10-K 1 v152372_10k.htm ANNUAL REPORT Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2009
Commission file number 0-20734

e.Digital Corporation
(Exact name of registrant as specified in its charter)

Delaware
33-0591385
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
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)

Securities registered pursuant to Section 12(b) of the Act:       None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

Large Accelerated Filer ¨  Accelerated filer ¨  Non-accelerated filer   ¨   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

The aggregate market value of the issuer’s Common Stock held by non-affiliates of the registrant on September 30, 2008 was approximately $38,485,941 based on the closing price as reported on the NASD’s OTC Electronic Bulletin Board system.

As of June 5, 2009 there were 282,871,198 shares of e.Digital Corporation Common Stock, par value $.001, outstanding.
 
 


 
 
 
 
TABLE OF CONTENTS
   
Page
PART I
       
ITEM 1.
Business
3
 
ITEM 1A.
Risk Factors
10
 
ITEM 1B.
Unresolved Staff Comments
16
 
ITEM 2.
Properties
16
 
ITEM 3.
Legal Proceedings
16
 
ITEM 4.
Submission of Matters to a Vote of Security Holders
17
 
       
PART II
       
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
   
 
Issuer Purchases of Equity Securities
17
 
ITEM 6.
Selected Financial Data
18
 
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
 
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk
29
 
ITEM 8.
Financial Statements and Supplementary Data
29
 
ITEM 9.
Changes In and Disagreement With Accountants on Accounting and Financial Disclosure
29
 
ITEM 9A(T). 
Controls and Procedures
30
 
ITEM 9B.
Other Information
31
 
 
PART III
       
ITEM 10.
Directors, Executive Officers and Corporate Governance
31
 
ITEM 11.
Executive Compensation
33
 
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related
   
 
Stockholder Matters
34
 
ITEM 13.
Certain Relationships and Related Transactions and Director Independence
37
 
ITEM 14.
Principal Accounting Fees and Services
38
 
       
PART IV
       
ITEM 15.
Exhibits, Financial Statement Schedules
39
 
       
 
Signatures
43
 
       
 
Financial Statements
F-1
 

FORWARD-LOOKING STATEMENTS

IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE “SAFE HARBOR” PROVISIONS THEREOF. THEREFORE, THE COMPANY IS INCLUDING THIS STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED 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 RISK FACTORS DESCRIBED BELOW AND NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF.

 

 

PART I
ITEM 1. BUSINESS

Overview
e.Digital Corporation (the “Company) is a holding company incorporated under the laws of Delaware  that operates through a wholly-owned California subsidiary of the same name.  We have innovated a proprietary secure digital video/audio technology platform (“DVAP”) and market our eVU™ mobile entertainment device for the travel and recreational industries. We also own and are licensing our Flash-R™ portfolio of patents related to the use of flash memory in portable devices.

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. Our products and services revenue is derived from the sale of DVAP products and accessories to customers, warranty and technical support services and content integration fees and related services. Our patent licensing revenue consists of intellectual property revenues from our Flash-R patent portfolio.Our Flash-R patent portfolio revenues to date have consisted of fees from one-time license and settlement agreements requiring no future performance.

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

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

Our Company, then known as Norris Communications, was incorporated in the Province of British Columbia, Canada on February 11, 1988 and on November 22, 1994 changed its domicile to the Yukon Territory, Canada.  On August 30, 1996, we filed articles of continuance to change our jurisdiction to the State of Wyoming, then on September 4, 1996, reincorporated in the State of Delaware.  On January 13, 1999, the stockholders approved a name change to e.Digital Corporation.  Our principal executive offices and primary operating facilities are located at 16770 West Bernardo Drive, San Diego, California 92127 and our telephone number is (858) 304-3016.  Our Internet site is located at www.edigital.com.Information contained in our Internet site is not part of this annual report.

Background on Technical Innovations
We have a record of pioneering technical innovations and achievements in developing portable electronic products including products developed under contract for major OEM (original equipment manufacturer) customers.  These innovations and achievements include:

 
·
1990 – Released the first commercial ear telephone with an earpiece that located both the speaker and the microphone in the ear without feedback.  (This was the first product in what ultimately became today’s line of Jabra™ hands-free communication products.)

 
·
1993 – Developed the first portable digital player/recorder with removable flash memory.  Resulted in five U.S. patents on the use of flash memory in portable devices.

 
·
1996 – Developed the first high-speed download device to store digital voice recordings on a personal computer in compressed format.

 
·
1998 – Developed the first multi-codec (including MP3) portable digital music player.

 
·
1999 – Delivered an integrated digital voice recorder and computer docking station system for medical transcription of voice and data for Lanier Healthcare, LLC.

 
·
2002 – Developed the first voice controlled MP3 player using our VoiceNav™ speech navigation system.
 
 
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·
2002 – Bang & Olufsen introduced a branded digital audio player (BeoSound 2) developed by us pursuant to a license agreement.

 
·
2003 – Designed, developed and delivered wireless MP3 headsets employing our MircoOS operating system to Hewlett-Packard for use at Disneyworld in Orlando, Florida.

 
·
2003 – Licensed our digital audio to a multi-billion dollar Asian OEM for branding to Gateway Computers.

 
·
2003 – Developed the first hard drive-based Hollywood studio-approved portable in-flight entertainment (“IFE”) device.

 
·
2006 – Introduced eVU, a next generation dedicated mobile entertainment device with 12+ hours of playback, wireless capability and proprietary content encryption approved by major studios.

 
·
2007 – Introduced eVU-ER, an improved dedicated portable IFE  player featuring a new power management technology providing an industry-leading 20+ hours of continuous video playback from a single battery. eVU is now available in either a 7" or 8" high resolution LCD screen with 160 GB to 200 GB of rugged and reliable storage.

 
·
2009 –Added new features to eVU including an advanced touch screen interface.

These technical achievements and our base of technology allow us to rapidly develop or customize electronic products for our own account or for others.

Digital Video/Audio Technology Platform
Our DVAP is based on our proprietary MicroOS™ core (see discussion below).  It accommodates various third party video compression encoded material, proprietary security measures and allows for other customizable options.  Our DVAP supports screen sizes from 2.5” to 10.4” and is capable of achieving better than DVD (digital video disc or digital versatile disc) quality video.

Our proprietary DVAP is flexible and we believe we can address markets beyond IFE with products customized for niche customers for travel and leisure, medical, education, government and military use.  We continue to modify and improve our DVAP technology to incorporate the latest LCD (liquid crystal display) screen, media storage, video processing, battery and other components to address specific needs of the medical and travel and leisure segments of the market.  We also seek to make improvements and component and model changes from time to time to be competitive.

Proprietary DVAP Technology Elements

 MicroOS™
Our proprietary MicroOS operating system serves as the software foundation for our DVAP Platform.  MicroOS was originally developed by us for use in digital voice recorder technology, but because of its inherent flexibility, has grown and been adapted to support audio and video storage and playback and wireless utilities.  MicroOS is compact, efficient and dynamic, responding to a variety of user interfaces. MicroOS manages the user interface functions, battery and power control, the volume and equalizer functions, the LCD drivers and interfaces, decodes processes a wide variety of audio and video files, interacts with a variety of digital rights management schemes and supports today’s most popular media storage formats including hard disk drives, compact and embedded flash and others. MicroOS efficiently manages multiple functions within a single device, utilizing less power, space and operating capacity than many alternative solutions.

Content Protection Technology
We have designed and developed a family of proprietary hardware and software encryption, digital rights management (“DRM”), key management and data obscuration technology for content protection.  This technology was employed in our prior MP3 player products and in our current DVAP products.  Our latest product eVU incorporates an implementation of this family of technology and has been tested and approved by major Hollywood movie studios.  We currently have a U.S. patent application pending for security technology and a provisional U.S. patent application for our family of security technology.

 
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Wireless Technology
We have experience in developing wireless solutions for business customers and our DVAP has applications for wireless technology.  Wireless communications between devices and hosts will benefit consumers’ abilities to manage and procure content and provide transaction based capabilities.  We are also integrating 802.11 (Wi-Fi) technology as an option for our DVAP.  
DVAP Products and Services
We are a leading producer of dedicated portable IFE products delivering over 13,000 units since 2003 for airline use.   Our latest model, eVU, features sharp images on a 7” or 8” high resolution LCD screen, a 160 GB (Gigabytes) to 200 GB of rugged and reliable storage, high audio fidelity, dual stereo headphone jacks, optional embedded credit card reader/processor, optional touch screen capabilities, a full feature graphical user interface, patent-pending hardware security technology, and 20 hours of high resolution video playback on a single battery charge.  We also have the capability to add features and customize the product for target markets or select customers.

We market and sell our eVU portable mobile entertainment device to corporate customers directly and through VARs. Generally each batch sale includes logo customization on the device (for example an airline logo) and an initial content integration with a customized graphical user interface (“GUI”) (for example the airline logo appearing on startup, then a listing of content for selection by the end user). While marketing and sales of eVUs is currently targeted primarily to the airline industry, we believe it has applications in the healthcare, military, and other travel and leisure markets.

We have developed and sell accessory products to our customers and VARs allowing them to operate a mobile entertainment business. These accessories include e.Digital Battery Charging Stations to charge and recondition batteries and e.Digital Content Loading Stations to upload graphical interfaces and content to multiple players at one time. Customers also may order spare batteries depending on their requirements.

We also provide content services to our customers and VARs that includes integrating the content with our proprietary GUI software to produce a master content file (containing content and the customized GUI interface) for rapid uploading to multiple players. Our GUI allows ease of use and can accommodate multiple languages. Our tested and Hollywood studio approved encryption methods protect content from being pirated.  These services allow protected content on eVU players to be periodically updated through e.Digital Content Loading Stations by our customers or VARs or others on their behalf.

We also offer extended maintenance and refurbishment services for customers.

Markets for DVAP Products and Services

Industry Background
Digital video players and related content are increasing in popularity with consumers.  According to the Digital Entertainment Group, U.S. consumer spending on DVD home entertainment increased from $12 billion in 1999 to over $24 billion in 2007.

Video compression formats such as MPEG-4 and DivX allow the compression and transmission of digital video files over the Internet.  They also allow consumers to download and store on their personal computer’s hard drive full-length, two-hour, motion picture files in as little as 500 MB of storage space. There is also a developing market for streaming delivery of video content on the Internet.  Corporations or video production companies may use streaming video to deliver information and entertainment to users.

We believe demand will grow for portable hardware systems that allow consumers to select and download movies over the Internet in digital form, then download them to a portable player capable of feeding the video and audio signals through a home entertainment system or built-in viewing screen and speakers. While our current focus is on our closed secure system offering high content protection in multiple use environments, we also see future opportunities to develop devices to meet the emerging need for digital download and portability.

We believe there are applications for our DVAP in broad aspects of the travel and leisure, medical, educational, consumer, government and military markets and that these are growing markets.

 
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In-Flight Entertainment
IFE encompasses music, news, television programming, and motion pictures presented through audio/video systems typically embedded into an aircraft.  Certain airlines are also beginning to incorporate satellite programming and/or wireless Internet access for their passengers through extensive built-in hardware in certain aircraft on certain routes.  According to a published industry 2007 survey, airlines worldwide spent approximately $1.45 billion on IFE hardware.

Because the costs to retrofit an aircraft with IFE equipment can be prohibitive, we developed our alternative IFE system.  Our portable IFE player, based upon our DVAP, is smaller than a typical laptop computer and has a high-quality color screen and stereo headphones and long battery life unattainable by computer based devices.  Although passengers may rent or purchase portable DVD players from outside entities, we created the first hard drive based portable video player that can be rented to passengers by the airline.  We believe this type of system is attractive to airlines and other travel-related entities because of its revenue potential, variety of content, long battery life, content security and inexpensive implementation.

The top 20 worldwide air carriers have over 7,400 aircraft many not equipped with IFE systems.  There are approximately 1,500 airlines worldwide representing a substantial market for portable IFE devices. Some of our initial eVU customers include Lufthansa, Air France, Malaysia Airlines, Alitalia, as well as small short-haul low cost carriers seeking to provide entertainment to their customers.

Other Markets
During fiscal 2007 (year ended March 31, 2007) we completed a successful trial in a major city hospital using eVU in a variety of settings but primarily for patient waiting areas.  Results indicate high satisfaction by users and hospital employees.  We believe the approximately 6,000 hospitals and the many outpatient and other medical facilities in the U.S. provide a substantial market opportunity.

We believe the travel and leisure market also provides a significant market opportunity.  This includes over 120 cruise ships operating internationally and over 40,000 hotels with under 150 rooms with many that do not offer in-room movies.  Rail, bus, ferries and other modes of transportation also represent markets for eVU.

We also believe there is a market for eVU devices in the military on aircraft carriers and in other settings where personnel have down time and seek entertainment from a robust device with wide content variety without DVDs or tape.

Flash-R Patent Portfolio
We believe we have an important portfolio of patents (Flash-R™ patent portfolio) related to the use of flash memory in portable devices and we are actively engaged in a strategy to monetize our patent portfolio through licensing.  In June 2006 we engaged an intellectual property consultant to investigate, document and develop the portfolio and to liaison with outside legal counsel. In March 2007 we selected and engaged the international law firm Duane Morris LLP to handle certain patent enforcement matters on a contingent fee basis. We, and our advisors, have performed due diligence on our patents and we believe we have strong intellectual property rights that can be licensed. In October 2007 we announced that our Company had commenced enforcement action with respect to our patent portfolio. During the period from September 2008 through March 31, 2009 we licensed our patent portfolio to six licensees. We anticipate bringing additional patent enforcement actions in the current fiscal year.

Our Flash-R patent portfolio covers certain aspects of the use of flash memory, addressing today's large and growing portable electronic products market. In 1993, we unveiled and began marketing the first digital voice recorder with removable flash memory, powered by MicroOS. In 1996, we produced and began marketing the first digital voice recorder interface for downloading and managing voice recordings on the personal computer. The Flash-R portfolio is protected through the years 2014 – 2016 and includes the following U.S. patents:

 
§
US5491774: Handheld record and playback device with flash memory
 
§
US5742737: Method for recording voice messages on flash memory in a hand held recorder
 
§
US5787445: Operating system including improved file management for use in devices utilizing flash memory as main memory
 
§
US5839108: Flash memory file system in a handheld record and playback device
 
§
US5842170: Method for editing in hand held recorder

Although most fees, costs and expenses of the litigation are covered under our contingent fee arrangement with Duane Morris, we incur support and related expenses for this litigation. In addition to support from our management team, we currently have one outside consultant assigned to assist, monitor and support Duane Morris in our intellectual property litigation and licensing activities.

