================================================================================

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

                                    FORM 10-Q

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

                For the quarterly period ended September 30, 2006

                         Commission File Number 0-20734

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


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

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

                                 (858) 304-3016
              (Registrant's telephone number, including area code)


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

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

   Large Accelerated Filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

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

As of November 1, 2006 a total of 216,509,686 shares of the Registrant's Common
Stock, par value $0.001, were issued and outstanding.


================================================================================


<PAGE>



e.DIGITAL CORPORATION


                                      INDEX

<TABLE>
<CAPTION>
                                                                                   Page
PART I. FINANCIAL INFORMATION
<S>     <C>                                                                        <C>
         Item 1. Financial Statements (unaudited):

                  Consolidated Balance Sheets as of September 30, 2006 and
                  and March 31, 2006
 3

                  Consolidated Statements of Operations for the three and six
                  months ended September 30, 2006 and 2005                             4

                  Consolidated Statements of Cash Flows for the three and six
                  months ended September 30, 2006 and 2005                             5

                  Notes to Interim Consolidated Financial Statements                   6

         Item 2. Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                               13
         Item 3. Quantitative and Qualitative Disclosure about Market Risk            18

         Item 4. Controls and Procedures                                              19


PART II. OTHER INFORMATION

         Item 1.  Legal Proceedings                                                   19

         Item 1A. Risk Factors                                                        20

         Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds         25

         Item 3.  Defaults Upon Senior Securities                                     25

         Item 4.  Submission of Matters to a Vote of Security Holders                 25

         Item 5.  Other Information                                                   25

         Item 6.  Exhibits and Reports on Form 8-K                                    25


SIGNATURES                                                                            26


                                       2
<PAGE>


</TABLE>


Part I. Financial Information
Item 1. Financial Statements:
e.Digital Corporation and subsidiary

<TABLE>
<CAPTION>
                                        CONSOLIDATED BALANCE SHEETS
                                               (Unaudited)
                                                                                     September 30,    March 31,
                                                                                         2006           2006
                                                                                      (Unaudited)
                                                                                           $              $
                                                                                      -----------    -----------
<S>                                                                                       <C>          <C>
ASSETS
Current
Cash and cash equivalents                                                                 631,213      1,058,723
Accounts receivable, trade                                                                    256          2,670
Inventory                                                                                  46,565           --
Deposits and prepaid expenses                                                              59,007         31,667
                                                                                      -----------    -----------
Total current assets                                                                      737,041      1,093,060
                                                                                      -----------    -----------
Property and equipment, net of accumulated depreciation of
   $621,078 and $593,266, respectively                                                     34,696         62,508
                                                                                      -----------    -----------
    Total assets                                                                          771,737      1,155,568
                                                                                      ===========    ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current
Accounts payable, trade                                                                   517,937        261,196
Other accounts payable and accrued liabilities                                             45,773        107,145
Accrued lease liability                                                                   515,000        515,000
Accrued employee benefits                                                                 120,397        117,108
Dividends                                                                                 450,634        402,305
Customer deposits                                                                         869,935        793,750
Convertible subordinated promissory notes,
   less $318,653 and $1,103,031 for debt
   discount, respectively                                                                 981,347        396,969
Unsecured promissory notes                                                                957,562      1,015,954
                                                                                      -----------    -----------
    Total liabilities                                                                   4,458,585      3,609,427
                                                                                      -----------    -----------

Commitments and Contingencies

Stockholders' deficit
Preferred stock, $0.001 par value; 5,000,000 shares authorized
  Series D Convertible Preferred stock 250,000 shares designated: 96,000 and 96,000
    issued and outstanding, respectively. Liquidation preference
    of $1,392,079 and $1,334,321, respectively                                            960,000        960,000
  Series EE Convertible and Redeemable Preferred stock 20,000 shares designated:
    1,250 and 2,500 issued and outstanding, respectively. Liquidation preference
    of $143,944 and $277,342 respectively                                                 125,000        250,000
Common stock, $0.001 par value, authorized 300,000,000,
 215,602,563 and 200,431,000 shares outstanding, respectively                             215,603        200,431
Additional paid-in capital                                                             75,382,621     73,710,110
Dividends                                                                                (450,634)      (402,305)
Accumulated deficit                                                                   (79,919,438)   (77,172,095)
                                                                                      -----------    -----------
Total stockholders' deficit                                                            (3,686,848)    (2,453,859)
                                                                                      -----------    -----------

Total liabilities and stockholders' deficit                                               771,737      1,155,568
                                                                                      ===========    ===========
</TABLE>

See notes to interim consolidated financial statements.


                                       3
<PAGE>


e.Digital Corporation and subsidiary

                 CONSOLIDATED STATEMENTS OF OPERATIONS
                      (UNAUDITED)

<TABLE>
<CAPTION>
                                                           For the three months ended          For the six months ended
                                                                 September 30,                       September 30,

                                                              2006            2005                2006            2005
                                                                            Restated                            Restated
Revenues:                                                       $                $                    $              $
                                                         -------------------------------     ------------------------------
<S>                                                               <C>         <C>                    <C>         <C>
   Products                                                       13,017      1,984,019              34,122      2,949,749
   Services                                                            -          6,120                   -         38,599
                                                         -------------------------------     ------------------------------
                                                                  13,017      1,990,139              34,122      2,988,348
                                                         -------------------------------     ------------------------------

Cost of revenues:
   Products                                                       12,598      1,578,258              29,210      2,400,900
   Services                                                            -              -                   -          4,875
                                                         -------------------------------     ------------------------------
                                                                  12,598      1,578,258              29,210      2,405,775
                                                         -------------------------------     ------------------------------
Gross profit                                                         419        411,881               4,912        582,573
                                                         -------------------------------     ------------------------------

Operating expenses:
   Selling and administrative                                    477,485        396,740             813,054        735,384
   Research and related expenditures                             401,640        288,323             754,249        650,244
                                                         -------------------------------     ------------------------------
          Total operating expenses                               879,125        685,064           1,567,303      1,385,628
                                                         -------------------------------     ------------------------------

Operating loss                                                  (878,706)      (273,183)         (1,562,391)      (803,056)
                                                         -------------------------------     ------------------------------

Other income (expense):
   Interest income                                                 2,508          2,234              10,497          7,447
   Interest expense                                             (498,555)      (111,676)           (945,965)      (232,992)
   Warrant inducement expense                                   (230,709)             -            (230,709)             -
   Other                                                               -              -                (470)        (1,300)
                                                         -------------------------------     ------------------------------
          Other income (expense)                                (726,756)      (109,442)         (1,166,647)      (226,845)
                                                         -------------------------------     ------------------------------

Loss and comprehensive loss for the period                    (1,605,462)      (382,625)         (2,729,038)    (1,029,901)
Accrued dividends on the Series D and EE Preferred stock         (32,926)       (42,585)            (66,634)       (85,685)
                                                         -------------------------------     ------------------------------
Loss attributable to common stockholders                      (1,638,388)      (425,210)         (2,795,672)    (1,115,586)
                                                         ===============================     ==============================
Loss per common share - basic and diluted                          (0.01)         (0.00)              (0.01)         (0.01)
                                                         ===============================     ==============================

Weighted average common shares outstanding                   205,997,409    175,260,876         203,379,113    175,208,630
                                                         ===============================     ==============================
</TABLE>

See notes to interim consolidated financial statements.

