|UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549


FORM 10-Q
|---------------------------------------------------------------------------------

||X| |  | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 | 
|--- |  | -------------------------------------------------------------------------------------- | 

|For the quarterly
period ended September 30, 2002


Commission File Number
0-20734


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

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

|13114 Evening
Creek Drive South, San Diego, California(Address of principal executive offices) | 92128(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 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(Class) | 140,656,307(Outstanding at November 12, 2002)
|------------------------------------- | ---------------------------------------------

|
|

|e.DIGITAL CORPORATION
INDEX
|---------------------------

|                                                                        | Page
|----------------------------------------------------------------------- | ----
|PART I. FINANCIAL INFORMATION                                           |     
|                                                                        |     
|Item
      1. Financial Statements (unaudited):                         |     
|                                                                        |     
|Consolidated
      Balance Sheets as of September 30, 2002 and          |     
|and
      March 31, 2002                                                |     
|                                                                        |     
|Consolidated
      Statements of Operations for the three and six       |     
|months
      ended September 30, 2002 and 2001                          |     
|                                                                        |     
|Consolidated
      Statements of Cash Flows for the six                 |     
|months
      ended September 30, 2002 and 2001                          |     
|                                                                        |     
|Notes
      to Interim Consolidated Financial Statements                |     
|                                                                        |     
|Item
      2. Managements Discussion and Analysis of Financial         |     
|Condition
      and Results of Operations                               |     
|                                                                        |     
|Item
      3. Quantitative and Qualitative Disclosure about Market Risk |     
|                                                                        |     
|Item
      4. Controls and Procedures                                   |     
|                                                                        |     
|PART II. OTHER INFORMATION                                              |     
|                                                                        |     
|Item
      1. Legal Proceedings                                         |     
|Item
      2. Changes in Securities                                     |     
|Item
      3. Defaults Upon Senior Securities                           |     
|Item
      4. Submission of Matters to a Vote of Security Holders       |     
|Item
      5. Other Information                                         |     
|Item
      6. Exhibits and Reports on Form 8-K                          |     
|                                                                        |     
|                                                                        |     
|                                                                        |     
|SIGNATURES                                                              |     

|2
|-

|Part I. Financial
InformationItem 1. Financial Statements:e.Digital Corporation and subsidiary


CONSOLIDATED BALANCE
SHEETS(UNAUDITED)[Note 1  Nature of Operations and Basis of Presentation]
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                               | September
      30, 2002
      $ | March 31,
      2002
      $
|-------------------------------------------------------------------------------------------------------------- | -------------------------------- | ----------------------------
|ASSETS                                                                                                         |                                  |                             
|Current                                                                                                        |                                 
|Cash and
      cash equivalents                                                                                |                                  | 117,438                     
|Certificate
      of deposit                                                                                   |                                  | 59,364                      
|Accounts
      receivable, trade, less allowance of $73,899 and $73,899                                        |                                 
|for
      doubtful accounts, respectively [note 10]                                                            |                                  | 136,620                     
|Inventory
      net of allowance for obsolete inventory of $723,745 and
         $55,965 respectively [note 7] |                                  | 726,627                     
|Prepaid
      expenses and other                                                                               |                                  | 101,130                     
|Deferred
      financing charges                                                                               |                                  | 10,500                      
|Deferred
      contract charges                                                                                |                                  | 112,907                     
|                                                                                                               |                                 
|Total
      current assets                                                                                     |                                  | 1,264,586                   
|                                                                                                               |                                 
|Property
      and equipment, net of accumulated depreciation of                                               |                                 
|$412,957
      and $352,510, respectively                                                                      |                                  | 352,327                     
|Intangible
      assets, net of accumulated amortization of                                                    |                                 
|$76,579
      and $47,468, respectively                                                                        |                                  | 55,980                      
|Restricted
      Cash [note 9]                                                                                 |                                  | 145,707                     
|                                                                                                               |                                 
|Total
      assets                                                                                             |                                  | 1,818,600                   
|                                                                                                               |                                 
|LIABILITIES
      AND STOCKHOLDERS DEFICIT                                                                    |                                 
|Current                                                                                                        |                                 
|Accounts
      payable, trade                                                                                  |                                  | 1,583,175                   
|Other accounts
      payable and accrued liabilities                                                           |                                  | 90,406                      
|Accrued
      lease liability [note 8]                                                                         |                                  | 515,000                     
|Accrued
      employee benefits                                                                                |                                  | 214,643                     
|Deferred
      revenue                                                                                         |                                  | 176,842                     
|Secured
      promissory notes [note 3]                                                                        |                                  | 1,038,852                   
|Unsecured
      promissory notes [note 4]                                                                      |                                  | 1,860,147                   
|                                                                                                               |                                 
|Total
      liabilities                                                                                        |                                  | 5,479,065                   
|                                                                                                               |                                 
|Commitments
      and Contingencies [note 1 and 8]                                                             |                                 
|Stockholders
      deficit [note 5]                                                                           |                                 
|Common
      stock, $0.001 par value, authorized 200,000,000,                                                  |                                 
|138,614,533
      and 132,537,298 shares outstanding, respectively                                             |                                  | 138,615                     
|Additional
      paid-in capital                                                                               |                                  | 57,591,454                  
|Contributed
      surplus                                                                                      |                                  | 1,592,316                   
|Accumulated
      deficit                                                                                      |                                  | (62,982,850                 
|                                                                                                               |                                 
|Total
      stockholders deficit                                                                              |                                  | (3,660,465                  
|                                                                                                               |                                 
|Total
      liabilities and stockholders deficit                                                              |                                  | 1,818,600                   
|                                                                                                               |                                 

|See notes to interim consolidated
financial statements.


3
|-----------------------------------------------------------

|e.Digital Corporation
and subsidiary


CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)[Note 1  Nature of Operations and Basis of Presentation]
|-------------------------------------------------------------------------------------------------------------------------------------------------

|                                                              | For the
      three months ended
      September 30, | For the
      six months ended
      September 30,
|------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------------
|
|Revenues:                                                     |                                                      |                                                   
|Products
      [note 11]                                      |                                                      | 180,969                                           
|Services
      [note 11]                                      |                                                      | 109,321                                           
|                                                              |                                                     
|                                                              |                                                      | 290,290                                           
|                                                              |                                                     
|Cost
      of revenues:                                       |                                                     
|Products                                                      |                                                      | 1,155,197                                         
|Services                                                      |                                                      | 33,031                                            
|                                                              |                                                     
|                                                              |                                                      | 1,188,228                                         
|                                                              |                                                     
|Gross profit
      (loss)                                     |                                                      | (897,938                                          
|                                                              |                                                     
|Operating
      expenses:                                     |                                                     
|Selling
      and administrative                              |                                                      | 1,056,998                                         
|Research
      and related expenditures                       |                                                      | 419,340                                           
|                                                              |                                                     
|Total
      operating expenses                                |                                                      | 1,476,338                                         
|                                                              |                                                     
|Operating
      loss                                          |                                                      | (2,374,276                                        
|                                                              |                                                     
|Other
      income (expense):                                 |                                                     
|Interest
      income                                         |                                                      | 565                                               
|Interest
      expense                                        |                                                      | (299,867                                          
|Loss
      on disposal of asset                               |                                                      |                                                  
|Other
      income                                            |                                                      |                                                  
|                                                              |                                                     
|Other
      income (expense)                                  |                                                      | (299,302                                          
|                                                              |                                                     
|Loss
      and comprehensive loss for the period              |                                                      | (2,673,578                                        
|Accrued
      dividends on the Series C Preferred stock       |                                                      |                                                  
|                                                              |                                                     
|Loss
      attributable to common stockholders
      [note 2] |                                                      | (2,673,578                                        
|                                                              |                                                     
|Loss
      per common share  basic and diluted [note 2]      |                                                      | (0.02                                             
|                                                              |                                                     
|Weighted
      average common shares outstanding              |                                                      | 138,025,421                                       
|                                                              |                                                     

|See notes to interim consolidated
financial statements.



