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CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND SUBSIDIARY

REPORT OF SINGERLEWAK LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-2

CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2009 AND 2008		F-3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2009 AND 2008		F-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED MARCH 31, 2009 AND 2008		F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2009 AND 2008		F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		F-7 to F-29

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

e.Digital Corporation

San Diego, CA

We have audited the accompanying consolidated balance sheets of e.Digital Corporation and subsidiary (the “Company”) as of March 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the two years in the period ended March 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2009 and 2008, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 2009 in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management's assertion about the effectiveness of the Company's internal control over financial reporting as of March 31, 2009 included in the accompanying Management’s Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has historically suffered recurring losses from operations and has a substantial accumulated deficit. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ SingerLewak LLP

SINGERLEWAK LLP

Irvine, CA

June 15, 2009

F-2

e.Digital Corporation and subsidiary

CONSOLIDATED BALANCE SHEETS

[See Note 1 - Nature of Operations and Basis of Presentation]

	As of March 31
	2009			2008
	$			$
ASSETS
Current
Cash and cash equivalents		3,813,990			122,116
Accounts receivable		93,771			174,905
Inventory		517,163			489,238
Deposits and prepaid expenses		26,108			34,717
Total current assets		4,451,032			820,976
Property, equipment and intangibles, net of accumulated depreciation and amortization of $165,449 and $485,037, respectively		26,638			40,061
Total assets		4,477,670			861,037
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current
Accounts payable, trade		202,900			836,217
Accrued and other liabilities		589,814			464,193
Current maturity of convertible term note, net of $6,141 and $25,842 of debt discount		381,093			366,989
Secured promissory note, net of $-0- and $4,131 for debt discount		—			445,869
Total current liabilities		1,173,807			2,113,268
Long-term convertible term note, net of $-0- and $6,141 of debt discount		—			381,093
Deferred revenue - long term		24,000			72,000
Total long-term liabilities		24,000			453,093
Total liabilities		1,197,807			2,566,361

Commitments and Contingencies

Stockholders' equity (deficit)
Preferred stock, $0.001 par value; 5,000,000 shares authorized
Series AA Convertible Preferred stock, $0.001 par value, 100,000 shares designated: 75,000 and -0- issued and outstanding, respectively Liquidation preference of $778,459 and $-0-, respectively		610,774			—
Common stock, $0.001 par value, authorized 350,000,000, 282,124,564 and 272,494,867 shares issued and outstanding, respectively		282,125			272,495
Additional paid-in capital		81,534,566			80,103,769
Accumulated deficit		(79,147,602	)		(82,081,588	)
Total stockholders' equity (deficit)		3,279,863			(1,705,324	)

Total liabilities and stockholders' equity (deficit)		4,477,670			861,037

See accompanying notes to consolidated financial statements

F-3

e.Digital Corporation and subsidiary

CONSOLIDATED STATEMENTS OF OPERATIONS

[See Note 1 - Nature of Operations and Basis of Presentation]

	For the year ended
	March 31
	2009			2008
	$			$
Revenues:
Products		362,079			4,841,855
Services		578,303			710,766
Patent license		10,115,350			—
		11,055,732			5,552,621

Cost of revenues:
Products		318,672			3,854,941
Services		209,022			153,672
Patent license		3,984,087			—
		4,511,781			4,008,613
Gross profit		6,543,951			1,544,008

Operating expenses:
Selling and administrative		2,325,359			1,980,451
Research and related expenditures		518,649			1,006,037
Total operating expenses		2,844,008			2,986,488

Operating income (loss)		3,699,943			(1,442,480	)

Other income (expense):
Interest and other income		59			41,114
Interest expense		(163,359	)		(237,020	)
Warrant and other finance expenses		(181,157	)		(80,681	)
Other expense		(344,457	)		(276,587	)

Income (loss) before provision for income taxes		3,355,486			(1,719,067	)
Provision for income taxes		(421,500	)		—
Income (loss) for the period		2,933,986			(1,719,067	)
Accrued and deemed dividends on preferred stock		(130,320	)		(81,975	)
Income (loss) attributable to common stockholders		2,803,666			(1,801,042	)
Income (loss) per common share - basic and diluted	$	0.01		$	(0.01	)

Weighted average common shares outstanding
Basic		277,997,077			252,683,865
Diluted		279,143,600			252,683,865

See accompanying notes to consolidated financial statements

F-4

e.Digital Corporation and subsidiary

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

[See Note 1 – Nature of Operations and Basis of Presentation]

	Preferred stock			Common stock				Additional						Accumulated
	Amount			Shares		Amount		paid-in capital			Dividends			deficit
Balance, March 31, 2007		910,000			243,453,037		243,453		78,236,434			(464,025	)		(80,362,521	)
Dividends on Series D preferred stock		—			—		—		—			(81,975	)		—
Shares issued for conversion of Series D preferred stock		(910,000	)		18,200,000		18,200		891,800			546,000			—
Shares issued upon exercise of options		—			76,166		76		11,234			—			—
Shares issued upon exercise of warrants		—			2,681,000		2,681		211,799			—			—
Shares issued for term debt payments		—			1,623,808		1,624		238,376			—			—
Shares issued for debt financing fees		—			177,581		178		30,322			—			—
Proceeds from sale of common stock net of $628,584 of prepaid transaction costs		—			6,283,275		6,283		325,133			—			—
Stock-based compensation		—			—		—		158,671			—			—
Loss and comprehensive loss		—			—		—		—			—			(1,719,067	)
Balance, March 31, 2008		—			272,494,867		272,495		80,103,769			—			(82,081,588	)
Sale of Series AA preferred stock and warrants net of $134,773 recorded as warrant liability		615,227			—		—		—			—			—
Record $134,773 beneficial conversion related to Series AA preferred stock		(134,773	)		—		—		134,773			—			—
Reclassification of warrant liability to equity		—			—		—		132,315			—			—
Value assigned to modification of Series AA warrants		—			—		—		177,125			—			—
Dividends on Series AA preferred stock		28,459			—		—		(28,459	)		—			—
Accretion of discount on Series AA preferred stock		101,861			—		—		(101,861	)		—			—
Shares issued for term debt payments		—			3,018,331		3,018		376,982			—			—
Shares issued for debt financing fees		—			108,921		109		11,691			—			—
Proceeds from sale of common stock at an average price of $0.104 per share		—			6,345,549		6,346		653,654			—			—
Shares issued on exercise of 325,000 options at $0.09 per share on a cashless basis		—			156,896		157		(157	)		—			—
Stock-based compensation		—			—		—		74,734			—			—
Income and comprehensive income		—			—		—		—			—			2,933,986
Balance, March 31, 2009		610,774			282,124,564		282,125		81,534,566			—			(79,147,602	)

See accompanying notes to consolidated financial statements

F-5

e.Digital Corporation and subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

[See Note 1 - Nature of Operations and Basis of Presentation]

	For the year ended
	March 31
	2009			2008
	$			$
OPERATING ACTIVITIES
Income (loss) for the period		2,933,986			(1,719,067	)
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		17,532			12,974
Accretion related to promissory notes		41,773			60,369
Warrant modification and warrant derivative revaluation		174,667			—
Interest paid with common stock		38,526			67,098
Warranty provision		(53,368	)		166,126
Stock-based compensation		74,734			158,671
Changes in assets and liabilities:
Accounts receivable, trade		81,134			(137,876	)
Inventories		(27,925	)		(179,846	)
Prepaid expenses and other		8,609			16,282
Accounts payable, trade		(583,317	)		149,085
Accrued and other liabilities		225,564			(1,963	)
Customer deposits		—			(38,850	)
Accrued employee benefits		(36,756	)		(45	)
Warranty reserve		(41,615	)		(97,060	)
Deferred revenue		(16,204	)		102,500
Cash provided by (used in) operating activities		2,837,340			(1,441,602	)

INVESTING ACTIVITIES
Purchase of property and equipment		(4,109	)		(16,829	)
Cash used in investing activities		(4,109	)		(16,829	)

FINANCING ACTIVITIES
Proceeds from sale of common stock		660,000			960,000
Proceeds from sale of preferred stock		700,000			—
Payments on secured promissory note		(450,000	)		(300,000	)
Payments on convertible term note		(51,357	)		—
Proceeds from unsecured promissory note		40,000			—
Payment on unsecured promissory note		(40,000	)		—
Proceeds from exercise of warrants		—			214,480
Proceeds from exercise of stock options		—			11,310
Cash provided by financing activities		858,643			885,790
Net increase (decrease) in cash and cash equivalents		3,691,874			(572,641	)
Cash and cash equivalents, beginning of period		122,116			694,757
Cash and cash equivalents, end of period		3,813,990			122,116

See accompanying notes to consolidated financial statements

F-6

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

e.Digital Corporation is a holding company incorporated under the laws of Delaware that operates through a wholly-owned California subsidiary of the same name. The Company has innovated a proprietary secure digital video/audio technology platform ("DVAP") and markets the eVU™ mobile entertainment device for the travel and recreational industries. The Company also obtains revenue from licensing its Flash-R™ portfolio of patents related to the use of flash memory in portable devices.

The consolidated financial statements have been prepared, by management, in accordance with accounting principles generally accepted in the United States on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.