 
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Our Business Strategy
We are leveraging and building on a leadership position in the portable IFE market to market our eVU device to airlines and expand eVU distribution to the healthcare, military, and other travel and leisure markets.  Our objective is to have our products play a significant role in the IFE and other related markets. We intend to expand our business by obtaining new IFE airline customers and customers in the healthcare, military, and other travel and leisure industries.  We intend to use both direct and VAR sales domestically and internationally to grow our business.

We also intend to continue to monetize our portfolio of patents related to the use of flash memory in portable devices. We expect to bring additional patent enforcement actions in the current fiscal year. There can be no assurance we can generate additional future revenues from this activity.

Manufacturing
In the past we have employed nonexclusive relationships with manufacturers with facilities in Asia and the United States.  These manufacturers either have performed or are qualified to perform manufacturing, assembly, and related services for us and for our customers and licensees.  We have expertise in developing, performing and overseeing manufacturing processes.

In fiscal 2009 (year ended March 31, 2009) we purchased primary components from various suppliers with one supplier accounting for 76% of total purchases for the fiscal year. In fiscal 2008 (year ended March 31, 2008) we purchased primary components from various suppliers with three suppliers accounting for 61%, 14% and 10%, respectively of total purchases for the fiscal year. Our manufacturers purchase major electronic components from a limited number of suppliers.

We have developed a turnkey domestic manufacturing relationship with a qualified contract electronic manufacturer for our eVU product and believe we can continue to deliver product timely to future customers.  We expect a majority of any fiscal 2010 (year ending March 31, 2010) purchases to be manufactured by this contract manufacturer.  The loss of this manufacturer or the disruption in supply from the manufacturer or in the supply of components by its and our suppliers could have a material adverse effect on our financial condition, results of operations and cash flows.

Marketing, Sales and Distribution
Marketing and sales are performed primarily by our President and Chief Executive Officer, outside sales representatives, and various technical personnel who are involved in the sales process.  Our initial focus has been on international and regional airlines directly and through a VAR.

We also intend to use VARs in the airline and other target markets.  A VAR offers the ability to provide entertainment (movie, television, music, informational, and/or educational content), supply, content refreshment and logistic services (recharging and maintenance) and related services for customers not able or willing to provide such services.  In May 2006 we entered into an VAR agreement with London-based Mezzo Movies Ltd. providing them exclusive rights to certain customers in the low-cost short-haul airline market primarily in Europe.  Although the agreement and associated exclusive rights have expired, we are continuing to provide products and services to Mezzo as a VAR customer.

We expect to add additional VARs in the airline and in our other target markets as we expand distribution.  For some customers we may expand our business to provide the support services typically provided by our larger customers or VARs.

We also intend to seek joint ventures or revenue sharing arrangements for deployment of eVU products in select applications.

We market our product and services through our strategic and industry relationships and technical articles in trade and business journals.  We also participate in industry trade shows, either directly or in conjunction with customers and/or strategic partners.  We employ marketing materials to supplement custom marketing presentations to key prospects.  We also employ limited and selected advertising in targeted industry publications.

Revenues from five licensees each accounted for more than 10% of revenues for the year ended March 31, 2009. These licensees pay a one-time fee and accordingly do not provide ongoing or future revenues. Sales to three customers comprised approximately 30%, 20% and 13% of revenues respectively in fiscal 2008. Historically, our revenues have relied on a few major customers.  There is no assurance we will obtain any revenues from existing customers in fiscal 2010. We are seeking to expand our eVU customer base and reduce reliance on a few customers in future periods. We also seek to license new targeted companies that we believe infringe on our patent portfolio.

 
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Our backlog fluctuates due to the timing of large orders and other factors.  Our products are manufactured with lead times of generally less than three months.  Our backlog at March 31, 2009 was $164,000 and at March 31, 2008 was $400,000. Our order backlog does not necessarily indicate future sales trends. Backlog orders are subject to modification, cancellation or rescheduling by our customers. Future shipments may also be delayed due to production delays, component shortages and other production and delivery related issues.

Research and Development Costs
For the years ended March 31, 2009 and 2008, we spent $518,649 and $1,006,037, respectively, on research and development.  We anticipate that we will continue to devote substantial resources to research and development activities.

Intellectual Property
We have five issued U.S. patents covering our MicroOS file management software and certain technology related to the use of flash memory in portable digital devices.  Our software is also protected by copyrights.  We rely primarily on a combination of patents, copyright and trade secret protection together with licensing arrangements and nondisclosure and confidentiality agreements to establish and protect our proprietary rights.

We have designed and developed proprietary hardware encryption technology for content protection.  This technology has been used in our products and has been tested and approved by major Hollywood movie studios.  We currently have a patent application pending with the U.S. Patent Office for this technology.

The patent position of any item for which we have filed a patent application is uncertain and may involve complex legal and factual issues.  Although we are currently pursuing trademark applications with the U.S. Patent and Trademark Office and also have filed certain U.S. and international patent applications, we do not know whether any of these applications will result in the issuance of patents or trademarks, or, for any patents already issued or issued in the future, whether they will provide significant proprietary protection or will be circumvented or invalidated.  Additionally, since an issued patent does not guarantee the right to practice the claimed invention, there can be no assurance others will not obtain patents that we would need to license or design around in order to practice our patented technologies, or that licenses that might be required would be available on reasonable terms.  Further there can be no assurance that any unpatented manufacture, use, or sale of our technology or products will not infringe on patents or proprietary rights of others.  We have made reasonable efforts in the design and development of our products not to infringe on other known patents.

We also rely on trade secret laws for protection of our intellectual property, but there can be no assurance others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can protect our rights to unpatented trade secrets.

We have also filed a number of trademark applications with the U.S. Patent and Trademark Office.  We have received notification of allowance from the United States Patent Office for use of e.Digital™, MicroOS™, Smart Solutions for a Digital World (Service Mark), VoiceNav®, Music Explorer®, MXP™, Flashback®, Hold That Thought®, Fumble Free® and SoundClip® as registered trade names.  We intend to make every reasonable effort to protect our proprietary rights to make it difficult for competitors to market equivalent competing products without being required to conduct the same lengthy testing and development conducted by us and not to use any of our innovative and novel solutions to overcome the many technical obstacles involved in developing portable devices using flash memory and other portable storage formats.

Competition
Many large manufacturers currently market various forms of component or handheld digital video players, including Apple, Panasonic, Sony, Samsung, Hitachi, RCA, Audiovox, Philips, Daewoo, General Electric, and Toshiba.  Other manufacturers may announce products in the future.

Competition in the IFE industry comes from portable DVD hardware manufactured by companies such as Sony, Samsung, Panasonic, or Audiovox, who may sell such products to travelers or airlines or rental outfits and custom portable IFE hardware specifically targeted for airline use. We compete with digEcor, a former customer that offers a competing product; The IMS Company, with their Fujitsu-based PEA (personal entertainment appliance) product and other products supplied by French consumer electronics manufacturer, Archos; European producers, AIRVOD Entertainment Systems and Bluebox Avionics, advertise portable IFE products that may become competitive to eVU. Panasonic and other electronic companies have or have announced products and may become more active in the portable IFE market.  The airline industry may also continue to opt for embedded IFE systems offered by Panasonic, Thales and others.  Motion picture studios or others could contract competing hardware developers to create new portable products for the IFE industry.  Although our system was designed as a portable IFE device and has unique features and the support of content providers, there can be no assurance that other manufacturers will not create and introduce new competing portable IFE products.

 
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Barriers to entry by new competitors are not significant and new competitors in consumer electronics are continually commencing operations.  The technology of electronics and electronic components, features and capabilities is also rapidly changing, in many cases causing rapid obsolescence of existing products and technologies.

We believe we have developed a leading low-level real time operating system and comprehensive file management system capable of customization for individual customer requirements.  Other companies offering file management systems include M-Systems Flash Disk Pioneers Ltd. (acquired in 2006 by SanDisk Corporation), Intel Corporation, PortalPlayer Inc. (acquired by NVIDIA Corp.), I/O Magic, and Datalight Inc.  In addition to licensing file management systems, some companies develop their own file management systems for a particular product, either in total or by adapting from one of the competitive vendors.  While this self-development is common in simple memory management devices, we offer a system attractive for complex applications.  Our technology competes with other solutions; however, we focus on markets requiring advanced features and a robust file management system.  Although we were successful in competing against other systems in our selection by Bang & Olufsen, Hewlett-Packard, and others, there is no assurance we can continue to compete against other providers of digital recording solutions, many of whom have substantially greater resources.

We believe our existing know-how, contracts, patents, copyrights, trade secrets and potential future patents and copyrights, will be significant in enabling us to compete successfully in the field of portable digital entertainment products and systems.

Seasonality
Our current business is not seasonal.

Employees
As of May 31, 2009, we employed approximately twelve full-time employees and one part-time employee of whom two were in production and testing, seven were in research, development and engineering, four were in sales, general and administrative.  None of our employees are represented by a labor union, and we are not aware of any current efforts to unionize the employees.  Management considers the relationship between the Company and its employees to be good.

We also engage consultants or lease engineering personnel on a temporary basis from time to time and use other outside consultants for various services.

Environmental Compliance and Government Regulation
Our operations are subject to various foreign, federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters and there can be no assurance that material costs and liabilities will not be incurred or that past or future operations will not result in exposure or injury or claims of injury by employees or the public.  Some risk of costs and liabilities related to these matters are inherent in our business, as with many similar businesses.  Management believes its business is operated in substantial compliance with applicable environmental, waste management, health and safety regulations, the violation of which could have a material adverse effect on our operations.  In the event of violation, these requirements provide for civil and criminal fines, injunctions and other sanctions and, in certain instances, allow third parties to sue to enforce compliance.  In addition, new, modified or more stringent requirements or enforcement policies could be adopted which could adversely affect our operations.

Portable electronic devices must comply with various regulations related to electronics and radiated emissions.  Devices for operation on aircraft must comply with additional emission regulations. RTCA, Inc., a global organization comprised of industry and government representatives, develops standards to assure the safety and reliability of all Airborne Electronics (Avionics).  Manufacturers of aircraft electronic equipment selling their products in the United States, Europe, and around the globe must meet RTCA requirements, including RTCA/DO-160D. Our eVU is DO-160D-certified for conducted and radiated emissions. DO-160D is the standard procedures and environmental test criteria for testing airborne equipment for the entire spectrum of aircraft from light general aviation aircraft and helicopters through large commercial jets. eVU is also U.S. FCC and European CE compliant.

 
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In 2006, the electronics industry became subject to the European Union’s Restrictions of Hazardous Substances, or RoHS, and Waste Electrical and Electronic Equipment, or WEEE, directives. Beginning January 1, 2007 the State of California put into effect a similar measure under the Electronic Waste Recycling Act of 2003 which requires the California Department of Toxic Substances Control to adopt regulations to prohibit the sale of electronic devices if they are prohibited from sale in the European Union because they contain certain heavy metals. Parallel initiatives are being proposed in other jurisdictions, including several other states in the United States and in the People’s Republic of China. RoHS prohibits the use of lead, mercury and certain other specified substances in electronics products and WEEE requires industry OEMs to assume responsibility for the collection, recycling and management of waste electronic products and components. We believe we produce RoHS compliant products. In the case of WEEE, the compliance responsibility rests primarily with OEMs, distributors or users of our products, however such parties may turn to product suppliers for assistance in meeting their WEEE obligations.

Available Information
Our Internet website address is www.edigital.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”) are available free of charge through our Company’s website as soon as reasonably practical after those reports are electronically filed with, or furnished to, the Securities and Exchange Commission.

ITEM 1A. RISK FACTORS

Cautionary Note on Forward Looking Statements
In addition to the other information in this annual report the factors listed below should be considered in evaluating our business and prospects.  This annual 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.

Financial Risks

We Have a History of Losses and May Incur Future Losses. Until the fiscal year ended March 31, 2009 (fiscal 2009), we incurred significant losses and negative cash flow from operations and we have an accumulated deficit of $79 million at March 31, 2009. Our recent profitability resulted from one-time patent licensing revenues and there is no assurance of future licensing revenues from new licensees. Accordingly, we could incur losses in the future until product, service and/or licensing revenues are sufficient to sustain continued profitability. Failure to achieve or maintain profitability will likely negatively impact the value of our securities. 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.
 
Disruptions in Financial Markets Could Continue to Adversely Affect our Business - As has been widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent quarters, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions intended to address extreme market conditions that include severely restricted credit and declines in real estate and other asset values. While we believe these conditions have adversely impacted our customers and our business, it has not impaired our ability to operate our business. There can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies, which can then lead to challenges in the operation of our business. These economic developments affect businesses such as ours in a number of ways. The current tightening of credit in financial markets adversely affects the ability of airline customers to finance purchases and operations and could result in a decrease in orders and spending for our products as well as create supplier disruptions. Economic and political developments have reduced travel and recreational spending and we believe adversely affected demand by airlines and others for our products and services. Financial difficulties of electronics manufacturers could also delay or reduce the likelihood of future patent licenses. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions and the effects they will have on our business and financial condition.

 
10

 

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

 
·
Unpredictable demand and pricing for our products, services
 
·
Uncertainty regarding the timing and amount of any future patent licensing revenues
 
·
Market acceptance of our products by our customers and their end users
 
·
Uncertainties with respect to future customer product orders, their timing and the margins to be received, if any
 
·
Fluctuations in product costs and operating costs
 
·
Changes in research and development costs
 
·
Changes in general economic conditions
 
·
Risks and costs of warranty claims
 
·
Changes in technology
 
·
Short product lifecycles and possible obsolescence of inventory and materials

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

Risks Related to Product Sales, Marketing and Competition

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

We Rely on a Limited Number of Customers for Revenue.  Historically, a substantial portion of our product revenues has been derived primarily from a limited number of customers.  The failure to receive orders for and produce products or a further decline in the economic prospects of the airline industry or our customers or the products we may produce for sale may have a material adverse effect on our operations.  The airline industry is continuing to face a variety of economic challenges that may adversely affect the prospects for new orders of portable IFE systems and adversely affecting future operating results.

Customer Litigation. In May 2006, we were sued by former customer digEcor. The bulk of the bench trial was completed in May 2009 related to digEcor's claims for breaches of three contracts and associated damages, and one claim for injunctive relief. The parties' proposed findings of fact and conclusions of law are due in July 2009 followed by closing arguments, deliberations and a decision. We presented substantive and multiple defenses at trial, however, there can be no assurance we will prevail. An adverse decision by the court could have a material adverse effect on our financial position and results of operations.  See “Legal Proceedings.”

