, of the significant accounting policies discussed in our
consolidated financial statements, the following accounting policies require our
most difficult, subjective or complex judgments:





·
            revenue
      recognition;


·
            estimates
      and allowances (primarily doubtful accounts and inventory
      obsolescence);


·
            stock-based
      compensation expense; and


·
              income
      taxes.


15





Historically,
our assumptions, judgments and estimates relative to our critical accounting
policies have not differed materially from actual results. There were no
significant changes or modification of our critical accounting policies and
estimates involving management valuation adjustments affecting our results for
the six months ended September 30, 2010. For further information on our critical
accounting policies, refer to Note 2 to the consolidated financial statements in
our Annual Report on Form 10-K for the year ended March 31, 2010.





Results
of Operations





Three months ended September
30, 2010 compared to the three months ended September 30,
2009





Three Months Ended September 30,2010
                  
                  
                  
                  
                  
                  2009% of
                  
                  
                  
                  
                  
                  % of
                  
                  
                  ChangeDollars
                  
                  
                  Revenue
                  
                  
                  Dollars
                  
                  
                  Revenue
                  
                  
                  Dollars
                  
                  
                  %Revenues:Products
                  
                  
                  54,212
                  
                  
                  
                  23
                  %
                  
                  
                  43,440
                  
                  
                  
                  3
                  %
                  
                  
                  10,772
                  
                  
                  
                  25
                  %Services
                  
                  
                  183,883
                  
                  
                  
                  77
                  %
                  
                  
                  218,827
                  
                  
                  
                  14
                  %
                  
                  
                  (34,944
                  )
                  
                  
                  (16
                  )%Patent
      license
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  1,250,000
                  
                  
                  
                  83
                  %
                  
                  
                  (1,250,000
                  )238,095
                  
                  
                  
                  100
                  %
                  
                  
                  1,512,267
                  
                  
                  
                  100
                  %
                  
                  
                  (1,274,172
                  )
                  
                  
                  (84
                  )%Gross
      Profit:Product
      gross profit (loss)
                  
                  
                  19,216
                  
                  
                  
                  8
                  %
                  
                  
                  15,651
                  
                  
                  
                  1
                  %
                  
                  
                  3,565
                  
                  
                  
                  23
                  %Service
      gross profit
                  
                  
                  84,954
                  
                  
                  
                  36
                  %
                  
                  
                  113,993
                  
                  
                  
                  8
                  %
                  
                  
                  (29,039
                  )
                  
                  
                  (25
                  )%Patent
      license
                  
                  
                  (15,158
                  )
                  
                  
                  (6
                  )%
                  
                  
                  807,000
                  
                  
                  
                  53
                  %
                  
                  
                  (822,158
                  )89,012
                  
                  
                  
                  37
                  %
                  
                  
                  936,644
                  
                  
                  
                  62
                  %
                  
                  
                  (847,632
                  )
                  
                  
                  (90
                  )%Operating
      Expenses:Selling
      and administrative
                  
                  
                  273,788
                  
                  
                  
                  115
                  %
                  
                  
                  250,741
                  
                  
                  
                  17
                  %
                  
                  
                  23,047
                  
                  
                  
                  9
                  %Research
      and related
                  
                  
                  87,413
                  
                  
                  
                  37
                  %
                  
                  
                  126,749
                  
                  
                  
                  9
                  %
                  
                  
                  (39,336
                  )
                  
                  
                  (31
                  )%361,201
                  
                  
                  
                  152
                  %
                  
                  
                  377,490
                  
                  
                  
                  25
                  %
                  
                  
                  (16,289
                  )
                  
                  
                  (4
                  )%Other
      expense
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  (4,518
                  )
                  
                  
                  (0
                  )%
                  
                  
                  4,518
                  
                  
                  
                  (100
                  )%Income
      (loss) before income taxes
                  
                  
                  (272,189
                  )
                  
                  
                  (114
                  )%
                  
                  
                  554,636
                  
                  
                  
                  37
                  %
                  
                  
                  (826,825
                  )
                  
                  
                  (149
                  )%





Income
(Loss) Before Income Taxes


The loss
before income taxes resulted primarily from no patent license revenue in the
most recent quarter and product sales and margins insufficient to cover reduced
operating expenses compared to the comparable quarter of the prior
year.





