**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 **FORM
        10-Q**
  x QUARTERLY
        REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 **For
        the quarterly period ended June 30, 2005**
 
 Commission
        File Number 0-20734
 
 **e.Digital
        Corporation**
 (Exact
        name of registrant as specified in its charter)
  Delaware
              33-0865123(State
                  or other jurisdiction of
              (I.R.S.
                  Empl. Ident. No.)incorporation
                  or organization)
 
 13114
                  Evening Creek Drive South, San Diego, California
              92128(Address
                  of principal executive offices)
              (Zip
                  Code)
 
 (858)
        679-1504
 (Registrant’s
        telephone number, including area code)
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. YES
x NO
o
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act). YES o 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 August 4, 2005)
  
  **e.DIGITAL
          CORPORATION**
  INDEX
 
 Page**PART
                  I. FINANCIAL INFORMATION**Item
                1.
              Financial
                  Statements (unaudited):Consolidated
                  Balance Sheets as of June 30, 2005 andand
                  March 31, 2005
              3Consolidated
                  Statements of Operations for the threemonths
                  ended June 30, 2005 and 2004
              4Consolidated
                  Statements of Cash Flows for the threemonths
                  ended June 30, 2005 and 2004
              5Notes
                  to Interim Consolidated Financial Statements
              6Item
                2.
              Management's
                  Discussion and Analysis of FinancialCondition
                  and Results of Operations
              12Item
                3.
              Quantitative
                  and Qualitative Disclosure about Market Risk
              21Item
                4.
              Controls
                  and Procedures
              21**PART
                  II. OTHER INFORMATION**Item
                1.
              Legal
                  Proceedings
              21Item
                2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              22Item
                3.
              Defaults
                  Upon Senior Securities
              22Item
                4.
              Submission
                  of Matters to a Vote of Security Holders
              22Item
                5.
              Other
                  Information
              22Item
                6.
              Exhibits
                  and Reports on Form 8-K
              22SIGNATURES
              23
  
  **Part
                    I. Financial Information****Item
                    1. Financial Statements:****e.Digital
                    Corporation and subsidiary****CONSOLIDATED
                    BALANCE SHEETS****June
                    30, 2005**
                
                **March
                    31, 2005****(Unaudited)**$
                
                $**ASSETS****Current**Cash
                    and cash equivalents
                
                
                541,863
                
                
                1,289,253Accounts
                    receivable, trade
                
                
                24,199
                
                
                52,841Deposits
                    and prepaid expenses
                
                
                948,566
                
                
                505,353**Total
                    current assets**
                
                
                1,514,628
                
                
                1,847,447Property
                    and equipment, net of accumulated depreciation of$545,794
                    and $529,772 , respectively
                
                
                109,980
                
                
                126,002**Total
                    assets**
                
                
                1,624,608
                
                
                1,973,449**LIABILITIES
                    AND STOCKHOLDERS' DEFICIT****Current**Accounts
                    payable, trade
                
                
                497,489
                
                
                521,347Other
                    accounts payable and accrued liabilities
                
                
                58,297
                
                
                83,295Accrued
                    lease liability
                
                
                515,000
                
                
                515,000Accrued
                    employee benefits
                
                
                162,019
                
                
                134,442Dividends
                
                
                356,321
                
                
                352,044Deferred
                    revenue
                
                
                45,495
                
                
                46,888Customer
                    deposits
                
                
                954,190
                
                
                707,250Convertible
                    subordinated promissory notes, less $120,062 and $58,045 for
                    amortizationof
                    warrant, respectively
                
                
                879,938
                
                
                941,955Unsecured
                    promissory notes, short term
                
                
                947,919
                
                
                35,000**Total
                    current liabilities**
                
                
                4,416,668
                
                
                3,337,221Deferred
                    revenue
                
                
                **-**
                
                
                6,942Unsecured
                    promissory note
                
                
                **-**
                
                
                889,855**Total
                    liabilities**
                
                
                4,416,668
                
                
                4,234,018**Commitments
                    and Contingencies****Stockholders'
                    deficit**Preferred
                    stock, $0.001 par value; 5,000,000 shares authorizedSeries
                    D Convertible Preferred stock 250,000 shares designated:110,000
                    and
                    125,000issued
                    and outstanding, respectively. Liquidation preference
                
                
                1,100,000
                
                
                1,150,000of
                    $1,434,767 and $1,552,917, respectivelySeries
                    EE Convertible and Redeemable Preferred stock 20,000 shares designated:4,330
                    and 18,500 issued and outstanding, respectively. Liquidation
                    preferenceof
                    $454,554 and $1,867,412 respectively
                
                
                433,000
                
                
                1,250,000Common
                    stock, $0.001 par value, authorized 200,000,000,175,260,876
                    and 170,493,385 shares outstanding, respectively
                
                
                175,262
                
                
                170,494Additional
                    paid-in capital
                
                
                68,496,128
                
                
                67,475,009Dividends
                
                
                (356,321
                )
                
                (352,044
                )Accumulated
                    deficit
                
                
                (72,640,128
                )
                
                (71,954,029
                )**Total
                    stockholders' deficit**
                
                
                (2,792,060
                )
                
                (2,260,569
                )**Total
                    liabilities and stockholders' deficit**
                
                
                1,624,608
                
                
                1,973,449
 See
          notes
          to interim consolidated financial statements
  3
  **e.Digital
                    Corporation and subsidiary****CONSOLIDATED
                    STATEMENTS OF OPERATIONS****(UNAUDITED)****For
                    the three months ended****June
                    30,****2005**
                
                **2004**$
                
                $**Revenues:**Products
                
                
                965,730
                
                
                61,448Services
                
                
                32,479
                
                
                31,716998,209
                
                
                93,164**Cost
                    of revenues:**Products
                
                
                822,642
                
                
                17,725Services
                
                
                4,875
                
                
                6,800827,517
                
                
                24,525Gross
                    profit
                
                
                170,692
                
                
                68,639**Operating
                    expenses:**Selling
                    and administrative
                
                
                338,644
                
                
                346,241Research
                    and related expenditures
                
                
                361,921
                
                
                426,915Total
                    operating expenses
                
                
                700,565
                
                
                773,156Operating
                    loss
                
                
                (529,873
                )
                
                (704,517
                )**Other
                    income (expense):**Interest
                    income
                
                
                5,213
                
                
                **-**Interest
                    expense
                
                
                (121,316
                )
                
                (30,179
                )Other
                
                
                (1,300
                )
                
                **-**Other
                    income (expense)
                
                
                (117,403
                )
                
                (30,179
                )**Loss
                    for the period**
                
                
                (647,276
                )
                