4
|------------------------------------------------------------

|e.Digital Corporation
and subsidiary




CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)[Note 1  Nature of Operations and Basis of Presentation]
|---------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                              | For the
      six months ended
      September 30,
|----------------------------------------------------------------------------- | --------------------------------------------------
|
|Loss
      for the period                                                     |                                                   
|Adjustments
      to reconcile loss to net cash used in operating activities: |                                                   
|Depreciation
      and amortization                                           |                                                   
|Loss
      on disposal of asset                                               |                                                   
|Gain
      on sale of investment                                              |                                                   
|Stock
      issued to vendor                                                  |                                                   
|Stock
      options issued to consultant                                      |                                                   
|Accrued
      interest and accretion relating to promissory notes             |                                                   
|Changes
      in assets and liabilities:                                      |                                                   
|Accounts
      receivable, trade                                              |                                                   
|Inventory                                                                     |                                                   
|Prepaid
      expenses and other                                              |                                                   
|Deferred
      contract charges                                               |                                                   
|Accounts
      payable, trade                                                 |                                                   
|Other
      accounts payable and accrued liabilities                          |                                                   
|Accrued
      employee benefits                                               |                                                   
|Deferred
      revenue                                                        |                                                   
|                                                                              |                                                   
|Cash (used
      in) operating activities                                     |                                                   
|                                                                              |                                                   
|INVESTING
      ACTIVITIES                                                    |                                                   
|Purchase
      of property and equipment                                      |                                                   
|Proceeds
      from sale of investment                                        |                                                   
|Increase
      in restricted cash                                             |                                                   
|Interest
      earned on certificate of deposit                               |                                                   
|                                                                              |                                                   
|Cash (used
      in) investing activities                                     |                                                   
|                                                                              |                                                   
|FINANCING
      ACTIVITIES                                                    |                                                   
|Proceeds
      from issuance of Shares                                        |                                                   
|Proceeds
      from issuance of Unsecured Notes                               |                                                   
|Payment
      on Secured Promissory Notes                                     |                                                   
|Deferred
      financing charge                                               |                                                   
|                                                                              |                                                   
|Cash provided
      by financing activities                                   |                                                   
|                                                                              |                                                   
|Net (decrease)
      in cash and cash equivalents                             |                                                   
|                                                                              |                                                   
|Cash and
      cash equivalents, beginning of period                          |                                                   
|                                                                              |                                                   
|Cash and
      cash equivalents, end of period                                |                                                   
|                                                                              |                                                   
|Supplemental
      schedule of noncash investing and financing activities:    |                                                   
|Deemed
      dividends on Series C preferred stock                            |                                                   

|See notes to interim consolidated
financial statements.



5
|------------------------------------------------------------

|E.DIGITAL CORPORATION
AND SUBSIDIARY NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)September 30, 2002


1. NATURE OF OPERATIONS
AND BASIS OF PRESENTATION


E.Digital Corporation (the
Company) is incorporated under the laws of Delaware. The Company offers
engineering partnerships to electronics companies to create portable digital devices that
can link to personal computers (PCs) and the Internet. The Company markets to
Original Equipment Manufacturers (OEMs) complete reference designs (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 the customers wishes) and technology platforms (basic working
technology that can be developed into a finished consumer product, or incorporated into an
existing consumer product design) with a focus on digital music and voice player/recorders
using the latest in digital storage media (a device used to store data) and
technology. In September 2001, the Company announced plans to brand and sell its own line
of digital audio products for consumers. In November 2002, the Company announced plans to
refocus its strategy on OEM opportunities and de-emphasize marketing its own branded
products.


The accompanying unaudited interim
consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary of the same name, based in San Diego, California. The unaudited interim
consolidated financial statements have been prepared, by management, in accordance with
accounting principles generally accepted in the United States for interim financial
information and in the opinion of management reflect all adjustments, which consist of
normal and recurring adjustments, necessary to present fairly the financial position and
results of operations and cash flows of the Company.


The unaudited interim consolidated
financial statements have been prepared on the 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 for the
six month period ended September 30, 2002 and has an accumulated deficit of $62,982,850 at
September 30, 2002. At September 30, 2002, the Company has a working capital deficiency of
$4,214,479. A substantial portion of the loss is attributable to marketing costs of the
Companys new products and technology, substantial expenditures on research and
development of technologies and its attempt to brand and sell its own line of products to
consumers. The Companys operating plans, including its plans to market to OEMs,
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. The Companys ability to
continue as a going concern is in substantial doubt and is dependent upon obtaining additional
financing and achieving a profitable level of operations.


Management of the Company has
undertaken steps as part of a plan to improve operations with the goal of sustaining
Company operations for the next twelve months and beyond. These steps include (a)
controlling overhead and expenses; (b) expanding sales and marketing to OEM customers and
markets and (c) raising additional capital and/or financing. Management is also attempting to restructure all of its debt prior to December 31, 2002. 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.


The Company is actively seeking
additional equity 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.


6
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|E.DIGITAL CORPORATION
AND SUBSIDIARY NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)September 30, 2002




2. LOSS PER SHARE


The Companys losses for the
periods presented cause the inclusion of potential common stock (Common Stock)
instruments outstanding to be antidilutive and, therefore, the Company is not required to
present a diluted loss per common share. Stock options and warrants exercisable into
7,098,663 shares of Common Stock were outstanding as at September 30, 2002. 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 six months ended September 30, 2002 and 2001 by
accrued dividends of $nil and $26,332, respectively. The loss available to common
stockholders is computed as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                  | For the
      three months ended
      September 30, | For the
      six months ended
      September 30,
|------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------------
|
|Loss
      and comprehensive loss                 |                                                      | $(2,673,578                                       
|Dividends
      on Series A and C preferred stock |                                                      |                                                  
|                                                  |                                                      |                                                   
|Loss available
      to common stockholders       |                                                      | $(2,673,578                                       
|                                                  |                                                      |                                                   

|3. SECURED PROMISSORY
NOTES


12% Promissory Notes


On September 28, 2001, the Company
issued 12% Secured Promissory Notes (SP Notes) for gross cash proceeds of
$1,000,000 to certain investors. The SP Notes mature December 31, 2002 and are secured by
the Companys accounts receivable and inventory. The interest under the SP Notes
accrues at a rate of 12% per annum simple interest and is payable in one installment on
the maturity date. All of the holders of the SP Notes subsequently agreed to subordinate
their security interest in the Companys accounts receivable and inventory in favor
of the rights granted to the holder of the 5% Secured Promissory Note (5% SP
Note) so long as the 5% SP Note is outstanding. The Company redeemed the 5% SP Note
on September 11, 2002.


In connection with the sale of the SP
Notes, the Company issued warrants to purchase 750,000 shares of Common Stock at a
purchase price of $0.75 per common share expiring September 20, 2006. The Company has
allocated $405,736 of the proceeds raised to the warrants and $594,264 to the SP Notes
based on the relative fair value the instruments. The discount on the SP Notes will be
subject to accretion over their term to maturity. The Company also issued warrants to
purchase 100,000 shares of Common Stock at a purchase price of $0.75 per common share
expiring September 30, 2006, as a finders fee. The estimated fair market value of
these warrants at issuance was $91,034 and has been recorded as a deferred financing
charge related to the SP Notes of $53,734 and $37,300 as a cost of issuing the warrants
charged to Additional Paid in Capital. The deferred financing charge is being amortized
over the term of the SP Notes.


In the event the Company offers
shares of its Common Stock or securities convertible into shares of Common Stock in
connection with an equity financing, each note holder shall have the right and option, at
any time prior to the maturity date, subject to and upon compliance with the provisions
and the terms of the equity offering document, to convert the unpaid principal amount of
each SP Note and accrued unpaid interest into shares of the Common Stock being offered at
a conversion price equal to the offering price of the Common Stock in effect at the time
of conversion. As at September 30, 2002, accrued interest totaled $120,667 [March 31, 2002
 $60,491].


