Form 8-K for E DIGITAL CORP

23-Mar-2006

Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sh

ITEM 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

On November 11, 2005, in the normal course of our business, we placed a purchase order for 1,250 digEplayers with our contract manufacturer, Maycom Co., Ltd. (``Maycom``). Maycom was paid progress payments with final payments made in full for the order by e.Digital and directly by our customer, digEcor (``digEcor``) in March, 2006.

Maycom has fulfilled orders for digEplayers since 2003, and has fulfilled orders for other products manufactured for e.Digital and its customers since 2000. On March 20, 2006 we became aware of information indicating that Maycom may be unwilling or unable to complete the purchase order for product intended for delivery to digEcor. We were advised that digEcor made an onsite inspection of order progress in January, 2006 prior to final progress payments being made.

We are investigating this matter, as well as discussing alternatives and actions with Maycom and digEcor. We expect Maycom to fulfill their obligation under the purchase order and we intend to take remedial steps including legal action, if necessary. We believe there are alternative suppliers that may be able to complete the order if Maycom is unable to do so. We are also evaluating if any third parties have interfered with our business relationship with Maycom.

We are unable to determine at this time the impact this matter may have on our financial position or results of operations if Maycom does not timely fulfill its obligation to us and we are unable to deliver product to our customer, digEcor, in a timely manner. We have not recognized any revenue or costs related to products associated with this order, as we only recognize revenues and associated costs when products are delivered to and accepted by our customer. We have approximately $600,000 in deposits to Maycom as a current asset and approximately $790,000 of deposits from digEcor as a current liability related to the digEplayers associated with this order. Our deposits with Maycom may be impaired and we could be obligated to digEcor for their deposits to us if product is not delivered. We intend to seek restitution from Maycom for any damages we may incur from this matter.

Maycom is not involved in the design, tooling or production of our proprietary eVU mobile entertainment product.