                (734,696
                )Accrued
                    dividends on the Series D and E Preferred stock
                
                
                (43,100
                )
                
                (47,457
                )**Loss
                    attributable to common stockholders**
                
                
                (690,376
                )
                
                (782,153
                )**Loss
                    per common share - basic and diluted**
                
                
                (0.00
                )
                
                (0.00
                )**Weighted
                    average common shares outstanding**
                
                
                175,208,630
                
                
                162,439,108
 See
        notes to interim consolidated financial
        statements
  4
  **e.Digital
                    Corporation and subsidiary****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****(UNAUDITED)****For
                    the three months ended****June
                    30****2005**
                
                **2004****OPERATING
                    ACTIVITIES**
                
                $
                
                $Loss
                    for the period
                
                
                (647,276
                )
                
                (734,696
                )Adjustments
                    to reconcile loss to net cash used in operating
                    activities:Depreciation
                    and amortization
                
                
                16,022
                
                
                11,530Accrued
                    interest and accretion relating to secured promissory
                    notes
                
                
                28,125
                
                
                28,125Amortization
                    of interest on warrants issued in connection with the12%
                    convertible subordinated promissory notes
                
                
                58,045
                
                
                **-**Changes
                    in assets and liabilities:Accounts
                    receivable, trade
                
                
                28,642
                
                
                33,857Inventory
                
                
                **-**
                
                
                5,009Prepaid
                    expenses and other
                
                
                (443,213
                )
                
                (801,627
                )Accounts
                    payable, trade
                
                
                (23,858
                )
                
                76,432Other
                    accounts payable and accrued liabilities
                
                
                (24,998
                )
                
                (45,015
                )Customer
                    deposits
                
                
                246,940
                
                
                1,035,625Accrued
                    employee benefits
                
                
                27,577
                
                
                (25,749
                )Deferred
                    revenue
                
                
                (8,335
                )
                
                (21,168
                )Cash
                    (used in) operating activities
                
                
                (742,329
                )
                
                (437,677
                )**INVESTING
                    ACTIVITIES**Purchase
                    of property and equipment
                
                
                **-**
                
                
                (8,138
                )Cash
                    (used in) investing activities
                
                
                **-**
                
                
                (8,138
                )**FINANCING
                    ACTIVITIES**Proceeds
                    from 12% Convertible Subordinated Promissory Notes
                
                
                **-**
                
                
                660,000Payment
                    on 15% Unsecured Note
                
                
                (5,061
                )
                
                **-**Proceeds
                    from exercise of stock options
                
                
                **-**
                
                
                4,650Cash
                    (used in) provided by financing activities
                
                
                (5,061
                )
                
                664,650Net
                    increase (decrease) in cash and cash equivalents
                
                
                (747,390
                )
                
                218,835Cash
                    and cash equivalents, beginning of period
                
                
                1,289,253
                
                
                467,954Cash
                    and cash equivalents, end of period
                
                
                541,863
                
                
                686,789**Supplemental
                    schedule of noncash investing and financing
                    activities:**Deemed
                    dividends on Series D, E and EE preferred stock
                
                
                43,100
                
                
                37,198Discount
                    on 12% Convertible Subordinated Promissory Notes
                
                
                120,062
                
                
                **-**
  See
        notes to interim consolidated financial
        statements
  5
 
 **E.DIGITAL
        CORPORATION AND SUBSIDIARY**
 **NOTES
        TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **June
        30, 2005**


**1.
        NATURE OF OPERATIONS AND BASIS OF PRESENTATION**
  e.Digital
        Corporation, (the “Company”) is incorporated under the laws of Delaware. The
        Company offers engineering services, as well as complete reference designs
        and
        technology platforms with a focus on digital video/audio and player/recorders.
 
 The
        consolidated financial statements have been prepared by management, in
        accordance with accounting principles generally accepted in the United States
        on
        a going concern basis, which contemplates the realization of assets and the
        discharge of liabilities in the normal course of business for the foreseeable
        future.
 
 The
        Company has incurred significant losses and negative cash flow from operations
        in each of the last three years and has an accumulated deficit of $72,640,128
        at
        June 30, 2005. At June 30, 2005, the Company had a working capital deficiency
        of
        $2,902,040. 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 23,260,315
        shares of common stock were outstanding as at June 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 was increased during the three months ended
        June 30, 2005 and 2 004
        by
        accrued dividends of $43,100 and $47,457, respectively. The loss available
        to
        Common Stockholders is computed as follows:
 Three
                      Months Ended June 30,2005
                  
                  
                  2004Loss
                  
                  $
                  (647,276
                  )
                  $
                  (734,696
                  )Dividends
                      on Series D and EE preferred stock
                  
                  
                  (43,100
                  )
                  
                  (47,457
                  )Loss
                      available to Common Stockholders
                  
                  $
                  (690,376
                  )
                  $
                  (782,153
                  )
 6
 **E.DIGITAL
          CORPORATION AND SUBSIDIARY**
 **NOTES
          TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **June
          30, 2005**
 **3.
        STOCK BASED COMPENSATION**
 The
        Company has a stock-based employee and non-employee compensation plan. The
        Company accounts for stock-based employee and non-employee compensation
        arrangements using the intrinsic value method in accordance with the provisions
        of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
        Employees” (“APB No. 25”) and complies with the disclosure provisions of
        Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
        Compensation” (“SFAS No. 123”). Under APB No. 25, compensation expense is based
        on the difference, if any, on the date of the grant, between the fair value
        of
        the Company’s stock and the exercise price. The Company accounts for stock
        issued to non-employees in accordance with the provisions of SFAS No. 123
        and
        Emerging Issues Task Force No. 96-18 “Accounting for Equity Instruments with
        Variable Terms That Are Issued for Consideration Other Than Employee Services
        Under FASB Statement No. 123.”
 
 During
        the first quarter of 2005, no new options were granted by the Company, and
        as of
        June 30, 2005, an aggregate of 6,331,665 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 76% a risk free interest rate of 3.02% and an
        expected life of 2.5 years. The following table summarizes the weighted average
        fair value of the stock options granted during the periods:
 
 Three
                  Months Ended June 30,2005
              
              2004Net
                  loss as reported
              
              $
              (690,376
              )
              $
              (782,153
              )Add:
                  Total stock-based employee compensation recorded
              
              
              
              
              
              -Deduct:
                  Total stock-based employee compensation expensedetermined
                  under fair value based method for all awards
              
              
              37,707
              
              
              6,557Pro
                  forma net loss
              
              $
              (728,083
              )
              $
              (788,710
              )Earnings
                  per share:Basic
                  and Diluted - as reported
              
              $
              (0.00
              )
              $
              (0.00
              )Basic
                  and Diluted - pro forma
              
              $
              (0.00
              )
              $
              (0.00
              )
 
 Beginning
        with the quarter ending December 31, 2005, 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
        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.
 
