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CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND SUBSIDIARY

REPORT OF SINGER LEWAK GREENBAUM & GOLDSTEIN LLP, INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM			F-2

CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2007 AND 2006			F-3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
MARCH 31, 2007, 2006 AND 2005			F-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT FOR THE YEARS ENDED
MARCH 31, 2007, 2006 AND 2005			F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
MARCH 31, 2007, 2006 AND 2005			F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			F-7 to F-24

VALUATION AND QUALIFYING ACCOUNTS

REPORT OF SINGER LEWAK GREENBAUM & GOLDSTEIN LLP, INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM			F-25

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS			F-26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

e.Digital Corporation

San Diego, CA

We have audited the consolidated balance sheets of e.Digital Corporation and subsidiary (the “Company”) as of March 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended March 31, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 provided 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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2007 in conformity with U.S. generally accepted accounting principles.

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 suffered recurring losses from operations, and its total liabilities exceeds its total assets. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans 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.

SINGER LEWAK GREENBAUM & GOLDSTEIN, LLP

Santa Ana, California

June 11, 2007

F-2

e.Digital Corporation and subsidiary

CONSOLIDATED BALANCE SHEETS

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

	As of March 31
	2007			2006
	$			$
ASSETS
Current
Cash and cash equivalents		694,757			1,058,723
Accounts receivable, trade		37,029			2,670
Inventory		309,392			-
Deposits and prepaid expenses		50,999			31,667
Total current assets		1,092,177			1,093,060
Property and equipment, net of accumulated depreciation of
$472,063 and $593,266, respectively		36,206			62,508
Prepaid transaction costs		628,584			-
Total assets		1,756,967			1,155,568
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current
Accounts payable, trade		687,132			261,196
Other accounts payable and accrued liabilities		131,107			107,145
Accrued lease liability		-			515,000
Accrued employee benefits		149,528			117,108
Dividends		464,025			402,305
Customer deposits		118,850			793,750
Current maturity of convertible term note, less $34,000 and $-0- of debt discount		138,902			-
Convertible subordinated promissory notes, less $-0- and $1,103,031 for debt discount		-			396,969
Secured promissory note		750,000			-
Unsecured promissory note		-			1,015,954
Total current liabilities		2,439,544			3,609,427
Long-term convertible term note, less $31,983 and $-0- of debt discount		748,082			-
Deferred revenue - long term		6,000			-
Total long-term liabilities		754,082			-
Total liabilities		3,193,626			3,609,427

Commitments and Contingencies

Stockholders' deficit
Preferred stock, $0.001 par value; 5,000,000 shares authorized
Series D Convertible Preferred stock 250,000 shares designated: 91,000 and 96,000
issued and outstanding, respectively. Liquidation preference
of $1,347,099 and $1,334,321, respectively		910,000			960,000
Series EE Convertible and Redeemable Preferred stock 20,000 shares designated:
-0- and 2,500 issued and outstanding, respectively. Liquidation preference
of $-0- and $277,342 respectively		-			250,000
Common stock, $0.001 par value, authorized 300,000,000,
243,453,037 and 200,431,000 shares and outstanding, respectively		243,453			200,431
Additional paid-in capital		78,236,434			73,710,110
Dividends		(464,025	)		(402,305	)
Accumulated deficit		(80,362,521	)		(77,172,095	)
Total stockholders' deficit		(1,436,659	)		(2,453,859	)

Total liabilities and stockholders' deficit		1,756,967			1,155,568

See accompanying notes

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
	2007			2006			2005
Revenues:	$			$			$
Products		1,815,014			3,174,730			4,002,212
Services		-			75,761			250,175
		1,815,014			3,250,491			4,252,387

Cost of revenues:
Products		789,773			2,643,034			3,149,357
Services		-			4,875			105,795
Impairment of deposits and other		-			488,611			-
		789,773			3,136,520			3,255,152
Gross profit		1,025,241			113,971			997,235

Operating expenses:
Selling and administrative		1,618,973			1,317,859			1,517,619
Research and related expenditures		1,474,540			1,337,568			1,515,238
Total operating expenses		3,093,513			2,655,427			3,032,857

Operating loss		(2,068,272	)		(2,541,456	)		(2,035,622	)

Other income (expense):
Interest income		12,729			9,062			3,785
Interest expense		(1,357,029	)		(573,500	)		(384,040	)
Other		283,299			(787	)		(936	)
Other expense		(1,061,001	)		(565,225	)		(381,191	)

Loss and comprehensive loss for the period		(3,129,273	)		(3,106,681	)		(2,416,813	)
Imputed deemed dividends on Series EE Preferrred Stock		-			-			(1,100,611	)
Additional deemed dividends on conversion repricing of
Series D and EE Preferred Stock		-			(1,999,951	)		-
Accrued dividends on the Series D and EE Preferred stock		(122,873	)		(161,695	)		(225,588	)
Loss attributable to common stockholders		(3,252,146	)		(5,268,327	)		(3,743,012	)
Loss per common share - basic and diluted		(0.01	)		(0.03	)		(0.02	)

Weighted average common shares outstanding		217,130,347			177,472,037			165,525,386

See accompanying notes

F-4

e.Digital Corporation and subsidiary

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

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

				Common stock				Additional						Accumulated
	Preferred stock			Shares		Amount		paid-in capital			Dividends			deficit
Balance, March 31, 2004		2,312,050			160,527,868		160,528		64,316,408			(246,798	)		(68,316,261	)
Shares issued upon exercise of stock options		-			30,000		30		4,620			-			-
Shares issued to satisfy trade payable		-			-		-		11,729			-			-
Shares issued upon exercise of warrants		-			394,872		395		66,105			-			-
Value assigned to warrants in connection with equity financing		-			-		-		271,121			-			-
Deemed dividends on Series EE preferred stock		-			-		-		1,100,611			-			(1,100,611	)
Issuance of Series EE preferred stock		1,850,000			-		-		-			-			-
Offering costs on Series EE preferred stock		-			-		-		(168,435	)		-			-
Shares issued for conversion of Series E preferred stock		(862,050	)		4,375,146		4,375		896,576			38,902			(38,902	)
Shares issued for conversion of Series D preferred stock		(300,000	)		1,931,871		1,932		365,119			67,051			(67,051	)
Shares issued for conversion of Series EE preferred stock		(600,000	)		3,233,628		3,234		611,155			14,389			(14,389	)
Dividends on Series D, E & EE preferred stock		-			-		-		-			(225,588	)		-
Loss and comprehensive loss		-			-		-		-			-			(2,416,813	)
Balance, March 31, 2005		2,400,000			170,493,385		170,494		67,475,009			(352,044	)		(71,954,029	)
Shares issued for conversion of Series D preferred stock		(190,000	)		2,755,976		2,756		254,649			67,406			(67,406	)
Shares issued for conversion of Series EE preferred stock		(1,000,000	)		6,956,639		6,956		1,037,072			44,028			(44,028	)
Dividends on Series D and EE preferred stock		-			-		-		-			(161,695	)		-
Shares issued upon exercise of warrants		-			1,475,000		1,475		116,525			-			-
Value assigned to reprice of subordinated debt warrants		-			-		-		120,062			-			-
Proceeds from sale of common stock at $0.08 per share		-			18,750,000		18,750		1,481,250			-			-
Value assigned to warrants and preferred convertible debt repricing in connection with common stock issuance		-			-		-		3,225,543			-			-
Value on repricing of preferred stock		-			-		-		-			-			(1,999,951	)
Loss and comprehensive loss		-			-		-		-			-			(3,106,681	)
Balance, March 31, 2006		1,210,000			200,431,000		200,431		73,710,110			(402,305	)		(77,172,095	)
Stock-based compensation									254,275
Shares issued for conversion of Series D preferred stock		(50,000	)		907,123		907		71,664			22,570			(22,570	)
Shares issued for conversion of Series EE preferred stock		(250,000	)		3,607,289		3,607		284,976			38,583			(38,583	)
Dividends on Series D and EE preferred stock		-			-		-		-			(122,873	)		-
Value assigned to inducement warrants		-			-		-		230,709			-			-
Shares issued upon exercise of warrants		-			11,236,500		11,236		1,028,291			-			-
Shares issued upon conversion of notes		-			18,750,000		18,750		1,481,250			-			-
Shares issued for note refinancing		-			500,000		500		77,000			-			-
Shares issued for term debt payments		-			154,459		155		29,845			-			-
Shares issued for services		-			200,000		200		33,800			-			-
Shares issued for financing commitment		-			3,500,000		3,500		591,500			-			-
Proceeds from sale of common stock at $0.12 per share		-			4,166,666		4,167		495,833			-			-
Offering costs on sale of common stock		-			-		-		(52,819	)		-			-
Loss and comprehensive loss		-			-		-		-			-			(3,129,273	)
Balance, March 31, 2007		910,000			243,453,037		243,453		78,236,434			(464,025	)		(80,362,521	)

