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

                                  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 December 31, 2005

                         Commission File Number 0-20734

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


             Delaware                                   33-0865123
             --------                                   ----------
(State or other jurisdiction of                 (I.R.S. Empl. Ident. No.)
 incorporation or organization)

13114 Evening Creek Drive South, San Diego, California          92128
------------------------------------------------------          -----
      (Address of principal executive offices)                (Zip Code)

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


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

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

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

Common Stock, par value $0.001                            175,260,876
------------------------------                            -----------
            (Class)                            (Outstanding at January 28, 2006)

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

<PAGE>

e.Digital Corporation

                                      INDEX

                                                                            Page
PART I. FINANCIAL INFORMATION

      Item 1.  Financial Statements (unaudited):

               Consolidated Balance Sheets as of December 31, 2005 and
               and March 31, 2005                                              3

               Consolidated Statements of Operations for the three and nine
               months ended December 31, 2005 and 2004                         4

               Consolidated Statements of Cash Flows for the three and nine
               months ended December 31, 2005 and 2004                         5

               Notes to Interim Consolidated Financial Statements              6

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

      Item 3.  Quantitative and Qualitative Disclosure about Market Risk      17

      Item 4. Controls and Procedures                                         17


PART II. OTHER INFORMATION

      Item 1.  Legal Proceedings                                              18
      Item 1A. Risk Factors                                                   18
      Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds    19
      Item 3.  Defaults Upon Senior Securities                                19
      Item 4.  Submission of Matters to a Vote of Security Holders            19
      Item 5.  Other Information                                              19
      Item 6.  Exhibits and Reports on Form 8-K                               19


SIGNATURES                                                                    20

                                       2
<PAGE>

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

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    December 31, 2005       March 31, 2005
                                                                                                 (Unaudited)
                                                                                            $                    $
                                                                                  -------------------------------------------
ASSETS
Current
<S>                                                                                         <C>                  <C>
Cash and cash equivalents                                                                       159,125            1,289,253
Accounts receivable, trade                                                                        8,294               52,841
Deposits and prepaid expenses                                                                   412,772              505,353
                                                                                  -------------------------------------------
Total current assets                                                                            580,191            1,847,447
                                                                                  -------------------------------------------
Property and equipment, net of accumulated depreciation of
   $577,102 and $529,772 , respectively                                                          78,672              126,002
                                                                                  -------------------------------------------
    Total assets                                                                                658,863            1,973,449
                                                                                  ===========================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current
Accounts payable, trade                                                                         522,486              521,347
Other accounts payable and accrued liabilities                                                   33,295               83,295
Accrued lease liability                                                                         515,000              515,000
Accrued employee benefits                                                                       132,763              134,442
Dividends                                                                                       441,492              352,044
Deferred revenue                                                                                 28,828               46,888
Customer deposits                                                                               557,875              707,250
Convertible subordinated promissory notes, less $0 and $58,045 for amortization
   of warrant, respectively                                                                   1,350,000              941,955
Unsecured promissory notes, short term                                                          993,466               35,000
                                                                                  -------------------------------------------
    Total current liabilities                                                                 4,575,205            3,337,221
                                                                                  -------------------------------------------
Deferred revenue                                                                                     --                6,942
Unsecured promissory note                                                                            --              889,855
                                                                                  -------------------------------------------
    Total liabilities                                                                         4,575,205            4,234,018
                                                                                  -------------------------------------------
Commitments and Contingencies

Stockholders' deficit
Preferred stock, $10.00 stated value; 5,000,000 shares authorized Series D
  Convertible Preferred stock 250,000 shares designated:110,000 and 125,000
    issued and outstanding, respectively. Liquidation preference
   of $1,502,233 and $1,465,100, respectively                                                 1,100,000            1,150,000
  Series EE Convertible and Redeemable Preferred stock 20,000 shares designated:
    4,330 and 18,500 issued and outstanding, respectively. Liquidation preference
   of $472,259 and $1,286,944 respectively                                                      433,000            1,250,000
Common stock, $0.001 par value, authorized 200,000,000,
   175,260,876 and 170,493,385 shares outstanding, respectively                                 175,261              170,494
Additional paid-in capital                                                                   68,496,127           67,475,009
Dividends                                                                                      (441,492)            (352,044)
Accumulated deficit                                                                         (73,679,239)         (71,954,029)
                                                                                  -------------------------------------------
Total stockholders' deficit                                                                  (3,916,342)          (2,260,569)
                                                                                  -------------------------------------------

Total liabilities and stockholders' deficit                                                     658,863            1,973,449
                                                                                  ===========================================
</TABLE>

See notes to interim consolidated financial statements

                                       3
<PAGE>

e.Digital Corporation and subsidiary

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                            For the three months ended          For the nine months ended
                                                                    December 31,                        December 31,
                                                                 2005            2004                 2005           2004
                                                                   $               $                   $               $
                                                          --------------------------------    -------------------------------
<S>                                                           <C>             <C>                 <C>            <C>
Revenues:
   Products                                                       106,362       1,391,646           3,056,111      3,406,881
   Services                                                         8,334          27,282              46,933        133,695
                                                          --------------------------------    -------------------------------
                                                                  114,696       1,418,928           3,103,044      3,540,576
                                                          --------------------------------    -------------------------------

