**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





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





**For
      the quarterly period ended September 30, 2005**





Commission
      File Number 0-20734





**e.Digital
      Corporation**


(Exact
      name of registrant as specified in its charter)




Delaware
              
              
              
              33-0865123(State
                  or other jurisdiction of
              
              
              
              (I.R.S.
                  Empl. Ident. No.)incorporation
                  or organization)
  13114
                  Evening Creek Drive South, San Diego,
                  California
              
              
              
              92128(Address
                  of principal executive
                  offices)
              
              
              
              (Zip
                  Code)





(858)
                  679-1504(Registrant’s
                  telephone number, including area
                  code)


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





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). YES oNO
x





Indicate
      the number of shares outstanding of each of the issuer's classes of Common
      Stock, as of the latest practicable date:




Common
                Stock, par value $0.001
            
            175,260,876(Class)
            
            (Outstanding
                at November 4,
                2005)

















**e.DIGITAL
      CORPORATION**




INDEX




Page**PART
                I. FINANCIAL INFORMATION**Item
                  1. Financial Statements (unaudited):Consolidated
                  Balance Sheets as of September 30, 2005 andand
                  March 31, 2005
              3Consolidated
                  Statements of Operations for the three and sixmonths
                  ended September 30, 2005 and 2004
              4Consolidated
                  Statements of Cash Flows for the three and sixmonths
                  ended September 30, 2005 and 2004
              5Notes
                  to Interim Consolidated Financial Statements
              6Item
                  2. Management's Discussion and Analysis of FinancialCondition
                  and Results of Operations
              12Item
                  3. Quantitative and Qualitative Disclosure about Market
                  Risk
              22Item
                  4. Controls and Procedures
              22**PART
                  II. OTHER INFORMATION**Item
                  1. Legal Proceedings
              22Item
                  2.Unregistered
                  Sales of Equity Securities and Use of Proceeds
              22Item
                  3. Defaults Upon Senior Securities
              22Item
                  4. Submission of Matters to a Vote of Security Holders
              23Item
                  5. Other Information
              23Item
                  6. Exhibits and Reports on Form 8-K
              23SIGNATURES
              24


2





**Part
                I. Financial Information****Item
                1. Financial Statements:****e.Digital
                Corporation and subsidiary****CONSOLIDATED
                BALANCE SHEETS****September
                30, 2005**
            
            **March
                31, 2005****(Unaudited)**$
            
            $**ASSETS****Current**Cash
                and cash equivalents
            
            
            380,469
            
            
            1,289,253Accounts
                receivable, trade
            
            
            21,826
            
            
            52,841Deposits
                and prepaid expenses
            
            
            77,921
            
            
            505,353**Total
                current assets**
            
            
            480,215
            
            
            1,847,447Property
                and equipment, net of accumulated depreciation of$561,815
                and $529,772 , respectively
            
            
            93,959
            
            
            126,002**Total
                assets**
            
            
            574,174
            
            
            1,973,449**LIABILITIES
                AND STOCKHOLDERS' DEFICIT****Current**Accounts
                payable, trade
            
            
            607,345
            
            
            521,347Other
                accounts payable and accrued liabilities
            
            
            33,295
            
            
            83,295Accrued
                lease liability
            
            
            515,000
            
            
            515,000Accrued
                employee benefits
            
            
            118,504
            
            
            134,442Dividends
            
            
            398,906
            
            
            352,044Deferred
                revenue
            
            
            37,162
            
            
            46,888Customer
                deposits
            
            
            40,640
            
            
            707,250Convertible
                subordinated promissory notes, less $60,031 and $58,045 for amortizationof
                warrant, respectively
            
            
            939,969
            
            
            941,955Unsecured
                promissory notes, short term
            
            
            972,564
            
            
            35,000**Total
                current liabilities**
            
            
            3,663,385
            
            
            3,337,221Deferred
                revenue
            
            
            **-**
            
            
            6,942Unsecured
                promissory note
            
            
            **-**
            
            
            889,855**Total
                liabilities**
            
            
            3,663,385
            
            
            4,234,018**Commitments
                and Contingencies****Stockholders'
                deficit**Preferred
                stock, $0.001 par value; 5,000,000 shares authorizedSeries
                D Convertible Preferred stock 250,000 shares designated:110,000 and
                125,000issued
                and outstanding, respectively. Liquidation preferenceof
                $1,468,500 and $1,552,917, respectively
            
            
            1,100,000
            
            
            1,150,000Series
                EE Convertible and Redeemable Preferred stock 20,000 shares designated:4,330
                and 18,500 issued and outstanding, respectively. Liquidation
                preferenceof
                $463,406 and $1,867,412 respectively
            
            
            433,000
            
            
            1,250,000Common
                stock, $0.001 par value, authorized 200,000,000,175,260,876
                and 170,493,385 shares outstanding, respectively
            
            
            175,262
            
            
            170,494Additional
                paid-in capital
            
            
            68,496,128
            
            
            67,475,009Dividends
            
            
            (398,906
            )
            
            (352,044
            )Accumulated
                deficit
            
            
            (72,894,695
            )
            
            (71,954,029
            )**Total
                stockholders' deficit**
            
            
            (3,089,211
            )
            
            (2,260,569
            )**Total
                liabilities and stockholders' deficit**
            
            
            574,174
            
            
            1,973,449




See
      notes
      to interim consolidated financial statements




3





**e.Digital
                Corporation and subsidiary****CONSOLIDATED
                STATEMENTS OF OPERATIONS****(UNAUDITED)****For
                the three months ended**
            
            **For
                the six months ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**$
            
            $
            
            $
            
            $**Revenues:**Products
            
            
            1,984,019
            
            
            1,953,787
            
            
            2,949,749
            
            
            2,015,235Services
            
            
            6,120
            
            
            74,697
            
            
            38,599
            
            
            106,4131,990,139
            
            
            2,028,484
            
            
            2,988,348
            
            
            2,121,648**Cost
                of revenues:**Products
            
            
            1,450,201
            
            
            1,613,831
            
            
            2,272,843
            
            
            1,631,556Services
            
            
            **-**
            
            
            47,617
            
            
            4,875
            
            
            54,4171,450,201
            
            
            1,661,448
            
            
            2,277,718
            
            
            1,685,973Gross
                profit
            
            
            539,938
            
            
            367,036
            
            
            710,630
            
            
            435,675**Operating
                expenses:**Selling
                and administrative
            
            
            396,740
            
            
            398,675
            
            
            735,384
            
            
            744,916Research
                and related expenditures
            
            
            288,323
            
            
            362,237
            
            
            650,244
            
            
            789,152Total
                operating expenses
            
            
            685,064
            
            
            760,912
            
            
            1,385,628
            
            
            1,534,068Operating
                loss
            
            
            (145,126
            )
            
            (393,876
            )
            
            (674,998
            )
            
            (1,098,393
            )**Other
                income (expense):**Interest
                income
            
            
            2,234
            
            
            **-**
            
            
            7,447
            
            
            **-**Interest
                expense
            
            
            (111,676
            )
            
            (116,514
            )
            
            (232,992
            )
            