See accompanying notes

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
	2007			2006			2005
OPERATING ACTIVITIES	$			$			$
Loss for the period		(3,129,273	)		(3,106,681	)		(2,416,813	)
Adjustments to reconcile loss to net cash used in operating activities:
Depreciation and amortization		53,757			63,494			48,452
Accrued interest related to unsecured promissory notes		72,332			112,500			37,500
Value assigned to inducement warrants		230,709			-			-
Impairment of deposit		-			603,750			-
Amortization of interest from warrants and common stock		-
issued in connection with promissory notes		1,114,548			300,665			174,138
Stock issued to vendor		-			-			11,729
Gain on settlement of accounts payable debt		-			(125,135	)		-
Write-off of accrued lease liability		(515,000	)		-			-
Interest paid in stock		12,080			-			-
Stock-based compensation		254,275			-			-
Changes in assets and liabilities:
Accounts receivable, trade		(34,359	)		50,171			(16,690	)
Inventory		(309,392	)		-			5,009
Prepaid expenses and other		(19,332	)		(130,064	)		(476,268	)
Accounts payable, trade		425,936			(135,016	)		135,894
Other accounts payable and accrued liabilities		29,962			23,850			12,441
Customer deposits		(674,900	)		86,500			707,250
Accrued employee benefits		32,420			(17,334	)		(51,295	)
Deferred revenue		-			(53,830	)		(122,613	)
Cash used in operating activities		(2,456,237	)		(2,327,130	)		(1,951,265	)

INVESTING ACTIVITIES
Purchase of property and equipment		(27,455	)		-			(15,816	)
Cash used in investing activities		(27,455	)		-			(15,816	)

FINANCING ACTIVITIES
Payments on promissory notes		(12,337	)		(21,400	)		(3,270	)
Proceeds from promissory notes		750,000			500,000			1,000,000
Proceeds from sale of preferred stock		-			-			1,850,000
Proceeds from sale of common stock		500,000			1,500,000			-
Payment for stock offering costs		(18,819	)		-			(129,500	)
Proceeds from exercise of warrants		934,466			118,000			66,500
Payment of prepaid transaction costs		(33,584	)		-			-
Proceeds from exercise of stock options		-			-			4,650
Cash provided by financing activities		2,119,726			2,096,600			2,788,380
Net increase (decrease) in cash and cash equivalents		(363,966	)		(230,530	)		821,299
Cash and cash equivalents, beginning of period		1,058,723			1,289,253			467,954
Cash and cash equivalents, end of period		694,757			1,058,723			1,289,253

See accompanying notes

F-6

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

e.Digital Corporation is a holding company that operates through a wholly-owned California subsidiary of the same name and is incorporated under the laws of Delaware. 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 owns a portfolio of patents related to the use of flash memory in portable devices and has commenced activities to license the portfolio.

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

The Company has incurred significant losses and negative cash flow from operations in each of the last three years and has an accumulated deficit of $80,362,521 at March 31, 2007 [2006 - $77,172,095]. At March 31, 2007, the Company had a working capital deficiency of $1,347,367. Substantial portions of the losses are attributable to marketing costs of the Company’s new product and substantial expenditures on research and development of technologies. The Company’s operating plans require additional funds that may take the form of debt or equity financings. There can be no assurance that any additional funds will be available. The Company’s ability to continue as a going concern is in substantial doubt and is dependent upon obtaining additional financing and achieving a profitable level of operations.

Management has undertaken steps as part of a plan to improve operations with the goal of sustaining operations for the next twelve months and beyond. These steps include (a) expanding sales and marketing to new customers and new markets; (b) executing a strategy to monetize the flash memory-related patent portfolio; (c) controlling overhead and expenses; and (c) raising additional capital and/or obtaining financing. The Company may have access to up to $8 million of additional funding pursuant to a common stock purchase agreement with Fusion Capital Fund II, LLC (“Fusion”). The availability under the Fusion agreement is subject to many conditions, some of which are predicated on events that are not within the Company’s control. There can be no assurance this capital resource will be available or be sufficient.

There can be no assurance the Company will achieve a profitable level of operations and obtain additional financing pursuant to the Fusion financing agreement or otherwise. There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.

In the event the Company is unable to continue as a going concern, it may elect or be required to seek protection from creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence.

These consolidated financial statements do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.

2. 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.

F-7

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

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.

Fair value of financial instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable trade, other accounts payable and accrued liabilities, preferred stock and promissory notes. Management has determined that the carrying value of cash and cash equivalent, accounts receivable, accounts payable trade and other accounts payable and accrued liabilities and accrued employee benefits approximate their fair value due to their short term nature. Management has determined that the carrying value of the preferred stock and promissory notes approximates its fair value based on discounted cash flows at market rates.

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.

Loss per share

Basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted loss per share reflects the potential dilution of securities that could share in the loss of an entity. As at March 31, 2007, stock options, warrants and convertible preferred stock and notes exercisable into 36,564,110 [2006 - 64,049,961] [2005 - 28,255,962] shares of common stock were outstanding. These securities were not included in the computation of diluted loss per share because they are antidilutive, but they could potentially dilute earnings (loss) per share in future years.

The provisions of each of the Company’s series D, E and EE of preferred stock provided for a 12%, 8% and 8% per annum accretion, respectively in the conversion value (similar to a dividend). These amounts increase the net loss available to common stockholders. Net loss available to common stockholders is computed as follows:


Years ended March 31,		2007			2006			2005
Net loss	$	(3,129,273	)	$	(3,106,681	)	$	(2,416,813	)
Imputed deemed dividends on Series EE preferred stock		-			-			(1,100,611	)
Additional deemed dividends on conversion repricing of Series D and EE preferred stock		-			(1,999,951	)		-
Accretion on preferred stock:
Series D preferred stock, 12% stated rate		(112,364	)		(126,944	)		(156,289	)
Series E preferred stock, 8% stated rate		-			-			(17,966	)
Series EE preferred stock, 8% stated rate		(10,509	)		(34,751	)		(51,333	)
Net loss available to common stockholders	$	(3,252,146	)	$	(5,268,327	)	$	(3,743,012	)

Guarantees and indemnifications

In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34.” The following is a summary of the Company’s agreements that the Company has determined are within the scope of FIN No. 45:

The Company provides a one year limited warranty for most of its products. See “Warranty Liabilities.”

F-8

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

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.

Revenue recognition

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 perfunctory to the services or product that has not been delivered, revenue will be recognized evenly over the remaining term of the undelivered element.

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.

Deferred revenue and deposits

Deferred revenue and deposits relates primarily to prepaid extended warranty arrangements and product sales paid but not delivered at period end.

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.

Cash equivalents

Cash equivalents are highly liquid investments with insignificant interest rate risk and maturities of three months or less at the date of purchase and are recorded at cost, which approximates fair value. Cash equivalents consist principally of investments in short-term money market instruments.