Cost of revenues:
   Products                                                       105,550         969,896           2,506,450      2,601,452
   Services                                                            --          10,796               4,875         65,213
                                                          --------------------------------    -------------------------------
                                                                  105,550         980,692           2,511,325      2,666,665
                                                          --------------------------------    -------------------------------
Gross profit                                                        9,146         438,236             591,719        873,911
                                                          --------------------------------    -------------------------------

Operating expenses:
   Selling and administrative                                     205,383         447,525             940,767      1,192,441
   Research and related expenditures                              318,358         339,163             968,602      1,128,315
                                                          --------------------------------    -------------------------------
          Total operating expenses                                523,741         786,688           1,909,369      2,320,756
                                                          --------------------------------    -------------------------------

Operating loss                                                   (514,594)       (348,452)         (1,317,650)    (1,446,845)
                                                          --------------------------------    -------------------------------

Other income (expense):
   Interest income                                                    317              --               7,764             --
   Interest expense                                              (141,909)       (116,255)           (374,901)      (262,948)
   Other                                                             (300)             --              (1,600)        (1,650)
                                                          --------------------------------    -------------------------------
          Other income (expense)                                 (141,892)       (116,255)           (368,737)      (264,598)
                                                          --------------------------------    -------------------------------

Loss and comprehensive loss for the period                       (656,486)       (464,707)         (1,686,387)    (1,711,443)
Imputed deemed dividends on Series EE Preferred Stock                  --        (469,664)                 --       (469,664)
Accrued dividends on the Series D and EE Preferred stock          (42,586)        (62,861)           (128,271)      (147,516)
                                                          --------------------------------    -------------------------------
Loss attributable to common stockholders                         (699,072)       (997,232)         (1,814,658)    (2,328,623)
                                                          ================================    ===============================
Loss per common share - basic and diluted                           (0.00)          (0.01)              (0.01)         (0.01)
                                                          ================================    ===============================

Weighted average common shares outstanding                    175,260,876     165,923,241         175,192,603    164,249,475
                                                          ================================    ===============================
</TABLE>

See notes to interim consolidated financial statements

                                       4
<PAGE>

e.Digital Corporation and subsidiary

                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                For the nine months ended
                                                                                     December 31, 2005
                                                                                  2005                2004
OPERATING ACTIVITIES                                                               $                   $
                                                                          -------------------  -----------------
<S>                                                                               <C>                <C>
Loss for the period                                                               (1,686,387)        (1,711,443)
Adjustments to reconcile loss to net cash used in operating activities:
     Depreciation and amortization                                                    47,330             35,695
     Accrued interest and accretion relating to secured promissory notes              84,375             84,375
     Amortization of interest on warrants issued in connection with the
         12% convertible subordinated promissory notes                               178,106            116,092
     Stock issued to vendor                                                               --             11,729
     Gain on settlement of accounts payable debt                                     (84,270)                --
Changes in assets and liabilities:
     Accounts receivable, trade                                                       44,547              5,766
     Inventory                                                                            --              5,009
     Prepaid expenses and other                                                       92,581           (679,344)
     Accounts payable, trade                                                          85,410             15,548
     Other accounts payable and accrued liabilities                                  (50,000)           (12,565)
     Customer deposits                                                              (149,375)           967,300
     Accrued employee benefits                                                        (1,679)           (29,811)
     Deferred revenue                                                                (25,002)           (54,279)
                                                                          -------------------  -----------------
Cash (used in) operating activities                                               (1,464,364)        (1,245,928)
                                                                          -------------------  -----------------
INVESTING ACTIVITIES
Purchase of property and equipment                                                        --            (13,458)
                                                                          -------------------  -----------------
Cash (used in) investing activities                                                       --            (13,458)
                                                                          -------------------  -----------------
FINANCING ACTIVITIES
Proceeds from 12% Convertible Subordinated Promissory Notes                          350,000          1,000,000
Proceeds from issuance of Series EE Preferred Stock                                       --          1,850,000
Payment for private placement fee in connection with the
Series EE Preferred Stock                                                                 --           (129,500)
Payment on 15% Unsecured Note                                                        (15,764)                --
Proceeds from exercise of stock options                                                   --              4,650
                                                                          -------------------  -----------------
Cash (used in) provided by financing activities                                      334,236          2,725,150

                                                                          -------------------  -----------------
Net increase (decrease) in cash and cash equivalents                              (1,130,128)           (48,780)
                                                                          -------------------  -----------------
Cash and cash equivalents, beginning of period                                     1,289,253            467,954
                                                                          -------------------  -----------------
Cash and cash equivalents, end of period                                             159,125            419,174
                                                                          ===================  =================
Supplemental disclosures of cash information:
  Cash paid during the period for:
   Interest                                                                          112,424             31,147
Supplemental schedule of noncash investing and financing activities:
Deemed dividends on Series D, E and EE Preferred Stock                               128,271            147,516
Conversion of Series D Preferred Stock                                                50,000            200,000
Conversion of Series E Preferred Stock                                                    --            365,000
Conversion of Series EE Preferred Stock                                              817,000                 --
Conversion of dividends on Series D and E Preferred Stock to equity                   38,823             73,956
Warrants exercised and applied to reduction to promissory note interest                   --              6,650
</TABLE>