Revenues


Revenues
decreased during the most recent fiscal quarter (Q2 of fiscal 2011) compared to
the second quarter of the prior year due to no patent license revenue. While
product and service revenues were comparable to the prior year, Q2 of the prior
year included $1,250,000 of patent license revenue. eVU product sales activity
has been slow and sporadic due to airline industry economics, with airlines
curtailing expansion and new projects. Our product sales in the second quarter
are not necessarily indicative of future orders and we had no significant
product backlog at September 30, 2010. Our service arrangements and terms vary
with each customer and there is no assurance in the current airline environment
that our service revenues will continue at comparable levels for the balance of
the fiscal year or in future periods.





We have
an outstanding complaint against sixteen additional electronics manufacturers,
and while we expect additional patent licenses from these and other companies in
future periods, there can be no assurance of the timing or amounts of future
patent license revenue.We are
pursuing new eVU and other technology business but our results will continue to
be dependent on the timing and quantity of eVU orders and the timing and amount
of any patent licensing arrangements.


16





Gross
Profit


Gross
profit for the second quarter of fiscal 2011 was $89,012 or 37% of
revenues.  The gross profit for the prior year’s first quarter was
$936,644 or 62% of revenues due to $807,000 of margin from patent licensing. Our
margin on service declined from 52% to 46% due to repair and content mix. Gross
profit margins are highly dependent on revenue mix, prices charged, volume of
orders, and for periods with patent licensing revenues the amounts of
contingency legal fees and costs.





Operating
Expenses


Selling
and administrative costs for the three months ended September 30, 2010 declined
by $23,047 compared to the same period in the year prior. The current period
included a $2,068 expense for noncash stock-based compensation expense compared
to $5,544 for the prior year’s second quarter. Reduced current period selling
and administrative expenses included $34,000 of reduced compensation costs due
to reduced staffing. The prior year Q2 included the benefit of $100,000
litigation accrual reversal as a result of a favorable litigation
outcome.





Research
and related expenses in the most recent quarter included $4,330 of noncash
stock-based compensation costs compared to $1,037 in the prior year Q2. Research
and related expenses decreased $39,336 due to reduced staffing costs and more
allocation of dual use personnel to service revenue work. Research and related
expenses can vary significantly from quarter to quarter based on the allocation
of time spent by personnel who work on both revenue producing service and repair
projects and on internal research projects. Such expenses also vary based on
decisions made regarding outside engineering and consulting.





Other
Income (Expense)


We had no
other income or expenses in the current period compared to $4,518 of net other
expenses for the prior year’s second quarter.





Income
Taxes


There was
no income tax expense or benefit for the current period and the prior year Q2
included a foreign tax provision of $206,250.





Loss
Attributable to Common Stockholders


The loss
attributable to common stockholders equaled the net loss after taxes of
$272,189. The net income after tax for the prior comparable second quarter was
$348,386 decreased by accrued and deemed dividends of $55,888 for net income
attributable to common stockholders of $292,498. Since all shares of Series AA
Stock were converted into common at June 30, 2010 we had no Series AA dividends
or accretion in Q2 and will have no further dividends or accretion in future
quarters.


17





Six months ended September
30, 2010 compared to the six months ended September 30, 2009





Six Months Ended September 30,2010
                  
                  
                  
                  
                  
                  2009% of
                  
                  
                  
                  
                  
                  % of
                  
                  
                  ChangeDollars
                  
                  
                  Revenue
                  
                  
                  Dollars
                  
                  
                  Revenue
                  
                  
                  Dollars
                  
                  
                  %Revenues:Product
      revenues
                  
                  
                  352,827
                  
                  
                  
                  47
                  %
                  
                  
                  57,515
                  
                  
                  
                  3
                  %
                  
                  
                  295,312
                  
                  
                  