                                       4
<PAGE>


e.Digital Corporation and subsidiary

                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (UNAUDITED)


<TABLE>
<CAPTION>
                                                                           For the six months ended
                                                                                September 30
                                                                              2006          2005
                                                                                          Restated
OPERATING ACTIVITIES                                                           $              $
                                                                           ----------    ----------
<S>                                                                        <C>           <C>
Loss for the period                                                        (2,729,038)   (1,029,901)
Adjustments to reconcile loss to net cash used in operating activities:
     Depreciation and amortization                                             27,812        32,043
     Accrued interest and accretion relating to secured promissory notes       56,250        56,250
     Value assigned to inducement warrants                                    230,709            --
     Amortization of interest on warrants issued in connection with the
         12% convertible subordinated promissory notes                        784,378       118,076
     Stock-based compensation                                                 104,968            --
Changes in assets and liabilities:
     Accounts receivable, trade                                                 2,414        31,016
     Inventory                                                                (46,565)           --
     Prepaid expenses and other                                               (27,340)      427,433
     Accounts payable, trade                                                  256,742        85,998
     Other accounts payable and accrued liabilities                           (61,372)       78,057
     Customer deposits                                                         76,185      (666,610)
     Accrued employee benefits                                                  3,289       (15,937)
     Deferred revenue                                                              --       (16,668)
                                                                           ----------    ----------
Cash (used in) operating activities                                        (1,321,568)     (900,244)
                                                                           ----------    ----------

FINANCING ACTIVITIES
Payment on 15% Unsecured Note                                                  (9,580)       (8,540)
Proceeds from exercise of warrants                                            903,638            --
                                                                           ----------    ----------
Cash (used in) provided by financing activities                               894,058        (8,540)
                                                                           ----------    ----------
Net increase (decrease) in cash and cash equivalents                         (427,510)     (908,784)
                                                                           ----------    ----------
Cash and cash equivalents, beginning of period                              1,058,723     1,289,253
                                                                           ----------    ----------
Cash and cash equivalents, end of period                                      631,213       380,469
                                                                           ==========    ==========

Supplemental Disclosures of Cash Flow Information:
   Cash paid during the period for interest and debt expense                  105,337        58,666
Supplemental schedule of noncash investing and financing activities:
   Deemed dividends on Series D and EE preferred stock                         66,634        85,685
   Discount on 12% Convertible Subordinated Promissory Notes                       --       120,062
   Stock based compensation expense                                           104,968            --
   Value assigned to inducement warrants                                      230,709            --
   Common stock issued on conversion of preferred stock                       143,305       905,823
</TABLE>

See notes to interim consolidated financial statements.

                                       5
<PAGE>

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
e.Digital Corporation is a holding company that operates through a wholly-owned
California subsidiary of the same name and is incorporated under the laws of
Delaware. The Company provides engineering services, product reference designs
and technology platforms to customers focusing on the digital video/audio and
player/recorder markets. The Company has innovated a proprietary secure digital
video/audio technology platform ("DVAP") and produces the eVU(TM) mobile
entertainment device for the travel and recreational industries. The Company
also believes it has a potentially important portfolio of patents for licensing
related to the use of flash memory in portable devices.

These unaudited consolidated financial statements have been prepared by
management in accordance with accounting principles generally accepted in the
United States and with the instructions to Form 10-Q and Article 10 of
Regulation S-X on a going concern basis, which contemplates the realization of
assets and the discharge of liabilities in the normal course of business for the
foreseeable future. These interim consolidated financial statements do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, the unaudited consolidated financial statements
reflect all adjustments considered necessary for a fair statement of the
Company's financial position at September 30, 2006, and the results of
operations and cash flows for the periods presented, consisting only of normal
and recurring adjustments. All significant intercompany transactions have been
eliminated in consolidation. Operating results for the three and six months
ended September 30, 2006 are not necessarily indicative of the results that may
be expected for the fiscal year ending March 31, 2007. For further information,
refer to the Company's consolidated financial statements and footnotes thereto
for the year ended March 31, 2006 filed on Form 10-K.

The Company has incurred significant losses and negative cash flow from
operations in each of the last three years and has an accumulated deficit of
$79,919,438 at September 30, 2006. At September 30, 2006, the Company had a
working capital deficiency of $3,768,109. Substantial portions of the losses are
attributable to marketing costs for new technology and substantial expenditures
on research and development of technologies. The Company's operating plans
require additional funds that may take the form of debt or equity financings.
There can be no assurance that any additional funds will be available. The
Company's ability to continue as a going concern is in substantial doubt and is
dependent upon achieving a profitable level of operations and obtaining
additional financing.

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

There can be no assurance the Company can successfully accomplish these steps
and it is uncertain it will achieve a profitable level of operations and obtain
additional financing. There can be no assurance that any additional financings
will be available to the Company on satisfactory terms and conditions, if at
all. In the event the Company is unable to continue as a going concern,
management may elect or be required to seek protection from creditors by filing
a voluntary petition in bankruptcy or may be subject to an involuntary petition
in bankruptcy. To date, management has not considered this alternative, nor does
management view it as a likely occurrence.

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

2. RECENT ACCOUNTING PRONOUNCEMENTS
On September 13, 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. ("SAB 108") which provides interpretive guidance
on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement. The guidance is
applicable for our fiscal 2007. We are not yet in a position to determine what,
if any, effects SAB No. 108 will have on our financial statements.




                                       6
<PAGE>

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

In December 2004, the Financial Accounting Standards Board ("FASB") finalized
Statement of Financial Accounting ("SFAS") No. 123(R), "Share-Based Payment,"
which requires companies to measure and recognize compensation costs for all
share-based payments (including stock options) at fair value, effective for
interim or annual periods beginning after June 15, 2005. On April 15, 2005, the
SEC announced a deferral of the effective date of SFAS No. 123(R) until the
first interim or annual reporting period of the first fiscal year beginning on
or after June 15, 2005. Effective April 1, 2006, the Company adopted the
provisions of SFAS No. 123(R) as discussed in Footnote 4, Stock-Based
Compensation.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets (SFAS No. 156). SFAS No. 156 amends SFAS No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," to require all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable.
SFAS No. 156 also permits servicers to subsequently measure each separate class
of servicing assets and liabilities at fair value rather than at the lower of
cost or market. For those companies that elect to measure their servicing assets
and liabilities at fair value, SFAS No. 156 requires the difference between the
carrying value and fair value at the date of adoption to be recognized as a
cumulative effect adjustment to retained earnings as of the beginning of the
fiscal year in which the election is made. SFAS No. 156 is effective for the
first fiscal year beginning after September 15, 2006. The Company is evaluating
the potential impact, if any, that the adoption of SFAS 156 will have on its
financial statements.