See notes to interim consolidated financial statements

                                       5
<PAGE>

                      E.DIGITAL CORPORATION AND SUBSIDIARY
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 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
$73,679,239 December 31, 2005. At December 31, 2005, the Company had a working
capital deficiency of $3,995,013. 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, convertible notes and preferred stock exercisable into
29,201,492 shares of common stock were outstanding as at December 31, 2005.
These securities were not included in the computation of diluted loss per share
because they are antidilutive, but they could potentially dilute earnings per
share in future periods.

The loss available to common stockholders ("Commons Stockholders") was increased
during the nine months ended December 31, 2005 and 2004 by accrued dividends of
$128,271 and $147,516, respectively. The loss available to Common Stockholders
is computed as follows:

<TABLE>
<CAPTION>
                                               For the three months ended     For the nine months ended
                                                        December 31,                  December 31,
                                                    2005           2004          2005            2004
--------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>            <C>            <C>
Net loss                                       $  (656,486)   $  (464,707)   $(1,686,387)   $(1,711,443)
Dividends on Series D and EE preferred stock       (42,586)       (62,861)      (128,271)      (147,516)
Imputed deemed dividends on Series EE
preferred stock                                         --       (469,664)            --       (469,664)
--------------------------------------------------------------------------------------------------------
Loss available to Common Stockholders          $  (699,072)   $  (997,232)   $(1,814,658)   $(2,328,623)
--------------------------------------------------------------------------------------------------------
</TABLE>

                                       6
<PAGE>

                      E.DIGITAL CORPORATION AND SUBSIDIARY
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 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 nine months ended December 31, 2005, 1,500,000 options were granted
by the Company, and as of December 31, 2005, an aggregate of 5,504,999 options
to purchase shares of the Company's common stock were outstanding pursuant to
the 1994 Stock Option Plan and 1,500,000 options to purchase shares of the
Company's common stock were outstanding under the 2005 Equity-Based Compensation
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 74.55% a risk free interest rate of 3.88% and an
expected life of 2.5 years. The following table summarizes the weighted average
fair value of the stock options granted during the periods:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                          Three Months Ended December 31,   Nine Months Ended December 31,
                                                               2005            2004              2005             2004
--------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>              <C>              <C>
Net loss as reported                                      $    (656,486)   $    (464,707)   $  (1,686,387)   $  (1,711,443)
Add: Total stock-based employee compensation recorded                --               --               --               --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards          21,199               --           98,346          132,220
--------------------------------------------------------------------------------------------------------------------------
Pro forma net loss                                        $    (677,685)   $    (464,707)   $  (1,784,733)   $  (1,843,663)
--------------------------------------------------------------------------------------------------------------------------
Earnings per share:
   Basic and Diluted - as reported                        $       (0.00)   $       (0.00)   $       (0.01)   $       (0.01)
   Basic and Diluted - pro forma                          $       (0.00)   $       (0.00)   $       (0.01)   $       (0.01)
</TABLE>

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

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

In December 2004, the FASB issued SFAS 123 (revised 2004), "Share Based
Payment". This statement replaces SFAS 123 "Accounting for Stock-Based
Compensation", and supersedes APB Opinion 25, "Accounting for Stock Issued to
Employees". SFAS No 123 (revised 2004) requires that the cost of share-based
payment transactions (including those with employees and non-employees) be
recognized as compensation costs in the financial statements. SFAS No. 123
(revised 2004) applies to all share-based payment transactions in which an
entity acquires goods or services by issuing (or offering to issue) its shares,
share options, or other equity instruments (except for those held by an ESOP) or

                                       7
<PAGE>

                      E.DIGITAL CORPORATION AND SUBSIDIARY
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 2005

by incurring liabilities in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or that require (or may require)
settlement by the issuance of an entity's shares or other equity instruments.
This statement applies to allow new awards granted during the fiscal year
beginning after December 15. 2005 and to previous awards that are modified or
cancelled after such date. We have not yet fully evaluated the effect of SFAS
No. 123 (revised 2004) on our financial statements and have not determined the
method of adoption we will use to implement SFAS No. 123 (revised 2004).

During March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 107, guidance on SFAS No. 123 (revised 2004) SAB
107 was issued to assist preparers by simplifying some to the implementation
challenges of SFAS No. 123 (revised 2004) while enhancing the information that
investors receive. The Company will consider the guidance provided by SAB No.
107 as it implements SFAS 123 (revised 2004) during fiscal 2006.