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

 
11

 

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

Risks Related to Operations

We Depend On a Limited Number of Contract Manufacturers and Suppliers and Our Business Will Be Harmed By Any Interruption of Supply or Failure of Performance.  We rely on one major supplier for manufacturing our eVU product.  We depend on our contract manufacturer to (i) allocate sufficient capacity to our manufacturing needs, (ii) produce acceptable quality products at agreed pricing and (iii) deliver on a timely basis.  If a manufacturer is unable to satisfy these requirements, our business, financial condition and operating results may be materially and adversely affected.  Any failure in performance by our manufacturer for any reason could have a material adverse affect on our business.  Production and pricing by such manufacturer is subject to the risk of price fluctuations and periodic shortages of components.  We have no supply agreements with component suppliers and, accordingly, we are dependent on the future ability of our manufacturer to purchase components.  Failure or delay by suppliers in supplying necessary components could adversely affect our ability to deliver products on a timely and competitive basis in the future.

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

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

Risks Related to our Patent Enforcement Strategy

We Face Uncertain Revenue Prospects from our Patent Enforcement Strategy.We have only recently recognized revenue from entering into one-time fully paid-up licenses for our portfolio of flash memory patents and technologies. Our portfolio has not been tested in court and there is no assurance we can prevail in any current or future patent litigation. The licensing demand for our patent portfolio is subject to fluctuation based upon the rate at which target infringers agree to pay royalties or settle future enforcement actions, if any. There can be no assurance of future revenues from our strategy of enforcing our flash memory patent portfolio.

Our Fee Arrangement with Patent Enforcement Counsel Subjects Us to Certain Risks and Substantial Costs and Fees Could Limit Our Net Proceeds From Any Successful Patent Enforcement Actions.Our agreement for legal services and a contingent fee arrangement with Duane Morris LLP provides that Duane Morris is our exclusive legal counsel in connection with the assertion of our flash memory related patents against infringers (“Patent Enforcement Matters’). Duane Morris is advancing 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. We are not in control of the timing, costs and fees, which could be substantial and could limit our share of proceeds, if any, from future patent enforcement actions. There can be no assurance Duane Morris will diligently and timely pursue patent enforcement actions on our behalf. In the event we are acquired or sold or we elect to sell the covered patents or upon certain other corporate events or in the event we terminate the agreement with Duane Morris for any reason, then Duane Morris shall be entitled to collect accrued costs and a fee equal to three times overall time and expenses and a fee of 15% of a good faith estimate of the overall value of the covered patents. We have provided Duane Morris a lien and a security interest in the covered patents to secure this obligation. Should any of the aforementioned events occur, the fees and costs owed to Duane Morris could be substantial and limit our revenues.

 
12

 

New Legislation, Regulations or Rules Related to Enforcing Patents Could Significantly Decrease Our Prospect for Revenue and Increase the Time and Costs Associated with Patent Enforcement. If new legislation, regulations or rules are implemented either by Congress, the United States Patent and Trademark Office, or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, these changes could negatively affect our revenue prospects and increase the costs of enforcement. For example, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, and any new standards or limitations on liability for patent infringement could negatively impact revenue derived from such enforcement actions. While we are not aware that any such changes are likely to occur in the foreseeable future that impact our current patents, we cannot assure that such changes will not occur.

Should Litigation Be Required to Enforce Our Patents, Trial Judges and Juries Often Find It Difficult to Understand Complex Patent Enforcement Litigation, and as a Result, We May Need to Appeal Adverse Decisions By Lower Courts In Order to Successfully Enforce Our Patents. It is difficult to predict the outcome of patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand complex, patented technologies, and as a result, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and delayed revenue. Although we intend to diligently pursue enforcement litigation if necessary to monetize our patents, we cannot predict with significant reliability the decisions made by juries and trial courts.

Federal Courts are Becoming More Crowded, and as a Result, Patent Enforcement Litigation is Taking Longer. Any patent enforcement actions we may be required to take to monetize our patents will most likely be prosecuted in federal court. Federal trial courts that hear patent enforcement actions also hear other cases that may take priority over any actions we may take. As a result, it is difficult to predict the length of time it will take to complete any enforcement actions.

As Patent Enforcement Litigation Becomes More Prevalent, It May Become More Difficult for Us to Voluntarily License Our Patents. We believe that the more prevalent patent enforcement actions become, the more difficult it will be for us to voluntarily license our patents to major electronic firms. As a result, we may need to increase the number of our patent enforcement actions to cause infringing companies to license our patents or pay damages for lost royalties. This may increase the risks associated with an investment in our Company.

Risks Related to Intellectual Property and Government Regulation

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

 
13

 

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

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

Compliance With Current And Future Environmental Regulations May Be Costly, Which Could Impact Our Future Earnings. We are subject to environmental and other regulations due to our production and marketing of products in certain states and countries. We also face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances in electronics that apply to specified electronics products put on the market in the European Union as of July 1, 2006 (Restriction of Hazardous Substances in Electrical and Electronic Equipment Directive (EU RoHS)). The European Union has also finalized the Waste Electrical and Electronic Equipment Directive (WEEE), which makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. Other countries, such as the United States, China and Japan, have enacted or may enact laws or regulations similar to the EU RoHS or WEEE Legislation. These and other environmental regulations may require us to reengineer certain of our existing products to comply with environmental regulations.

We May Incur Liability from Our Requirement to Indemnify Certain Customers Regarding Current Litigation and Certain Intellectual Property Matters.  Our contracts with major airlines are subject to future performance by us and product warranties and intellectual property indemnifications including certain remedies, ranging from modification to product substitution or refund. We are also required to provide similar indemnification for adverse consequences of the litigation described below in “Legal Proceedings.” Should our products be deemed to infringe on the intellectual property of others the costs of modification, substitution or refund could be material and could harm our business and adversely impact our operations.

Our Internal Control Over Financial Reporting Is Not Adequate and May Result In Financial Statements That Are Incomplete or Subject To Restatement. Section 404 of the Sarbanes Oxley Act of 2002 requires significant procedures and review processes of our system of internal controls. Section 404 requires that we evaluate and report on our system of internal control over financial reporting in connection with this Annual Report on Form 10-K. In addition, our independent registered public accounting firm will be required to report on our internal controls over financial reporting for the year ending March 31, 2010. The additional costs associated with this process may be significant.

After documenting and testing our system, we have identified a material weakness in our accounting and financial functions due to a lack of oversight by an independent audit committee. As a result, our internal control over financial reporting is not effective. As a result of our internal control over financial reporting being ineffective, investors could lose confidence in our financial reports, and our stock price might be adversely affected. In addition, remedying this or any future material weaknesses that we or our independent registered public accounting firm might identify, could require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the measures we might implement to remedy any such deficiencies would effectively mitigate or remedy such deficiencies.

 
14

 
 
Risks Related to Trading in Our Common Stock

Sales of Common Stock Issuable on the Exercise of Outstanding Convertible Preferred Stock, Warrants and Options, May Depress the Price of Our Common Stock. As of March 31, 2009, we had preferred stock outstanding convertible into 7,784,589 shares of our common stock, outstanding warrants to purchase 9,831,572 shares of our common stock and outstanding options granted to our employees, directors and consultants to purchase 8,050,500 shares of our common stock. The exercise prices for the options and warrants range from $0.09 to $0.28 per share. In the future we may issue additional convertible securities, options and warrants. The issuance of shares of common stock issuable upon the exercise of outstanding or future convertible securities, options or warrants could cause substantial dilution to holders of common stock, and the sale of those shares in the market could cause the market price of our common stock to decline. The potential dilution from these shares could negatively affect the terms on which we could obtain any future equity financing.

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

 
·
Quarter-to-quarter variations in operating results
 
·
Announcements of technological innovations by us, our customers or competitors
 
·
New products or significant design achievements by us or our competitors
 
·
General conditions in the markets for the our products or in the electronics industry
 
·
The price and availability of products and components
 
·
Changes in operating factors including delays of shipments, orders or cancellations
 
·
General financial market conditions
 
·
Market conditions for technology stocks
 
·
Litigation or changes in operating results or estimates by analysts or others
 
·
Or other events or factors

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

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

Low-Price Stocks and Stocks Traded on the OTC Electronic Bulletin Board are Subject to Special Regulations and may have Increased Risk.Our shares of common stock are traded on the OTC Electronic Bulletin Board, an electronic, screen-based trading system operated by the National Association of Securities Dealers, Inc. (“NASD”).  Securities traded on the OTC Electronic Bulletin Board are, for the most part, thinly traded and are subject to special regulations not imposed on securities listed or traded on the NASDAQ system or on a national securities exchange.  As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the price of, our common stock.  Sales of substantial amounts of our outstanding common stock in the public market could materially adversely affect the market price of our common stock.  To date, the price of our common stock has been extremely volatile with the sale price fluctuating from a low of $0.08 to a high of $0.20 in the last twelve months.  In addition, our common stock is subject to Rules 15g-1-15g-6 promulgated under the Exchange Act that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, a person with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with his or her spouse).  For transactions covered by this rule, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale.  Consequently, the rule may affect the ability of broker-dealers to sell the Company’s securities and may affect the ability of investors to sell their securities in the secondary market.  The Securities and Exchange Commission has also adopted regulations which define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  For any transaction involving a penny stock, unless exempt, the regulations require the delivery, prior to the transaction, of a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market.  The broker-dealer must also disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market.  Finally, monthly statements must be sent disclosing recent price information for the penny stock in the account and information on the limited market in penny stocks.

 
15

 

Important Factors Related to Forward-Looking Statements and Associated Risks.  This prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and we intend that such forward-looking statements be subject to the safe harbors created thereby.  These forward-looking statements include our plans and objectives of management for future operations, including plans and objectives relating to the products and our future economic performance.  The forward-looking statements included herein are based upon current expectations that involve a number of risks and uncertainties.  These forward-looking statements are based upon assumptions that we will design, manufacture, market and ship new products on a timely basis, that competitive conditions within the computer and electronic markets will not change materially or adversely, that the computer and electronic markets will continue to experience growth, that demand for the our products will increase, that we will obtain and/or retain existing development partners and key management personnel, that future inventory risks due to shifts in market demand will be minimized, that our forecasts will accurately anticipate market demand and that there will be no material adverse change in our operations or business. Assumptions relating to the foregoing involve judgments with respect, among other things, to future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.  Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking information will be realized.  In addition, as disclosed above, our business and operations both from product sales and licensing are subject to substantial risks which increase the uncertainty inherent in such forward-looking statements.  Any of the other factors disclosed above could cause our net sales or net income (or loss), or our growth in net sales or net income (or loss), to differ materially from prior results.  Growth in absolute amounts of costs of sales and selling and administrative expenses or the occurrence of extraordinary events could cause actual results to vary materially from the results contemplated in the forward-looking statements.  Budgeting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our results of operations.  In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

In March 2006, we entered into a sixty-two month lease, commencing June 1, 2006, for approximately 4,800 square feet at 16770 West Bernardo Drive, San Diego, California with a current aggregate monthly payment of $6,159 excluding utilities and costs.  The aggregate payments adjust annually with maximum aggregate payments totaling $6,535 in the fifty-first through the sixty-second month.

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

ITEM 3. LEGAL PROCEEDINGS

Business Litigation
In May 2006, we announced that a complaint had been filed against the Company and certain of our officers and employees by digEcor, Inc. in the Third Judicial District Court of Utah, County of Salt Lake. The complaint alleged breaches of contract, unjust enrichment, breaches of good faith and fair dealing, fraud, negligent misrepresentation, and interference with prospective economic relations. digEcor sought, among other things, an injunction to prevent us from selling or licensing certain digital rights management technology and "from engaging in any competition with digEcor until after 2009." digEcor also sought "actual damages" of $793,750 and "consequential damages...not less than an additional $1,000,000." This action was related to a purchase order we placed for this customer in the normal course of business on November 11, 2005 for 1,250 digEplayers with our contract manufacturer, Maycom Co., Ltd.. Maycom was paid in full for the order by both e.Digital and digEcor by March 2006, but Maycom failed to timely deliver the order. In October 2006 we received delivery from Maycom of the delayed 1,250-unit digEplayer order and delivered the order to digEcor. We answered digEcor's complaint and pursued certain counterclaims and each party subsequently supplemented their various claims.

 
16

 

In January 2007, March 2009 and April 2009 the Court ruled on certain motions of the parties substantially limiting the issues for trial and each party has voluntarily dismissed additional claims and specific defendants.  In its rulings, the Court has dismissed digEcor's unjust enrichment, fraud, negligent misrepresentation, tortious interference, non-competition, punitive damage and certain unfair competition claims. The Court has further acknowledged the delivery of the 1,250-unit order and a partial settlement between the parties reducing digEcor's claim for purchase-price or actual damages from $793,750 to $94,846 with such amount still being disputed by us.

The bulk of the bench trial was completed in May 2009 related to digEcor's claims for breaches of three contracts and associated damages, and one claim for injunctive relief. The parties' proposed findings of fact and conclusions of law are due in July 2009 followed by closing arguments, deliberations and a decision. We believe we presented substantive and multiple defenses at trial, however, there can be no assurance we will prevail. The issues at trial and prior rulings may also be subject to appeal by either party. We are also unable to determine at this time the impact this complaint and matter may have on our financial position or results of operations. We have an accrual of $80,000 related to a deposit made by digEcor and at March 31, 2009 we accrued an additional $100,000 as an estimate of our obligation related to the remaining general damage claim based on a settlement offer we made prior to trial. We intend to seek restitution from Maycom for any damages we may incur. Recovery from Maycom is not assured.

Intellectual Property Litigation
In September 2007 and March 2008, we filed complaints against eight electronic product manufacturers in the U.S. District Court for the Eastern District of Texas asserting that products made by the companies infringe four of our U.S. patents covering the use of flash memory technology. These patents are part of our Flash-R patent portfolio. By March 31, 2009 we had licensed and settled the litigation with six of the manufacturers and suspended the complaint against one defendant currently in bankruptcy. Litigation is still pending against one remaining defendant. We intend to pursue our claims vigorously but the litigation is in the early stage and there is no assurance of recovery. Although most fees, costs and expenses of the litigation are covered under our arrangement with Duane Morris LLP, we may incur support and related expenses for this litigation that may become material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information
Our common stock trades in the over-the-counter market on the OTC Electronic Bulletin Board. The following table sets forth, for the periods indicated, the high and low closing bid prices for our common stock, as reported by the National Quotation Bureau, for the quarters presented. Bid prices represent inter-dealer quotations without adjustment for markups, markdowns, and commissions.