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

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

3. LOSS PER SHARE
Stock options, warrants and convertible preferred stock exercisable into
35,760,779 shares of common stock were outstanding as at September 30, 2006.
These securities were not included in the computation of diluted loss per share
because they are antidilutive, but they could potentially dilute earnings per
share in future periods.

The loss attributable to common stockholders was increased during the six months
ended September 30, 2006 and 2005 by accrued dividends of $66,634 and $85,685,
respectively. The loss attributable to common stockholders was increased during
the three months ended September 30, 2006 and 2005 by accrued dividends of
$32,929 and $42,585, respectively.

4. STOCK -BASED COMPENSATION
The Company has adopted stock plans as summarized in Note 8 below. The Company
adopted SFAS No. 123 (Revised 2004), "Share -Based Payment", effective April 1,
2006. SFAS 123R requires the recognition of fair value of stock compensation as
an expense in the calculation of net income. The Company recognizes stock
compensation expense ratably over the vesting period of individual option
grants. The Company has no awards with market or performance conditions. All
stock compensation recorded during the period ended September 30, 2006 has been
accounted for as an equity instrument. Prior to April 1, 2006 the Company
followed the Accounting Principles Board ("APB") Opinion 25, "Accounting for
Stock Issued to Employees", and related interpretations for stock compensation.





                                       7
<PAGE>

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

The Company's employee stock options have various restrictions that reduce
option value, including vesting provisions and restrictions on transfer, among
others, and are often exercised prior to their contractual maturity. The Company
plans to issue shares on each option exercise and has no plans to repurchase
option shares. Under the provisions of SFAS 123R the Company recorded $48,531
and $104,968 of stock compensation expense in its unaudited Statement of
Operations for the three and six months ended September 30, 2006, respectively.
A total of $34,588 and $66,021 was included in selling and administrative costs
and $13,943 and $38,947 was included in research and related expenditures for
the three and six months ended September 30, 2006, respectively. A total of
$47,237 and $103,674 for the three and six months ended September 30, 2006,
respectively, of this expense relates to prior year awards vesting after April
1, 2006. For both the three and six months ended September 30, 2006, $1,294
relates to options granted after the adoption of SFAS 123R as there were no
option grants in the first quarter. The weighted-average estimated fair value of
unvested options was $0.07 at April 1, 2006 and the weighted-average estimated
fair value of options granted during the three months ended September 30, 2006
(no options were granted in the first quarter) was $0.08 per share, using the
Black-Scholes option pricing model with the following weighted average
assumptions (annualized percentages):

                                                      Three
                                                   Months Ended
                                                September 30, 2006
--------------------------------------------------------------------------------
         Volatility                                    93.0%
         Risk-free interest rate                        5.1%
         Forfeiture rate                                5.0%
         Dividend yield                                 0.0%
         Expected life in years                         3.0

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

As the amount of share-based compensation expense recognized is based on awards
ultimately expected to vest, it is reduced for estimated forfeitures. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Pre-vesting forfeitures were estimated to be approximately 5% in the
second quarter of fiscal 2007 based on historical experience. Under the
provisions of SFAS 123R, the Company will record additional expense if the
actual forfeiture rate is lower than estimated, and will record a recovery of
prior expense if the actual forfeiture is higher than estimated. In the
Company's pro forma information required under SFAS 123 for the periods prior to
fiscal 2007, the Company accounted for forfeitures as they occurred.

Since the Company has a net operating loss carryforward as of September 30,
2006, no excess tax benefit for the tax deductions related to stock-based awards
was recognized for the three and the six months ended September 30, 2006.
Additionally, no incremental tax benefits were recognized from stock options
exercised in the three and six months ended September 30, 2006 which would have
resulted in a reclassification to reduce net cash provided by operating
activities with an offsetting increase in net cash provided by financing
activities.



                                       8
<PAGE>

As of September 30, 2006 total estimated compensation cost of options granted
but not yet vested was approximately $247,000 and is expected to be recognized
over the weighted average period of 1.4 years.

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

<TABLE>
<CAPTION>
                                                                                 Three Months     Six Months
                                                                                    Ended           Ended
                                                                                September 30,  September 30,
                                                                                     2005           2005
---------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>            <C>
Net loss attributable to common shareholders                                      $(425,210)    $(1,115,586)
Plus: Stock-based employee compensation expense included in reported net loss           -               -
Less:  Total stock-based employee compensation expense determined using
           fair value based method                                                    39,440          77,147
---------------------------------------------------------------------------------------------------------------
Pro forma net loss attributable to common stockholders                            $(464,650)    $(1,192,733)
---------------------------------------------------------------------------------------------------------------
Net loss per common share - basic and diluted - pro forma                            ($0.00)         ($0.01)
---------------------------------------------------------------------------------------------------------------
Net loss per common share - basic and diluted - as reported                          ($0.00)         ($0.01)
---------------------------------------------------------------------------------------------------------------
</TABLE>

During the three and six months ended September 30, 2005, under APB 25, the
Company estimated the fair value of each stock award at the grant date by using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2005: dividend yield of zero percent for each
period; expected volatility of 76 percent; risk-free interest rates of 3.02
percent; and expected life of 2.5 years.

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

5. OPTIONS AND WARRANTS
Options
The Company has stock options outstanding under two stock option plans. The 1994
Stock Option Plan entitled certain directors, key employees and consultants of
the Company to purchase common shares of the Company. The 1994 Plan covered a
maximum aggregate of 14,000,000 shares, as amended and expired on August 18,
2004. At September 30, 2006 there were options outstanding on 3,686,666 common
shares pursuant to the 1994 Plan.

The 2005 Equity-Based Compensation Plan was approved by the stockholders on
August 5, 2005 and covers a maximum of 10,000,000 common shares. The Company may
grant incentive options, nonstatutory options, stock appreciation rights or
restricted stock awards to employees, directors or consultants. At September 30,
2006 there were options outstanding on 7,340,000 common shares pursuant to the
2005 Plan with options on 2,660,000 shares available for future grant under the
2005 Plan.

The following table summarizes stock option activity for the period:


                                                                Weighted average
                                            Shares               exercise price
                                               #                        $
--------------------------------------------------------------------------------
Outstanding March 31, 2006               11,071,666                  0.1885
Granted                                     150,000                  0.1450
Canceled/expired                           (195,000)                 0.7595
Exercised                                         -                     -
--------------------------------------------------------------------------------
Outstanding September 30, 2006           11,026,666                  0.1778
--------------------------------------------------------------------------------
Exercisable at September 30, 2006         6,123,330                  0.2050
--------------------------------------------------------------------------------



                                       9
<PAGE>

Options outstanding are exercisable at prices ranging from $0.09 to $1.03 and
expire over the period from 2006 to 2011 with an average life of 3.6 years.