            (146,693
            )Other
            
            
            **-**
            
            
            **-**
            
            
            (1,300
            )
            
            (1,800
            )Other
                income (expense)
            
            
            (109,442
            )
            
            (116,514
            )
            
            (226,845
            )
            
            (148,493
            )**Loss
                and comprehensive loss for the period**
            
            
            (254,568
            )
            
            (510,390
            )
            
            (901,843
            )
            
            (1,246,886
            )Accrued
                dividends on the Series D and EE Preferred stock
            
            
            (42,585
            )
            
            (37,198
            )
            
            (85,685
            )
            
            (84,655
            )**Loss
                attributable to common stockholders**
            
            
            (297,153
            )
            
            (547,588
            )
            
            (987,528
            )
            
            (1,331,541
            )**Loss
                per common share - basic and diluted**
            
            
            (0.00
            )
            
            (0.00
            )
            
            (0.01
            )
            
            (0.01
            )**Weighted
                average common shares outstanding**
            
            
            175,260,876
            
            
            164,386,736
            
            
            175,208,630
            
            
            163,250,768




See notes to interim consolidated financial
      statements




4





**e.Digital
                Corporation and subsidiary****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****(UNAUDITED)****For
                the six months ended****September
                30****2005**
            
            **2004****OPERATING
                ACTIVITIES**
            
            
            $
            
            
            $Loss
                for the period
            
            
            (901,843
            )
            
            (1,246,886
            )Adjustments
                to reconcile loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            32,043
            
            
            23,641Accrued
                interest and accretion relating to secured promissory
                notes
            
            
            56,250
            
            
            56,250Amortization
                of interest on warrants issued in connection with the12%
                convertible subordinated promissory notes
            
            
            118,076
            
            
            58,047Stock
                issued to vendor
            
            
            **-**
            
            
            11,729Changes
                in assets and liabilities:Accounts
                receivable, trade
            
            
            31,016
            
            
            (35,684
            )Inventory
            
            
            **-**
            
            
            5,009Prepaid
                expenses and other
            
            
            427,433
            
            
            (145,225
            )Accounts
                payable, trade
            
            
            85,998
            
            
            133,775Other
                accounts payable and accrued liabilities
            
            
            (50,000
            )
            
            (37,565
            )Customer
                deposits
            
            
            (666,610
            )
            
            217,874Accrued
                employee benefits
            
            
            (15,938
            )
            
            (65,719
            )Deferred
                revenue
            
            
            (16,668
            )
            
            (16,222
            )Cash
                (used in) operating activities
            
            
            (900,244
            )
            
            (1,040,976
            )**INVESTING
                ACTIVITIES**Purchase
                of property and equipment
            
            
            **-**
            
            
            (12,455
            )Cash
                (used in) investing activities
            
            
            **-**
            
            
            (12,455
            )**FINANCING
                ACTIVITIES**Proceeds
                from 12% Convertible Subordinated Promissory Notes
            
            
            **-**
            
            
            1,000,000Payment
                on 15% Unsecured Note
            
            
            (8,540
            )
            
            **-**Proceeds
                from exercise of stock options
            
            
            **-**
            
            
            4,650Cash
                (used in) provided by financing activities
            
            
            (8,540
            )
            
            1,004,650Net
                increase (decrease) in cash and cash equivalents
            
            
            (908,784
            )
            
            (48,780
            )Cash
                and cash equivalents, beginning of period
            
            
            1,289,253
            
            
            467,954Cash
                and cash equivalents, end of period
            
            
            380,469
            
            
            419,174**Supplemental
                Disclosures of Cash Flow Information:**Cash
                paid during the period for interest and debt expense
            
            
            58,666
            
            
            31,147**Supplemental
                schedule of noncash investing and financing
                activities:**Deemed
                dividends on Series D, E and EE preferred stock
            
            
            85,685
            
            
            84,655Discount
                on 12% Convertible Subordinated Promissory Notes
            
            
            120,062
            
            
            **-**


See notes to interim consolidated financial
        statements
  5


**E.DIGITAL
        CORPORATION AND SUBSIDIARY**
 **NOTES
        TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **September
        30, 2005**





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


e.Digital
      Corporation, (the “Company”) is incorporated under the laws of Delaware. The
      Company offers engineering services, as well as complete reference designs
      and
      technology platforms with a focus on digital video/audio and player/recorders.





The
      consolidated financial statements have been prepared by management, in
      accordance with accounting principles generally accepted in the United States
      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.





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 $72,894,695
      September 30, 2005. At September 30, 2005, the Company had a working capital
      deficiency of $3,183,170. Substantial portions of the losses are attributable
      to
      marketing costs of the Company’s 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
      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 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 the Company 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 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.





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 financial statements.





**2.
      LOSS PER SHARE**


Stock
      options, warrants and convertible preferred stock exercisable into 22,757,780
      shares of common stock were outstanding as at September 30, 2005. 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
      available to common
      stockholders (“Commons Stockholders”) was increased during the six months ended
      September 30, 2005 and 2004 by accrued dividends of $85,685 and $84,665,
      respectively. The loss available to Common Stockholders is computed as
      follows:




For
                the three months ended
            
            For
                the six months endedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004Loss
                for the period
            
            $
            (254,568
            )
            $
            (510,389
            )
            $
            (901,843
            )
            $
            (1,246,886
            )Dividends
                on Series D and EE preferred stock
            
            
            (42,585
            )
            
            (37,198
            )
            
            (85,685
            )
            
            (84,655
            )Loss
                available to Common Stockholders
            
            $
            (297,153
            )
            $
            (547,587
            )
            $
            (987,528
            )
            $
            (1,331,541
            )





**3.
      STOCK BASED COMPENSATION**


The
      Company has a stock-based employee and non-employee compensation plan. The
      Company accounts for stock-based employee and non-employee compensation
      arrangements using the intrinsic value method in accordance with the provisions
      of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” (“APB No. 25”) and complies with the disclosure provisions of
      Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
      Compensation” (“SFAS No. 123”). Under APB No. 25, compensation expense is based
      on the difference, if any, on the date of the grant, between the fair value
      of
      the Company’s stock and the exercise price. The Company accounts for stock
      issued to non-employees in accordance with the provisions of SFAS No. 123 and
      Emerging Issues Task Force No. 96-18 “Accounting for Equity Instruments with
      Variable Terms That Are Issued for Consideration Other Than Employee Services
      Under FASB Statement No. 123.”