Until the fiscal year ended March 31, 2009 (fiscal 2009), the Company incurred significant losses and negative cash flow from operations and has an accumulated deficit of $79,147,602 at March 31, 2009 (2008 - $82,081,588). The Company’s recent profitability has resulted from one-time patent licensing revenues and there is no assurance of future licensing revenues from new licensees. Accordingly, the Company could incur losses in the future until product, service and/or licensing revenues are sufficient to sustain continued profitability. The Company's ability to continue as a going concern is in doubt and is dependent upon sustaining a profitable level of operations and if necessary obtaining additional financing.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These consolidated financial statements do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements:

Principles of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, e.Digital Corporation (a company incorporated in the State of California). All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Segment Information

With the inception of patent license revenue in fiscal 2009, the Company determined that it has two operating segments: (1) products and services and (2) patent licensing. Products and services consist of sales of the Company’s electronic eVU mobile entertainment device and related content services and patent licensing consists of intellectual property revenues from the Flash-R patent portfolio. Segment information and related disclosures about the Company’s products, services, geographical areas and major customers is contained in Note 12.

F-7

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

Fair Value of Financial Instruments

On April 1, 2008, the Company adopted certain provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. The provisions of SFAS 157 relate to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis and did not have a material impact on the Company’s consolidated financial statements. The provisions of SFAS 157 related to other nonfinancial assets and liabilities will be effective for the Company on April 1, 2009, and will be applied prospectively. The Company is currently evaluating the impact that these additional SFAS 157 provisions will have on the Company’s consolidated financial statements. See Note 11 - Fair Value Measurements.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company has certain financial assets and liabilities recorded at fair value (principally cash equivalents) that have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in SFAS 157. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability. The Company’s cash and money market funds have been classified as Level 1 because their fair values are based on quoted market prices.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Under SFAS No. 159, companies may elect to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 for fiscal 2009. However the Company did not elect to apply the fair value option to any financial instruments or other items upon adoption of SFAS No. 159 or during the year ended March 31, 2009. Therefore, the adoption of SFAS No. 159 did not impact the Company’s consolidated financial position, results of operations or cash flows.

The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses and other current liabilities approximate fair values due to their short-term maturities.

Translation of Foreign Currencies

Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the rate in effect at the balance sheet date. Other balance sheet items and revenues and expenses are translated into U.S. dollars at the rates prevailing on the respective transaction dates. Gains and losses on foreign currency transactions, which have not been material, are reflected in the consolidated statements of operations in other income (expense) for the reporting period. To date foreign currency transactions are primarily undertaken in European countries. Foreign currency loss for the year ended March 31, 2009 was $1,805 (2008 - gain of $20,515).

Income (Loss) per Share

Basic earnings per common share is computed by dividing income (loss) attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the period. The income attributable to common stockholders is reduced and the loss attributable to common stockholder is increased by accrued and deemed dividends on preferred stock during the years ended March 31, 2009 and 2008 of $130,320 and $81,975, respectively. Diluted earnings per common share is computed by dividing income (loss) attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding convertible preferred stock, stock options, warrants, and convertible debt. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.

F-8

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

The following table sets forth the computation of basic and diluted earnings per share:

Year Ended March 31,	2009		2008
Basic
Income (loss) attributable to common stockholders	$	2,803,666	$	(1,801,042	)
Weighted average common shares outstanding (basic)		277,997,077		252,683,865
Basic income (loss) per common share	$	0.01	$	(0.01	)

Diluted
Income (loss) attributable to common stockholders	$	2,803,666	$	(1,801,042	)
Plus:
Accrued and deemed dividends on preferred stock (1)		—		—
Income (loss) for diluted	$	2,803,666	$	(1,801,042	)
Common and potential common shares:
Weighted average common shares outstanding		277,997,077		252,683,865
Assumed conversion of preferred stock (1)		—		—
Assumed exercise of options and warrants		1,258,422		—
Common and potential common shares		279,255,499		252,683,865
Diluted income (loss) per common share	$	0.01	$	(0.01	)

Potentially dilutive securities outstanding at period end excluded from diluted computation as they were antidilutive		19,364,976		15,828,955

(1) The convertible preferred stock and convertible term note were antidilutive for the respective periods.

Concentration of Credit Risk and Sources of Supply

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company at March 31, 2009 had substantially all of its cash and cash equivalents at one financial institution in a non-interest bearing account. Effective October 14, 2008, Federal Deposit Insurance Corporation deposit insurance was changed to provide full deposit insurance coverage for non-interest bearing deposit transaction accounts through December 31, 2009.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the number and nature of customers comprising the Company’s customer base and their geographic dispersion. The Company has not incurred any significant credit related losses.

The Company relies on one third-party contract manufacturer to produce its eVU mobile entertainment product and generally relies on single suppliers for batteries, charging stations and other components. The Company also currently relies on one legal firm to represent it in patent licensing matters.

Guarantees and Indemnifications

The Company enters into standard indemnification agreements in the ordinary course of business. Some of the Company’s product sales and services agreements include a limited indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with SFAS No. 5, Accounting for Contingencies. The indemnification is generally limited to the amount paid by the customer. To date, there have been no claims under such indemnification provisions.

The Company provides a one-year limited warranty for most of its products.

F-9

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

Revenue Recognition

The Company’s segments have the following revenue recognition policies:

Products and Services

The Company recognizes product revenue upon shipment of a product to the customer, FOB shipping point, or upon acceptance by the customer depending on the specific contract terms, if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and there are no resulting obligations. Research and development contract revenues on short-term projects or service revenue is recognized once the services or product has been delivered, the fee is fixed and determinable, collection of the resulting receivable is probable and there are no resulting obligations. If all of the service or product has been delivered and there is one element that is more than perfunctory to the services or product that has not been delivered, revenue will be deferred and recognized evenly over the remaining term of the undelivered element.

Service revenues may include revenue from coding, encrypting and integrating content for periodic uploading to hardware players. Revenue is recognized upon acceptance of the content master file by the customer if the fee is fixed and determinable, collection of the resulting receivables is probable and there are no resulting obligations.

In accordance with Staff Accounting Bulletin (“SAB”) No. 104 Revenue Recognition (“SAB 104”) and Emerging Issues Task Force (“EITF”) Issue 00-21 Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), when an arrangement contains multiple elements with standalone value, such as hardware and content or other services, revenue is allocated based on the fair value of each element as evidenced by vendor specific objective evidence. Such evidence consists primarily of pricing of multiple elements as if sold as separate products or services. The Company defers revenue for any undelivered elements, and recognizes revenue when the product is delivered or over the period in which the service is performed, in accordance with the Company’s revenue recognition policy for such element. If the Company cannot objectively determine the fair value of any undelivered element included in a multiple-element arrangement, revenue is deferred until all elements are delivered and/or services have been performed, or until the Company can objectively determine the fair value of all remaining undelivered elements.

Revenue from separately priced extended warranty or product replacement arrangements is deferred and recognized to income on a straight-line basis over the contract period. The Company evaluates these arrangements to determine if there are excess costs greater than future revenues to be recorded as a loss.

Funds received in advance of meeting the criteria for revenue recognition are deferred and are recorded as revenue as they are earned. Any amounts related to periods beyond twelve months are considered long-term deferred revenue.

Patent Licensing

The Company applies the guidance of SEC Staff Accounting Bulletin Topic 13.A.3(f), Nonrefundable Up-Front Fees, to its patent license and settlement agreements using the specific performance method analogous to the sale of an asset in such literature as FASB Statement No. 13, Accounting for Leases and AICPA Statement of Position 00-2, Accounting by Producers and Distributors of Films.Accordingly, the Company recognizes revenue from patent license agreements when (i) the patent license agreement is executed, (ii) the amounts due are fixed, determinable, and billable, (iii) the customer has been provided rights to the licensed technology and (iv) collection of the resulting receivable, if any, is probable. At the time the Company enters into a contract and provides the customer with the licensed technology the Company has performed all of its obligations under contract, the rights to the Company’s technology have been transferred and no significant performance obligations remain. License revenue to date consists of one-time license and settlement agreements requiring no future performance. The Company has no licenses that do not include settlement and covenants not to sue.

While the consideration to dismiss any patent litigation and the perpetual license may be considered two deliverables under EITF 00-21: Revenue Arrangements with Multiple Deliverables, the Company treats the deliverables as one unit of accounting as the delivered items do not have value to customers on a stand alone basis,there are no undelivered elements and there is no general right of return relative to the delivered perpetual license. While license agreements to date have not provided for unit royalties or payments for fixed past or future term periods, the Company evaluates each license agreement for revenue recognition in accordance with applicable literature.

F-10

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

The Company values nonexclusive cross licenses received only if directly used in operations. To date the Company has not valued any cross licenses received as they were considered part of the customer’s overall license and settlement strategy and are not used in the Company’s products.

Patent license costs of revenues include contingency legal and other direct costs associated with patent licensing.

Deferred Revenue, Deposits and Prepaid Expenses

Deferred revenue and deposits relates primarily to prepaid extended warranty arrangements and product sales or services paid but not delivered at period end. The Company has certain customer arrangements providing for multiple year content services. To the extent deferred services are to be provided beyond twelve months they are treated as long-term. Prepaid expenses are recorded at amounts paid to suppliers or others. Amounts recorded are evaluated for impairment each reporting period.

Shipping and Handling Costs and Sales Taxes

Amounts paid by customers for shipping and handling and for sales taxes are included in product revenues. Actual shipping and handling costs and sales taxes are included in product cost of revenues.

Inventory

Inventory is recorded at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis. Carrying value of inventory is periodically reviewed and impairments, if any, are recognized when the expected benefit is less than carrying value. See Note 13 for purchase commitments.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 7 years or, in the case of leasehold improvements, over the lesser of the useful life of the related asset or the lease term. When assets are sold or retired, the cost and accumulated depreciation are removed from the respective accounts and any gain or loss on the disposition is credited or charged to income. Maintenance and repair costs are charged to operations when incurred. The Company reviews the carrying amount of fixed assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable in accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”).