   
Low
   
High
 
Fiscal year ended March 31, 2008
           
First quarter
  $ 0.23     $ 0.17  
Second quarter
  $ 0.22     $ 0.16  
Third quarter
  $ 0.11     $ 0.18  
Fourth quarter
  $ 0.11     $ 0.15  
             
Fiscal year ended March 31, 2009
           
First quarter
  $ 0.08     $ 0.16  
Second quarter
  $ 0.08     $ 0.18  
Third quarter
  $ 0.08     $ 0.16  
Fourth quarter
  $ 0.10     $ 0.20  
 
17

 
Holders

At June 1, 2009 there were 282,871,198 shares of common stock outstanding and approximately 2,869 stockholders of record.

Dividends
We have never paid any dividends to our common stockholders. Future cash dividends or special payments of cash, stock or other distributions, if any, will be dependent upon our earnings, financial condition and other relevant factors.  The Board of Directors does not intend to pay or declare any dividends on our common stock in the foreseeable future, but instead intends to have the Company retain all earnings, if any, for use in the business.

Equity Compensation Plan Information
The following table sets forth information as of March 31, 2009, with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance, aggregated as follows:

Plan Category
 
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
 
Weighted-average exercise
price of outstanding
options, warrants and
rights
(b)
 
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders
 
7,550,500
    
$
0.16
    
3,590,000
Equity compensation plans not approved by security holders (1)
 
500,000
    
$
0.15
    
-0-
Total
 
8,050,500
    
$
0.16
    
3,590,000

(1) Includes (a) 250,000 shares of common stock subject to inducement stock options granted to an employee (subsequently appointed an executive officer) with an exercise price of $0.145 per share, and (c) 250,000 shares of common stock granted to a consultant vesting on a performance basis with an exercise price of $0.16 per share.

Recent Sales of Unregistered Securities
The following common shares were issued during the fiscal year and not previously reported in a Quarterly Report on Form 10-Q or Current Report on Form 8-K:

§
On March 31, 2009 the Company issued 305,623 shares of common stock to Davric Corporation in consideration of a $50,000 monthly payment on its 7.5% term note. The shares were sold upon the exemption provided by Section 4(2) under the Securities Act of 1933, no commissions were paid and a restrictive legend was placed on the shares issued.

Issuer Purchases of Equity Securities
Not applicable.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

Not applicable.

 
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto and 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 elsewhere in this Annual Report and under the sub-heading, “Risk Factors - Important Factors Related to Forward-Looking Statements and Associated Risks.”

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

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. Our products and services revenue is derived from the sale of DVAP products and accessories to customers, warranty and technical support services and content integration fees and related services. Our patent licensing revenue consists of intellectual property revenues from our Flash-R patent portfolio.Our Flash-R patent portfolio revenues to date have consisted of fees from one-time license and settlement agreements requiring no future performance.

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

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

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

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

For the year ended March 31, 2009:

 
·
We recognized net income before income taxes of $3,355,486. This was before income tax expense of $421,500 for foreign and state income taxes. The resulting net income of $2,933,986 was an improvement from the net loss of $1,719,067 for the prior year.  The improvement resulted primarily from new higher margin patent licensing revenue that offset a substantial decline in eVU product and service revenues.

 
·
Our revenues were $11.1 million compared to $5.6 million for the prior year. Revenues in fiscal 2009 included $10.1 million of patent license revenue. Last year’s fiscal 2008 revenues included product sales to new European IFE customers. Recent eVU sales activity has been slow due to airline industry economics and industry credit concerns resulting in airlines curtailing expansion and new projects. We are aggressively pursuing new business but our results will be dependent on the timing and quantity of additional patent licenses and eVU orders. We seek to expand and diversify our customer base both in the IFE space and other markets.

 
19

 

 
·
Our gross profit for the year ended March 31, 2009 was $6.5 million or 59% of revenues compared to $1.5 million or 28% of revenues for the comparable prior year. Results benefited from higher patent licensing gross profit percentages as compared to product sales. Gross profit margins are highly dependent on revenue and product mix, prices charged, volume of orders and costs.

 
·
Operating expenses were $2.8 million for fiscal 2009 compared to $3.0 million for the first nine months of fiscal 2008 with a reduction in research and development expenditures offset by increases in selling and administrative expenses resulting primarily from increased litigation expenses.

Management faces significant challenges in fiscal 2009 to execute its plan to grow product and service revenues, continue to monetize the Flash-R patent portfolio and obtain license fees, control costs and fund any future operating losses or other capital requirements.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. We may incur future losses until such time as we are able to realize recurring revenues and margins sufficient to cover our costs of operations.  We may also face unanticipated technical or manufacturing obstacles and face warranty and other risks in our business.Our ability to continue as a going concern is in substantial doubt and is dependent upon sustaining a profitable level of operations and if necessary obtaining additional financing.

Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including but not limited to those related to product returns, bad debts, inventory valuation, intangible assets, financing operations, warranty obligations, stock-based compensation, fair values, estimated costs to complete research contracts, 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 the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition
Our segments have the following revenue recognition policies:

Products and Services
We recognize product revenue upon shipment of a product to the customer, FOB shipping point, or upon acceptance by the customer depending on the specific contract terms, if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and there are no resulting obligations. Research and development contract revenues on short-term projects or service revenue is recognized once the services or product has been delivered, the fee is fixed and determinable, collection of the resulting receivable is probable and there are no resulting obligations. If all of the service or product has been delivered and there is one element that is more than perfunctory to the services or product that has not been delivered, revenue will be deferred and recognized evenly over the remaining term of the undelivered element.

Service revenues may include revenue from coding, encrypting and integrating content for periodic uploading to hardware players. Revenue is recognized upon acceptance of the content master file by the customer if the fee is fixed and determinable, collection of the resulting receivables is probable and there are no resulting obligations.

In accordance with Staff Accounting Bulletin (“SAB”) No. 104 Revenue Recognition (“SAB 104”) and Emerging Issues Task Force (“EITF”) Issue 00-21 Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), when an arrangement contains multiple elements with standalone value, such as hardware and content integration or other services, revenue is allocated based on the fair value of each element as evidenced by vendor specific objective evidence. Such evidence consists primarily of pricing of multiple elements as if sold as separate products or services. We defer revenue for any undelivered elements, and recognizes revenue when the product is delivered or over the period in which the service is performed, in accordance with our revenue recognition policy for such element. If we cannot objectively determine the fair value of any undelivered element included in a multiple-element arrangement, revenue is deferred until all elements are delivered and/or services have been performed, or until we can objectively determine the fair value of all remaining undelivered elements.

 
20

 

Revenue from separately priced extended warranty or product replacement arrangements is deferred and recognized to income on a straight-line basis over the contract period. We evaluate these arrangements to determine if there are excess costs greater than future revenues to be recorded as a loss.

Funds received in advance of meeting the criteria for revenue recognition are deferred and are recorded as revenue as they are earned. Any amounts related to periods beyond twelve months are considered long-term deferred revenue.

Patent Licensing
We apply the guidance of SEC Staff Accounting Bulletin Topic 13.A.3(f), Nonrefundable Up-Front Fees, to our patent license and settlement agreements using the specific performance method analogous to the sale of an asset in such literature as Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 13, Accounting for Leases and AICPA Statement of Position 00-2, Accounting by Producers and Distributors of Films. Accordingly, we recognize revenue from patent license agreements when (i) the patent license agreement is executed, (ii) the amounts due are fixed, determinable, and billable, (iii) the customer has been provided rights to the licensed technology and (iv) collection of the resulting receivable, if any, is probable. At the time we enter into a contract and provide the customer with the licensed technology we have performed all of our obligations under contract, the rights to our technology have been transferred and no significant performance obligations remain. License revenue to date consists of one-time license and settlement agreements requiring no future performance. We have no licenses that do not include settlement and covenants not to sue.

While the consideration to dismiss any patent litigation and the perpetual license may be considered two deliverables under EITF 00-21: Revenue Arrangements with Multiple Deliverables,we treat the deliverables as one unit of accounting as the delivered items do not have value to customers on a stand alone basis,there are no undelivered elements and there is no general right of return relative to the delivered perpetual license. While license agreements to date have not provided for unit royalties or payments for fixed past or future term periods, we evaluate each license agreement for revenue recognition in accordance with applicable literature.

We value nonexclusive cross licenses received only if directly used in operations. To date we have not valued any cross licenses received as they were considered part of the customer’s overall license and settlement strategy and are not used in our products.

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

Estimates and Allowances
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  We also review deposits with manufacturers and others for impairment.

We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. Factors affecting warranty reserve levels include the number of units sold and anticipated cost of warranty repairs and anticipated rates of warranty claims. We evaluate the adequacy of the provision for warranty costs each reporting period.

Income Taxes
We account for income taxes using the asset and liability method described in SFAS No. 109, Accounting For Income Taxes (“SFAS 109”), the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We provide a full valuation reserve related to our net deferred tax assets. In the future, if sufficient evidence of an ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, we may be required to reduce the valuation allowances, resulting in income tax benefits in the consolidated statement of operations.  We evaluate the realizability of our deferred tax assets and assesses the need for valuation allowance quarterly.  The utilization of the net operating loss carry forwards could be substantially limited due to restrictions imposed under federal and state laws upon a change in ownership. We have experienced various ownership changes as a result of past financings and could experience future ownership changes.

 
21

 

We adopted the provisions of FASB interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of SFAS 109 on April 1, 2007.  As a result of the implementation of FIN 48, we recognized no adjustment for uncertain tax provisions and the total amount of unrecognized tax benefits as of April 1, 2007 was $-0-.  At the adoption date of April 1, 2007, deferred tax assets were fully reserved by a valuation allowance to reduce the deferred tax assets to zero, the amount that more likely than not is expected to be realized. For the year ended March 31, 2008, we removed our net operating loss (“NOL”) carryforwards from our deferred tax asset accounts as well as the related full valuation reserve because an analysis of Section 382 of the Internal Revenue Code (“IRC”) of 1986 ownership changes had not been completed. Based on a preliminary analysis of ownership changes performed in fiscal 2009 we determined that that no Section 382 ownership changes occurred since March 31, 2000 but have not yet determined how much, if any, the use of the approximately $31.4 million of prior period losses will be limited until their expiration. Accordingly, NOL carryforwards generated during the 2001 through 2008 fiscal years are generally not subject to Section 382 limitations and we will be able to utilize such NOLs and any documented research and development (R&D) carryforwards provided the Company generates sufficient future earnings. Accordingly at March 31, 2009, we re-established deferred tax assets associated with such federal NOLs, related state NOLs, and certain California research and development tax credits and recorded a corresponding increase to our valuation allowance.

Stock-Based Compensation
We adopted SFAS No. 123(R), Share Based Payment, effective April 1, 2006 using a modified prospective application. We record the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using a Black-Scholes option-pricing model. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award, if any, over the fair value of the original award.

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

Derivative Instruments and Preferred Stock
We value derivative instruments in accordance with the interpretative guidance of SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Accounting Principles Board Opinion No. 14 Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, EITF 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27 Application of Issue No. 98-5 to Certain Convertible  Instruments and associated pronouncements related to the classification and measurement of warrants and instruments with embedded conversion features. We make certain assumptions and estimates to value our derivative liabilities. Factors affecting these liabilities and values include changes in the stock price and other assumptions.

We accounted for preferred stock issued in fiscal 2009 that was subject to provisions for redemption outside of our control as mezzanine equity in accordance with SFAS 150 Accounting for Certain Financial Instruments with Characteristics of Both Debt and Equity, EITF Topic D-98 Classification and Measurement of Redeemable Securities and SEC Accounting Series Release (ASR) No. 268 Redeemable Preferred Stocks, and recorded the values net of discounts for warrant values and beneficial conversion features. These securities were recorded at fair value at the date of issue and related discounts are being accreted over the term of the securities. The securities were reclassified to permanent equity when the provisions for redemption were terminated. We accounted for the related warrants as a derivative instrument as defined in SFAS 133 and treated the warrants as a liability due to the lack of sufficient authorized shares of common stock. Upon the authorization and reservation of shares of common stock for exercise of the warrants we determined the warrants were no longer a derivative liability and we reclassified the value at that date to paid-in capital.  We also determined that the termination of certain warrant redemption rights was an effective modification of the warrant term and calculated the fair value of the warrants immediately prior to the modification compared to the value immediately after the modification and recorded the difference in warrant value in other finance expenses.

 
22

 

Fair Value of Financial Instruments
On April 1, 2008, we adopted certain provisions of SFAS No. 157, Fair Value Measurements, which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. The provisions of SFAS 157 relate to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis and did not have a material impact on the our consolidated financial statements. The provisions of SFAS 157 related to other nonfinancial assets and liabilities will be effective for us on April 1, 2009, and will be applied prospectively. We are currently evaluating the impact that these additional SFAS 157 provisions will have on our consolidated financial statements.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We have certain financial assets and liabilities recorded at fair value (principally cash equivalents) that have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in SFAS 157. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability. Our cash and money market funds have been classified as Level 1 because their fair values are based on quoted market prices.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Under SFAS No. 159, companies may elect to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS No. 159 for fiscal 2009. However we did not elect to apply the fair value option to any financial instruments or other items upon adoption of SFAS No. 159 or during the year ended March 31, 2009. Therefore, the adoption of SFAS No. 159 did not impact our consolidated financial position, results of operations or cash flows.

The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses and other current liabilities approximate fair values due to their short-term maturities.

Indemnities and Litigation
We enter into standard indemnification agreements in the ordinary course of business. Some of our product sales and services agreements include a limited indemnification provision for claims from third parties relating to our intellectual property. Such indemnification provisions are accounted for in accordance with SFAS No. 5, Accounting for Contingencies. The indemnification is generally limited to the amount paid by the customer. To date, there have been no claims under such indemnification provisions.

We are currently involved in certain legal proceedings.  For any legal proceedings we are involved in, we estimate the range of liability relating to pending litigation, where the amount and range of loss can be estimated.  We record our best estimate of a loss when a loss is considered probable. As additional information becomes available, we assess the potential liability related to pending litigation and revise our estimates.

Our law 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 are not obligated to pay these costs except out of future proceeds or as provided in the following paragraph. 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.

 
23

 

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. We have not recorded any liability for this contingent obligation.