6
 
  **E.DIGITAL
          CORPORATION AND SUBSIDIARY**
 **NOTES
          TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **September
          30, 2005**


During
      the six months ended September 30, 2005, no new options were granted by the
      Company, and as of September 30, 2005, an aggregate of 5,504,999 options to
      purchase shares of the Company's common stock were outstanding pursuant to
      the
      1994 Stock Option Plan. The fair value of vested options, used as a basis for
      the above pro forma disclosures, was estimated at the date of grant using the
      Black-Scholes option-pricing model. The option pricing assumptions include
      a
      dividend yield of 0%; expected volatility of 75.58% a risk free interest rate
      of
      3.02% and an expected life of 2.5 years. The following table summarizes the
      weighted average fair value of the stock options granted during the
      periods:





Three
                Months Ended September 30,
            
            Six
                Months Ended September 30,2005
            
            2004
            
            2005
            
            2004Loss
                attributable to common Stockholders as reported
            
            $
            (297,153
            )
            $
            (510,012
            )
            $
            (987,528
            )
            $
            (1,246,886
            )**Add:**Total stock-based employee compensation recorded -
            
            -
            
            
            -
            
            
            -**Deduct:**Total stock-based employee compensation expensedetermined
                under fair value based method for all awards
            
            
            39,440
            
            
            63,853
            
            
            77,147
            
            
            132,220Pro
                forma net loss
            
            $
            (336,593
            )
            $
            (573,865
            )
            $
            (1,064,675
            )
            $
            (1,379,106
            )Earnings
                per share:Basic
                and Diluted - as reported
            
            $
            (0.00
            )
            $
            (0.00
            )
            $
            (0.01
            )
            $
            (0.01
            )Basic
                and Diluted - pro forma
            
            $
            (0.00
            )
            $
            (0.00
            )
            $
            (0.00
            )
            $
            (0.01
            )





Beginning
      with the quarter ending June 30, 2006, the Company will account for its
      stock-based compensation plans in accordance with SFAS Statement
      No. 123, “Accounting for Stock Based Compensation (revised).





**4.
      RECENT ACCOUNTING PRONOUNCEMENTS**


In
      November 2004, Statement of Financial Accounting Standards (“SFAS”) No. 151,
“Inventory Costs - An Amendment of ARB No. 43, Chapter 4”, was issued which
      amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4,
“Inventory Pricing,” to clarify the accounting for abnormal amounts of idle
      facility expense, freight, handling costs, and wasted material. Among other
      provisions, the new rule requires that items such as idle facility expense,
      excessive spoilage, double freight, and rehandling costs be recognized as
      current-period charges regardless of whether they meet the criterion of “so
      abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the
      allocation of fixed production overheads to the costs of conversion be based
      on
      the normal capacity of the production facilities. SFAS 151 is effective for
      fiscal years beginning after June 15, 2005. We are currently evaluating the
      effect that the adoption of SFAS 151 will have on our consolidated results
      of
      operations and financial condition.




In
        December, 2004 the FASB issued SFAS 123 (revised 2004), “Share Based Payment”.
        This statement replaces SFAS 123 “Accounting for Stock-Based Compensation”, and
        supersedes APB Opinion 25, “Accounting for Stock Issued to Employees”. SFAS No
        123 (revised 2004) requires that the cost of share-based payment transactions
        (including those with employees and non-employees) be recognized as compensation
        costs in the financial statements. SFAS No. 123 (revised 2004) applies to
        all
        share-based payment transactions in which an entity acquires goods or services
        by issuing (or offering to issue) its shares, share options, or other equity
        instruments (except for those held by an ESOP) or by incurring liabilities
        in
        amounts based (even in part) on the price of the entity’s shares or other equity
        instruments, or that require (or may require) settlement by the issuance
        of an
        entity’s shares or other equity instruments. This statement applies to allow new
        awards granted during the fiscal year beginning after December 15. 2005 and
        to
        previous awards that are modified or cancelled after such date. We have not
        yet
        fully evaluated the effect of SFAS No. 123 (revised 2004) on our financial
        statements and have not determined the method of adoption we will use to
        implement SFAS No. 123 (revised 2004).
 
 During
        March 2005, the Securities and Exchange Commission issued Staff Accounting
        Bulletin (“SAB”) No. 107, guidance on SFAS No. 123 (revised 2004) SAB 107 was
        issued to assist preparers by simplifying some to the implementation challenges
        of SFAS No. 123 (revised 2004) while enhancing the information that investors
        receive. The Company will consider the guidance provided by SAB No. 107 as
        it
        implements SFAS 123 (revised 2004) during fiscal 2006.


In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”.
      FASB Statement of Accounting Standards (SFAS) 154 establishes new standards
      on
      accounting for changes in accounting principles. Pursuant to the new rules,
      all
      such changes must be accounted for by retrospective application to the financial
      statements of prior periods unless it is impracticable to do so. SFAS 154
      completely replaces Accounting Principles Bulletin (APB) Opinion 20 and SFAS
      3,
      though it carries forward the guidance in those pronouncements with respect
      to
      accounting for changes in estimates, changes in the reporting entity, and the
      correction of errors. The Statement is effective for accounting changes and
      error corrections made in fiscal years beginning after December 15, 2005, with
      early adoption permitted for changes and corrections made in years beginning
      after May 2005. Management does not expect adoption of SFAS No. 154 to have
      a
      material impact on the Company’s financial statements.





7
 
  **E.DIGITAL
          CORPORATION AND SUBSIDIARY**
 **NOTES
          TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **September
          30, 2005**


**5.
      PROMISSORY NOTES**


September
                30, 2005
            
            March
                31, 200515%
                Unsecured Promissory Notes
            
            $
            888,189
            
            $
            900,00012%
                Convertible Subordinated Promissory Note
            
            
            1,000,000
            
            
            1,000,000Accrued
                interest on notes
            
            
            84,375
            
            
            24,855Less
                unamortized discount
            
            
            (60,031
            )
            
            (58,045
            )Less
                current portion
            
            
            (1,912,533
            )
            
            (976,955
            )Long
                term
            
            $
            -
            
            $
            889,855





**15%
      Unsecured Promissory Note**


On
      December 11, 2002, the Company issued a 15% Unsecured Promissory Note (“15%
      Unsecured Note”) for cash proceeds of $750,000 from an unrelated corporation. On
      January 31, 2005, the 15% Unsecured Note was amended to extend the maturity
      date
      to September 30, 2006 when principal and interest will be payable. Accrued
      interest on the note at September 30, 2005 was $158,500. On January 31, 2005,
      the Company paid cash interest of $8,500 and issued to the noteholder a
      secondary 15% Unsecured Promissory Note (“15% Note”) for accrued interest of
      $150,000. The 15% Note will also mature on September 30, 2006. Principal and
      interest on the 15% Note is payable in monthly installments of $3,500 with
      the
      balance due at maturity





**12%
      Convertible Subordinated Promissory Notes**


In
      June
      and July 2004, the Company sold $1,000,000 of Unsecured 12% Convertible
      Subordinated Promissory Notes due July 1, 2005 (“12% CSP Notes”). The
      purchasers, in connection therewith, were granted warrants to purchase 2,000,000
      shares of common stock at an exercise price of $0.25 per share, exercisable
      until September 30, 2007 (collectively, the “Warrants”). On June 30, 2005, the
      12% CSP Notes and Warrants were modified by extending the maturity date of
      the
      CSP Notes from July 1, 2005 to December 31, 2005 and by reducing the purchase
      price of each warrant share purchasable under the Warrant from $0.25 to $0.19.
      Due to the modification of these warrants, the Company recorded additional
      debt
      discount of $120,062 on the 12% Convertible Subordinated Promissory
      Notes.