Deposits and prepaid expenses

Deposits and prepaid expenses are recorded at amounts paid to suppliers or others. Amounts recorded are evaluated for impairment periodically and at March 31, 2006 a charge of $603,750 was expensed to cost of revenues to reflect impairment of deposits made to a contract manufacturer that failed to timely deliver with no assurance of future performance. During fiscal 2007 the contract manufacturer delivered the products and the impairment charge was reversed at the time of recognition of revenue to the customer.

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.

Due to the use of a turn-key contract manufacturers for major products and accessories, the Company does not take title until receipt of finished goods and accordingly does not maintain inventories of raw materials or assemblies. See Note 14 for purchase commitments.

F-9

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

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.

Intangible assets

Intangible assets include third party costs relating to obtaining patents, which are deferred when management is reasonably certain the patent will be granted. Such costs are amortized to operations over the life of the patent. If management determines that development of products to which patent costs relate is not reasonably certain, or that deferred patent costs exceed net recoverable value, such costs are charged to operations. Intangible assets also include website development costs incurred during the application development stage of the Company’s website which have been capitalized and are amortized over a two year period on the straight-line method. All other patent and website related costs are charged to operations when incurred.

Advertising

Advertising costs are charged to expense as incurred. The Company expensed $1,020, $104 and $420 for the years ending March 31, 2007, 2006 and 2005, 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.

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 9 for additional information regarding warranties.

Interest expense

Interest expense includes interest expense and non-cash amortization of debt discount.

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 follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect for the year in which the differences are expected to reverse.

Stock based compensation

The Company has adopted stock plans as summarized in Note 12 below. The Company adopted SFAS No. 123 (Revised 2004), “Share Based Payment”, effective April 1, 2006 the first day of the Company’s 2007 fiscal year. SFAS 123R requires the recognition of fair value of stock compensation as an expense in the calculation of net income. The Company recognizes stock compensation expense ratably over the vesting period of individual option grants. All stock compensation recorded during the period ended March 31, 2007 has been accounted for as an equity instrument. Prior to April 1, 2006 the Company followed the Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees”, and related interpretations for stock compensation.

F-10

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

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 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 elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all stock-based awards granted or other awards granted that are subsequently reclassified into equity. The fair values of options issued in prior periods are not revised for comparative purposes and the financial statements of prior interim and fiscal periods do not reflect any restated amounts. The unrecognized expense of awards not yet vested as of April 1, 2006, the date of SFAS 123R adoption, is now being recognized as an expense in the calculation of net loss using the same valuation method (Black-Scholes) and assumptions disclosed in the Company’s previous filings.

In November, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. SFAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards”. The Company is considering whether to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

The Company’s stock options have various restrictions that reduce option value, including vesting provisions and restrictions on transfer, among others, and are often exercised prior to their contractual maturity. The Company plans to issue shares on each option exercise and has no plans to repurchase option shares.

The Company recorded $254,187 of stock compensation expense for the year ended March 31, 2007. A total of $187,354 was included in selling and administrative costs and $66,833 was included in research and related expenditures. A total of $207,956 of this expense relates to prior year awards vesting after April 1, 2006. A total of $46,133 relates to options granted after the adoption of SFAS 123R to consultants. The weighted-average estimated fair value of options granted during the year ended March 31, 2007 was $0.11 per share, using the Black-Scholes option pricing model with the following weighted average assumptions (annualized percentages):

	Year Ended March 31, 2007
Volatility		82% - 91.0	%
Risk-free interest rate		4.4% - 4.7	%
Forfeiture rate		0.0% - 5.0	%
Dividend yield		0.0	%
Expected life in years		4

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 expected life is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is zero for consultant options and five percent for employee options.

F-11

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

Since the Company has a net operating loss carryforward as of March 31, 2007, no excess tax benefit for the tax deductions related to stock-based awards was recognized for the year ended March 31, 2007. Additionally, no incremental tax benefits were recognized from stock options exercised during the year ended March 31, 2007 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, 2007 total estimated compensation cost of options granted but not yet vested was approximately $147,000 and is expected to be recognized over the weighted average period of 1.2 years.

SFAS 123R requires the Company to present pro forma information for the comparative period prior to the adoption as if the Company had accounted for all employee stock options under the fair value method of the original SFAS 123. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation to the prior-year periods.

	Year Ended			Year Ended
	March 31, 2006			March 31, 2005
Net loss attributable to common stockholders	$	(5,268,327	)	$	(3,743,012	)
Plus: Stock-based employee compensation expense included in reported net loss		-			-
Less: Total stock-based employee compensation expense determined using fair value based method		(147,050	)		(132,220	)
Pro forma net loss attributable to common stockholders	$	(5,415,377	)	$	(3,875,232	)
Net loss per common share - basic and diluted - pro forma		($0.03	)		($0.02	)
Net loss per common share - basic and diluted - as reported		($0.03	)		($0.02	)

The Company estimated the fair value of each stock award at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2006 and 2005: dividend yield of zero percent for each period; expected volatility of 72 to 87 percent; risk-free interest rates of 2.86 percent to 4.95 percent; and expected life of 2.5 years.

The amortization of stock compensation under SFAS 123R for the period after its adoption, and under APB 25 or SFAS 123 (pro forma disclosure) for the period prior to the adoption of SFAS 123R was done in accordance with FASB Interpretation (“FIN”) No. 28.

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, 2007, 2006 and 2005, there were no material differences between comprehensive loss and net loss for the year.

Software development costs

The Company accounts for software development costs in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” under which certain software development costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model. Development costs incurred subsequent to the establishment of technological feasibility have not been significant, and all software development costs have been charged to research and related expenditures in the accompanying consolidated statements of operations.

F-12

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

Impairment of long-lived assets

Long-lived assets and identifiable intangibles held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset or if changes in facts and circumstances indicate, an impairment loss is recognized and measured using the asset’s fair value.

Segment information

The Company identifies its operating segments based on how management internally evaluates separate financial information (if available), business activities and management responsibility. The Company believes it operates in a single business segment, the development, manufacture and marketing of electronic technology and products for portable digital devices.

Common stock issued for services

The Company records compensation expense for common stock issued for services based on the estimated fair market value. Estimated fair market value is determined based on the quoted closing-bid stock price on the day of issuance.

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.

Reclassifications

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.

Recent accounting pronouncements

On September 13, 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. (“SAB 108”) which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for the Company’s fiscal 2007. The Company is not yet in a position to determine what, if any, effects SAB No. 108 will have on its financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), expands disclosures about fair value measurements, and applies to other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the FASB anticipates that for some entities, the application of SFAS No. 157 will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 157.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of FIN 48 will have a significant impact on its consolidated financial position, results of operations and cash flows. However the Company is evaluating the impact that FIN 48 will have on the amount, reporting and disclosures of fully reserved deferred net tax assets resulting primarily from tax loss carryforwards.

F-13

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

In February 2007, the FASB issued Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159.permits entities to choose to measure certain financial instruments and certain other items at fair value for those financial assets and liabilities not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of adopting SFAS 159 on our consolidated financial statements.

3. CREDIT RISK

Financial instruments totaling $655,798 [2006 - $888,762] [2005 - $1,131,525] which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, certificate of deposit and accounts receivable. The Company maintains cash and cash equivalents with three financial institutions. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses which, when realized, have been within the range of management’s expectations.

Amounts owing from one customer comprise approximately 86% of accounts receivable at March 31, 2007 [2006 - one customer comprised 100%].

4. MAJOR CUSTOMERS AND SUPPLIERS

The Company operates in one major line of business, the development, manufacture and marketing of electronic products. Sales to two customers comprised approximately 53% and 39% of revenues respectively in fiscal 2007 [2006 - one customer comprised 94%] [2005 - one customer comprised 94%]. The Company purchases its primary component from one distributor accounting for 73% of total purchases for fiscal 2007. Purchases from two distributors accounting for 74% ad 13% of total purchases for fiscal 2006. Purchases from one distributor accounted for 92% of total purchases for fiscal 2005. The provision for doubtful accounts receivable at March 31, 2007 and 2006 was $-0-.