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

5.    PROMISSORY NOTES

<TABLE>
<CAPTION>
                                               December 31, 2005    March 31, 2005
----------------------------------------------------------------------------------
<S>                                            <C>                  <C>
15% Unsecured Promissory Notes                 $         880,966    $      900,000
12% Convertible Subordinated Promissory Note           1,350,000         1,000,000
Accrued interest on notes                                112,500            24,855
Less unamortized discount                                     --           (58,045)
Less current portion                                  (2,343,446)         (976,955)
----------------------------------------------------------------------------------
Long term                                      $              --    $      889,855
----------------------------------------------------------------------------------
</TABLE>

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

12% Convertible Subordinated Promissory Notes
In June and July 2004, the Company sold $1,000,000 of Unsecured 12% Convertible
Subordinated Promissory Notes due July 1, 2005 ("12% CSP Notes"). The
purchasers, in connection therewith, were granted warrants to purchase 2,000,000
shares of common stock at an exercise price of $0.25 per share, exercisable
until December 31, 2007 (collectively, the "Warrants"). 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
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% CSP Notes.

                                       8
<PAGE>

                      E.DIGITAL CORPORATION AND SUBSIDIARY
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 2005

In October 2005, the 12% CSP Notes were modified by extending the maturity date
to December 31, 2006 and to increase the maximum allowable note amount from
$1,000,000 to $1,500,000. As of December 31, 2005, $350,000 of additional notes
were sold. Noteholders acquiring 12% CSP Notes on or after October 26, 2005 are
entitled to receive a royalty equal to (i) the principal of the 12% CSP Note
purchased divided by (ii) $500,000 (or the aggregate principal of the additional
12% CSP Notes sold) (the "Additional Notes") multiplied by (iii) Twenty Dollars
($20.00) for each entertainment device sold during the calendar years of 2006,
2007 and 2008. The outstanding 12% CSP Notes were also amended such that the
principal amount is convertible at $0.19 per common share, subject to
antidilution adjustments if the Company makes certain issuances of stock at a
lower price.

6.    STOCKHOLDERS' EQUITY
The following table summarizes stockholders' equity transactions during the
nine-month period ended December 31, 2005:

<TABLE>
<CAPTION>
                                            Preferred Stock                    Common Stock
                                        Shares         Amounts            Shares          Amounts
----------------------------------------------------------------------------------------------------
<S>                                     <C>        <C>                  <C>           <C>
Balance, March 31, 2005                 127,500    $    2,400,000       170,493,385   $      170,494
Shares issued on conversion of
Series D Preferred Stock                 (5,000)          (50,000)          335,702              335
Shares issued on conversion of
Series EE Preferred Stock                (8,170)         (817,000)        4,431,789            4,432
Accrued dividends on Series D
Preferred Stock                              --                --                --               --
Accrued dividends on Series EE
Preferred Stock                              --                --                --               --
Discount on 12%
Convertible
Subordinated Promissory Notes                --                --                --               --
Loss for the period                          --                --                --               --
----------------------------------------------------------------------------------------------------
Balance, December 31, 2005              114,330    $    1,533,000       175,260,876   $      175,261
----------------------------------------------------------------------------------------------------

<CAPTION>
                                          Additional                        Accumulated
                                        Paid-in Capital     Dividends         Deficit
-----------------------------------------------------------------------------------------
<S>                                     <C>              <C>               <C>
Balance, March 31, 2005                 $   67,475,009   $     (352,044)   $  (71,954,029)
Shares issued on conversion of
Series D Preferred Stock                        63,448           13,783           (13,783)
Shares issued on conversion of
Series EE Preferred Stock                      837,608           25,040           (25,040)
Accrued dividends on Series D
Preferred Stock                                     --         (101,236)               --
Accrued dividends on Series EE
Preferred Stock                                     --          (27,035)               --
Discount on 12%
Convertible
Subordinated Promissory Notes                  120,062               --                --
Loss for the period                                 --               --        (1,686,387)
-----------------------------------------------------------------------------------------
Balance, December 31, 2005              $   68,496,127   $     (441,492)   $  (73,679,239)
-----------------------------------------------------------------------------------------
</TABLE>

7.    WARRANTS AND OPTIONS
At December 31, 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)                112,500                   0.19      September 30, 2006
Warrant(1)              2,000,000                   0.19           June 30, 2007
Warrant                 4,070,000                   0.50       November 30, 2007
--------------------------------------------------------------------------------
Total                   6,182,500
--------------------------------------------------------------------------------

(1)   The warrants are subject to certain adjustments if the Company issues
      shares lower than $0.19.

The following table summarizes stock option activity for the period:

                                                                Weighted average
                                                Shares           exercise price
                                                   #                    $
--------------------------------------------------------------------------------
Outstanding March 31, 2005                   6,656,665               0.3721
Granted                                      1,500,000               0.0900
Canceled/expired                            (1,151,666)              0.4515
Exercised                                            -                    -
--------------------------------------------------------------------------------
Outstanding December 31, 2005                7,004,999               0.2788
--------------------------------------------------------------------------------
Exercisable at December 31, 2005             4,459,166               0.3698
--------------------------------------------------------------------------------

                                       9
<PAGE>

                      E.DIGITAL CORPORATION AND SUBSIDIARY
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 2005

Options outstanding are exercisable at prices ranging from $0.09 to $2.25 and
expire over the period from 2006 to 2010 with an average life of 3.4 years. The
1994 Stock Option Plan expired on August 15, 2004. On August 4, 2005 the
stockholders approved the adoption of the 2005 Equity-Based Compensation Plan
for 10,000,000 common shares.