Intangible Assets

Intangible assets are recorded at cost, less accumulated amortization. These costs are capitalized and amortized on a straight-line basis over the estimated periods benefited by the asset. The Company assesses the recoverability of any affected long-lived assets in accordance with SFAS No. 144 by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows.

Advertising

Advertising costs are charged to expense as incurred. The Company expensed $10,031 and $37,503 for the years ending March 31, 2009 and 2008, respectively.

Research and Development Costs

Research and development costs are expensed as incurred.

Warranty Liability

The Company warrants its products to be free from defects in materials and workmanship for a period ranging up to one year from the date of purchase, depending on the product. The warranty is generally a limited warranty, and in some instances imposes certain shipping costs on the customer. The Company currently provides warranty service directly and through subcontractors. Some agreements with customers require certain quantities of product be made available for use as warranty replacements. International market warranties are generally similar to the U.S. market.

F-11

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. Factors affecting warranty reserve levels include the number of units sold and anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period. See Note 6 for additional information regarding warranties.

Other Income (Expense)

Interest and other income for the year ended March 31, 2008 included $20,000 from the sale of trademark rights and $20,515 of foreign exchange income.

Interest expense includes interest expense paid in cash and shares of common stock and non-cash amortization of debt discounts.

Warrant and other finance expense for the year ended March 31, 2009 included a non-cash financing expense of $174,667 (2008 - $-0-) related to warrant and derivative modifications, financing related royalty expense of $4,640 (2008 - $78,860) and foreign exchange loss of $1,746.

Leases

Leases entered into are classified as either capital or operating leases. Leases, which substantially transfer all benefits and risks of ownership of property to the Company, are accounted for as capital leases. At the time a capital lease is entered into, an asset is recorded together with its related long-term obligation to reflect the purchase and financing. Rental payments under operating leases are expensed as incurred.

Income Taxes

The Company accounts for income taxes using the asset and liability method described in SFAS No. 109, Accounting For Income Taxes(“SFAS 109”), the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company provides a full valuation reserve related to its net deferred tax assets. In the future, if sufficient evidence of an ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, the Company may be required to reduce the valuation allowances, resulting in income tax benefits in the consolidated statement of operations. The Company evaluates the realizability of the deferred tax assets and assesses the need for valuation allowance quarterly. The utilization of the net operating loss carry forwards could be substantially limited due to restrictions imposed under federal and state laws upon a change in ownership.The Company has experienced various ownership changes as a result of past financings and could experience future ownership changes.

The Company adopted the provisions of Financial Accounting Standards Board interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of SFAS 109 on April 1, 2007. As a result of the implementation of FIN 48, the Company recognized no adjustment for uncertain tax provisions and the total amount of unrecognized tax benefits as of April 1, 2007 was $-0-. At the adoption date of April 1, 2007, deferred tax assets were fully reserved by a valuation allowance to reduce the deferred tax assets to zero, the amount that more likely than not is expected to be realized.

The Company recognizes interest and penalties related to uncertain tax positions as part of the provision for income taxes. As of March 31, 2009, the Company had not recorded any provisions for accrued interest and penalties related to uncertain tax positions.

The tax years 2004 through 2008 remain open under the statue of limitations to examination by the major tax jurisdictions to which we are subject. However, due to net operating loss carryforwards (“NOL”) from prior periods, the Internal Revenue Service (IRS) could potentially review the losses related to NOL-generating years back to 1993.

F-12

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

Stock-based Compensation

The Company has adopted stock plans as summarized in Note 10. The Company adopted SFAS No. 123(R), Share Based Payment, effective April 1, 2006 using a modified prospective application. The Company records the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using a Black-Scholes option-pricing model. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award, if any, over the fair value of the original award.

Options or stock awards issued to non-employees who are not directors of the Company are recorded at their estimated fair value at the measurement date in accordance with SFAS No. 123(R) and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services, and are periodically revalued as the options vest and are recognized as expense over the related service period on a graded vesting method. Stock options issued to consultants with performance conditions are measured and recognized when the performance is complete.

The Company recorded $74,734 and $158,671 of stock compensation expense for the years ended March 31, 2009 and 2008, respectively. The amounts of stock-based compensation expense are classified in the consolidated statements of operations as follows:

Year Ended March 31,	2009		2008
	$		$
Cost of revenues		—		14,411
Research and development		26,620		33,785
Selling and administrative		48,114		110,475
Total stock-based compensation expense		74,734		158,671

In March 2009 the Company authorized 425,000 options to former employees to replace comparable stock-appreciation rights previously recorded as a $26,620 liability with such amount included in paid-in capital and stock-based compensation costs and included above.

Comprehensive Loss

Comprehensive loss is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. For the years ended March 31, 2009 and 2008, there were no material differences between comprehensive loss and net loss for the year.

Common Stock Issued for Services or Payments

The Company records compensation expense for common stock issued for services or financing fees based on the estimated fair market value. Estimated fair market value is determined based on the quoted closing stock price on the day of issuance or the market price defined in any underlying agreement as long as such price closely approximates market price.

Derivative Instruments

The Company values derivative instruments in accordance with the interpretative guidance of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities, EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Accounting Principles Board Opinion No. 14 Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, EITF 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments and associated pronouncements related to the classification and measurement of warrants and instruments with embedded conversion features. The Company makes certain assumptions and estimates to value its derivative liabilities. Factors affecting these liabilities and values include changes in the stock price and other assumptions.

F-13

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

Reclassifications and Quarterly Restatement

Certain amounts included in the prior year financial statements have been reclassified to conform to the current year’s presentation. These reclassifications have no affect on the reported net income (loss). In issuing results for the prior year, the Company restated the results for the two quarters therein ended September 30, 2007 and December 31, 2007 to correct for a misclassification of supplier material transfers that overstated both revenues and cost of sales in the two quarters but did not impact operating loss or net loss for any previously reported period. See unaudited Note 15.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No. 141R”). SFAS No. 141R retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (which SFAS No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141R also establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) improves the completeness of the information reported about a business combination by changing the requirements for recognizing assets acquired and liabilities assumed arising from contingencies; (c) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (d) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (for acquisitions closed on or after April 1, 2009 for the Company). Early application is not permitted. Since the Company is not contemplating any business combinations after its effective date it does not presently expect any impact of SFAS No. 141R on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Non-Controlling Interests in Consolidated Financial Statements an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new standards for the accounting for and reporting of non-controlling interests (formerly minority interests) and for the loss of control of partially owned and consolidated subsidiaries. SFAS 160 does not change the criteria for consolidating a partially owned entity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The provisions of SFAS 160 will be applied prospectively upon adoption except for the presentation and disclosure requirements which will be applied retrospectively. The Company does not expect the adoption of SFAS 160 will have a material impact on its consolidated financial statements.

On March 19, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has not determined the impact, if any SFAS No. 161 will have on its consolidated financial statements.

In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property. Companies may enter into arrangements with other companies to jointly develop, manufacture, distribute, and market a product. Often the activities associated with these arrangements are conducted by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a “virtual joint venture”). The arrangements generally provide that the collaborators will share, based on contractually defined calculations, the profits or losses from the associated activities. Periodically, the collaborators share financial information related to product revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined profits or losses. The consensus requires collaborators in such an arrangement to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. EITF Issue No. 07-1 is effective for collaborative arrangements in place at the beginning of the annual period beginning after December 15, 2008. The Company does not expect the adoption of EITF Issue No. 07-1 to have a material impact on its financial statements.

F-14

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

In June 2008, the FASB issued Emerging Issues Task Force No. 07-5 (EITF 07-5), Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock. EITF 07-5 requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, paragraph 11(a), and should be classified as a liability and marked-to-market. The statement is effective for fiscal years beginning after December 15, 2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings. The Company is assessing the impact of this EITF for the year ended March 31, 2010.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is applicable for interim or annual periods after June 15, 2009. In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 (SFAS No. 166”). SFAS No. 166 seeks to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 is applicable for annual periods after November 15, 2009 and interim periods therein and thereafter. In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167 seeks to improve financial reporting by enterprises involved with variable interest entities. SFAS No. 167 is applicable for annual periods after November 15, 2009 and interim periods therein and thereafter. The Company has not determined the impact, if any SFAS No. 165, 166 and 167 will have on its consolidated financial statements.

