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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT
     Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

             January 8, 2007 (January 2, 2007) Date of Report (Date
                           of earliest event reported)
                              E.DIGITAL CORPORATION
               (Exact name of registrant as specified in charter)

                                    Delaware
                 (State or other jurisdiction of incorporation)

                                     0-20734
                            (Commission File Number)

                                   33-0591385
                        (IRS Employer Identification No.)

                            16770 West Bernardo Drive
                           San Diego, California 92127
                    (Address of principal executive offices)

                                 (858) 304-3016
              (Registrant's telephone number, including area code)




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Item 1.01.Entry into a Material Definitive Agreement.

      On January 2, 2007, we entered into a common stock purchase agreement (the
"Purchase Agreement") with Fusion Capital Fund II, LLC, an Illinois limited
liability company ("Fusion Capital"). Pursuant to the Purchase Agreement, we
have sold to Fusion Capital $250,000 of our common stock at a purchase price of
$0.12 per share and we have agreed to sell to Fusion Capital $250,000 of our
common stock at a purchase price of $0.12 per share on the date that a
registration statement related to the transaction is filed with the SEC. Subject
to earlier termination at our discretion, we may sell an additional $8.0 million
of our common stock to Fusion Capital from time to time over a 25-month period
after the SEC has declared effective the registration statement related to the
transaction. We agreed to issue to Fusion Capital 200,000 shares of our common
stock as an expense reimbursement and 3,500,000 shares of our common stock as a
commitment fee for entering into the Purchase Agreement.

      Concurrently with entering into the Purchase Agreement, we entered into a
registration rights agreement with Fusion Capital (the "Registration Rights
Agreement"). Under the Registration Rights Agreement, we agreed to file a
registration statement with the SEC covering the shares that have been issued or
may be issued to Fusion Capital under the Purchase Agreement. After the SEC has
declared effective the registration statement, generally we have the right but
not the obligation from time to time to sell our shares to Fusion Capital in
amounts between $80,000 and $1 million depending on certain conditions. We have
the right to control the timing and amount of any sales of our shares to Fusion
Capital. The purchase price of the shares will be determined based upon the
market price, as defined in the Purchase Agreement, of our shares without any
fixed discount. Fusion Capital shall not have the right or the obligation to
purchase any shares of our common stock on any business day that the price of
our common stock is below $0.08. The agreement may be terminated by us at any
time at our discretion without any additional cost to us.

      The issuance of the 2,083,333 shares of common stock for the cash of
$250,000, the issuance of the 200,000 expense reimbursment shares and the
3,500,000 commitment shares and the additional 2,083,333 shares issuable for
cash of $250,000 at the registration statement date are issued or issuable as
exempt under section 4(2) of the Securities Act of 1933, as amended.

      The foregoing description of the Purchase Agreement and the Registration
Rights Agreement are qualified in their entirety by reference to the full text
of the Purchase Agreement and Registration Rights Agreement, a copy of each of
which is attached hereto as Exhibit 10.1 and 10.2, respectively, and each of
which is incorporated herein in its entirety by reference.

Item 3.02. Unregistered Sales of Equity Securities.

      The information contained above in Item 1.01 is hereby incorporated by
reference into this Item 3.02.

      At September 30, 2006 the Company had $1,300,000 of convertible 12%
Subordinated Promissory Notes due December 31, 2006, as amended ("Subordinated
Notes") outstanding. As reported on Form 8-K filed December 12, 2006, $600,000
was converted into 7,500,000 shares of common stock. On or before December 29,
2006, the balance of $700,000 was converted by three holders and the Company has
issued 8,750,000 shares of common stock. At December 29, 2006 all convertible
12% Subordinated Promissory Notes due December 31, 2006 had been converted and
are no longer an obligation of the Company. A legend was placed on each of the
stock certificates that were issued except for shares meeting the requirements
of SEC Rule 144(k).

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

10.1  Common Stock Purchase Agreement, dated as of January 2, 2007, by and
      between e.Digital Corporation and Fusion Capital Fund II, LLC.

10.2  Registration Rights Agreement, dated as of January 2, 2007, by and between
      e.Digital corporation and Fusion Capital Fund II, LLC.

99.1  Press Release dated January 8, 2007.



                                   SIGNATURES

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



                                       E.DIGITAL CORPORATION

                                       By:  /s/ Robert Putnam
                                            --------------------------------
Date: January 8, 2007                      Robert Putnam, Senior Vice
                                           President and Secretary (Interim
                                           Principal Financial Officer and
                                           duly authorized to sign on behalf
                                           of the Registrant)


                                                                  Execution Copy
                         COMMON STOCK PURCHASE AGREEMENT

      COMMON STOCK PURCHASE AGREEMENT (the "Agreement"),  dated as of January 2,
2007  by  and  between  e.Digital  Corporation,   a  Delaware  corporation  (the
"Company"),  and Fusion  Capital  Fund II, LLC, an  Illinois  limited  liability
company (the "Buyer").  Capitalized  terms used herein and not otherwise defined
herein are defined in Section 10 hereof.

                                    WHEREAS:

      Subject  to the terms and  conditions  set  forth in this  Agreement,  the
Company  wishes  to sell to the  Buyer,  and the  Buyer  wishes  to buy from the
Company,  up to Eight Million Five Hundred Thousand Dollars  ($8,500,000.00)  of
the Company's common stock, par value $0.001 per share (the "Common Stock"). The
shares of Common Stock to be purchased hereunder are referred to herein
as the "Purchase Shares."

      NOW THEREFORE, the Company and the Buyer hereby agree as follows:

      1.    PURCHASE OF COMMON STOCK.

      Subject  to the terms and  conditions  set  forth in this  Agreement,  the
Company has the right to sell to the Buyer,  and the Buyer has the obligation to
purchase from the Company, Purchase Shares as follows:

      (a) Initial Purchases;  Commencement of Base and Block Purchases of Common
Stock.  Within one Business Day after the  execution of this  Agreement and also
again on the Filing Date (as defined in Section  4(a)  hereof),  the Buyer shall
buy from the  Company on each such date  2,083,333  Purchase  Shares  (each such
purchase an "Initial  Purchase" and such Purchase  Shares are referred to herein
as "Initial  Purchase  Shares")  for a total  purchase  price Two Hundred  Fifty
Thousand Dollars  ($250,000.00)  or $0.12 per share.  The two Initial  Purchases
hereunder shall be Five Hundred Thousand Dollars  ($500,000.00) in aggregate and
the Buyer shall receive  4,166,666  shares in the aggregate  relating to the two
Initial  Purchases.  The Initial Purchase Shares shall be issued in certificated
form and  (subject to Section 5 hereof)  shall bear the  restrictive  legend set
forth in Section  4(e)  hereof.  Thereafter,  the  purchase and sale of Purchase
Shares  hereunder  shall  occur  from time to time upon  written  notices by the
Company to the Buyer on the terms and  conditions as set forth herein  following
the satisfaction of the conditions (the "Commencement") as set forth in Sections
6 and 7 below (the date of satisfaction of such  conditions,  the  "Commencement
Date").

      (b) The  Company's  Right to Require  Purchases.  Any time on or after the
Commencement  Date,  the Company shall have the right but not the  obligation to
direct the Buyer by its delivery to the Buyer of Base Purchase Notices from time
to time to buy Purchase  Shares (each such  purchase a "Base  Purchase")  in any
amount up to Eighty Thousand Dollars  ($80,000.00) per Base Purchase Notice (the
"Base Purchase  Amount") at the Purchase Price on the Purchase Date. The Company
may deliver multiple Base Purchase Notices to the Buyer so long as at least Four
(4) Business Days have passed since the most recent Base Purchase was completed.
Notwithstanding  the forgoing,  any time on or after the Commencement  Date, the
Company shall also have the right but not the  obligation by its delivery to the
Buyer of Block  Purchase  Notices  from time to time to direct  the Buyer to buy
Purchase Shares (each such purchase a "Block  Purchase") in any amount up to One
Million Dollars  ($1,000,000.00) per Block Purchase Notice at the Block Purchase
Price on the Purchase Date as provided herein. For a Block Purchase Notice to be


valid the following  conditions must be met: (1) the Block Purchase Amount shall
not exceed One Hundred Thousand Dollars ($100,000.00) per Block Purchase Notice,
(2) the Company must deliver the Purchase Shares before 11:00 a.m.  eastern time
on the  Purchase  Date and (3) the Sale  Price of the  Common  Stock must not be
below  $0.10   (subject  to  equitable   adjustment   for  any   reorganization,
recapitalization,  non-cash dividend,  stock split or other similar transaction)
during the Purchase Date, the date of the delivery of the Block Purchase  Notice
and during the Business Day prior to the delivery of the Block Purchase  Notice.
The Block  Purchase  Amount may be increased to up to Two Hundred Fifty Thousand
Dollars  ($250,000.00) per Block Purchase Notice if the Sale Price of the Common
Stock  is  not  below  $0.20   (subject   to   equitable   adjustment   for  any
reorganization,  recapitalization,  non-cash  dividend,  stock  split  or  other
similar  transaction)  during the Purchase Date, the date of the delivery of the
Block  Purchase  Notice and during the Business Day prior to the delivery of the
Block Purchase Notice.  The Block Purchase Amount may be increased to up to Five
Hundred  Thousand  Dollars  ($500,000.00)  per Block Purchase Notice if the Sale
Price of the Common Stock is not below $0.40  (subject to  equitable  adjustment
for any  reorganization,  recapitalization,  non-cash  dividend,  stock split or
other similar transaction) during the Purchase Date, the date of the delivery of
the Block  Purchase  Notice and during the Business Day prior to the delivery of
the Block Purchase  Notice.  The Block Purchase Amount may be increased to up to
One Million Dollars  ($1,000,000.00) per Block Purchase Notice if the Sale Price
of the Common Stock is not below $0.80 (subject to equitable  adjustment for any
reorganization,  recapitalization,  non-cash  dividend,  stock  split  or  other
similar  transaction)  during the Purchase Date, the date of the delivery of the
Block  Purchase  Notice and during the Business Day prior to the delivery of the
Block Purchase  Notice.  As used herein,  the term "Block  Purchase Price" shall
mean the lesser of (i) the lowest Sale Price of the Common Stock on the Purchase
Date or (ii) the lowest  Purchase  Price during the  previous ten (10)  Business
Days prior to the date that the valid Block Purchase  Notice was received by the
Buyer.  However,  if at any  time  during  the  Purchase  Date,  the date of the
delivery of the Block  Purchase  Notice or during the  Business Day prior to the
delivery of the Block  Purchase  Notice,  the Sale Price of the Common  Stock is
below the applicable Block Purchase  threshold price,  such Block Purchase shall
be void and the Buyer's  obligations  to buy Purchase  Shares in respect of that
Block Purchase Notice shall be terminated.  Thereafter,  the Company shall again
have the right to submit a Block Purchase Notice as set forth herein by delivery
of a new Block  Purchase  Notice  only if the Sale Price of the Common  Stock is
above the  applicable  Block  Purchase  threshold  price  during the date of the
delivery of the Block  Purchase  Notice and during the Business Day prior to the
delivery of the Block Purchase  Notice.  The Company may deliver  multiple Block
Purchase  Notices to the Buyer so long as at least three (3) Business  Days have
passed since the most recent Block Purchase was completed.

      (c) Payment  for  Purchase  Shares.  The Buyer shall pay to the Company an
amount equal to the Purchase Amount with respect to such Purchase Shares as full
payment for such  Purchase  Shares via wire  transfer of  immediately  available
funds on the same Business Day that the Buyer  receives such Purchase  Shares if
they are received by the Buyer before 11:00 a.m.  eastern time or if received by
the Buyer after 11:00 a.m.  eastern  time,  the next  Business  Day. The Company
shall not issue any  fraction of a share of Common Stock upon any  purchase.  If
the  issuance  would  result in the  issuance of a fraction of a share of Common
Stock,  the Company  shall round such  fraction of a share of Common Stock up or
down to the nearest whole share. All payments made under this Agreement shall be
made in  lawful  money of the  United  States of  America  or wire  transfer  of
immediately available funds to such account as the Company may from time to time
designate by written notice in accordance with the provisions of this Agreement.
Whenever any amount expressed to be due by the terms of this Agreement is due on
any day that is not a Business  Day,  the same shall  instead be due on the next
succeeding day that is a Business Day.

                                      -2-

      (d) Purchase  Price Floor.  The Company and the Buyer shall not effect any
sales under this Agreement on any Purchase Date where the Purchase Price for any
purchases of Purchase  Shares would be less than the Floor Price.  "Floor Price"
means  $0.08,  which shall be  appropriately  adjusted  for any  reorganization,
recapitalization, non-cash dividend, stock split or other similar transaction.

      (e) Records of  Purchases.  The Buyer and the Company  shall each maintain
records  showing the remaining  Available  Amount at any give time and the dates
and  Purchase  Amounts  for each  purchase  or  shall  use  such  other  method,
reasonably satisfactory to the Buyer and the Company.

(f) Taxes.  The Company shall pay any and all  transfer,  stamp or similar taxes
that may be payable  with  respect to the issuance and delivery of any shares of
Common Stock to the Buyer made under this Agreement.

      2.    BUYER'S REPRESENTATIONS AND WARRANTIES.

      The Buyer  represents  and  warrants  to the  Company  that as of the date
hereof and as of the Commencement Date:

      (a)  Investment  Purpose.  The Buyer is entering  into this  Agreement and
acquiring  the  Commitment  Shares,  (as defined in Section 4(e)  hereof)  (this
Agreement,  the  Purchase  Shares and the  Commitment  Shares  are  collectively
referred to herein as the "Securities"), for its own account for investment only
and not with a view towards,  or for resale in connection  with, the public sale
or distribution thereof; provided however, by making the representations herein,
the Buyer does not agree to hold any of the  Securities for any minimum or other
specific term.

      (b) Accredited  Investor Status. The Buyer is an "accredited  investor" as
that term is defined in Rule 501(a)(3) of Regulation D.

      (c) Reliance on Exemptions.  The Buyer understands that the Securities are
being  offered  and  sold to it in  reliance  on  specific  exemptions  from the
registration requirements of United States federal and state securities laws and
that the  Company  is relying  in part upon the truth and  accuracy  of, and the
Buyer's   compliance   with,  the   representations,   warranties,   agreements,
acknowledgments  and  understandings  of the Buyer set forth  herein in order to
determine the  availability  of such exemptions and the eligibility of the Buyer
to acquire the Securities.

      (d) Information.  The Buyer has been furnished with all materials relating
to the business,  finances and operations of the Company and materials  relating
to the offer and sale of the Securities that have been  reasonably  requested by
the Buyer,  including,  without  limitation,  the SEC  Documents  (as defined in
Section  3(f)  hereof).  The  Buyer  understands  that  its  investment  in  the
Securities  involves  a high  degree of risk.  The Buyer (i) is able to bear the
economic risk of an investment in the  Securities  including a total loss,  (ii)
has such knowledge and  experience in financial and business  matters that it is
capable of  evaluating  the merits and risks of the proposed  investment  in the
Securities  and (iii) has had an  opportunity  to ask  questions  of and receive
answers from the officers of the Company concerning the financial  condition and
business of the  Company  and others  matters  related to an  investment  in the
Securities.  Neither such  inquiries nor any other due diligence  investigations
conducted by the Buyer or its representatives  shall modify, amend or affect the
Buyer's right to rely on the Company's  representations and warranties contained
in Section 3 below. The Buyer has sought such  accounting,  legal and tax advice
as it has  considered  necessary to make an informed  investment  decision  with
respect to its acquisition of the Securities.

                                      -3-

      (e) No Governmental  Review.  The Buyer  understands that no United States
federal  or state  agency or any other  government  or  governmental  agency has
passed on or made any  recommendation  or  endorsement  of the Securities or the
fairness  or  suitability  of the  investment  in the  Securities  nor have such
authorities  passed  upon  or  endorsed  the  merits  of  the  offering  of  the
Securities.

      (f) Transfer or Sale. The Buyer understands that except as provided in the
Registration  Rights  Agreement  (as defined in Section  4(a)  hereof):  (i) the
Securities have not been and are not being  registered under the 1933 Act or any
state  securities  laws,  and may not be offered  for sale,  sold,  assigned  or
transferred  unless (A) subsequently  registered  thereunder or (B) an exemption
exists  permitting such Securities to be sold,  assigned or transferred  without
such registration;  (ii) any sale of the Securities made in reliance on Rule 144
may be made only in accordance  with the terms of Rule 144 and further,  if Rule
144 is not applicable, any resale of the Securities under circumstances in which
the seller (or the person  through whom the sale is made) may be deemed to be an
underwriter  (as that term is  defined in the 1933 Act) may  require  compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder;  and (iii) neither the Company nor any other person is under any
obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption thereunder.

      (g)  Validity;  Enforcement.  This  Agreement  has been  duly and  validly
authorized,  executed  and  delivered  on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable  against the Buyer in accordance with
its terms,  subject as to enforceability to general  principles of equity and to
applicable bankruptcy, insolvency,  reorganization,  moratorium, liquidation and
other  similar laws  relating to, or affecting  generally,  the  enforcement  of
applicable creditors' rights and remedies.

      (h) Residency. The Buyer is a resident of the State of Illinois.

      (i) No Prior  Short  Selling.  The Buyer  represents  and  warrants to the
Company  that at no time  prior  to the  date of this  Agreement  has any of the
Buyer, its agents,  representatives or affiliates engaged in or effected, in any
manner whatsoever, directly or indirectly, any (i) "short sale" (as such term is
defined in Section  242.200 of Regulation SHO of the Securities  Exchange Act of
1934,  as  amended  (the  "1934  Act"))  of the  Common  Stock  or (ii)  hedging
transaction,  which  establishes a net short position with respect to the Common
Stock.