 In
        December, 2004 the FASB issued SFAS 123 (revised 2004), “Share Based Payment”.
        This statement replaces SFAS 123 “Accounting for Stock-Based Compensation”, and
        supersedes APB Opinion 25, “Accounting for Stock Issued to Employees”. SFAS No
        123 (revised 2004) requires that the cost of share-based payment transactions
        (including those with employees and non-employees) be recognized as compensation
        costs in the financial statements. SFAS No. 123 (revised 2004) applies to
        all
        share-based payment transactions in which an entity acquires goods or services
        by issuing (or offering to issue) its shares, share options, or other equity
        instruments (except for those held by an ESOP) or by incurring liabilities
        in
        amounts based (even in part) on the price of the entity’s shares or other equity
        instruments, or that require (or may require) settlement by the issuance
        of an
        entity’s shares or other equity instruments. This statement applies to allow new
        awards granted during the fiscal year beginning after December 15. 2005 and
        to
        previous awards that are modified or cancelled after such date. We have not
        yet
        fully evaluated the effect of SFAS No. 123 (revised 2004) on our financial
        statements and have not determined the method of adoption we will use to
        implement SFAS No. 123 (revised 2004).
  7
 **E.DIGITAL
          CORPORATION AND SUBSIDIARY**
 **NOTES
          TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **June
          30, 2005**
 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.
 
 **5.
        PROMISSORY NOTES**
 June
                  30, 2005
              
              March
                  31, 200515%
                  Unsecured Promissory Notes
              
              $
              891,669
              
              $
              900,00012%
                  Convertible Subordinated Promissory Note, net
              
              
              879,938
              
              
              1,000,000Accrued
                  interest on notes
              
              
              56,250
              
              
              24,855Less
                  amortization of warrant
              
              
              -
              
              
              (58,045
              )Less
                  current portion
              
              
              -
              
              
              (976,955
              )Long
                  term
              
              $
              1,827,857
              
              $
              889,855
 
 **15%
        Unsecured Promissory Note**
 On
        December 11, 2002, the Company issued a 15% Unsecured Promissory Note (“15%
        Unsecured Note”) for cash proceeds of $750,000 from an unrelated corporation. On
        January 31, 2005, the 15% Unsecured Note was amended to extend the maturity
        date
        to June 30, 2006 when principal and interest will be payable. Accrued interest
        on the note at June 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 June 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 June 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.
  8
 **E.DIGITAL
          CORPORATION AND SUBSIDIARY**
 **NOTES
          TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **June
          30, 2005**
  **6.
        STOCKHOLDERS’ EQUITY**
 The
        following table summarizes stockholders’ equity transactions during the
        three-month period ended June 30, 2005:
 
 Preferred
                  stock
              
              Common
                  stock
              
              AdditionalPaid-in
              
              
              
              AccumulatedShares
              
              Amounts
              
              Shares
              
              Amounts
              
              Capital
              
              Dividends
              
              DeficitBalance,
                  March 31, 2005
              
              
              127,500
              
              $
              2,400,000
              
              
              170,493,385
              
              $
              170,493
              
              $
              67,475,009
              
              $
              (352,044
              )
              $
              (71,954,029
              )Shares
                  issued on conversion of Series D Preferred Stock
              
              
              (5,000
              )
              
              (50,000
              )
              
              335,702
              
              
              336
              
              
              63,447
              
              
              13,783
              
              
              (13,783
              )Shares
                  issued on conversion of Series EE Preferred Stock
              
              
              (8,170
              )
              
              (817,000
              )
              
              4,431,789
              
              
              4,432
              
              
              837,608
              
              
              25,040
              
              
              (25,040
              )Accrued
                  dividends on Series D Preferred Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (33,450
              )
              
              -Accrued
                  dividends on Series EE Preferred Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (9,650
              )
              
              -Discount
                  on 12% Convertible Subordinated Promissory Notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              120.062
              
              
              -
              
              
              -Loss
                  for the period
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (647,276
              )Balance,
                  June 30, 2005
              
              
              114,330
              
              $
              1,533,000
              
              
              175,260,876
              
              $
              175,262
              
              $
              68,496,128
              
              $
              (356,321
              )
              $
              (72,640,128
              )
 
 **7.
        WARRANTS AND OPTIONS**
 At
        June
        30, 2005 warrants were outstanding and exercisable into the following shares
        of
        common stock:
  **Number
                    of**
                **Exercise
                    Price****Description**
                **Common
                    Shares**
                **Per
                    Share $**
                **Expiration
                    Date**Warrant(1)
                46,189
                0.19
                October
                    5, 2005Warrant
                856,166
                1.00
                November
                    18, 2005Warrant(1)
                112,500
                0.19
                September
                    30, 2006Warrant(2)
                2,000,000
                0.19
                June
                    30, 2007Warrant(3)
                4,070,000
                0.50
                November
                    30, 2007Total
                7,084,855
 (1)
              The
                  warrants are subject to certain adjustments if the Company issues
                  shares
                  lower than $0.19.
 
 (2)
              In
                  connection with the issuance of 12% CSP Notes the Company issued
                  2,000,000
                  warrants with an exercise price of $0.25. The estimated fair market
                  value
                  of these warrants at issuance was $232,186 and was recorded as
                  a deferred
                  financing charge related to the 12% CSP Notes as a cost of issuing
                  the
                  warrants charged to Additional Paid in Capital. The deferred financing
                  charge was amortized over the original term of the 12% CSP Notes.
                  On June
                  30, 2005 the Warrants were modified by reducing the exercising
                  price of
                  $0.25 to $0.19.
 
 (3)
              In
                  connection with the issuance of the Series EE preferred stock the
                  Company
                  issued 370,000 warrants with an exercise price of $0.50 as a private
                  placement fee. The estimated fair market value of these warrants
                  at
                  issuance was $38,935 and was recorded as a deferred offering cost
                  related
                  to the issuance of the Series EE preferred stock.
 
 9
 **E.DIGITAL
          CORPORATION AND SUBSIDIARY**
 **NOTES
          TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **June
          30, 2005**
  The
        following table summarizes stock option activity for the period:
 **Weighted
                    average****Shares**
                
                **exercise
                    price**#
                
                $Outstanding
                    March 31, 2005
                
                
                6,656,665
                
                
                
                1.0846Granted
                
                
                -Canceled/expired
                
                
                (325,000
                )
                
                
                0.2200Exercised
                
                
                -
                
                
                
                -Outstanding
                    June 30, 2005
                
                
                6,331,665
                
                
                
                0.3773Exercisable
                    at June 30, 2005
                
                
                4,016,665
                
                
                
                0.4681
  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.
 