5% Secured Promissory Note


On January 18, 2002, the Company
issued a 5% Secured Promissory Note (5% SP Note) for gross cash proceeds of
$1,200,000. The 5% SP Note, originally matured on April 18, 2002 and is secured by all
assets of the Company including, without limitation, the Companys intellectual
property. The interest under the 5% SP Note accrued at a rate of 5% per annum simple
interest and was payable in one installment on maturity date. On April 17, 2002, the 5% SP
Note holder agreed to extend the maturity date of the 5% SP Note from April 18, 2002 to
May 2, 2002 for no consideration. On April 29, 2002, the 5% SP Note holder agreed to
extend the maturity date of the 5% SP Note from May 2, 2002 to October 29, 2002 and to
reduce the interest rate from 5% to 4% in exchange for (i) a $200,000 finance fee that
increased the principal amount from $1,200,000 to $1,400,000, (ii) a minimum monthly
principal reduction of $100,000; (iii) an immediate principal repayment of $300,000 and
(iv) repayment of accrued interest to April 18, 2002 of $15,000. On September 11, 2002,
the Company redeemed the outstanding balance and accrued interest on the 5% SP Note. As at
September 30, 2002, accrued interest totaled $nil [March 31, 2002  $11,343].


7
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|E.DIGITAL CORPORATION
AND SUBSIDIARY NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)September 30, 2002



4. UNSECURED PROMISSORY
NOTES


In July 2002, the Company issued
Unsecured Promissory Notes (Unsecured Notes) for gross cash proceeds of
$1,050,000 to certain investors to finance various purchase orders and accounts payable.
The Unsecured Notes matured sixty days from issuance, commencing September 1, 2002. The
interest under the Unsecured Notes accrues at a rate of 24% per annum simple interest and
is payable in one installment on the maturity date. The Company has entered into a
forbearance agreement with the investors through and including December 31, 2002. The
Company is currently in negotiations with the holders of the Unsecured Notes about
restructuring the payment terms and maturity dates of the Unsecured Notes and accrued
interest. As at September 30, 2002, accrued interest totaled $54,210 [March 31, 2002
 $nil]


15% Unsecured Promissory
Note


On September 11, 2002, the Company
issued a 15% Unsecured Promissory Note (15% Unsecured Note) for gross cash
proceeds of $750,000 to an individual. The 15% Unsecured Note matures February 11, 2004.
The 15% Unsecured Note is payable $50,000 each month, with a final payment of $35,801 on
February 11, 2003. The Company has entered into a forbearance agreement with the investor
through and including December 31, 2002. The Company did not make a payment in October and
is currently in negotiations with the holder of the 15% Unsecured Note about restructuring
the payment terms of the 15% Unsecured Note. At as September 30, 2002, accrued interest
totaled $5,938 [March 31, 2002  $nil].


5. STOCKHOLDERS
EQUITY


The following table summarizes
stockholders equity transactions during the six month period ended September 30,
2002:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        | Shares
      # | Amount
      $ | Additional
      paid-in capital
      $ | Contributed
      surplus
      $ | Accumulated
      deficit
      $
|--------------------------------------- | -------------- | -------------- | ---------------------------------------- | --------------------------------- | ---------------------------------
|Balance,
      March 31, 2002           | 132,537,298    |                | $132,537                                 |                                   | $54,628,608                      
|Shares
      issued                     | 5,957,235      |                | 5,958                                    |                                   | 2,711,881                        
|Shares
      issued to vendor           | 120,000        |                | 120                                      |                                   | 65,880                           
|Value
      assigned to 400,000 options |                |                |                                          |                                   |                                  
|Issued
      to consultant              |               |                |                                         |                                   | 185,085                          
|Loss
      for the period               |               |                |                                         |                                   |                                 
|                                        |               
|Balance,
      September 30, 2002       | 138,614,533    |                | $138,615                                 |                                   | $57,591,454                      
|                                        |               

|6. WARRANTS AND OPTIONS


At September 30, 2002, warrants were
outstanding and exercisable into the following shares of Common Stock:
|-------------------------------------------------------------------------------------------------------------------------------------

|Description | Number ofCommon Shares | Exercise Price$ | Expiration Date
|----------- | ---------------------- | --------------- | ---------------
|Warrants    |                        | 500,000         |                
|Warrants    |                        | 161,662         |                
|Warrants    |                        | 850,000         |                
|           
|Total       |                        | 1,511,662       |                
|           

|8
|-

|E.DIGITAL CORPORATION
AND SUBSIDIARY NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)September 30, 2002


In connection with the issuance of
the Series C stock in October 2000, the Company issued warrants with an exercise price of
$5.20. In May 2002, 161,662 warrants, which were issued to the investors and a placement
agent in connection with the Series C stock were repriced from $0.75 to $0.53. The
warrants were repriced pursuant to anti-dilution protection given to the warrant holders
triggered by the sale of $1,500,000 of shares of Common Stock in May 2002. On June 7,
2002, the 161,662 warrants were repriced from $0.53 to $0.38 triggered by the sale of
$800,000 of shares of Common Stock in June 2002, and on November 1, 2002, the 161,662
warrants were repriced again from $0.38 to $0.31 triggered by the sale of $138,500 of
shares of Common Stock in November 2002.


In connection with the issuance of
the SP Notes, the Company issued warrants with an exercise price of $0.75. On June 7,
2002, 850,000 warrants, which were issued to the investors and placement agent in
connection with the SP Notes were repriced to $0.38. The warrants were repriced pursuant
to anti-dilution protection given to the warrant holders triggered by the sale of $800,000
of shares of Common Stock in June 2002, and on November 1, 2002, the warrants were
repriced again to $0.31 triggered by the sale of $138,500 of shares of Common Stock in
June 2002.


The following table summarizes stock
option activity for the period:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                   | Number ofOptions | Weighted AverageExercise Price
| | --------------------------------- | ---------------- | ------------------------------
| | Outstanding at March 31, 2002     |                  | 5,915,750                     
| | Granted                           |                  | 2,680,000                     
| | Exercised                         |                  | (111,250                      
| | Forfeited                         |                  | (782,499                      
| | Cancelled                         |                  | (2,115,000                    
| |                                   |                  |                               
| | Outstanding at September 30, 2002 |                  | 5,587,001                     
| |                                   |                  |                               
| | Exercisable at September 30, 2002 |                  | 4,101,743                     
| |                                   |                  |                               

|Options outstanding are exercisable
at prices ranging from $0.0875 to $5.46 and expire over the period from 2002 to 2007 with
an average life of 3.34 years. During the quarter ending September 30, 2002 two officers
of the Company voluntarily cancelled a total of 2,115,000 vested options exercisable at
$5.46.


7. INVENTORY


Inventory is recorded at the lower of
cost and net realizable value. Cost is determined on a first-in, first out basis.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     | September
      30, 2002
      $ | March 31,
      2002
      $
|-------------------- | -------------------------------- | ----------------------------
|Finished
      goods |                                  | 497,974                     
|Raw materials        |                                  | 228,653                     
|                     |                                 
|                     |                                  | 726,627                     
|                     |                                 

|At March 31, 2002, the provision for
inventory obsolescence was $55,965. During the quarter ended June 30, 2002, the provision
was increased by $158,272 without a reduction in the opening provision. As the Company is
de-emphasizing the marketing of its own branded products, during the quarter
ended September 30, 2002, the provision was increased by $509,508 without a reduction in
the opening provision and accordingly the provision for inventory obsolescence at
September 30, 2002 amounted to $723,745.


8. COMMITMENTS AND
CONTINGENCIES


The Company has entered into a
three-year fulfillment, storage and freight management agreement with APL Direct Logistics
ending on September 30, 2004. As part of this agreement, the Company provided APL Direct
Logistics with a letter of credit amounting to $144,724 ($145,707 at September 30, 2002)
and prepaid $90,000 to APL Direct Logistics for inbound and outbound freight management
services which will be drawn down upon submission of invoices from APL. The Company also
paid APL Direct Logistics $14,000 for initial integration and implementation expenses. In
June, the Company made a payment of $35,000 to APL Direct Logistics as an additional
prepayment for freight management. As of September 30, 2002, the Company had a balance in
prepaid freight of $16,227. The Companys minimum monthly commitment, which includes
call center support, is approximately $46,000. Depending on the volume of units shipped,
this amount may increase. In September, the Company notified APL that it is terminating
the agreement. At September 30, 2002, the total amount due to APL was $265,931 and has
been recorded as a current liability. At September 30, 2002, approximately $51,922 of
finished goods inventory was held at APL Direct Logistics facilities. The Company is
currently negotiating with APL to establish the total amount to be paid by the Company to
terminate this agreement and the timing of the release of the inventory currently held at
APL.


