e.Digital Corporation (fka EDIG)

[Cassandra]

Good news and bad news in the 10Q…

The good news:

- Best operating results ever.
- Revenue better than expected
- Gross Margin was over 27% (they’re really sticking it to Wencor)
- Operating expenses reduced (cuts in R&D function)
- Cash burn for Q was only 1/5 what is was for QE 6/30/05

The Bad News:

- Despite including $20/unit royalties for 3 years on MedeViewer sales and full conversion rights, they seem to be having trouble getting takers for the additional $500,000 12% notes. Only $250,000 of $500,000 had been sold as of 11/14/05 (they've been offered since 10/25/05).

- Financing is still needed in near future and will likely involve the registration and sales of more stock. Given that they are always priced at a discount to the market and the massive backlog of convertible shares for the Series D and EE CP stock and now the 12% CSP notes that would be repriced to match the offering price, the millions of new shares to be dumped onto the market would be tank the PPS further.

- Because of the above backlog, the fact that their only large customer will cease ordering early next year (making future revenue uncertain) and the fact that they have a negative net worth of $3.1 million and a working capital deficiency of $3.2 million, finding buyers for new shares will be very difficult.

- In order to sell more stock via a PIPE deal, the conversion price floor would have to be low or non-existent (aka floorless) to make it a safe deal for the buyers as they would be competing with the sellers from the Series D and EE stock as well as the 12% noteholders. Potential buyers would not want to be in the situation of the Series D and EE financiers whose conversion rights at $0.19 have been "out of the money"
for several months.

- Another shelf offering is also less attractive than it was in the past. New rules make it more difficult to use shelf shares to cover a short position.

Given that they definitely need additional financing to stay in business and that their desperate financial position and that several factors make the company unattractive to potential financiers, any financing they do get is likely to be at terms that are very hostile to the PPS.

The long and short of it is that despite having operating results last Q that are by far the best in the company's history, the desperate financial condition and needs for additional financing make it likely that the PPS will continue to experience downward pressure.

10Q: http://www.pinksheets.com/quote/print_filings.jsp?url=%2Fredirect.asp%3Ffilename%3D0001144204%252D05...