In
      the
      event the Company offers shares of capital stock, noteholders have the right
      and
      option to convert the unpaid principal amount of the note, the prepayment fee,
      if any, and any accrued and unpaid interest into shares of capital stock
      offered. The noteholders waived their rights to convert for the November 30,
      2004 Series EE preferred stock offering sale.





Subsequent
      to September 30, 2005, the 12% CSP Notes were modified by extending the maturity
      date to December 31, 2006 and to increase the maximum note amount from
      $1,000,000 to $1,500,000. As of the date of this report $250,000 of additional
      notes had been sold. Note holders acquiring Notes on or after October 26, 2005
      shall be entitled to receive a royalty equal to (i) the principal of this Note
      divided by (ii) $500,000 (the aggregate principal of the additional Notes sold
      concurrently herewith) (the “Additional Notes”) multiplied by (iii) Twenty
      Dollars ($20.00) for each MedeViewerTM sold during the calendar years of 2006,
      2007 and 2008. The CSP notes were also amended such that the principal amount
      is
      convertible at $0.19 per common shares, subject to antidilution adjustments
      if
      the Company makes certain issuances of stock at a lower price.





8
 
  **E.DIGITAL
          CORPORATION AND SUBSIDIARY**
 **NOTES
          TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **September
          30, 2005**


**6.
      STOCKHOLDERS’ EQUITY**


The
      following table summarizes stockholders’ equity transactions during the six-month
      period ended September 30, 2005:





Preferred
                Stock
            
            Common
                Stock
            
            Additional
            
            
            
            AccumulatedShares
            
            Amounts
            
            Shares
            
            Amounts
            
            Paid-in
                Capital
            
            Dividends
            
            DeficitBalance,
                March 31, 2005
            
            
            127,500
            
            $
            2,400,000
            
            
            170,493,385
            
            $
            170,493
            
            $
            67,475,009
            
            $
            (352,044
            )
            $
            (71,954,029
            )Shares
                issued on conversion of Series D Preferred Stock
            
            
            (5,000
            )
            
            (50,000
            )
            
            335,702
            
            
            336
            
            
            63,447
            
            
            13,783
            
            
            (13,783
            )Shares
                issued on conversion of Series EE Preferred Stock
            
            
            (8,170
            )
            
            (817,000
            )
            
            4,431,789
            
            
            4,432
            
            
            837,608
            
            
            25,040
            
            
            (25,040
            )Accrued
                dividends on Series D Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (67,183
            )
            
            -Accrued
                dividends on Series EE Preferred Stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (18,502
            )
            
            -Discount
                on 12% Convertible Subordinated Promissory Notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            120,062
            
            
            -
            
            
            -Loss
                for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (901,843
            )Balance,
                September 30, 2005
            
            
            114,330
            
            $
            1,533,000
            
            
            175,260,876
            
            $
            175,262
            
            $
            68,496,128
            
            $
            (398,906
            )
            $
            (72,894,695
            )





**7.
      WARRANTS AND OPTIONS**


At
      September 30, 2005 warrants were outstanding and exercisable into the following
      shares of common stock:




**Number
              of**
            
            
            **Exercise
              Price****Description**
            
            
            **Common
              Shares**
            
            
            **Per
              Share**
            
            
            **Expiration
              Date**Warrant(1)
            
            
            46,189
            
            
            0.19
            
            
            October
                5, 2005Warrant
            
            
            856,166
            
            
            1.00
            
            
            November
                18, 2005Warrant(1)
            
            
            112,500
            
            
            0.19
            
            
            September
                30, 2006Warrant(2)
            
            
            2,000,000
            
            
            0.19
            
            
            September
                30, 2007Warrant(3)
            
            
            4,070,000
            
            
            0.50
            
            
            November
                30, 2007Total
            
            
            7,084,855


(1)
              The warrants are subject to certain
                adjustments if the Company issues shares lower than
                $0.19.
 
 (2)
              In
                  connection with the issuance of 12% CSP Notes the Company issued
                  2,000,000
                  warrants with an exercise price of $0.25. The estimated fair market
                  value
                  of these warrants at issuance was $232,186
                  and was recorded as a deferred financing charge related to the
                  12% CSP
                  Notes as a cost of issuing the warrants charged to Additional Paid
                  in
                  Capital. The deferred financing charge was amortized over the original
                  term of the 12% CSP Notes. On June 30, 2005 the Warrants
                  were
                  modified by reducing the exercise price of $0.25 to $0.19 and thus
                  additional discounts were
                  recorded.





(3)
            In
                connection with the issuance of the Series EE preferred stock the
                Company
                issued 370,000 warrants with an exercise price of $0.50 as a private
                placement fee.The
                estimated fair market value of these warrants at issuance was $38,935
                and
                was recorded as a deferred offering cost related to the issuance
                of the
                Series EE preferred stock.





9
 
  **E.DIGITAL
          CORPORATION AND SUBSIDIARY**
 **NOTES
          TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **September
          30, 2005**





The
      following table summarizes stock option activity for the period:




**Weighted
                  average****Shares**
              
              **exercise
                  price**#
              
              $Outstanding
                  March 31, 2005
              
              
              6,656,665
              
              
              1.0846Granted
              
              
              --
              
              
              --Canceled/expired
              
              
              (1,151,666
              )
              
              0.4515Exercised
              
              
              --
              
              
              --Outstanding
                  September 30, 2005
              
              
              5,504,999
              
              
              0.3555Exercisable
                  at September 30, 2005
              
              
              3,959,166
              
              
              0.4052




Options
      outstanding are exercisable at prices ranging from $0.0875 to $2.25 and expire
      over the period from 2006 to 2009 with an average life of 3.6 years. The 1994
      Stock Option Plan expired on August 15, 2004. On August 4, 2005 the stockholders
      approved the adoption of the 2005 Equity-Based Compensation Plan for 10,000,000
      common shares. At September 30, 2005 no grants had been made under this
      plan.





**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. The Series D Stock was issued pursuant to a conversion
      agreement with all of the noteholders of the Company's $1,000,000 Subordinated
      Promissory Notes and $1,050,000 Unsecured Notes. 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
      $0.19 subject to certain adjustments if the Company issues shares at prices
      lower than $0.19. As of September 30, 2005 the 110,000 shares of the Series
      D
      Stock would have been convertible into 7,728,947 shares common stock. The Series
      D stock shall be subject to automatic conversion on December 31, 2007.





**Convertible
      Redeemable Series EE**


On
      November 30, 2004, the Company issued 18,500 shares of 8% Series EE Convertible
      Preferred Stock (the “Series EE Stock”) at a per share price of $100 for an
      aggregate amount of $1,850,000. 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 $0.25 per share
      which
      is fixed for the first 90 days following the original issue date, and commencing
      90 days following the original issue date, the conversion price shall equal
      the
      lower of (i) $0.25 and (ii) 85% of the average of the volume weighted average
      price per share of any ten days during the twenty consecutive trading days
      immediately preceding the conversion date. However, the conversion price shall
      not be less than $0.19 per share. The Series EE Stock shall be subject to
      automatic conversion on or about November 30, 2006 subject to certain
      conditions. The Company also issued to the Investors, warrants to purchase
      3,700,000 shares of common stock at $0.50 per share until November 30, 2007.
      At
      September 30, 2005, the Series EE Stock was convertible into 2,438,979 shares
      of
      common stock.





