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

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

                                   FORM 10-Q/A
                                (Amendment No. 1)

     [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 [_]


Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [_] NO [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)

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

<PAGE>


Explanatory Note

e.Digital Corporation. (the "Company") is filing this Quarterly Report on Form
10-Q/A for the fiscal quarter ended September 30, 2005 (this "Amendment") to
reflect the restatement of its consolidated financial statements for the fiscal
quarter ended September 30, 2005 and to amend and restate Items 1, 2 and 4 of
Part I contained in the original filing made with the Securities and Exchange
Commission on November 14, 2005 (the "Prior Report"). The restated interim
consolidated financial statements result from an error made in accruing
liabilities for direct shipments of product to a customer. At September 30, 2005
the Company failed to record $128,057 of accrued liabilities and understated
cost of sales for the same amount. The Company's accounting staff failed to
properly reconcile customer prepayments, customer invoices, inventory, cost of
sales and accrued liabilities and accordingly revenue for the direct shipment
was properly recorded but the related and matching vendor costs for one shipment
were not properly accrued. Management and the Audit Committee have determined
based on the facts and circumstances that contributed to this error that there
was no evidence of knowingly inappropriate accounting, fraud, or malfeasance
however certain accounting remediation would be required.

This Prior Report has not been updated except as required to reflect the effects
of the restatement and the amendment and restatement of the items indicated
above. Items included in the Prior Report that are not included herein are not
amended and remain in effect as of the date of the original filing of the Prior
Report. Additionally, other than as indicated above, this Amendment does not
provide an update or a discussion of any other events that have occurred since
the filing of the Prior Report. Accordingly, this Amendment should be read in
conjunction with any filings made with the Securities and Exchange Commission
subsequent to the filing of the Prior Report.


                                       2

<PAGE>


e.DIGITAL CORPORATION

                                      INDEX

<TABLE>
<CAPTION>
                                                                                    Page
<S>                                                                                 <C>
PART I. FINANCIAL INFORMATION

         Item 1. Financial Statements (unaudited):

                 Consolidated Balance Sheets as of September 30, 2005 and
                 and March 31, 2005                                                  3

                 Consolidated Statements of Operations for the three and six
                 months ended September 30, 2005 and 2004                            4

                 Consolidated Statements of Cash Flows for the three and six
                 months ended September 30, 2005 and 2004                            5

                 Notes to Interim Consolidated Financial Statements                  6

         Item 2. Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                             12

         Item 3. Quantitative and Qualitative Disclosure about Market Risk          22

         Item 4. Controls and Procedures                                            22


PART II. OTHER INFORMATION

         Item 1. Legal Proceedings                                                  22
         Item 2. Unregistered Sales of Equity Securities and Use of Proceeds        22
         Item 3. Defaults Upon Senior Securities                                    22
         Item 4. Submission of Matters to a Vote of Security Holders                23
         Item 5. Other Information                                                  23
         Item 6. Exhibits and Reports on Form 8-K                                   23

SIGNATURES                                                                          24
</TABLE>

                                       2
<PAGE>


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

                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                   September 30, 2005   March 31, 2005
                                                                                       Restated
                                                                                            $               $
                                                                                      -----------      -----------
                                                                                      <C>              <C>
ASSETS
Current
Cash and cash equivalents                                                                 380,469        1,289,253
Accounts receivable, trade                                                                 21,826           52,841
Deposits and prepaid expenses                                                              77,921          505,353
                                                                                      -----------      -----------
Total current assets                                                                      480,215        1,847,447
                                                                                      -----------      -----------
Property 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          521,347
Other accounts payable and accrued liabilities                                            161,352           83,295
Accrued lease liability                                                                   515,000          515,000
Accrued employee benefits                                                                 118,505          134,442
Dividends                                                                                 398,906          352,044
Deferred revenue                                                                           37,162           46,888
Customer deposits                                                                          40,640          707,250
Convertible subordinated promissory notes, less $60,031
   and $58,045 for amortization of warrant, respectively                                  939,969          941,955
Unsecured promissory notes, short term                                                    972,564           35,000
                                                                                      -----------      -----------
    Total current liabilities                                                           3,791,443        3,337,221
                                                                                      -----------      -----------
Deferred revenue                                                                               --            6,942
Unsecured promissory note                                                                      --          889,855
                                                                                      -----------      -----------
    Total liabilities                                                                   3,791,443        4,234,018
                                                                                      -----------      -----------
Commitments and Contingencies