 **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 June 30, 2005 the 110,000 shares of the Series D
        Stock
        would have been convertible into 7,551,405 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 June 30, 2005,
        the
        Series EE Stock was convertible into 2,392,389 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.
 
 Approximately
        $515,000 of the accrued lease liability 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.
  10
  **E.DIGITAL
        CORPORATION AND SUBSIDIARY**
 **NOTES
        TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **June
        30, 2005**
 
 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 99% of accounts receivable at June 30, 2005.
        Amounts owing from two major customers comprised approximately 46% and 31%,
        respectively of accounts receivable at June 30, 2004.
 
 **11.
        MAJOR CUSTOMERS AND SUPPLIERS**
 The
        Company operates in one major line of business, the development, manufacture
        and
        marketing of electronic products. Sa les
        to
        one customer comprised 99% of revenue for the three months ended June 30,
        2005.
        Sales to two major customers comprised 72% of revenue for the three months
        ended
        June 30, 2004.
 
 **12.
        COMPARATIVE FIGURES**
 Certain
        of the comparative figures have been restated to conform with the current
        period’s presentation.
 
 **13.
        INCOME TAX**
 The
        Company has U.S. federal net operating loss carryforwards available at March
        31,
        2005 of approximately $53,300,000 [2004 - $51,000,000] which will begin to
        expire in 2006. The Company has state net operating loss carryforwards of
        $16,400,000 [2004 - $16,000,000] which will expire beginning in 2005. The
        difference between federal and state net operating loss carryforwards is
        due to
        the 50% limitation of California loss carryforwards and to expiring California
        carryforwards.
  11
 
 **Item
        2. Management's Discussion and Analysis of Financial Condition and Results
        of
        Operations**
 
 THE
        FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO
        THE
        COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
        FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON
        A
        VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING,
        "BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
        YEAR
        ENDED MARCH 31, 2005.
 
 **General**
 e.Digital
        Corporation is a holding company that operates through a wholly-owned California
        subsidiary of the same name and is incorporated under the laws of Delaware.
        We
        provide engineering services, product reference designs and technology platforms
        to customers focusing on the digital video/audio and player/recorder markets.
        Our product reference designs are working, full-featured designs sometimes
        implemented as prototypes that can be customized to a customers’ preferred look
        and feel or branded and sold as they are, according to a customer’s wishes. Our
        technology platforms are basic working technology that can be developed into
        a
        finished consumer product, or incorporated into an existing consumer product
        design for private labeling. Our technology and services are used by customers
        to design, develop and produce complex electronic products primarily targeted
        at
        end-user consumers.
 
 The
        Company has incurred significant losses and negative cash flow from operations
        in each of the last three years and has an ac cumulated
        deficit of $72,640,128 at June 30, 2005. At June 30, 2005, the Company had
        a
        working capital deficiency of $2,902,040. Our monthly cash operating costs
        have
        been on average $180,000 and $215,000 per month for the periods ending June
        30,
        2005 and 2004, respectively. However, we may increase expenditure levels
        in
        future periods to support and expand our revenue opportunities and continue
        advanced product and technology research and development. Accordingly, our
        losses are expected to continue until such time as we are able to realize
        supply, licensing, royalty, sales, and development revenues sufficient to
        cover
        the fixed costs of operations. We continue to be subject to the risks normally
        associated with any new business activity, including unforeseeable expenses,
        delays and complications. Accordingly, there is no guarantee that we can
        or will
        report operating profits in the future.
 
 We
        have
        experienced a substantial reduction in cash that adversely affects our
        liquidity. Our operating plans require additional funds which may take the
        form
        of debt or equity financings. There can be no assurance that any additional
        funds will be available to our company on satisfactory terms and conditions,
        if
        at all. Our company’s ability to continue as a going concern is in substantial
        doubt and is dependent upon achieving a profitable level of operations and,
        if
        necessary, obtaining additional financing.
 
 Management
        of our company has undertaken steps as part of a plan to improve operations
        with
        the goal of sustaining our operations for the next twelve months and beyond.
        These steps include (a) controlling overhead and expenses; (b) expanding
        sales
        and marketing to business customers and markets and (c) raising, if necessary,
        additional capital and/or obtaining third party financing.
 
 **Critical
        Accounting Policies**
 The
        discussion and analysis of our financial condition and results of operations
        are
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States.
        The preparation of these financial statements requires us to make estimates
        and
        judgments that affect the reported amounts of assets, liabilities, revenues
        and
        expenses, and related disclosure of contingent assets and liabilities. On
        an
        on-going basis, we evaluate our estimates, including those related to product
        returns, bad debts, inventory valuation, intangible assets, financing
        operations, warranty obligations, estimated costs to complete research contracts
        and contingencies and litigation. We base our estimates on historical experience
        and on various other assumptions that we believe to be reasonable under the
        circumstances, the results of which form the basis for making judgments about
        the carrying values of assets and liabilities that are not readily apparent
        from
        other sources. Actual results may differ from these estimates under different
        assumptions or conditions.
 
 We
        believe the following critical accounting policies affect our more significant
        judgments and estimates used in the preparation of our consolidated financial
        statements.
  12
 
 We
        recognize license revenue and product revenue upon shipment of a product
        to the
        customer, FOB destination or FOB shipping point depending on the specific
        contract term, if a signed contract exists, the fee is fixed and determinable,
        collection of resulting receivables is probable and there are no resulting
        obligations. Research and development contract revenues on short-term projects
        or service revenue is recognized once the services or product has been
        delivered, the fee is fixed and determinable, collection of the resulting
        receivable is probable and there are no resulting obligations. If all of
        the
        service or product has been delivered and there is one element that is
        perfunctory to the services or product that has not been delivered, revenue
        will
        be recognized evenly over the remaining term of the undelivered element.
        Research and development contract revenue on long-term projects is recognized
        on
        the percentage of completion method. Funds received in advance of meeting
        the
        criteria for revenue recognition are deferred and are recorded as revenue
        as
        they are earned. If the costs we incur on a contract are expected to exceed
        the
        anticipated revenue we will record the loss in the period in which the facts
        that give rise to the revision becomes known.
 
 We
        record
        estimated reductions to revenue for anticipated product returns, discounts
        offered to our customers and volume-based incentives. If market conditions
        were
        to decline, we may take actions to increase the discounts offered for future
        sales which will result in an incremental reduction of revenue at the time
        the
        discounts are offered.
 