5. STATEMENT OF CASH FLOWS

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

	2007		2006		2005
	$		$		$
Non-cash financing activities:
Common stock issued on conversion of preferred stock		361,154		5,742,416		1,882,391
Shares issued on conversion of debt		1,500,000		—		—
Shares issued for term debt payments		17,920		—		—
Shares issued for financing commitment		595,000		—		—
Shares issued for note refinancing		77,500		—		—
Note principal applied to exercise of warrants		105,062		—		—
Value assigned to 370,000 warrants granted in connection
with the issuance of Series EE preferred stock				—		271,121
Value assigned to common shares issued for placement costs		34,000		—		—
Accrued dividends on preferred stock		122,873		161,695		225,588
Value assigned to inducement warrants for early exercise of warrants		230,709		—		—
Beneficial conversion feature on the issuance of Series EE preferred stock				—		1,100,611
Deemed dividends on preferred repricing				1,999,951		—
Amortization of warrants				300,665		—
Impairment of deposit				603,750		—
Cash payments for interest were as follows:
Interest		153,063		272,835		384,040

F-14

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

6. PROPERTY AND EQUIPMENT			Accumulated
			depreciation and		Net book
	Cost		amortization		value
	$		$		$
2007
Computer hardware and software		91,927		80,832		11,095
Furniture and equipment		26,499		26,499		—
Machinery and equipment		82,912		77,521		5,391
Tooling		224,372		204,652		19,720
		425,710		389,504		36,206
2006
Computer hardware and software		84,192		74,561		9,631
Furniture and equipment		26,499		26,499		—
Machinery and equipment		82,912		71,474		11,438
Leasehold improvements		174,960		174,960		—
Tooling		204,652		163,213		41,439
		573,215		510,707		62,508

7. INTANGIBLE ASSETS
			Accumulated		Net book
	Cost		amortization		value
	$		$		$
2007
Website development costs		43,150		43,150		—
Patents and licenses		39,409		39,409		—
		82,559		82,559		—
2006
Website development costs		43,150		43,150		—
Patents and licenses		39,409		39,409		—
		82,559		82,559		—

8. PROMISSORY NOTES
	March 31, 2007			March 31, 2006
7.5% Convertible Subordinated Term Note	$	952,967		$	-
Less unamortized debt discount		(65,983	)
Less long-term portion		(748,082	)		-
Short term portion		138,902
18% Secured Promissory Note		750,000			-
15% Unsecured Promissory Notes and accrued interest					1,015,954
12% Convertible Subordinated Promissory Notes		-			1,500,000
Less unamortized debt discount		-			(1,103,031	)
Short-term portion of promissory notes	$	888,902		$	1,412,923

7.5% Convertible Subordinated Term Note

On December 12, 2006 the Company issued a new 7.5% Convertible Subordinated Term Note in the principal amount of $970,752 due November 30, 2009 in exchange for the 15% Unsecured Promissory Notes described below. The note provided for monthly principal and interest installments of $6,000 starting December 2006, increased to $15,000 in February 2007, increasing to $30,000 starting in December 2007 and $50,000 in December 2008 with maturity November 30, 2009. Commencing with the February 2007 installment payment, the Company has the option, subject to certain limitations, 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 parts of $50,000 on ten-day notice. The note may be subordinate to certain future senior indebtedness.

F-15

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

15% Unsecured Promissory Note

On December 11, 2002, the Company issued a 15% Unsecured Promissory Note for cash proceeds of $750,000. On January 31, 2005, the 15% Unsecured Promissory Note was amended to extend the maturity date to September 30, 2006. On January 31, 2005, the Company paid cash interest of $8,500 and issued to the noteholder a secondary 15% Unsecured Promissory Note for accrued interest of $150,000. The secondary 15% Unsecured Promissory Note also was due on September 30, 2006. Principal and interest on the secondary 15% Unsecured Promissory Note was payable in monthly installments of $3,500 with the balance due at maturity. Effective June 30, 2006 the maturity date of both notes was extended to December 31, 2006.

On December 12, 2006 the Company exchanged the balance of the two short-term 15% Unsecured Promissory Notes due December 31, 2006 for (i) a new 7.5% Convertible Subordinated Term Note, with principal and interest payable monthly, in the principal amount of $970,752 due November 30, 2009 and (ii) 500,000 shares of common stock representing consideration for extending the maturity date and reducing the interest rate from 15% to 7.5%. As a consequence of the exchange, the previously outstanding 15% Unsecured Promissory Notes due December 31, 2006 were cancelled.

The Company evaluated the note exchange under FASB No. 15 “Accounting by Debtors and Creditors for Troubled Debt Restructurings” and determined that no gain or loss should be recorded as a result of the exchange. The fair value of the 500,000 shares issued of $77,500 is a debt discount being amortized over the term of the note using the interest method.

The following table summarized activity for the period from April 1, 2006 to the December 12, 2006 note exchange:


Balance at April 1, 2006	$	1,015,954
Principal exchanged in August 2006 as exercise price of warrants		(105,062	)
Principal payments		(12,337	)
Accrued, unpaid interest		72,198
Balance exchanged for new three year term note (1)		(970,752	)
	$	-

12% Convertible Subordinated Promissory Notes and Related Royalty Obligation

In June and July 2004, the Company sold $1,000,000 of unsecured 12% Subordinated Promissory Notes due July 1, 2005. The purchasers were also granted warrants to purchase 2,000,000 shares of common stock at an exercise price of $0.25 per share, exercisable until December 31, 2007. The estimated fair market value of the warrants at issuance was $232,186 and was recorded as a deferred financing charge. The deferred financing charge was amortized as a debt discount over the original term of the 12% Subordinated Promissory Notes. On June 30, 2005, the 12% Subordinated Promissory Notes and warrants were modified by extending the maturity date from July 1, 2005 to December 31, 2005 and by reducing the purchase price of each warrant share from $0.25 to $0.19. Due to this modification, the Company recorded additional debt discount of $120,062 on the 12% Subordinated Promissory Notes.

In October 2005, the 12% Subordinated Promissory Notes were further modified by extending the maturity date to December 31, 2006 and to increase the maximum allowable note amount from $1,000,000 to $1,500,000 with all $500,000 of additional notes being sold (one officer/director purchased $50,000 of the additional notes). Noteholders acquiring the additional $500,000 of 12% Subordinated Promissory Notes (the “Additional Notes”) are entitled to receive a royalty equal to (i) the principal of the Additional Notes purchased divided by (ii) $500,000 multiplied by (iii) Twenty Dollars ($20.00) for each entertainment device sold during the calendar years of 2006, 2007 and 2008. The outstanding 12% Subordinated Promissory Notes were also amended such that the principal amount was convertible at $0.19 per common share, subject to anti-dilution adjustments for certain future issuances of stock at a lower price. On February 24, 2006, the conversion price on the $1,500,000 of 12% Subordinated Promissory Notes was adjusted from $0.19 per share to $0.08 per share pursuant to an antidilution adjustment. The exercise price of the 2,000,000 warrants was also adjusted from $0.19 per share to $0.08. An additional debt discount of $1,225,590 was recorded to reflect the value of the reduced conversion price of the debt and the value of the warrants due to the new warrant exercise price and this amount was amortized over the term of the notes and accelerated on any note conversions.

F-16

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

During the period September through December 2006, the $1,500,000 balance of notes was converted into 18,750,000 common shares and all debt discount was charged as non-cash interest expense.

The Company recorded in other income and expenses royalty expense related to the $500,000 of notes as described above of $15,280 for the year ended March 31, 2007.

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 is outstanding subject to a security agreement providing a security interest in substantially all of the Company’s assets. The note is due the earlier of September 23, 2007 or within two business days of receipt by the Company of final payments from certain purchase orders, contains no prepayment fee and provides customary late payment penalties and default provisions. Subsequent to March 31, 2007 the Company paid an associated $15,000 finance charge by issuing 73,385 restricted shares of common stock with no registration rights.