Stockholders' deficit
Preferred stock, $0.001 par value; 5,000,000 shares authorized
  Series D Convertible Preferred stock 250,000 shares designated:
    110,000 and 125,000 issued and outstanding, respectively.
    Liquidation preference of $1,468,500 and $1,465,100, respectively                   1,100,000        1,150,000
  Series EE Convertible and Redeemable Preferred stock 20,000 shares designated:
    4,330 and 18,500 issued and outstanding, respectively. Liquidation preference
    of $463,406 and $1,286,944 respectively                                               433,000        1,250,000
Common stock, $0.001 par value, authorized 200,000,000,
    175,260,876 and 170,493,385 shares outstanding, respectively                          175,262          170,494
Additional paid-in capital                                                             68,496,128       67,475,009
Dividends                                                                                (398,906)        (352,044)
Accumulated deficit                                                                   (73,022,753)     (71,954,029)
                                                                                      -----------      -----------
Total stockholders' deficit                                                            (3,217,269)      (2,260,569)
                                                                                      -----------      -----------
Total liabilities and stockholders' deficit                                               574,174        1,973,449
                                                                                      ===========      ===========
</TABLE>

See notes to interim consolidate financial statements


                                       3
<PAGE>


e.Digital Corporation and subsidiary

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


                                                  For the three months ended
                                                        September 30,
                                                   2005              2004
                                                 Restated
Revenues:                                            $                $
                                               ------------      ------------
   Products                                       1,984,019         1,953,787
   Services                                           6,120            74,697
                                               ------------      ------------
                                                  1,990,139         2,028,484
                                               ------------      ------------

Cost of revenues:
   Products                                       1,578,258         1,613,831
   Services                                              --            47,617
                                               ------------      ------------
                                                  1,578,258         1,661,448
                                               ------------      ------------
Gross profit                                        411,881           367,036
                                               ------------      ------------
Operating expenses:
   Selling and administrative                       396,740           398,675
   Research and related expenditures                288,323           362,237
                                               ------------      ------------
          Total operating expenses                  685,064           760,912
                                               ------------      ------------

Operating loss                                     (273,183)         (393,876)
                                               ------------      ------------

Other income (expense):
   Interest income                                    2,234                --
   Interest expense                                (111,676)         (116,514)
   Other                                                 --                --
                                               ------------      ------------

          Other income (expense)                   (109,442)         (116,514)
                                               ------------      ------------

Loss and comprehensive loss for the period         (382,625)         (510,390)
Accrued dividends on the Series D and
  EE Preferred stock                                (42,585)          (37,198)
                                               ------------      ------------

Loss attributable to common stockholders           (425,210)         (547,588)
                                               ============      ============
Loss per common share - basic and diluted             (0.00)            (0.00)
                                               ============      ============

Weighted average common shares outstanding      175,260,876       164,386,736
                                               ============      ============

See notes to interim consolidate financial statements

                                       4
<PAGE>

<TABLE>
<CAPTION>
                                                 For the six months ended
                                                        September 30,
                                                    2005             2004
                                                           Restated
Revenues:                                            $                 $
                                                ------------      ------------
<S>                                                <C>               <C>
   Products                                        2,949,749         2,015,235
   Services                                           38,599           106,413
                                                ------------      ------------
                                                   2,988,348         2,121,648
                                                ------------      ------------

Cost of revenues:
   Products                                        2,400,900         1,631,556
   Services                                            4,875           54,417
                                                ------------      ------------
                                                   2,405,775         1,685,973
                                                ------------      ------------
Gross profit                                         582,573           435,675
                                                ------------      ------------

Operating expenses:
   Selling and administrative                        735,384           744,916
   Research and related expenditures                 650,244           789,152
                                                ------------      ------------
          Total operating expenses                 1,385,628         1,534,068
                                                ------------      ------------

Operating loss                                      (803,056)       (1,098,393)
                                                ------------      ------------

Other income (expense):
   Interest income                                     7,447               --
   Interest expense                                 (232,992)         (146,693)
   Other                                              (1,300)           (1,800)
                                                ------------      ------------