 We
        maintain allowances for doubtful accounts for estimated losses resulting
        from
        the inability of our customers to make required payments. If the financial
        condition of our customers were to deteriorate, resulting in an impairment
        of
        their ability to make payments, additional allowances may be required.
 
 We
        have
        provided for a full valuation reserve related to our substantial deferred
        tax
        assets. In the future, if sufficient evidence of our ability to generate
        sufficient future taxable income in certain tax jurisdictions becomes apparent,
        we may be required to reduce our valuation allowances, resulting in income
        tax
        benefits in our consolidated statement of operations. We evaluate the
        realizability of the deferred tax assets and assess the need for valuation
        allowance quarterly. The utilization of the net operating loss carryforwards
        could be substantially limited due to restrictions imposed under federal
        and
        state laws upon a change in ownership.
 
 Under
        our
        bylaws, we have agreed to indemnify our officers and directors for certain
        events. We also enter into certain indemnification agreements in the normal
        course of our business. The Company has no liabilities recorded for such
        indemnities.
 
 We
        do not
        have off-balance sheet arrangements, financings, or relationships with
        unconsolidated entities or other persons, also known as “special purposes
        entities” (SPEs).
 
 **Results
        of Operations**
 **Three
        months ended June 30, 2005 compared to three months ended June 30,
        2004**
 
 For
        the
        first three months of fiscal 2006, we reported total revenues of $998,209
        a 971%
        increase from total revenues of $93,164 for the first three months of fiscal
        2005. Product revenues for the quarter ending June 30, 2005 were $965,730  compared
        to $61,488
        for the quarter ending June 30, 2004. The $904,282 increase is related to
        the
        timing of products being shipped. For fiscal 2004, product was expected to
        ship
        in June but commenced in July 2004. We have received purchase orders for
        approximately $1.6 million of which $954,190 has been received and is recorded
        as customer deposits. The entire backlog is expected to ship in the quarter
        ending September 30, 2005.
  Service
        revenues for the first three months of fiscal 2006 were $32,479 compared
        to
        $31,716 for the comparable period of the prior year. The timing and amount
        of
        service revenues is dependent upon a limited num ber
        of
        projects. At June 30, 2005 we had $779,193 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
        June
        30, 2005 consisted of $822,642 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 three months ended June 30, 2004 consisted of $17,725 of product
        costs
        and $6,800 of service costs, consisting mostly of research and development
        labor
        funded in part by OEM development agreements. Although we do not anticipate
        any
        significant future contract losses, we cannot guarantee that we can maintain
        positive gross margins in the future or with future customers.
  13
 
 Gross
        profit for the first three months of fiscal 2006 was $170,692 compared to
        $68,639 for the first three months of fiscal 2005. Gross profit as a percent
        of
        sales for the first quarter of fiscal 2005 was 17% compared to 74% for the
        same
        period last year. The gross margins for our product have on average been
        approximately 20%. The decrease in product gross margin for the period ending
        June 30, 2005 includes additional costs incurred for the development of the
        enhanced in-flight entertainment device. At the present time, warranty costs
        are
        not significant.
 
 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 June 30, 2005 were
        $361,921, as compared
        to $426,915 for the three months ended June 30, 2004. The decrease of $64,994
        can be attributed to the decrease in engineering costs of $59,625, a decrease
        of
        $33,307 in personnel and related costs offset by an increase of $33,096 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.
 
 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 June 30, 2005, was $338,644 compared to $346,241 for the first
        three months of fiscal 2005. We anticipate quarterly selling and administrative
        expenses to be constant as we are focused on more on business customer
        opportunities and de-emphasize selling and marketing our branded
        products.
 
 We
        reported an operating loss of
        $529,873 for the
        three months ended June 30, 2005, as compared to an operating loss of $704,517
        for the three months ended June 30, 2004. The 25% decrease in operating loss
        resulted primarily from the positive 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 $121,316 for the three months ended June 30,
        2004
        versus $30,179. The increase in 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 first three months of fiscal 2006 of $647,276 as
        compared to a loss of $734,696 for the prior first three months of fiscal
        2005 .
 
 The
        loss
        attributable to Common Stockholders for the three months ended June 30, 2005
        and
        2004 was $690,376 and $782,153 ,
        respectively. Included in the loss available to Common Stockholders for the
        period ending June 30, 2005 were accrued dividends on the Series D and Series
        EE
        stock of $33,450 and $9,650, respectively. Included in the loss available
        to
        Common Stockholders for the period ending June 30, 2004 were accrued dividends
        on the Series D and Series E stock of $38,039 and $9,418, respectively.
 
 **Liquidity
        and Capital Resources**
 At
        June
        30, 2005, we had working capital deficit of $2,902,040 compared to a
        working capital deficit of $1,489,774 at March 31, 2005. Cash used in operating
        activities for the three month period ended June 30, 2005 was
        $742,329 resulting
        primarily from the $647,276 loss for the period, a decrease of $8,335 in
        deferred revenue, an increase of $443,213 in prepaid expenses and other,
        an
        increase of $76,432 in other accounts payable, an increase of $27,577 in
        accrued
        employee benefits, and a decrease of $28,642 in accounts receivable, an increase
        of $246,940 in customer deposits. During the three months ended June 30,
        2005,
        the Company purchased
        no additional property
        and equipment.
 
 For
        the
        three months ended June 30, 2005, cash used in financing activities was $5,061 resulting
        primarily from principal payment on the 15% Unsecured Promissory Note. For
        the
        three months ended June 30, 2005, net cash and cash equivalents decreased by
        $747,390.
  14
 
 At
        June
        30, 2005,
        we
        had net accounts receivable of
        $24,199 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
        June
        30, 2005, we had cash and cash equivalents of $541,863. 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 branded and 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 forebearance agreements on the $947,919 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
        June 30, 2005, our contractual obligations and commercial commitments are
        summarized below:
 
 Cash
                    Contractual Obligations by PeriodTotal
                
                Less
                    than 1 year
                
                1-2
                    years
                
                2-3
                    years15%
                    Unsecured Notes(1)
                
                $
                1,060,419
                
                $
                1,060,419
                
                
                -
                
                
                -12%
                    Subordinated Promissory Notes(2)
                
                
                1,060,000
                
                
                1,060,000
                
                
                -
                
                
                -Operating
                    Leases(3)
                
                
                92,910
                
                
                92,910
                
                
                -
                
                
                -Total
                    Cash Obligations
                
                $
                2,213,329
                
                $
                2,213,329
                
                $
                -
                
                $
                -
  (1)
                    Includes two 15% unsecured notes and accrued interest as of June
                    30, 2005,
                    both notes mature on June 30, 2006(2)
                    Notes modified to extend maturity date to December 31,
                    2005(3)
                    Office sublease agreement expires July 31, 2006
 
 **Future
        Commitments and Financial Resources**
 We
        have
        an accrued lease liability of $515,000 that arose in the normal course of
        business for equipment delivered to the Company. This amount is approximately
        eight years old. The accrued lease liability reflects management’s best estimate
        of amounts due for matters in dispute. Settlement of this liability may either
        be more or less than the amount recorded in the audited consolidated financial
        statements and accordingly may be subject to measurement uncertainty in the
        near
        term.
 