Subsequent to September 30, 2006, the Company granted four year options on up to
750,000 shares exercisable at $0.16 per share to an intellectual property
consultant assisting in monetizing the Company's patent portfolio. A total of
100,000 options vested at grant and the balance are performance based vesting
only on the achievement of milestones including significant patent license fees.

Share warrants
The following table summarizes information about warrant activity during the
period ended September 30, 2006:

                                                                Weighted average
                                             Shares              exercise price
                                                #                       $
--------------------------------------------------------------------------------
Outstanding March 31, 2006                14,082,500                  0.09
Warrants issued                            2,331,572                  0.15
Warrants canceled/expired                          -                    -
Warrants exercised                       (10,880,250)                 0.09
--------------------------------------------------------------------------------
Outstanding September 30, 2006             5,533,822                  0.11
--------------------------------------------------------------------------------

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

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

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

During the period ended September 30, 2006 a total of 1,437,500 other warrants
were exercised for cash proceeds of $99,000 and debt reduction of $16,000. No
inducement was granted in connection with these warrant exercises. The Company
has outstanding share warrants as of September 30, 2006, granted in connection
with private placements entitling the holders to purchase one common share for
each warrant held as follows (subject to certain future antidilution price
protection):

<TABLE>
<CAPTION>
                Number of Exercise Price
Description            Common Shares        Per Share $            Expiration Date
-----------------------------------------------------------------------------------
<S>             <C>                         <C>                  <C>
Warrant                      200,000               0.08              June 30, 2007
Warrant                    2,846,000               0.08          November 30, 2007
Warrant                       78,125               0.10          February 28, 2009
Warrant                       78,125               0.09           February 4, 2007
Warrant                    2,331,572               0.15            August 31, 2009
-----------------------------------------------------------------------------------
Total                      5,533,822               0.11 Average
-----------------------------------------------------------------------------------
</TABLE>

6. PROMISSORY NOTES

12% Convertible Subordinated Promissory Notes
In October 2005, the Company's 12% Subordinated Promissory Notes were modified
by extending the maturity date to December 31, 2006 and to increase the maximum
allowable note amount from $1,000,000 to $1,500,000 and all $500,000 of
additional notes were sold. Noteholders acquiring 12% Subordinated Promissory
Notes on or after October 26, 2005 receive a royalty equal to (i) the principal
of the 12% Subordinated Promissory Note purchased divided by (ii) $500,000
multiplied by (iii) Twenty Dollars ($20.00) for each eVU device sold during the
calendar years of 2006, 2007 and 2008. The outstanding 12% Subordinated
Promissory Notes were also amended such that the principal amount was
convertible and on February 24, 2006 the conversion price was adjusted from
$0.19 per share to $0.08 per share pursuant to an antidilution adjustment. A
debt discount of $1,225,590 was recorded to reflect the value of the reduced
conversion price of the debt and the value of repricing 2,000,000 warrants and
is being amortized over the remaining term of the notes or accelerated on note
conversion. At September 30, 2006 the unamortized debt discount was $318,653.



                                       10
<PAGE>

In September 2006, $200,000 of notes were converted into 2,500,000 common
shares. The balances of $1.3 million of notes were convertible into 16,250,000
shares of common stock.

Unsecured Promissory Notes
At September 30, 2006 the Company had two 15% unsecured promissory notes
outstanding as follows:

<TABLE>
<CAPTION>
<C>                                                                             <C>
15% unsecured note, as amended effective June 30, 2006,
    principal and interest due at maturity on December 31, 2006                 $ 750,000
15% unsecured note, as restated effective June 30, 2006, monthly payments
   of $5,000 due with the balance of principal and interest due at maturity
   on December 31, 2006 (1)                                                       207,562
-----------------------------------------------------------------------------------------
                                                                                $ 957,562
-----------------------------------------------------------------------------------------
</TABLE>

(1)   In August 2006 a total of $105,062 of principal balance of this note was
      exchanged as the exercise price of warrants.

7. STOCKHOLDERS' EQUITY
The following table summarizes stockholders' equity transactions during the
six-month period ended September 30, 2006:

<TABLE>
<CAPTION>
                                      Preferred stock                Common stock           Additional                  Accumulated
                                                                                             Paid-in
                                   Shares         Amounts        Shares        Amounts       Capital      Dividends       Deficit
------------------------------- ------------    ------------  ------------   ------------  ------------  ------------  ------------
<S>                             <C>             <C>           <C>            <C>           <C>           <C>           <C>
Balance, March 31, 2006               98,500    $  1,210,000   200,431,000   $    200,431  $ 73,710,110  $   (402,305) $(77,172,095)

Accrued dividends on Series D
Preferred Stock                           --              --            --             --            --       (57,758)           --
Accrued dividends on Series EE
Preferred Stock                           --              --            --             --            --        (8,876)           --
Non-cash stock  based
compensation                              --              --            --             --       104,968            --            --
Conversion of Series EE
Preferred Stock                       (1,250)        125,000     1,791,313          1,791       141,514        18,305       (18,305)

Stock issued on exercise of
warrants                                  --              --    10,880,250         10,881       997,820            --            --

Stock issued on conversion of
debt                                      --              --     2,500,000          2,500       197,500            --            --

Value assigned to inducement
warrants                                  --              --            --             --       230,709            --            --

Loss for the period                       --              --            --             --            --            --    (2,729,038)
------------------------------- ------------    ------------  ------------   ------------  ------------  ------------  ------------
Balance, September 30, 2006           97,250       1,085,000   215,602,563   $    215,603  $ 75,382,621  $   (450,634) $(79,919,438)
------------------------------- ------------    ------------  ------------   ------------  ------------  ------------  ------------
</TABLE>

8. PREFERRED STOCK
Convertible Non-Redeemable Series D
On December 30, 2002, the Company issued 205,000 shares of 12% Series D
non-redeemable convertible preferred stock (the "Series D Stock") with a stated
value of $10 per share. Dividends of 12% per annum are payable, with certain
exceptions, either in cash or in shares of common stock at the Company's
election. The conversion price for each share of Series D Stock is $0.08 subject
to certain adjustments if the Company issues shares at prices lower than $0.08.
The Series D Stock shall be subject to automatic conversion on December 31,
2007. As of September 30, 2006 the 96,000 shares of the Series D Stock would
have been convertible into 17,400,986 shares common stock. The Series D stock
shall be subject to automatic conversion on December 31, 2007.



                                       11
<PAGE>

Subsequent to September 30, 2006 a total of 5,000 Series D shares were converted
into 907,123 shares of common stock.

Convertible Redeemable Series EE
On November 30, 2004, the Company issued 18,500 shares of 8% Series EE
Convertible Preferred Stock (the "Series EE Stock") at a per share price of $100
for an aggregate amount of $1,850,000. The Series EE Stock is redeemable in
certain instances at the Company's option upon the occurrence of certain
triggering events. Dividends of 8% per annum are payable, with certain
exceptions, either in cash or in shares of common stock at the election of the
company. The stated dollar amount of Series EE Stock is convertible into fully
paid and nonassessable shares of common stock at a conversion price $0.08 per
share, subject to certain adjustments if the Company issues shares at prices
lower than $0.08. At September 30, 2006, the 1,250 shares of Series EE Stock was
convertible into 1,799,313 shares of common stock. The Series EE Stock is
subject to automatic conversion on or about November 30, 2006 subject to certain
conditions.