3. STATEMENT OF CASH FLOWS

The Company had non-cash operating and financing activities and made cash payments as follows:

Year Ended March 31,	2009		2008
	$		$
Non-cash financing activities:
Common stock issued on conversion of preferred stock		—		1,456,000
Accounts payable exchanged for preferred stock		50,000		—
Shares issued for term debt payments		380,000		240,000
Shares issued for financing fees		11,800		30,500
Options exercised on a cashless basis		29,250		—
Options granted for stock appreciation rights obligation		26,620		—
Accrued and deemed dividends on preferred stock		130,320		81,975
Warrant derivative liability reclassified as equity		132,315		—
Cash payments during year for:
Interest		83,059		109,553
Income taxes		264,000		—

4. INVENTORIES

Inventories consist of the following:

March 31,	2009		2008
	$		$
Raw materials		35,330		41,354
Work in process		316,734		217,820
Finished goods		165,099		230,064
		517,163		489,238

F-15

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

5. PROPERTY, EQUIPMENT AND INTANGIBLES

Property and equipment consisted of the following:

Year Ended March 31,	2009			2008
	$			$
Computer hardware and software		47,321			107,117
Furniture and equipment		26,499			26,499
Machinery and equipment		72,499			82,912
Leasehold improvements		1,639			1,639
Tooling		19,720			224,372
		167,678			442,539
Accumulated depreciation and amortization		(141,040	)		(402,478	)
		26,638			40,061

Intangible assets consisted of the following:

Year Ended March 31,	2009			2008
	$			$
Website development costs		—			43,150
Patents and licenses		24,409			39,409
		24,409			82,559
Accumulated amortization		(24,409	)		(82,559	)
		—			—

6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

March 31,	2009		2008
	$		$
Payroll and related		112,727		149,483
Deferred revenue		68,296		36,500
Customer deposits		80,000		80,000
Accrued litigation		100,000		—
Warranty reserve		14,155		109,139
Accrued state taxes		157,500		—
Accrued professional fees		45,000		75,000
Deferred rent		12,136		13,782
Other		—		289
		589,814		464,193

F-16

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

Details of the estimated warranty liability are as follows:

Year Ended March 31,	2009			2008
	$			$
Beginning balance		109,138			40,072
Warranty provision		(53,368	)		166,126
Warranty deductions		(41,615	)		(97,060	)
Ending balance		14,155			109,138

7. PROMISSORY NOTES

7.5% Convertible Subordinated Term Note

March 31,	2009			2008
	$			$
7.5% Convertible Subordinated Term Note		387,234			780,065
Less unamortized debt discount		(6,141	)		(31,983	)
Less long-term portion – net of related unamortized debt discount		—			(381,093	)
Short term portion of Convertible Subordinated Term Note		381,093			366,989

On December 12, 2006 the Company became obligated on a 7.5% Convertible Subordinated Term Note (“Term Note”) in the original principal amount of $970,752 that was issued in exchange for two short-term unsecured promissory notes. The Term Note provided for monthly principal and interest installments of $6,000 starting December 2006, increased to $15,000 in February 2007, increased to $30,000 in December 2007 and to $50,000 in December 2008 with maturity November 30, 2009. Commencing with the February 2007 installment payment, the Company had the option, subject to certain limitations, to elect to make such installment payments either in cash or in shares of common stock (“Monthly Installment Shares”). Monthly Installment Shares are valued at the arithmetic average of the closing prices for the last five trading days of the applicable month without discount. Installment note payments must be paid in cash if the computed average price is less than $0.10 per share. Subject to certain notice periods and other limitations, the balance of the note is convertible by the holder at $0.30 per common share and the Company may elect to call the note for mandatory conversion if the closing sale price of the Company’s common stock is at least $0.40 per share for ten consecutive trading days. The Company may also prepay the note in full or in minimum payments of $50,000 on ten-day notice. The note may be subordinate to certain future senior indebtedness.

For the year ended March 31, 2009 the Company made two monthly payments totaling $60,000 in cash and ten monthly payments aggregating $380,000 by issuing 3,018,331 shares of common stock. For the year ended March 31, 2008 the Company made all monthly note payments aggregating $240,000 by issuing 1,623,808 shares of common stock.

18% Secured Promissory Note

In March 2007 the Company obtained $750,000 in short-term purchase order financing from a commercial lender pursuant to an 18% Secured Promissory Note with interest payable monthly for any full or partial month the principal was outstanding subject to a security agreement providing a security interest in substantially all of the Company’s assets. The Company paid an initial origination finance charge of $15,000 by issuing 73,385 restricted shares of common stock. In connection with two renewals during fiscal 2008 the Company paid aggregate finance charges of $15,500 by issuing 104,196 restricted shares of common stock. The Company made principal reductions of $300,000 during fiscal 2008 and the principal balance at March 31, 2008 was $450,000.

In connection with two renewals during fiscal 2009 the Company paid aggregate finance charges of $7,000 by issuing 68,921 restricted shares of common stock. The Company made additional principal reductions of $150,000 during the year and paid the remaining balance of $300,000 in March 2009. The note financing fees were recorded as a debt discount and amortized over the respective amended term of the note using the interest method.

F-17

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

12% Promissory Note

In April 2008 the Company borrowed $40,000 pursuant to an unsecured promissory note with principal and interest due April 3, 2009. In April 2008 the Company issued 40,000 shares of common stock as payment of a $4,800 originating finance fee. The note financing fee was recorded as a debt discount and amortized over the amended term of the note using the interest method. This note was repaid in March 2009.

8. INCOME TAXES

Details of the income tax benefit (provision) for the years ended March 31, 2009 and 2008 are as follows:

Year ended March 31,	2009			2008
	$			$
Current tax expense		421,500			—
Deferred tax expense (benefit)		868,000			(509,000	)
Change in valuation allowance (1)		(868,000	)		509,000
Income tax provision		421,500			—

The Company had a total income tax expense of approximately $421,500 for the year ended March 31, 2009 which is comprised of foreign and state tax liabilities as follows:

Year ended March 31,	2009		2008
	$		$
Current tax expense:
Federal expense (benefit)		—		—
State		157,500		—
Foreign		264,000		—
		421,500		—

Foreign taxes of $264,000 were withheld and paid in connection with a patent licensing agreement and the Company generated a tax liability in the state of California due to the suspension of the net operating loss (“NOL”) carryforwards for the 2008 and 2009 tax years. The state tax liability of $157,500 is after a reduction of 50% from the use of allowable research and development (“R&D”)credits generated in prior years.

The Company has U.S. federal NOL carryforwards available at March 31, 2009 of approximately $54,300,000 (2008 - $58,700,000) that will begin to expire in 2010. The Company has state net operating loss carryforwards of $18,600,000 (2008 - $18,600,000) that will begin to expire in 2012. The difference between federal and state net operating loss carryforwards is due to certain percentage limitations of California loss carryforwards and to expired California carryforwards. The foreign taxes paid create a foreign tax credit carryover that will be available to offset federal tax expense in future years, subject to certain limitations. The foreign tax credit carryover expires beginning in 2019.

Utilization of the NOL and any R&D credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code (“IRC”) of 1986 and similar state provisions, due to changes in ownership of the Company that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the date of currently available NOLs from fiscal 1994, the Company has raised capital through the issuance of capital stock using multiple types of securities on multiple occasions which, the Company believes, caused multiple ownership changes as defined by Section 382. The Company has performed a preliminary 382 analysis to assess whether ownership changes have occurred which would limit the Company’s utilization of its NOLs and any R&D credits carryforwards. Based on this analysis, the Company determined that no ownership changes have occurred since March 31, 2000 but has not yet determined how much, if any, the use of the approximately $31.4 million of prior period losses will be limited until their expiration. Accordingly, NOL carryforwards generated during the 2001 through 2008 fiscal years, are generally not subject to Section 382 limitations and the Company will be able to utilize such NOLs and any documented R&D carryforwards provided it generates sufficient future earnings. Future ownership changes may limit the Company’s ability to fully utilize these tax benefits.

F-18

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

For the year ended March 31, 2008, the Company removed the NOL carryforwards from its deferred tax asset accounts because the preliminary analysis had not been completed. For the year ended March 31, 2009, although multiple ownership changes occurred prior to March 31, 2000, the Company, at a minimum, will be able to utilize $26.3 million of federal NOLs generated from April 1, 2000 to March 31, 2008 provided it generates sufficient future earnings ($3.5 million of NOLs applied against fiscal 2009 federal taxable income). The Company has also determined that it has sufficient qualifying California state R&D expenditures for R&D tax credits to offset 50% of the current year’s tax liability, the maximum offset allowable. Accordingly, the Company has re-established the deferred tax assets associated with such federal NOLs, related state NOLs, and the amount of the California R&D tax credit being applied to current year state taxable income and recorded a corresponding increase to the valuation allowance.

The Company plans to study the availability and limitations on losses prior the March 31, 2000 and also the availability of federal and additional state R&D credits for applicable years. When such study is completed, the Company plans to update the unrecognized tax benefits under FIN 48. Therefore, the unrecognized tax benefits could change within 12 months of this reporting date but at this time the Company cannot estimate how much the unrecognized tax benefits may change. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

Significant components of the Company’s deferred tax assets as of March 31, 2009 and 2008 are shown below. A valuation allowance of $9,609,000 and $174,000 was established at March 31, 2009 and 2008 respectively, to offset the net deferred tax assets as realization is uncertain. When and if the Company can sustain consistent profitability and management determines that it is more likely than not that the Company will be able to utilize the deferred tax assets prior to their expiration, the valuation allowance may be reduced or eliminated.

March 31,	2009			2008
	$			$
Deferred tax assets:
Net operating loss carryforwards		9,639,000			—
Foreign tax credit		264,000			—
Stock-based compensation		65,000			34,000
Accruals and other		150,000			176,000
		10,118,000			210,000

Deferred tax liabilities:
Depreciation and amortization		(31,000	)		(30,000	)
State taxes		(478,000	)		(6,000	)
		(509,000	)		(36,000	)
		9,609,000			174,000

The difference between the provision for income taxes (benefit) and the amount computed by applying the U.S. federal income tax rate for the years ended March 31, 2009 and 2008 is as follows:

F-19

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

Year ended March 31,	2009			2008
	$			$
Income taxes (benefit) computed at federal statutory rate		1,174,000			(602,000	)
Foreign taxes		264,000			—
Foreign tax credit		(264,000	)		—
Permanent book-tax differences		69,000			177,000
State income taxes, net of federal effect		204,000			(84,000	)
State tax credit		(157,500	)		—
Change in valuation allowance (1)		(868,000	)		509,000
Income tax provision		421,500			—

(1)

The removal and re-establishment of the valuation allowance related to the NOL’s and the California R&D credit is not included in the change in the valuation allowance. See above for explanation.