      3.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      The  Company  represents  and  warrants  to the Buyer  that as of the date
hereof and as of the Commencement Date:

      (a) Organization  and  Qualification.  The Company and its  "Subsidiaries"
(which for  purposes of this  Agreement  means any entity in which the  Company,
directly or indirectly, owns 50% or more of the voting stock or capital stock or
other similar  equity  interests)  are  corporations  duly organized and validly
existing in good standing under the laws of the  jurisdiction  in which they are
incorporated,  and have the requisite corporate power and authority to own their
properties  and to carry on their business as now being  conducted.  Each of the
Company and its  Subsidiaries  is duly qualified as a foreign  corporation to do
business and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business  conducted by it makes such qualification
necessary,  except to the extent  that the failure to be so  qualified  or be in
good  standing  could not  reasonably  be  expected  to have a Material  Adverse
Effect. As used in this Agreement,  "Material Adverse Effect" means any material
adverse  effect on any of: (i) the  business,  properties,  assets,  operations,
results  of   operations   or  financial   condition  of  the  Company  and  its
Subsidiaries,  if any, taken as a whole, or (ii) the authority or ability of the
Company to perform its obligations  under the Transaction  Documents (as defined
in Section 3(b) hereof).  The Company has no Subsidiaries except as set forth on
Schedule 3(a).

                                      -4-

      (b)  Authorization;   Enforcement;  Validity.  (i)  The  Company  has  the
requisite   corporate  power  and  authority  to  enter  into  and  perform  its
obligations under this Agreement,  the Registration Rights Agreement and each of
the other agreements  entered into by the parties on the  Commencement  Date and
attached hereto as exhibits to this Agreement  (collectively,  the  "Transaction
Documents"), and to issue the Securities in accordance with the terms hereof and
thereof,  (ii) the  execution and delivery of the  Transaction  Documents by the
Company and the consummation by it of the transactions  contemplated  hereby and
thereby, including without limitation, the issuance of the Commitment Shares and
the  reservation  for issuance and the issuance of the Purchase  Shares issuable
under  this  Agreement,  have been duly  authorized  by the  Company's  Board of
Directors and no further  consent or  authorization  is required by the Company,
its Board of Directors or its  shareholders,  (iii) this Agreement has been, and
each other Transaction Document shall be on the Commencement Date, duly executed
and delivered by the Company and (iv) this Agreement constitutes, and each other
Transaction  Document  upon  its  execution  on  behalf  of the  Company,  shall
constitute, the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may be
limited by general  principles of equity or applicable  bankruptcy,  insolvency,
reorganization,   moratorium,  liquidation  or  similar  laws  relating  to,  or
affecting  generally,  the  enforcement of creditors'  rights and remedies.  The
Board of Directors of the Company has approved  the  resolutions  (the  "Signing
Resolutions")  substantially  in the form as set forth as Exhibit  C-1  attached
hereto to authorize this Agreement and the transactions contemplated hereby. The
Signing  Resolutions  are  valid,  in full  force and  effect  and have not been
modified or  supplemented in any respect other than by the resolutions set forth
in Exhibit C-2 attached hereto regarding the registration  statement referred to
in Section 4 hereof.  The Company has  delivered to the Buyer a true and correct
copy of a unanimous written consent adopting the Signing Resolutions executed by
all of the members of the Board of Directors of the Company.  No other approvals
or consents of the Company's Board of Directors and/or shareholders is necessary
under  applicable  laws and the Company's  Certificate of  Incorporation  and/or
Bylaws to authorize the  execution and delivery of this  Agreement or any of the
transactions contemplated hereby, including, but not limited to, the issuance of
the Commitment Shares and the issuance of the Purchase Shares.

      (c) Capitalization. As of the date hereof, the authorized capital stock of
the Company  consists of (i) 300,000,000  shares of Common Stock, of which as of
the date hereof, 235,275,662 shares are issued and outstanding, none are held as
treasury  shares,  13,636,666  shares are reserved for issuance  pursuant to the
Company's stock option plans of which only approximately 1,910,000 shares remain
available for future  grants and 8,570,109  shares are issuable and reserved for
issuance pursuant to securities (other than stock options issued pursuant to the
Company's stock option plans and  convertible  preferred  stock)  exercisable or
exchangeable  for, or convertible  into, shares of Common Stock and (ii) 250,000
shares of Series D  Preferred  Stock,  $0.001  par value with a $14.80 per share
liquidation preference,  of which as of the date hereof 91,000 shares are issued
and  outstanding  and no  other  Preferred  Stock  is  outstanding.  All of such
outstanding  shares have been, or upon issuance will be,  validly issued and are
fully paid and  nonassessable.  Except as  disclosed  in Schedule  3(c),  (i) no
shares of the Company's  capital  stock are subject to preemptive  rights or any
other similar rights or any liens or  encumbrances  suffered or permitted by the
Company,  (ii) there are no  outstanding  debt  securities,  (iii)  there are no
outstanding  options,   warrants,  scrip,  rights  to  subscribe  to,  calls  or
commitments  of any  character  whatsoever  relating to, or securities or rights
convertible  into,  any  shares of  capital  stock of the  Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the  Company  or  any of  its  Subsidiaries  is or may  become  bound  to  issue
additional  shares of capital stock of the Company or any of its Subsidiaries or
options,  warrants,  scrip,  rights to subscribe to, calls or commitments of any

                                      -5-

character  whatsoever relating to, or securities or rights convertible into, any
shares of capital  stock of the Company or any of its  Subsidiaries,  (iv) there
are  no  agreements  or  arrangements  under  which  the  Company  or any of its
Subsidiaries is obligated to register the sale of any of their  securities under
the 1933 Act  (except  the  Registration  Rights  Agreement),  (v)  there are no
outstanding  securities or instruments of the Company or any of its Subsidiaries
which contain any redemption or similar provisions,  and there are no contracts,
commitments,  understandings  or arrangements by which the Company or any of its
Subsidiaries  is or may become  bound to redeem a security of the Company or any
of its  Subsidiaries,  (vi) there are no  securities or  instruments  containing
anti-dilution  or similar  provisions  that will be triggered by the issuance of
the  Securities  as described in this  Agreement  and (vii) the Company does not
have any stock appreciation rights or "phantom stock" plans or agreements or any
similar  plan or  agreement.  The  Company has  furnished  to the Buyer true and
correct copies of the Company's Certificate of Incorporation,  as amended and as
in effect on the date  hereof  (the  "Certificate  of  Incorporation"),  and the
Company's  By-laws,  as  amended  and as in  effect  on  the  date  hereof  (the
"By-laws"),  and summaries of the terms of all  securities  convertible  into or
exercisable for Common Stock, if any, and copies of any documents containing the
material rights of the holders thereof in respect thereto.

      (d)  Issuance  of  Securities.   The  Commitment  Shares  have  been  duly
authorized  and,  upon  issuance  in  accordance  with  the  terms  hereof,  the
Commitment Shares shall be (i) validly issued, fully paid and non-assessable and
(ii) free from all taxes,  liens and charges with respect to the issue  thereof.
19,166,666  shares of Common  Stock have been duly  authorized  and reserved for
issuance upon purchase under this Agreement.  Upon issuance and payment therefor
in  accordance  with the terms and  conditions of this  Agreement,  the Purchase
Shares shall be validly issued,  fully paid and  nonassessable and free from all
taxes,  liens and charges  with respect to the issue  thereof,  with the holders
being entitled to all rights accorded to a holder of Common Stock.

      (e) No Conflicts.  Except as disclosed in Schedule  3(e),  the  execution,
delivery and  performance  of the  Transaction  Documents by the Company and the
consummation by the Company of the transactions  contemplated hereby and thereby
(including, without limitation, the reservation for issuance and issuance of the
Purchase  Shares)  will not (i)  result in a  violation  of the  Certificate  of
Incorporation,  any Certificate of  Designations,  Preferences and Rights of any
outstanding  series of  preferred  stock of the  Company or the  By-laws or (ii)
conflict  with,  or constitute a default (or an event which with notice or lapse
of time or both would become a default)  under,  or give to others any rights of
termination,   amendment,   acceleration  or  cancellation  of,  any  agreement,
indenture or  instrument  to which the Company or any of its  Subsidiaries  is a
party, or result in a violation of any law, rule, regulation, order, judgment or
decree  (including  federal and state  securities  laws and  regulations and the
rules and regulations of the Principal  Market  applicable to the Company or any
of its  Subsidiaries) or by which any property or asset of the Company or any of
its  Subsidiaries  is  bound  or  affected,  except  in the  case of  conflicts,
defaults, terminations, amendments, accelerations,  cancellations and violations
under  clause  (ii),  which  could not  reasonably  be  expected  to result in a
Material  Adverse  Effect.  Except as  disclosed in Schedule  3(e),  neither the
Company nor its  Subsidiaries is in violation of any term of or in default under

                                      -6-

its Certificate of  Incorporation,  any Certificate of Designation,  Preferences
and  Rights of any  outstanding  series of  preferred  stock of the  Company  or
By-laws or their  organizational  charter or  by-laws,  respectively.  Except as
disclosed in Schedule 3(e),  neither the Company nor any of its  Subsidiaries is
in  violation  of any term of or is in  default  under  any  material  contract,
agreement, mortgage,  indebtedness,  indenture,  instrument, judgment, decree or
order or any  statute,  rule or  regulation  applicable  to the  Company  or its
Subsidiaries,   except  for  possible  conflicts,   defaults,   terminations  or
amendments  which could not  reasonably  be expected to have a Material  Adverse
Effect. The business of the Company and its Subsidiaries is not being conducted,
and shall not be conducted,  in violation of any law,  ordinance,  regulation of
any governmental entity, except for possible violations, the sanctions for which
either individually or in the aggregate could not reasonably be expected to have
a Material Adverse Effect. Except as specifically contemplated by this Agreement
and as required  under the 1933 Act or applicable  state  securities  laws,  the
Company is not  required to obtain any  consent,  authorization  or order of, or
make any filing or registration  with, any court or  governmental  agency or any
regulatory  or  self-regulatory  agency in order for it to  execute,  deliver or
perform  any  of its  obligations  under  or  contemplated  by  the  Transaction
Documents in accordance with the terms hereof or thereof. Except as disclosed in
Schedule 3(e), all consents,  authorizations,  orders, filings and registrations
which the Company is required to obtain pursuant to the preceding sentence shall
be obtained or effected on or prior to the Commencement  Date.  Except as listed
in Schedule  3(e),  since  January 1, 2006,  the Company  has not  received  nor
delivered any notices or  correspondence  from or to the Principal  Market.  The
Principal  Market  has not  commenced  any  delisting  proceedings  against  the
Company.

      (f) SEC Documents;  Financial Statements.  Except as disclosed in Schedule
3(f),  since  January  1,  2006,  the  Company  has  timely  filed all  reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC  pursuant  to the  reporting  requirements  of the  1934 Act (all of the
foregoing filed prior to the date hereof and all exhibits  included  therein and
financial  statements  and  schedules  thereto  and  documents  incorporated  by
reference therein being hereinafter  referred to as the "SEC Documents").  As of
their  respective  dates (except as they have been correctly  amended),  the SEC
Documents  complied in all material  respects with the  requirements of the 1934
Act and the rules and regulations of the SEC promulgated  thereunder  applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC  (except as they may have been  properly  amended),  contained  any
untrue statement of a material fact or omitted to state a material fact required
to be stated  therein or necessary in order to make the statements  therein,  in
light of the  circumstances  under which they were made, not  misleading.  As of
their  respective  dates  (except  as they  have  been  properly  amended),  the
financial statements of the Company included in the SEC Documents complied as to
form in all material  respects with applicable  accounting  requirements and the
published rules and regulations of the SEC with respect thereto.  Such financial
statements have been prepared in accordance with generally  accepted  accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto or (ii)
in the case of  unaudited  interim  statements,  to the extent  they may exclude
footnotes or may be condensed or summary  statements)  and fairly present in all
material respects the financial  position of the Company as of the dates thereof
and the  results of its  operations  and cash flows for the  periods  then ended
(subject,  in the  case  of  unaudited  statements,  to  normal  year-end  audit
adjustments).  Except as listed in Schedule  3(f),  the Company has  received no
notices or  correspondence  from the SEC since January 1, 2006.  The SEC has not
commenced  any  enforcement  proceedings  against  the  Company  or  any  of its
subsidiaries.

      (g) Absence of Certain  Changes.  Except as  disclosed  in Schedule  3(g),
since  September  30,  2006,  there has been no material  adverse  change in the
business, properties,  operations,  financial condition or results of operations
of the Company or its  Subsidiaries.  The  Company has not taken any steps,  and
does not currently expect to take any steps, to seek protection  pursuant to any
Bankruptcy  Law  nor  does  the  Company  or any of its  Subsidiaries  have  any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy or insolvency proceedings.  The Company is financially solvent and is
generally able to pay its debts as they become due.

                                      -7-

      (h) Absence of Litigation.  There is no action, suit, proceeding,  inquiry
or  investigation  before or by any  court,  public  board,  government  agency,
self-regulatory organization or body pending or, to the knowledge of the Company
or any of its  Subsidiaries,  threatened  against or affecting the Company,  the
Common Stock or any of the Company's Subsidiaries or any of the Company's or the
Company's Subsidiaries' officers or directors in their capacities as such, which
could reasonably be expected to have a Material Adverse Effect. A description of
each action, suit, proceeding,  inquiry or investigation before or by any court,
public board, government agency,  self-regulatory organization or body which, as
of the date of this  Agreement,  is pending or threatened in writing  against or
affecting the Company, the Common Stock or any of the Company's  Subsidiaries or
any of the  Company's or the  Company's  Subsidiaries'  officers or directors in
their capacities as such, is set forth in Schedule 3(h).

      (i) Acknowledgment  Regarding Buyer's Status. The Company acknowledges and
agrees that the Buyer is acting solely in the capacity of arm's length purchaser
with respect to the  Transaction  Documents  and the  transactions  contemplated
hereby and  thereby.  The  Company  further  acknowledges  that the Buyer is not
acting as a  financial  advisor or  fiduciary  of the Company (or in any similar
capacity)  with  respect  to the  Transaction  Documents  and  the  transactions
contemplated  hereby and thereby and any advice given by the Buyer or any of its
representatives  or agents in connection with the Transaction  Documents and the
transactions contemplated hereby and thereby is merely incidental to the Buyer's
purchase of the Securities. The Company further represents to the Buyer that the
Company's decision to enter into the Transaction Documents has been based solely
on the  independent  evaluation  by the  Company  and  its  representatives  and
advisors.

      (j)  No  General  Solicitation.  Neither  the  Company,  nor  any  of  its
affiliates,  nor any person  acting on its or their  behalf,  has engaged in any
form of general  solicitation  or general  advertising  (within  the  meaning of
Regulation  D under  the 1933 Act) in  connection  with the offer or sale of the
Securities.

       (k) Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all material trademarks, trade names,
service  marks,  service mark  registrations,  service  names,  patents,  patent
rights,    copyrights,    inventions,    licenses,    approvals,    governmental
authorizations,  trade secrets and rights  necessary to conduct their respective
businesses as now conducted.  Except as set forth on Schedule 3(k),  none of the
Company's  material  trademarks,   trade  names,  service  marks,  service  mark
registrations,  service names, patents, patent rights,  copyrights,  inventions,
licenses,   approvals,   government  authorizations,   trade  secrets  or  other
intellectual  property  rights have expired or terminated,  or, by the terms and
conditions thereof,  could expire or terminate within two years from the date of
this  Agreement.  The Company and its  Subsidiaries do not have any knowledge of
any infringement by the Company or its  Subsidiaries of any material  trademark,
trade name rights, patents,  patent rights,  copyrights,  inventions,  licenses,
service names, service marks, service mark registrations,  trade secret or other
similar  rights of others,  or of any such  development  of similar or identical
trade  secrets or technical  information  by others and,  except as set forth on
Schedule  3(k),  there is no claim,  action or proceeding  being made or brought
against, or to the Company's knowledge, being threatened against, the Company or
its  Subsidiaries  regarding  trademark,  trade name,  patents,  patent  rights,
invention,  copyright,  license,  service  names,  service  marks,  service mark
registrations,  trade secret or other  infringement,  which could  reasonably be
expected to have a Material Adverse Effect.

      (l)  Environmental  Laws.  The  Company  and its  Subsidiaries  (i) are in
compliance with any and all applicable  foreign,  federal,  state and local laws
and  regulations  relating to the  protection  of human  health and safety,  the
environment  or  hazardous  or  toxic   substances  or  wastes,   pollutants  or
contaminants ("Environmental Laws"), (ii) have received all permits, licenses or
other approvals required of them under applicable  Environmental Laws to conduct
their  respective  businesses  and  (iii) are in  compliance  with all terms and
conditions of any such permit, license or approval, except where, in each of the
three  foregoing  clauses,  the  failure to so comply  could not  reasonably  be
expected to have, individually or in the aggregate, a Material Adverse Effect.

                                      -8-

      (m) Title. The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal
property  owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and defects
except  such as are  described  in  Schedule  3(m) or such as do not  materially
affect the value of such  property  and do not  interfere  with the use made and
proposed to be made of such property by the Company and any of its Subsidiaries.
Any real property and facilities  held under lease by the Company and any of its
Subsidiaries  are held by them under valid,  subsisting and  enforceable  leases
with such  exceptions as are not material and do not interfere with the use made
and proposed to be made of such  property  and  buildings by the Company and its
Subsidiaries.