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 December 31, 2005 the 110,000 shares of the Series D
Stock would have been convertible into 7,906,489 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
subject to certain adjustments if the Company issues shares at prices lower than
$0.19. 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. 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. At December 31, 2005, the Series EE Stock was
convertible into 2,485,574 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.

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

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

                                       10
<PAGE>

                      E.DIGITAL CORPORATION AND SUBSIDIARY
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                December 31, 2005

2006. In September, we received notification that the property was sold and that
the current sublease will not be renewed and terminated on December 31, 2005. As
of date of filing the new owners and the Company are working together to
relocate to a facility that the new owners also own. The Company anticipates
reducing its rent expense.

10.   CREDIT RISK
Amounts owing from three customers comprise of 50%, 21% and 29% and one customer
comprise 98% of accounts receivable at December 31, 2005 and 2004, respectively

11.   MAJOR CUSTOMERS AND SUPPLIERS
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products. Sales to one customer comprised 99% and
98% of revenue for the nine months ended December 31, 2005 and 2004,
respectively.

12.   COMPARATIVE FIGURES
Certain of the comparative figures have been restated to conform with the
current period's presentation.

13.   INCOME TAX
The Company has U.S. federal net operating loss carryforwards available at March
31, 2005 of approximately $53,300,000 [2004 - $51,000,000] which will begin to
expire in 2006. The Company has state net operating loss carryforwards of
$16,400,000 [2004 - $16,000,000] which will expire beginning in 2006 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
<PAGE>

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

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING,
"BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED MARCH 31, 2005.

Overview
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. We have innovated a proprietary secure digital
video/audio technology platform (DVAP) that can be applied to produce complex
consumer electronic products. In 2003 our DVAP was applied to an in-flight
Entertainment (IFE) device, the digEplayer(TM), for one customer. To date, we
have delivered over 8,000 digEplayers for airline use.

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

While we continue to offer engineering services, product reference designs and
technology platforms and we continue to produce the digEplayer for our existing
customer, our primary strategy for future quarters is to produce branded eVU
devices for customer orders. eVU is targeted at business opportunities for
secure hard drive-based closed system video products loaded with desirable
movie, television, music, informational, and educational content, rented or
provided to customers. We have commenced eVU demonstration deliveries and are
preparing pilot trials for select target customers. We are focused on U.S. and
international companies in the healthcare, military, and travel and leisure
industries who desire to brand and market eVU to consumers at their facilities.
We have developed logistic and secure content solutions to enable customers to
rapidly deploy, operate and maintain eVUs for target customers. In addition to
offering eVUs for sale we expect to provide eVU solutions on a periodic payment
program.

Our business and technology is high risk in nature. There can be no assurance we
can successfully introduce the eVU to market or produce future revenues from
existing or new products or services. 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. However, we believe there is
a significant market and business opportunity for a rugged, secure hard
drive-based closed system video product loaded with desirable content that is
not easily served by existing consumer products. Introduction of this product
will require additional financial resources, a sustained marketing and
distribution push and strong logistical and content relationships. We are
focused on these areas while also containing our operating costs.

Overall Performance
We have incurred significant losses and negative cash flow from operations in
each of the last three years and have an accumulated deficit of $73,679,239 at
December 31, 2005. At December 31, 2005, we had a working capital deficiency of
$3,995,013. We have experienced a substantial reduction in cash that adversely
affects our liquidity. Our 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 to our company on satisfactory terms and
conditions, if at all. Our company's ability to continue as a going concern is
in substantial doubt and is dependent upon achieving a profitable level of
operations and obtaining additional financing.

For the nine months ended December 31, 2005:
o     Our revenues were $3,103,044, a 12% decrease from total revenues of
      $3,540,576 for the first nine months of fiscal 2005. Sales to one customer
      accounted for 99% of our revenues and our results have been highly
      dependent on the timing and quantity of digEplayer orders by this customer
      and its airline customers. At December 31, 2005 we had approximately $1.2
      million of orders in production for this customer expected to ship during

                                       12
<PAGE>

      the fourth quarter of fiscal 2006 and the first quarter of fiscal 2007.
      There can be no assurance of future orders from this customer and
      cancellations or delays of existing orders could have a material impact on
      our operations.
o     We recorded a gross profit of $591,719 compared to a gross profit of
      $873,911 for the first nine months of fiscal 2005. Gross profit decreased
      due to the mix of devices, batteries and other accessories and the lower
      sales volume.
o     Operating expenses were $1,909,369 a decrease from $2,320,756 for the nine
      months of fiscal 2005 due primarily to reduced personnel and legal costs
      in the current period.
o     Other income and expenses were a net $368,737 consisting primarily of
      interest expense of $374,901 including non-cash interest of $178,107
      related to amortization of warrants issued with debt.
o     Our net loss decreased to $1,686,387 from $1,711,443 for the prior years
      first nine months and the net loss available to Common Stockholders after
      non-cash deemed and imputed dividends on preferred stock decreased to
      $1,814,658 from $2,328,623 for the prior comparable period.