          Other income (expense)                    (226,845)         (148,493)
                                                ------------      ------------

Loss and comprehensive loss for the period        (1,029,901)       (1,246,886)
Accrued dividends on the Series D and
  EE Preferred stock                                 (85,685)          (84,655)
                                                ------------      ------------

Loss attributable to common stockholders          (1,115,586)       (1,331,541)
                                                ============      ============
Loss per common share - basic and diluted              (0.01)            (0.01)
                                                ============      ============

Weighted average common shares outstanding       175,208,630       163,250,768
                                                ============      ============
</TABLE>

See notes to interim consolidate financial statements

                                       4
<PAGE>


e.Digital Corporation and subsidiary

                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (UNAUDITED)

<TABLE>
<CAPTION>


                                                                                For the six months ended
                                                                                     September 30
                                                                                2005             2004
                                                                              Restated
OPERATING ACTIVITIES                                                              $               $
                                                                             ----------      ----------
<S>                                                                          <C>             <C>
Loss for the period                                                          (1,029,901)     (1,246,886)
Adjustments to reconcile loss to net cash used in operating activities:
     Depreciation and amortization                                               32,043          23,641
     Accrued interest and accretion relating to secured promissory notes         56,250          56,250
     Amortization of interest on warrants issued in connection with the
         12% convertible subordinated promissory notes                          118,076          58,047
     Stock issued to vendor                                                          --          11,729
Changes in assets and liabilities:
     Accounts receivable, trade                                                  31,016         (35,684)
     Inventory                                                                       --           5,009
     Prepaid expenses and other                                                 427,433        (145,225)
     Accounts payable, trade                                                     85,998         133,775
     Other accounts payable and accrued liabilities                              78,057         (37,565)
     Customer deposits                                                         (666,610)        217,874
     Accrued employee benefits                                                  (15,937)        (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                          --       1,000,000
Payment on 15% Unsecured Note                                                    (8,540)             --
Proceeds from exercise of stock options                                              --           4,650
                                                                             ----------      ----------
Cash (used in) provided by financing activities                                  (8,540)      1,004,650
                                                                             ----------      ----------
Net increase (decrease) in cash and cash equivalents                           (908,784)        (48,780)
                                                                             ----------      ----------
Cash and cash equivalents, beginning of period                                1,289,253         467,954
                                                                             ----------      ----------
Cash 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          84,655
   Discount on 12% Convertible Subordinated Promissory Notes                    120,062              --

</TABLE>

                                       5
<PAGE>

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



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
$73,022,753 September 30, 2005. At September 30, 2005, the Company had a working
capital deficiency of $3,311,228. 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:
<TABLE>
<CAPTION>

                                                          For the three                  For the six
                                                          months ended                   months ended
                                                          September 30,                  September 30,
                                                      2005           2004             2005          2004
---------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>              <C>              <C>
Net loss
                                           $  (382,625)     $  (510,389)     $(1,029,901)     $(1,246,886)
Dividends on Series D and EE preferred
stock                                          (42,585)         (37,198)         (85,685)         (84,655)
----------------------------------------------------------------------------------------------------------
Loss available to Common Stockholders      $  (425,210)     $  (547,587)     $(1,115,586)     $(1,331,541)
----------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       6
<PAGE>

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


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."

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:
<TABLE>
<CAPTION>

                                               Three Months Ended            Six Months Ended
                                                  September 30,                September 30,
                                               2005          2004           2005           2004

<S>                                    <C>            <C>            <C>            <C>
Net loss as reported                   $  (382,625)   $  (510,012)   $(1,029,901)   $(1,246,886)
Add: Total stock-based
employee compensation
recorded                                        --             --             --             --
Deduct: Total stock-based employee
compensation expense
determined under fair value based
method for all
awards                                      39,440         63,853         77,147        132,220
--------------------------------------------------------------------------------------------------------
Pro forma net loss                     $  (422,065)   $  (573,865)   $(1,115,586)   $(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)
</TABLE>

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

                                       7
<PAGE>

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

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.