9. CAPITAL STOCK

Authorized Capital

The authorized capital of the Company consists of 350,000,000 common shares with a par value of $.001 per share and 5,000,000 preferred shares with a par value of $10.00 per share.

Common Stock

The issued common stock of the Company consisted of 282,124,564 and 272,494,867 common shares as of March 31, 2009 and 2008, respectively.

Preferred Stock

On December 30, 2002, the Company issued 205,000 shares of 12% Series D non-redeemable convertible preferred stock (the "Series D Stock") with a stated value of $10 per share in exchange for an aggregate amount of $2,050,000 of notes payable. During the year ended March 31, 2008 the remaining 91,000 preferred shares were converted into 18,200,000 shares of common stock and no preferred shares remained outstanding at March 31, 2008. The accretion (similar to a dividend) on the Series D Stock was recorded as a liability and a reduction of stockholders equity until conversion. Such amount also was used in determining the net loss attributable to common stockholders for the periods the Series D Stock was outstanding.

On June 27, 2008 the Company issued 75,000 shares of 5% Series AA Convertible Preferred Stock (the “Series AA Stock”) with a stated value of $10 per share. Dividends of 5% per annum are payable in shares of common stock or at the Company’s election additional shares of Series AA Stock or under certain circumstances in cash. The Series AA Stock has voting rights of ten votes per share and a liquidation preference equal to $10.00 per share plus accrued and unpaid dividends. The stated value plus accrued dividends on Series AA Stock is convertible into common stock at $0.10 per common share with automatic conversion on June 30, 2010 subject to certain limitations. The Company may call the Series AA Stock for conversion if the common stock market price is at least $0.25 per share for ten consecutive trading days.

The Series AA Stock was issued for aggregate proceeds of $750,000 including $700,000 of cash and conversion of $50,000 of vendor debt. Purchasers were also issued warrants to purchase an aggregate of 7,500,000 shares of common stock exercisable at $0.10 per common share until June 30, 2011 (“Series AA Warrants”). One officer/director purchased for $100,000 cash 10,000 shares of Series AA Stock and was issued warrants to purchase 1,000,000 shares of common stock on the same terms as unaffiliated investors.

At the holder’s option the Series AA Stock and the Series AA Warrants were redeemable for cash at June 30, 2009 should sufficient shares of common stock not be authorized and reserved for conversion of all underlying shares by such date. This redemption right was terminated effective September 17, 2008 with the shareholders authorizing additional shares of common stock and the Board of Directors reserving sufficient shares for future conversions of the Series AA Stock and exercise of the Series AA Warrants.

F-20

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

The proceeds of $750,000 were allocated between the fair value of the Series AA Stock ($615,227) with the value of the Series AA Warrants ($134,773) treated as a discount to the Series AA Stock. The Company determined the fair value of the Series AA Warrants using the Black-Scholes option pricing model with the following assumptions: no dividend yield; weighted average risk free rate of 2.93%; volatility of 60.6% and a term of one year. Because the redemption event was not certain to occur but was outside the Company’s control, the Company originally recorded the portion of the proceeds attributable to the stock as mezzanine equity pursuant to EITF Topic D-98, Classification and Measurement of Redeemable Securities after determining the guidance in FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity did not apply. Upon termination of the redemption right on September 17, 2008 the value of the stock was reclassified as permanent equity.

Additionally, the Company evaluated whether the embedded conversion feature in the preferred stock required bifurcation and determined that the economic characteristics and risks of the embedded conversion feature in the stock were clearly and closely related to the stock and concluded that bifurcation was not required under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. The Company calculated the intrinsic value of the beneficial conversion feature as $134,773 pursuant to the guidance in EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. The total discount to the Series AA Stock of $269,546, consisting of the value of the Series AA Warrants and the amount of the beneficial conversion feature, is being accreted as a deemed dividend over the term of the Series AA Stock. A total of $101,861 of the discount was accreted as a deemed dividend for the period from issuance to March 31, 2009 by a charge to paid-in capital. The stated 5% dividend also accrues to the carrying value of the Series AA Stock. The deemed and stated dividends are also used in determining the net income (loss) attributable to common stockholders for the respective periods.

The Company determined that the warrants met the definition of a derivative instrument at issuance as defined in SFAS 133 and was treated as a liability due to the lack of sufficient authorized shares of common stock. The Company recorded a liability of $134,773 for the value of the warrants. As a derivative liability this amount was evaluated for reclassification and adjusted at each reporting period based on the current market price. Upon the authorization and reservation of shares of common stock for exercise of the warrants on September 17, 2008, the Company determined the warrants were no longer a derivative liability. The value at that date of $132,315 was reclassified to paid-in capital and a net non-cash gain of $2,458 was recorded. The Company also determined that the termination of the warrant redemption rights was an effective modification of the warrant term and calculated the fair value of the warrants immediately prior to the modification compared to the value immediately after the modification and recorded the difference in warrant value of $177,125. The net of warrant adjustments of $174,667 is included in warrant and other finance expenses.

Fusion Capital Equity Purchase Agreement

On January 2, 2007, the Company entered into an agreement with Fusion Capital Fund II, LLC (“Fusion”) pursuant to which the Company (a) sold 4,166,666 common shares for $500,000 cash at $0.12 per share, and (b) had the right, subject to certain conditions and limitations, to sell to Fusion up to $8.0 million worth of additional common stock in specified increments, at the Company’s election, over a two year period that ended February 9, 2009 at prices determined based upon the market price of the Company’s common stock at the time of each sale, without any fixed discount to the market price as defined in the agreement.

Under the terms of the agreement, the Company issued 3,500,000 shares of common stock to Fusion for no consideration as a commitment fee and 200,000 shares of common stock as an expense reimbursement fee. The fair value of the 3,700,000 shares was $629,000 and recorded as offering costs along with legal and related direct costs of $52,403. A total of $52,819 of these costs were associated with the January 2007 sale of common stock and the balance of $628,584 was recorded as prepaid transaction costs and then discounted against subsequent stock sales during fiscal 2008.

During the year ended March 31, 2009, the Company sold 6,345,549 common shares to Fusion under the agreement for cash of $660,000 (2008 – 6,283,275 common shares were sold for cash of $960,000).

Share Warrants

A summary of warrant activity during the years ended March 31, 2008 and 2009 is presented below:

F-21

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

	Number			Average Purchase Price Per Share $
Shares purchasable under outstanding warrants at March 31, 2007		5,177,572			0.11
Stock purchase warrants exercised		(2,681,000	)		0.08
Stock purchase warrants expired		(165,000	)		0.08
Shares purchasable under outstanding warrants at March 31, 2008		2,331,572			0.15
Stock purchase warrants issued		7,500,000			0.10
Shares purchasable under outstanding warrants at March 31, 2009		9,831,572			0.11

The Company has outstanding share warrants as of March 31, 2009, as follows:

	Number of		Exercise Price
Description	Common Shares		Per Share $		Expiration Date
Warrants (1)		2,331,572		0.15	August 31, 2009
Warrants		7,500,000		0.10	June 30, 2011
		9,831,572		0.11

(1)

exercise price subject to certain antidilution price protection.

10. BENEFIT PLANS AND STOCK-BASED COMPENSATION

Stock Option Plans

The Company has stock options outstanding under two stock option plans. The 1994 Stock Option Plan entitled certain directors, key employees and consultants of the Company to purchase common shares of the Company. The 1994 Plan covered a maximum aggregate of 14,000,000 shares, as amended and expired on August 18, 2004. At March 31, 2009 there were options outstanding on 1,515,000 common shares pursuant to the 1994 Plan.

The 2005 Equity-Based Compensation Plan was approved by the stockholders on August 5, 2005 and covers a maximum of 10,000,000 common shares. The Company may grant incentive options, nonstatutory options, stock appreciation rights or restricted stock awards to employees, directors or consultants. At March 31, 2009 there were options outstanding on 6,035,500 common shares pursuant to the 2005 Plan with options on 3,590,000 shares available for future grant under the 2005 Plan plus any future forfeitures or cancellations from the 2005 Plan options currently outstanding.

The Company has granted options outside the above plans as inducements to new employees and for the continued service of key employees. At March 31, 2009 there were options outstanding on 500,000 common shares from grants outside the stock option plans.

Stock-Based Compensation Information Under SFAS No. 123R

The following table sets forth the weighted-average key assumptions and fair value results for stock options granted during the years ended March 31, 2009 and 2008 (annualized percentages):

F-22

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

	Year Ended March 31,
	2009			2008
Volatility		76	%		78	%
Risk-free interest rate		1.80	%		4.1%-5.0	%
Forfeiture rate		0.0	%		5.0	%
Dividend yield		0.0	%		0.0	%
Expected life in years		2.9			3
Weighted-average fair value of options granted	$	0.06		$	0.10

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the common stock over the period commensurate with the expected life of the options. The Company has a small number or option grants and limited exercise history and accordingly has for all new option grants applied the simplified method prescribed by SEC Staff Accounting Bulletin 110, Share-Based Payment: Certain Assumptions Used in Valuation Methods - Expected Term,to estimate expected life (computed as vesting term plus contractual term divided by two). The expected forfeiture rate is estimated based on historical experience and is assumed at 0.0% for nonemployees. Additional expense is recorded when the actual forfeiture rates are lower than estimated and a recovery of prior expense will be recorded if the actual forfeitures are higher than estimated.

Since the Company has a net operating loss carryforward as of March 31, 2009, no excess tax benefit for the tax deductions related to stock-based awards was recognized for the year ended March 31, 2009. Additionally, no incremental tax benefits were recognized from stock options exercised during the year ended March 31, 2009 or 2008 that would have resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities.