9. WARRANTY RESERVE

Details of the estimated warranty liability are as follows:

	Year Ended March 31,
	2007		2006
	$		$
Beginning balance		15,789		15,789
Warranty provision		24,283		-
Warranty deductions		-		-
Ending balance		40,072		15,789

10. INCOME TAXES

There is no net provision for income taxes in 2007, 2006 and 2005 as the Company incurred losses in each year. Income taxes consist of the following:

	2007			2006			2005
Deferred (benefit):
Federal	$	(628,000	)	$	(914,000	)	$	(845,000	)
State		(103,000	)		(154,000	)		(63,000	)
		(731,000	)		(1,068,000	)		(908,000	)
Change in valuation allowance		731,000			1,068,000			908,000
	$	—		$	—		$	—

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. For financial statement purposes, a change in valuation allowance of $(1,050,000) [2006 - $2,570,000] has been recognized to offset certain nets deferred tax assets for which realization is uncertain. Significant components of the Company’s deferred tax liabilities and assets as of March 31(substantially all liabilities and assets being long-term) are as follows:

F-17

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

	2007			2006
	$			$
Deferred tax liabilities
State Taxes		540,000			570,000
Tax over book depreciation		30,000			60,000
Total deferred tax liabilities		580,000			630,000
Deferred tax assets
Net operating loss carryforwards		21,610,000			22,460,000
Allowances and other		210,000			460,000
Total deferred tax assets		21,820,000			22,920,000
Valuation allowance for deferred tax assets		(21,240,000	)		(22,290,000	)
Net deferred tax assets		580,000			630,000
Net deferred tax balance		—			—

A reconciliation between federal statutory income tax rates and the effective tax rate of the Company at March 31 is as follows:

	Liability method
	2007			2006			2005
	%			%			%
U.S. federal statutory rate		35.0			35.0			35.0
U.S. federal net operating loss rate		(35.0	)		(35.0	)		(35.0	)
Effective rate on operating loss		—			—			—

The Company has U.S. federal net operating loss carryforwards available at March 31, 2007 of approximately $57,400,000 [2006 - $55,250,000] which will begin to expire in 2007. The Company has state net operating loss carryforwards of $17,240,000 [2006 - $17,600,000] which will begin to expire in 2010. 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 utilization of the net operating loss carry-forwards could be substantially limited due to restrictions imposed under federal and state laws upon a change of ownership. The

amount of the limitation, if any, has not been determined at this time.

11. CAPITAL STOCK

Authorized capital

The authorized capital of the Company consists of 300,000,000 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 243,453,037, 200,431,000 and 170,493,385 common shares as of March 31, 2007, 2006 and 2005, respectively.

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) has the right, subject to certain conditions and limitations, to sell to Fusion up to $8.0 million worth of additional common stock, at the Company’s election, over a two year period 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. Common stock may be sold in $80,000 increments every fourth business day, with additional $100,000 increments available every third business day if the market price of the common stock is $0.10 or higher. This $100,000 increment may be further increased at graduated levels up to $1.0 million if the market price increases from $0.10 to $0.80. If the price of the stock is below $0.08 per share, no sales shall be made under the agreement.

F-18

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

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 are prepaid transaction costs to be discounted against future stock sales under the agreement or charged to expense if the arrangement is terminated or management determines it will not issue sufficient shares to offset the offering costs.

Under a related registration rights agreement, before Fusion was obligated to purchase shares, the Company was required to file a registration statement covering the sale of the common shares described above. The Form S-1 registration statement was declared effective on February 9, 2007. A total of 15,000,000 shares were registered for future sale, accordingly the Company is currently limited to selling the lesser of 15,000,000 shares or $8 million. The Company is required to maintain effectiveness of the registration statement until the earlier of the date that Fusion may sell the shares without restriction pursuant to Rule 144(k) or the date that Fusion has sold all registered shares and no available unpurchased shares remain under the agreement. Upon occurrence of certain events of default as defined, including lapse of effectiveness of the registration statement for 10 or more consecutive business days or for 30 or more business days within a 365-day period, suspension of trading for 3 consecutive business days, delisting of the shares from the principal market on which they are traded, failure by the stock transfer agent to issue shares within 5 business days, or other material breaches, Fusion may terminate the stock purchase agreement. The Company may terminate the agreement at any time.

Subsequent to March 31, 2007 during the period to June 28, 2007, the Company sold 1,735,796 common shares to Fusion under the agreement for cash of $320,000.

Stock options

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, 2007 there were options outstanding on 3,636,666 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, 2007 there were options outstanding on 5,648,000 common shares pursuant to the 2005 Plan with options on 4,352,000 shares available for future grant under the 2005 Plan.

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, 2007 there were options outstanding on 1,750,000 common shares from grants outside the stock option plans.

During 2007, 973,000 [2006 - 7,190,000] options were granted at exercise prices ranging from $0.145 to $0.23 [2006 - $0.09 to $0.145] per share. The following table summarizes stock option transactions:

F-19

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

				Weighted average
	Shares			exercise price
	#			$
Outstanding March 31, 2004		4,141,665			0.80
Fiscal 2005
Granted		3,380,000			0.22
Canceled/expired		(835,000	)		1.87
Exercised		(30,000	)		0.16
Outstanding March 31, 2005		6,656,665			0.37
Exercisable at March 31, 2005		3,608,506			0.50
Fiscal 2006
Granted		7,190,000			0.37
Canceled/expired		(2,774,999	)		0.49
Outstanding March 31, 2006		11,071,666			0.19
Exercisable at March 31, 2006		5,405,199			0.23
Fiscal 2007
Granted		973,000			0.16
Canceled/expired		(1,010,000	)		0.31
Outstanding March 31, 2007		11,034,666			0.17
Exercisable at March 31, 2007		8,015,835			0.18
Weighted average fair value of options granted during the year					0.11

The following table summarizes the number of options exercisable at March 31, 2007 and the weighted average exercise prices and remaining contractual lives of the options.

Range of exercise prices	Number outstanding at March 31, 2007		Number exercisable at March 31, 2007		Weighted Average exercise price		Weighted average remaining contractual life		Weighted average Exercise price of options exercisable at March 31, 2007
$	#		#		$		Years		$
$0.09		1,500,000		1,125,000		0.09		3.6		0.09
$0.145-$0.16		7,044,166		4,842,495		0.15		2.7		0.15
$0.20-$0.28		1,763,000		1,320,840		0.22		2.3		0.22
$0.42-$0.55		727,500		727,500		0.50		0.4		0.50

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.

Subsequent to March 31, 2007 on May 15, 2007 the Company granted stock options with a contract life of four years to two employees on an aggregate of 100,000 shares of common stack vesting over a two year term exercisable at $0.185 per share and on June 6, 2007 the Company granted stock options with a contract life of four years to three directors on an aggregate of 750,000 shares of common stock vesting over a three year term exercisable at $0.18 per share.

F-20

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

Share warrants

A summary of warrant activity during the years ended March 31, 2005, 2006 and 2007 is presented below:

	Number			Average Purchase Price Per Share $
Shares purchasable under outstanding warrants at March 31, 2004		3,164,688			0.68
Stock purchase warrants issued		6,070,000			0.42
Stock purchase warrants exercised		(437,500	)		0.19
Stock purchase warrants expired		(1,712,333	)		0.60
Shares purchasable under outstanding warrants at March 31, 2005		7,084,855			0.48
Stock purchase warrants issued		9,375,000			0.10
Stock purchase warrants exercised		(1,475,000	)		0.08
Stock purchase warrants expired		(902,355	)		1.00
Shares purchasable under outstanding warrants at March 31, 2006		14,082,500			0.09
Stock purchase warrants issued		2,331,572			0.15
Stock purchase warrants exercised		(11,236,500	)		0.09
Shares purchasable under outstanding warrants at March 31, 2007		5,177,572			0.11

In February 2006, the Company issued 4,687,500 of A warrants exercisable at $0.10 per common share and 4,687,500 of B warrants exercisable at $0.09 per common share in connection with a restricted common stock sale of 18,750,000 shares for gross proceeds of $1,500,000.