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|E.DIGITAL CORPORATION
AND SUBSIDIARY NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)September 30, 2002



The Company relies on Maycom Co.,
Ltd, Musical Electronics, Ltd, Digitalway Co., Ltd., (Digitalway) and DGN,
Inc. Ltd. for the manufacture and assembly of its MXP 100, TREO 15, Odyssey products and
the Silhouette, respectively. The Company depends on its contract manufacturers to (i)
allocate sufficient capacity to its 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
these manufacturers for any reason could have a material adverse affect on the
Companys business. Production and pricing by each such manufacturer is subject to
the risk of price fluctuations and periodic shortages of components. The Company has no
supply agreements with component suppliers and, accordingly, 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.


On March 25, 2002, the Company
entered into a supply agreement with Digitalway, one of its contract manufacturers, and
has agreed in good faith to purchase a minimum of approximately $5.96 million of product
in the twelve-month period from initial order date. As of September 30, 2002, the Company
has not taken delivery of any products under this agreement. The Company placed its
initial order with Digitalway for product delivery during the quarter ended December 31,
2002. The Company does not believe that it needs to accrue for this agreement.


Approximately $515,000 of the accrued
lease liability arose in the normal course of business for goods and services delivered to
the Company and were recorded at amounts reflected on the invoices and other documentation
received from the third party vendor. This amount is approximately five years old. The
amount owing to the vendor is still 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 the amount that may be due. 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, the Company
entered into a three-year sublease agreement expiring on July 31, 2003. The Company is
occupying approximately 13,000 square feet with aggregate monthly lease payments of
$15,967 inclusive of utilities and costs. The aggregate monthly lease payments increased
to $16,606 beginning August 1, 2002. As of September 30, 2002, the total operating lease
obligation under the lease for office space is $166,060.


The Company maintains a credit card
facility of up to $50,000 for corporate credit cards and a $129,000 facility for a standby
letter of credit.


9. RESTRICTED CASH


Restricted cash represents the
stand-by letter of credit issued to APL Direct Logistics in the amount of $145,707
expiring in October 2004.


10. CREDIT RISK


Amounts owing from three major
customers comprise 77% of accounts receivable at September 30, 2002. In the quarter ended
September 30, 2002, the Company wrote-off $20,914, the entire accounts receivable balance
due from Dataplay. Amounts owing from three major customers comprised 85% of accounts
receivable at March 31, 2002.


11. MAJOR CUSTOMERS AND
SUPPLIERS


The Company operates in one major
line of business, the development, manufacture and marketing of electronic products. Sales
to two major customers comprise 41% of revenue for the quarter ended September 30, 2002.
Sales to two major customers comprise 88% of revenue for the quarter ended September 30,
2001. Details of one customers plan of operations going forward (Lanier) are not
known at this time. In October 2001, the Company satisfied its contractual commitment to
deliver of product to Lanier and, to date, have received no additional purchase orders.
The Companys agreement with Lanier has not been renewed and the Company expects no
additional sales. The loss of this customer has had a material adverse impact on the
Company and its results of operations.


12. COMPARATIVE FIGURES


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


10
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|E.DIGITAL CORPORATION
AND SUBSIDIARY NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)September 30, 2002



13. SUBSEQUENT EVENTS


On October 2, 2002, the Company
issued 455,000 shares of Common Stock to an institutional investor for gross cash proceeds
of $182,000 and 840,000 shares of Common Stock, valued at $336,000 to three vendors for
goods and services received.


On November 1, 2002, the Company
issued 446,774 shares of Common Stock to an institutional investor for gross cash proceeds
of $138,500 and 300,000 shares of Common Stock, valued at $93,000 to a vendor for goods
and services received.



11
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|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, 2002.


General


We offer engineering services to
leading electronics companies to create portable digital devices that can link to PCs, the
Internet and other electronic devices. We market our services and technologies to Original
Equipment Manufacturers (OEMs) with a focus on developing digital music,
voice, and video players/recorders using the latest in digital storage media (a device
used to store data) and technology. OEMs are business customers that license or purchase
our products or our technology to embed in their own products. We offer complete reference
designs (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 the customers wishes) and technology platforms (basic working
technology that can be developed into a finished consumer product, or incorporated into an
existing consumer product design) for private labeling by OEMs. We may sometimes integrate
our OEMs unique or proprietary features and/or technology into new products for
their product lines. We focus our marketing efforts on OEMs in various digital processing
markets including digital music, dictation equipment, consumer electronics, digital image
and video and other electronic product markets.


We have relationships with ISO
certified manufacturing facilities in the United States, Malaysia, Taiwan, China,
Singapore, and Korea. The ISO, or International Standards Organization, creates uniform,
measurable quality standards used around the world. They measure, judge, and certify
companies based upon compliance with stringent standards applicable to their industry. We
have expertise in developing, performing and overseeing manufacturing processes. We
license technology and offer manufacturing supervision, documentation and quality control
services to our OEM customers.


Services offered include custom
hardware, firmware (an instruction set programmed into a chip which determines the
products functionality and user interface), software development, technology
platform development, product design, manufacturing services, fulfillment services,
warranty services, and licensing of our patented file management systems. Our revenues may
result from the sale of products and fees from engineering services, industrial order
fulfillment, technical support services, warranty services and/or design services. In some
cases, we rely on outside subcontractors to perform services including manufacturing,
testing and certification, industrial design, and assembly.


In September 2001, we announced plans
to brand and sell our own line of digital audio products for consumers. The first product
in this program is a digital audio player named MXP100, which incorporates our
MicroOS 2.0 and VoiceNav technologies into a handheld digital music and voice
recorder/player. This product which was launched on our website store on November 2, 2001,
incorporates a proprietary PC software interface program designed and developed by us,
called MXP Music Explorer, that allows users to download MP3 and Windows
Media files from their PCs hard drive to the portable player. The MXP-100
player uses either Microdrive storage media from IBM or CompactFlash storage
media from SanDisk. In November 2002, we announced plans to focus our strategy on OEM
opportunities and deempahsize marketing our own branded products. The decision to move
away from marketing and selling our own branded products was driven by (i) slow payment
terms by retailers, (ii) large working capital requirements, specifically inventory, (iii)
extremely competitive and price sensitive market for consumer electronic goods in the
United States; (iv) low margins and (v) the need for high level of sales and marketing
expenditures.


Directly related to our consumer
product sales plans, in September 2001, we signed a three-year agreement with APL Direct
Logistics, a custom fulfillment partner, for product distribution, fulfillment, and
support services. Under the multi-year agreement, APL Direct Logistics receives our
product inventory in their distribution center in Hebron, Kentucky, and fulfills orders
directly to consumers. These orders come from our secure online store, which has been
established at http://www.edigital-store.com. Orders also may come from our
partners, from other online sales sites, from other distributors, from resellers, or from
retail stores. This agreement includes provisions for APL Direct Logistics or a
subcontractor to provide call center support to answer consumer questions about our
e.Digital branded products and non-branded products marketed by us and to take
orders by phone when necessary. The agreement requires certain minimum payments to APL
Direct Logistics and is for a term of three years, terminating September 30, 2004. In
September, we notified APL that we are terminating the agreement. In order to reduce our
monthly overhead expenses, we have brought in-house all of the fulfillment, distribution
and support services that previously had been handled by APL. At September 30, 2002,
approximately $51,922 of finished goods inventory was held at APL Direct Logistics
facilities. We are currently negotiating with APL to establish the total amount to be paid
by us to terminate this agreement and the timing of the release of the inventory currently
held at APL.


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|In May 2002, we signed a strategic
development agreement with Digitalway Co., Ltd., (Digitalway) of Korea. Under
the agreement, we will co-develop and market advanced digital audio players for the
consumer market. The products will be branded by e.Digital and marketed in the United
States and Canada. The products will be branded by Digitalway and marketed in Asia and
other territories. The new products developed under the agreement will be also branded by
e.Digital and marketed in Europe. On May 30, 2002, we announced the first products
resulting from this agreement, the Odyssey 100, Odyssey 200, and Odyssey 300. In July
2002, the products became available for sale. All of these portable MP3 player products
use embedded Flash-memory technology with a SmartMedia card expansion slot for optional
storage media upgrades. The Odyssey 100 is an extremely compact MP3 player with very
efficient power management, providing up to 30 hours of playback time on a single AA
Alkaline battery. The Odyssey 200 incorporates an FM tuner and a digital voice recorder.
The Odyssey 300 features direct MP3 encoding, allowing users to plug in their personal CD
player and encode MP3 files directly to the Odyssey 300 without the use of a computer. It
also incorporates a digital voice recorder, FM tuner, and FM recorder. The Odyssey
products include software to interface with PC and Mac platforms to organize and
upload/download files.