As of March 31, 2009 total estimated compensation cost of options granted but not yet vested was approximately $43,800 and is expected to be recognized over the weighted average period of 1.3 years.

Stock Option Summary Information

During 2009, 1,537,500 (2007 – 880,000) options were granted at exercise prices ranging from $0.11 to $0.22 (2008 - $0.18 to $0.185) per share. The following table summarizes stock option transactions:

				Weighted average		Aggregate
	Shares			Exercise price		Intrinsic Value
	#			$		$
Outstanding March 31, 2007		11,034,666			0.17
Fiscal 2008
Granted		880,000			0.18
Exercised		(76,166	)		0.15
Canceled/expired		(941,333	)		0.54
Outstanding March 31, 2008		10,897,167			0.16		183,813
Exercisable at March 31, 2008		9,769,916			0.15		183,813
Fiscal 2009
Granted		1,537,500			0.13
Exercised		(325,000	)		0.09
Canceled/expired		(4,059,167	)		0.14
Outstanding March 31, 2009		8,050,500			0.16		126,050
Exercisable at March 31, 2009		6,346,332			0.17		72,875

F-23

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

The 325,000 options exercised were on a cashless basis with 156,896 net shares of common stock issued. The intrinsic value of options exercised was $27,300.

The following table summarizes the number of options exercisable at March 31, 2009 and the weighted average exercise prices and remaining contractual lives of the options.

Range of exercise prices		Number outstanding at March 31, 2009		Number exercisable at March 31, 2009		Weighted Average exercise price		Weighted average remaining contractual life		Weighted average Exercise price of options exercisable at March 31, 2009
$		#		#		$		Years		$
	$0.09-$0.115		1,100,000		75,000		0.11		4.2		0.12
	$0.145-$0.16		4,800,000		4,300,000		0.15		1.1		0.15
	$0.18-$0.28		2,150,500		1,971,332		0.21		0.8		0.22

The options generally vest over a period of two to three years. Options on 500,000 shares are subject to and vest based on future performance conditions.

11. FAIR VALUE MEASUREMENTS

On April 1, 2008, the Company adopted SFAS No. 157 which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year.

SFAS No. 157 establishes a three-level valuation hierarchy of valuation techniques that is based on observable and unobservable inputs. Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The first two inputs are considered observable and the last unobservable, that may be used to measure fair value and include the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of March 31, 2009, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis, including its cash and cash equivalents. The fair value of these assets and liabilities was determined using the following inputs in accordance with SFAS 157 at March 31, 2009:

	Fair Value Measurement as of March 31, 2009
	Total		Level 1		Level 2		Level 3
Description	$		$		$		$
Cash and cash equivalents (1)		3,813,990		3,813,990		—		—
Warrant derivative liability (2)		—		—		—		—

(1)

Included in cash and cash equivalents on the accompanying consolidated balance sheet.

(2)

Represents Series AA Warrants issued in June 2008 and valued using the income approach using the Black-Scholes option pricing model (see Note 9). An initial liability of $134,773 was revalued to $132,315 at September 17, 2008 and reclassified as equity (see Note 9).

F-24

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

The following table reconciles the warrant derivative and stock appreciation right liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended March 31, 2009:

	Warrant			Stock
	Derivative			Appreciation
	Liability			Right Liability
	$			$
Balance at April 1, 2008		—			—
Issuance of warrant derivative (1)		134,773			—
Issuance of SARs included in research and development expenses (2)		—			8,918
Adjustment to fair value included in warrant and other finance expense		(2,458	)		—
Adjustment to fair value included in research and development expenses		—			17,702
Reclassification to equity		(132,315	)		(26,620	)
Balance at March 31, 2009		—			—

(1)

Represents Series AA Warrants issued in June 2008 (see Note 9), revalued at each reporting period and reclassified to equity in September 2008.

(2)

Represents stock appreciation rights (“SAR”) issued during the year, revalued at each reporting period and replaced with stock-based awards in March 2009 and reclassified as equity.

12. SEGMENT INFORMATION

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, (“SFAS No. 131”) provides annual and interim reporting standards for an enterprise’s business segments and related disclosures about its products, services, geographical areas and major customers. With the inception of patent license revenue in fiscal 2009, the Company determined that it has two operating segments: (1) products and services and (2) patent licensing. Products and services consist of sales of the Company’s electronic eVU mobile entertainment device and related content services and patent licensing consists of intellectual property revenues from the Flash-R patent portfolio.

Our reportable segment information for the years ended March 31, 2009 and 2008 is as follows:

F-25

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

Year Ended March 31,	2009			2008
	$			$
REVENUES:
Products and services		940,382			5,552,621
Patent licensing		10,115,350			—
Total revenue		11,055,732			5,552,621

GROSS PROFIT:
Products and services		412,688			1,544,008
Patent licensing		6,131,263			—
Total gross profit		6,543,951			1,544,008

RECONCILIATION:
Total segment gross profit		6,543,951			1,544,008
Operating expenses		(2,844,008	)		(2,986,488	)
Other income (expense)		(344,457	)		(276,587	)
Income (loss) before provision for income taxes		3,355,486			(1,719,067	)

The Company does not have significant assets employed in the patent license segment and does not track capital expenditures or assets by reportable segment. Consequently it is not practical to show this information.

Revenue by geographic region is determined based on the location of the Company’s direct customers or distributors for product sales and services. Patent license revenue is considered United States revenue as payments are for licenses for United States operations irrespective of the location of the licensee’s or licensee’s parent home domicile.

Year Ended March 31,	2009		2008
	$		$
United States		10,115,350		—
International		940,382		5,552,621
Total revenue		11,055,732		5,552,621

Revenues from five licensees each accounted for more than 10% of revenues for the year ended March 31, 2009. Sales to three customers comprised approximately 30%, 20% and 13% of revenues respectively in fiscal 2008. Accounts receivable from three parties comprised 44%, 19% and 11% of net accounts receivable at March 31, 2009 and amounts due from three parties comprised approximately 32%, 24% and 22% of accounts receivable at March 31, 2008.

13. COMMITMENTS AND CONTINGENCIES

Legal Matters

In May 2006, the Company announced that a complaint had been filed against it and certain of its officers and employees by digEcor, Inc. in the Third Judicial District Court of Utah, County of Salt Lake. The complaint alleged breaches of contract, unjust enrichment, breaches of good faith and fair dealing, fraud, negligent misrepresentation, and interference with prospective economic relations. digEcor sought, among other things, an injunction to prevent our Company from selling or licensing certain digital rights management technology and "from engaging in any competition with digEcor until after 2009." digEcor also sought "actual damages" of $793,750 and "consequential damages...not less than an additional $1,000,000." This action was related to a purchase order the Company placed for this customer in the normal course of business on November 11, 2005 for 1,250 digEplayers with its contract manufacturer, Maycom Co., Ltd.. Maycom was paid in full for the order by both e.Digital and digEcor by March 2006, but Maycom failed to timely deliver the order. In October 2006 the Company received delivery from Maycom of the delayed 1,250-unit digEplayer order and delivered the order to digEcor. The Company answered digEcor's complaint and pursued certain counterclaims and each party subsequently supplemented their various claims.

F-26

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

In January 2007, March 2009 and April 2009 the Court ruled on certain motions of the parties substantially limiting the issues for trial and each party has voluntarily dismissed additional claims and specific defendants. In its rulings, the Court has dismissed digEcor's unjust enrichment, fraud, negligent misrepresentation, tortious interference, non-competition, punitive damage and certain unfair competition claims. The Court has further acknowledged the delivery of the 1,250-unit order and a partial settlement between the parties reducing digEcor's claim for purchase-price or actual damages from $793,750 to $94,846 with such amount still being disputed by the Company.

The bulk of the bench trial was completed in May 2009 related to digEcor’s claims for breaches of three contracts and associated damages, and one claim for injunctive relief. The parties’ proposed findings of fact and conclusions of law are due in July 2009 followed by closing arguments, deliberations and a decision. The Company presented multiple substantive defenses at trial. However, there can be no assurance the Company will prevail. The Court’s prior rulings and final verdict may also be subject to appeal by either party. The Company is also unable to determine at this time the impact this complaint and matter may have on its financial position or results of operations. The Company has an accrual of $80,000 related to a deposit made by digEcor and at March 31, 2009 accrued an additional $100,000 as an estimate of its obligation related to the remaining general damage claim based on settlement offer made by the Company. The Company intends to seek restitution from Maycom for any damages it may incur. Recovery from Maycom is not assured.

Intellectual Property Litigation

In September 2007 and March 2008, the Company filed complaints against eight electronic product manufacturers in the U.S. District Court for the Eastern District of Texas asserting that products made by the companies infringe four of the Company's U.S. patents covering the use of flash memory technology. These patents are part of the Company’s Flash-R patent portfolio. By March 31, 2009 the Company had licensed and settled the litigation with six of the manufacturers and suspended the complaint against one defendant currently in bankruptcy. Litigation is still pending against one remaining defendant. The Company intends to pursue its claims vigorously but the litigation is in the early stage and there is no assurance of recovery. Although most fees, costs and expenses of the litigation are covered under the Company’s arrangement with Duane Morris LLP as described below, the Company may incur support and related expenses for this litigation that may become material.

Commitment Related to Intellectual Property Legal Services

On March 23, 2007 the Company entered into an agreement for legal services and a contingent fee arrangement with Duane Morris LLP. The agreement provides that Duane Morris is the Company’s legal counsel in connection with the assertion of the Company’s flash memory related patents against infringers (“Patent Enforcement Matters’).