9. LITIGATION
On May 12, 2006, the Company became aware of a complaint filed on May 4, 2006
against it and certain of officers and employees by digEcor, Inc., ("digEcor")
in the Third Judicial District Court of Utah, County of Salt Lake. The complaint
alleges breaches of contract, unjust enrichment, breaches of good faith and fair
dealing, fraud, negligent misrepresentation, and interference with prospective
economic relations. digEcor is seeking, among other things, an injunction to
prevent the Company from selling or licensing certain digital rights management
(DRM) technology "to any other party besides digEcor" and "from engaging in any
competition with digEcor until after 2009." digEcor is also seeking "actual
damages" of $793,750 and "consequential damages...not less than an additional
$1,000,000." The Company believes this action is related to a purchase order
placed in the normal course of business on November 11, 2005 for 1,250
digEplayers with contract manufacturer, Maycom Co., Ltd. ("Maycom"). Maycom was
paid progress payments with final payments made in full for the order by the
Company, and directly by digEcor, in March 2006. Maycom's failure to timely
deliver the order resulted in this complaint.

In August 2006 the Company filed a motion seeking to amend its response and
counterclaims including seeking an injunction against digEcor from manufacturing
and selling their planned next generation player based on alleged improper use
of the Company's confidential information.

In October 2006 the Company received delivery from Maycom of the delayed 1,250
unit order. The Company delivered these units to digEcor in November 2006. At
this time the Company does not believe reversal of the impairment charge of
$603,750 expensed to cost of revenues at the end of fiscal 2006 is appropriate
as delivery has not yet been accepted by digEcor and accordingly this would be a
gain contingency. The Company expects to recognize the revenue related to the
units and reverse the impairment charge upon acceptance of the units by digEcor.
Although this may not end the litigation, the Company believes the delivery of
these units removes the potential obligation to refund customer deposits and
reduces the likelihood of any other monetary damages.

The Company is unable to determine at this time the impact this complaint and
matter may have on its financial position or results of operation. At September
30, 2006 the Company had not recognized any revenue or costs related to products
associated with this order. The Company intends to seek restitution from Maycom
for any damages it may incur from this matter and the digEcor complaint though
recovery is not assured.

10. COMMITMENTS AND CONTINGENCIES
The Company depends on contract manufacturers 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, the Company's business, financial condition and
operating results may be materially and adversely affected. Any failure in
performance by either of these manufacturers for any reason could have a
material adverse affect on the Company's business. Production and pricing by
each such manufacturer is subject to the risk of price fluctuations and periodic
shortages of components. The Company does not have supply agreements with
component suppliers and, accordingly, it is dependent on the future ability of
its manufacturers to purchase components. Failure or delay by suppliers in
supplying necessary components could adversely affect the Company's ability to
deliver products on a timely and competitive basis in the future.



                                       12
<PAGE>

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

11. MAJOR CUSTOMERS AND SUPPLIERS
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products. Sales to two customer comprised 76% and
16% of revenue for the six months ended September 30, 2006. Sales to one
customer comprised 99% of revenue for the six months ended September 30, 2005.

12. INCOME TAX
At September 30, 2006, a 100% valuation allowance has been provided to offset
the net deferred tax assets arising from available net operating loss
carryforwards as management believes it is not more likely than not that the
deferred tax asset will be realized.

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

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

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

Cautionary Note on Forward Looking Statements

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

General
We are a holding company that operates through our wholly-owned California
subsidiary of the same name and is incorporated under the laws of Delaware. We
provide engineering services, product reference designs and technology platforms
to customers focusing on the digital video/audio and player/recorder markets. We
have innovated a proprietary secure digital video/audio technology platform
("DVAP") that can be applied to produce complex consumer electronic products. In
2003 our DVAP was applied to an in-flight entertainment ("IFE") device, the
digEplayer(TM), for one customer. To date, we have delivered over 9,250
digEplayers for airline use.

In December 2005 we announced our latest proprietary DVAP device, the eVU(TM)
mobile entertainment device. The rugged eVU features sharp images on a 7" high
resolution LCD screen, a 40 GB hard drive, high audio fidelity, dual stereo
headphone jacks, embedded credit card reader/processor, touch screen
capabilities, full feature graphical user interface, patent-pending hardware
security technology, and 10 hours of high resolution video playback on a single
battery charge. We also have the capability to add features and customize the
product for select customers.



                                       13
<PAGE>

Our primary strategy for future quarters is to produce branded eVU devices for
customer orders. eVU is targeted at business opportunities for secure hard
drive-based closed system video products loaded with desirable movie,
television, music, informational, and educational content, rented or provided to
customers. We are focused on U.S. and international companies in the healthcare,
military, and travel and leisure industries who desire to brand and market eVU
to consumers at their facilities. We have developed logistic and secure content
solutions to enable customers to rapidly deploy, operate and maintain eVUs for
target customers. In addition to offering eVUs for sale we expect to provide eVU
solutions on a periodic payment program. We commenced initial eVU deliveries to
select target customers in the first fiscal quarter and commercial quantities
are expected to ship in the third fiscal quarter of 2007.

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

In October 2006 we received delivery from our contract manufacturer, Maycom Co.,
Ltd. ("Maycom") of the delayed 1,250 unit digEplayer order as further described
in Note 9 to our interim statements above. At this time we do not believe
reversal of the impairment charge of $603,750 expensed to cost of revenues at
the end of fiscal 2006 is appropriate as delivery has not yet been accepted by
digEcor and accordingly this would be a gain contingency. We expect to recognize
the revenue related to the units and reverse the impairment charge upon
acceptance of the units by digEcor. Although this may not end the litigation, we
believe the delivery of these units removes the potential obligation to refund
customer deposits and reduces the likelihood of any other monetary damages.

As of the date of this report we had an order backlog of approximately $1.0
million for eVU units and accessories. We believe the majority of the backlog
will ship to customers in the third quarter ending December 31, 2006. Backlog
orders are subject to modification, cancellation or rescheduling by our
customers. Future shipments may also be delayed due to production delays,
component shortages and other production and delivery related issues.

Overall Performance
We have incurred significant operating losses and negative cash flow from
operations in the current period and in each of the last three fiscal years and
these losses have been material. We have an accumulated deficit of $79,919,438
and a working capital deficit of $3,768,107 at September 30, 2006. Our operating
plans require additional funds which may take the form of debt or equity
financings. There can be no assurance that any additional funds will be
available to our company on satisfactory terms and conditions, if at all. Our
company's ability to continue as a going concern is in substantial doubt and is
dependent upon achieving a profitable level of operations and obtaining
additional financing.