**9.
      COMMITMENTS AND CONTINGENCIES**


The
      Company relies on Asian contract manufacturing partners for the manufacture
      of
      its products. The Company depends on these and other contract manufacturers
      to
      (i) allocate sufficient capacity to the Company’s 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 this manufacturer 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.





10
 
  **E.DIGITAL
          CORPORATION AND SUBSIDIARY**
 **NOTES
          TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **September
          30, 2005**


The
      Company's financial statements include $515,000 of  accrued lease
      liability that arose in the normal course of business for equipment delivered
      to
      the Company and was recorded at amounts reflected on the invoices and other
      documentation received from the third party vendor. This amount is approximately
      eight years old. The
      amount owing to the vendor may still be due but as the Company has had no
      contact with the vendor, the amount may not require payment. Accordingly, the
      accrued lease liability reflects management’s best estimate of amounts due for
      matters in dispute. Settlement of this liability may be either more or less
      than
      the amount recorded in the consolidated financial statements and accordingly
      may
      be subject to measurement uncertainty in the  near
      term.





In
      September 2000, we entered into a three-year sublease agreement which expired
      on
      July 31, 2003. From the date of expiration until December 2003, the Company
      leased the property on a month-to-month basis. On January 1, 2004, the Company
      amended the lease for approximately 7,750 square feet with an aggregate monthly
      payment of $9,291 inclusive of utilities and costs expiring on July 31,
      2006.





**10.
      CREDIT RISK**


Amounts
      owing from one customer comprise 77% and 98% of accounts receivable at September
      30, 2005 and 2004, respectively





**11.
      MAJOR CUSTOMERS AND SUPPLIERS**


The
      Company operates in one major line of business, the development, manufacture
      and
      marketing of electronic products. Sales to one customer comprised 99% and 97%
      of
      revenue for the six months ended September 30, 2005 and 2004,
      respectively.





**12.
      COMPARATIVE FIGURES**


Certain
      of the comparative figures have been restated to conform with the current
      period’s presentation.





**13.
      INCOME TAX**


The
      Company has U.S. federal net operating loss carryforwards available at March
      31,
      2005 of approximately $53,300,000 [2004 - $51,000,000] which will begin to
      expire in 2006. The Company has state net operating loss carryforwards of
      $16,400,000 [2004 - $16,000,000] which will expire beginning in 2005. The
      difference between federal and state net operating loss carryforwards is due
      to
      the 50% limitation of California loss carryforwards and to expiring California
      carryforwards.




11





**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, 2005.





**General**


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.
      We
      provide engineering services, product reference designs and technology platforms
      to customers focusing on the digital video/audio and player/recorder markets.
      Our product reference designs are working, full-featured designs sometimes
      implemented as prototypes that can be customized to a customers’ preferred look
      and feel or branded and sold as they are, according to a customer’s wishes. Our
      technology platforms are basic working technology that can be developed into
      a
      finished consumer product, or incorporated into an existing consumer product
      design for private labeling. Our technology and services are used by customers
      to design, develop and produce complex electronic products primarily targeted
      at
      end-user consumers.





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 $72,894,695
      at
      September 30, 2005. At September 30, 2005, the Company had a working capital
      deficiency of $3,183, 170.
      Our
      monthly cash operating costs have been on average $180,000 and $215,000 per
      month for the periods ending September 30, 2005 and 2004, respectively. However,
      we may increase expenditure levels in future periods to support and expand
      our
      revenue opportunities and continue advanced product and technology research
      and
      development. Accordingly, our losses are expected to continue until such time
      as
      we are able to realize supply, licensing, royalty, sales, and development
      revenues sufficient to cover the fixed costs of operations. We continue to
      be
      subject to the risks normally associated with any new business activity,
      including unforeseeable expenses, delays and complications. Accordingly, there
      is no guarantee that we can or will report operating profits in the
      future.





We
      have
      experienced a substantial reduction in cash that adversely affects our
      liquidity. 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,
      if
      necessary, 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, if necessary,
      additional capital and/or obtaining third party financing.





**Critical
      Accounting Policies**


The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates, including those related to product
      returns, bad debts, inventory valuation, intangible assets, financing
      operations, warranty obligations, estimated costs to complete research contracts
      and contingencies and litigation. We base our estimates on historical experience
      and on various other assumptions that we believe to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions.





We
      believe the following critical accounting policies affect our more significant
      judgments and estimates used in the preparation of our consolidated financial
      statements.





12


We
      recognize license revenue and product revenue upon shipment of a product to
      the
      customer, FOB destination or FOB shipping point depending on the specific
      contract term, if a signed contract exists, the fee is fixed and determinable,
      collection of resulting receivables is probable and there are no resulting
      obligations. Research and development contract revenues on short-term projects
      or service revenue is recognized once the services or product has been
      delivered, the fee is fixed and determinable, collection of the resulting
      receivable is probable and there are no resulting obligations. If all of the
      service or product has been delivered and there is one element that is
      perfunctory to the services or product that has not been delivered, revenue
      will
      be recognized evenly over the remaining term of the undelivered element.
      Research and development contract revenue on long-term projects is recognized
      on
      the percentage of completion method. Funds received in advance of meeting the
      criteria for revenue recognition are deferred and are recorded as revenue as
      they are earned. If the costs we incur on a contract are expected to exceed
      the
      anticipated revenue we will record the loss in the period in which the facts
      that give rise to the revision becomes known.





We
      record
      estimated reductions to revenue for anticipated product returns, discounts
      offered to our customers and volume-based incentives. If market conditions
      were
      to decline, we may take actions to increase the discounts offered for future
      sales which will result in an incremental reduction of revenue at the time
      the
      discounts are offered.





We
      maintain allowances for doubtful accounts for estimated losses resulting from
      the inability of our customers to make required payments. If the financial
      condition of our customers were to deteriorate, resulting in an impairment
      of
      their ability to make payments, additional allowances may be required.





We
      have
      provided for a full valuation reserve related to our substantial deferred tax
      assets. In the future, if sufficient evidence of our ability to generate
      sufficient future taxable income in certain tax jurisdictions becomes apparent,
      we may be required to reduce our valuation allowances, resulting in income
      tax
      benefits in our consolidated statement of operations. We evaluate the
      realizability of the deferred tax assets and assess the need for valuation
      allowance quarterly. The utilization of the net operating loss carryforwards
      could be substantially limited due to restrictions imposed under federal and
      state laws upon a change in ownership.





Under
      our
      bylaws, we have agreed to indemnify our officers and directors for certain
      events. We also enter into certain indemnification agreements in the normal
      course of our business. The Company has no liabilities recorded for such
      indemnities.





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, 2005 compared to six months ended September 30,
      2004**





For
      the
      six months ended September 30, 2005, we reported total revenues of $2,988,348,
      a
      40% increase from total revenues of $2,121,648 for the six months of fiscal
      2005. Product revenues for six months ending September 30, 2005 were $2,949,749 , a
      46% increase
      from product revenues of $2,015,235 for the six months ending September 30,
      2004. We have received product purchase orders for approximately $0.6 million,
      which is expected to ship in the third quarter of fiscal 2006.