Duane Morris has agreed to handle the Company’s Patent Enforcement Matters and certain related appeals on a contingent fee basis. Duane Morris also has agreed to advance certain costs and expenses including travel expenses, court costs and expert fees. The Company has agreed to pay Duane Morris a fee equal to 40% of any license or litigation recovery related to Patent Enforcement Matters, after recovery of expenses, and 50% of recovery if appeal is necessary.

In the event the Company is acquired or sold or elects to sell the covered patents or upon certain other corporate events or in the event the Company terminates the agreement for any reason, then Duane Morris shall be entitled to collect accrued costs and a fee equal to three times overall time and expenses accrued in connection with the agreement and a fee of 15% of a good faith estimate of the overall value of the covered patents. The Company has provided Duane Morris a lien and a security interest in the covered patents to secure its obligations under the agreement.

F-27

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

Contract Manufacturers and Suppliers

At March 31, 2009 the Company had outstanding unfilled purchase orders and was committed to a contract manufacturer and component suppliers for approximately $128,000 of future deliveries.

Facility Lease

In March 2006 the Company entered into a sixty-two month lease, commencing June 1, 2006, for approximately 4,800 square feet with an aggregate monthly payment currently at $6,159 excluding utilities and costs. The aggregate payments adjust annually with maximum aggregate payments totaling $6,535 in the fifty-first through the sixty-second month. Office rent expense recorded by the Company for the year ended March 31, 2009 was $99,474 (2008 - $86,397).

14. RELATED PARTY TRANSACTIONS

On October 8, 2008 Eric M. Polis was appointed as a director of the Company. Mr. Polis is Secretary, Treasurer and a director of ASI Technology Corporation (“ASI”) the holder of the 18% Secured Promissory Note (see Note 7) that was repaid in March 2009. The Company paid cash interest of $69,750 to ASI during the year ended March 31, 2009. As compensation for his role as a director, the Company granted Mr. Polis options on 300,000 common shares vesting over two years and exercisable at $0.115 per share until October 2013, subject to continued service.

See additional related party disclosure in Note 9.

15. QUARTERLY FINANCIAL INFORMATION (unaudited)

The following table sets forth unaudited income statement data for each of the Company’s last eight quarters. During the prior year the two quarters ended September 30, 2007 and December 31, 2007 were restated with comparisons to the results as previously reported illustrated below. The restatement was due to an overstatement of both sales and cost of sales of $104,000 and $62,400 for the quarter ended September 30, 2007 and December 31, 2007, respectively, due to a misclassification of supplier material transfers with no effect on gross profit, operating loss or net loss in either quarter or for the fiscal year ended March 31, 2008.

Quarter ended	6/30/2008			9/30/2008			12/31/2008		3/31/2009		FY 2009
Revenues	$	377,727		$	1,774,430		$	3,906,033	$	4,997,542	$	11,055,732
Gross profit		114,057			1,157,107			2,286,550		2,986,237		6,543,951
Income (loss) for the period		(669,207	)		(28,833	)		1,547,795		2,084,231		2,933,986
Operating profit (loss)		(571,489	)		400,511			1,597,631		2,273,290		3,699,943
Income (loss) attributable to common shareholders		(670,618	)		(72,116	)		1,504,511		2,041,889		2,803,666
Basic and diluted earnings (loss) per common share	$	(0.00	)	$	(0.00	)	$	0.01	$	0.01	$	0.01
Weighted average shares outstanding (basic)		274,497,647			277,082,261			279,143,996		281,298,128		277,997,077

	As Reported
Quarter ended	6/30/2007			9/30/2007			12/31/2007
Revenues	$	1,304,634		$	2,419,781		$	1,253,247
Gross profit		246,115			597,398			396,351
Loss for the period		(593,406	)		(157,740	)		(397,371	)
Operating loss		(505,294	)		(90,532	)		(331,246	)
Loss attributable to common shareholders		(620,631	)		(185,265	)		(424,596	)
Basic and diluted earnings (loss) per common share	$	(0.00	)	$	(0.00	)	$	(0.00	)
Weighted average shares outstanding (basic)		244,411,088			246,361,041			249,097,860

F-28

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2009

				As Restated (*)
Quarter ended	6/30/2007			9/30/2007			12/31/2007			3/31/2008			FY 2008
Revenues	$	1,304,634		$	2,315,781		$	1,190,847		$	741,359		$	5,552,621
Gross profit		246,115			597,398			396,351			304,144			1,544,008
Loss for the period		(593,406	)		(157,740	)		(397,371	)		(570,550	)		(1,719,067	)
Operating loss		(505,294	)		(90,532	)		(331,246	)		(515,408	)		(1,442,480	)
Loss attributable to common shareholders		(620,631	)		(185,265	)		(424,596	)		(570,550	)		(1,801,042	)
Basic and diluted earnings (loss) per common share	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)
Weighted average shares outstanding (basic)		244,411,088			246,361,041			249,097,860			270,974,359			252,683,865

* As restated applies only to the two fiscal quarters ended September 30, 2007 and December 31, 2007. No other quarter of either fiscal 2008 or 2009 has been restated.

F-29

Delaware	33-0591385
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

		Page
PART I

ITEM 1.	Business	3
ITEM 1A.	Risk Factors	10
ITEM 1B.	Unresolved Staff Comments	16
ITEM 2.	Properties	16
ITEM 3.	Legal Proceedings	16
ITEM 4.	Submission of Matters to a Vote of Security Holders	17

PART II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and
	Issuer Purchases of Equity Securities	17
ITEM 6.	Selected Financial Data	18
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	29
ITEM 8.	Financial Statements and Supplementary Data	29
ITEM 9.	Changes In and Disagreement With Accountants on Accounting and Financial Disclosure	29
ITEM 9A(T).	Controls and Procedures	30
ITEM 9B.	Other Information	31

PART III

ITEM 10.	Directors, Executive Officers and Corporate Governance	31
ITEM 11.	Executive Compensation	33
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related
	Stockholder Matters	34
ITEM 13.	Certain Relationships and Related Transactions and Director Independence	37
ITEM 14.	Principal Accounting Fees and Services	38

PART IV

ITEM 15.	Exhibits, Financial Statement Schedules	39

	Signatures	43

	Financial Statements	F-1

	Low		High
Fiscal year ended March 31, 2008
First quarter	$	0.23	$	0.17
Second quarter	$	0.22	$	0.16
Third quarter	$	0.11	$	0.18
Fourth quarter	$	0.11	$	0.15

	2008			2009		2008 to 2009 variance in $'s		2008 to 2009 variance in %'s
(in thousands, except percentages)
Working capital (deficit)	$	(1,292	)	$	3,277	$	4,569		354	%
Cash and cash equivalents	$	122		$	3,814	$	3,692		3,026	%
Total assets	$	861		$	4,478	$	3,617		420	%

	2008			2009			2008 to 2009 variance in $'s			2008 to 2009 variance in %'s
	(in thousands, except percentages)
Net cash provided by (used in)
Operating activities	$	(1,442	)	$	2,837		$	4,279			297	%
Investing activities	$	(17	)	$	(4	)	$	13			76	%
Financing activities	$	886		$	859		$	(27	)		(3	)%


Fiscal year ended March 31, 2009
First quarter	$	0.08	$	0.16
Second quarter	$	0.08	$	0.18
Third quarter	$	0.08	$	0.16
Fourth quarter	$	0.10	$	0.20

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	7,550,500	$	0.16	3,590,000
Equity compensation plans not approved by security holders (1)	500,000	$	0.15	-0-
Total	8,050,500	$	0.16	3,590,000

Name	Age	Positions	Director Since
Alfred H. Falk	54	President, Chief Executive Officer and Director	January 2009
Robert Putnam	50	Senior Vice President, Corporate Secretary, Interim Chief Accounting Officer and Director	1995
Allen Cocumelli	59	Chairman* and Director	1999
Renee Warden	45	Director	2005
Eric M. Polis	38	Director	October 2008

Name and Principal Position	Fiscal Year	Salary(1)		Bonus		Option Awards(2)		All Other Compensation			Total
Alfred H. Falk, President and	2009	$	155,000	$	-0-	$	-0-	$	-0-		$	155,000
Chief Executive Officer (PEO)

William Blakeley, President	2009	$	155,184	$	-0-	$	-0-	$	40,385	(3)	$	195,569
and Chief Technical Officer	2008	$	175,000	$	-0-	$	22,426	$	-0-		$	197,426
(PEO)(3)	2007	$	175,000	$	-0-	$	33,026	$	-0-		$	208,026

Robert Putnam, Senior Vice	2009	$	85,000	$	-0-	$	-0-	$	-0-		$	85,000
President, Secretary and	2008	$	85,000	$	-0-	$	13,052	$	-0-		$	98,052
Interim Chief Accounting	2007	$	85,000	$	-0-	$	13,052	$	-0-		$	98,052
Officer (PFO) (4)

Name	Number of Securities Underlying Unexercised Options Exercisable		Number of Securities Underlying Unexercised Options Unexercisable		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options		Option Exercise Price		Option Expiration Date
Alfred H. Falk		750,000		—		—	$	0.145	3/30/10
		400,000		—		—	$	0.23	7/1/09

William Blakeley(1)		—		—		—		—		—

Robert Putnam		25,000		—		—	$	0.23	07/1/09
		500,000		—		—	$	0.145	3/30/10

Name	Fee Earned or Paid in Cash		Option Awards (1)		All Other Compensation		Total
Alex Diaz(2)		—	$	-0-		—	$	-0-
Allen Cocumelli(3)		—	$	12,723		—	$	12,723
Renee Warden (4)		—	$	12,723		—	$	12,723
Eric M. Polis (5)		—	$	3,975		—	$	3,975