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

         For the six months ended September 30, 2006:

      o     Our revenues were $34,122. Sales to two customer accounted for 76%
            and 16% of our revenues and our results have been highly dependent
            on the timing and quantity of eVU orders by this customer and the
            potential of other airline customers. At September 30, 2006 we had
            approximately $0.8 million of orders in production for this customer
            but delivery by our contractor is behind schedule and not assured
            (See Note 9. Litigation, above). Although we expect growing orders
            for eVU players in future quarters we do not expect future
            digEplayer orders selected for a replacement product. The failure to
            obtain eVU orders or delays of future orders could have a material
            impact on our operations.

      o     We recorded a gross profit of $4,912 compared to a gross profit of
            $582,573 for the six months of 2006. Gross profit decreased due to
            the decrease in product being completed and shipped and the digEcor
            litigation that has hindered the closing of the volume eVU orders.
            We anticipate improved margins once product is in full production
            with our contract manufacturer.



                                       14
<PAGE>

      o     Operating expenses were $1.6 million, an increase from $1.4 million
            for the first six months of 2006 consisting primarily from the
            adoption of SFAS 123R in which the company recognized approximately
            $105,000 as stock-based compensation expense and approximately
            $101,000 for preproduction costs incurred in the development of the
            eVU product.

      o     Other income and expenses were a net expense of $1.2 million
            consisting primarily of non-cash interest of $0.8 million related to
            amortization of warrants issued with debt and $0.2 million as
            warrant inducement expense.

      o     Our net loss increased to $ 2.8 million from $1.1 million for the
            prior six months ended September 30, 2005.

Our monthly cash operating costs have been on average approximately $220,000 per
month for the period ending September 30, 2006. However, we may increase
expenditure levels in future periods to support and expand our revenue
opportunities and continue advanced product and technology research and
development. The introduction of the eVU will also require additional
expenditures, the amount and timing not currently estimable by management.
Accordingly, our losses are expected to continue until such time as we are able
to realize revenues and margins sufficient to cover our costs of operations. We
may also face unanticipated technical or manufacturing obstacles and face
warranty and other risks in our business See Part II, Item 1A (Risk Factors)
below.

Critical Accounting Policies

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

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

Results of Operations
Six months ended September 30, 2006 compared to six months ended September 30,
2005

For the six months ended September 30, 2006, we reported total revenues of
$34,122, a 99% decrease from total revenues of $2,988,348 for the six months of
fiscal 2006. Product revenues for six months ending September 30, 2006 were also
$34,122, a 99% decrease from product revenues of $2,949,749 for the six months
ending September 30, 2005. The decrease in product revenue for the first six
months ending September 30, 2006, resulted from the digEplayer order delay
described further in Note 9 above, no new orders for digEplayers and no
significant revenues from eVU due to its very recent introduction. We expect
growing orders for eVU players in future quarters but do not expect future
digEplayer orders as our customer has announced an alternative supplier has been
selected for a replacement product.

We had no service revenues for the six months ended September 30, 2006 as we
focused on our internally developed eVU product. We had services revenues of
$38,599 for the comparable six months of the prior year.

Cost of sales includes manufacturing costs for products sold, operation costs
associated with product support and other costs associated with the delivery of
engineering support and services. Cost of sales for the six months ended
September 30, 2006 consisted of $29,210 of product costs and $0 of service
costs, consisting primarily of manufacturing costs associated with the
production of in-flight entertainment devices that were shipped in the period.
Cost of sales for the six months ended September 30, 2005 consisted of
$2,400,900 of product costs and $4,875 of service costs, consisting mostly of
research and development labor funded in part by OEM development agreements.



                                       15
<PAGE>

Gross profit for the first six months of fiscal 2007 was $4,912 compared to a
gross profit of $582,573 for the first six months of fiscal 2006. Gross profit
as a percent of sales for the first six months of fiscal 2007 was 14% compare to
19.5% for the same period last year. Gross profit percentage is highly dependent
on sales, price, volume, purchasing costs and overhead allocations. Gross
margins may vary significantly from period to period. At the present time,
warranty costs are not significant.

Selling, general and administrative expenses include payroll, employee benefits,
and other costs associated with finance, customer support functions, facilities,
stock-based compensation and depreciation expenses. Selling, general and
administrative costs for the six months ended September 30, 2006, was $813,054
compared to $735,384 for the first six months of fiscal 2006. The increase of
$77,670 can be attributed to an increase of stock-based compensation expense of
$66,021. Recent quarterly selling and administrative expenses have been
relatively constant as we maintained staffing levels and had no significant
outside selling costs. However in the future we may incur additional legal costs
associated with current litigation and additional costs to comply with Section
404 of the Sarbanes-Oxley Act. We anticipate quarterly selling and
administrative expenses to be constant as we are focused on business customer
opportunities.

Research and development expenses include payroll, employee benefits, and other
costs associated with product development. Research and development expenses
also include third-party development and programming costs. Research and related
expenditures for the six months ended September 30, 2006 were $754,249, as
compared to $650,244 for the six months ended September 30, 2005. The increase
of $104,005 can be attributed to the increase in preproduction costs of
$101,369, an increase of $15,775 in personnel and related costs offset by a
decrease of $24,905 for consulting and professional services. Research and
development costs are subject to significant quarterly variations depending on
the use of outside services, the assignment of engineers to development
projects, reimbursement by OEM contracts and the availability of financial
resources.

We reported an operating loss of $1,562,391 for the six months ended September
30, 2006 as compared to an operating loss of $803,056 for the six months ended
September 30, 2005. The increase in operating loss resulted from the decrease in
gross profit for the six month period and by the increase of $759,335 in
operating expenses. We believe, but we cannot guarantee, that our strategy of
investing in digital video/audio platform developments with supply or royalty
provisions will provide positive margins in future periods. The timing and
amount of product sales and the recognition of contract service revenues impact
our operating losses. Accordingly, there is uncertainty about future operating
results and the results for the six months are not necessarily indicative of
operating results for future periods or the fiscal year.

We reported a loss for the six months of the current fiscal year of $2,729,038
as compared to a loss of $1,029,901 for the prior year's six months. For the six
months ended September 30, 2006, we incurred interest expense of $945,965 as
compared to $232,992 for the comparable period in the prior year. This included
non-cash amortization of debt discount of $784,378 and $118,076 for the six
months ended September 30, 2006 and 2005, respectively. We also recorded a
warrant inducement expense for $230,709 representing the fair value of the
2,331,572 New Warrants issued as an inducement for early exercise.

The loss available to common stockholders for the six months ended September 30,
2006 and 2005 was $2,795,672 and $1,115,586 respectively. Included in the loss
available to common stockholders for the six months ending September 30, 2006
and 2005 was accrued dividends of $66,634 and $85,685 respectively on preferred
stock.

Three months ended September 30, 2006 compared to six months ended September 30,
2005

For the second quarter of fiscal 2007, we reported total revenues of $13,017 a
99% decrease from total revenues of $1,990,139 for the second quarter of fiscal
2006. Product revenues for the quarter ending September 30, 2006 decreased to
$13,017 compared to $1,984,019 for the second quarter ending September 30, 2005.