      (n)  Insurance.  The Company and each of its  Subsidiaries  are insured by
insurers of recognized  financial  responsibility  against such losses and risks
and in such  amounts as  management  of the  Company  believes to be prudent and
customary  in the  businesses  in which the  Company  and its  Subsidiaries  are
engaged.  Neither  the  Company  nor any such  Subsidiary  has been  refused any
insurance  coverage  sought or applied  for and neither the Company nor any such
Subsidiary  has any  reason  to  believe  that it will not be able to renew  its
existing  insurance  coverage  as and when such  coverage  expires  or to obtain
similar  coverage  from  similar  insurers as may be  necessary  to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise,  or the earnings,  business or operations of the Company
and its Subsidiaries, taken as a whole.

      (o)  Regulatory  Permits.  The  Company and its  Subsidiaries  possess all
material  certificates,  authorizations  and permits  issued by the  appropriate
federal,  state or foreign  regulatory  authorities  necessary to conduct  their
respective  businesses,  and neither the  Company  nor any such  Subsidiary  has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.

      (p) Tax Status. The Company and each of its Subsidiaries has made or filed
all federal and state income and all other  material  tax  returns,  reports and
declarations  required by any  jurisdiction  to which it is subject  (unless and
only to the extent that the Company and each of its  Subsidiaries  has set aside
on its books  provisions  reasonably  adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental  assessments and
charges  that are  material  in amount,  shown or  determined  to be due on such
returns,  reports and  declarations,  except those being contested in good faith
and has set aside on its books provision  reasonably adequate for the payment of
all taxes for periods  subsequent to the periods to which such returns,  reports
or declarations  apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any  jurisdiction,  and the officers of the
Company know of no basis for any such claim.

      (q) Transactions With Affiliates. Except as set forth on Schedule 3(q) and
other than the grant or exercise of stock  options  disclosed on Schedule  3(c),
none of the  officers,  directors,  or  employees  of the Company is presently a
party to any transaction with the Company or any of its Subsidiaries (other than
for services as  employees,  officers and  directors),  including  any contract,
agreement or other  arrangement  providing for the  furnishing of services to or
by,  providing for rental of real or personal  property to or from, or otherwise
requiring payments to or from any officer,  director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any  officer,  director,  or any such  employee  has an  interest or is an
officer, director, trustee or partner.

                                      -9-

      (r)  Application  of  Takeover  Protections.  The Company and its board of
directors have taken or will take prior to the  Commencement  Date all necessary
action, if any, in order to render  inapplicable any control share  acquisition,
business  combination,  poison pill (including any  distribution  under a rights
agreement) or other similar  anti-takeover  provision  under the  Certificate of
Incorporation  or the laws of the state of its  incorporation  which is or could
become  applicable to the Buyer as a result of the transactions  contemplated by
this Agreement,  including,  without  limitation,  the Company's issuance of the
Securities and the Buyer's ownership of the Securities.

      (s)  Foreign  Corrupt  Practices.  Neither  the  Company,  nor  any of its
Subsidiaries,  nor any director, officer, agent, employee or other person acting
on behalf of the  Company or any of its  Subsidiaries  has, in the course of its
actions  for, or on behalf of, the  Company,  used any  corporate  funds for any
unlawful contribution,  gift,  entertainment or other unlawful expenses relating
to  political  activity;  made any direct or  indirect  unlawful  payment to any
foreign or  domestic  government  official  or employee  from  corporate  funds;
violated  or is in  violation  of any  provision  of the  U.S.  Foreign  Corrupt
Practices Act of 1977, as amended; or made any unlawful bribe,  rebate,  payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.


      4.    COVENANTS.

      (a) Filing of Form 8-K and Registration Statement. The Company agrees that
it shall,  within the time required under the 1934 Act file a Report on Form 8-K
disclosing this Agreement and the transaction  contemplated  hereby. The Company
shall also file within ten (10) Business Days (the "Filing  Date") from the date
hereof a new  registration  statement  covering only the sale of the  Commitment
Shares,  the Signing Shares and 19,166,666  Purchase  Shares (which includes the
4,166,666  Initial  Purchase  Shares)  in  accordance  with  the  terms  of  the
Registration Rights Agreement between the Company and the Buyer, dated as of the
date hereof ("Registration Rights Agreement"). After such registration statement
is declared  effective by the SEC, the Company agrees and acknowledges  that any
sales by the Company to the Buyer  pursuant to this  Agreement  are sales of the
Company's  equity  securities in a transaction that is registered under the 1933
Act.

      (b) Blue Sky. The Company shall take such action, if any, as is reasonably
necessary in order to obtain an exemption for or to qualify (i) the initial sale
of the  Commitment  Shares  and any  Purchase  Shares  to the Buyer  under  this
Agreement and (ii) any subsequent sale of the Commitment  Shares or any Purchase
Shares by the Buyer,  in each case,  under  applicable  securities or "Blue Sky"
laws of the  states  of the  United  States  in  such  states  as is  reasonably
requested by the Buyer from time to time, and shall provide evidence of any such
action so taken to the Buyer.

      (c) Listing.  The Company shall promptly  secure the listing of all of the
Purchase  Shares,  the Signing Shares and  Commitment  Shares upon each national
securities exchange and automated quotation system, if any, upon which shares of
Common Stock are then listed  (subject to official notice of issuance) and shall
maintain,  so long as any other shares of Common Stock shall be so listed,  such
listing of all such securities from time to time issuable under the terms of the
Transaction   Documents.   The  Company  shall   maintain  the  Common   Stock's
authorization for quotation on the Principal Market. Neither the Company nor any
of its Subsidiaries  shall take any action that would be reasonably  expected to
result in the  delisting  or  suspension  of the Common  Stock on the  Principal
Market.  The Company  shall  promptly,  and in no event later than the following
Business  Day,  provide to the Buyer copies of any notices it receives  from the
Principal  Market  regarding the continued  eligibility  of the Common Stock for
listing on such automated quotation system or securities  exchange.  The Company
shall pay all fees and expenses in connection  with  satisfying its  obligations
under this Section.

                                      -10-

      (d) Limitation on Short Sales and Hedging  Transactions.  The Buyer agrees
that  beginning  on the  date  of  this  Agreement  and  ending  on the  date of
termination of this  Agreement as provided in Section  11(k),  the Buyer and its
agents,  representatives and affiliates shall not in any manner whatsoever enter
into or effect,  directly or  indirectly,  any (i) "short sale" (as such term is
defined in  Section  242.200  of  Regulation  SHO of the 1934 Act) of the Common
Stock or (ii) hedging  transaction,  which establishes a net short position with
respect to the Common Stock.

      (e)  Issuance of  Commitment  Shares;  Limitation  on Sales of  Commitment
Shares.  Immediately  upon the  execution of this  Agreement,  the Company shall
issue to the Buyer as  consideration  for the Buyer entering into this Agreement
3,500,000  shares of Common Stock (the "  Commitment  Shares").  The  Commitment
Shares and the Initial Purchase Shares shall be issued in certificated  form and
(subject to Section 5 hereof) shall bear the following restrictive legend:

      THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE  HAVE NOT BEEN REGISTERED
      UNDER  THE  SECURITIES  ACT OF  1933,  AS  AMENDED,  OR  APPLICABLE  STATE
      SECURITIES  LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
      NOT BE OFFERED FOR SALE,  SOLD,  TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
      AN  EFFECTIVE   REGISTRATION   STATEMENT  FOR  THE  SECURITIES  UNDER  THE
      SECURITIES ACT OF 1933, AS AMENDED,  OR APPLICABLE  STATE SECURITIES LAWS,
      UNLESS SOLD PURSUANT TO: (1) RULE 144 UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED,  OR (2) AN OPINION OF HOLDER'S COUNSEL, IN A CUSTOMARY FORM, THAT
      REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES
      LAWS.

        The  Buyer  agrees  that  the  Buyer  shall  not  transfer  or sell  the
Commitment  Shares  until  the  earlier  of (a) 500  Business  Days (25  Monthly
Periods)  from the date hereof or (b) the date on which this  Agreement has been
terminated,  provided,  however,  that such restrictions shall not apply: (i) in
connection  with any  transfers to or among  affiliates  (as defined in the 1934
Act),  (ii) in connection with any pledge in connection with a bona fide loan or
margin account,  (iii) in the event that the  Commencement  does not occur on or
before May 1, 2007,  due to the failure of the Company to satisfy the conditions
set forth in Section 7 or (iv) if an Event of Default has occurred, or any event
which,  after  notice  and/or  lapse of time,  would become an Event of Default,
including any failure by the Company to timely issue Purchase  Shares under this
Agreement.  Notwithstanding  the  forgoing,  the Buyer may  transfer  Commitment
Shares to a third  party in order to  settle a sale made by the Buyer  where the
Buyer  reasonably  expects the Company to deliver  Purchase  Shares to the Buyer
under  this  Agreement  so long as the  Buyer  maintains  ownership  of the same
overall number of shares of Common Stock by "replacing" the Commitment Shares so
transferred with Purchase Shares when the Purchase Shares are actually issued by
the Company to the Buyer.

      (g) Due  Diligence.  The Buyer shall have the right,  from time to time as
the Buyer may reasonably deem appropriate,  to perform  reasonable due diligence
on the Company during normal  business  hours.  The Company and its officers and
employees shall provide  information and reasonably  cooperate with the Buyer in
connection  with any reasonable  request by the Buyer related to the Buyer's due
diligence of the Company,  including,  but not limited to, any such request made
by the Buyer in  connection  with (i) the filing of the  registration  statement
described  in Section 4(a) hereof and (ii) the  Commencement.  Each party hereto
agrees not to disclose any  Confidential  Information  of the other party to any
third party and shall not use the Confidential Information for any purpose other
than in connection  with, or in furtherance  of, the  transactions  contemplated
hereby. Each party hereto  acknowledges that the Confidential  Information shall
remain the  property of the  disclosing  party and agrees that it shall take all
reasonable  measures  to protect  the  secrecy of any  Confidential  Information
disclosed by the other party.

                                      -11-


      5.    TRANSFER AGENT INSTRUCTIONS.

      Immediately  upon the  execution  of this  Agreement,  the  Company  shall
deliver  to the  Transfer  Agent a letter in the form as set forth as  Exhibit E
attached  hereto with respect to the issuance of the Commitment  Shares.  On the
Commencement  Date,  the  Company  shall  cause  any  restrictive  legend on the
Commitment  Shares, the Initial Purchase Shares and the 200,000 shares of Common
Stock issued to the Buyer upon signing that certain Term Sheet between the Buyer
and the Company and dated as of December 19, 2006 (the  "Signing  Shares") to be
removed  and all of the  remaining  Purchase  Shares  to be  issued  under  this
Agreement  shall be issued  without  any  restrictive  legend  unless  the Buyer
expressly consents otherwise.  The Company shall issue irrevocable  instructions
to the Transfer  Agent,  and any subsequent  transfer  agent,  to issue Purchase
Shares  in the name of the  Buyer  for the  Purchase  Shares  (the  "Irrevocable
Transfer  Agent  Instructions").  The  Company  warrants  to the  Buyer  that no
instruction  other than the Irrevocable  Transfer Agent  Instructions  expressly
referred to in this Agreement will be given by the Company to the Transfer Agent
with  respect to the  Purchase  Shares and that the  Commitment  Shares  Signing
Shares and the Purchase  Shares shall  otherwise be freely  transferable  on the
books and records of the Company as and to the extent provided in this Agreement
and the Registration  Rights Agreement subject to the provisions of Section 4(e)
in the case of the Commitment Shares.


      6.    CONDITIONS  TO THE  COMPANY'S  RIGHT TO COMMENCE  SALES OF SHARES OF
            COMMON STOCK UNDER THIS AGREEMENT.

      The right of the  Company  hereunder  to  commence  sales of the  Purchase
Shares is subject to the satisfaction of each of the following  conditions on or
before the Commencement Date (the date that the Company may begin sales):

      (a)   The Buyer shall have executed each of the Transaction  Documents and
            delivered the same to the Company;

      (b)   A registration  statement covering the sale of all of the Commitment
            Shares,  Signing Shares and Purchase Shares shall have been declared
            effective  under  the  1933  Act by the SEC and no stop  order  with
            respect to the registration statement shall be pending or threatened
            by the SEC.


      7.    CONDITIONS TO THE BUYER'S  OBLIGATION TO MAKE PURCHASES OF SHARES OF
            COMMON STOCK.

      The obligation of the Buyer to buy Purchase Shares under this Agreement is
subject to the satisfaction of each of the following conditions on or before the
Commencement  Date (the date that the  Company  may begin  sales)  and once such
conditions  have  been  initially  satisfied,  there  shall  not be any  ongoing
obligation to satisfy such conditions after the Commencement has occurred:

      (a) The Company shall have executed each of the Transaction  Documents and
delivered the same to the Buyer;

                                      -12-

      (b) The Company shall have issued to the Buyer the  Commitment  Shares and
shall  have  removed  the  restrictive  transfer  legend  from  the  certificate
representing the Commitment  Shares, the Initial Purchase Shares and the Signing
Shares;

      (c) The Common Stock shall be  authorized  for  quotation on the Principal
Market, trading in the Common Stock shall not have been within the last 365 days
suspended by the SEC or the  Principal  Market and the  Purchase  Shares and the
Commitment Shares shall be approved for listing upon the Principal Market;

      (d) The Buyer shall have  received  the  opinions of the  Company's  legal
counsel dated as of the Commencement Date substantially in the form of Exhibit A
attached hereto;

      (e) The  representations  and  warranties of the Company shall be true and
correct  in all  material  respects  (except  to the  extent  that  any of  such
representations and warranties is already qualified as to materiality in Section
3 above, in which case, such  representations  and warranties  shall be true and
correct  without further  qualification)  as of the date when made and as of the
Commencement  Date as though made at that time (except for  representations  and
warranties  that  speak  as of a  specific  date)  and the  Company  shall  have
performed, satisfied and complied with the covenants,  agreements and conditions
required by the  Transaction  Documents to be  performed,  satisfied or complied
with by the Company at or prior to the  Commencement  Date. The Buyer shall have
received a  certificate,  executed by the CEO,  President or CFO of the Company,
dated as of the Commencement  Date, to the foregoing effect in the form attached
hereto as Exhibit B;

      (f) The Board of Directors of the Company  shall have adopted  resolutions
in the form attached hereto as Exhibit C which shall be in full force and effect
without any amendment or supplement thereto as of the Commencement Date;

      (g) As of the  Commencement  Date,  the Company shall have reserved out of
its  authorized and unissued  Common Stock,  solely for the purpose of effecting
purchases  of  Purchase  Shares  hereunder,  19,166,666  shares of Common  Stock
including the Initial Purchase Shares;

      (h) The Irrevocable Transfer Agent Instructions, in form acceptable to the
Buyer shall have been  delivered to and  acknowledged  in writing by the Company
and the Company's Transfer Agent;

      (i) The Company shall have delivered to the Buyer a certificate evidencing
the  incorporation  and good  standing  of the  Company in the State of Delaware
issued by the  Secretary  of State of the State of  Delaware as of a date within
ten (10)  Business  Days of the  Commencement  Date and the  Company  shall have
delivered to the Buyer a certificate  evidencing good standing of the Company in
the  State of  California  issued  by the  Secretary  of  State of the  State of
California as of a date within ten (10) Business Days of the Commencement Date;

      (j) The Company shall have  delivered to the Buyer a certified copy of the
Certificate of Incorporation as certified by the Secretary of State of the State
of Delaware within ten (10) Business Days of the Commencement Date;

      (k)  The  Company  shall  have   delivered  to  the  Buyer  a  secretary's
certificate  executed  by  the  Secretary  of  the  Company,  dated  as  of  the
Commencement Date, in the form attached hereto as Exhibit D;

                                      -13-

      (l) A  registration  statement  covering the sale of all of the Commitment
Shares,  the  Signing  Shares  and  Purchase  Shares  shall  have been  declared
effective  under the 1933 Act by the SEC and no stop order  with  respect to the
registration  statement  shall be pending or  threatened by the SEC. The Company
shall have  prepared and  delivered  to the Buyer a final and  complete  form of
prospectus,  dated and current as of the  Commencement  Date,  to be used by the
Buyer in connection with any sales of any Commitment  Shares, the Signing Shares
or any  Purchase  Shares,  and to be filed by the Company one Business Day after
the  Commencement  Date.  The  Company  shall  have made all  filings  under all
applicable  federal  and state  securities  laws  necessary  to  consummate  the
issuance of the Commitment  Shares,  the Signing Shares and the Purchase  Shares
pursuant to this Agreement in compliance with such laws;

      (m) No Event of Default has  occurred,  or any event  which,  after notice
and/or lapse of time, would become an Event of Default has occurred;

      (n) On or prior to the  Commencement  Date,  the  Company  shall  take all
necessary action, if any, and such actions as reasonably requested by the Buyer,
in  order  to  render  inapplicable  any  control  share  acquisition,  business
combination,  shareholder rights plan or poison pill (including any distribution
under a rights  agreement) or other similar  anti-takeover  provision  under the
Certificate of Incorporation or the laws of the state of its incorporation which
is or could  become  applicable  to the  Buyer as a result  of the  transactions
contemplated by this Agreement,  including,  without  limitation,  the Company's
issuance of the Securities and the Buyer's ownership of the Securities; and

      (o) The  Company  shall  have  provided  the  Buyer  with the  information
requested by the Buyer in connection with its due diligence  requests made prior
to, or in connection  with, the  Commencement,  in accordance  with the terms of
Section 4(g) hereof.