                  513
                  %Service
      revenues
                  
                  
                  372,402
                  
                  
                  
                  50
                  %
                  
                  
                  427,782
                  
                  
                  
                  25
                  %
                  
                  
                  (55,380
                  )
                  
                  
                  (13
                  )%Patent
      license
                  
                  
                  25,264
                  
                  
                  
                  3
                  %
                  
                  
                  1,250,000
                  
                  
                  
                  72
                  %
                  
                  
                  (1,224,736
                  )
                  
                  
                  (98
                  )%750,493
                  
                  
                  
                  100
                  %
                  
                  
                  1,735,297
                  
                  
                  
                  100
                  %
                  
                  
                  (984,804
                  )
                  
                  
                  (57
                  )%Gross
      Profit:Product
      gross profit
                  
                  
                  76,146
                  
                  
                  
                  10
                  %
                  
                  
                  (19,278
                  )
                  
                  
                  -1
                  %
                  
                  
                  95,424
                  
                  
                  
                  (495
                  )%Service
      gross profit
                  
                  
                  187,470
                  
                  
                  
                  25
                  %
                  
                  
                  250,974
                  
                  
                  
                  15
                  %
                  
                  
                  (63,504
                  )
                  
                  
                  (25
                  )%Patent
      license gross profit
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  807,000
                  
                  
                  
                  47
                  %
                  
                  
                  (807,000
                  )
                  
                  
                  (100
                  )%263,616
                  
                  
                  
                  35
                  %
                  
                  
                  1,038,696
                  
                  
                  
                  60
                  %
                  
                  
                  (775,080
                  )
                  
                  
                  (75
                  )%Operating
      Expenses:Selling
      and administrative
                  
                  
                  639,913
                  
                  
                  
                  85
                  %
                  
                  
                  827,413
                  
                  
                  
                  48
                  %
                  
                  
                  (187,500
                  )
                  
                  
                  (23
                  )%Research
      and related
                  
                  
                  246,084
                  
                  
                  
                  33
                  %
                  
                  
                  206,330
                  
                  
                  
                  12
                  %
                  
                  
                  39,754
                  
                  
                  
                  19
                  %885,997
                  
                  
                  
                  118
                  %
                  
                  
                  1,033,743
                  
                  
                  
                  60
                  %
                  
                  
                  (147,746
                  )
                  
                  
                  (14
                  )%Other
      expense
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  (19,393
                  )
                  
                  
                  (1
                  )%
                  
                  
                  19,393
                  
                  
                  
                  (100
                  )%Loss
      before income taxes
                  
                  
                  (622,381
                  )
                  
                  
                  (83
                  )%
                  
                  
                  (14,440
                  )
                  
                  
                  (1
                  )%
                  
                  
                  (607,941
                  )
                  
                  
                  4210
                  %





Loss
Before Income Taxes


The loss
before income taxes of $622,381 resulted primarily from no patent license
revenue in the most recent quarter and product sales and margins insufficient to
cover reduced operating expenses compared to the comparable six months of the
prior year which included $1,250,000 of patent license revenue.





Revenues


Revenues
decreased during the most recent six months compared to the comparable period of
the prior year due to the decrease in patent license revenue from $1,250,000 to
$25,264. We currently have two licensees reporting periodic royalties with one
such payment recognized in Q1, all other royalties including the $1,250,000 in
the prior year Q2 have been one time fully paid up royalties. Product revenues
increased $295,312 due to increased Q1 product sales. Service revenues vary
depending on repair and content services provided to a changing customer mix.
eVU product sales activity has been slow and sporadic due to airline industry
economics with airlines curtailing expansion and new projects. Our product sales
for the first six months are not necessarily indicative of future orders and we
had no significant product backlog at September 30, 2010. Our service
arrangements and terms vary with each customer and there is no assurance in the
current airline environment that our service revenues will continue at
comparable levels for the balance of the fiscal year or in future
periods.