Our monthly cash operating costs have been on average $180,000 and $215,000 per
month for the periods ending December 31, 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. The introduction of the eVU will also require additional
expenditures, the amount and timing not currently estimable by management.
Accordingly, our losses are expected to continue until such time as we are able
to realize revenues and margins sufficient to cover our costs of operations. We
may also face unanticipated technical or manufacturing obstacles and face
warranty and other risks in our business. See Part II, Item 1A (Risk Factors)
below.

Critical Accounting Policies
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.

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.

                                       13
<PAGE>

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
Nine months ended December 31, 2005 compared to nine months ended December 31,
2004

For the nine months ended December 31, 2005, we reported total revenues of
$3,103,044, a 12% decrease from total revenues of $3,540,576 for the nine months
of fiscal 2005. Product revenues for nine months ending December 31, 2005 were
$3,056,111, a 10% decrease from product revenues of $3,406,881 for the nine
months ending December 31, 2004. At December 31, 2005 we had approximately $1.2
million in orders, for which we have received approximately $550,000 in
production payments. The orders are expected to ship during the fourth quarter
of fiscal 2006 and the first quarter of fiscal 2007.

Service revenues for the first nine months of fiscal 2006 were $46,933 compared
to $133,695 for the comparable period of the prior year. The timing and amount
of service revenues are dependent upon a limited number of projects. At December
31, 2005 we had $28,828 of deferred revenue from development contracts, which
will be recognized based on the terms and conditions of each agreement. We are
increasing our focus on internally developed technology to be offered to our
customers in order to speed adoption of our technology and enhance our future
revenues.

Sales to one customer comprised 99% and 98% of revenue for the nine months ended
December 31, 2005 and 2004, respectively. This customer may cease doing business
with us at any time and the loss of this customer would negatively impact our
results of operations in future periods.

For the nine months ended December 31, 2005, we reported a gross profit of
$591,719 compared to a gross profit of $873,911 for the first nine months of
fiscal 2005. Cost of sales includes manufacturing costs for products sold,
operation costs associated with product support and other costs associated with
the delivery of our engineering support and services. Cost of sales for the nine
months ended December 31, 2005 consisted of $2,506,450 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 nine months ended December 31, 2004 consisted of
$2,601,452 of product costs and $65,213 of service costs, consisting mostly of
research and development labor funded in part by OEM development agreements.
Although we do not anticipate any significant future contract losses, we cannot
guarantee that we can maintain positive gross margins in the future or with
future customers.

Selling, general and administrative expenses include payroll, employee benefits,
and other costs associated with finance, customer support functions, facilities
and depreciation expenses. Selling, general and administrative costs for the
nine months ended December 31, 2005, was $940,767 compared to $1,192,441 for the
nine months of fiscal 2005. The $251,674 decrease can be attributed to primarily
to a reduction in legal of $198,208. We anticipate quarterly selling and
administrative expenses to be constant as we are focused on business customer
opportunities.

Research and development expenses include payroll, employee benefits, and other
costs associated with product development. Research and development expenses
also include third-party development and programming costs. Research and related
expenditures for the nine months ended December 31, 2005 were $968,602, as
compared to $1,128,315 for the nine months ended December 31, 2004. The decrease
of $159,713 can be attributed primarily to a decrease of $124,909 in personnel
and related costs, a decrease of $18,500 for engineering materials and supplies.

                                       14
<PAGE>

Research and development costs are subject to significant quarterly variations
depending on the use of outside services, the assignment of engineers to
development projects, reimbursement by OEM contracts and the availability of
financial resources.

We reported an operating loss of $1,317,650 for the nine months ended December
31, 2005 as compared to an operating loss of $1,446,845 for the nine months
ended December 31, 2004. The decrease in operating loss resulted from the
decrease of $411,387 in operating expenses offset by a decrease in gross profit
of $282,192. We believe, but we cannot guarantee, that our strategy of investing
in digital video/audio platform developments with supply or royalty provisions
will provide positive margins in future periods. The timing and amount of
product sales and the recognition of contract service revenues impact our
operating losses. Accordingly, there is uncertainty about future operating
results and the results for the nine months are not necessarily indicative of
operating results for future periods or the fiscal year.

We reported a loss for the first nine months of the current fiscal year of
$1,686,387 as compared to a loss of $1,711,443 for the prior year's nine months.
For the nine months ended December 31, 2005, we incurred interest expense of
$374,901 as compared to $262,948 for the comparable period in the prior year.
This included non-cash amortization of debt discount of $178,107 and $0 for the
nine months ended December 31, 2005 and 2004, respectively.

The loss available to Common Stockholders for the nine months ended December 31,
2005 and 2004 was $1,814,658 and $2,328,623, respectively. Included in the loss
available to Common Stockholders for the nine months ending December 31, 2005
and 2004 are accrued dividends of $128,271 and $147,516 respectively on
preferred stock. Also, included in the loss available to Common Stockholders for
the nine months ended December 31, 2004 were imputed deemed dividends on the
Series EE Preferred Stock of $469,664.