5. PROMISSORY NOTES
<TABLE>
<CAPTION>

                                                      September            March
                                                      30, 2005            31, 2005
------------------------------------------------------------------------------------>
<S>                                                 <C>                 <C>
15% Unsecured Promissory Notes                      $   888,189         $   900,000

12% Convertible Subordinated Promissory Note          1,000,000           1,000,000

Accrued interest on notes                                84,375              24,855

Less unamortized discount                               (60,031)            (58,045)

Less current portion                                 (1,912,533)           (976,955)
------------------------------------------------------------------------------------
Long term                                           $        --         $   889,855
------------------------------------------------------------------------------------
</TABLE>

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


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

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 MedeViewer(TM) 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.

6. STOCKHOLDERS' EQUITY

The following table summarizes stockholders' equity transactions during the
six-month period ended September 30, 2005:
<TABLE>
<CAPTION>

                             Preferred Stock                 Common Stock            Additional                    Accumulated
                                                                                      Paid-in
                         Shares        Amounts         Shares          Amounts        Capital        Dividends      Deficit
---------------------------------   -------------   -------------   -------------   -------------  -------------   --------------
<S>                       <C>       <C>               <C>          <C>            <C>             <C>             <C>
Balance, March
31, 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                        --              --              --             --             --              --      (1,029,901)
--------------------------------------------------------------------------------------------------------------------------------
Balance, September
30, 2005                  114,330   $   1,533,000     175,260,876  $     175,262  $  68,496,128   $    (398,906)  $ (73,022,753)
================================================================================================================================
</TABLE>


7. WARRANTS AND OPTIONS

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

                                       Number of               Exercise Price

Description                        Common Shares                  Per Share $                       Expiration Date
---------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                           <C>                     <C>
Warrant(1)                                 46,189                        0.19                       October 5, 2005
Warrant                                   856,166                        1.00                     November 18, 2005
Warrant(1)                                112,500                        0.19                    September 30, 2006
Warrant(2)                              2,000,000                        0.19                    September 30, 2007
Warrant(3)                              4,070,000                        0.50                     November 30, 2007
---------------------------------------------------------------------------------------------------------------------------
Total                                   7,084,855
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

      (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
<PAGE>
                      E.DIGITAL CORPORATION AND SUBSIDIARY
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 2005
                                    Restated

The following table summarizes stock option activity for the period:
<TABLE>
<CAPTION>

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

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
<PAGE>
                      E.DIGITAL CORPORATION AND SUBSIDIARY
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                               September 30, 2005
                                    Restated


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.

14. RESTATEMENT

During the review of its consolidated financial statements for the third fiscal
quarter of 2006, the Company determined that its consolidated financial
statements for the fiscal quarter ended September 30, 2005 required restatement
to correct an error made in accruing liabilities for direct shipments of product
to a customer. The effects of the restatement on the consolidated financial
statements was to increase accrued liabilities by $128,057 at September 30, 2005
and increase cost of sales by $128,057 for both the three and six months ended
September 30, 2005 resulting in a corresponding increase in net loss to a
restated net loss of $382,625 and $1,029,901 for the three and six months ended
September 30, 2005, respectively.

                                       11
<PAGE>

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
$73,022,753 at September 30, 2005. At September 30, 2005, the Company had a
working capital deficiency of $3,217,269. 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

                                       12
<PAGE>

financial statements.

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).

Restatement of Previously Published Financial Statements

Following the filing of our Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2005 (the "Prior Report"), we determined that our previously
published consolidated financial statements as of and for the six months ended
September 30, 2005 required restatement to correct an error made in accruing
liabilities for direct shipments of product to a customer. Please refer to Note
14 of the notes to the accompanying consolidated financial statements for a
description and quantification of the associated restatement.

The consolidated financial statement as of and for the six months ended
September 30, 2005 included in this Quarterly Report on Form 10-Q/A reflect the
adjustments described above. Investors should rely on the consolidated financial
statements as of and for the six months ended September 30, 2005 in this
Quarterly Report on Form 10-Q/A and not on the previously published consolidated
financial statements for this period. A complete discussion of the restated
financial data is included in Note 14 to our consolidated financial statements
included in this report.

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
                                       13
<PAGE>

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 number 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
$582,573 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 $2,400,900 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.

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 $803,056 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 $1,029,901
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 $1115,586 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

                                       14
<PAGE>

service revenues is dependent upon a limited number 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 $1,578,258 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.