In October 2002, we announced a
partnership with Aircraft Protective Systems, Inc. (APS) to develop and market
a portable, hard disk drive-based In-Flight Entertainment, or IFE, system under contract
for a leading U.S. airline. The agreement specifies that we will manufacture and sell the
customizable digital video player through APS. The agreement includes provisions for
non-recurring engineering (NRE) fees to be paid by APS to us for design
services plus licensing fees and royalties. To date, we have received $50,000 in payments
under this agreement with respect to NRE fees only, of which $50,000 has been deferred at
September 30, 2002.


In September 2001, we signed a
strategic alliance agreement with DataPlay, Inc. (DataPlay) of Boulder,
Colorado. The agreement specifies that we will provide engineering and technology
development to DataPlay, specifically to incorporate DataPlays removable digital
media and micro-optical engine into a variety of portable products. The agreement also
states that DataPlay will refer OEM customers to us for product design, technology
integration, and application development around DataPlays technology. This agreement
includes provisions for non-recurring engineering (NRE) fees to be paid by
DataPlay to us for design services and specifies that we will collect royalties from OEM
customers on certain DataPlay-enabled products. To date we have received $335,000 in
payments under this agreement with respect to NRE fees only, which have all been recorded
as revenue. In September 2002, DataPlay announced that it had filed for chapter 11 of the
Bankruptcy Code and furloughed all of its employees and that it had begun to search for a
buyer for the company and technology. Accordingly, we have written off $20,914, the total
amount due from DataPlay at September 30, 2002.


In September 2001, we signed a
royalty-bearing licensing agreement with Hong Kong manufacturer Musical Electronics, Ltd.
(Musical). Under the agreement, Musical licensed technology from us for use in
Musicals OEM products. The agreement calls for Musical to pay us licensing fees as
well as per-unit royalties. On December 3, 2001, Musical announced that its first product,
the Classic XP3, created under their licensing agreement with e.Digital, will be sold
through Circuit City, a national consumer electronics retailer. To date, we have received
$17,736 of licensing revenues and have recognized a total of $17,736 as revenues under
this agreement. In addition, we have received $50,000 with respect to NRE fees, of which
$36,662has been deferred at September 30, 2002.


In January 2002, we announced that we
collaborated with Evolution Technologies and DataPlay on the development and design of the
MTV DataPlay-enabled music player, which was introduced at the 2002 International Consumer
Electronics Show in Las Vegas. The next-generation portable device, with DataPlay
removable storage media, functions as a music player, a recorder, an external storage
drive, and an optical media burner. Consumers can encode compressed music files, download
content, store and transport files, and playback user-recorded files and/or pre-recorded
content. Under our agreements with DataPlay and Musical, we expect to collect royalties on
the MTV DataPlay-enabled music player when production units begin shipping. To date,
shipments of the MTV device have not begun and we have not received any royalties from
this collaboration.


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|In March 2002, we announced that we
had entered into a Development and Manufacturing Agreement with Eclipse by Fujitsu Ten
(Eclipse), a car stereo company. Under the agreement, e.Digital will receive
NRE fees for design and development services, as well as revenues for the manufacture and
delivery of Eclipse-branded audio products. Specifically, the agreement states that
e.Digital will provide Eclipse with engineering services to integrate file management and
compressed audio management technology designed by e.Digital into an advanced automotive
audio system. Eclipse refers to their automotive audio system as an
infotainment platform because it includes not only a radio and CD Player, but
also may (i) connect wirelessly to the Internet to download music or other data, (ii)
store, organize, retrieve, and play back data, including digital audio files, from a hard
disk drive, (iii) connect wirelessly to a users home personal computer while parked
in the driveway for purposes of downloading and/or uploading music or other information,
(iv) record radio signals to a built-in hard disk drive as they are received and (v)
recognize the drivers voice commands to perform a variety of operations. Prior to
entering into the Development and Manufacturing Agreement, we had collaborated with
Eclipse for several months to develop and deliver state-of-the-art automotive OEM and
aftermarket infotainment systems integrating the latest digital audio, voice recognition,
data storage, video, and wireless Internet technologies for sale under the Eclipse brand
name. The first system was unveiled at the 2002 International Consumer Electronics Show in
Las Vegas. To date, we have received $55,000 under this agreement with respect to NRE fees
only, of which $15,000 has been deferred as of September 30, 2002


In April 2002, we announced a
strategic collaboration with DivXNetwork, Inc. (DivX Networks) of San Diego,
California. DivX Networks created and markets a motion picture compression format (the
DivX codec, a leading standard for MPEG-4 video distribution) that is
used for storing, playing back, and streaming motion pictures over the Internet. Over 50
million users worldwide have downloaded the DivX codec and the format is frequently used
for distribution of news, information, and entertainment by corporations and video
producers including major motion picture companies. Under the agreement we are working
with DivX to jointly develop and market a range of consumer electronics devices that play
back DivX video. To date, we have received no revenues from this collaboration.


In July 2001, we signed a
royalty-bearing licensing agreement with Bang & Olufsen Multimedia A/S (Bang
& Olufsen), a premier European electronics, telephony and audio/video
manufacturer. Under this licensing agreement, we customized and provided Bang &
Olufsen a MicroOS based custom product platform for use in their branded music
product line. To date, we have received $75,000 under this agreement with respect to NRE
fees only, of which $45,706 has been deferred as of September 30, 2002. The first product
developed under our licensing agreement (the BeoSound 2 digital audio player) became
available to consumers in the United States and Canada in late June 2002, and in European
markets a few weeks later. Bang & Olufsen sells their branded products through
exclusive retail stores worldwide. To date, we have received $40,995 of licensing revenues
and have recognized a total of $40,995 of revenues under this agreement.


We designed, developed and produced a
digital voice recorder and computer docking station for the medical industry pursuant to a
January 1997 development and supply agreement with Lanier Healthcare, LLC
(Lanier). These products represent the Cquence Mobile portion of Laniers
Cquence line of products for the medical industry. The Cquence line is an integrated
medical document management solution that manages medical documents from creation,
completion, distribution and retention. Cquence Mobile offers healthcare providers a
mobile digital dictation unit and computer interface with a number of new advanced
features. The Lanier agreement provided that we would supply and deliver product to them
through December 2001. In May 1999, we commenced production, through a subcontract
manufacturer, and in June 1999 commenced initial limited customer deliveries pursuant to
purchase orders. The supply agreement provided for rolling six-month requirement forecasts
and three-month advance orders. During the quarter ended September 30, 2002, we delivered
$nil of products to Lanier, compared to $164,792 for the quarter ended September 30, 2001.
In October 2001, we satisfied our contractual commitment to deliver of product to Lanier
and, to date, have received no additional purchase orders. Our agreement with Lanier has
not been renewed and we expect no additional sales.


We incurred operating losses in each
of the last three fiscal years and for the six months ended September 30, 2002 and these
losses have been material. We incurred operating losses of $4.2 million, $5.9 million,
$3.9 million and $2.6 million in the six months ended September 30, 2002 and fiscal years
ended March 31, 2002, 2001 and 2000, respectively. At September 30, 2002, we had a working
capital deficit of $4.2 million. Our current level of monthly cash operating costs is
approximately $350,000. However, we may increase expenditure levels in future periods to
expand our OEM 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 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.


Since March 31, 2002, we have
experienced increased costs that adversely affect our current results of operations and
liquidity. Our operating plans, including our plans to market to OEMs, 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.


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|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 OEM customers and markets and
(c) raising, if necessary, additional capital and/or obtaining third party financing.