 In
        the
        future, if our operations increase significantly, we may require additional
        fun ds.
        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.
  15
 
 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.
 
 **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 June 30, 2005 had an accumulated deficit of $72.6 million.
        We
        had losses of approximately $3.7 million, $3.5 million and $6.7 million in
        fiscal 2005, 2004 and 2003, respectively. To date, we have not achieved
        profitability and given the level of operating expenditures and the uncertainty
        of revenues and margins, we will continue to incur losses and negative cash
        flows in future periods. The failure to obtain sufficient revenues and margins
        to support operating expenses could harm our business.
 
 ***We
        do not Anticipate Paying Dividend*** *s* .
        We have
        never paid any cash dividends on our common stock and do not anticipate paying
        any cash dividends in the foreseeable future. We currently intend to retain
        any
        future earnings to fund the development and growth of our business. An
        investment in our common stock, therefore, may be more suitable for an investor
        that is seeking capital appreciation rather than current yield and, as a
        consequence, may be more speculative. Accordingly, investors should not purchase
        our common stock with an expectation of receiving regular dividends.
 
 ***We
        Expect Our Operating Results To Fluctuate
        Significantly*** **** -
        Our
        quarterly and annual operating results have fluctuated significantly in the
        past
        and we expect that they will continue to fluctuate in the future. This
        fluctuation is a result of a variety of factors, including the
        following:
 
 ·
              Unpredictable
                  demand and pricing for our contract development
                  services
 ·
              Market
                  acceptance of our business customers’ products by end
                  users
 ·
              Uncertainties
                  with respect to future customer product orders, their timing and
                  the
                  margins to be received, if any
 ·
              Fluctuations
                  in operating costs
 ·
              Changes
                  in research and development costs
 ·
              Changes
                  in general economic conditions
 ·
              Changes
                  in technology
 ·
              Short
                  product lifecycles
 
 ***We
        May Experience Product Delays, Cost Overruns and Errors Which Could Adversely
        Affect our Operating Performance and Ability to Remain
        Competitive.*** ** We
        have
        experienced development delays and cost overruns associated with contract
        development services in the past. We may experience additional delays and
        cost
        overruns on current projects or future projects. Future delays and cost overruns
        could adversely affect our financial results and could affect our ability
        to
        respond to technological changes, evolving industry standards, competitive
        developments or customer requirements. Our technology, the results of our
        contract services and the products produced for our customers could contain
        errors that could cause delays, order cancellations, contract terminations,
        adverse publicity, reduced market acceptance of products, or lawsuits by
        our
        customers or others who have acquired our products, including customers branded
        products.
  16
 
 ***We
        May Need to Obtain Additional Financing to Continue Operating our
        Business*** *.* We
        believe that with cash on hand and proceeds from existing development and
        production contracts and product sales, we have sufficient proceeds to meet
        cash
        requirements for the next nine ** months.
        However, we may need to raise additional funds to:
 
 ·
              Finance
                  unanticipated working capital
                  requirements
 ·
              Pay
                  for increased operating expenses or shortfalls in anticipated
                  revenues
 ·
              Fund
                  increases in research and development
                  costs
 ·
              Develop
                  new technology, products or
                  services
 ·
              Respond
                  to competitive pressures
 ·
              Support
                  strategic and industry
                  relationships
 ·
              Fund
                  the marketing of our products and
                  services
 
 In
        the
        event additional funds are required, we cannot assure you that such additional
        financing will be available on terms favorable to us, or at all. In addition,
        in
        order to obtain additional financing through the sale of shares of our common
        stock, we may need to obtain the approval of our stockholders of an amendment
        to
        our certificate of incorporation to sufficiently increase the number of
        authorized shares of our common stock, depending upon the size of the offering
        and the numbers of shares to be sold. However, we can give no assurance that
        our
        stockholders would approve a sufficient increase in our authorized shares
        of
        common stock. 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 2005, fiscal
        year 2004 and in prior years and (iii) the possibility that we may be unable
        to
        meet our debts as they come due, raise substantial doubt about our ability
        to
        continue as a going concern. Our company’s ability to continue as a going
        concern is dependent upon our ability to obtain adequate financing and achieve
        a
        level of revenues, adequate to support our capital and operating requirements,
        as to which no assurance can be given. In the event we are unable to continue
        as
        a going concern, we may elect or be required to seek protection from our
        creditors by filing a voluntary petition in bankruptcy or may be subject
        to an
        involuntary petition in bankruptcy. To date, management has not considered
        this
        alternative, nor does management view it as a likely occurrence. Our auditors
        have included in their report an explanatory paragraph describing conditions
        that raise substantial doubt about our ability to continue as a going
        concern.
 
 ***Risks
        Related to Sales, Marketing and Competition***
 
 ***We
        May Be Unable to Successfully Compete in the Electronic Products Market Which
        is
        Highly Competitive and Subject to Rapid Technological
        Change*** *.* We
        compete in the market for electronics products which is intensely competitive
        and subject to rapid technological change. The market is also impacted by
        evolving industry standards, rapid price changes and rapid product obsolescence.
        Our competitors include a number of large foreign companies with U.S. operations
        and a number of domestic companies, many of which have substantially greater
        financial, marketing, personnel and other resources. Our current competitors
        or
        new market entrants could introduce new or enhanced technologies or products
        with features that render the company’s technology or products obsolete or less
        marketable, or could develop means of producing competitive products at a
        lower
        cost. Our ability to compete successfully will depend in large measure on
        our
        ability to maintain our capabilities in connection with upgrading products
        and
        quality control procedures and to adapt to technological changes and advances
        in
        the industry. Competition could result in price reductions, reduced margins,
        and
        loss of contracts, any of which could harm our business. There can be no
        assurance that we will be able to keep pace with the technological demands
        of
        the marketplace or successfully enhance our products or develop new products
        that are compatible with the products of the electronics industry.
 