In August and September 2006, as an inducement for early warrant exercise, the Company offered to holders of outstanding “A” and “B” Warrants (issued in connection with a common stock offering in February 2006) a new warrant exercisable for 25% of the shares issued exercisable at $.15 per share through August 31, 2009 (“New Warrant”). A total of 9,218,750 warrants were exercised for cash proceeds of $786,719 and debt reduction of $89,062 and the Company issued 2,304,692 New Warrants. Two officers exercised 500,000 warrants for cash of $47,500 and were granted 125,000 New Warrants on the same terms as other investors.

In August and September 2006, as an inducement for early warrant exercise of Series EE Warrants, the Company offered holders a New Warrant equal to 12% of the shares issued upon exercise. A total of 224,000 warrants were exercised for cash proceeds of $17,920 and the Company issued 26,880 New Warrants.

The Company recorded a non-cash other expense in the statement of operations for $230,709 representing the fair value of the 2,331,572 New Warrants issued as an inducement for early exercise. Fair value was determine using the Black-Scholes option pricing model assuming no expected dividends, 120% volatility, expected life of 3 years and a risk-free interest rate of 4.85%.

During the year ended March 31, 2007 a total of 1,793,750 other warrants were exercised for cash proceeds of $129,844 and debt reduction of $16,000. No inducement was granted in connection with these warrant exercises.

The Company has the following outstanding share warrants as of March 31, 2007, granted in connection with Series EE preferred stock and as an inducement for early exercise of warrants, respectively, entitling the holders to purchase one common share for each warrant held (subject to certain future antidilution price protection):

F-21

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

Number of			Exercise Price
Description	Common Shares		Per Share $		Expiration Date
Warrant		2,846,000		0.08		November 30, 2007
Warrant		2,331,572		0.15		August 31, 2009
Total		5,177,572

12. REDEEMABLE AND NON-REDEEMABLE PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of $0.001 par value preferred stock in one or more series from time to time by action of the Board of Directors.

The following is a summary of the terms of the preferred stock series outstanding during the fiscal years ended March 31, 2007 and 2006, respectively.

Preferred Series	Issuance Date	Aggregate Purchase Price	Number of Shares Authorized/Issued	Terms
12% Convertible Non-redeemable Series D stated value of $10 per share	December 2002	$2,050,000	205,000/205,000	Purchase price plus 12% accretion. Convertible at $0.08 per share subject to certain adjustments if the company issues shares less then $0.08 per share. Subject to automatic conversion on December 31, 2007.
8% Convertible Redeemable Series EE issued at $100 per share	November 2004	$1,850,000	20,000/18,500	Purchase price plus 8% accretion. Convertible at $0.25 for the first 90 days following original issuance date then lower of $0.25 and 85% of market, with a floor of $0.08 per share, as adjusted. Automatic conversion in November 2006.

On December 30, 2002, the Company issued 205,000 shares of 12% Series D non-redeemable convertible preferred stock (the "Series D Stock") with a stated value of $10 per share. The Series D stock was issued pursuant to a conversion agreement with respect to $2,050,000 of notes payable. The conversion price was reduced to $0.19 pursuant to anti-dilution protection given to the preferred stockholders triggered by the sale of $129,000 of shares of Common Stock in January 2003 and to $0.08 per share by the sale of $1,500,000 of common stock in February 2006. In connection with the repricing to $0.08, the Company recorded an additional deemed dividend of $1,522,400 to reflect the new beneficial conversion price. During the fiscal year ended March 31, 2007 a total of 5,000 shares of Series D Stock were converted into 907,123 shares of common stock. At March 31, 2007 a total of 91,000 shares of Series D Stock were outstanding convertible, subject to certain limitations, into 17,175,315 shares of common stock.

On November 30, 2004, the Company issued 18,500 shares of 8% Series EE Convertible Preferred Stock (the "Series EE Stock") at a per share price of $100 for an aggregate amount of $1,850,000. The Company also issued to the Investors, warrants to purchase 3,700,000 shares of common stock at $0.50 per share until November 30, 2007. The Company utilized the Black Scholes Method in valuing the warrants, and calculated the relative fair value of the Series EE Stock and warrants. The effective conversion price of the Series EE Stock was then determined by the Company based on the relative fair value of the stock. The beneficial conversion feature was calculated, based on EITF 98-5 as modified by EITF 00-27, as a “convertible instrument containing fixed terms that change”. Utilizing the calculated intrinsic value of the Series EE Stock, the Company calculated a beneficial conversion charge in the amount of $1,100,611, which was recorded in the loss attributed to common stockholders in the accompanying financial statements. As a result of a reset of the conversion price of the Series EE Stock in February 2006 to $0.08 per common share, the Company recorded an additional deemed dividend of $477,551 to reflect the new beneficial conversion price.

The Series EE Stock was subject to automatic conversion in November 2006 and no shares were outstanding at March 31, 2007. During the fiscal year ended March 31, 2007 a total of 2,500 shares of Series EE Stock were converted into 3,607,289 shares of common stock.

F-22

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

The following table summarizes values assigned as deemed dividends during the last three fiscal years for the value of warrants and the beneficial conversion feature on each series of preferred stock:

Preferred Series	Issuance Date		Number of Warrants		Warrant Exercise Price		Warrant Expiration Date		Value Assigned to Warrants		Value of Beneficial Conversion Discount
8% Series EE		November 2004		3,700,000	$	0.50		November 2007	$	389,364	$	1,100,611
8% Series EE⁽¹⁾		November 2004									$	477,551
12% Series D⁽¹⁾		December 2002									$	1,522,400

(1) Additional values for deemed dividends associated with a reset of the conversion price from $0.19 per common share to $0.08 per common share.

13. LITIGATION

In May 2006, the Company announced that a complaint had been filed against the Company 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 the 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 a 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. The Company recorded an impairment charge of $603,750 in March 2006 for deposits paid to Maycom due to the uncertainty of obtaining future delivery. 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 recognized $713,750 of revenue from this order and reversed an impairment charge of $603,750 in its third fiscal 2007 quarter.

The Company has answered the complaint. The case is currently in the discovery phase. In January 2007, the Court ruled on certain motions of the parties. In its ruling, the Court dismissed digEcor’s unjust enrichment, fraud, negligent misrepresentation, tortuous interference and punitive damage claims. The Court 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 e.Digital. digEcor’s contract and damages claims remain in dispute, and the Court provided some interpretation of the contracts at issue in its ruling. The foregoing and other findings of the Court may be subject to appeal by either party. digEcor has since amended its Complaint to assert an alternative breach of contract claim, and claims for federal, state and common law unfair competition, and digEcor seeks an injunction prohibiting the Company “from engaging in any competition with digEcor until after 2013.” In April 2007 digEcor filed a motion for summary judgment seeking enforcement of an alleged noncompete provision and an injunction prohibiting the Company from competing with digEcor, to which the Company responded in June 2007. The Company believes it has substantive and multiple defenses and intends to vigorously challenge the pending summary judgment motion and all remaining matters. Due to the uncertainties inherent in any litigation, however, there can be no assurance whether the Company will or will not prevail in its defense against digEcor’s remaining claims. 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 as an estimate of a deposit obligation related to the remaining general damage claim and the Company intends to seek restitution from Maycom for any damages it may incur but recovery from Maycom is not assured. Maycom is not involved in the design, tooling or production of the Company’s proprietary eVU mobile product. Moreover, the Company does not presently plan or expect to produce or sell digEplayer models to digEcor or other customers in the future.