      8.    INDEMNIFICATION.

      In consideration of the Buyer's  execution and delivery of the Transaction
Documents and acquiring the  Securities  hereunder and in addition to all of the
Company's other obligations under the Transaction  Documents,  the Company shall
defend,  protect,  indemnify  and  hold  harmless  the  Buyer  and  all  of  its
affiliates,  shareholders, officers, directors, employees and direct or indirect
investors  and any of the  foregoing  person's  agents or other  representatives
(including,   without   limitation,   those  retained  in  connection  with  the
transactions contemplated by this Agreement)  (collectively,  the "Indemnitees")
from and against any and all actions,  causes of action, suits, claims,  losses,
costs,  penalties,  fees,  liabilities  and damages,  and expenses in connection
therewith  (irrespective of whether any such Indemnitee is a party to the action
for  which  indemnification  hereunder  is  sought),  and  including  reasonable
attorneys' fees and disbursements (the "Indemnified  Liabilities"),  incurred by
any  Indemnitee  as a result  of,  or  arising  out of, or  relating  to (a) any
misrepresentation  or  breach  of any  representation  or  warranty  made by the
Company in the  Transaction  Documents or any other  certificate,  instrument or
document  contemplated  hereby  or  thereby,  (b) any  breach  of any  covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby, or
(c) any cause of action,  suit or claim brought or made against such  Indemnitee
and arising out of or resulting  from the  execution,  delivery,  performance or
enforcement of the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby,  other than with respect to Indemnified
Liabilities  which  directly and primarily  result from the gross  negligence or
willful  misconduct  of  the  Indemnitee.  To  the  extent  that  the  foregoing
undertaking  by the Company  may be  unenforceable  for any reason,  the Company
shall make the maximum  contribution to the payment and  satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law.

                                      -14-

      9.    EVENTS OF DEFAULT.

      An "Event of Default"  shall be deemed to have occurred at any time as any
of the following events occurs:

      (a)  while  any  registration  statement  is  required  to  be  maintained
effective  pursuant  to the  terms of the  Registration  Rights  Agreement,  the
effectiveness of such registration  statement lapses for any reason  (including,
without limitation, the issuance of a stop order) or is unavailable to the Buyer
for sale of all of the  Registrable  Securities (as defined in the  Registration
Rights  Agreement)  in  accordance  with the  terms of the  Registration  Rights
Agreement,  and such lapse or unavailability  continues for a period of ten (10)
consecutive  Business Days or for more than an aggregate of thirty (30) Business
Days in any 365-day period;

      (b) the  suspension  from  trading or  failure  of the Common  Stock to be
listed on the Principal  Market for a period of three (3)  consecutive  Business
Days;

      (c) the delisting of the Company's Common Stock from the Principal Market,
provided,  however, that the Common Stock is not immediately  thereafter trading
on the New York Stock  Exchange,  the Nasdaq Global  Market,  the Nasdaq Capital
Market, or the American Stock Exchange;

      (d) the failure  for any reason by the  Transfer  Agent to issue  Purchase
Shares to the Buyer within five (5) Business Days after the applicable  Purchase
Date which the Buyer is entitled to receive;

      (e) the Company breaches any representation,  warranty,  covenant or other
term or  condition  under any  Transaction  Document if such breach could have a
Material Adverse Effect and except,  in the case of a breach of a covenant which
is reasonably  curable,  only if such breach  continues for a period of at least
five (5) Business Days;

      (f) if any Person  commences a proceeding  against the Company pursuant to
or within the meaning of any Bankruptcy Law ;

      (g) if the Company  pursuant  to or within the  meaning of any  Bankruptcy
Law; (A) commences a voluntary  case,  (B) consents to the entry of an order for
relief against it in an involuntary  case, (C) consents to the  appointment of a
Custodian of it or for all or  substantially  all of its  property,  (D) makes a
general assignment for the benefit of its creditors,  (E) becomes insolvent,  or
(F) is generally unable to pay its debts as the same become due;

      (h) a court of competent  jurisdiction enters an order or decree under any
Bankruptcy  Law that (A) is for relief  against  the  Company in an  involuntary
case, (B) appoints a Custodian of the Company or for all or substantially all of
its property, or (C) orders the liquidation of the Company or any Subsidiary; or

      (i) a material  adverse  change in the business,  properties,  operations,
financial condition or results of operations of the Company and its Subsidiaries
taken as a whole.

                                      -15-

In addition  to any other  rights and  remedies  under  applicable  law and this
Agreement, including the Buyer termination rights under Section 11(k) hereof, so
long as an Event of Default  has  occurred  and is  continuing,  or if any event
which, after notice and/or lapse of time, would become an Event of Default,  has
occurred  and is  continuing,  or so long as the  Purchase  Price is  below  the
Purchase Price Floor, the Buyer shall not be obligated to purchase any shares of
Common Stock under this  Agreement.  If pursuant to or within the meaning of any
Bankruptcy Law, the Company commences a voluntary case or any Person commences a
proceeding  against the Company, a Custodian is appointed for the Company or for
all or  substantially  all of its  property,  or the  Company  makes  a  general
assignment for the benefit of its creditors,  (any of which would be an Event of
Default as described  in Sections  9(f),  9(g) and 9(h)  hereof) this  Agreement
shall  automatically  terminate  without any liability or payment to the Company
without  further  action or notice by any Person.  No such  termination  of this
Agreement  under  Section  11(k)(i)  shall  affect the  Company's or the Buyer's
obligations  under this  Agreement  with  respect to pending  purchases  and the
Company and the Buyer shall complete their  respective  obligations with respect
to any pending purchases under this Agreement.


      10.   CERTAIN DEFINED TERMS.

      For  purposes  of this  Agreement,  the  following  terms  shall  have the
following meanings:

      (a) "1933 Act" means the Securities Act of 1933, as amended.

      (b) "Available Amount" means initially Eight Million Five Hundred Thousand
Dollars  ($8,500,000)  in the  aggregate  which  amount  shall be reduced by the
Purchase Amount each time the Buyer purchases shares of Common Stock pursuant to
Section 1 hereof.

      (c) "Bankruptcy  Law" means Title 11, U.S. Code, or any similar federal or
state law for the relief of debtors.

      (d) "Base Purchase  Notice" shall mean an irrevocable  written notice from
the  Company  to the Buyer  directing  the Buyer to buy up to the Base  Purchase
Amount in Purchase  Shares as specified by the Company therein at the applicable
Purchase Price on the Purchase Date.

      (e) "Block  Purchase  Amount"  shall mean such  Block  Purchase  Amount as
specified  by the Company in a Block  Purchase  Notice  subject to Section  1(b)
hereof.

      (f) "Block Purchase Notice" shall mean an irrevocable  written notice from
the Company to the Buyer directing the Buyer to buy the Block Purchase Amount in
Purchase  Shares as specified by the Company therein at the Block Purchase Price
as of the Purchase Date subject to Section 1 hereof.

                                      -16-

      (d) "Business Day" means any day on which the Principal Market is open for
trading  including any day on which the Principal Market is open for trading for
a period of time less than the customary time.

      (e) "Closing Sale Price" means,  for any security as of any date, the last
closing trade price for such security on the Principal Market as reported by the
Principal  Market,  or, if the Principal Market is not the principal  securities
exchange or trading  market for such  security,  the last closing trade price of
such security on the principal  securities exchange or trading market where such
security is listed or traded as reported by the Principal Market.

      (f) "Confidential  Information" means any information  disclosed by either
party to the other party, either directly or indirectly,  in writing,  orally or
by inspection of tangible objects  (including,  without  limitation,  documents,
prototypes,   samples,   plant   and   equipment),   which  is   designated   as
"Confidential,"   "Proprietary"   or  some  similar   designation.   Information
communicated  orally  shall  be  considered  Confidential  Information  if  such
information is confirmed in writing as being Confidential Information within ten
(10) business days after the initial  disclosure.  Confidential  Information may
also  include  information  disclosed to a  disclosing  party by third  parties.
Confidential  Information shall not, however,  include any information which (i)
was publicly  known and made  generally  available in the public domain prior to
the time of disclosure by the disclosing  party; (ii) becomes publicly known and
made  generally  available  after  disclosure  by the  disclosing  party  to the
receiving party through no action or inaction of the receiving  party;  (iii) is
already in the  possession of the  receiving  party at the time of disclosure by
the  disclosing  party as shown  by the  receiving  party's  files  and  records
immediately  prior to the time of disclosure;  (iv) is obtained by the receiving
party from a third party without a breach of such third party's  obligations  of
confidentiality;  (v) is independently  developed by the receiving party without
use of or reference to the disclosing party's Confidential Information, as shown
by documents and other competent  evidence in the receiving party's  possession;
or (vi) is required by law to be disclosed by the receiving party, provided that
the receiving  party gives the  disclosing  party prompt  written notice of such
requirement  prior to such  disclosure  and  assistance  in  obtaining  an order
protecting the information from public disclosure.

      (g)  "Custodian"  means any  receiver,  trustee,  assignee,  liquidator or
similar official under any Bankruptcy Law.

      (h)  "Maturity  Date" means the date that is 500 Business Days (25 Monthly
Periods) from the Commencement Date.

      (i)  "Monthly  Period"  means  each  successive  20  Business  Day  period
commencing with the Commencement Date.

      (j) "Person" means an individual or entity including any limited liability
company,  a  partnership,   a  joint  venture,   a  corporation,   a  trust,  an
unincorporated  organization  and a  government  or  any  department  or  agency
thereof.

      (k)  "Principal  Market"  means the Nasdaq OTC  Bulletin  Board;  provided
however,  that in the event the Company's  Common Stock is ever listed or traded
on the Nasdaq  Global  Market,  the Nasdaq  Capital  Market,  the New York Stock
Exchange or the American Stock Exchange,  than the "Principal Market" shall mean
such other market or exchange on which the Company's Common Stock is then listed
or traded.

      (l) "Purchase Amount" means, with respect to any particular  purchase made
hereunder,  the portion of the  Available  Amount to be  purchased  by the Buyer
pursuant to Section 1 hereof as set forth in a valid Base  Purchase  Notice or a
valid Block Purchase Notice which the Company delivers to the Buyer.

      (m)  "Purchase  Date" means with respect to any  particular  purchase made
hereunder,  the Business Day after receipt by the Buyer of a valid Base Purchase
Notice or a valid Block Purchase Notice that the Buyer is to buy Purchase Shares
pursuant to Section 1 hereof.

      (n)  "Purchase  Price" means the lower of the (A) the lowest Sale Price of
the Common  Stock on the  Purchase  Date and (B) the  arithmetic  average of the
three (3) lowest Closing Sale Prices for the Common Stock during the twelve (12)
consecutive Business Days ending on the Business Day immediately  preceding such
Purchase   Date  (to  be   appropriately   adjusted   for  any   reorganization,
recapitalization, non-cash dividend, stock split or other similar transaction).

                                      -17-

      (o) "Sale Price" means,  any trade price for the shares of Common Stock on
the Principal Market as reported by the Principal Market.

      (q) "SEC" means the United States Securities and Exchange Commission.

      (r) "Transfer  Agent" means the transfer agent of the Company as set forth
in Section 11(f) hereof or such other person who is then serving as the transfer
agent for the Company in respect of the Common Stock.


      11.   MISCELLANEOUS.

      (a) Governing  Law;  Jurisdiction;  Jury Trial.  The corporate laws of the
State of Delaware shall govern all issues  concerning the relative rights of the
Company and its shareholders.  All other questions  concerning the construction,
validity,  enforcement  and  interpretation  of this  Agreement  and  the  other
Transaction  Documents  shall be governed by the  internal  laws of the State of
Illinois,  without  giving  effect  to any  choice  of law  or  conflict  of law
provision or rule (whether of the State of Illinois or any other  jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of  Illinois.  Each party  hereby  irrevocably  submits  to the  exclusive
jurisdiction of the state and federal courts sitting in the City of Chicago, for
the  adjudication  of any  dispute  hereunder  or under  the  other  Transaction
Documents  or in  connection  herewith  or  therewith,  or with any  transaction
contemplated  hereby or discussed herein,  and hereby  irrevocably  waives,  and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or  proceeding  is  brought in an  inconvenient  forum or that the venue of such
suit,  action or proceeding is improper.  Each party hereby  irrevocably  waives
personal  service of process and  consents to process  being  served in any such
suit,  action or  proceeding  by  mailing a copy  thereof  to such  party at the
address for such notices to it under this Agreement and agrees that such service
shall  constitute  good and  sufficient  service of process and notice  thereof.
Nothing  contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST,  A JURY TRIAL FOR THE ADJUDICATION
OF ANY  DISPUTE  HEREUNDER  OR IN  CONNECTION  HEREWITH  OR ARISING  OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

      (b) Counterparts.  This Agreement may be executed in two or more identical
counterparts,  all of which shall be considered  one and the same  agreement and
shall  become  effective  when  counterparts  have been signed by each party and
delivered  to the other  party;  provided  that a facsimile  signature  shall be
considered  due execution  and shall be binding upon the signatory  thereto with
the same force and effect as if the signature were an original,  not a facsimile
signature.

      (c)  Headings.  The  headings of this  Agreement  are for  convenience  of
reference  and shall not form part of, or affect  the  interpretation  of,  this
Agreement.

      (d)  Severability.  If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction  or the  validity  or  enforceability  of  any  provision  of  this
Agreement in any other jurisdiction.

                                      -18-

      (e) Entire  Agreement.  With the  exception  of the  Mutual  Nondisclosure
Agreement  between the parties  dated as of November  16, 2006,  this  Agreement
supersedes  all other prior oral or written  agreements  between the Buyer,  the
Company, their affiliates and persons acting on their behalf with respect to the
matters discussed herein,  and this Agreement,  the other Transaction  Documents
and the instruments  referenced  herein contain the entire  understanding of the
parties with respect to the matters  covered  herein and therein and,  except as
specifically  set forth  herein or  therein,  neither  the Company nor the Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters.  The Company  acknowledges and agrees that is has not relied on, in any
manner whatsoever,  any  representations  or statements,  written or oral, other
than as expressly set forth in this Agreement.

      (f) Notices.  Any notices,  consents or other  communications  required or
permitted to be given under the terms of this  Agreement  must be in writing and
will be  deemed  to  have  been  delivered:  (i)  upon  receipt  when  delivered
personally;  (ii) upon receipt when sent by facsimile (provided  confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending  party);  or (iii) one  Business  Day after  deposit  with a  nationally
recognized  overnight  delivery service,  in each case properly addressed to the
party to  receive  the  same.  The  addresses  and  facsimile  numbers  for such
communications shall be:

      If to the Company:
            e.Digital Corporation
            16770 West Bernardo Drive
            San Diego, California 92127
            Telephone:  858-304-3016
            Facsimile:  858-304-3023
            Attention:  Chief Financial Officer

      With a copy to:
            McConnell, Dunning & Barwick LLP
            15 Enterprise, Suite 360
            Aliso Viejo, California 92656
            Telephone:   949-900-4400
            Facsimile:   949-900-4401
            Attention:   Curt C. Barwick, Esq.

      If to the Buyer:
            Fusion Capital Fund II, LLC
            222 Merchandise Mart Plaza, Suite 9-112
            Chicago, IL 60654
            Telephone:  312-644-6644
            Facsimile:  312-644-6244
            Attention:  Steven G. Martin

      If to the Transfer Agent:
            Interwest Transfer Co.
            1981 E. 4800 S., Suite 100
            Salt Lake City, UT  84117
            Telephone:  801-272-9294
            Facsimile:  801.277.3147
            Attention:  Kurt Hughes

                                      -19-

or at such other address and/or facsimile number and/or to the attention of such
other person as the  recipient  party has  specified by written  notice given to
each other  party three (3)  Business  Days prior to the  effectiveness  of such
change.  Written  confirmation  of receipt  (A) given by the  recipient  of such
notice,  consent or other  communication,  (B)  mechanically  or  electronically
generated by the sender's  facsimile  machine  containing  the time,  date,  and
recipient facsimile number or (C) provided by a nationally  recognized overnight
delivery service,  shall be rebuttable evidence of personal service,  receipt by
facsimile or receipt from a nationally  recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.

      (g) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective  successors and assigns.  The
Company shall not assign this Agreement or any rights or  obligations  hereunder
without  the  prior  written  consent  of the  Buyer,  including  by  merger  or
consolidation.  The Buyer may not assign its  rights or  obligations  under this
Agreement.

      (h) No Third Party  Beneficiaries.  This  Agreement  is  intended  for the
benefit of the parties  hereto and their  respective  permitted  successors  and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

      (i) Publicity.  The Buyer shall have the right to approve before  issuance
any press  release,  SEC  filing or any other  public  disclosure  made by or on
behalf of the Company  whatsoever with respect to, in any manner, the Buyer, its
purchases  hereunder  or any  aspect  of  this  Agreement  or  the  transactions
contemplated  hereby;  provided,  however,  that the Company  shall be entitled,
without  the prior  approval  of the Buyer,  to make any press  release or other
public  disclosure  (including  any filings  with the SEC) with  respect to such
transactions  as is required by applicable  law and  regulations  so long as the
Company and its counsel consult with the Buyer in connection with any such press
release or other public  disclosure  at least two (2) Business Days prior to its
release.  The  Buyer  must be  provided  with a copy  thereof  at least  two (2)
Business  Days prior to any release or use by the Company  thereof.  The Company
agrees and  acknowledges  that its failure to fully  comply with this  provision
constitutes a material  adverse effect on its ability to perform its obligations
under this Agreement.

      (j) Further  Assurances.  Each party shall do and perform,  or cause to be
done and  performed,  all such  further acts and things,  and shall  execute and
deliver all such other agreements,  certificates,  instruments and documents, as
the other  party may  reasonably  request  in order to carry out the  intent and
accomplish  the  purposes  of  this  Agreement  and  the   consummation  of  the
transactions contemplated hereby.