 ***We
        Rely on a Limited Number of Customers for Revenue*** *.* Historically,
        a substantial portion of our revenues has been derived primarily from a limited
        number of customers. One customer accounted for approximately 99% of revenues
        for the period ending June 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.
  17
 
 ***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”) product.
        We depend on our contract manufacturer to (i) allocate sufficient capacity
        to
        our manufacturing needs, (ii) produce acceptable quality products at agreed
        pricing and (iii) deliver on a timely basis. If a manufacturer is unable
        to
        satisfy these requirements, our business, financial condition and operating
        results may be materially and adversely affected. Any failure in performance
        by
        our manufacturer for any reason could have a material adverse affect on our
        business. Production and pricing by such manufacturer is subject to the risk
        of
        price fluctuations and periodic shortages of components. We have no supply
        agreements with component suppliers and, accordingly, we are dependent on
        the
        future ability of our manufacturer to purchase components. Failure or delay
        by
        suppliers in supplying necessary components could adversely affect our ability
        to deliver products on a timely and competitive basis in the
        future.
 
 ***If
        We Lose Key Personnel or Are Unable to Attract and Retain Additional Highly
        Skilled Personnel Required For the Expansion of Our Activities Our Business
        Will
        Suffer*** *.* Our
        future success depends to a significant extent on the continued service of
        our
        key technical, sales and senior management personnel and their ability to
        execute our strategy. The loss of the services of any of our senior level
        management, or certain other key employees, may harm our business. Our future
        success also depends on our ability to attract, retain and motivate highly
        skilled employees. Competition for employees in our industry is intense.
        We may
        be unable to retain our key employees or to attract, assimilate and retain
        other
        highly qualified employees in the future. We have from time to time in the
        past
        experienced, and we expect to continue to experience in the future, difficulty
        in hiring and retaining highly skilled employees with appropriate
        qualifications.
  18
 
 ***Because
        Some of Our Management are Part-Time and Have Certain Conflicts of Interest,
        Our
        Business Could Be Harmed*** **.** Our Vice
        President, Robert Putnam, is also a Vice President, Investor Relations of
        American Technology Corporation. As a result of his involvement with American
        Technology Corporation, Mr. Putnam has in the past, and is expected in the
        future to devote a substantial portion of his time to other endeavors and
        only
        part-time services to e.Digital. Certain conflicts of interest now exist
        and
        will continue to exist between e.Digital and Mr. Putnam due to the fact that
        he
        has other employment or business interests to which he devotes some attention
        and he is expected to continue to do so. It is conceivable that the respective
        areas of interest of e.Digital and American Technology Corporation could
        overlap
        or conflict.
 
 ***Risks
        Related to Intellectual Property and Government
        Regulation***
 
 ***Failing
        to Protect Our Proprietary Rights to Our Technology Could Harm Our Ability
        to
        Compete, as well as Our Results of Our Operations.*** ** Our
        success and ability to compete substantially depends on our internally developed
        software, technologies and trademarks, which we protect through a combination
        of
        patent, copyright, trade secret and trademark laws. Patent applications or
        trademark registrations may not be approved. Even when they are approved,
        our
        patents or trademarks may be successfully challenged by others or invalidated.
        If our trademark registrations are not approved because third parties own
        such
        trademarks, our use of these trademarks would be restricted unless we enter
        into
        arrangements with the third-party owners, which may not be possible on
        commercially reasonable terms or at all. We generally enter into confidentiality
        or license agreements with our employees, consultants and strategic and industry
        partners, and generally control access to and distribution of our software,
        technologies, documentation and other proprietary information. Despite our
        efforts to protect our proprietary rights from unauthorized use or disclosure,
        parties may attempt to disclose, obtain or use our solutions or technologies.
        The steps we have taken may not prevent misappropriation of our solutions
        or
        technologies, particularly in foreign countries where laws or law enforcement
        practices may not protect our proprietary rights as fully as in the United
        States. We have licensed, and we may license in the future, certain proprietary
        rights to third parties. While we attempt to ensure that our business partners
        maintain the quality of our brand, they may take actions that could impair
        the
        value of our proprietary rights or our reputation. In addition, these business
        partners may not take the same steps we have taken to prevent misappropriation
        of our solutions or technologies.
 
 ***We
        May Face Intellectual Property Infringement Claims That May Be Difficult
        to
        Defend and Costly To Resolve, Which Could Harm Our
        Business.*** ** Although
        we do not believe we infringe the proprietary rights of any third parties,
        we
        cannot assure you that third parties will not assert such claims against
        us in
        the future or that such claims will not be successful. We could incur
        substantial costs and diversion of management resources to defend any claims
        relating to proprietary rights, which could harm our business. In addition,
        we
        are obligated under certain agreements to indemnify the other party for claims
        that we infringe on the proprietary rights of third parties. If we are required
        to indemnify parties under these agreements, our business could be harmed.
        If
        someone asserts a claim relating to proprietary technology or information
        against us, we may seek licenses to this intellectual property. We may not
        be
        able to obtain licenses on commercially reasonable terms, or at all. The
        failure
        to obtain the necessary licenses or other rights may harm our
        business.
 
 ***Risks
        Related To Government Regulation, Content And Intellectual Property Government
        Regulation May Subject Us to Liability and Require Us To Change The Way We
        Do
        Business.*** ** Our
        business is subject to rapidly changing laws and regulations. Although our
        operations are currently based in California, the United States government
        and
        the governments of other states and foreign countries have attempted to regulate
        activities on the Internet. Evolving areas of law that are relevant to our
        business include privacy law, copyright law, proposed encryption laws, content
        regulation and import/export regulations. Because of this rapidly evolving
        and
        uncertain regulatory environment, we cannot predict how these laws and
        regulations might affect our business. In addition, these uncertainties make
        it
        difficult to ensure compliance with the laws and regulations governing the
        Internet. These laws and regulations could harm us by subjecting us to liability
        or forcing us to change how we do business.
 
 ***Risks
        Related to Trading in Our Common Stock***
 
 ***Investing
        in a Technology Stock (Such as Ours) May Involve Greater Risk Than Other
        Investments Due to Market Conditions, Stock Price Volatility and Other
        Factors*** *.* The
        trading price of our common stock has been subject to significant fluctuations
        to date, and will likely be subject to wide fluctuations in the future due
        to:
  19
 
 ·
              Quarter-to-quarter
                  variations in operating results
 ·
              Announcements
                  of technological innovations by us, our customers or
                  competitors
 ·
              New
                  products or significant design achievements by us or our competitors
 ·
              General
                  conditions in the markets for the our products or in the electronics
                  industry
 ·
              The
                  price and availability of products and
                  components
 ·
              Changes
                  in operating factors including delays of shipments, orders or
                  cancellations
 ·
              General
                  financial market conditions
 ·
              Market
                  conditions for technology stocks
 ·
              Litigation
                  or changes in operating results or estimates by analysts or
                  others
 ·
              Or
                  other events or factors
 