On February 6, 2002, we filed a
shelf registration statement on Form S-3, No. 333-82272 (the
Registration Statement) to sell up to 20,000,000 shares of common stock. The
Registration Statement was declared effective by the Securities and Exchange Commission on
April 29, 2002. On April 30, 2002, we sold 2,830,189 shares of common stock for gross
proceeds of $1,500,000, and utilized $300,000 to reduce the principal amount due under the
5% SP Note, $15,000 to reduce accrued interest due under the 5% SP Note, and $5,105 for
offering expenses. On June 7, 2002, we sold 2,105,264 shares of common stock for gross
proceeds of $800,000, and utilized $250,000 to reduce the principal amount due under the
5% SP Note and $1,000 for offering expenses. On September 3, 2002, we sold 425,532 shares
of common stock for gross proceeds of $200,000 and utilized $195,000 for working capital
purposes and $5,000 for offering expenses. On October 2, 2002, we sold 455,000 shares of
common stock for gross proceeds of $182,000, and utilized $32,000 to reduce accrued
interest due under the Unsecured Notes. On November 1, 2002, we sold 455,000 shares of
common stock for gross proceeds of $138,500 and utilized $138,500 for working capital
purposes.


In July 2002, we issued Unsecured
Promissory Notes (Unsecured Notes) for gross cash proceeds of $1,050,000 to
certain investors to finance various purchase orders and accounts receivable. The
Unsecured Notes matured sixty days from issuance, commencing September 1, 2002. The
interest under the Unsecured Notes accrues at a rate of 24% per annum simple interest and
is payable in one installment on the maturity date. We have entered into a forbearance
agreement with the investors through and including December 31, 2002. We are currently in
negotiations with the holders of the Unsecured Notes about restructuring the payment terms
and maturity dates of the Unsecured Notes and accrued interest. As at September 30, 2002,
accrued interest totaled $54,210 [March 31, 2002  $nil]


On August 2, 2002, we issued 360,000
restricted shares of Common Stock to a director for gross proceeds of $120,000. The
restricted shares of Common Stock do not have any registration rights.


On September 11, we issued a 15%
Unsecured Promissory Notes (15% Unsecured Note) for gross cash proceeds of
$750,000. The 15% Unsecured Note matures February 11, 2004. The 15% Unsecured Note is
payable $50,000 each month, with a final payment of $35,801 on February 11, 2003. We have
entered into a forbearance agreement with the investor through and including December 31,
2002. We did not make a payment in October and we are currently in negotiations with the
holder of the 15% Unsecured Note about restructuring the payment terms of the 15%
Unsecured Note. As at September 30, 2002, accrued interest totaled $5,938 [March 31, 2002
 $nil].


Results of
OperationsSix months ended September 30, 2002 compared to six months ended September 30,
2001


For the six months ended
September 30, 2002, we reported total revenues of $841,797, a 28.4% decrease from total
revenues of $1,176,275 for the first six months of fiscal 2002. Product revenues for six
months ending September 30, 2002 were $665,471, a 19.5% decrease from product revenues of
$827,175 for the six months ending September 30, 2001. Product revenues for the six months
ending September 30, 2002 consisted almost entirely of sale of portable digital audio
players, which we launched during the 3rd and 4th fiscal quarter of
2002, while product revenues for the six months ending September 30, 2001 consisted almost
entirely of product shipment to Lanier. The loss of Lanier as a customer has had a
material adverse impact on our results of operations. Based on our experience with the
purchasing and payment history of our customers, we began, in the quarter ending June 30,
to recognize revenue from products sold to most of our retailers as they ship product to
their customers rather than when we ship products to the retailers.


Service revenues for the first six
months of fiscal 2003 were $176,326 compared to $349,100 for the comparable period of the
prior year. The timing and amount of service revenues is dependent upon a limited number
of projects. At September 30, 2002 we had $112,907 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 OEM customers
in order to speed adoption of our technology and enhance our future revenues.


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|For the six months ended September
30, 2002, we reported a gross loss of $1,332,373 compared to a gross profit of $421,776
for the first six months of fiscal 2002. Cost of sales for the six months ended September
30, 2002 consisted of $2,075,723 of product costs and $98,447 of service costs, consisting
mostly of research and development labor being 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 as a percentage of revenue decreased from 35.9% to (158.3%), due
primarily to start-up costs relating to the launch of our branded products, the write-down
of inventory by $667,780 related to slow moving and obsolete products, price reductions on
our branded products and the APL Direct Logistics costs. At the present time,
warranty costs are not significant. We generally sell our branded products with a
six-month manufacturing warranty, while the contract supply agreement on Lanier products
provided a twelve-month manufacturing warranty.


Total operating expenses (consisting
of research and related expenditures and selling and administrative expenses) for the six
months ended September 30, 2002 were $2,847,756, as compared to $2,532,271for the six
months ended September 30, 2001. Selling and administrative costs aggregated $2,044,261
for the first six months of fiscal 2003 compared to $1,038,819 in the prior period. The
$1,005,442 increase in selling and administrative costs resulted primarily from the
following: increase in personnel and benefit costs of $514,390, an increase of $320,502 in
professional fees, an increase in customer service costs of $81,000, advertising and
promotional items of $49,830, offset by a decrease in outside public relations expense of
$56,417.We anticipate quarterly selling and administrative expenses to decrease as
we focus more on OEM opportunities and deemphasize selling and marketing our branded
products.


Research and related expenditures for
the six months ended September 30, 2002 were $803,495, as compared to $1,493,452, for the
six months ended September 30, 2001. The $689,957 decrease in research and development
costs resulted primarily from a decrease in the use of outside consultants and temporary
labor of approximately $154,962, and a decrease of approximately $228,333 in personnel and
benefit costs resulting primarily from personnel who have moved from the research and
development department into the sales and administrative departments. Research and
development costs are subject to significant quarterly variations depending on the use of
outside services, the assignment of engineers to development projects and the availability
of financial resources.


We reported an operating loss of
$4,180,129 for the six months ended September 30, 2002 as compared to an operating loss of
$2,110,495 for the six months ended September 30, 2001. The increase in operating loss
resulted primarily from the gross loss for the six months ended June 30, 2002 as compared
to a gross profit for the six months ended September 30, 2001, as well as increased
selling and administrative costs. We believe, but we can not guarantee, that our strategy
of investing in OEM developments with supply or royalty provisions will provide positive
margins in future periods. The timing and amount of product sales and the recognition of
contract service revenues impact our operating losses. Accordingly, there is uncertainty
about future operating results and the results for the three months are not necessarily
indicative of operating results for future periods or the fiscal year.


We reported a loss for the first six
months of the current fiscal year of $4,615,860 as compared to a loss of $2,061,315 for
the prior years first six months. For the six months ended September 30, 2002, we
incurred interest expense of $504,346 as compared to $nil for the comparable period in the
prior year.


The loss available to common
stockholders for the six months ended September 30, 2002 and 2001 is $4,615,860 and
$2,061,315, respectively. Included in the loss available to common stockholders for the
six months ending September 30, 2002 and 2001 is accrued dividends of $nil and $26,332,
respectively on the Series C stock.


Three months ended September 30,
2002 compared to six months ended September 30, 2001


For the three months ended September
30, 2002, we reported total revenues of $290,290, a 42.7% decrease from total revenues of
$506,997 for the quarter ending September 30, 2001. Product revenues for the quarter ended
September 30, 2002 were $180,969, a 9.8% decrease from product revenues of $200,648 for
the quarter ended September 30, 2001. Product revenues for the quarter ended September 30,
2002 consisted almost entirely of sale of portable digital audio players, which we
launched during the 3rd and 4th fiscal quarter of 2002, while
product revenues for the quarter ended September 30, 2001 consisted almost entirely of
product shipment to Lanier. The loss of Lanier as a customer has had a material adverse
impact on our results of operations.


16
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|Service revenues for the quarter
ended September 30, 2002 were $109,321 compared to $306,349 for the comparable period of
the prior year. The timing and amount of service revenues is dependent upon a limited
number of projects.


For the quarter ended September 30,
2002, we reported a gross loss of $897,938 compared to a gross profit of $269,780 for the
quarter ended September 30, 2001. Cost of sales for the quarter ended September 30, 2002
consisted of $1,155,197 of product costs and $33,031 of service costs, consisting mostly
of research and development labor being 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 as a percentage of revenue decreased from 53.2% to (309.3%), due primarily to
start-up costs relating to the launch of our branded products, the write-down of inventory
by $509,508 related to slow moving and obsolete products, price reduction on our branded
products and the APL Direct Logistics costs. At the present time, warranty costs are
not significant. We generally sell our branded products with a six-month manufacturing
warranty, while the contract supply agreement on Lanier products, which has not been
renewed, provided a twelve-month manufacturing warranty.