      (k) Termination. This Agreement may be terminated only as follows:

            (i) By the Buyer any time an Event of  Default  exists  without  any
      liability or payment to the Company. However, if pursuant to or within the
      meaning of any Bankruptcy  Law, the Company  commences a voluntary case or
      any Person  commences a  proceeding  against the  Company,  a Custodian is
      appointed for the Company or for all or substantially all of its property,
      or  the  Company  makes  a  general  assignment  for  the  benefit  of its
      creditors,  (any of which  would be an Event of  Default as  described  in
      Sections 9(f),  9(g) and 9(h) hereof) this Agreement  shall  automatically
      terminate  without any liability or payment to the Company without further
      action or notice by any  Person.  No such  termination  of this  Agreement
      under this  Section  11(k)(i)  shall  affect the  Company's or the Buyer's
      obligations under this Agreement with respect to pending purchases and the
      Company and the Buyer shall complete  their  respective  obligations  with
      respect to any pending purchases under this Agreement.

                                      -20-

            (ii) In the event that the Commencement shall not have occurred, the
      Company shall have the option to terminate  this  Agreement for any reason
      or for no reason without liability of any party to any other party.

            (iii) In the event that the Commencement  shall not have occurred on
      or before May 1, 2007,  due to the failure to satisfy the  conditions  set
      forth in  Sections 6 and 7 above with  respect  to the  Commencement,  the
      nonbreaching  party shall have the option to terminate  this  Agreement at
      the close of business on such date or thereafter  without liability of any
      party to any other party.

            (iv) If by the  Maturity  Date for any  reason or for no reason  the
      full  Available  Amount  under this  Agreement  has not been  purchased as
      provided  for in Section 1 of this  Agreement,  by the Buyer  without  any
      liability or payment to the Company.

            (v) At any time after the Commencement  Date, the Company shall have
      the option to terminate  this Agreement for any reason or for no reason by
      delivering notice (a "Company  Termination  Notice") to the Buyer electing
      to terminate this Agreement without any liability or payment to the Buyer.
      The  Company  Termination  Notice  shall  not be  effective  until one (1)
      Business Day after it has been received by the Buyer.

            (vi) This Agreement shall  automatically  terminate on the date that
      the Company  sells and the Buyer  purchases the full  Available  Amount as
      provided herein, without any action or notice on the part of any party.

Except as set forth in  Sections  11(k)(i)  (in  respect  of an Event of Default
under  Sections  9(f),  9(g) and 9(h)) and  11(k)(vi),  any  termination of this
Agreement  pursuant to this  Section  11(k) shall be effected by written  notice
from the Company to the Buyer, or the Buyer to the Company,  as the case may be,
setting forth the basis for the  termination  hereof.  The  representations  and
warranties of the Company and the Buyer contained in Sections 2, 3 and 5 hereof,
the indemnification  provisions set forth in Section 8 hereof and the agreements
and covenants set forth in Section 11, shall  survive the  Commencement  and any
termination of this Agreement. No termination of this Agreement shall affect the
Company's or the Buyer's rights or obligations (i) under the Registration Rights
Agreement which shall survive any such  termination or (ii) under this Agreement
with respect to pending  purchases and the Company and the Buyer shall  complete
their respective  obligations  with respect to any pending  purchases under this
Agreement.

      (l) No Financial Advisor,  Placement Agent,  Broker or Finder. The Company
represents  and  warrants  to the Buyer that it has not  engaged  any  financial
advisor,  placement agent,  broker or finder in connection with the transactions
contemplated  hereby.  The Buyer  represents and warrants to the Company that it
has not engaged any  financial  advisor,  placement  agent,  broker or finder in
connection  with the  transactions  contemplated  hereby.  The Company  shall be
responsible for the payment of any fees or commissions, if any, of any financial
advisor,  placement  agent,  broker or finder  relating to or arising out of the
transactions  contemplated  hereby.  The Company  shall pay,  and hold the Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorneys' fees and out of pocket expenses)  arising in connection with any such
claim.

      (m) No Strict  Construction.  The language used in this  Agreement will be
deemed to be the language  chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.

                                      -21-

      (n) Remedies,  Other  Obligations,  Breaches and  Injunctive  Relief.  The
Buyer's remedies  provided in this Agreement shall be cumulative and in addition
to all other remedies available to the Buyer under this Agreement,  at law or in
equity  (including  a decree of specific  performance  and/or  other  injunctive
relief),  no remedy of the Buyer  contained  herein  shall be deemed a waiver of
compliance  with the  provisions  giving rise to such remedy and nothing  herein
shall limit the Buyer's  right to pursue  actual  damages for any failure by the
Company to comply with the terms of this  Agreement.  The  Company  acknowledges
that a breach by it of its obligations  hereunder will cause irreparable harm to
the Buyer and that the remedy at law for any such breach may be inadequate.  The
Company  therefore  agrees that,  in the event of any such breach or  threatened
breach,  the  Buyer  shall be  entitled,  in  addition  to all  other  available
remedies,  to an  injunction  restraining  any breach,  without the necessity of
showing economic loss and without any bond or other security being required.

      (0)  Enforcement  Costs.  If: (i) this Agreement is placed by the Buyer in
the hands of an attorney for enforcement or is enforced by the Buyer through any
legal proceeding;  or (ii) an attorney is retained to represent the Buyer in any
bankruptcy,   reorganization,   receivership  or  other  proceedings   affecting
creditors'  rights  and  involving  a claim  under this  Agreement;  or (iii) an
attorney is retained to represent the Buyer in any other proceedings  whatsoever
in connection with this  Agreement,  then the Company shall pay to the Buyer, as
incurred by the Buyer,  all reasonable costs and expenses  including  attorneys'
fees  incurred in  connection  therewith,  in addition to all other  amounts due
hereunder.

      (p) Failure or Indulgence Not Waiver.  No failure or delay in the exercise
of any power,  right or privilege  hereunder  shall operate as a waiver thereof,
nor shall any single or partial  exercise of any such power,  right or privilege
preclude  other or  further  exercise  thereof or of any other  right,  power or
privilege.


                                     * * * * *



                                      -22-



      IN WITNESS  WHEREOF,  the Buyer and the  Company  have  caused this Common
Stock Purchase Agreement to be duly executed as of the date first written above.



                                    THE COMPANY:
                                    ------------

                                    e.Digital Corporation


                                    By: /s/Robert Putnam
                                        --------------------
                                    Name:  Robert Putnam
                                    Title: Senior Vice President


                                    BUYER:
                                    ------

                                    Fusion Capital Fund II, LLC
                                    By: Fusion Capital Partners, LLC
                                    By: Rockledge Capital Corporation

                                    By: /s/Josh Scheinfeld
                                        ----------------------
                                    Name:  Josh Scheinfeld
                                    Title: President



                                      -23-



                                    SCHEDULES

Schedule 3(a)     Subsidiaries
Schedule 3(c)     Capitalization
Schedule 3(e)     Conflicts
Schedule 3(f)     1934 Act Filings
Schedule 3(g)     Material Changes
Schedule 3(h)     Litigation
Schedule 3(k)     Intellectual Property
Schedule 3(m)     Liens
Schedule 3(q)     Certain Transactions



                                    EXHIBITS

Exhibit A         Form of Company Counsel Opinion
Exhibit B         Form of Officer's Certificate
Exhibit C         Form of Resolutions of Board of Directors of the Company
Exhibit D         Form of Secretary's Certificate
Exhibit E         Form of Letter to Transfer Agent





                              DISCLOSURE SCHEDULES


                          Schedule 3(a) - Subsidiaries


                         Schedule 3(c) - Capitalization


                          Schedule 3(e) - No Conflicts


                        Schedule 3(f) - 1934 Act Filings


                   Schedule 3(g) - Absence of Certain Changes


                           Schedule 3(h) - Litigation


                  Schedule 3(k) - Intellectual Property Rights


                              Schedule 3(m) - Title


                  Schedule 3(q) - Transactions with Affiliates





                                    EXHIBIT A
                                    ---------

                         FORM OF COMPANY COUNSEL OPINION

      Capitalized terms used herein but not defined herein, have the meaning set
forth in the  Common  Stock  Purchase  Agreement.  Based on the  foregoing,  and
subject to the assumptions and  qualifications  set forth herein,  we are of the
opinion that:

            1. The Company is a corporation  existing and in good standing under
the laws of the State of Delaware.  The Company is qualified to do business as a
foreign corporation and is in good standing in the State of California.

            2. The Company has the corporate  power to execute and deliver,  and
perform its obligations under, each Transaction Document to which it is a party.
The Company has the  corporate  power to conduct its business as, to the best of
our knowledge, it is now conducted,  and to own and use the properties owned and
used by it.

            3. The  execution,  delivery and  performance  by the Company of the
Transaction  Documents to which it is a party have been duly  authorized  by all
necessary  corporate  action  on the  part of the  Company.  The  execution  and
delivery of the  Transaction  Documents by the Company,  the  performance of the
obligations  of  the  Company  thereunder  and  the  consummation  by it of  the
transactions  contemplated therein have been duly authorized and approved by the
Company's Board of Directors and no further  consent,  approval or authorization
of the  Company,  its Board of Directors or its  stockholders  is required.  The
Transaction  Documents  to which the Company is a party have been duly  executed
and  delivered by the Company and are the valid and binding  obligations  of the
Company,  enforceable  against the Company in accordance with their terms except
as such  enforceability  may be  limited  by  general  principles  of  equity or
applicable bankruptcy,  insolvency,  liquidation or similar laws relating to, or
affecting creditor's rights and remedies.

            4. The  execution,  delivery and  performance  by the Company of the
Transaction  Documents,  the  consummation  by the  Company of the  transactions
contemplated thereby including the offering, sale and issuance of the Commitment
Shares,  and the Purchase  Shares in accordance with the terms and conditions of
the Common Stock Purchase  Agreement,  and fulfillment and compliance with terms
of the  Transaction  Documents,  does not and  shall  not:  (i)  conflict  with,
constitute a breach of or default (or an event which,  with the giving of notice
or  lapse of time or  both,  constitutes  or  could  constitute  a  breach  or a
default),  under  (a) the  Certificate  of  Incorporation  or the  Bylaws of the
Company,  (b) any  material  agreement,  note,  lease,  mortgage,  deed or other
material instrument to which to our knowledge the Company is a party or by which
the Company or any of its assets are bound,  (ii) result in any violation of any
statute,  law,  rule or regulation  applicable  to the Company,  or (iii) to our
knowledge,  violate any order,  writ,  injunction  or decree  applicable  to the
Company or any of its subsidiaries.

            5.  The  issuance  of  the  Purchase  Shares,   Signing  Shares  and
Commitment  Shares  pursuant  to the terms  and  conditions  of the  Transaction
Documents has been duly authorized and the Signing Shares,  the Initial Purchase
Shares and Commitment Shares are validly issued,  fully paid and non-assessable,
to our knowledge,  free of all taxes, liens,  charges,  restrictions,  rights of
first refusal and preemptive  rights.  ________ shares of Common Stock have been
properly reserved for issuance under the Common Stock Purchase  Agreement.  When
issued and paid for in accordance with the Common Stock Purchase Agreement,  the
Purchase Shares shall be validly issued,  fully paid and non-assessable,  to our
knowledge,  free of all taxes,  liens,  charges,  restrictions,  rights of first
refusal and preemptive  rights. To our knowledge,  the execution and delivery of
the Registration  Rights Agreement do not, and the performance by the Company of
its  obligations  thereunder  shall  not,  give rise to any  rights of any other
person for the registration  under the 1933 Act of any shares of Common Stock or
other securities of the Company which have not been waived.


            6. As of the  date  hereof,  the  authorized  capital  stock  of the
Company  consists of _______ shares of common stock, par value $0.001 per share,
of which to our knowledge  __________ shares are issued and outstanding.  Except
as set forth on Schedule  3(c) of the Common Stock  Purchase  Agreement,  to our
knowledge,  there are no outstanding shares of capital stock or other securities
convertible  into or exchangeable or exercisable for shares of the capital stock
of the Company.

            7. Assuming the accuracy of the  representations and your compliance
with the covenants made by you in the Transaction Documents,  the offering, sale
and  issuance  of the  Commitment  Shares,  the  signing  Shares and the Initial
Purchase  Shares to you pursuant to the  Transaction  Documents  was exempt from
registration  under the 1933 Act and the securities  laws and regulations of the
State of California.

            8. Other than that which has been  obtained and  completed  prior to
the date hereof, no authorization,  approval,  consent, filing or other order of
any federal or state governmental body,  regulatory agency, or stock exchange or
market,  or any court,  or, to our knowledge,  any third party is required to be
obtained  by the Company to enter into and  perform  its  obligations  under the
Transaction  Documents or for the Company to issue and sell the Purchase  Shares
as contemplated by the Transaction Documents.

            9. The Common Stock is  registered  pursuant to Section 12(g) of the
1934 Act.  To our  knowledge,  since  January 1, 2006,  the  Company has been in
compliance with the reporting  requirements of the 1934 Act applicable to it. To
our  knowledge,  since January 1, 2006, the Company has not received any written
notice  from the  Principal  Market  stating  that the  Company  has not been in
compliance with any of the rules and regulations (including the requirements for
continued listing) of the Principal Market.

      We  further  advise  you that to our  knowledge,  except as  disclosed  on
Schedule 3(h) in the Common Stock Purchase Agreement,  there is no action, suit,
proceeding,  inquiry or  investigation  before or by any court,  public board or
body, any governmental  agency, any stock exchange or market, or self-regulatory
organization, which has been threatened in writing or which is currently pending
against the Company,  any of its subsidiaries,  any officers or directors of the
Company or any of its  subsidiaries  or any of the  properties of the Company or
any of its subsidiaries.

      In addition,  we have  participated in the preparation of the Registration
Statement (SEC File  #________)  covering the sale of the Purchase  Shares,  the
Commitment Shares including the prospectus dated ____________, contained therein
and in  conferences  with  officers  and other  representatives  of the  Company
(including the Company's  independent auditors) during which the contents of the
Registration  Statement  and related  matters were  discussed  and reviewed and,
although we are not passing  upon and do not assume any  responsibility  for the
accuracy,   completeness  or  fairness  of  the  statements   contained  in  the
Registration  Statement,  on the basis of the information  that was developed in
the course of the performance of the services  referred to above,  considered in
the  light of our  understanding  of the  applicable  law,  nothing  came to our
attention that caused us to believe that the Registration  Statement (other than
the financial  statements and schedules and the other  financial and statistical
data  included  therein,  as to which we express no belief),  as of their dates,
contained  any  untrue  statement  of a  material  fact or  omitted to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.




                                    EXHIBIT B
                                    ---------

                          FORM OF OFFICER'S CERTIFICATE

         This Officer's Certificate  ("Certificate") is being delivered pursuant
to Section 7(e) of that  certain  Common Stock  Purchase  Agreement  dated as of
_________,  ("Common  Stock  Purchase  Agreement"),  by  and  between  e.Digital
Corporation, a Delaware corporation (the "Company"), and Fusion Capital Fund II,
LLC (the  "Buyer").  Terms used herein and not otherwise  defined shall have the
meanings ascribed to them in the Common Stock Purchase Agreement.

         The undersigned,  ___________,  ______________  of the Company,  hereby
certifies as follows:

            1. I am the  _____________  of the Company  and make the  statements
      contained in this Certificate;

            2. The  representations  and  warranties of the Company are true and
      correct in all  material  respects  (except to the extent that any of such
      representations  and warranties is already  qualified as to materiality in
      Section 3 of the Common  Stock  Purchase  Agreement,  in which case,  such
      representations  and  warranties  are true  and  correct  without  further
      qualification) as of the date when made and as of the Commencement Date as
      though made at that time (except for  representations  and warranties that
      speak as of a specific date);

            3. The Company has performed, satisfied and complied in all material
      respects  with  covenants,  agreements  and  conditions  required  by  the
      Transaction  Documents to be performed,  satisfied or complied with by the
      Company at or prior to the Commencement Date.

            4. The  Company  has not taken  any  steps,  and does not  currently
      expect to take any steps,  to seek  protection  pursuant to any Bankruptcy
      Law nor does the Company or any of its Subsidiaries  have any knowledge or
      reason  to  believe  that its  creditors  intend to  initiate  involuntary
      bankruptcy or insolvency  proceedings.  The Company is financially solvent
      and is generally able to pay its debts as they become due.

      IN WITNESS  WHEREOF,  I have hereunder signed my name on this ___ day of

_________________.

                                    ----------------------
                                    Name:
                                    Title:

      The undersigned as Secretary of ________, a ________  corporation,  hereby
certifies that ___________ is the duly elected, appointed,  qualified and acting
________ of  _________  and that the  signature  appearing  above is his genuine
signature.