 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 $0.12 to a high of $0.43 in
        the
        last twelve months. In addition, our common stock is subject to Rules
        15g-1-15g-6 promulgated under the Securities Exchange Act of 1934 that imposes
        additional sales practice requirements on broker-dealers who sell such
        securities to persons other than established customers and accredited investors
        (generally, a person with assets in excess of $1,000,000 or annual income
        exceeding $200,000 or $300,000 together with his or her spouse). For
        transactions covered by this rule, the broker-dealer must make a special
        suitability determination for the purchaser and have received the purchaser’s
        written consent to the transaction prior to sale. Consequently, the rule
        may
        affect the ability of broker-dealers to sell the company’s securities and may
        affect the ability of investors to sell their securities in the secondary
        market. The Commission has also adopted regulations which define a “penny stock”
        to be any equity security that has a market price (as defined) of less than
        $5.00 per share or an exercise price of less than $5.00 per share, subject
        to
        certain exceptions. For any transaction involving a penny stock, unless exempt,
        the regulations require the delivery, prior to the transaction, of a disclosure
        schedule prepared by the Commission relating to the penny stock market. The
        broker-dealer must also disclose the commissions payable to both the
        broker-dealer and the registered representative, current quotations for the
        securities and, if the broker-dealer is the sole market maker, the broker-dealer
        must disclose this fact and the broker-dealer’s presumed control over the
        market. Finally, monthly statements must be sent disclosing recent price
        information for the penny stock in the account and information on the limited
        market in penny stocks.
 
 ***Important
        Factors Related to Forward-Looking Statements and Associated
        Risks*** *.* This
        annual report contains certain forward-looking statements within the meaning
        of
        Section 27A of the Securities Act and Section 21E of the Securities Exchange
        Act
        of 1934 and we intend that such forward-looking statements be subject to
        the
        safe harbors created thereby. These forward-looking statements include our
        plans
        and objectives of management for future operations, including plans and
        objectives relating to the products and our future economic performance.
        The
        forward-looking statements included herein are based upon current expectations
        that involve a number of risks and uncertainties. These forward-looking
        statements are based upon assumptions that we will design, manufacture, market
        and ship new products on a timely basis, that competitive conditions within
        the
        computer and electronic markets will not change materially or adversely,
        that
        the computer and electronic markets will continue to experience growth, that
        demand for the our products will increase, that we will obtain and/or retain
        existing development partners and key management personnel, that future
        inventory risks due to shifts in market demand will be minimized, that our
        forecasts will accurately anticipate market demand and that there will be
        no
        material adverse change in our operations or business. Assumptions relating
        to
        the foregoing involve judgments with respect, among other things, to future
        economic, competitive and market conditions and future business decisions,
        all
        of which are difficult or impossible to predict accurately and many of which
        are
        beyond our control. Although we believe that the assumptions underlying the
        forward-looking statements are reasonable, any of the assumptions could prove
        inaccurate and, therefore, there can be no assurance that the results
        contemplated in forward-looking information will be realized. In addition,
        as
        disclosed above, our business and operations are subject to substantial risks
        which increase the uncertainty inherent in such forward-looking statements.
        Any
        of the other factors disclosed above could cause our net sales or net income
        (or
        loss), or our growth in net sales or net income (or loss), to differ materially
        from prior results. Growth in absolute amounts of costs of sales and selling
        and
        administrative expenses or the occurrence of extraordinary events could cause
        actual results to vary materially from the results contemplated in the
        forward-looking statements. Budgeting and other management decisions are
        subjective in many respects and thus susceptible to interpretations and periodic
        revisions based on actual experience and business developments, the impact
        of
        which may cause us to alter our marketing, capital expenditure or other budgets,
        which may in turn affect our results of operations. In light of the significant
        uncertainties inherent in the forward-looking information included herein,
        the
        inclusion of such information should not be regarded as a representation
        by us
        or any other person that our objectives or plans will be achieved.
  20
 
 **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 $541,863 and our debt of $1,947,919,
        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 June 30, 2005, the market value of these
        investments, which were all classified as cash and cash equivalents and
        certificate of deposit, and debt approximated cost. ****
 
 **Item
        4. Controls and Procedures**
 We
        maintain disclosure controls and procedures (as defined in Rules 13a-15(e)
        and
        15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
        Act”)) that are designed to ensure that information required to be disclosed
        in
        our reports filed under the Exchange Act, is recorded, processed, summarized
        and
        reported within the time periods specified in the SEC’s rules and forms, and
        that such information is accumulated and communicated to our management,
        including our Chief Executive Officer and Interim Chief Accounting Officer,
        as
        appropriate, to allow timely decisions regarding required disclosure. In
        designing and evaluating the disclosure controls and procedures, management
        recognized that any controls and procedures, no matter how well designed
        and
        operated, can provide only reasonable assurance of achieving the desired
        control
        objectives, and management necessarily was required to apply its judgment
        in
        evaluating the cost-benefit relationship of possible controls and procedures.
 
 We
        carried out an evaluation under the supervision and with the participation
        of
        management, including our Chief Executive Officer and Interim Chief Accounting
        Officer, of the effectiveness of the design and operation of our disclosure
        controls and procedures as of June 30, 2005, the end of the period covered
        by
        this report. Based on that evaluation, our Chief Executive Officer and Interim
        Chief Accounting Officer concluded that our disclosure controls and procedures
        were effective at the reasonable assurance level as of June 30, 3005.
 
 There
        have been no changes in our internal control over financial reporting (as
        defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
        quarter ended June 30, 2005 that materially affected, or are reasonably likely
        to materially affect, our internal control over financial
        reporting.
 
 **PART
        II. OTHER INFORMATION**
 
 **Item
        1. Legal Proceedings**
 We
        are
        involved from time to time in routine litigation incidental to the conduct
        of
        our business. Except as set forth below, there is currently no material pending
        legal proceedings to which we are party or to which any of our property is
        subject.
  21
  **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**
 NONE
  **Item
        5. Other Information**
 (a)
        NONE
 (b)
        NONE
 
 **Item
        6. Exhibits**
 
 Exhibit 31.1
        -
        Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
        302 of the Sarbanes-Oxley Act of 2002, signed by Atul Anandpura, Chief 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 Atul Anandpura, Chief Executive
        Officer and Robert Putnam, Principal Accounting Officer.
 
 22
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
  e.DIGITAL
                CORPORATIONDate:August
                15, 2005
              By:
              /s/
                ROBERT PUTNAMRobert
                  Putnam, Interim Chief Accounting Officer
                (Principal
                  Accounting and Financial Officer
                and
                  duly authorized to sign on behalf of the Registrant)
 23