In April 2007 the Company filed a second amended counterclaim in the United States District Court of Utah seeking a declaratory judgment confirming the status of prior agreements between the parties, alleging breach of e.Digital’s confidential information and trade secrets by digEcor, seeking an injunction against digEcor’s manufacture and sale of a portable product based on the Company’s technology, alleging breach of duty to negotiate regarding revenue sharing dollars the Company believes it has the right to receive and tortious interference by digEcor in the Company’s contracts with third parties. The Company intends to vigorously prosecute these counterclaims. There can be no assurance, however, that the Company will prevail on any of its counterclaims.

F-23

e.Digital Corporation

Notes to Consolidated Financial Statements

March 31, 2007

14. COMMITMENTS AND CONTINGENCIES

Commitment Related to 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 will be the Company’s exclusive 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.

Contract Manufacturers and Suppliers

The Company depends on contract manufacturers and suppliers to (i) allocate sufficient capacity to its manufacturing needs, (ii) produce acceptable quality products at agreed pricing and (iii) deliver on a timely basis. If a manufacturer is unable to satisfy these requirements, the Company's business, financial condition and operating results may be materially and adversely affected. Any failure in performance by either of these manufacturers for any reason could have a material adverse affect on the Company's business. Production and pricing by such manufacturers is subject to the risk of price fluctuations and periodic shortages of components. The Company does not have supply agreements with component suppliers and, accordingly, it is dependent on the future ability of its manufacturers to purchase components. Failure or delay by suppliers in supplying necessary components could adversely affect the Company's ability to deliver products on a timely and competitive basis in the future.

At March 31, 2007 the Company had outstanding unfilled purchase orders and was committed to a contract manufacturers and component suppliers for approximately $1.1 million 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 payment of $5,805 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, 2007 was $91,932 [2006 - $102,194] and [2005 - $111,480].

F-24

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

e.Digital Corporation

San Diego, CA

Our audits of the consolidated financial statements referred to in our report dated June 11, 2007 (included elsewhere in this Annual Report on Form 10-K) also included the financial statement schedules of e.Digital Corporation (the “Company”), listed in Item 15(a) of this Form 10-K. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits of the consolidated financial statements.

In our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Our report covering the basic financial statements indicates that there is substantial doubt as to the Company's ability to continue as a going concern, the outcome of which cannot presently be determined and that the financial statements do not include any adjustments, that might result from the outcome of this uncertainty.

SINGER LEWAK GREENBAUM & GOLDSTEIN, LLP

Santa Ana, California

June 11, 2007

F-25

e.Digital Corporation

Schedule II - Valuation and Qualifying Accounts

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Description	Balance at beginning of period	Charged to cost and expense	Deductions	Balance at end of period
Year ended March 31, 2007	—	—	—	—
Year ended March 31, 2006	—	—	—	—
Year ended March 31, 2005	$174,255	—	174,255	—

RESERVE FOR OBSOLESCENCE

Description	Balance at beginning of period	Charged to cost and expense	Deductions	Balance at end of period
Year ended March 31, 2007	—	—	—	—
Year ended March 31, 2006	—	—	—	—
Year ended March 31, 2005	$ 4,600	—	4,600	—

WARRANTY RESERVE

Description	Balance at beginning of period	Charged to cost and expense	Deductions	Balance at end of period
Year ended March 31, 2007	$15,789	$24,283	—	$40,072
Year ended March 31, 2006	$15,789	—	—	$15,789
Year ended March 31, 2005	$15,789	—	—	$15,789

F-26

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	12
ITEM 1B.	Unresolved Staff Comments	18
ITEM 2.	Properties	18
ITEM 3.	Legal Proceedings	18
ITEM 4.	Submission of Matters to a Vote of Security Holders	20

PART II

ITEM 5.	Market for Common Equity and Related Stockholder Matters	20
ITEM 6.	Selected Consolidated Financial Statements	21
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	30
ITEM 8.	Financial Statements and Supplementary Data	30
ITEM 9.	Changes In and Disagreement With Accountants on Accounting and Financial Disclosure	30
ITEM 9A.	Controls and Procedures	30
ITEM 9B.	Other Information	31

PART III

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

PART IV

ITEM 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	31

	Signatures	36

	Financial Statements and Financial Statement Schedules

Balance Sheet Data	2007			2006			2005			2004			2003
Total current assets	$	1,092		$	1,093		$	1,847		$	538		$	715
Total current liabilities		2,440			3,610			3,337			1,634			2,021
Total assets		1,757			1,156			1,973			696			895
Long-term debt, less current maturities		754			-			897			836			637
Series D preferred stock		910			960			1,150			1,450			2,050
Series E preferred stock		-			-			-			862			-
Series EE preferred stock		-			250			1,250			-			-
Stockholders’ deficit		(1,437	)		(2,454	)		(2,261	)		(1,774	)		(1,874	)

	2005		2006		2007		2005 to 2006 variance in $'s			2005 to 2006 variance in %'s			2006 to 2007 variance in $'s			2006 to 2007 variance in %'s
	(in thousands, except percentages)
Net revenue	$	4,252	$	3,250	$	1,815		($1,002	)		(24	%)		($1,435	)		(44	%)
Cost of goods sold	$	3,255	$	3,137	$	790		($118	)		(4	%)		($2,347	)		(75	%)

	2005			2006			2007			2005 to 2006 variance in $'s			2005 to 2006 variance in %'s			2006 to 2007 variance in $'s		2006 to 2007 variance in %'s
	(in thousands, except percentages)
Gross profit (loss)	$	997		$	114		$	1,025			($883	)		(89	%)	$	911		799	%
Gross margin		23	%		4	%		56	%					(19	%)				52	%

Fiscal year ended March 31, 2006
First quarter	$	0.22	$	0.15
Second quarter	$	0.16	$	0.10
Third quarter	$	0.11	$	0.07
Fourth quarter	$	0.17	$	0.07

Fiscal year ended March 31, 2007
First quarter	$	0.16	$	0.08
Second quarter	$	0.20	$	0.12
Third quarter	$	0.20	$	0.15
Fourth quarter	$	0.28	$	0.16

Statement of Operations Data	2007			2006			2005			2004			2003
Revenues	$	1,815		$	3,250		$	4,252		$	3,418		$	2,597
Gross profit (loss)		1,025			114			997			689			(900	)
Operating loss		(2,068	)		(2,541	)		(2,035	)		(2,328	)		(5,841	)
Loss for the year		(3,129	)		(3,107	)		(2,417	)		(2,516	)		(6,666	)
Loss attributable to common stockholders		(3,252	)		(5,268	)		(3,743	)		(3,468	)		(6,727	)
Basic earnings per common share (1)		($0.01	)		($0.03	)	$	(0.02	)	$	(0.02	)	$	(0.05	)
Weighted average number of common and
common equivalent shares outstanding		217,130			177,472			165,525			155,100			140,065

Fiscal year ending:
March 31, 2008	$	240,000
March 31, 2009	$	440,000
March 31, 2010	$	398,165

Cash Contractual Obligations by Period	Total		Less than 1 year		1 - 2 years		2 - 3 years		3 - 4 years		Over 4 years
18% Secured promissory note and interest	$	817,500	$	817,500	$	-	$	-	$	-	$	-
7.5% convertible term note		1,078,165		240,000		440,000		398,165		-		-
Purchase commitments ⁽¹⁾		1,103,356		1,103,356		-		-		-		-
Operating Lease ⁽²⁾		323,338		71,061		73,192		75,388		77,560		26,137
Total cash obligations	$	3,322,359	$	2,231,917	$	513,192	$	473,553	$	77,560	$	26,137

	6/30/2006			9/30/2006			12/31/2006			3/31/2007			FYE 2007
Revenues	$	21,105		$	13,017		$	1,302,312		$	478,580		$	1,815,014
Gross profit (loss)		4,493			419			939,544			80,785			1,025,241
Loss for the period		(1,123,576	)		(1,605,462	)		(156,433	)		(243,802	)		(3,129,273	)
Operating profit (loss)		(683,685	)		(878,706	)		226,003			(731,884	)		(2,068,272	)
Loss attributable to common		(1,157,284	)		(1,638,388	)		(185,746	)		(270,728	)		(3,252,146	)
Basic earnings per common share		($0.01	)		($0.01	)		($0.00	)		($0.00	)		($0.01	)
Weighted average shares outstanding		200,431,000			205,997,409			220,870,444			242,537,926			217,130,347

	6/30/2005			9/30/2005			12/31/2005			3/31/2006			FYE 2006
Revenues	$	998,209		$	1,990,139		$	114,696		$	147,447		$	3,250,491
Gross profit (loss)		170,692			411,881			9,146			(477,748	)		113,971
Loss for the period		(647,276	)		(382,625	)		(656,486	)		(1,420,294	)		(3,106,681	)
Operating loss		(529,873	)		(273,183	)		(514,594	)		(1,223,806	)		(2,541,456	)
Loss attributable to common		(690,376	)		(425,210	)		(699,072	)		(3,453,669	)		(5,268,327	)
Basic earnings per common share	$	-		$	-		$	-		$	(0.02	)	$	(0.03	)
Weighted average shares outstanding		175,208,630			175,260,786			175,260,876			184,440,251			177,472,037

Exhibit
Number		Description of Exhibit
2.6		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.