Service
      revenues for the six months of fiscal 2006 were $38,599 compared to $106,413
      for
      the comparable period of the prior year. The timing and amount of service
      revenues are dependent upon a limited num ber
      of
      projects. At September 30, 2005 we had $37,162 of deferred revenue from
      development contracts, which will be recognized based on the terms and
      conditions of each agreement . We
      are
      increasing our focus on internally developed technology to be offered to our
      customers in order to speed adoption of our technology and enhance our future
      revenues.





For
      the
      six months ended September 30, 2005, we reported a gross profit of $710,630
      compared to a gross profit of $435,675 for the first six months of fiscal 2005.  Cost
      of
      sales includes manufacturing costs for products sold, operation costs associated
      with product support and other costs associated with the delivery of our
      engineering support and services. Cost of sales for the six months ended
      September 30, 2005 consisted of $2,272,843 of product costs and $4,875 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, 2004 consisted of
      $1,631,556 of product costs and $54,417 of service costs, consisting mostly
      of
      research and development labor funded in part by OEM development agreements.
      Although we do not anticipate any significant future contract losses, we cannot
      guarantee that we can maintain positive gross margins in the future or with
      future customers.





13


Selling,
      general and administrative expenses include payroll, employee benefits, and
      other costs associated with finance, customer support functions, facilities
      and
      depreciation expenses. Selling, general and administrative costs for the six
      months ended September 30, 2005, was $735,384 compared to $744,916 for the
      six
      months of fiscal 2005. 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, 2005 were $650,244,
      as compared
      to $789,152 for the six months ended September 30, 2004. The decrease of
      $138,908 can be attributed to the decrease in engineering costs of $59,122,
      a
      decrease of $84,313 in personnel and related costs offset by an increase of
      $10,071 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
      $674,998 for the six
      months ended September 30, 2005 as compared to an operating loss of $1,098,393
      for the six months ended September 30, 2004. The decrease in operating loss
      resulted from the increase gross profit for the six month period and by the
      decrease of $148,440 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 three 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 $901,843 as
      compared to a loss of $1,246,886 for the prior year’s six months. For the six
      months ended September 30, 2005, we incurred interest expense of $232,992
      as compared
      to $148,493 for the comparable period in the prior year. This included non-cash
      amortization of debt discount of $118,076 and $58,047 for the six months ended
      September 30, 2005 and 2004, respectively.





The
      loss
      available to Common Stockholders for the six months ended September 30, 2005
      and
      2004 is $987,528
      and $1,331,541, respectively. Included in the loss available to Common Stockholders
      for the six months ending September 30, 2005 and 2004 is accrued dividends
      of
      $85,685 and $84,655 respectively on the preferred stock.





**Three
      months ended September 30, 2005 compared to six months ended September 30,
      2004**





For
      the
      second quarter of fiscal 2006, we reported total revenues of $1,990,139 a less
      than one percent decrease from total revenues of $2,028,484 for the second
      quarter of fiscal 2005. Product revenues for the quarter ending September 30,
      2005 increased to $1,984,019  compared
      to $1,953,787
      for the second quarter ending September 30, 2004.


Service
      revenues for the second quarter of fiscal 2006 were $6,120 compared to $74,697
      for the comparable period of the prior year. The timing and amount of service
      revenues is dependent upon a limited num ber
      of
      projects. At September 30, 2005 we had $37,162 of deferred revenue from product
      that has been partially paid by our customer but not yet shipped and development
      contracts that will be recognized based on the terms and conditions of each
      agreement .





Cost
      of
      sales includes manufacturing costs for products sold, operation costs associated
      with product support and other costs associated with the delivery of our
      engineering support and services. Cost of sales for the three months ended
      September 30, 2005 consisted of $1,450,201 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, 2004 consisted of $1,613,831 of product costs and $47,617
      of
      service costs, consisting mostly of research and development labor funded in
      part by OEM development agreements. Although we do not anticipate any
      significant future contract losses, we cannot guarantee that we can maintain
      positive gross margins in the future or with future customers.





14


Gross
      profit for the second quarter of fiscal 2006 was $539,938 compared to $367,036
      for the second quarter of fiscal 2005. Gross profit as a percent of sales for
      the first quarter of fiscal 2006 was 27% compared to 18% for the same period
      last year. 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
      and
      depreciation expenses. Selling, general and administrative costs for the three
      months ended September 30, 2005, was $396,740 compared to $398,675 for the
      second quarter of fiscal 2005. 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 three months ended September 30, 2005 were $288,323,
      as compared
      to $362,237 for the three months ended September 30, 2004. The decrease of
      $74,914 can be attributed to the decrease of $52,006 in personnel and related
      costs and by a decrease of $19,257 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
      $145,126 for the
      three months ended September 30, 2005, as compared to an operating loss of
      $393,876 for the three months ended September 30, 2004. The 63% decrease in
      operating loss resulted primarily from the increased gross margins and the
      decrease in total operating expense. We believe, but we can not guarantee,
      that
      our strategy of investing in digital video and audio platform developments
      with
      supply or royalty provisions will provide positive margins in the 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 three months are not
      necessarily indicative of operating results for future periods or the fiscal
      year.





We
      reported interest expense of $111,676 for the three months ended September
      30,
      2005 versus $116,514 for the prior comparable period. The interest expense
      can
      be attributed to the amortization of the warrants issued in connection with
      the
      12% SP Notes.





We
      reported a loss for the second quarter of fiscal 2006 of $254,568 as compared
      to
      a loss of $510,390 for the prior second quarter of fiscal 2005 .





The
      loss
      attributable to Common Stockholders for the three months ended September 30,
      2005 and 2004 was $297,153 and $547,588 ,
      respectively. 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. Included in the loss available to Common Stockholders for the period
      ending September 30, 2004 were accrued dividends on the preferred stock of
      $37,198.





**Liquidity
      and Capital Resources**


At
      September 30, 2005, we had working capital deficit of $3,183,170
      compared to a
      working capital deficit of $1,489,774 at March 31, 2005. Cash used in operating
      activities for the six month period ended September 30, 2005 was
      $900,244 resulting primarily from the $901,843 loss for the period, a decrease of $16,668
      in deferred revenue, an decrease of $427,433 in prepaid expenses and other,
      an
      increase of $85,998 in other accounts payable, an decrease of $15,938 in accrued
      employee benefits, and a decrease of $31,016 in accounts receivable and a
      decrease of $666,610 in customer deposits. During the six months ended September
      30, 2005, the Company purchased
      no additional property
      and equipment.





For
      the
      six months ended September 30, 2005, cash used in financing activities was $8,540 resulting
      primarily from principal payment on the 15% Unsecured Promissory Note. For
      the
      six months ended September 30, 2005, net cash and cash equivalents decreased by
      $908,784.