Three months ended December 31, 2005 compared to three months ended December 31,
2004

For the third quarter of fiscal 2006, we reported total revenues of $114,696 a
92% decrease from total revenues of $1,418,928 for the third quarter of fiscal
2005. Product revenues for the quarter ending December 31, 2005 decreased to
$106,362 compared to $1,391,646 for the third quarter ending December 31, 2004.
The decrease in revenue is attributed to the 2 to 3 month production schedule
for in-flight entertainment units. The timing of orders and deliveries has a
significant impact on quarterly results. At December 31, 2005 we had
approximately $1.2 million in orders, for which we have received approximately
$550,000 in production payments. The orders are expected to ship during the
fourth quarter of fiscal 2006 and the first quarter of fiscal 2007.

Service revenues for the third quarter of fiscal 2006 were $8,334 compared to
$27,282 for the comparable period of the prior year. The timing and amount of
service revenues is dependent upon a limited number of projects. At December 31,
2005, we had $28,828 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
December 31, 2005 consisted of $105,550 of product costs primarily related to
spare parts used for the in-flight entertainment units. Cost of sales for the
three months ended December 31, 2004 consisted of $969,896 of product costs and
$10,796 of service costs, consisting mostly of research and development labor
funded in part by OEM development agreements. Although we do not anticipate any
significant future contract losses, we cannot guarantee that we can maintain
positive gross margins in the future or with future customers.

Gross profit for the third quarter of fiscal 2006 was $9,146 compared to a gross
profit of $438,236 for the third quarter of fiscal 2005. Gross profit as a
percent of sales for the third quarter of fiscal 2006 was 8% compared to a gross
profit as a percent of sales of 31% for the same period last year. The decrease
in gross profit is related to the lower margins on the sale of in-flight
entertainment spare parts. At the present time, warranty costs are not
significant.

Selling, general and administrative expenses include payroll, employee benefits,
and other costs associated with finance, customer support functions, facilities
and depreciation expenses. Selling, general and administrative costs for the
three months ended December 31, 2005, was $205,383 compared to $447,525 for the
third quarter of fiscal 2005. The $242,142 decrease can be attributed to a
$41,946 decrease in personnel and related costs, a decrease of $116,718 in legal

                                       15
<PAGE>

and other professional services and a current credit for $84,375 in accounts
payable from 2002. We anticipate quarterly selling and administrative expenses
to be constant as we are focused on business customer opportunities.

Research and development expenses include payroll, employee benefits, and other
costs associated with product development. Research and development expenses
also include third-party development and programming costs. Research and related
expenditures for the three months ended December 31, 2005 were $318,358, as
compared to $339,163 for the three months ended December 31, 2004. We anticipate
quarterly research and development expenses to be constant as we are focused on
business customer opportunities.

We reported an operating loss of $514,594 for the three months ended December
31, 2005, as compared to an operating loss of $348,452 for the three months
ended December 31, 2004. The 48% increase in operating loss resulted primarily
from the decreased product revenue sales for the period offset by 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 $141,409 for the three months ended December 31,
2005 versus $116,255 for the prior comparable period. The incurred interest
expense can be attributed to the amortization of the warrants issued in
connection with the 12% SP Notes of $60,031 and interest paid on the 15% and 12%
notes.

We reported a loss for the third quarter of fiscal 2006 of $656,486 as compared
to a loss of $464,707 for the prior third quarter of fiscal 2005.

The loss attributable to Common Stockholders for the three months ended December
31, 2005 and 2004 was $699,072 and $997,232, respectively. Included in the loss
available to Common Stockholders for the period ending December 31, 2005 were
accrued dividends on the preferred stock of $42,586. Included in the loss
available to Common Stockholders for the period ending December 31, 2004 were
accrued dividends on the preferred stock of $62,861 and imputed deemed dividends
on the Series EE Preferred Stock of $469,664.

Liquidity and Capital Resources
At December 31, 2005, we had a working capital deficit of $3,995,013 compared to
a working capital deficit of $1,363,772 at March 31, 2005. Cash used in
operating activities for the nine month period ended December 31, 2005 was
$1,464,363 resulting primarily from the $1,686,387 loss for the period, a
decrease of $25,002 in deferred revenue, an increase of $92,581 in prepaid
expenses and other, a decrease of $50,000 in other accounts payable, an decrease
of $1,679 in accrued employee benefits, and a decrease of $44,547 in accounts
receivable and a decrease of $149,375 in customer deposits. During the nine
months ended December 31, 2005, the Company purchased no additional property and
equipment.

For the nine months ended December 31, 2005, cash provided by financing
activities was $334,236 resulting from a $350,000 increase in notes less
principal payment on the 15% Unsecured Promissory Note. For the nine months
ended December 31, 2005, net cash and cash equivalents decreased by $1,130,127.