Service revenues for the second quarter of fiscal 2007 were $0 compared to
$6,120 for the comparable period of the prior year.

Cost of sales for the three months ended September 30, 2006 consisted of $12,598
of product costs primarily for manufacturing costs associated with the
production of in-flight entertainment devices that were shipped in the period.
Cost of sales for the three months ended September 30, 2005 consisted of
$1,578,258 of product costs and $0 of service costs.



                                       16
<PAGE>

Gross profit for the second quarter of fiscal 2007 was $419 compared to a gross
profit of $411,881 for the second quarter of fiscal 2006. Gross profit as a
percent of sales for the first quarter of fiscal 2007 was 3% compared to 21% for
the same period last year.

Selling, general and administrative costs for the three months ended September
30, 2006, was $477,485 compared to $396,740 for the second quarter of fiscal
2006. The $80,745 increase can be attributed to an increase of $34,588 for
stock-based compensation expense, an increase of $162,968 in legal and
accounting costs offset by a decrease of $36,671 in personnel and related costs
and a decrease of $105,535 in shareholder relations due to the timing of the
annual shareholders meeting.

Research and related expenditures for the three months ended September 30, 2006
were $401,640, as compared to $288,323 for the three months ended September 30,
2005. The increase of $113,317 can be attributed to the increase of $56,850 in
preproduction costs associated with the eVU production units, an increase of
$13,943 in stock-based compensation costs and an increase of $41,647 for
consulting and professional services.

We reported an operating loss of $878,706 for the three months ended September
30, 2006, as compared to an operating loss of $273,183 for the three months
ended September 30, 2005. The 222% increase in operating loss resulted primarily
from the decrease of revenue and the increase in total operating expense.

We reported interest expense of $498,555 for the three months ended September
30, 2006 versus $111,676 for the prior comparable period. This included non-cash
amortization of debt discount of $416,700 and $60,031 for the three months ended
September 30, 2006 and 2005, respectively. We also recorded a warrant inducement
expense for $230,709 representing the fair value of the 2,331,572 New Warrants
issued as an inducement for early exercise.

We reported a loss for the second quarter of fiscal 2007 of $1,605,462 as
compared to a loss of $382,625 for the prior second quarter of fiscal 2006. The
loss attributable to common stockholders for the three months ended September
30, 2006 and 2005 was $1,638,388 and $425,210, respectively. Included in the
loss available to common stockholders for the period ending September 30, 2006
were accrued dividends on the preferred stock of $32,926. Included in the loss
available to Common Stockholders for the period ending September 30, 2005 were
accrued dividends on the preferred stock of $42,585.

Liquidity and Capital Resources
At September 30, 2006, we had a working capital deficit of $3,768,107 compared
to a working capital deficit of $2,516,367 at March 31, 2006. Cash used in
operating activities for the six month period ended September 30, 2006 was
$1,321, 568 resulting primarily from the $2,729,037 loss for the period, a
decrease of $2,414 in accounts receivable, an increase of $27,340 in prepaid
expenses, an increase of $46,565 in inventory, an increase of $256,742 in
accounts payable, a decrease of $61,372 in other accounts payable and accrued
liabilities and an increase of $76,185 in customer deposits.

During the six months ended September 30, 2006, the Company purchased no
additional property and equipment.

For the six months ended September 30, 2006 and 2005, cash provided by and used
in financing activities was $894,058 and $8,540, respectively with cash provided
from the exercise of warrants and used for principal payments on notes.

At September 30, 2006, we had a minimal amount in accounts receivable as
compared to $2,670 at March 31, 2006. The decrease in receivables can be
attributed to the Company's policy to grant payment upon receipt terms to our
customers. Receivables can vary dramatically due to the timing of product
shipments and contract arrangements on development agreements.

At September 30, 2006, we had cash and cash equivalents of $631, 213. Other than
cash and cash equivalents, we have no material unused sources of liquidity at
this time. We have no material commitments for capital expenditures or
resources. Based on our cash position and assuming currently planned
expenditures and level of operation, we believe we will require approximately
$1.5 million of additional funds for the next twelve months of operations. We
will also be required to renegotiate the terms or make payments on our 15%
unsecured debt of approximately $1.1 million due at December 31, 2006 and our
$1.3 million of convertible debt if it is not converted prior to maturity at
December 31, 2006. However, actual results could differ significantly from
management plans. We believe we may be able to obtain some additional funds from
future product margins from product sales but actual future margins to be
realized, if any, and the timing of shipments and the amount and quantities of
shipments, orders and reorders are subject to many factors and risks, many
outside our control. Accordingly we will need to seek equity or debt financing
in the next twelve months for working capital and we may need to seek equity or
debt financing for payment of existing debt obligations and other obligations
reflected on our balance sheet.



                                       17
<PAGE>

There can be no guarantee that we will be able to raise additional equity or
debt financing, if required, and/or renegotiate the terms of debts as they
arise. We may also require additional capital to finance future developments and
improvements to our technologies or develop new technologies.

Should additional funds not be available, we may be required to curtail or scale
back staffing or operations. Failure to obtain additional financings will have a
material adverse affect on our Company. Potential sources of such funds include
exercise of outstanding warrants and options, or debt financing or additional
equity offerings. However, there is no guarantee that warrants and options will
be exercised or that debt or equity financing will be available when needed. Any
future financing may be dilutive to existing stockholders.

As of September 30, 2006, our contractual obligations and commercial commitments
are summarized below:

<TABLE>
<CAPTION>
                                                      Less than 1
Cash Contractual Obligations by Period     Total          year     1 - 2 years  2 - 3 years  Over 3 years
<S>              <C>                     <C>          <C>          <C>          <C>          <C>
12% Subordinated Convertible
Promissory Notes (1)                     $1,339,000   $1,339,000   $       --   $       --   $       --

15% Unsecured Promissory Notes (2)          993,471      993,471           --           --           --

Operating Lease (3)                         358,262       34,834      144,253      153,038       26,137
                                         ----------   ----------   ----------   ----------   ----------
Total cash obligations                   $2,690,733   $2,367,305   $  144,253   $  153,038   $   26,137

                                         ==========   ==========   ==========   ==========   ==========
</TABLE>

1     Includes estimated interest to maturity at December 31, 2006 and that the
      notes are not converted to common stock.
2     Includes two 15% unsecured notes and estimated future interest payments to
      maturity at December 31, 2006.
3     Office sublease agreement.

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

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

In March 2006, we entered into a sixty-two month lease, commencing June 1, 2006,
for approximately 4,800 square feet at 16770 West Bernardo Drive, San Diego,
California with an aggregate payment of $5,805 excluding utilities and costs.
The aggregate payments adjust annually with maximum aggregate payments totaling
$6,535 in the fifty-first through the sixty-second month.

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

Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse changes in market prices,
including interest rate risk and other relevant market rate or price risks.