15


At
      September 30, 2005, we had net accounts receivable of $21,826 as
      compared to
      $52,841 at March 31, 2005. 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, 2005, we had cash and cash equivalents of $380,469. Other
      than cash and cash equivalents and accounts receivable, 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 assuming (a)
      continuation of existing business customers arrangements, and (b) currently
      planned expenditures and level of operation, we believe we will require
      approximately $1,000,000 of additional funds for the next twelve months of
      operations plus amounts required to make payments on the 15% Unsecured Notes
      of
      $750,000, 15% Note of $150,000 and the 12% Subordinated Promissory Note of
      $1,000,000. However, actual results could differ significantly from management
      plans. We believe we may be able to obtain additional funds from future product
      margins from OEM 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.
      We
      have forbearance agreements on the $972,564 principal and accrued interest
      on
      the 15% Unsecured Note and the timing and schedule of amounts due thereafter
      are
      not currently known. Accordingly we may need to seek equity or debt financing
      in
      the next twelve months for working capital if product margins are insufficient
      and we may need to seek equity or debt financing for payments of the 15%
      Unsecured Note and 15% Note (or renegotiate terms thereon) and other obligations
      reflected on our balance sheet.





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, 2005, our contractual obligations and commercial commitments
      are
      summarized below:





Cash
                  Contractual Obligations by PeriodTotal
              
              Less
                  than 1 year
              
              1-2
                  years
              
              2-3
                  years15%
                  Unsecured Notes(1)
              
              $
              1,060,419
              
              $
              1,060,419
              
              
              -
              
              
              -12%
                  Subordinated Promissory Notes(2)
              
              
              1,060,000
              
              
              1,060,000
              
              
              -
              
              
              -Operating
                  Leases(3)
              
              
              27,873
              
              
              27,873
              
              
              -
              
              
              -Total
                  Cash Obligations
              
              $
              2,148,292
              
              $
              2,148,292
              
              $
              -
              
              $
              -
  (1)
                  Includes two 15% unsecured notes and accrued interest as of September
                  30,
                  2005, both notes mature on September 30, 2006(2)
                  Notes modified to extend maturity date to December 31,
                  2005(3)
                  Office sublease agreement subject to expire December 31,
                  2005





**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
      eight 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
      September 2000, we entered into a three-year sublease agreement, which expired
      on July 31, 2003. From the date of expiration until December 2003, the Company
      leased the property on a month-to-month basis. On January 1, 2004, the Company
      amended the lease for approximately 7,750 square feet with an aggregate monthly
      payment of $9,291 inclusive of utilities and costs expiring on July 31, 2006.
      In
      September, we received notification that the property was sold and that the
      current sublease will not be renewed and in fact, is
      scheduled to terminate effective December 31, 2005.





16


**Certain
      Factors That May Affect Our Business, Future Results and Financial
      Condition**


In
      addition to the other information in this Annual Report on Form 10-K, the
      factors listed below should be considered in evaluating our business and
      prospects. This Annual Report contains a number of forward-looking statements
      which reflect our current views with respect to future events and financial
      performance. These forward-looking statements are subject to certain risks
      and
      uncertainties, including those discussed below and elsewhere herein, that could
      cause actual results to differ materially from historical results or those
      anticipated. In this report, the words
“anticipates,”“believes,”“expects,”“intends,”“future” and similar expressions
      identify forward-looking statements. Readers are cautioned to consider the
      specific factors described below and not to place undue reliance on the
      forward-looking statements contained herein, which speak only as of the date
      hereof. We undertake no obligation to publicly revise these forward-looking
      statements, to reflect events or circumstances that may arise after the date
      hereof.





***Financial
      Risks***





***We
      Have a History of Losses and May Incur Future Losses*** *.* We
      have
      incurred significant operating losses in prior fiscal years and as of the fiscal
      year ended and at September 30, 2005 had an accumulated deficit of $72,894,695
      million. We had losses of approximately $3.7 million, $3.5 million and $6.7
      million in fiscal 2005, 2004 and 2003, respectively. To date, we have not
      achieved profitability and given the level of operating expenditures and the
      uncertainty of revenues and margins, we will 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
      do not Anticipate Paying Dividend*** *s* .
      We have
      never paid any cash dividends on our common stock and do not anticipate paying
      any cash dividends in the foreseeable future. We currently intend to retain
      any
      future earnings to fund the development and growth of our business. An
      investment in our common stock, therefore, may be more suitable for an investor
      that is seeking capital appreciation rather than current yield and, as a
      consequence, may be more speculative. Accordingly, investors should not purchase
      our common stock with an expectation of receiving regular dividends.





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





·
            Unpredictable
                demand and pricing for our contract development
                services


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


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


·
            Fluctuations
                in operating costs


·
            Changes
                in research and development costs


·
            Changes
                in general economic conditions


·
            Changes
                in technology


·
            Short
                product lifecycles





***We
      May Experience Product Delays, Cost Overruns and Errors Which Could Adversely
      Affect our Operating Performance and Ability to Remain
      Competitive.*** ** We
      have
      experienced development delays and cost overruns associated with contract
      development services in the past. We may experience additional delays and cost
      overruns on current projects or 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, the results of our
      contract services and the products produced for our customers could contain
      errors that could cause delays, order cancellations, contract terminations,
      adverse publicity, reduced market acceptance of products, or lawsuits by our
      customers or others who have acquired our products, including customers branded
      products.





***We
      May 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:





17


·
            Finance
                working capital requirements


·
            Pay
                for increased operating expenses or shortfalls in anticipated
                revenues


·
            Fund
                increases in research and development
                costs


·
            Develop
                new technology, products or
                services


·
            Respond
                to competitive pressures


·
            Support
                strategic and industry
                relationships


·
            Fund
                the production and marketing of our products and
                services





We
      cannot
      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, projected revenues and increased
      costs that adversely affected our results of operations and cash flows. Our
      company has 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 2006, fiscal
      year 2005 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 company’s 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 electronics 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 companies with U.S. operations
      and a number of domestic companies, many of which have substantially greater
      financial, marketing, personnel and other resources. Our current competitors
      or
      new market entrants could introduce new or enhanced technologies or products
      with features that render 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 contracts, any of which could harm our business. There can be no
      assurance that we will be able to keep pace with the technological demands
      of
      the marketplace or successfully enhance our products or develop new products
      that are compatible with the products of the electronics industry.





***We
      Rely on a Limited Number of Customers for Revenue*** *.* Historically,
      a substantial portion of our revenues has been derived primarily from a limited
      number of customers. One customer accounted for approximately 99% of revenues
      for the period ending September 30, 2005. The failure to receive orders for
      and
      produce products or a decline in the economic prospects of our customers or
      the
      products we may produce for sale may have a material adverse effect on our
      operations.





***If
      We Are Unsuccessful in Achieving Market Acceptance of Our Products, It Could
      Harm Our Business*** *.* Sales
      and
      marketing strategy contemplates sales of developed products to the electronics
      and computer software market by our customers. The failure of our customers
      to
      penetrate their 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.





18


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





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





***Because
      Some of Our Management are Part-Time and Have Certain Conflicts of Interest,
      Our
      Business Could Be Harmed*** **.** Our Vice
      President, Robert Putnam, is also a Vice President, 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.