Other
We do not have off-balance sheet transactions, arrangements or obligations.  Inflation has not had any significant impact on our business.

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

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

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

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

 
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In June 2008, the FASB issued Emerging Issues Task Force No. 07-5 (EITF 07-5), Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.  EITF 07-5 requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions.  Instruments not indexed to their own stock fail to meet the scope exception of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), and should be classified as a liability and marked-to-market.  The statement is effective for fiscal years beginning after December 15, 2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings.  We are assessing the impact of this EITF for the year ended March 31, 2010.
 
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is applicable for interim or annual periods after June 15, 2009. In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 (SFAS No. 166”). SFAS No. 166 seeks to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 is applicable for annual periods after November 15, 2009 and interim periods therein and thereafter. In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167 seeks to improve financial reporting by enterprises involved with variable interest entities. SFAS No. 167 is applicable for annual periods after November 15, 2009 and interim periods therein and thereafter. We have not determined the impact, if any SFAS No. 165, 166 and 167 will have on our consolidated financial statements.
 
Other accounting standards have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date and are not expected to have a material impact on our consolidated financial statements upon adoption.

Results of Operations

Year ended March 31, 2009 Compared to Year ended March 31, 2008

   
Year Ended March 31,
             
   
2009
         
2008
                   
         
% of
         
% of
   
Change
 
   
Dollars
   
Revenue
   
Dollars
   
Revenue
   
Dollars
   
%
 
Revenues:
                                   
Products
    362,079       3 %     4,841,855       87 %     (4,479,776 )     (93 )%
Services
    578,303       5 %     710,766       13 %     (132,463 )     (19 )%
Patent license
    10,115,350       91 %     -       0 %     10,115,350          
      11,055,732       100 %     5,552,621       100 %     5,503,111       99 %
Gross Profit:
                                               
Product gross profit
    43,407       0 %     986,914       18 %     (943,507 )     (96 )%
Service gross profit
    369,281       3 %     557,094       10 %     (187,813 )     (34 )%
Patent license
    6,131,263       55 %     -       0 %     6,131,263          
      6,543,951       59 %     1,544,008       28 %     4,999,943       324 %
Operating Expenses:
                                               
Selling and administrative
    2,325,359       21 %     1,980,451       36 %     344,908       17 %
Research and related
    518,649       5 %     1,006,037       18 %     (487,388 )     (48 )%
      2,844,008       26 %     2,986,488       54 %     (142,480 )     (5 )%
Other expenses
    (344,457 )     (3 )%     (276,587 )     (5 )%     (67,870 )     25 %
                                                 
Income (loss) before provision for income taxes
    3,355,486       30 %     (1,719,067 )     (31 )%     5,074,553       (295 )%

Income (loss) before provision for income taxes
We reported income before income taxes of $3,355,486 for the year ended March 31, 2009 compared to a loss of $1,719,067 for the prior year. The $5,074,553 improvement was the result of higher margin patent license revenues that offset a decline in eVU product and service revenues. Since patent license revenues to date have been one-time with each licensee, they are non-recurring and accordingly there is no assurance of any future patent license revenues.

Revenues
Revenues of $11,055,732 for fiscal 2009 compared to $5,552,621 for the previous year. The revenue mix was significantly different each year. During the prior year ended March 31, 2008, revenues consisted entirely of $4,841,855 from selling eVU players and related equipment for use by airline customers and $710,766 from service revenues for content integration and support services. Product and service revenues for the prior year included a limited number of orders from several large customers. Recent eVU product sales activity has been slow due to airline industry economics and industry credit concerns resulting in airlines curtailing expansion and new projects.

 
25

 

Revenues for the year ended March 31, 2009 included $10,115,350 of one-time non-recurring patent license revenue and $940,382 of eVU product and service revenues. We are pursuing new eVU business and targeting new patent licensees but our results will continue to be dependent on the timing and quantity of eVU orders and the timing and amount of future patent licensing arrangements, if any.

Gross Profit
Gross profit for fiscal 2009 was $6,543,951 or 59% of revenues.  The gross profit on product and service revenues was 44% and the gross profit on patent licensing fees was 61% of license revenues. License revenue costs of revenues consists primarily of contingency legal and other direct costs associated with patent licensing.The gross profit for the prior year was $1,544,008 or 28% of revenues. The improved gross profit percentage resulted from higher margin patent license revenue and higher margins associated with services compared to product sales. Gross profit margins are highly dependent on revenue mix, prices charged, volume of orders, contingency patent legal fees and costs. Accordingly, management does not believe historical gross profits percentages can be relied on as an indicator of results from any future revenues.

Operating Expenses
Selling and administrative costs for the year ended March 31, 2009, were $2,325,359 compared to $1,980,451 for the prior year. The $344,908 increase included increases in legal and litigation expenses of $485,000 due primarily to the digEcor litigation and an increase of $75,000 in shareholder related costs primarily as a result of the annual meeting material and mailing costs for the meeting held in September 2008 with no comparable costs in the prior year.These increases were offset by decreases in sales commissions of $103,000 due to decreased product sales and a $110,000 reduction in staffing costs due to reduced personnel and reduced stock-based compensation costs.

We accrued an additional $100,000 of litigation settlement costs in the fourth quarter ended March 31, 2009 as a result of settlement discussions prior to trial for the digEcor litigation (see “Legal Proceedings”). We expect significant legal costs in our first quarter of fiscal 2010 ending June 30, 2009 due to trial related costs. While we believe our total litigation and deposit accrual of $180,000 at March 31, 2009 related to this matter is adequate, we are unable to determine at this time the impact this litigation may have on our financial position or results of operations.

Research and related expenditures for the year ended March 31, 2009 were $518,649, compared to $1,006,037 for prior year. The decrease resulted from reduced personnel and from reassigning other engineers and technicians to customer support and service roles in the most recent year. We expect future research and development costs to be comparable to the most recent year due to current staffing levels and projects. Should we elect to develop significant new products or major revisions to our existing products we may require increased internal and external research and development costs.

Operating costs for the year ended March 31, 2009 included $74,734 of non-cash stock-based compensations costs compared to $144,260 for the prior year. The reduction resulted from reduced personnel and limited option grants in recent periods.

Other Income (Expenses)
Net other expenses were $344,457 for the year ended March 31, 2009 compared to net expenses of $276,587 for the prior year. The most recent fiscal year 2009 costs included $163,559 of interest expense including $80,300 of non-cash interest from the amortization of debt discount and $181,157 of non-cash warrant and other finance related expenses. The prior year included interest of $237,020, of which $127,467 was non-cash interest, and $78,860 of financing royalties reduced by foreign exchange and other gains of $39,293.

Provision for Income Taxes
The provision for income taxes for the year ended March 31, 2009 of $421,500 consists of foreign taxes withheld and paid of $264,000 on license revenues and $157,500 accrual for California state taxes. The deferred tax expense of $868,000 was offset by a benefit related to the decrease of the deferred tax asset valuation allowance. There was no income tax provision or benefit for the prior year ended March 31, 2008.

The Company generated a tax liability in the state of California due to recent legislation suspending NOL carryforwards for the 2008 and 2009 tax years. The state tax liability of $157,500 is after a reduction of 50% from the use of allowable R&D credits generated in prior years.

 
26

 

Income (Loss) Attributable to Common Stockholders
The income attributable to common stockholders for the year ended March 31, 2009 included the net income after taxes of $2,933,986 reduced by accrued  and deemed dividends on convertible preferred stock of $130,320 or a net income attributable to common stockholders of $2,803,666. The net loss after tax for the prior year was $1,719,067 increased by accrued and deemed dividends of $81,975 for a net loss attributable to common stockholders of $1,801,042.

Liquidity and Capital Resources

   
2008
   
2009
   
2008 to 2009
variance in $'s
   
2008 to 2009
variance in %'s
 
(in thousands, except percentages)
 
Working capital (deficit)
  $ (1,292 )   $ 3,277     $ 4,569       354 %
Cash and cash equivalents
  $ 122     $ 3,814     $ 3,692       3,026 %
Total assets
  $ 861     $ 4,478     $ 3,617       420 %

   
2008
   
2009
   
2008 to 2009
variance in $'s
   
2008 to 2009
variance in %'s
 
 
 
(in thousands, except percentages)
 
Net cash provided by (used in)                                
Operating activities
  $ (1,442 )   $ 2,837     $ 4,279       297 %
Investing activities
  $ (17 )   $ (4 )   $ 13       76 %
Financing activities
  $ 886     $ 859     $ (27 )     (3 )%

At March 31, 2009, we had working capital of $3.3 million compared to a working capital deficit of $1.3 million for the prior year. We had $94,000 and $175,000 of working capital invested in accounts receivable at March 31, 2009 and 2008, respectively. Our terms to customers vary but we often require payment prior to shipment of product and any such payments are recorded as deposits. We expect certain airline customers to demand commercial terms such as 30 or 60 days in the future and this could increase our need for working capital. Patent license payments are normally due at signing of the license or within 30-45 days.

Operating Activities
For the year ended March 31, 2009, net cash increased by $3.7 million. Cash provided by operating activities was $2.8 million. Cash provided by operating activities included income of $2.9 million increased by net non-cash expenses of $294,000. Major components also providing operating cash was a decrease of $81,000 in accounts receivable and an increase of $226,000 in accrued liabilities. Major components using operating cash included a $28,000 increase in inventory and a $583,000 decrease in accounts payable.

For the year ended March 31, 2008, net cash decreased by $573,000. Cash used in operating activities was $1,442,000. The major components using cash were a loss of $1.7 million reduced by $465,000 of net non-cash expenses. Cash used in operating activities was also impacted by an increase of $149,000 in accounts payable, $16,000 decrease in prepaids and a $102,500 increase in deferred revenue. The major changes in assets and liabilities using operating cash was a $138,000 increase in accounts receivable, a $180,000 increase in inventory, $97,000 in warranty costs and a decrease of $39,000 in customer deposits.

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

Financing Activities
For the year ended March 31, 2009, cash provided by financing activities was $859,000. This included $660,000 from the sale of common stock during the year to Fusion Capital Fund II, LLC (“Fusion”) and $700,000 cash from the sale of preferred stock. We paid off our secured note balance of $450,000 and made term principal payments of $51,000. During the prior year we obtained $960,000 from the sale of common stock to Fusion, obtained $226,000 from exercises of warrants and options and made secured note payments of $300,000.

With the February 9, 2009 expiration of the Fusion arrangement, we currently have no sources of financing funding other than the potential exercise of options and warrants which generally will be dependent on higher stock prices and thus substantial uncertainty.

 
27

 

Debt and Other Commitments
We currently have unsecured convertible term debt with a principal amount of $387,234. Our plans are to make future principal and interest payments with shares of common stock, subject to maintaining the $0.10 minimum share price and other covenants of the term loan. Aggregate principal and interest payments due to maturity in November 2009 are $398,165 with the April and May 2009 payments of $50,000 each paid in shares of common stock rather than cash.

At March 31, 2009 we were committed to approximately $128,000 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 Note 13 to our 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 March 31, 2009 and (a) current planned expenditures and level of operation, and (c) no cash debt service (assuming convertible term debt payments are made in shares of common stock) we believe we have sufficient capital resources for the next twelve months. Actual results could differ significantly from management plans. We believe we may be able to obtain additional funds from future patent licensing and eVU product sales and services but the timing of licenses and shipments and the amount and quantities of shipments, orders and reorders are subject to many factors and risks, many outside our control.

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

Selected Quarterly Financial Information
The following table sets forth unaudited income statement data for each of our Company’s last eight quarters. During the prior year the two quarters ended September 30, 2007 and December 31, 2007 were restated with comparisons to the results as previously reported illustrated below. The restatement was due to an overstatement of both sales and cost of sales of $104,000 and $62,400 for the quarter ended September 30, 2007 and December 31, 2007, respectively, due to a misclassification of supplier material transfers with no effect on gross profit, operating loss or net loss in either quarter or for the fiscal year ended March 31, 2008.

The unaudited quarterly financial information as restated has been prepared on the same basis as the annual information presented elsewhere in the Form 10-K and, in the opinion of management, reflects all adjustments (consisting of normal recurring entries) necessary for a fair presentation of the information presented. The operating results for any quarter are not necessarily indicative of results for any future period.

 
28

 
 
Quarter ended
 
6/30/2008
   
9/30/2008
   
12/31/2008
   
3/31/2009
   
FY 2009
 
Revenues
  $ 377,727     $ 1,774,430     $ 3,906,033     $ 4,997,542     $ 11,055,732  
Gross profit
    114,057       1,157,107       2,286,550       2,986,237       6,543,951  
Income (loss) for the period
    (669,207 )     (28,833 )     1,547,795       2,084,231       2,933,986  
Operating profit (loss)
    (571,489 )     400,511       1,597,631       2,273,290       3,699,943  
Income (loss) attributable to common shareholders
    (670,618 )     (72,116 )     1,504,511       2,041,889       2,803,666  
Basic and diluted earnings (loss) per common share
  $ (0.00 )   $ (0.00 )   $ 0.01     $ 0.01     $ 0.01  
Weighted average shares outstanding (basic)
    274,497,647       277,082,261       279,143,996       281,298,128       277,997,077  

   
As Reported
 
Quarter ended
 
6/30/2007
   
9/30/2007
   
12/31/2007
 
Revenues
  $ 1,304,634     $ 2,419,781     $ 1,253,247  
Gross profit
    246,115       597,398       396,351  
Loss for the period
    (593,406 )     (157,740 )     (397,371 )
Operating loss
    (505,294 )     (90,532 )     (331,246 )
Loss attributable to common shareholders
    (620,631 )     (185,265 )     (424,596 )
Basic and diluted earnings (loss) per common share
  $ (0.00 )   $ (0.00 )   $ (0.00 )
Weighted average shares outstanding (basic)
    244,411,088       246,361,041       249,097,860  

         
As Restated (*)
             
Quarter ended
 
6/30/2007
   
9/30/2007
   
12/31/2007
   
3/31/2008
   
FY 2008
 
Revenues
  $ 1,304,634     $ 2,315,781     $ 1,190,847     $ 741,359     $ 5,552,621  
Gross profit
    246,115       597,398       396,351       304,144       1,544,008  
Loss for the period
    (593,406 )     (157,740 )     (397,371 )     (570,550 )     (1,719,067 )
Operating loss
    (505,294 )     (90,532 )     (331,246 )     (515,408 )     (1,442,480 )
Loss attributable to common shareholders
    (620,631 )     (185,265 )     (424,596 )     (570,550 )     (1,801,042 )
Basic and diluted earnings (loss) per common share
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.01 )
Weighted average shares outstanding (basic)
    244,411,088       246,361,041       249,097,860       270,974,359       252,683,865  

* As restated applies only to the two fiscal quarters ended September 30, 2007 and December 31, 2007. No other quarter of either fiscal 2008 or 2009 has been restated.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of the Company required to be included in this Item 8 are incorporated herein by reference and are set forth in a separate section of this report following Item 15 and the Signature Page (page 43) commencing on Page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

 
29

 

ITEM 9A(T). CONTROLS & PROCEDURES

Attached as exhibits to this Form 10-K are certifications of our President (“Principal Executive Officer” or “PEO”) and Interim Chief Accounting Officer (“Principal Financial Officer” or “PFO”) that are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications.

Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls (as defined in Rule 13a-15(e) of the Exchange Act) and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our PEO and PFO, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

At the conclusion of the period ended March 31, 2009, we carried out an evaluation, under the supervision and with the participation of our management, including the PEO and PFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the PEO and PFO concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were not effective due to the existence of a material weakness in our internal control over financial reporting, discussed below.

Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for our Company. We maintain internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reposting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of e.Digital; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with authorizations of management and directors of e.Digital; and (iii) provide reasonable assurance regarding prevention and timely detection of unauthorized acquisition, use, or disposition of e.Digital’s assets that could have a material effect on the financial statements.

Management conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2009 using criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Management’s assessment is supported by testing and monitoring performed by certain of our finance and accounting personnel of the operational effectiveness of our internal control.

Based on this assessment, management identified a material weaknesses 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 our internal control over financial reporting needs improvement and was not effective. Due to our small size and limited resources it is difficult to attract qualified independent directors and qualified audit committee members. Management has concluded that with certain management oversight controls that are in place, the risks associated with the lack of independent audit committee oversight is not sufficient to justify the costs of adding additional directors and independent audit committee members at this time. Management will periodically reevaluate this situation. If we secure sufficient capital or sustain our improved operating results it is our intention to change the composition and/or size of the Board of Directors with emphasis on recruiting qualified independent audit committee members.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

 
30

 

Inherent Limitations on Effectiveness of Controls
Our management, including the PEO and PFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions of deterioration in the degree of compliance with policies or procedures.

Changes In Internal Control Over Financial Reporting
No change in our internal controls over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Directors and Executive Officers
The following table sets forth the name and position of each of our directors and executive officers at May 31, 2009:

Name
 
Age
 
Positions
 
Director Since
Alfred H. Falk
 
54
 
President, Chief Executive Officer and Director
 
January 2009
Robert Putnam
 
50
 
Senior Vice President, Corporate Secretary, Interim Chief Accounting Officer and Director
 
1995
Allen Cocumelli
 
59
 
Chairman* and Director
 
1999
Renee Warden
 
45
 
Director
 
2005
Eric M. Polis
 
38
 
Director
 
October 2008

* Allen Cocumelli as Chairman of our Board of Directors, is technically considered as an executive officer under our bylaws. However, we do not believe that he meets the definition of an “executive officer” under Rule 16a-1(f) of the Securities Exchange Act of 1934 in that he does not perform any policy-making functions for our Company, nor is he compensated for this position.

There are no arrangements or understandings between our company and any other person pursuant to which he was or is to be selected as a director, executive officer or nominee.

Alfred H. Falk – Mr. Falk was promoted and appointed as President and Chief Executive Officer of the company by the Board of Directors on January 20, 2009.  Mr. Falk had been the Company’s vice president of corporate development since July 2004. He formerly served as president and a member of the Board of the company from January 1997 (and from July 1998 as chief executive officer) until July 2004. From March 1995 to January 1997, he served as vice president of corporate development and vice president of OEM and international sales. Prior to joining the company, Falk worked for Resources Internationale as director of U.S. sales from 1993 to 1995. From 1988 to 1993, he was the manager of OEM sales and technology licensing for Personal Computer Products, Inc. From 1978 to 1988, he held several management positions at DH Technology.

Robert Putnam - Mr. Putnam was appointed Senior Vice President in April 1993.  He was appointed a Director of e.Digital Corporation in 1995.  In May 2005, Mr. Putnam assumed the additional responsibilities of Interim Chief Accounting Officer and Corporate Secretary.  Mr. Putnam also served as Secretary of from March 1998 until December 2001.  He served as a Director of American Technology Corporation (“ATC”) from 1984 to September 1997 and served as Secretary/Treasurer until February 1994, President and Chief Executive Officer from February 1994 to September 1997 and currently serves as director of investor relations of ATC.  He also served as Secretary/Treasurer of Patriot Scientific (“Patriot”) from 1989 to 2000 and from 1989 to March 1998 was a Director of Patriot.  Mr. Putnam obtained a B.A. degree in mass communications/advertising from Brigham Young University in 1983.  Mr. Putnam devotes only part-time services to the company, approximately twenty hours per week.

 
31

 

Allen Cocumelli – Mr. Cocumelli was appointed Chairman of the Board in October 2008. Mr. Columelli also previously served as Chairman of the Board from April 2000 to November 2002. Mr. Cocumelli has been Secretary and General Counsel of SimpleNet, Inc. since 2004. Prior thereto, Mr. Cocumelli was a Director of Website Services at Yahoo! Inc. from 2000 to 2004. Prior to joining Yahoo! Inc., Mr. Cocumelli was General Counsel of Simplenet Network Communications Inc. from 1996 and Chief Operating Officer of Simplenet Network Communications Inc. from November 1997 until 1999. Prior to joining Simplenet Network Communications Inc., Mr. Cocumelli was in the private practice of law. From 1978 to 1986 Mr. Cocumelli served as a manager in the Components Manufacturing Group and as Director of Corporate Training and Development at Intel. Mr. Cocumelli obtained a B.S. degree in Industrial Psychology from the University of California, Los Angeles in 1972 and a J.D. from Thomas Jefferson University in 1991. Mr. Cocumelli is a member of the California Bar Association.

Renee Warden –Ms. Warden has been Director of Accounting for Revolution Money, Inc. since April 2007. Prior to its acquisition by Crown Castles in April 2007, Ms. Warden was Manager Special Projects/SOX for Global Signal, Inc. Prior to joining Global Signal, Inc. Ms. Warden was Vice President and Controller for Kintera, Inc. from May 2005 to May 2006. Prior to joining Kintera, Inc., Ms. Warden was an executive officer of e.Digital Corporation. Ms. Warden joined e.Digital Corporation in 1991 as Accounting Manager. In 1997 Ms.  Warden was appointed Controller and Corporate Secretary for e.Digital Corporation and in 2003 was promoted to Chief Accounting Officer and Secretary until May 2005. From 1993 to 2003 Ms. Warden also held the positions of Chief Accounting Officer, Secretary and Director of Human Resources for ATC. Ms. Warden obtained a B.S. degree in business accounting from the University of Phoenix in 1999.

Eric M. Polis - Mr. Polis has been Secretary, Treasurer and a Director of ASI Technology Corporation, a publicly traded specialty finance company, since July 2000. He has been employed as an asset manager for privately-held Davric Corporation since 1997. Mr. Polis is also a private investor and serves on the board of several Las Vegas non-profit organizations. He obtained a B.S. in Business Administration from the University of Arizona in 1993.

Code of Business Conduct and Ethics
We have adopted a Code of Conduct Policy applicable to all our employees, including our principal executive officer, principal financial officer and principal accounting officer. We will provide any person, without charge, a copy of our Code of Conduct Policy upon written request to Investor Relations, e.Digital Corporation, 16770 West Bernardo Drive, San Diego, California 92127. We also post on our website a copy of or Code of Conduct Policy at www.edigital.com.

Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of copies of such reports furnished to our Company and representation that no other reports were required during the fiscal year ended March 31, 2009, we believe that all persons subject to the reporting requirements pursuant to Section 16(a) filed the required reports on a timely basis with the Securities and Exchange Commission except as follows: One issuance of 28,517 shares to ASI Technology Corporation (ASI) as payment for a $3,000 finance fee on February 6, 2009 did not qualify for Form 5 reporting and was reported late on one Form 4 on May 18, 2009 by Eric M. Polis, an officer and director of ASI and a director of the Company.

Stockholder Recommendations for Director Nominations
We have no nominating committee of the Board of Directors and no formal procedure for director nominations. Accordingly, there has been no change in the procedures by which security holders may recommend nominees to our board of directors since our last shareholders meeting in September 2008.

Audit Committee and Audit Committee Financial Expert
We have a separately designated standing Audit Committee, currently consisting of Ms. Warden and Mr. Putnam. Ms. Warden has been designated as the “Audit Committee Financial Expert,” as defined by Regulation S-K, although as a paid accounting consultant to the Company she is not an “independent” director, as defined under the NASDAQ Stock Market rules and Rule 10A-3 of the Securities Exchange Act of 1934. Likewise Mr. Putnam, as an executive officer is not independent.

 
32

 
 
Item 11. Executive Compensation.

Summary Compensation Table

Name and Principal Position
 
Fiscal
Year
 
Salary(1)
   
Bonus
   
Option
Awards(2)
   
All Other
Compensation
   
Total
 
Alfred H. Falk, President and
 
2009
  $ 155,000     $ -0-     $ -0-     $ -0-     $ 155,000  
Chief Executive Officer (PEO)
                                           
                                             
William Blakeley, President
 
2009
  $ 155,184     $ -0-     $ -0-     $ 40,385
(3)
  $ 195,569  
and Chief Technical Officer
 
2008
  $ 175,000     $ -0-     $ 22,426     $ -0-     $ 197,426  
(PEO)(3)
 
2007
  $ 175,000     $ -0-     $ 33,026     $ -0-     $ 208,026  
                                             
Robert Putnam, Senior Vice
 
2009
  $ 85,000     $ -0-     $ -0-     $ -0-     $ 85,000  
President, Secretary and
 
2008
  $ 85,000     $ -0-     $ 13,052     $ -0-     $ 98,052  
Interim Chief Accounting
 
2007
  $ 85,000     $ -0-     $ 13,052     $ -0-     $ 98,052  
Officer (PFO) (4)
                                           

(1)
Represents actual cash compensation.
(2)
The value listed in the above table represents the fair value of the options granted in prior years that was recognized in 2009, 2008 and 2007 under FAS 123R. Fair value is calculated as of the grant date using a Black-Scholes option-pricing model. The determination of the fair value of share-based payment awards made on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. Our assumptions in determining fair value are described in note 10 to our audited consolidated financial statements for the year ended March 31, 2009, included herein.
(3)
Mr. Blakeley resigned as an executive officer effective January 16, 2009. All other compensation represents severance pay on termination.
(4)
Mr. Putnam provides part-time services to our company.  See “Certain Transactions – Conflicts of Interest.”

Outstanding Equity Awards at Fiscal Year-End

Name
 
Number of
Securities
Underlying
Unexercised
Options
Exercisable
   
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
   
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
   
Option
Exercise
Price
   
Option Expiration
Date
 
Alfred H. Falk
    750,000                 $ 0.145    
3/30/10
 
      400,000                 $ 0.23    
7/1/09
 
                                       
William Blakeley(1)
                           
—  
 
                                         
Robert Putnam
    25,000                 $ 0.23    
07/1/09
 
      500,000                 $ 0.145    
3/30/10
 

(1)
A total of 1,175,000 vested and exercisable options were forfeited during the year and options on 375,000 shares were exercised on a net exercise basis with 156,896 net shares of common stock issued. The intrinsic value of the options exercised was $27,300 and Mr. Blakeley reimbursed the Company for the employee share of payroll and withholding taxes.

 
33

 
 
Employment Agreements, Termination of Employment and Change in Control Arrangements
Mr. Blakeley resigned as president and chief technical officer effective January 16, 2009. Mr. Blakeley was paid three months salary continuation as severance as provided by the terms of his 2005 employment letter.

Mr. Putnam and Mr. Falk have no employment letter or agreement.

Director Compensation
Our directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors and committee meetings. Employee directors do not receive any cash compensation for services as directors and have not received any equity compensation grants designated for such services. In addition, members of the board of directors who are not employees receive equity compensation grants as consideration for board and committee service from time to time. There is no established policy as to frequency or amount of equity compensation grants for non-employee directors.

The following table sets forth the compensation paid to our non-employee directors in 2009.

Name
 
Fee Earned or
Paid in Cash
   
Option
Awards (1)
   
All Other
Compensation
   
Total
 
Alex Diaz(2)
        $ -0-           $ -0-  
Allen Cocumelli(3)
        $ 12,723           $ 12,723  
Renee Warden (4)
        $ 12,723           $ 12,723  
Eric M. Polis (5)
        $ 3,975           $ 3,975  

(1)
The value listed in the above table represents the fair value of the options granted that was recognized in 2009 under FAS 123R. Fair value is calculated as of the grant date using a Black-Scholes option-pricing model. The determination of the fair value of share-based payment awards made on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. Our assumptions in determining fair value are described in note 10 to our audited consolidated financial statements for the year ended March 31, 2009, included in our Annual Report on Form 10-K.
(2)
Mr. Diaz resigned as a director in October 2008 and forfeited options on 775,000 shares of common stock (691,666 that were vested and exercisable).
(3)
At March 31, 2009 Mr. Cocumelli had option awards outstanding exercisable into 775,000 shares of common stock of which 691,666 were vested and exercisable.
(4)
Ms. Warden served as our Chief Accounting Officer and Secretary until May 2005 and during fiscal 2009 provided accounting services unrelated to her role as a director or audit committee member and earned compensation of $3,356 not included above. At March 31, 2009 Ms. Warden had option awards outstanding exercisable into 850,000 shares of common stock of which 766,666 were vested and exercisable.
(5)
At March 31, 2009 Mr. Polis had option awards outstanding exercisable into 300,000 shares of common stock of which 75,000 were vested and exercisable.

Compensation Committee Interlocks and Insider Participation
The Compensation Committee of our Company’s Board of Directors was formed in June 2000 and is currently comprised of Directors, Allen Cocumelli and Eric Polis. Mr. Alex Diaz served as a member until October 2008 upon his resignation and the appointment of Mr. Polis to the Board of Directors and the Compensation Committee.  None of these individuals was at any time during the fiscal year 2009, or at any time, an employee or officer of the Company.  No executive officer of the Company serves as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving as a member of our Company’s Board of Directors or Compensation Committee.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Common Stock
The following security ownership information is set forth, as of May 31, 2009, with respect to (i) each stockholder known by us to be beneficial owners of more than 5% of our outstanding Common Stock, (ii) each of the current directors and nominees for election as directors, (iii) each of the executive officers named in the Summary Compensation Table below and (iv) all current directors, nominees and executive officers as a group (five persons).  Other than as set forth below, we are not aware of any other stockholder who may be deemed to be a beneficial owner of more than 5% of our company’s Common Stock.