Total operating expenses (consisting
of research and related expenditures and selling and administrative expenses) for the
quarter ended September 30, 2002 were $1,476,338, as compared to $1,349,907 for the
quarter ended September 30, 2001. Selling and administrative costs aggregated $1,056,998
for the quarter ended September 30, 2002 compared to $548,390 in the prior period. The
$508,608 increase in selling and administrative costs resulted primarily from the
following: increase in personnel and benefit costs of $252,509, an increase of $203,636 in
professional fees, an increase in customer service costs of $41,500, offset by a decrease
in outside public relations expense of $25,036. We anticipate quarterly selling and
administrative expenses to decrease as we focus more on OEM opportunities and away from
selling and marketing our branded products.


Research and related expenditures for
the quarter ended September 30, 2002 were $419,340, as compared to $801,517, for the
quarter ended September 30, 2001. The $382,177 decrease in research and development costs
resulted primarily from a decrease in the use of outside consultants and temporary labor
of approximately $174,572, and a decrease of approximately $261,299 in personnel and
benefit costs resulting primarily from personnel who have moved from the research and
development department into the sales and administrative departments. Research and
development costs are subject to significant quarterly variations depending on the use of
outside services, the assignment of engineers to development projects and the availability
of financial resources.


We reported an operating loss of
$2,374,276 for the quarter ended September 30, 2002 as compared to an operating loss of
$1,080,126 for the quarter ended September 30, 2001. The increase in operating loss
resulted primarily from the gross loss for the quarter ended September 30, 2002 as
compared to a gross profit for the quarter ended September 30, 2001, as well as increased
operating expenses. We believe, but we can not guarantee, that our strategy of branding
and marketing our own branded e.Digital portable audio players and investing in OEM
developments with supply or royalty provisions will provide positive margins in future
periods. The timing and amount of product sales and the recognition of contract service
revenues impact our operating losses. Accordingly, there is uncertainty about future
operating results and the results for the three months are not necessarily indicative of
operating results for future periods or the fiscal year.


We reported a loss for the quarter
ended September 30, 2002 of $2,673,578 as compared to a loss of $1,062,352 for the quarter
ended September 30, 2001. For the quarter ended September 30, 2002, we incurred interest
expense of $299,867 as compared to $nil for the comparable period in the prior year.


The loss available to common
stockholders for the quarter ended September 30, 2002 and 2001 is $2,673,578 and
$1,075,592, respectively. Included in the loss available to common stockholders for the
quarter ended September 30, 2002 and 2001 is accrued dividends of $nil and $13,238,
respectively on the Series C stock.


Liquidity and Capital
Resources


At September 30, 2002, we had working
capital deficit of $4,214,479 compared to a working capital deficit of $2,543,657 at March
31, 2002. We had $726,627 of working capital invested in inventory at September 30, 2002.
Cash used in operating activities for the six month period ended September 30, 2002 was
$3,352,507 resulting primarily from the loss for the period, offset by a decrease in
accounts receivable. During the six months ended September 30, 2002 we purchased $62,810
in property and equipment. For the six months ended September 30, 2002, cash provided by
financing activities was $3,088,838 resulting primarily from $2,667,838 proceeds from
issuance of shares of Common Stock and $1,800,000 proceeds from the issuance of the
Unsecured Notes and the 15% Unsecured Note, offset by a payment of $1,400,000 on the 5% SP
Notes. For the six months ended September 30, 2002, net cash and cash equivalents
decreased by $327,781.


17
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------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|At September 30, 2002, we had net
accounts receivable of $136,620 as compared to $618,509 at March 31, 2002. This
represented approximately 43 days of revenues. During the quarter ending September 30,
2002, we wrote-off $20,914, the entire amount due from DataPlay. The decrease in
receivables resulted from collections during the quarter ending September 30, 2002. In
addition, beginning in the quarter ending September 30, 2002, we began to offset accounts
receivable with deferred revenues for most of our retail customers, which had the impact
of lowering our reported accounts receivable balances. Receivables can vary dramatically
due to the timing of product shipments and contract arrangements on development
agreements.


At September 30, 2002, we had cash
and cash equivalents of $117,438. 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 OEM arrangements, and (b) currently planned
expenditures and level of operation, we believe we have sufficient capital resources for
the next two months. However actual results could differ significantly from management
plans. The actual future margins to be realized, if any, and the timing of shipments and
the amount and quantities of OEM shipments, orders and reorders are subject to many
factors and risks, many outside our control.


We require additional capital to
finance future developments and improvements to our technology. 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.


On February 6, 2002, we filed a
shelf registration statement on Form S-3, No. 333-82272 (the
Registration Statement) to sell up to 20,000,000 shares of common stock. The
Registration Statement was declared effective by the Securities and Exchange Commission on
April 29, 2002. On April 30, 2002, we sold 2,830,189 shares of common stock for gross
proceeds of $1,500,000, and utilized $300,000 to reduce the principal amount due under the
5% SP Note, $15,000 to reduce accrued interest due under the 5% SP Note, and $5,105 for
offering expenses. On June 7, 2002, we sold 2,105,264 shares of common stock for gross
proceeds of $800,000, and utilized $250,000 to reduce the principal amount due under the
5% SP Note and $1,000 for offering expenses. On September 3, 2002, we sold 425,532 shares
of common stock for gross proceeds of $200,000 and utilized $195,000 for working capital
purposes and $5,000 for offering expenses. On October 2, 2002, we sold 455,000 shares of
common stock for gross proceeds of $182,000, and utilized $150,000 to reduce the principal
amount due under the Unsecured Notes and $32,000 to reduce accrued interest due under the
Unsecured Notes. On November 1, 2002, we sold 446,774 shares of common stock for gross
proceeds of $138,500 and utilized $138,500 for working capital purposes.


In July 2002, we issued Unsecured
Promissory Notes (Unsecured Notes) for gross cash proceeds of $1,050,000 to
certain investors to finance various purchase orders and accounts receivable. The
Unsecured Notes matured sixty days from issuance, commencing September 1, 2002. The
interest under the Unsecured Notes accrues at a rate of 24% per annum simple interest and
is payable in one installment on the maturity date. We have entered into a forbearance
agreement with the investors through and including December 31, 2002. We are currently in
negotiations with the holders of the Unsecured Notes about restructuring the payment
terms and maturity dates of the Unsecured Notes and accrued interest. There can be no
assurances that holders of the Unsecured Notes will agree to restructure the Unsecured
Notes. As at September 30, 2002, accrued interest totaled $54,210 [March 31, 2002  $nil]


On August 2, 2002, we issued 360,000
restricted shares of Common Stock to a director for gross proceeds of $120,000. The
restricted shares of Common Stock do not have any registration rights.


On September 11, we issued a 15%
Unsecured Promissory Notes (15% Unsecured Note) for gross cash proceeds of
$750,000. The 15% Unsecured Note matures February 11, 2004. The 15% Unsecured Note is
payable $50,000 each month, with a final payment of $35,801 on February 11, 2003. We have
entered into a forbearance agreement with the investor through and including December 31,
2002. We did not make a payment in October and we are currently in negotiations with the
holder of the 15% Unsecured Note about restructuring the payment terms of the 15%
Unsecured Note. There can be no assurances that the holder of the 15% Unsecured Note will
agree to restructure the 15% Unsecured Note. As at September 30, 2002, accrued interest
totaled $5,938 [March 31, 2002  $nil].


We are actively seeking equity
financing and intend to use proceeds from equity sales for working capital and to repay
the SP Notes, the Unsecured Notes and the 15% Unsecured Notes. If we are unable to secure
equity financing, we will attempt to renegotiate the terms of all of the notes with the
lenders. There can be no guarantee that we will be able to raise additional equity and/or
renegotiate the terms of the notes with the lenders. If we are able to renegotiate the
terms of the notes we are unable to determine what terms the lenders may demand. If we
fail to raise additional equity and/or refinance or renegotiate the terms of the notes,
the holders of the notes may have the right to take possession of our intellectual
property and all of our assets or may have the right to operate our business and have the
right to assign, sell, lease or otherwise dispose of our intellectual property and all of
our assets.