19


***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.





***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:





·
            Quarter-to-quarter
                variations in operating results


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


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


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


·
            The
                price and availability of products and
                components


20
 ·
              Changes
                  in operating factors including delays of shipments, orders or
                  cancellations


·
            General
                financial market conditions


·
            Market
                conditions for technology stocks


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


·
            Or
                other events or factors





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





***Low-Price
      Stocks and Stocks Traded on the OTC Electronic Bulletin Board are Subject to
      Special Regulations and may have Increased Risk.*** ** Our
      shares of common stock are traded on the OTC Electronic Bulletin Board, an
      electronic, screen-based trading system operated by the National Association
      of
      Securities Dealers, Inc. (“NASD”). Securities traded on the OTC Electronic
      Bulletin Board are, for the most part, thinly traded and are subject to special
      regulations not imposed on securities listed or traded on the NASDAQ system
      or
      on a national securities exchange. As a result, an investor may find it
      difficult to dispose of, or to obtain accurate quotations as to the price of,
      our common stock. Sales of substantial amounts of our outstanding common stock
      in the public market could materially adversely affect the market price of
      our
      common stock. To date, the price of our common stock has been extremely volatile
      with the sale price fluctuating from a low of $0.09 to a high of $0.38 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.





***Important
      Factors Related to Forward-Looking Statements and Associated
      Risks*** *.* This
      annual report contains certain forward-looking statements within the meaning
      of
      Section 27A of the Securities Act and Section 21E of the Securities Exchange
      Act
      of 1934 and we intend that such forward-looking statements be subject to the
      safe harbors created thereby. These forward-looking statements include our
      plans
      and objectives of management for future operations, including plans and
      objectives relating to the products and our future economic performance. The
      forward-looking statements included herein are based upon current expectations
      that involve a number of risks and uncertainties. These forward-looking
      statements are based upon assumptions that we will design, manufacture, market
      and ship new products on a timely basis, that competitive conditions within
      the
      computer and electronic markets will not change materially or adversely, that
      the computer and electronic markets will continue to experience growth, that
      demand for the our products will increase, that we will obtain and/or retain
      existing development partners and key management personnel, that future
      inventory risks due to shifts in market demand will be minimized, that our
      forecasts will accurately anticipate market demand and that there will be no
      material adverse change in our operations or business. Assumptions relating
      to
      the foregoing involve judgments with respect, among other things, to future
      economic, competitive and market conditions and future business decisions,
      all
      of which are difficult or impossible to predict accurately and many of which
      are
      beyond our control. Although we believe that the assumptions underlying the
      forward-looking statements are reasonable, any of the assumptions could prove
      inaccurate and, therefore, there can be no assurance that the results
      contemplated in forward-looking information will be realized. In addition,
      as
      disclosed above, our business and operations are subject to substantial risks
      which increase the uncertainty inherent in such forward-looking statements.
      Any
      of the other factors disclosed above could cause our net sales or net income
      (or
      loss), or our growth in net sales or net income (or loss), to differ materially
      from prior results. Growth in absolute amounts of costs of sales and selling
      and
      administrative expenses or the occurrence of extraordinary events could cause
      actual results to vary materially from the results contemplated in the
      forward-looking statements. Budgeting and other management decisions are
      subjective in many respects and thus susceptible to interpretations and periodic
      revisions based on actual experience and business developments, the impact
      of
      which may cause us to alter our marketing, capital expenditure or other budgets,
      which may in turn affect our results of operations. In light of the significant
      uncertainties inherent in the forward-looking information included herein,
      the
      inclusion of such information should not be regarded as a representation by
      us
      or any other person that our objectives or plans will be achieved.





21


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


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





Our
      exposure to market risk for changes in interest rates relates primarily to
      our
      investment in cash and cash equivalents of $380,469 and our debt of $1,972,564,
      consisting of accrued interest, the 15% Unsecured Note and the 12% Convertible
      Subordinated Promissory Note. 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, 2005, 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) 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 rules and forms of the Securities
      and
      Exchange Commission, 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, 2005, 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,
      3005.





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, 2005 that materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.





**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**


We
      are
      involved from time to time in routine litigation incidental to the conduct
      of
      our business. Except as set forth below, there is currently no material pending
      legal proceedings to which we are party or to which any of our property is
      subject.





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


(a)
            NONE


(b)
            NONE


(c)
            NONE





**Item
      3. Defaults Upon Senior Securities**


NONE





22





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


At
      the
      Company’s Annual Meeting of Stockholders held on August 4, 2005, the following
      individuals, all of the members of the Board of Directors were
      elected: Atul Anandpura, Robert Putnam, Allen Cocumelli, Alex Diaz and
      Renee Warden For each elected director, the results of the voting
      were:





**Affirmative
                Votes**
            
            **Votes
                Withheld**Atul
                Anandpura
            
            
            161,834,981
            
            
            3,150,143Robert
                Putnam
            
            
            161,901,418
            
            
            3,893,706Allen
                Cocumelli
            
            
            161,366,129
            
            
            3,618,995Alex
                Diaz
            
            
            161,362,598
            
            
            3,622,526Renee
                Warden
            
            
            156,927,071
            
            
            8,058,053





Our
      stockholders also voted to approve an amendment to the Company’s Certificate of
      Incorporation to increase the authorized number of shares of common stock from
      200,000 to 300,000. The results of the voting on this proposal
      were:




**Affirmative
                Votes**
            
            **Negative
                Votes**
            
            **Abstentions**
            
            **Broker
                Non-Votes**159,582,273
            
            5,146,620
            
            256,231
            
            -0-




The
      foregoing proposal was approved and accordingly ratified.





Our
      stockholders also voted to approve the 2005 Equity-Based Compensation Plan.
      The
      results of the voting on this proposal were:





**Affirmative
                Votes**
            
            **Negative
                Votes**
            
            **Abstentions**
            
            **Broker
                Non-Votes**35,385,374
            
            10,740,172
            
            581,614
            
            -0-








The
      foregoing proposal was approved.





Our
      stockholders also voted to ratify Singer, Lewak, Greenbaum & Goldstein, LLP
      as the Company’s independent auditors for the fiscal year ending March 31, 2006.
      The results of the voting on this proposal were:





**Affirmative
                Votes**
            
            **Negative
                Votes**
            
            **Abstentions**
            
            **Broker
                Non-Votes**162,502,178
            
            1,992,410
            
            490,536
            
            -0-








The
      foregoing proposal was approved and accordingly ratified.





**Item
      5. Other Information**


(a)
      NONE


(b)
      NONE




**Item
      6. Exhibits**


Exhibit 31.1
      -
      Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002, signed by Alex Diaz, 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, 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 Alex Diaz, Principal Executive
      Officer and Robert Putnam, Principal Accounting Officer.




23


**SIGNATURES**





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




e.DIGITAL
              CORPORATIONDate:November
              14, 2005
            By:
            /s/ ROBERT
              PUTNAMRobert
              Putnam, Interim Chief Accounting Officer(Principal
              Accounting and Financial Officerand duly authorized to sign on behalf of the
              Registrant)







24