 
34

 
 
Name and Address
 
Amount and Nature of
   
Percent
 
Title
 
of Beneficial Owner
 
Beneficial Ownership
   
of Class
 
of Class
 
Alfred H. Falk
    2,143,850
(1)
    *  
Common
 
16770 West Bernardo Drive
                   
San Diego, CA 92127
                   
                     
Robert Putnam
    5,387,925
(2)
    1.9 %
Common
 
16770 West Bernardo Drive
                   
San Diego, CA 92127
                   
                     
Allen Cocumelli
    276,000
(3)
    *  
Common
 
16770 West Bernardo Drive
                   
San Diego, CA 92127
                   
                     
Eric M. Polis
    3,907,119
(4)
    1.4 %
Common
 
980 American Pacific Drive, #111
                   
Henderson, NV 89014
                   
                     
Renee Warden
    850,000
(5)
    *  
Common
 
16770 West Bernardo Drive
                   
San Diego, CA 92127
                   
                     
Jerry E. Polis
    24,685,121
(6)
    8.7 %
Common
 
980 American Pacific Drive, #111
                   
Henderson, NV 89014
                   
                     
All officers, directors and nominees
                   
as a group (5 persons)
    12,452,394
(7)
    4.3 %
Common
 
 
(1)
Includes 550 shares held by son to which Mr. Falk disclaims beneficial ownership. Includes options and warrants exercisable within 60 days to purchase 1,150,000 shares.
(2)
Includes options and warrants exercisable within 60 days to purchase 1,603,125 shares and preferred stock convertible into 1,046,300 shares.
(3)
Includes options exercisable within 60 days to purchase 275,000 shares.
(4)
Includes options exercisable within 60 days to purchase 112,500 shares. Also includes (i) 2,307,421 shares of common stock held a Family Trust of which Mr. Polis is Trustee, (ii) 1,042,696 shares of common stock held by the Polis Family LLC of which Mr. Polis is a managing member, (iii) 133,000 shares of common stock held by The Polis Charitable Foundation of which Mr. Polis is an officer, (iv) 25,000 shares of common stock held in a personal IRA, (v) 107,922 shares of common stock held by ASI Capital Corporation of which Mr. Polis is President, (vi) 138,580 shares of common stock held by ASI Technology Corporation of which Mr. Polis is Secretary, and (vii) 40,000 shares of common stock held as custodian for a minor child. Mr. Polis disclaims beneficial ownership of the shares held by the Polis Charitable Foundation and as custodian for the minor child and to the shares held by ASI Capital Corporation and ASI Technology Corporation except to the extent of his respective pecuniary interest.
(5)
Includes options exercisable within 60 days to purchase 850,000 shares.
(6)
Includes (i) 15,739,000 shares of common stock held by the Jerry E. Polis Family Trust (“Family Trust”) of which Mr. Polis is Trustee and warrants exercisable by the Family Trust for 156,250 shares of common stock, (ii) 5,943,232 shares of common stock held by Davric Corporation (“Davric”) of which Mr. Polis is President and Director and convertible debt and warrants held by Davric for 1,050,716 shares of common stock (iii) 1,042,696 shares of common stock held by the Polis Family LLC of which Mr. Polis is a managing member, (iv) 133,000 shares of common stock held by The Polis Charitable Foundation of which Mr. Polis is President, (v) warrants exercisable for 78,125 shares of common stock held by JEP Leasing LLC (“JEP”) over which Mr. Polis exercises control (vi) 228,000 shares of common stock held by the Polis Museum of Fine Art of which Mr. Polis is trustee, (vii) 67,600 shares of common stock held in a personal IRA, (viii) 107,922 shares of common stock held by ASI Capital Corporation of which Mr. Polis is President and (ix) 138,580 shares of common stock held by ASI Technology Corporation of which Mr. Polis is President. Mr. Polis disclaims beneficial ownership of the shares held by the Polis Charitable Foundation and the Polis Museum of Fine Art and to the shares held by ASI Capital Corporation and ASI Technology Corporation except to the extent of his respective pecuniary interest.

 
35

 
 
(7)
Includes options and warrants exercisable within 60 days to purchase 3,878,125 shares and preferred stock convertible into 1,046.300 shares.

*  Less than 1%

Series AA Preferred Stock

The following security ownership information is set forth as of May 31, 2009 with respect to certain persons or groups known to the Company to be beneficial owners of more than 5% of Series AA Preferred Stock.

Name and Address
 
Amount and Nature of
   
Percent
 
Title
 
of Beneficial Owner
 
Beneficial Ownership(1)
   
of Class
 
of Class
 
Robert Putnam
    10,000 (2)     13.3 %  
Series AA
 
16770 West Bernardo Drive
               
Preferred Stock
 
San Diego, CA 92127
                   
                     
James A. Barnes
    15,000 (3)     20.0 %
Series AA
 
8617 Canyon View Dr.
               
Preferred Stock
 
Las Vegas, NV 89117
                   
                     
Norris Family 1997 Trust
    10,000 (4)     13.3 %
Series AA
 
16101 Blue Crystal Trail
               
Preferred Stock
 
Poway, CA 92064
                   
                     
James C. Zolin & Josephine Zolin
    5,000 (5)     6.7 %
Series AA
 
17108 Via De La Valle
               
Preferred Stock
 
Rancho Santa Fe, CA 92067
                   
                     
Victor Gabourel
    5,000 (6)     6.7 %
Series AA
 
11404 Cypress Woods Dr.
               
Preferred Stock
 
San Diego, CA 92131
                   
                     
Wayne Opperman and Barbara Opperman
    10,000 (5)     13.3 %
Series AA
 
36837 Wax Myrtle Place
               
Preferred Stock
 
Murieta, CA 92562
                   
                     
Edward J. Kashou & Steven C. Kashou
    10,000 (5)     13.3 %
Series AA
 
10321 Hitching Post Way
               
Preferred Stock
 
Santee, CA 92071
                   
                     
Robert M. Kaplan
    5,000 (6)     6.7 %
Series AA
 
P.O. Box 2600
               
Preferred Stock
 
Sun Valley, ID 83353
                   

 
(1)
Represents the number of shares of Series AA Preferred Stock held as of May 31, 2009. At such date an aggregate of 75,000 shares of Series AA Preferred Stock were issued and outstanding with each share having 100 votes per share.
 
(2)
Mr. Putnam is an officer and director of the Company and has sole voting and investment power with respect to the Series AA Preferred Stock.
 
(3)
Includes 5,000 shares held by Sunrise Capital, Inc., 5,000 shares held by Sunrise Management, Inc. Profit Sharing Plan and 5,000 shares held by Palermo Trust. Mr. Barnes is President of Sunrise Capital, Inc. and Trustee of Sunrise Management, Inc. Profit Sharing Plan and the Palermo Trust. Mr. Barnes shares investment and voting power with respect to the Series AA Preferred Stock with his spouse.
 
(4)
Voting and investment power with respect to the Series AA Preferred Stock is shared by Elwood G. Norris and Stephanie Norris.
 
(5)
The named owners are believed by the Company to share investment and voting power over the Series AA Preferred Stock.

 
36

 

 
(6)
The named owner is believed by the Company to have sole investment and voting power over the Series AA Preferred Stock.

Item 13. Certain Relationships and Related Transactions and Director Independence.

Conflicts of Interest
Certain conflicts of interest now exist and will continue to exist between e.Digital Corporation and its officers and directors due to the fact that they have other employment or business interests to which they devote some attention and they are expected to continue to do so.  We have not established policies or procedures for the resolution of current or potential conflicts of interest between our company and its management or management affiliated entities.  There can be no assurance that members of management will resolve all conflicts of interest in our company’s favor.  The officers and directors are accountable to our company as fiduciaries, which means that they are legally obligated to exercise good faith and integrity in handling our company’s affairs.  Failure by them to conduct our company’s business in its best interests may result in liability to them.

Officer and director Robert Putnam also acts as Director of Investor Relations of ATC.  The possibility exists that this other relationship could affect Mr. Putnam’s independence as a director and/or officer of e.Digital Corporation.  Mr. Putnam is obligated to perform his duties in good faith and to act in the best interest of our company and its stockholders, and any failure on his part to do so may constitute a breach of his fiduciary duties and expose such person to damages and other liability under applicable law.  While the directors and officers are excluded from liability for certain actions, there is no assurance that Mr. Putnam would be excluded from liability or indemnified if he breached his loyalty to our company.

Transactions with Related Persons
On occasion we engage in certain related party transactions. Related parties include directors and executive officers and their immediate family members and certain security holders and their immediate family members. For purposes of this disclosure related party security holders include any beneficial owner of more than five percent of either our common or preferred shares. The following are related party transactions with respect to the two fiscal years ended March 31, 2009.

Mr. James A. Barnes, was considered a related party between April 1, 2007 and December 2007 through ownership of greater than 5% of the our Series D preferred stock (subsequently converted to common stock in December 2007) and again in June 2008 when affiliated entities acquired greater than 5% of our Series AA preferred stock. During fiscal 2008 and fiscal 2009, we incurred accounting and regulatory consulting services of $36,405 and $44,997, respectively to Sunrise Capital, Inc., a company controlled by Mr. Barnes.

Jerry E. Polis and affiliated entities are considered as related parties through ownership of greater than 5% of the our Series D preferred stock (subsequently converted to common stock in December 2007 through which Mr. Polis continued as a related party through ownership of greater than 5% of our outstanding common stock). At April 1, 2007 we owed Davric Corporation (“Davric”) $952,967 on a 7.5% Convertible Term Note (“Term Note”). Stated monthly principal and interest payments were $15,000 in April 2007 increasing to $30,000 starting in December 2007 and $50,000 starting in December 2008 with maturity November 30, 2009.  We may, subject to certain limitations, elect to make monthly installment payments either in cash or in shares of common stock (“Monthly Installment Shares”).  Monthly Installment Shares are valued at the arithmetic average of the closing prices for the last five trading days of the applicable month without discount.  Installment note payments must be paid in cash if the computed average price is less than $0.10 per share.  Subject to certain notice periods and other limitations, the balance of the Term Note is convertible by Davric at $0.30 per common share and we may elect to call the Term Note for mandatory conversion if the closing sale price of our common stock is at least $0.40 per share for ten consecutive trading days.  We also may prepay the Term Note in full or in minimum parts of $50,000 on ten-day notice.  The Term Note may be subordinate to certain future senior indebtedness as defined in the Term Note.  We are not obligated to register the Monthly Installment Shares or any shares issuable on conversion of the Term Note. During fiscal 2008 we made $240,000 of principal and interest payments through the issuance of 1,623,808 restricted shares of common stock reducing the principal balance to $780,065 at March 31, 2008. Interest expense paid on the Term Note for the year ended March 31, 2008 was $107,098. During fiscal 2009 we made two monthly payments totaling $60,000 in cash and ten monthly payments aggregating $380,000 by issuing 3,018,331 restricted shares of common stock reducing the principal balance to $387,234 at March 31, 2009. Interest expense paid on the Term Note for the year ended March 31, 2009 was $47,169.

 
37

 

On March 23, 2007 we entered into a short-term purchase order and working capital financing arrangement providing cash proceeds of $750,000, the balance at April 1, 2007. The lender, ASI Capital Corporation, is a Nevada based mortgage broker/banker of which Jerry E. Polis is Chairman, President and largest shareholder. We paid an initial origination finance charge of $15,000 by issuing 73,385 restricted shares of common stock. In connection with two renewals during fiscal 2008 we paid aggregate finance charges of $15,500 by issuing 104,196 restricted shares of common stock. We made principal reductions of $300,000 during fiscal 2008 and the principal balance at March 31, 2008 was $450,000.During fiscal 2008 we made cash interest payments of $111,750 (in addition to the finance charges described above). The obligation was amended to be payable to the parent of ASI Capital, Inc. or ASI Technology Corporation in connection with a December 2007 extension. In connection with two renewals during fiscal 2009 we paid aggregate finance charges of $7,000 by issuing 68,921 restricted shares of common stock. During fiscal 2009 we made additional principal reductions of $150,000 and paid the remaining principal balance of $300,000 in March 2009. There was no balance outstanding at March 31, 2009 and we made cash interest payments of $69,750 (in addition to the finance charges described above). The obligation was documented by an 18% secured promissory note, as amended, with interest payable monthly for any full or partial month the principal was outstanding and was secured pursuant to a security agreement providing a security interest in substantially all of the our assets.

In April 2008 we borrowed $40,000 pursuant to an unsecured 12% promissory note with principal and interest due April 3, 2009 from Mr. Jerry Polis’ family trust. In April 2008 we issued 40,000 shares of common stock as payment of a $4,800 originating finance fee. This note was repaid in March 2009 with cash interest paid of $4,667.

In June 2008 director and officer Robert Putnam purchased 10,000 shares of Series AA convertible preferred stock and related warrants exercisable for 1,000,000 shares of common stock for cash of $100,000 on the same terms as other unaffiliated investors.

During fiscal 2009 we paid director and former executive officer Renee Warden an aggregate of $3,356 ($6,121 in fiscal 2008) for accounting services unrelated to her role as a director or audit committee member.

On June 6, 2007, directors Alex Diaz, Renee Warden and Allen Cocumelli were each granted an option on 250,000 common shares exercisable at $0.18 per share until June 6, 2011 subject to two year vesting and other standard option plan conditions.On October 8, 2008 we granted newly appointed director Eric M. Polis options on 300,000 common shares vesting over two years and exercisable at $0.115 per share until October 2013, subject to continued service. Mr. Eric Polis is also an officer and director of ASI Technology and ASI Capital, with transactions described above.

Item 14. Principal Accounting Fees and Services.

The following table describes fees for professional audit services rendered by SingerLewak LLP, our principal accountant, for the audit of our annual financial statements for the years ended March 31, 2009 and March 31, 2008 and fees billed for other services rendered by SingerLewak LLP during those periods. These amounts include fees paid to SingerLewak LLP.

Type of Fee
 
2009
   
2008
 
Audit Fees (1)
  $ 160,797     $ 158,232  
Audit Related Fees (2)
          15,153  
Tax Fees (3)
           
All Other Fees (4)
           
Total
  $ 160,797     $ 173,385  

1.           Audit Fees include the aggregate fees paid by us during the fiscal year indicated for professional services rendered by SingerLewak LLP for the audit of our annual financial statements and review of financial statements included in our Forms 10-Q.