                                    -----------------------------------
                                    Secretary




                                   EXHIBIT C-1
                                   -----------

                           FORM OF COMPANY RESOLUTIONS
                         FOR SIGNING PURCHASE AGREEMENT

                          UNANIMOUS WRITTEN CONSENT OF

                              e.Digital Corporation


      Pursuant to Section ______ of the _________, the undersigned, being all of
the   directors  of  e.Digital   Corporation,   a  Delaware   corporation   (the
"Corporation")  do hereby consent to and adopt the following  resolutions as the
action of the Board of Directors for and on behalf of the Corporation and hereby
direct  that this  Consent be filed with the minutes of the  proceedings  of the
Board of Directors:

      WHEREAS,  there  has  been  presented  to the  Board of  Directors  of the
Corporation  a draft of the  Common  Stock  Purchase  Agreement  (the  "Purchase
Agreement")  by and  between the  Corporation  and Fusion  Capital  Fund II, LLC
("Fusion"),  providing  for the  purchase by Fusion of up to Eight  Million Five
Hundred Thousand  Dollars  ($8,500,000) of the  Corporation's  common stock, par
value $0.001 (the "Common Stock"); and

      WHEREAS,  after  careful  consideration  of the  Purchase  Agreement,  the
documents  incident  thereto and other factors  deemed  relevant by the Board of
Directors, the Board of Directors has determined that it is advisable and in the
best interests of the Corporation to engage in the transactions  contemplated by
the Purchase Agreement, including, but not limited to, the issuance of 3,500,000
shares of Common Stock to Fusion as a commitment fee (the  "Commitment  Shares")
and the sale of  shares of Common  Stock to  Fusion up to the  available  amount
under the Purchase Agreement (the "Purchase Shares").

                              Transaction Documents
                              ---------------------

      NOW,  THEREFORE,  BE IT RESOLVED,  that the transactions  described in the
Purchase  Agreement  are hereby  approved and  ___________________________  (the
"Authorized  Officers")  are  severally  authorized  to execute  and deliver the
Purchase Agreement,  and any other agreements or documents  contemplated thereby
including,   without   limitation,   a   registration   rights   agreement  (the
"Registration Rights Agreement") providing for the registration of the shares of
the  Company's  Common Stock  issuable in respect of the  Purchase  Agreement on
behalf  of  the  Corporation,  with  such  amendments,  changes,  additions  and
deletions as the Authorized  Officers may deem to be appropriate  and approve on
behalf of, the  Corporation,  such approval to be conclusively  evidenced by the
signature of an Authorized Officer thereon; and

      FURTHER RESOLVED, that the terms and provisions of the Registration Rights
Agreement by and among the  Corporation  and Fusion are hereby  approved and the
Authorized  Officers  are  authorized  to execute and  deliver the  Registration
Rights Agreement  (pursuant to the terms of the Purchase  Agreement),  with such
amendments,  changes, additions and deletions as the Authorized Officer may deem
appropriate  and  approve on behalf of, the  Corporation,  such  approval  to be
conclusively evidenced by the signature of an Authorized Officer thereon; and


      FURTHER  RESOLVED,  that the terms and  provisions of the Form of Transfer
Agent Instructions (the  "Instructions")  are hereby approved and the Authorized
Officers are authorized to execute and deliver the Instructions (pursuant to the
terms of the Purchase Agreement),  with such amendments,  changes, additions and
deletions as the Authorized  Officers may deem appropriate and approve on behalf
of, the Corporation, such approval to be conclusively evidenced by the signature
of an Authorized Officer thereon; and

                         Execution of Purchase Agreement
                         -------------------------------

      FURTHER  RESOLVED,  that the Corporation be and it hereby is authorized to
execute the Purchase Agreement providing for the purchase of common stock of the
Corporation having an aggregate value of up to $8,500,000.00; and

                            Issuance of Common Stock
                            ------------------------

      FURTHER  RESOLVED,  that the  Corporation  was authorized to issue 200,000
shares of Common Stock to Fusion pursuant to the Confidential Term Sheet between
the Company and Fusion dated as of December 19, 2006 ("Signing Shares") and that
upon  issuance  of the  Signing  Shares,  the  Signing  Shares  have  been  duly
authorized,  validly  issued,  fully  paid and  nonassessable  with no  personal
liability attaching to the ownership thereof; and

      FURTHER  RESOLVED,  that the  Corporation  is hereby  authorized  to issue
3,500,000  shares of Common Stock to Fusion  Capital Fund II, LLC as  Commitment
Shares and that upon issuance of the Commitment  Shares pursuant to the Purchase
Agreement, the Commitment Shares shall be duly authorized, validly issued, fully
paid and  nonassessable  with no personal  liability  attaching to the ownership
thereof; and

      FURTHER  RESOLVED,  that the  Corporation  is hereby  authorized  to issue
shares of Common Stock upon the purchase of Purchase  Shares up to the available
amount under the Purchase Agreement in accordance with the terms of the Purchase
Agreement  and that,  upon  issuance  of the  Purchase  Shares  pursuant  to the
Purchase Agreement, the Purchase Shares will be duly authorized, validly issued,
fully  paid  and  nonassessable  with no  personal  liability  attaching  to the
ownership thereof; and

      FURTHER RESOLVED,  that the Corporation shall initially reserve 19,166,666
shares of Common  Stock for  issuance  as  Purchase  Shares  under the  Purchase
Agreement.

                               Approval of Actions
                               -------------------

      FURTHER  RESOLVED,  that,  without limiting the foregoing,  the Authorized
Officers are, and each of them hereby is,  authorized and directed to proceed on
behalf of the  Corporation  and to take all such  steps as deemed  necessary  or
appropriate, with the advice and assistance of counsel, to cause the Corporation
to consummate the agreements  referred to herein and to perform its  obligations
under such agreements; and

      FURTHER RESOLVED, that the Authorized Officers be, and each of them hereby
is,  authorized,  empowered  and  directed  on  behalf of and in the name of the
Corporation,  to take or cause  to be taken  all  such  further  actions  and to
execute and  deliver or cause to be  executed  and  delivered  all such  further
agreements,   amendments,   documents,    certificates,    reports,   schedules,
applications,  notices,  letters and  undertakings and to incur and pay all such
fees and expenses as in their judgment  shall be necessary,  proper or desirable
to carry into  effect  the  purpose  and intent of any and all of the  foregoing
resolutions, and that all actions heretofore taken by any officer or director of
the  Corporation  in  connection  with  the  transactions  contemplated  by  the
agreements  described herein are hereby approved,  ratified and confirmed in all
respects.

      IN WITNESS WHEREOF, the Board of Directors has executed and delivered this
Consent effective as of __________, 200__.



- ----------------------

- ----------------------

- ----------------------




being all of the directors of ____________





                                   EXHIBIT C-2
                                   -----------

          FORM OF COMPANY RESOLUTIONS APPROVING REGISTRATION STATEMENT

                          UNANIMOUS WRITTEN CONSENT OF

                              e.Digital Corporation


      Pursuant to Section ______ of the _________, the undersigned, being all of
the   directors  of  e.Digital   Corporation,   a  Delaware   corporation   (the
"Corporation")  do hereby consent to and adopt the following  resolutions as the
action of the Board of Directors for and on behalf of the Corporation and hereby
direct  that this  Consent be filed with the minutes of the  proceedings  of the
Board of Directors.


      WHEREAS,  there  has  been  presented  to the  Board of  Directors  of the
Corporation a Common Stock Purchase Agreement (the "Purchase  Agreement") by and
among the Corporation and Fusion Capital Fund II, LLC ("Fusion"),  providing for
the  purchase by Fusion of up to Eight  Million Five  Hundred  Thousand  Dollars
($8,500,000.00) of the Corporation's common stock, par value $0.001 (the "Common
Stock"); and

      WHEREAS,  after  careful  consideration  of the  Purchase  Agreement,  the
documents  incident  thereto and other factors  deemed  relevant by the Board of
Directors,  the Board of Directors  has approved the Purchase  Agreement and the
transactions contemplated thereby and the Company has executed and delivered the
Purchase Agreement to Fusion; and

      WHEREAS, in connection with the transactions  contemplated pursuant to the
Purchase Agreement, the Company has agreed to file a registration statement with
the  Securities  and Exchange  Commission  (the  "Commission")  registering  the
Commitment Shares (as defined in the Purchase Agreement) and the Purchase Shares
(as herein defined in the Purchase Agreement);

      WHEREAS,  the management of the  Corporation has prepared an initial draft
of a Registration Statement on Form ___ (the "Registration  Statement") in order
to  register  the  sale of the  Purchase  Shares,  the  Signing  Shares  and the
Commitment Shares (collectively, the "Shares"); and

      WHEREAS, the Board of Directors has determined to approve the Registration
Statement and to authorize the  appropriate  officers of the Corporation to take
all such actions as they may deem appropriate to effect the offering.

      NOW,  THEREFORE,  BE IT RESOLVED,  that the officers and  directors of the
Corporation  be, and each of them hereby is,  authorized and directed,  with the
assistance of counsel and accountants for the Corporation,  to prepare,  execute
and file with the  Commission the  Registration  Statement,  which  Registration
Statement  shall be filed  substantially  in the form  presented to the Board of
Directors,  with such  changes  therein  as the Chief  Executive  Officer of the
Corporation or any Vice President of the Corporation shall deem desirable and in
the best  interest  of the  Corporation  and its  shareholders  (such  officer's
execution   thereof   including   such  changes  shall  be  deemed  to  evidence
conclusively such determination); and


      FURTHER  RESOLVED,  that the officers of the  Corporation  be, and each of
them hereby is,  authorized  and  directed,  with the  assistance of counsel and
accountants  for  the  Corporation,  to  prepare,  execute  and  file  with  the
Commission all amendments,  including post-effective amendments, and supplements
to the  Registration  Statement,  and  all  certificates,  exhibits,  schedules,
documents and other instruments relating to the Registration  Statement, as such
officers  shall deem  necessary or  appropriate  (such  officer's  execution and
filing thereof shall be deemed to evidence conclusively such determination); and

      FURTHER RESOLVED,  that the execution of the Registration Statement and of
any  amendments  and  supplements  thereto by the officers and  directors of the
Corporation  be,  and  the  same  hereby  is,  specifically   authorized  either
personally or by the Authorized  Officers as such  officer's or director's  true
and lawful attorneys-in-fact and agents; and

      FURTHER  RESOLVED,  that the Authorized  Officers are hereby designated as
"Agent for  Service" of the  Corporation  in  connection  with the  Registration
Statement  and the  filing  thereof  with  the  Commission,  and the  Authorized
Officers  hereby are authorized to receive  communications  and notices from the
Commission with respect to the Registration Statement; and

      FURTHER  RESOLVED,  that the officers of the  Corporation  be, and each of
them hereby is, authorized and directed to pay all fees, costs and expenses that
may  be  incurred  by  the  Corporation  in  connection  with  the  Registration
Statement; and

      FURTHER  RESOLVED,  that it is desirable  and in the best  interest of the
Corporation  that the  Shares be  qualified  or  registered  for sale in various
states;  that the  officers of the  Corporation  be, and each of them hereby is,
authorized to determine the states in which appropriate action shall be taken to
qualify  or  register  for sale all or such part of the  Shares as they may deem
advisable;  that said  officers  be, and each of them hereby is,  authorized  to
perform  on  behalf  of the  Corporation  any and all such acts as they may deem
necessary or advisable in order to comply with the  applicable  laws of any such
states, and in connection therewith to execute and file all requisite papers and
documents,  including, but not limited to, applications,  reports, surety bonds,
irrevocable  consents,  appointments  of  attorneys  for  service of process and
resolutions; and the execution by such officers of any such paper or document or
the doing by them of any act in  connection  with the  foregoing  matters  shall
conclusively  establish  their  authority  therefor from the Corporation and the
approval and  ratification  by the  Corporation  of the papers and  documents so
executed and the actions so taken; and

      FURTHER  RESOLVED,  that if,  in any  state  where  the  securities  to be
registered or qualified for sale to the public,  or where the  Corporation is to
be registered in connection with the public offering of the Shares, a prescribed
form of  resolution  or  resolutions  is  required to be adopted by the Board of
Directors,  each such  resolution  shall be  deemed  to have been and  hereby is
adopted,  and the Secretary is hereby  authorized to certify the adoption of all
such resolutions as though such resolutions were now presented to and adopted by
the Board of Directors; and

      FURTHER RESOLVED, that the officers of the Corporation with the assistance
of counsel be, and each of them hereby is,  authorized  and directed to take all
necessary steps and do all other things  necessary and appropriate to effect the
listing of the Shares on the Nasdaq OTC Bulletin Board market, if any.


                               Approval of Actions
                               -------------------

      FURTHER  RESOLVED,  that,  without limiting the foregoing,  the Authorized
Officers are, and each of them hereby is,  authorized and directed to proceed on
behalf of the Corporation and to take all such steps as are deemed  necessary or
appropriate, with the advice and assistance of counsel, to cause the Corporation
to take all such  action  referred  to herein  and to  perform  its  obligations
incident to the registration, listing and sale of the Shares; and

      FURTHER RESOLVED, that the Authorized Officers be, and each of them hereby
is,  authorized,  empowered  and  directed  on  behalf of and in the name of the
Corporation,  to take or cause  to be taken  all  such  further  actions  and to
execute and  deliver or cause to be  executed  and  delivered  all such  further
agreements,   amendments,   documents,    certificates,    reports,   schedules,
applications,  notices,  letters and  undertakings and to incur and pay all such
fees and expenses as in their judgment  shall be necessary,  proper or desirable
to carry into  effect  the  purpose  and intent of any and all of the  foregoing
resolutions, and that all actions heretofore taken by any officer or director of
the  Corporation  in  connection  with  the  transactions  contemplated  by  the
agreements  described herein are hereby approved,  ratified and confirmed in all
respects.



IN WITNESS WHEREOF, the Board of Directors has executed and delivered this
Consent effective as of __________, 200_.



- ----------------------

- ----------------------

- ----------------------


being all of the directors of ____________



                                    EXHIBIT D
                                    ---------

                         FORM OF SECRETARY'S CERTIFICATE

      This Secretary's  Certificate  ("Certificate") is being delivered pursuant
to Section 7(k) of that  certain  Common Stock  Purchase  Agreement  dated as of
__________,  ("Common  Stock  Purchase  Agreement"),  by and  between  e.Digital
Corporation,  a Delaware corporation (the "Company") and Fusion Capital Fund II,
LLC (the  "Buyer"),  pursuant  to which the  Company may sell to the Buyer up to
Eight Million Five Hundred Thousand Dollars ($8,500,000) of the Company's Common
Stock,  par value $0.001 per share (the "Common  Stock").  Terms used herein and
not  otherwise  defined  shall have the meanings  ascribed to them in the Common
Stock Purchase Agreement.

      The undersigned,  ____________, Secretary of the Company, hereby certifies
as follows:

            1. I am the  Secretary  of  the  Company  and  make  the  statements
      contained in this Secretary's Certificate.

            2. Attached hereto as Exhibit A and Exhibit B are true,  correct and
      complete  copies of the Company's  bylaws  ("Bylaws")  and  Certificate of
      Incorporation  ("Articles"),  in each case,  as amended  through  the date
      hereof,  and no  action  has been  taken by the  Company,  its  directors,
      officers or  shareholders,  in  contemplation of the filing of any further
      amendment relating to or affecting the Bylaws or Articles.

            3.  Attached  hereto as  Exhibit C are true,  correct  and  complete
      copies of the  resolutions  duly  adopted by the Board of Directors of the
      Company  on  _____________,  at  which a quorum  was  present  and  acting
      throughout.  Such resolutions have not been amended, modified or rescinded
      and  remain in full force and  effect  and such  resolutions  are the only
      resolutions adopted by the Company's Board of Directors,  or any committee
      thereof,  or the  shareholders of the Company relating to or affecting (i)
      the entering into and performance of the Common Stock Purchase  Agreement,
      or the  issuance,  offering  and  sale  of the  Purchase  Shares  and  the
      Commitment  Shares  and (ii) and the  performance  of the  Company  of its
      obligation under the Transaction Documents as contemplated therein.

            4. As of the  date  hereof,  the  authorized,  issued  and  reserved
      capital stock of the Company is as set forth on Exhibit D hereto.

      IN WITNESS  WHEREOF,  I have hereunder signed my name on this ___ day of
___________________.


- -------------------------
                                          Secretary


The  undersigned as ___________ of __________,  a ________  corporation,  hereby
certifies that ____________ is the duly elected, appointed, qualified and acting
Secretary of _________,  and that the signature  appearing  above is his genuine
signature.


- -----------------------------------




                                    EXHIBIT E
                                    ---------

    FORM OF LETTER TO THE TRANSFER AGENT FOR THE ISSUANCE OF THE COMMITMENTS
                   SHARES AT SIGNING OF THE PURCHASE AGREEMENT




                              [COMPANY LETTERHEAD]



[DATE]

[TRANSFER AGENT]

- ------------------

- ------------------

- ------------------

Re: Issuance of Common Shares to Fusion Capital Fund II, LLC

Dear ________,

On behalf of e.Digital Corporation,  (the "Company"),  you are hereby instructed
to issue as soon as possible  ________ shares of our common stock in the name of
Fusion Capital Fund II, LLC. The share certificate  should be dated [DATE OF THE
COMMON STOCK PURCHASE  AGREEMENT].  I have included a true and correct copy of a
unanimous  written  consent  executed  by all of the  members  of the  Board  of
Directors of the Company  adopting  resolutions  approving the issuance of these
shares. The shares should be issued subject to the following restrictive legend:

      THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE  HAVE NOT BEEN REGISTERED
      UNDER  THE  SECURITIES  ACT OF  1933,  AS  AMENDED,  OR  APPLICABLE  STATE
      SECURITIES  LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
      NOT BE OFFERED FOR SALE,  SOLD,  TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
      AN  EFFECTIVE   REGISTRATION   STATEMENT  FOR  THE  SECURITIES  UNDER  THE
      SECURITIES ACT OF 1933, AS AMENDED,  OR APPLICABLE  STATE SECURITIES LAWS,
      UNLESS SOLD PURSUANT TO: (1) RULE 144 UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED,  OR (2) AN OPINION OF HOLDER'S COUNSEL, IN A CUSTOMARY FORM, THAT
      REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES
      LAWS.