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|Future Commitments and
Financial Resources


We have entered into a three-year
fulfillment, storage and freight management agreement with APL Direct Logistics ending on
September 30, 2004. As part of this agreement, we provided APL Direct Logistics with a
letter of credit amounting to $144,724, we paid $90,000 to APL Direct Logistics as a
deposit for inbound and outbound freight management services and we paid APL Direct
Logistics $14,000 for initial integration and implementation expenses. Our minimum monthly
commitment amount, which includes call center support, is approximately $46,000. Depending
on the volume of units shipped, this amount may increase. As of September 30, 2002, the
total minimum commitment to APL is $1,104,000 through the end of the contract in 2004. In
September, we notified APL that we are terminating the agreement. In order to reduce our
monthly overhead expenses, we have brought in-house all of the fulfillment, distribution
and support services that previously had been handled by APL. At September 30, 2002,
approximately $51,922 of finished goods inventory was held at APL Direct Logistics
facilities. We are currently negotiating with APL to establish the total amount to be paid
by us to terminate this agreement and the timing of the release of the inventory currently
held at APL.


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 unaudited items
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 expiring on July 31, 2003. We are occupying approximately
13,000 square feet with aggregate monthly lease payments of $15,967 inclusive of utilities
and costs. The aggregate monthly lease payments increased to $16,606 beginning August 1,
2002. As of September 30, 2002, the total operating lease obligation under the lease for
office space is $166,060.


Business Risks


This report contains a number of
forward-looking statements that reflect our current views with respect to future events
and financial performance. These forward-looking statements are subject to certain risks
and uncertainties 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 and substantial business risk factors described above and in the
Companys Annual Report on Form 10-K for the year ended March 31, 2002 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.


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.


We are exposed to some market risk
through interest rates, related to our investment of our current cash and cash equivalents
of $117,438 as of September 30, 2002. A 10% change in market interest rates would not have
a material affect on earnings or cash flows. We do not consider this risk to be material,
and we manage the risk by continuing to evaluate the best investment rates available for
short-term high quality investments.


We have no activities in long-term
indebtedness and our other investments are insignificant as of the date of this report.


19
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|Item 4. Controls and
Procedures


The Companys Chief Executive
Officer and Chief Financial Officer (collectively, the Certifying Officers)
are responsible for establishing and maintaining disclosure controls and procedures for
the Company. Such officers have concluded (based upon their evaluation of these controls
and procedures as of a date within 90 days of the filing of this report) that the
Companys disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in this report is accumulated and communicated to
the Companys management, including its principal executive officers as appropriate,
to allow timely decisions regarding required disclosure.


The Certifying Officers also have
indicated that there were no significant changes in the Companys internal controls
or other factors that could significantly affect such controls subsequent to the date of
their evaluation, and there were no corrective actions with regard to significant
deficiencies and material weaknesses.


PART II. OTHER
INFORMATION


Item 1. Legal Proceedings


We are involved in routine litigation
incidental to the conduct of our business. There are currently no material pending legal
proceedings to which we are a party or to which any of our property is subject.


Item 2. Changes in
Securities
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(a) | NONE
|--- | ----

|(b) | NONE
|--- | ----

|(c) | In July 2002, we issued Unsecured Promissory Notes (Unsecured Notes)
          for gross cash proceeds of $1,050,000 to certain investors to finance various
          purchase orders and accounts receivable. The Unsecured Notes mature sixty days
          from issuance, commencing September 1, 2002. The interest under the Unsecured
          Notes accrues at a rate of 24% per annum simple interest and is payable in one
          installment on the maturity date. We have entered into a forbearance agreement
          with the investors through and including December 31, 2002. We are currently in
          negotiations with the holders of the Unsecured Notes about restructuring the
          payment terms and maturity dates of the Unsecured Notes.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 2, 2002, we issued 360,000 restricted shares of Common Stock to a director for
gross proceeds of $120,000. The restricted shares of Common Stock do not have any
registration rights.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 6, 2002, we issued 125,000 shares of Common Stock, valued at $50,000, to two
individuals in connection with the purchase of certain tangible and intangible assets with
respect to our digital multimedia website
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 26, 2002, we issued 120,000 shares of Common Stock, valued at $66,000 to a vendor
for goods and services received.
| | ----------------------------------------------------------------------------------------------------------------------------

| | On
September 11, 2002, we issued a 15% Unsecured Promissory Notes (15% Unsecured
Note) for gross cash proceeds of $750,000. The 15% Unsecured Note matures February
11, 2004. The 15% Unsecured Note is payable $50,000 each month, with a final payment of
$35,801 on February 11, 2003. We have entered into a forbearance agreement with the
investor through and including December 31, 2002. We are currently in negotiations with
the holder of the 15% Unsecured Note about restructuring the payment terms of the 15%
Unsecured Note.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 2, 2002, we issued 455,000 shares of Common Stock to an institutional investor for
gross cash proceeds of $182,000 and 840,000 shares of Common Stock, valued at $336,000 to
three vendors for goods and services received.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 1, 2002, we issued 446,774 shares of Common Stock to an institutional investor
for gross cash proceeds of $138,500 and 300,000 shares of Common Stock, valued at $93,000
to a vendor for goods and services received.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 3. Defaults Upon
Senior Securities


NONE


20
|---------------------------------------------------

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


At the Companys fiscal 2002
Annual Meeting of Stockholders held on November 5, 2002 the following individuals,
constituting all of the members of the Board of Directors were elected: Allen Cocumelli,
Alfred H. Falk, Robert Putnam, Jim Collier, Alex Diaz and Victor Ramsauer.


The following proposals were approved
at the Companys Annual Meeting of Stockholders:



1.     ELECTION
OF DIRECTORS:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                   | Affirmative Votes | Negative Votes | Votes Withheld
| | ----------------- | ----------------- | -------------- | --------------
| | Allen Cocumelli   |                   | 129,560,356    |               
| | Alfred H. Falk    |                   | 129,207,631    |               
| | Robert Putnam     |                   | 129,094,451    |               
| | Jim Collier       |                   | 131,545,349    |               
| | Victor G Ramsauer |                   | 129,320,011    |               
| | Alex Diaz         |                   | 131,614,795    |               

|2.    
          PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP, AS THE INDEPENDENT
          AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING MARCH 31, 2003.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Affirmative Votes | Negative Votes | Votes Withheld
| |  | ----------------- | -------------- | --------------
| |  |                   | 131,844,425    |               

|Item 5. Other Information


On November 11, 2002, Jim Collier
resigned as President and Chief Operating Officer and Alfred H. Falk, current Chief
Executive Officer, was named President. Mr. Collier remains on the Board of Directors.


Also, on November 11, 2002,
newly-elected Alex Diaz was appointed as Chairman of the Board of Directors. Former
Chairman of the Board Allen Cocumelli, remains on the Board of Directors.


Item 6. Exhibits and
Reports on Form 8-K


(a) Exhibits



Exhibit   99.1
 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, signed by Alfred H. Falk, Chief Executive Officer.


Exhibit   99.2
 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, signed by Ran Furman, Chief Financial Officer.


Exhibit   99.3
 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, signed by Alfred H. Falk, Chief Executive Officer and Ran
Furman, Chief Financial Officer.


Exhibit   4.39
 Form of 24% Unsecured Promissory Notes aggregating $1,050,000 entered into with three
accredited investors (individual notes differ only as to amount).


Exhibit   4.40
 Form of 15% Unsecured Promissory Notes due February 11, 2002 in the amount of $750,000
entered into with Davric Corporation.




     (b)    
          Reports on Form 8-K


On August 14, 2002, the Company filed
a Form 8-k reporting an Item 9 event and accompanying exhibit filed pursuant to Item 7
relating to a certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.


21
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|SIGNATURES


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

| |  | e.DIGITAL CORPORATION
| |  | ---------------------

|Date: November 14, 2002 | By: | /s/ RAN FURMANRan Furman, Chief Financial Officer
(Principal Financial and Accounting Officer
and duly authorized to sign on behalf of the Registrant)
|----------------------- | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

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