2.           Audit Related Fees include the aggregate fees paid by us during the fiscal year indicated for assurance and related services by SingerLewak LLP that are reasonably related to the performance of the audit or review of our financial statements and not included in Audit Fees.

3.           Tax Fees include the aggregate fees paid by us during the fiscal year for professional services for tax compliance, tax advice and tax planning. No such fees were billed by SingerLewak LLP for the respective periods.

4.           All Other Fees include the aggregate fees paid by us during the fiscal year indicated for products and services other than the services reported above. No such fees were billed by SingerLewak LLP for the respective periods.

 
38

 
 
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee on an annual basis reviews audit and non-audit services performed by the independent auditor. All audit and non-audit services are pre-approved by the Audit Committee, which considers, among other things, the possible effect of the performance of such services on the auditors’ independence. The Audit Committee has considered the role of SingerLewak LLP in providing services to us for the fiscal year ended March 31, 2009 and has concluded that such services are compatible with their independence as our company’s auditors. The Audit Committee has established its pre-approval policies and procedures, pursuant to which the Audit Committee approved the foregoing audit services provided by SingerLewak LLP in fiscal year 2009.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this Annual Report on Form 10-K:

(a) Consolidated Financial Statements
See “Index to Consolidated Financial Statements” on page F-1.

 (b) Exhibits
Each exhibit marked with an asterisk is filed with this Annual Report on Form 10-K. Each exhibit not marked with an asterisk is incorporated by reference to the exhibit of the same number (unless otherwise indicated) previously filed by the Company as indicated below.

Exhibit
   
Number
 
Sequential Description
     
2.1
 
Plan of Reorganization and Agreement of Merger, dated July 1996 and filed as Exhibit A to the Company’s July 3, 1996 Proxy Statement.
     
3.1
 
Certificate of Incorporation of Norris Communications, Inc. (as amended through May 28, 1996) and filed as Exhibit B to the Company’s July 3, 1996 Proxy Statement.
     
3.1.1
 
Certificate of Amendment of Certificate of Incorporation of Norris Communications, Inc. filed with the State of Delaware on January 14, 1998 and filed as Exhibit 3.1.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 1997.
     
3.1.2
 
Certificate of Amendment of Certificate of Incorporation of Norris Communications Inc. filed with the State of Delaware on January 13, 1999 and filed as Exhibit 3.1.2 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998.
     
3.1.3
 
Certificate of Amendment of Certificate of Incorporation of e.Digital Corporation filed with the State of Delaware on September 18, 2008 and filed as Exhibit 3.1.3 to the Company’s Current Report on Form 8-K dated September 18, 2008.
     
3.1.4
 
Certificate of Amendment of Certificate of Incorporation of e.Digital Corporation filed with the State of Delaware on August 11, 2005 and filed as Exhibit 3.1.4 to the Company’s Current Report on Form 8-K dated September 18, 2008.
     
3.2
 
Bylaws of the Company, filed as Exhibit C to the Company’s July 3, 1996 Proxy Statement.
     
3.3
 
Certificate of Designation of Preferences, Rights and Limitations of Series A Redeemable Convertible Preferred Stock filed with the State of Delaware on September 19, 1997 and filed as Exhibit 3.3 to the Company’s Current Report on Form 8-K dated October 3, 1997.
 
 
39

 

3.4
 
Certificate of Designation of Preferences, Rights and Limitations of Series B Redeemable Convertible Preferred Stock filed with the State of Delaware on June 24, 1999, and filed as Exhibit 3.4 to the Company’s Annual Report on Form 10-KSB dated March 31, 1999.
     
3.5
 
Certificate of Designation of Preferences, Rights and Limitations of Series C Redeemable Convertible Preferred Stock filed with the State of Delaware on October 4, 2000 and filed as Exhibit 3.5 to the Company’s Registration Statement on Form S-3 dated November 3, 2000.
     
3.6
 
Certificate of Designation of Preferences, Rights and Limitations of Series D preferred stock filed with the State of Delaware on December 23, 2002 and filed as Exhibit 3.6 to the Company’s Current Report on Form 8-K dated December 30, 2002.
     
3.7
 
Certificate of Designation of Preferences, Rights and Limitations of Series E preferred stock filed with the State of Delaware on November 19, 2003 and filed as Exhibit 3.7 to the Company’s Current Report on Form 8-K dated November 21, 2003.
     
3.8
 
Certificate of Designation of Preferences, Rights and Limitations of Series EE preferred stock filed with the State of Delaware on November 19, 2004 and filed as Exhibit 3.7 to the Company’s Current Report on Form 8-K dated November 19, 2004.
     
3.9
 
Certificate of Designation of Preferences, Rights and Limitations of Series AA preferred stock filed with the State of Delaware on June 26, 2008 and filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K dated July 1, 2008.
     
4.1
 
Form of Stock Purchase Warrant (Series EE Warrants) exercisable until November 2006 issued to seventeen accredited investors for an aggregate of 4,070,000 common shares (individual warrants differ only as to holder and number of shares) and filed as Exhibit 4.55 to the Company’s Current Report on Form 8-K dated November 19, 2004.
     
4.2
 
Form of 12% Subordinated Promissory Note and Warrant Purchase Agreement dated as of June 30, 2005 entered into with certain accredited investors in a maximum aggregate amount of $1,000,000 and filed as Exhibit 4.50 to the Company’s 2004 Form 10-K.
     
4.2.1
 
Form of First Amendment to 12% Subordinated Promissory Note dated as of June 30, 2005 between the company and certain accredited investors (individual amendments differ only as to name of Payee) filed as Exhibit 4.51.1 to Form 8-K dated July 13, 2005.
     
4.2.2
 
Form of Second Amendment to 12% Subordinated Promissory Note dated as of October 25, 2005 between the company and certain accredited investors (individual amendments differ only as to name of Payee) filed as Exhibit 4.50.2 to Form 8-K dated November 8, 2005.
     
4.2.3
 
Form of Amendment to 12% Subordinated Promissory Note and Warrant Purchase Agreement dated as of October 25, 2005 between the company and certain accredited investors (individual amendments differ only as to name of Purchaser) filed as Exhibit 4.50.1 to Form 8-K dated November 8, 2005.
     
4.3
 
Form of Stock Purchase Warrant exercisable until June 30, 2007 issued to certain accredited investors for up to an aggregate of 2,000,000 common shares (individual warrants differ only as to holder and number of shares) and filed as Exhibit 4.52 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004.
     
4.3.1
 
Form of First Amendment to Stock Purchase Warrant dated as of June 30, 2005 between the company and certain accredited investors (individual amendments differ only as to name of Holder) filed as Exhibit 4.51.2 to Form 8-K dated July 13, 2005.
     
4.4
 
Form of Restricted Common Stock Purchase Agreement, dated February 24, 2006 between the Company and certain accredited investors for purchase of 18,750,000 common shares (individual agreements differ only as to number of shares) and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 27, 2006.
 
 
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4.5
Form of Series “A” Warrant exercisable until February 28, 2009, issued February 24, 2006 to certain accredited investors for up to an aggregate of 4,687,500 common shares (individual warrants differ only as to holder and number of shares) and filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 27, 2006
   
4.6
Form of Series “B” Warrant exercisable until six months after the effectiveness of this Registration Statement or July 31, 2008 whichever is earlier, issued February 24, 2006 to certain accredited investors for up to an aggregate of 4,687,500 common shares (individual warrants differ only as to holder and number of shares) and filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated February 27, 2006.
   
4.7
Form of New Warrant  issued to 29 investors in August and September 2006 for an aggregate of 2,331,572 common shares exercisable at $0.15 per share through August 31, 2009 filed as Exhibit 4.53 to Form 8-K dated August 28, 2006
   
4.8
Exchange Agreement between the Company and Davric Corporation dated December 1, 2006 filed as Exhibit 99.1 to Form 8-K dated December 12, 2006.
   
4.8.1
7.5% Convertible Subordinated Term Note issued by the Company to Davric Corporation dated December 1, 2006 filed as Exhibit 99.2 to Form 8-K dated December 12, 2006.
   
4.9
Common Stock Purchase Agreement, dated as of January 2, 2007, by and between e.Digital Corporation and Fusion Capital Fund II, LLC filed as Exhibit 10.1 to Form 8-K dated January 8, 2007.
   
4.10
Registration Rights Agreement, dated as of January 2, 2007, by and between e.Digital Corporation and Fusion Capital Fund II, LLC filed as Exhibit 10.2 to Form 8-K dated January 8, 2007.
   
4.11
Form of Convertible Preferred Stock Purchase Agreement between the Company and 12 investors for an aggregate of 75,000 Series AA Preferred Shares and Warrants (individual agreements differ only as to number of shares) dated June 27, 2008 filed as Exhibit 99.2 to Form 8-K dated July 1, 2008.
   
4.12
Form of Stock Purchase Warrant between the Company and 12 investors for an aggregate of 7,500,000 common shares (individual warrants differ only as to holder and number of shares) dated June 27, 2008 filed as Exhibit 99.3 to Form 8-K dated July 1, 2008.
   
10.1
Lease Agreement between the Company and LBA Industrial Fund – Holding Co. II, Inc. and Innsbruck Holdings, L.P. dated March 3, 2006 and filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
   
10.2
Agreement for Legal Services and Contingent Fee Arrangement dated March 23, 2007 between the Company and Duane Morris LLP filed as Exhibit 99.1 to Form 8-K dated  March 28, 2007. (Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Exchange Act of 1934, as amended.)
   
10.3
Secured Promissory Note of the Company to ASI Capital Corporation dated March 23, 2007 filed as Exhibit 99.3 to Form 8-K dated March 28, 2007.
   
10.3.1
Loan Extension Agreement between the Company and ASI Capital Corporation dated as of September 28, 2007 and previously filed as Exhibit 99.1 to Form 8-K dated October 15, 2007.
   
10.3.2
Secured Promissory Note of the Company to ASI Technology Corporation dated December 23, 2007 filed as Exhibit 99.1 to Form 8-K dated January 4, 2008.
   
10.3.3
Loan Extension Agreement between the Company and ASI Technology Corporation dated as of June 30, 2008 and previously filed as Exhibit 99.1 to Form 8-K dated July 1, 2008.
   
10.3.4
Loan Extension Agreement between the Company and ASI Technology Corporation dated as of December 31, 2008 and previously filed as Exhibit 99.1 to Form 8-K dated January 5, 2009.
 
 
41

 

10.4
Security Agreement between the Company and its subsidiary and ASI Capital Corporation dated March 23, 2007 filed as Exhibit 99.4 to Form 8-K dated March 28, 2007.
   
10.4.1
Security Agreement between the Company and its subsidiary and ASI Technology Corporation dated December 23, 2007 filed as Exhibit 99.2 to Form 8-K dated January 4, 2008.
   
10.5
Stock Option Plan adopted by the Company on September 29, 1994 ("1994 Plan"), filed as Exhibit 10.10 to the Company's 1995 Form 10-KSB.
   
10.5.1
First Amendment to Stock Option Plan adopted by the Company on January 26, 1996 and filed previously as Exhibit 10.14.1 to the Company's Annual Report on Form 10-KSB dated March 31, 1998.
   
10.5.2
Second Amendment to Stock Option Plan adopted by the Company on September 3, 1997 and filed previously as Exhibit 10.14.2 to the Company's Annual Report on Form 10-KSB dated March 31, 1998.
   
10.5.3
Third Amendment to Stock Option Plan adopted by the Company on November 9, 2000 and filed previously as Exhibit B to the Company's Annual Report on Schedule 14A dated September 22, 2000.
   
10.6
2005 Equity-Based Compensation Plan, filed as Exhibit B to the to the Company's July 12, 2005 Definitive Proxy Statement.
   
10.6.1
Form of Incentive Stock Option Agreement under the 2005 Equity-Based Compensation Plan and filed previously as Exhibit 10.6.1 to the Company’s Annual Report on Form 10-K dated March 31, 2007.
   
10.6.2
Form of Nonstatutory Stock Option Agreement under the 2005 Equity-Based Compensation Plan and filed previously as Exhibit 10.6.2 to the Company’s Annual Report on Form 10-K dated March 31, 2007.
   
10.7
Employment letter between the Company and William A. Blakeley dated October 20, 2005 filed as Exhibit 99.2 to Form 8-K dated  October 27, 2005.
   
10.7.1
Inducement Stock Option Grant Notice and Inducement Stock Option Agreement for William A. Blakeley dated November 14, 2005 and filed previously as Exhibit 10.7.1 to the Company’s Annual Report on Form 10-K dated March 31, 2007.
   
10.7.2
Special Stock Option Grant Notice and Stock Option Agreement for William A. Blakeley dated March 30, 2006 and filed previously as Exhibit 10.7.2 to the Company’s Annual Report on Form 10-K dated March 31, 2007.
   
21.1
List of subsidiaries.  *
   
23.1
Consent of SingerLewak LLP, Independent Registered Public Accounting Firm.*
   
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, Principal Executive Officer.*
   
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, Principal Accounting Officer.*
   
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, Principal Executive Officer and Robert Putnam, Principal Accounting Officer.*
 

*
Filed concurrently herewith.

 
42

 
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 Corporation
   
   
 
By:
/s/     ALFRED H. FALK
 
          President and Chief Executive Officer
 
Date:  June 16, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name
 
Position
 
Date
         
/s/ ALFRED H. FALK
 
President and Chief Executive Officer 
 
June 16, 2009
Alfred H. Falk
 
(Principal Executive Officer)
   
         
/s/ ALLEN COCUMELLI
 
Chairman of the Board and Director
 
June 16, 2009
Allen Cocumelli
       
         
/s/ ROBERT PUTNAM
 
Senior Vice President and Director
 
June 16, 2009
     Robert Putnam
 
Interim Chief Accounting Officer and
   
   
Secretary (Principal Financial and Accounting Officer)
   
         
/s/ ERIC M. POLIS
 
Director
 
June 16, 2009
Eric M. Polis
       
         
/s/ RENEE WARDEN
 
Director
 
June 16, 2009
     Renee Warden
       
 
 
43

 
 
INDEX TO FINANCIAL STATEMENTS
 
   
Page
     
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND SUBSIDIARY
     
REPORT OF SINGERLEWAK LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
F-2
     
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2009 AND 2008
 
F-3
     
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2009 AND 2008
 
F-4