Gross profit for the second quarter of fiscal 2006 was $411,881 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 20% 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 $273,183 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 31% 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 $382,625 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 $425,210 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 $3,217,269 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 $1,029,901 loss for the period, a decrease


                                       15
<PAGE>

of $16,668 in deferred revenue, an decrease of $427,433 in prepaid expenses and
other, an increase of $85,998 in accounts payable, a increase of $78,057 in
other accounts payable and accrued liabilities, 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.

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:
<TABLE>
<CAPTION>

                                                            Cash Contractual Obligations by Period
                                                                    Less than 1
                                                   Total               year              1-2 years        2-3 years
-----------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                  <C>
15% 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           $      --                $  --
=======================================================================================================================
</TABLE>

(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

                                       16
<PAGE>

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.

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 $73,022,753
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 Dividends. We have never paid any cash dividends on
our common stock and do not anticipate paying any cash dividends in the
foreseeable future. We currently intend to retain any future earnings to fund
the development and growth of our business. An investment in our common stock,
therefore, may be more suitable for an investor that is seeking capital
appreciation rather than current yield and, as a consequence, may be more
speculative. Accordingly, investors should not purchase our common stock with an
expectation of receiving regular dividends.

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

      o     Unpredictable demand and pricing for our contract development
            services
      o     Market acceptance of our business customers' products by end users
      o     Uncertainties with respect to future customer product orders, their
            timing and the margins to be received, if any
      o     Fluctuations in operating costs
      o     Changes in research and development costs
      o     Changes in general economic conditions
      o     Changes in technology
      o     Short product lifecycles

                                       17
<PAGE>

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:

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

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

Unless We Obtain Adequate Financing and Increase Our Revenues We May Be Unable
to Continue as a Going Concern. We have experienced substantial reduction in
cash, 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


                                       18
<PAGE>

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.

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


                                       19
<PAGE>

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

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

Risks Related to 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.

                                       20
<PAGE>

Risks Related to Trading in Our Common Stock

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

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

We do not 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


                                       21
<PAGE>

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.

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 that are designed to ensure that
information required to be disclosed in our reports pursuant to the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including
Alex Diaz., our principal executive officer, and Robert Putnam, our principal
financial officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended. Based upon the identification of
the material weakness discussed below related to direct customer shipments by
vendors our principal executive officer and our principal financial officer have
concluded that our disclosure controls and procedures were not effective as of
September 30, 2005 at a reasonable assurance level.

Identification of Material Weakness and Remedial Measures

In connection with the closing of our general ledger and the preparation of our
Form 10-Q for the quarter ended December 31, 2005 we determined that our


                                       22
<PAGE>

consolidated financial statements included in the Quarterly Report for the
quarterly period ended September 30, 2005 reflected an error made in accruing
liabilities for direct shipments of product to a customer. Management has
determined that the error was the result of a control deficiency with the
Company's procedures in correctly reconciling customer prepayments, customer
invoices, inventory, cost of sales and accrued liabilities. Management believes
this control deficiency constituted a material weakness. A material weakness is
a control deficiency, or a combination of control deficiencies, that results in
a more than remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. In response to
this error, we have restated our consolidated financial statements for the
quarterly period ended September 30, 2005. As a result of this finding, our
Audit Committee has authorized and directed management to implement actions to
address this deficiency and to enhance the reliability and effectiveness of our
control procedures. As a result, we have established a policy for accounting
staff to follow to make sure the proper reconciliations of accounts is completed
each reporting period and that vendor payables and accruals are properly matched
and recorded with direct customer shipments.

Changes in Internal Control over Financial Reporting

Other than as summarized above there were no changes in our internal control
over financial reporting during the fiscal quarter ended September 30, 2005 that
have 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

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

At the Company'sAnnual 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            3,150,143
Robert Putnam            161,901,418            3,893,706
Allen Cocumelli          161,366,129            3,618,995
Alex Diaz                161,362,598            3,622,526
Renee 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-


                                       23
<PAGE>

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.

                                       24
<PAGE>



                                   SIGNATURES

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

                                          e.DIGITAL CORPORATION

Date:    February 14, 2006                      By: /s/ ROBERT PUTNAM
                                                    ----------------------------
                                                    Robert Putnam, Interim Chief
                                                    Accounting Officer
                                                   (Principal Accounting and
                                                    Financial Officer
                                                    and duly authorized to sign
                                                    on behalf of the Registrant)

                                       25