The share  certificate  should be sent as soon as possible via overnight mail to
the following address:

                  Fusion Capital Fund II, LLC
                  222 Merchandise Mart Plaza, Suite 9-112
                  Chicago, IL 60654
                  Attention: Steven Martin

Thank you very much for your help.  Please call me at ______________ if you have
any questions or need anything further.




e.Digital Corporation


BY:_____________________________
      [name]
      [title]


                                                                  Execution Copy
                          REGISTRATION RIGHTS AGREEMENT

      REGISTRATION RIGHTS AGREEMENT (this  "Agreement"),  dated as of January 2,
2007,  by and  between  e.Digital  Corporation,  a  Delaware  corporation,  (the
"Company"), and Fusion Capital Fund II, LLC (together with it permitted assigns,
the "Buyer").  Capitalized  terms used herein and not otherwise  defined  herein
shall  have the  respective  meanings  set forth in the  Common  Stock  Purchase
Agreement  by and between the  parties  hereto,  dated as of the date hereof (as
amended,  restated,  supplemented  or otherwise  modified from time to time, the
"Purchase Agreement").

                                    WHEREAS:

      A. The Company has agreed, upon the terms and subject to the conditions of
the  Purchase  Agreement,  to issue to the  Buyer (i) up to Eight  Million  Five
Hundred Thousand  Dollars  ($8,500,000) of the Company's common stock, par value
$0.001 per share (the "Common  Stock") (the  "Purchase  Shares"),  and (ii) such
number of shares of Common Stock as is required  pursuant to Section 4(e) of the
Purchase Agreement (the "Commitment Shares"); and

      B. To induce the Buyer to enter into the Purchase  Agreement,  the Company
has agreed to provide  certain  registration  rights under the Securities Act of
1933,  as  amended,  and the rules and  regulations  thereunder,  or any similar
successor  statute   (collectively,   the  "1933  Act"),  and  applicable  state
securities laws.

      NOW, THEREFORE,  in consideration of the premises and the mutual covenants
contained  herein and other good and  valuable  consideration,  the  receipt and
sufficiency of which are hereby  acknowledged,  the Company and the Buyer hereby
agree as follows:

      1. DEFINITIONS.

            As used in this  Agreement,  the  following  terms  shall  have  the
following meanings:

            a. "Investor" means the Buyer, any transferee or assignee thereof to
whom a Buyer  assigns its rights under this  Agreement  and who agrees to become
bound by the provisions of this  Agreement in accordance  with Section 9 and any
transferee  or assignee  thereof to whom a  transferee  or assignee  assigns its
rights under this  Agreement and who agrees to become bound by the provisions of
this Agreement in accordance with Section 9.

            b. "Person" means any person or entity including any corporation,  a
limited liability company,  an association,  a partnership,  an organization,  a
business,  an individual,  a governmental or political  subdivision thereof or a
governmental agency.

            c.  "Register,"   "registered,"  and   "registration"   refer  to  a
registration   effected  by  preparing  and  filing  one  or  more  registration
statements of the Company in  compliance  with the 1933 Act and pursuant to Rule
415 under the 1933 Act or any successor rule  providing for offering  securities
on a  continuous  basis  ("Rule  415"),  and  the  declaration  or  ordering  of
effectiveness of such registration  statement(s) by the United States Securities
and Exchange Commission (the "SEC").


            d.  "Registrable  Securities"  means the Purchase  Shares which have
been, or which may from time to time be,  issued or issuable  upon  purchases of
the  Available  Amount  under  the  Purchase  Agreement  (without  regard to any
limitation or  restriction  on purchases)  the Signing Shares and the Commitment
Shares issued or issuable to the Investor and any shares of capital stock issued
or issuable with respect to the Purchase  Shares,  the  Commitment  Shares,  the
Signing Shares or the Purchase  Agreement as a result of any stock split,  stock
dividend,  recapitalization,  exchange or similar  event or  otherwise,  without
regard to any limitation on purchases under the Purchase Agreement.

            e. "Registration  Statement" means the registration statement of the
Company covering only the sale of the Registrable Securities.

      2. REGISTRATION.

            a.  Mandatory  Registration.  The  Company  shall  within  ten  (10)
Business Days from the date hereof file with the SEC the Registration Statement.
The Registration Statement shall register only the Registrable Securities and no
other  securities  of the Company.  The  Investor  and its counsel  shall have a
reasonable opportunity to review and comment upon such registration statement or
amendment to such registration statement and any related prospectus prior to its
filing with the SEC. Investor shall furnish all information reasonably requested
by the Company for inclusion therein.  The Company shall use its best efforts to
have the Registration  Statement or amendment  declared  effective by the SEC at
the earliest  possible date.  The Company shall use  reasonable  best efforts to
keep the Registration Statement effective pursuant to Rule 415 promulgated under
the 1933 Act and available for sales of all of the Registrable Securities at all
times until the earlier of (i) the date as of which the Investor may sell all of
the  Registrable   Securities  without  restriction   pursuant  to  Rule  144(k)
promulgated under the 1933 Act (or successor  thereto) or (ii) the date on which
(A) the Investor shall have sold all the Registrable Securities and no Available
Amount remains under the Purchase  Agreement (the  "Registration  Period").  The
Registration  Statement  (including any  amendments or  supplements  thereto and
prospectuses  contained  therein)  shall not contain any untrue  statement  of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading.

            b. Rule 424 Prospectus. The Company shall, as required by applicable
securities  regulations,  from time to time file with the SEC,  pursuant to Rule
424 promulgated  under the 1933 Act, the prospectus and prospectus  supplements,
if any, to be used in connection with sales of the Registrable  Securities under
the Registration Statement. The Investor and its counsel shall have a reasonable
opportunity to review and comment upon such prospectus  prior to its filing with
the SEC. The Investor shall use its reasonable best efforts to comment upon such
prospectus  within one (1) Business Day from the date the Investor  receives the
final version of such prospectus.

            c. Sufficient Number of Shares  Registered.  In the event the number
of shares  available under the  Registration  Statement is insufficient to cover
all of the  Registrable  Securities,  the Company  shall amend the  Registration
Statement or file a new registration statement (a "New Registration Statement"),
so as to cover all of such Registrable Securities as soon as practicable, but in
any event not later than ten (10)  Business  Days after the  necessity  therefor
arises. The Company shall use it reasonable best efforts to cause such amendment
and/or New  Registration  Statement to become  effective as soon as  practicable
following the filing thereof.

                                       2

      3. RELATED OBLIGATIONS.

      With respect to the  Registration  Statement and whenever any  Registrable
Securities  are to be registered  pursuant to Section 2(b)  including on any New
Registration  Statement,  the Company shall use its  reasonable  best efforts to
effect the  registration  of the  Registrable  Securities in accordance with the
intended method of disposition thereof and, pursuant thereto,  the Company shall
have the following obligations:

            a. The Company shall  prepare and file with the SEC such  amendments
(including  post-effective  amendments)  and  supplements  to  any  registration
statement  and  the  prospectus  used  in  connection  with  such   registration
statement,  which  prospectus  is to be filed  pursuant to Rule 424  promulgated
under the 1933 Act, as may be  necessary to keep the  Registration  Statement or
any New  Registration  Statement  effective at all times during the Registration
Period, and, during such period, comply with the provisions of the 1933 Act with
respect to the disposition of all Registrable  Securities of the Company covered
by the Registration  Statement or any New Registration Statement until such time
as all of such Registrable  Securities shall have been disposed of in accordance
with the intended methods of disposition by the seller or sellers thereof as set
forth in such registration statement.

            b. The Company  shall permit the Investor to review and comment upon
the Registration  Statement or any New Registration Statement and all amendments
and  supplements  thereto at least two (2)  Business  Days prior to their filing
with the SEC, and not file any document in a form to which  Investor  reasonably
objects.  The Investor shall use its reasonable best efforts to comment upon the
Registration  Statement or any New Registration  Statement and any amendments or
supplements  thereto  within two (2)  Business  Days from the date the  Investor
receives the final version  thereof.  The Company shall furnish to the Investor,
without  charge any  correspondence  from the SEC or the staff of the SEC to the
Company or its representatives relating to the Registration Statement or any New
Registration Statement.

            c. Upon request of the  Investor,  the Company  shall furnish to the
Investor,  (i)  promptly  after the same is prepared  and filed with the SEC, at
least one copy of such  registration  statement  and any  amendment(s)  thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits,  (ii) upon the  effectiveness of any registration
statement,  a copy of the prospectus included in such registration statement and
all  amendments and  supplements  thereto (or such other number of copies as the
Investor  may  reasonably  request)  and (iii) such other  documents,  including
copies of any  preliminary or final  prospectus,  as the Investor may reasonably
request  from  time  to time in  order  to  facilitate  the  disposition  of the
Registrable Securities owned by the Investor.

            d. The Company shall use reasonable best efforts to (i) register and
qualify the  Registrable  Securities  covered by a registration  statement under
such other  securities  or "blue sky" laws of such  jurisdictions  in the United
States as the  Investor  reasonably  requests,  (ii)  prepare  and file in those
jurisdictions,   such  amendments  (including  post-effective   amendments)  and
supplements  to such  registrations  and  qualifications  as may be necessary to
maintain the effectiveness  thereof during the Registration  Period,  (iii) take
such other  actions as may be  necessary  to  maintain  such  registrations  and
qualifications in effect at all times during the Registration  Period,  and (iv)
take all  other  actions  reasonably  necessary  or  advisable  to  qualify  the
Registrable Securities for sale in such jurisdictions;  provided,  however, that
the  Company  shall not be required in  connection  therewith  or as a condition
thereto to (x)  qualify to do business  in any  jurisdiction  where it would not
otherwise be required to qualify but for this Section 3(d),  (y) subject  itself
to general taxation in any such  jurisdiction,  or (z) file a general consent to
service of process in any such  jurisdiction.  The Company shall promptly notify
the Investor who holds  Registrable  Securities of the receipt by the Company of
any  notification  with  respect  to  the  suspension  of  the  registration  or
qualification of any of the Registrable Securities for sale under the securities
or "blue sky" laws of any  jurisdiction  in the United  States or its receipt of
actual  notice of the  initiation  or  threatening  of any  proceeding  for such
purpose.

                                       3

            e. As promptly as practicable  after becoming aware of such event or
facts,  the Company shall notify the Investor in writing of the happening of any
event or existence of such facts as a result of which the prospectus included in
any registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements  therein,  in light of the circumstances  under
which they were made,  not  misleading,  and promptly  prepare a  supplement  or
amendment to such  registration  statement  to correct such untrue  statement or
omission, and deliver a copy of such supplement or amendment to the Investor (or
such other number of copies as the Investor may reasonably request). The Company
shall also promptly  notify the Investor in writing (i) when a prospectus or any
prospectus  supplement or  post-effective  amendment has been filed,  and when a
registration  statement or any  post-effective  amendment  has become  effective
(notification  of such  effectiveness  shall be  delivered  to the  Investor  by
facsimile on the same day of such  effectiveness and by overnight mail), (ii) of
any  request  by the SEC  for  amendments  or  supplements  to any  registration
statement  or  related  prospectus  or  related  information,  and  (iii) of the
Company's  reasonable   determination  that  a  post-effective  amendment  to  a
registration statement would be appropriate.

            f. The Company shall use its reasonable  best efforts to prevent the
issuance  of  any  stop  order  or  other  suspension  of  effectiveness  of any
registration   statement,   or  the  suspension  of  the  qualification  of  any
Registrable  Securities  for sale in any  jurisdiction  and, if such an order or
suspension  is issued,  to obtain the  withdrawal of such order or suspension at
the earliest  possible moment and to notify the Investor of the issuance of such
order  and the  resolution  thereof  or its  receipt  of  actual  notice  of the
initiation or threat of any proceeding for such purpose.

            g. The Company shall (i) cause all the Registrable  Securities to be
listed on each  securities  exchange  on which  securities  of the same class or
series  issued by the  Company are then  listed,  if any, if the listing of such
Registrable  Securities is then permitted  under the rules of such exchange,  or
(ii) secure  designation and quotation of all the Registrable  Securities on the
Principal Market. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section.

            h. The Company shall  cooperate  with the Investor to facilitate the
timely  preparation  and delivery of  certificates  (not bearing any restrictive
legend)  representing  the Registrable  Securities to be offered pursuant to any
registration  statement and enable such certificates to be in such denominations
or amounts as the Investor may  reasonably  request and registered in such names
as the Investor may request.

            i. The  Company  shall at all  times  provide a  transfer  agent and
registrar with respect to its Common Stock.

            j. If reasonably  requested by the  Investor,  the Company shall (i)
immediately  incorporate in a prospectus supplement or post-effective  amendment
such information as the Investor believes should be included therein relating to
the  sale  and  distribution  of  Registrable  Securities,   including,  without
limitation,  information  with respect to the number of  Registrable  Securities
being sold,  the purchase  price being paid  therefor and any other terms of the
offering of the Registrable  Securities;  (ii) make all required filings of such
prospectus  supplement  or  post-effective  amendment as soon as notified of the
matters to be  incorporated  in such  prospectus  supplement  or  post-effective
amendment;   and  (iii)  supplement  or  make  amendments  to  any  registration
statement.

                                       4

            k. The Company  shall use its  reasonable  best efforts to cause the
Registrable   Securities  covered  by  the  any  registration  statement  to  be
registered with or approved by such other  governmental  agencies or authorities
as  may  be  necessary  to  consummate  the  disposition  of  such   Registrable
Securities.

l. Within one (1) Business Day after any  registration  statement which includes
the  Registrable  Securities is ordered  effective by the SEC, the Company shall
deliver,  and shall  cause legal  counsel  for the  Company to  deliver,  to the
transfer  agent for such  Registrable  Securities  (with copies to the Investor)
confirmation that such registration statement has been declared effective by the
SEC in the form attached  hereto as Exhibit A.  Thereafter,  if requested by the
Buyer at any time, the Company shall require its counsel to deliver to the Buyer
a written  confirmation  whether or not the  effectiveness of such  registration
statement has lapsed at any time for any reason (including,  without limitation,
the issuance of a stop order) and whether or not the  registration  statement is
current  and  available  to the  Buyer  for  sale  of  all  of  the  Registrable
Securities.

            m. The Company shall take all other reasonable  actions necessary to
expedite and facilitate  disposition  by the Investor of Registrable  Securities
pursuant to any registration statement.

      4. OBLIGATIONS OF THE INVESTOR.

            a.  The  Company  shall  notify  the  Investor  in  writing  of  the
information the Company reasonably requires from the Investor in connection with
any registration statement hereunder.  The Investor shall furnish to the Company
such information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and shall execute such  documents in connection  with such  registration  as the
Company may reasonably request.

            b. The Investor  agrees to cooperate  with the Company as reasonably
requested by the Company in connection  with the  preparation  and filing of any
registration statement hereunder.

            c. The  Investor  agrees  that,  upon receipt of any notice from the
Company  of the  happening  of any  event  or  existence  of  facts  of the kind
described  in Section  3(f) or the first  sentence of 3(e),  the  Investor  will
immediately  discontinue  disposition of Registrable  Securities pursuant to any
registration   statement(s)  covering  such  Registrable  Securities  until  the
Investor's  receipt of the  copies of the  supplemented  or  amended  prospectus
contemplated  by Section  3(f) or the first  sentence  of 3(e).  Notwithstanding
anything to the contrary, the Company shall cause its transfer agent to promptly
deliver shares of Common Stock without any restrictive legend in accordance with
the terms of the Purchase  Agreement in connection  with any sale of Registrable
Securities  with  respect to which an Investor  has entered  into a contract for
sale  prior to the  Investor's  receipt  of a notice  from  the  Company  of the
happening  of any  event of the kind  described  in  Section  3(f) or the  first
sentence of 3(e) and for which the Investor has not yet settled.

                                       5

      5. EXPENSES OF REGISTRATION.

            All reasonable expenses,  other than sales or brokerage commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including,  without limitation, all registration,  listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel for the Company, shall be paid by the Company.