At December 31, 2005, we had net accounts receivable of $8,294 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 December 31, 2005, we had cash and cash equivalents of $159,126. 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 and the
12% Subordinated Promissory Note of $1,350,000. However, actual results could
differ significantly from management plans. We believe we may be able to obtain

                                       16
<PAGE>

additional funds from future product margins from eVU(TM) product leases and
sales but actual future margins to be realized, if any, and the timing of
shipments and the amount and quantities of shipments, orders and reorders are
subject to many factors and risks, many outside our control. We have forbearance
agreements on the $993,466 principal and accrued interest on the 15% Unsecured
Note and the timing and schedule of amounts due thereafter are not currently
known. Accordingly we need additional equity or debt financing in the next
twelve months for working capital and operations and we may need to seek equity
or debt financing for payments of the 15% Unsecured Note and 12% Subordinated
Notes (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 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 products or develop new technologies and products

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 December 31, 2005, our contractual obligations and commercial commitments
are summarized below:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
                                        Cash Contractual Obligations by Period
-----------------------------------------------------------------------------------------
                                                    Less than 1
                                             Total         year    1-2 years    2-3 years
-----------------------------------------------------------------------------------------
<S>                                     <C>          <C>                 <C>          <C>
12% Subordinated Promissory Notes (1)   $1,350,000   $1,350,000           --           --
15% Unsecured Notes(2)                     993,466      993,466           --           --
-----------------------------------------------------------------------------------------
Total Cash Obligations                  $2,343,466   $2,343,466           --   $       --
-----------------------------------------------------------------------------------------
</TABLE>

(1)   Notes modified to extend maturity date to December 31, 2006 and amended to
      increase the maximum note amount up to $1,500,000.

(2)   Includes two 15% unsecured notes and accrued interest as of December 31,
      2005, both notes mature on September 30, 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
ten years old. The accrued lease liability reflects management's best estimate
of amounts due for matters in dispute. Settlement of this liability may either
be more or less than the amount recorded in the audited consolidated financial
statements and accordingly may be subject to measurement uncertainty in the near
term.

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

In September 2000, we entered into a three-year sublease agreement, which
expired on July 31, 2003. From the date of expiration until December 2003, the
Company leased the property on a month-to-month basis. On January 1, 2004, the
Company amended the lease for approximately 7,750 square feet with an aggregate
monthly payment of $9,291 inclusive of utilities and costs expiring on July 31,
2006. In September, we received notification that the property was sold and that
the current sublease will not be renewed and terminated on December 31, 2005. As
of date of filing the new owners and the Company are working together to
relocate to a facility that the new owners also own. The Company anticipates
reducing its rent expense.

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.

                                       17
<PAGE>

Our exposure to market risk for changes in interest rates relates primarily to
our investment in cash and cash equivalents of $159,126 and our debt of
$2,343,466, 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 December 31,
2005, the market value of these investments, which were all classified as cash
and cash equivalents and certificate of deposit, and debt approximated cost.

Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports pursuant to the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including
Alex Diaz, our principal executive officer, and Robert Putnam, our principal
financial officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended. Based upon the identification of
the material weakness discussed below related to direct customer shipments by
vendors our principal executive officer and our principal financial officer have
concluded that our disclosure controls and procedures were not effective as of
December 31, 2005 at a reasonable assurance level.

Identification of Material Weakness and Remedial Measures

In connection with the closing of our general ledger and the preparation of our
Form 10-Q for the quarter ended December 31, 2005 we determined that our
consolidated financial statements included in the Quarterly Report for the
quarterly period ended September 30, 2005 reflected an error made in accruing
liabilities for direct shipments of product to a customer. Management has
determined that the error was the result of a control deficiency with the
Company's procedures in correctly reconciling customer prepayments, customer
invoices, inventory, cost of sales and accrued liabilities. Management believes
this control deficiency constituted a material weakness. A material weakness is
a control deficiency, or a combination of control deficiencies, that results in
a more than remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. In response to
this error, we restated our consolidated financial statements for the quarterly
period ended December 31, 2005. As a result of this finding, our Audit Committee
has authorized and directed management to implement actions to address this
deficiency and to enhance the reliability and effectiveness of our control
procedures. As a result, we have established a policy for accounting staff to
follow to make sure the proper reconciliations of accounts is completed each
reporting period and that vendor payables and accruals are properly matched and
recorded with direct customer shipments.

Changes in Internal Control over Financial Reporting

Other than as summarized above there were no changes in our internal control
over financial reporting during the fiscal quarter ended December 31, 2005 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
We are involved from time to time in routine litigation incidental to the
conduct of our business. Except as set forth below, there is currently no
material pending legal proceedings to which we are party or to which any of our
property is subject.

Item 1.A. Risk Factors
An investment in our company involves a high degree of risk. In addition to the
other information in this Quarterly Report on Form 10-Q, you should carefully
consider the risk factors set forth in our Annual Report on Form 10-K in
evaluating an investment in our company. You should consider these matters in
conjunction with the other information included or incorporated by reference in
this report. This 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

                                       18
<PAGE>

uncertainties 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 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.

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

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

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

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

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

                                       19
<PAGE>

                                   SIGNATURES

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

                                    e.DIGITAL CORPORATION

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


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