We have
an outstanding complaint against sixteen additional electronics manufacturers,
and while we expect additional patent licenses from these and other companies in
future periods, there can be no assurance of the timing or amounts of future
patent license revenue.We are
pursuing new eVU and other technology business but our results will continue to
be dependent on the timing and quantity of eVU orders and the timing and amount
of any patent licensing arrangements.





Gross
Profit


Gross
profit for the six months ended September 30, 2010 was $263,616 or 35% of
revenues.  The gross profit for the prior year’s first six months was
$1,038,696 or 60% of revenues including $807,000 of margin from patent
licensing. While our margin on service declined from 58% to 50% due to repair
and content mix, our product gross margin was positive compared to the prior
year. Gross profit margins are highly dependent on revenue mix, prices charged,
volume of orders, and for periods with patent licensing revenues the amounts of
contingency legal fees and costs.


18





Operating
Expenses


Selling
and administrative costs for the six months ended September 30, 2010 declined by
$187,500 compared to the same period in the year prior. The current period
included a $77,800 expense for noncash stock-based compensation expense compared
to $17,289 for the prior year’s first six months. Reduced current period selling
and administrative expenses included $209,000 of reduced professional fees
primarily due to reduced business litigation costs as a result of the favorable
outcome of the digEcor litigation reported last year.





Research
and related expenses in the most recent six month period ended September 30,
2010 included $22,364 of noncash stock-based compensation costs compared to
$1,037 in the prior year. Increased research and related expenses included
$46,500 of increased staffing and consulting costs primarily associated with new
projects. Research and related expenses can vary significantly from quarter to
quarter based on the allocation of time spent by personnel who work on both
revenue producing service and repair projects and on internal research projects.
Such expenses also vary based on decisions made regarding outside engineering
and consulting.





Other
Income (Expense)


We had no
other income or expenses in the current six month period ended September 30,
2011 compared to $19,393 of net other expenses for the prior year’s first six
months consisting primarily of interest expense.





Income
Taxes


There was
no income tax expense or benefit for the current six month period and the prior
year included a foreign tax provision of $206,250 on patent license
revenues.





Loss
Attributable to Common Stockholders


The loss
attributable to common stockholders equaled the net loss after taxes of
$622,381. The net loss after tax for the prior comparable six month period was
$220,690 decreased by accrued and deemed dividends of $98,701 for net loss
attributable to common stockholders of $319,391. Since all shares of Series AA
Stock were converted into common stock at June 30, 2010 we will not have further
Series AA dividends or accretion in future quarters.





Liquidity
and Capital Resources


At
September 30, 2010, we had working capital of $2,447,640 compared to a working
capital of $2,965,681 at March 31, 2010. At September 30, 2010 we had cash on
hand of $2,144,904.





Operating
Activities


Cash used
in operating activities was $672,720 for the six months ended September 30,
2010. Cash used in operating activities included the net loss of $622,381
reduced by net non-cash expenses of $116,770. Major components also providing
operating cash was a decrease of $48,933 in inventory and an increase of $55,362
in accounts payable. Major components using operating cash included an increase
of $60,669 in accounts receivable and a $224,239 reduction in accrued and other
liabilities including a reduction of $153,743 reduction in deferred revenue and
customer deposits at March 31, 2010 that converted into revenue during the six
months ended September 30, 2010.





Cash used
in operating activities during the six months ended September 30, 2009 was
$1,197,273 with the larger usage caused by a $1,342,942 increase in accounts
receivable from patent license activity. Our terms to customers vary but we
often require payment prior to shipment of product and any such payments are
recorded as deposits. Patent license payments are normally due at signing of the
license or within 30-45 days of settlement or end of royalty reporting
period.





Individual
working capital components can change dramatically from period to period due to
timing of sales and shipments and corresponding receivable, inventory and
payable balances. Accordingly operating cash requirements vary significantly
from period to period.





Investing
Activities


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


19





Financing
Activities


There
were no cash financing activities during the six months ended September 30, 2010
or 2009. On June 30, 2010 $605,226 of preferred stock automatically converted to
common stock with no cash impact.