3.2		Bylaws of Norris Communications, Inc., 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.

3.4		Certificate of Designation of Preferences, Rights and Limitations of Series B Redeemable Convertible Preferred Stock filed with the State of Delaware on June 24, 1999 and filed as Exhibit 3.4 to the Company's Annual Report on Form 10-KSB dated March 31, 1999.

3.5		Certificate of Designation of Preferences, Rights and Limitations of Series C Redeemable Convertible Preferred Stock filed with the State of Delaware on October 4, 2000 and filed as Exhibit 3.5 to the Company’s Form S-3, dated November 3, 2000.

3.6		Certificate of Designation of Preferences, Rights and Limitations of Series D preferred stock filed with the State of Delaware on December 23, 2002 and filed as Exhibit 3.6 to the Company’s Current Report on Form 8-K dated December 30, 2002.

3.7		Certificate of Designation of Preferences, Rights and Limitations of Series E preferred stock filed with the State of Delaware on November 19, 2003 and filed as Exhibit 3.7 to the Company’s Current Report on Form 8-K dated November 21, 2003

3.8		Certificate of Designation of Preferences, Rights and Limitations of Series E preferred stock filed with the State of Delaware on November 19, 2003 and filed as Exhibit 3.7 to the Company’s Current Report on Form 8-K dated November 21, 2003.

3.9		Certificate of Designation of Preferences, Rights and Limitations of Series EE preferred stock filed with the State of Delaware on November 19, 2004 and filed as Exhibit 3.7 to the Company’s Current Report on Form 8-K dated November 19, 2004.

4.3		Form of Stock Purchase Warrant (Series EE Warrants) exercisable until November 2006 issued to seventeen accredited investors for an aggregate of 4,070,000 common shares (individual warrants differ only as to holder and number of shares) and filed as Exhibit 4.55 to the Company’s Current Report on Form 8-K dated November 19, 2004.

4.4		Convertible Preferred Stock Purchase Agreement between the Company and the Series EE preferred stockholders dated as of November 18, 2004 and filed as Exhibit 4.53 to the Company’s Current Report on Form 8-K dated November 19, 2004.

4.5		Registration Rights Agreement between the Company and the Series EE preferred stockholders dated as of November 18, 2004 and filed as Exhibit 4.54 to the Company’s Current Report on Form 8-K dated November 19, 2004.

4.6		Form of 12% Subordinated Promissory Note and Warrant Purchase Agreement entered into with certain accredited investors in a maximum aggregate amount of $1,000,000 and filed as Exhibit 4.50 to the Company’s 2004 Form 10-K.

4.6.1		Form of First Amendment to 12% Subordinated Promissory Note dated as of June 30, 2005 between the company and certain accredited investors (individual amendments differ only as to name of Payee) filed as Exhibit 4.51.1 to Form 8-K dated July 13, 2005.

4.6.2		Form of Second Amendment to 12% Subordinated Promissory Note dated as of October 25, 2005 between the company and certain accredited investors (individual amendments differ only as to name of Payee) filed as Exhibit 4.50.2 to Form 8-K dated November 8, 2005.

4.6.3		Form of Amendment to 12% Subordinated Promissory Note and Warrant Purchase Agreement dated as of October 25, 2005 between the company and certain accredited investors (individual amendments differ only as to name of Purchaser) filed as Exhibit 4.50.1 to Form 8-K dated November 8, 2005.

4.7		Form of Stock Purchase Warrant exercisable until June 30, 2007 issued to certain accredited investors for up to an aggregate of 2,000,000 common shares (individual warrants differ only as to holder and number of shares) and filed as Exhibit 4.52 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004.

4.7.1		Form of First Amendment to Stock Purchase Warrant dated as of June 30, 2005 between the company and certain accredited investors (individual amendments differ only as to name of Holder) filed as Exhibit 4.51.2 to Form 8-K dated July 13, 2005.

4.8		Form of Restricted Common Stock Purchase Agreement, dated February 24, 2006 between the Company and certain accredited investors for purchase of 18,750,000 common shares (individual agreements differ only as to number of shares) and filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 27, 2006.

4.9		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.

4.10		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.

4.11		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

4.12		15% Unsecured Promissory Note due February 11, 2002 in the amount of $750,000 entered into with Davric Corporation and filed as Exhibit 4.40 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

4.12.1		First Amendment to 15% Promissory Note due February 11, 2002 filed as Exhibit 4.40.1 to the Company’s form 8-k dated December 30, 2002.

4.12.2		Second Amendment to 15% Promissory Note between the Company and Davric Corporation effective as of January 14, 2004 filed as Exhibit 4.40.2 to Form 8-K dated July 26, 2006.

4.12.3		Third Amendment to 15% Promissory Note between the company and Davric Corporation effective as of January 31, 2005 filed as Exhibit 4.40.3 to Form 8-K dated July 26, 2006.

4.12.4		Fourth Amendment to 15% Promissory Note between the company and Davric Corporation effective as of June 30, 2006 filed as Exhibit 4.40.4 to Form 8-K dated July 26, 2006.

4.12.5		Promissory Note between the company and Davric Corporation in the principal amount of $150,000 effective as of January 31, 2005 filed as Exhibit 4.40.5 to Form 8-K dated July 26, 2006.

4.12.6		Promissory Note between the company and Davric Corporation in the principal amount of $290,164.36 effective as of June 30, 2006 filed as Exhibit 4.40.6 to Form 8-K dated July 26, 2006.

4.12.7		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.

4.12.8		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.

4.13		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.

4.14		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.

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

10.4		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.

10.5		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. *

10.6.2		Form of Nonstatutory Stock Option Agreement under the 2005 Equity-Based Compensation Plan. *

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.*

10.7.2		Special Stock Option Grant Notice and Stock Option Agreement for William A. Blakeley dated March 30, 2006.*

21.1		List of subsidiaries. *

23		Consents of Experts and Counsel

23.1		Singer Lewak Greenbaum & Goldstein, LLP *

31		Certifications *

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 William Blakeley, Chief 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 William Blakeley, Chief Executive Officer and Robert Putnam, Principal Accounting Officer.


	e.Digital Corporation

	By:	/s/ WILLIAM BLAKELEY
		President and Chief Technical Officer

Name	Position	Date

/s/ WILLIAM BLAKELEY	President and Chief Technical Officer	June 29, 2007
William Blakeley	(Principal Executive Officer)

/s/ ALEX DIAZ	Chairman of the Board and Director	June 29, 2007
Alex Diaz

/s/ ROBERT PUTNAM	Senior Vice President and Director	June 29, 2007
Robert Putnam	Interim Chief Accounting Officer and Secretary (Principal Financial and Accounting Officer)

/s/ ALLEN COCUMELLI	Director	June 29, 2007
Allen Cocumelli

/s/ RENEE WARDEN	Director	June 29, 2007
Renee Warden