                                       18
<PAGE>

Our exposure to market risk for changes in interest rates relates primarily to
our investment in cash and cash equivalents of $631,213 and our debt of
$2,257,562, consisting of accrued interest, the 15% Unsecured Note and the 12%
Convertible Subordinated Promissory Notes. We do not use derivative financial
instruments in our investment portfolio and due to the nature of our
investments, do not expect our operating results or cash flows to be
significantly affected by potential changes in interest rates. At September 30,
2006, the market value of these investments, which were all classified as cash
and cash equivalents and certificate of deposit, and debt approximated cost.

Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) that are designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Interim Chief Accounting
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.

We carried out an evaluation under the supervision and with the participation of
management, including our Chief Executive Officer and Interim Chief Accounting
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of September 30, 2006, the end of the period covered
by this report. Based on that evaluation, our Chief Executive Officer and
Interim Chief Accounting Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level as of September 30,
2006.

There have been no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
quarter ended September 30, 2006 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

In our Annual Report on Form 10-K at March 31, 2006 we disclosed a material
weakness related to closing our general ledger and the preparation of our Form
10-Q for the quarter ended September 30, 2005 that resulted in a restatement. We
believe we have implemented actions to address the deficiency and to enhance the
reliability and effectiveness of our control procedures.

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

PART II.       OTHER INFORMATION

Item 1. Legal Proceedings
On May 12, 2006, we became aware of a complaint filed on May 4, 2006 against us
and certain of our officers and employees by digEcor, Inc., in the Third
Judicial District Court of Utah, County of Salt Lake. The complaint alleges
breaches of contract, unjust enrichment, breaches of good faith and fair
dealing, fraud, negligent misrepresentation, and interference with prospective
economic relations. digEcor is seeking, among other things, an injunction to
prevent us from selling or licensing certain digital rights management (DRM)
technology "to any other party besides digEcor" and "from engaging in any
competition with digEcor until after 2009." digEcor is also seeking "actual
damages" of $793,750 and "consequential damages...not less than an additional
$1,000,000." We believe this action is related to a purchase order placed in the
normal course of business on November 11, 2005 for 1,250 digEplayers with
contract manufacturer. Maycom was paid progress payments with final payments
made in full for the order by the Company, and directly by digEcor, in March
2006. Maycom's failure to timely deliver the order resulted in this complaint.



                                       19
<PAGE>

In August 2006 we filed a motion seeking to amend our response and counterclaims
including seeking an injunction against digEcor from manufacturing and selling
their planned next generation player based on alleged improper use of the
Company's confidential information.

In October 2006 we received delivery from Maycom of the delayed 1,250 unit
order. We delivered these units to digEcor in November 2006. At this time we do
not believe reversal of the impairment charge of $603,750 expensed to cost of
revenues at the end of fiscal 2006 is appropriate as delivery has not yet been
accepted by digEcor and accordingly this would be a gain contingency. We expect
to recognize the revenue related to the units and reverse the impairment charge
upon acceptance of the units by digEcor. Although this may not end the
litigation, we believe the delivery of these units removes the potential
obligation to refund customer deposits and reduces the likelihood of any other
monetary damages.

We are unable to determine at this time the impact this complaint and matter may
have on our financial position or results of operation. At September 30, 2006 we
had not recognized any revenue or costs related to products associated with this
order. We intend to seek restitution from Maycom for any damages we may incur
from this matter and the digEcor complaint though recovery is not assured. At
March 31, 2006 we recorded an impairment charge of $603,750 to expense as cost
of revenues the value of deposits made to Maycom that became impaired as a
result of Maycom's nonperformance.

Item 1A. Risk Factors
Set forth below and elsewhere in this report and in other documents we file with
the SEC are risks and uncertainties that could cause our actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this report and other public statements we make. See
"Cautionary Note on Forward Looking Statements" within this document. If any of
the following risks actually occurs, our business, financial condition, or
results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment.

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

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

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

Financial Risks

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

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:

      o     Market acceptance of our products by business customers and end
            users
      o     Uncertainties with respect to future customer product orders, their
            timing and the margins to be received, if any
      o     Fluctuations in operating costs
      o     Changes in research and development costs
      o     Changes in general economic conditions


                                       20
<PAGE>

      o     Changes in technology
      o     Short product lifecycles

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

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

      o     Finance working capital requirements
      o     Pay for increased operating expenses or shortfalls in anticipated
            revenues
      o     Fund research and development costs
      o     Develop new technology, products or services
      o     Respond to competitive pressures
      o     Support strategic and industry relationships
      o     Fund the production and marketing of our products and services

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

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

Risks Related to Sales, Marketing and Competition

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



                                       21
<PAGE>

We Rely on a Limited Number of Customers for Revenue. Historically, a
substantial portion of our revenues have been derived primarily from a limited
number of customers. One customer accounted for approximately 100% of revenues
for the period ended September 30, 2006. We do not expect future orders from
digEcor, and if we are unable to obtain sufficient new customers for our new eVU
product, reduced sales may have a material adverse effect on our operations. In
May 2006, the company and certain of its officers were sued by digEcor. We are
unable to determine at this time the impact this litigation and matter may have
on our financial position or results of operations.

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

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

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

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

Risks Related to Operations

We Depend On a Limited Number of Contract Manufacturers and Suppliers and Our
Business Has Been and Will Be Harmed By Any Interruption of Supply or Failure of
Performance. We rely on two suppliers for manufacturing the digEplayer and eVU
products. We do not currently anticipate future production of the digEplayer
product. We depend on our contract manufacturers 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. Failure to
timely deliver by our digEplayer supplier has had a significant impact on our
operations as further described in our interim financial statements.



                                       22
<PAGE>

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

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

Risks Related to Intellectual Property and Government Regulation

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

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.



                                       23
<PAGE>

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

Risks Related to Trading in Our Common Stock

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

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

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

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

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



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<PAGE>

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

(a)  The following equity securities were sold by the Company during the quarter
     that were not registered under the Securities Act and not previously
     reported on Form 8-K:

(b)  In July 2006 we issued 37,500 shares of common stock upon the cash exercise
     of warrants issued in 2001. No placement fees were paid. We issued the
     shares without registration under the Securities Act of 1933, as amended,
     pursuant to the exemptions provided by Section 4(2) thereof. The shares
     issued may not be offered or sold in the United States in the absence of an
     effective registration statement or exemption from the registration
     requirements under the Securities Act. An appropriate legend was placed on
     the shares.

(c)  NONE

Item 3. Defaults Upon Senior Securities
NONE

Item 4. Submission of Matters to a Vote of Security Holders
NONE

Item 5. Other Information
(a) NONE
(b) NONE

Item 6. Exhibits
Exhibit 31.1 - Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by William
Blakeley, President (Principal Executive Officer).

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

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




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<PAGE>





                                   SIGNATURES

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

                                     e.DIGITAL CORPORATION

Date:    November 9, 2006            By: /s/ ROBERT PUTNAM
                                         ---------------------------------------
                                         Robert Putnam, Interim Chief Accounting
                                         Officer (Principal Accounting and
                                         Financial Officer and duly authorized
                                         to sign on behalf of the Registrant)




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