Debt
and Other Commitments


We
currently have no debt outstanding other than trade payables and accruals.At September
30, 2010 we were committed to approximately $19,000 as purchase commitments for
product and components. These orders are generally subject to modification as to
timing, quantities and scheduling and in certain instances may be cancelable
without penalty.





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





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





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





Cash
Requirements


Other
than cash on hand and accounts receivable, we have no material unused sources of
liquidity at this time.  Based on our cash position at September 30,
2010 and current planned expenditures and level of operation, we believe we have
sufficient capital resources for the next twelve months. Actual results could
differ significantly from management plans. We believe we may be able to obtain
additional funds from future patent licensing and eVU product sales and services
but the timing of licenses and shipments and the amount and quantities of
shipments, orders and reorders are subject to many factors and risks, many
outside our control.





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





Item
4. Controls and Procedures


Based on
an evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as
of September 30, 2010, our President and CEO (“Principal Executive Officer” or
“PEO”) and Interim Chief Accounting Officer (“Principal Financial Officer” or
“PFO”) have concluded that our disclosure controls and procedures were not
effective at the reasonable assurance level in ensuring that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and forms.





In
connection with the preparation of our annual financial statements, our
management performed an assessment of the effectiveness of internal control over
financial reporting as of March 31, 2010. Management's assessment included an
evaluation of the design of our internal control over financial reporting and
testing of the operational effectiveness of those controls. Based on this
evaluation, management determined that, as of March 31, 2010, there was a
material weakness in our internal control over financial reporting: the lack of
independent oversight by an audit committee of independent members of the Board
of Directors. In light of this material weakness, management concluded that, as
of March 31, 2010, we did not maintain effective internal control over financial
reporting. As defined by the Public Company Accounting Oversight Board Auditing
Standard No. 5, a material weakness is a deficiency or a combination of
deficiencies, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management has concluded
that with certain management oversight controls that are in place, the risks
associated with the lack of independent audit committee oversight is not
sufficient to justify the costs of adding additional directors and independent
audit committee members at this time. Management will periodically reevaluate
this situation. If we secure sufficient capital or improve operating results it
is our intention to change the composition and/or size of the Board of Directors
with emphasis on recruiting qualified independent audit committee
members.


20





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





CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING


There have been no changes in our
internal control over financial reporting during our fiscal quarter endedSeptember30, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. Our process for evaluating controls and procedures is
continuous and encompasses constant improvement of the design and effectiveness
of established controls and procedures and the remediation of any deficiencies
which may be identified during this process.





PART
II.       OTHER INFORMATION





Item
1. Legal Proceedings





Intellectual Property
Litigation


During
the period commencing September 2007 through and including March 2008, we filed
complaints against eight electronic product manufacturers in the U.S. District
Court for the Eastern District of Texas asserting that products made by the
companies infringe four of our U.S. patents covering the use of flash memory
technology. These patents are part of our Flash-R patent portfolio. By September
30, 2009 we had licensed and settled the litigation with seven of the
manufacturers and suspended the complaint against one defendant currently in
bankruptcy.





In
November 2009, we filed an additional patent infringement complaint in the
United States District Court for the District of Colorado against
nineteen companies that manufacture devices using flash memory.
Subsequently we have licensed and settled with three of the defendants.





Although
most fees, costs and expenses of the litigation are covered under our
arrangement with Duane Morris LLP, we may incur support and related expenses for
this litigation that may become material.





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





(a)
            NONE


(b)
            NONE


(c)
            NONE





Item
3. Defaults Upon Senior Securities





NONE





Item
4. (Removed and Reserved)





Item
5. Other Information





(a)
NONE


(b)
NONE


21





Item
6. Exhibits





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





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





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





SIGNATURES





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





e.DIGITAL
      CORPORATIONDate:     
      November 12, 2010
              By:
              /s/ ROBERT PUTNAMRobert
      Putnam, Interim Chief Accounting Officer(Principal
      Accounting and Financial Officerand
      duly authorized to sign on behalf of the
  Registrant)


22