Name and Address	Amount and Nature of			Percent			Title
of Beneficial Owner	Beneficial Ownership			of Class			of Class
Alfred H. Falk		2,143,850	(1)		*		Common
16770 West Bernardo Drive
San Diego, CA 92127

Robert Putnam		5,387,925	(2)		1.9	%	Common
16770 West Bernardo Drive
San Diego, CA 92127

Allen Cocumelli		276,000	(3)		*		Common
16770 West Bernardo Drive
San Diego, CA 92127

Eric M. Polis		3,907,119	(4)		1.4	%	Common
980 American Pacific Drive, #111
Henderson, NV 89014

Renee Warden		850,000	(5)		*		Common
16770 West Bernardo Drive
San Diego, CA 92127

Jerry E. Polis		24,685,121	(6)		8.7	%	Common
980 American Pacific Drive, #111
Henderson, NV 89014

All officers, directors and nominees
as a group (5 persons)		12,452,394	(7)		4.3	%	Common

Type of Fee	2009		2008
Audit Fees (1)	$	160,797	$	158,232
Audit Related Fees (2)		—		15,153
Tax Fees (3)		—		—
All Other Fees (4)		—		—
Total	$	160,797	$	173,385

Exhibit
Number		Sequential Description

2.1		Plan of Reorganization and Agreement of Merger, dated July 1996 and filed as Exhibit A to the Company’s July 3, 1996 Proxy Statement.

3.1		Certificate of Incorporation of Norris Communications, Inc. (as amended through May 28, 1996) and filed as Exhibit B to the Company’s July 3, 1996 Proxy Statement.

3.1.1		Certificate of Amendment of Certificate of Incorporation of Norris Communications, Inc. filed with the State of Delaware on January 14, 1998 and filed as Exhibit 3.1.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 1997.

3.1.2		Certificate of Amendment of Certificate of Incorporation of Norris Communications Inc. filed with the State of Delaware on January 13, 1999 and filed as Exhibit 3.1.2 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998.

3.1.3		Certificate of Amendment of Certificate of Incorporation of e.Digital Corporation filed with the State of Delaware on September 18, 2008 and filed as Exhibit 3.1.3 to the Company’s Current Report on Form 8-K dated September 18, 2008.

3.1.4		Certificate of Amendment of Certificate of Incorporation of e.Digital Corporation filed with the State of Delaware on August 11, 2005 and filed as Exhibit 3.1.4 to the Company’s Current Report on Form 8-K dated September 18, 2008.

3.2		Bylaws of the Company, filed as Exhibit C to the Company’s July 3, 1996 Proxy Statement.

3.3		Certificate of Designation of Preferences, Rights and Limitations of Series A Redeemable Convertible Preferred Stock filed with the State of Delaware on September 19, 1997 and filed as Exhibit 3.3 to the Company’s Current Report on Form 8-K dated October 3, 1997.

4.5	Form of Series “A” Warrant exercisable until February 28, 2009, issued February 24, 2006 to certain accredited investors for up to an aggregate of 4,687,500 common shares (individual warrants differ only as to holder and number of shares) and filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 27, 2006

4.6	Form of Series “B” Warrant exercisable until six months after the effectiveness of this Registration Statement or July 31, 2008 whichever is earlier, issued February 24, 2006 to certain accredited investors for up to an aggregate of 4,687,500 common shares (individual warrants differ only as to holder and number of shares) and filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated February 27, 2006.

4.7	Form of New Warrant issued to 29 investors in August and September 2006 for an aggregate of 2,331,572 common shares exercisable at $0.15 per share through August 31, 2009 filed as Exhibit 4.53 to Form 8-K dated August 28, 2006

4.8	Exchange Agreement between the Company and Davric Corporation dated December 1, 2006 filed as Exhibit 99.1 to Form 8-K dated December 12, 2006.

4.8.1	7.5% Convertible Subordinated Term Note issued by the Company to Davric Corporation dated December 1, 2006 filed as Exhibit 99.2 to Form 8-K dated December 12, 2006.

4.9	Common Stock Purchase Agreement, dated as of January 2, 2007, by and between e.Digital Corporation and Fusion Capital Fund II, LLC filed as Exhibit 10.1 to Form 8-K dated January 8, 2007.

4.10	Registration Rights Agreement, dated as of January 2, 2007, by and between e.Digital Corporation and Fusion Capital Fund II, LLC filed as Exhibit 10.2 to Form 8-K dated January 8, 2007.

4.11	Form of Convertible Preferred Stock Purchase Agreement between the Company and 12 investors for an aggregate of 75,000 Series AA Preferred Shares and Warrants (individual agreements differ only as to number of shares) dated June 27, 2008 filed as Exhibit 99.2 to Form 8-K dated July 1, 2008.

4.12	Form of Stock Purchase Warrant between the Company and 12 investors for an aggregate of 7,500,000 common shares (individual warrants differ only as to holder and number of shares) dated June 27, 2008 filed as Exhibit 99.3 to Form 8-K dated July 1, 2008.

10.1	Lease Agreement between the Company and LBA Industrial Fund – Holding Co. II, Inc. and Innsbruck Holdings, L.P. dated March 3, 2006 and filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.

10.2	Agreement for Legal Services and Contingent Fee Arrangement dated March 23, 2007 between the Company and Duane Morris LLP filed as Exhibit 99.1 to Form 8-K dated March 28, 2007. (Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Exchange Act of 1934, as amended.)

10.3	Secured Promissory Note of the Company to ASI Capital Corporation dated March 23, 2007 filed as Exhibit 99.3 to Form 8-K dated March 28, 2007.

10.3.1	Loan Extension Agreement between the Company and ASI Capital Corporation dated as of September 28, 2007 and previously filed as Exhibit 99.1 to Form 8-K dated October 15, 2007.

10.3.2	Secured Promissory Note of the Company to ASI Technology Corporation dated December 23, 2007 filed as Exhibit 99.1 to Form 8-K dated January 4, 2008.

10.3.3	Loan Extension Agreement between the Company and ASI Technology Corporation dated as of June 30, 2008 and previously filed as Exhibit 99.1 to Form 8-K dated July 1, 2008.

10.3.4	Loan Extension Agreement between the Company and ASI Technology Corporation dated as of December 31, 2008 and previously filed as Exhibit 99.1 to Form 8-K dated January 5, 2009.

10.4	Security Agreement between the Company and its subsidiary and ASI Capital Corporation dated March 23, 2007 filed as Exhibit 99.4 to Form 8-K dated March 28, 2007.

10.4.1	Security Agreement between the Company and its subsidiary and ASI Technology Corporation dated December 23, 2007 filed as Exhibit 99.2 to Form 8-K dated January 4, 2008.

10.5	Stock Option Plan adopted by the Company on September 29, 1994 ("1994 Plan"), filed as Exhibit 10.10 to the Company's 1995 Form 10-KSB.

10.5.1	First Amendment to Stock Option Plan adopted by the Company on January 26, 1996 and filed previously as Exhibit 10.14.1 to the Company's Annual Report on Form 10-KSB dated March 31, 1998.

10.5.2	Second Amendment to Stock Option Plan adopted by the Company on September 3, 1997 and filed previously as Exhibit 10.14.2 to the Company's Annual Report on Form 10-KSB dated March 31, 1998.

10.5.3	Third Amendment to Stock Option Plan adopted by the Company on November 9, 2000 and filed previously as Exhibit B to the Company's Annual Report on Schedule 14A dated September 22, 2000.

10.6	2005 Equity-Based Compensation Plan, filed as Exhibit B to the to the Company's July 12, 2005 Definitive Proxy Statement.

10.6.1	Form of Incentive Stock Option Agreement under the 2005 Equity-Based Compensation Plan and filed previously as Exhibit 10.6.1 to the Company’s Annual Report on Form 10-K dated March 31, 2007.

10.6.2	Form of Nonstatutory Stock Option Agreement under the 2005 Equity-Based Compensation Plan and filed previously as Exhibit 10.6.2 to the Company’s Annual Report on Form 10-K dated March 31, 2007.

10.7	Employment letter between the Company and William A. Blakeley dated October 20, 2005 filed as Exhibit 99.2 to Form 8-K dated October 27, 2005.

10.7.1	Inducement Stock Option Grant Notice and Inducement Stock Option Agreement for William A. Blakeley dated November 14, 2005 and filed previously as Exhibit 10.7.1 to the Company’s Annual Report on Form 10-K dated March 31, 2007.

10.7.2	Special Stock Option Grant Notice and Stock Option Agreement for William A. Blakeley dated March 30, 2006 and filed previously as Exhibit 10.7.2 to the Company’s Annual Report on Form 10-K dated March 31, 2007.

21.1	List of subsidiaries. *

23.1	Consent of SingerLewak LLP, Independent Registered Public Accounting Firm.*

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

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

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

	e.Digital Corporation


	By:	/s/ ALFRED H. FALK
	President and Chief Executive Officer

Name	Position	Date

/s/ ALFRED H. FALK	President and Chief Executive Officer	June 16, 2009
Alfred H. Falk	(Principal Executive Officer)

/s/ ALLEN COCUMELLI	Chairman of the Board and Director	June 16, 2009
Allen Cocumelli

/s/ ROBERT PUTNAM	Senior Vice President and Director	June 16, 2009
Robert Putnam	Interim Chief Accounting Officer and
	Secretary (Principal Financial and Accounting Officer)

/s/ ERIC M. POLIS	Director	June 16, 2009
Eric M. Polis

/s/ RENEE WARDEN	Director	June 16, 2009
Renee Warden