      6. INDEMNIFICATION.

            a. To the fullest  extent  permitted by law, the Company  will,  and
hereby does, indemnify,  hold harmless and defend the Investor,  each Person, if
any, who controls the Investor, the members, the directors,  officers, partners,
employees, agents,  representatives of the Investor and each Person, if any, who
controls  the  Investor  within the  meaning  of the 1933 Act or the  Securities
Exchange  Act of 1934,  as  amended  (the "1934  Act")  (each,  an  "Indemnified
Person"), against any losses, claims, damages,  liabilities,  judgments,  fines,
penalties,  charges,  costs,  attorneys'  fees,  amounts paid in  settlement  or
expenses, joint or several, (collectively,  "Claims") incurred in investigating,
preparing  or  defending  any  action,   claim,   suit,   inquiry,   proceeding,
investigation  or appeal  taken  from the  foregoing  by or before  any court or
governmental,  administrative  or  other  regulatory  agency,  body or the  SEC,
whether pending or threatened,  whether or not an indemnified party is or may be
a party thereto ("Indemnified Damages"), to which any of them may become subject
insofar  as such  Claims  (or  actions  or  proceedings,  whether  commenced  or
threatened,  in respect  thereof) arise out of or are based upon: (i) any untrue
statement or alleged  untrue  statement of a material  fact in the  Registration
Statement,  any  New  Registration  Statement  or any  post-effective  amendment
thereto  or in any  filing  made in  connection  with the  qualification  of the
offering  under the securities or other "blue sky" laws of any  jurisdiction  in
which Registrable Securities are offered ("Blue Sky Filing"), or the omission or
alleged  omission  to state a material  fact  required  to be stated  therein or
necessary  to make the  statements  therein  not  misleading,  (ii)  any  untrue
statement or alleged untrue  statement of a material fact contained in the final
prospectus  (as  amended or  supplemented,  if the Company  files any  amendment
thereof or supplement  thereto with the SEC) or the omission or alleged omission
to state  therein  any  material  fact  necessary  to make the  statements  made
therein,  in light of the circumstances  under which the statements therein were
made, not misleading, (iii) any violation or alleged violation by the Company of
the 1933 Act, the 1934 Act, any other law, including,  without  limitation,  any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable  Securities pursuant to the Registration Statement or
any New Registration  Statement or (iv) any material violation by the Company of
this  Agreement  (the matters in the  foregoing  clauses (i) through (iv) being,
collectively, "Violations"). The Company shall reimburse each Indemnified Person
promptly as such  expenses are  incurred and are due and payable,  for any legal
fees  or  other  reasonable   expenses  incurred  by  them  in  connection  with
investigating  or  defending  any such  Claim.  Notwithstanding  anything to the
contrary  contained  herein,  the  indemnification  agreement  contained in this
Section 6(a):  (i) shall not apply to a Claim by an  Indemnified  Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information  furnished in writing to the Company by such Indemnified Person
expressly  for  use in  connection  with  the  preparation  of the  Registration
Statement,  any New  Registration  Statement  or any such  amendment  thereof or
supplement  thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) or Section  3(e);  (ii) with respect to any  superceded
prospectus,  shall not inure to the  benefit  of any such  person  from whom the
person  asserting any such Claim purchased the  Registrable  Securities that are
the subject thereof (or to the benefit of any person controlling such person) if
the untrue  statement or omission of material fact  contained in the  superceded
prospectus  was  corrected  in  the  revised  prospectus,  as  then  amended  or
supplemented,  if such  revised  prospectus  was timely  made  available  by the
Company pursuant to Section 3(c) or Section 3(e), and the Indemnified Person was
promptly advised in writing not to use the incorrect prospectus prior to the use
giving rise to a violation and such  Indemnified  Person,  notwithstanding  such
advice,  used it; (iii) shall not be available to the extent such Claim is based
on a  failure  of the  Investor  to  deliver  or to  cause to be  delivered  the
prospectus  made  available by the Company,  if such  prospectus was timely made
available  by the Company  pursuant to Section  3(c) or Section  3(e);  and (iv)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected  without the prior written consent of the Company,  which consent shall
not be  unreasonably  withheld.  Such  indemnity  shall remain in full force and
effect regardless of any  investigation  made by or on behalf of the Indemnified
Person and shall  survive the  transfer  of the  Registrable  Securities  by the
Investor pursuant to Section 9.

                                       6

            b.  In  connection  with  the  Registration  Statement  or  any  New
Registration  Statement,  the  Investor  agrees  to  severally  and not  jointly
indemnify,  hold harmless and defend,  to the same extent and in the same manner
as is set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement or any New Registration Statement,
each Person, if any, who controls the Company within the meaning of the 1933 Act
or the 1934 Act  (collectively  and  together  with an  Indemnified  Person,  an
"Indemnified  Party"),  against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise,  insofar
as such  Claim  or  Indemnified  Damages  arise  out of or are  based  upon  any
Violation,  in each  case to the  extent,  and  only to the  extent,  that  such
Violation  occurs in reliance  upon and in conformity  with written  information
about the Investor set forth on Exhibit B attached  hereto and  furnished to the
Company by the Investor  expressly for use in connection with such  registration
statement;  and,  subject to Section 6(d), the Investor will reimburse any legal
or other expenses  reasonably  incurred by them in connection with investigating
or defending any such Claim;  provided,  however,  that the indemnity  agreement
contained in this Section 6(b) and the  agreement  with respect to  contribution
contained  in Section 7 shall not apply to  amounts  paid in  settlement  of any
Claim if such  settlement is effected  without the prior written  consent of the
Investor, which consent shall not be unreasonably withheld;  provided,  further,
however, that the Investor shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified  Damages as does not exceed the net proceeds to
the Investor as a result of the sale of Registrable  Securities pursuant to such
registration  statement.  Such  indemnity  shall remain in full force and effect
regardless of any  investigation  made by or on behalf of such Indemnified Party
and shall  survive the transfer of the  Registrable  Securities  by the Investor
pursuant to Section 9.

            c. Promptly  after receipt by an  Indemnified  Person or Indemnified
Party  under  this  Section  6 of notice of the  commencement  of any  action or
proceeding  (including any governmental action or proceeding) involving a Claim,
such  Indemnified  Person or  Indemnified  Party  shall,  if a Claim in  respect
thereof is to be made  against  any  indemnifying  party  under this  Section 6,
deliver to the indemnifying party a written notice of the commencement  thereof,
and the  indemnifying  party shall have the right to participate in, and, to the
extent the indemnifying  party so desires,  jointly with any other  indemnifying
party similarly  noticed,  to assume control of the defense thereof with counsel
mutually  satisfactory to the indemnifying  party and the Indemnified  Person or
the  Indemnified  Party,  as  the  case  may  be;  provided,  however,  that  an
Indemnified  Person or Indemnified  Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying  party, if, in
the  reasonable  opinion of counsel  retained  by the  indemnifying  party,  the
representation  by such counsel of the Indemnified  Person or Indemnified  Party
and the  indemnifying  party would be  inappropriate  due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party  represented  by such counsel in such  proceeding.  The  Indemnified
Party or Indemnified Person shall cooperate fully with the indemnifying party in
connection  with any  negotiation  or defense of any such action or claim by the
indemnifying  party and shall furnish to the indemnifying  party all information
reasonably  available  to the  Indemnified  Party or  Indemnified  Person  which
relates  to such  action  or  claim.  The  indemnifying  party  shall  keep  the
Indemnified  Party or  Indemnified  Person fully apprised at all times as to the

                                       7

status of the defense or any settlement  negotiations  with respect thereto.  No
indemnifying  party shall be liable for any  settlement of any action,  claim or
proceeding  effected without its written consent,  provided,  however,  that the
indemnifying  party shall not  unreasonably  withhold,  delay or  condition  its
consent.  No  indemnifying  party shall,  without the consent of the Indemnified
Party or Indemnified Person,  consent to entry of any judgment or enter into any
settlement or other compromise  which does not include as an unconditional  term
thereof the giving by the  claimant or plaintiff  to such  Indemnified  Party or
Indemnified  Person of a release from all  liability in respect to such claim or
litigation.   Following   indemnification   as  provided  for   hereunder,   the
indemnifying party shall be subrogated to all rights of the Indemnified Party or
Indemnified  Person with  respect to all third  parties,  firms or  corporations
relating to the matter for which  indemnification  has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified  Person or Indemnified  Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action.

            d. The  indemnification  required by this Section 6 shall be made by
periodic  payments of the amount thereof during the course of the  investigation
or defense, as and when bills are received or Indemnified Damages are incurred.

            e. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the  indemnifying  party or others,  and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.

      7. CONTRIBUTION.

            To the  extent  any  indemnification  by an  indemnifying  party  is
prohibited or limited by law, the indemnifying  party agrees to make the maximum
contribution  with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no seller of Registrable  Securities guilty of fraudulent  misrepresentation
(within  the  meaning of Section  11(f) of the 1933 Act)  shall be  entitled  to
contribution  from any seller of  Registrable  Securities  who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds  received by
such seller from the sale of such Registrable Securities.

      8. REPORTS AND DISCLOSURE UNDER THE SECURITIES ACTS.

            With a view to making available to the Investor the benefits of Rule
144  promulgated  under the 1933 Act or any other  similar rule or regulation of
the SEC that may at any time  permit  the  Investor  to sell  securities  of the
Company to the public without  registration ("Rule 144"), the Company agrees, at
the Company's sole expense, to:

            a. make and keep public  information  available,  as those terms are
understood and defined in Rule 144;

            b.  file  with the SEC in a timely  manner  all  reports  and  other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such  requirements and the filing of such reports
and other documents is required for the applicable provisions of Rule 144; and

                                       8

            c. furnish to the Investor so long as the Investor owns  Registrable
Securities,  promptly upon request,  (i) a written statement by the Company that
it has complied with the reporting and or disclosure provisions of Rule 144, the
1933 Act and the 1934 Act,  (ii) a copy of the most recent  annual or  quarterly
report of the  Company  and such other  reports  and  documents  so filed by the
Company,  and (iii) such other  information  as may be  reasonably  requested to
permit  the  Investor  to sell  such  securities  pursuant  to Rule 144  without
registration.

            d. take such  additional  action as is  requested by the Investor to
enable the  Investor to sell the  Registrable  Securities  pursuant to Rule 144,
including,  without  limitation,  delivering all such legal opinions,  consents,
certificates,  resolutions and  instructions to the Company's  Transfer Agent as
may be requested from time to time by the Investor and otherwise fully cooperate
with Investor and Investor's  broker to effect such sale of securities  pursuant
to Rule 144.

            The Company agrees that damages may be an inadequate  remedy for any
breach of the terms and  provisions of this Section 8 and that  Investor  shall,
whether or not it is pursuing  any  remedies  at law,  be entitled to  equitable
relief in the form of a preliminary or permanent injunctions,  without having to
post any bond or other  security,  upon any breach or  threatened  breach of any
such terms or provisions.

      9. ASSIGNMENT OF REGISTRATION RIGHTS.

            The  Company  shall  not  assign  this  Agreement  or any  rights or
obligations  hereunder  without  the  prior  written  consent  of the  Investor,
including  by merger or  consolidation.  The  Investor may not assign its rights
under this Agreement  without the written consent of the Company,  other than to
an  affiliate  of the  Investor  controlled  by  Steven  G.  Martin or Joshua B.
Scheinfeld.

      10. AMENDMENT OF REGISTRATION RIGHTS.

            Provisions  of this  Agreement  may be  amended  and the  observance
thereof may be waived (either  generally or in a particular  instance and either
retroactively  or  prospectively),  only with the written consent of the Company
and the Investor.

      11. MISCELLANEOUS.

            a. A Person  is  deemed  to be a holder  of  Registrable  Securities
whenever  such  Person  owns or is  deemed  to own of  record  such  Registrable
Securities.  If  the  Company  receives  conflicting  instructions,  notices  or
elections  from  two or  more  Persons  with  respect  to the  same  Registrable
Securities,  the  Company  shall act upon the basis of  instructions,  notice or
election received from the registered owner of such Registrable Securities.

            b. Any notices,  consents,  waivers or other communications required
or  permitted to be given under the terms of this  Agreement  must be in writing
and will be deemed to have been  delivered:  (i) upon  receipt,  when  delivered
personally;  (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending  party);  or (iii) one (1) Business Day after  deposit with a nationally
recognized  overnight  delivery service,  in each case properly addressed to the
party to  receive  the  same.  The  addresses  and  facsimile  numbers  for such
communications shall be:

                                       9

      If to the Company:
            e.Digital Corporation
            16770 West Bernardo Drive
            San Diego, California 92127
            Telephone:  858-304-3016
            Facsimile:  858-304-3023
            Attention:  Chief Financial Officer

      With a copy to:
            McConnell, Dunning & Barwick LLP
            15 Enterprise, Suite 360
            Aliso Viejo, California 92656
            Telephone:  949-900-4400
            Facsimile:  949-900-4401
            Attention:  Curt C. Barwick, Esq

      If to the Investor:
            Fusion Capital Fund II, LLC
            222 Merchandise Mart Plaza, Suite 9-112
            Chicago, IL 60654
            Telephone:  312-644-6644
            Facsimile:  312-644-6244
            Attention:  Steven G.  Martin

or at such other address and/or facsimile number and/or to the attention of such
other person as the  recipient  party has  specified by written  notice given to
each other  party three (3)  Business  Days prior to the  effectiveness  of such
change.  Written  confirmation  of receipt  (A) given by the  recipient  of such
notice,   consent,   waiver  or  other   communication,   (B)   mechanically  or
electronically  generated by the sender's facsimile machine containing the time,
date,  recipient  facsimile  number  and an  image  of the  first  page  of such
transmission  or (C)  provided by a  nationally  recognized  overnight  delivery
service, shall be rebuttable evidence of personal service,  receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

            c.  Failure of any party to exercise  any right or remedy under this
Agreement or otherwise,  or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.

            d. The  corporate  laws of the State of  Delaware  shall  govern all
issues concerning the relative rights of the Company and its  stockholders.  All
other  questions   concerning  the  construction,   validity,   enforcement  and
interpretation  of this Agreement  shall be governed by the internal laws of the
State of Illinois, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Illinois or any other  jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of  Illinois.  Each party  hereby  irrevocably  submits  to the  exclusive
jurisdiction  of the state and federal courts  sitting the City of Chicago,  for
the adjudication of any dispute hereunder or in connection  herewith or with any
transaction  contemplated  hereby or discussed  herein,  and hereby  irrevocably
waives,  and agrees not to assert in any suit,  action or proceeding,  any claim
that it is not personally  subject to the  jurisdiction of any such court,  that
such suit, action or proceeding is brought in an inconvenient  forum or that the
venue of such  suit,  action  or  proceeding  is  improper.  Each  party  hereby
irrevocably  waives  personal  service of process and consents to process  being
served in any such suit,  action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient  service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any right
to serve  process in any  manner  permitted  by law.  If any  provision  of this
Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity
or  unenforceability  shall not affect the  validity  or  enforceability  of the
remainder  of  this   Agreement  in  that   jurisdiction   or  the  validity  or
enforceability  of any  provision of this  Agreement in any other  jurisdiction.
EACH PARTY HEREBY  IRREVOCABLY  WAIVES ANY RIGHT IT MAY HAVE,  AND AGREES NOT TO
REQUEST,  A JURY  TRIAL FOR THE  ADJUDICATION  OF ANY  DISPUTE  HEREUNDER  OR IN
CONNECTION  HEREWITH  OR  ARISING  OUT OF  THIS  AGREEMENT  OR  ANY  TRANSACTION
CONTEMPLATED HEREBY.

                                       10

            e. This Agreement,  and the Purchase Agreement constitute the entire
agreement among the parties hereto with respect to the subject matter hereof and
thereof. There are no restrictions,  promises, warranties or undertakings, other
than those set forth or referred to herein and therein.  This  Agreement and the
Purchase Agreement  supersede all prior agreements and understandings  among the
parties hereto with respect to the subject matter hereof and thereof.

            f. Subject to the  requirements  of Section 9, this Agreement  shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.

            g. The headings in this  Agreement are for  convenience of reference
only and shall not limit or otherwise affect the meaning hereof.

            h. This Agreement may be executed in identical counterparts, each of
which shall be deemed an original but all of which shall  constitute one and the
same agreement.  This Agreement,  once executed by a party,  may be delivered to
the other party hereto by  facsimile  transmission  of a copy of this  Agreement
bearing the signature of the party so delivering this Agreement.

            i.  Each  party  shall  do and  perform,  or  cause  to be done  and
performed,  all such further acts and things,  and shall execute and deliver all
such other  agreements,  certificates,  instruments and documents,  as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.

            j. The  language  used in this  Agreement  will be  deemed to be the
language  chosen by the parties to express  their mutual  intent and no rules of
strict construction will be applied against any party.

            k. This  Agreement is intended for the benefit of the parties hereto
and  their  respective  permitted  successors  and  assigns,  and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.



                                  * * * * * *



                                       11






      IN WITNESS  WHEREOF,  the parties  have caused  this  Registration  Rights
Agreement to be duly executed as of day and year first above written.



                                    THE COMPANY:
                                    ------------

                                    e.Digital Corporation


                                    By: /s/Robert Putnam
                                        --------------------
                                    Name:  Robert Putnam
                                    Title: Senior Vice President


                                    BUYER:
                                    ------

                                    Fusion Capital Fund II, LLC
                                    By: Fusion Capital Partners, LLC
                                    By: Rockledge Capital Corporation

                                    By: /s/Josh Scheinfeld
                                        ----------------------
                                    Name:  Josh Scheinfeld
                                    Title: President




                                       12


                                    EXHIBIT A
                                    ---------

                        TO REGISTRATION RIGHTS AGREEMENT
                        --------------------------------

                         FORM OF NOTICE OF EFFECTIVENESS
                            OF REGISTRATION STATEMENT





_________, 2007


[TRANSFER AGENT]

- -----------------

- -----------------


Attention: ___________

RE: e.Digital Corporation


Ladies and Gentlemen:

       We are counsel to  e.Digital  Corporation,  a Delaware  corporation  (the
"Company"),  and have  represented  the Company in connection  with that certain
Common  Stock  Purchase  Agreement,  dated as of  ____________,  (the  "Purchase
Agreement"), entered into by and between the Company and Fusion Capital Fund II,
LLC (the "Buyer") pursuant to which the Company has agreed to issue to the Buyer
shares of the Company's  Common  Stock,  par value $0.001 per share (the "Common
Stock"),  in an  amount  up to  Eight  Million  Five  Hundred  Thousand  Dollars
($8,500,000.00),  in  accordance  with the terms of the Purchase  Agreement.  In
connection with the  transactions  contemplated by the Purchase  Agreement,  the
Company  has  registered  with the U.S.  Securities  & Exchange  Commission  the
following shares of Common Stock:

      (1)   _________ shares of Common Stock to be issued upon purchase from the
            Company by the Buyer from time to time (the "Purchase Shares.").

      (2)   4,166,666  Purchase Shares of Common Stock previously  issued to the
            Buyer (the "Initial Purchase Shares.").

      (3)   3,500,000 shares of Common Stock which have been issued to the Buyer
            as a commitment fee (the "Commitment Shares").

      (4)   200,000  additional shares of Common Stock which have been issued by
            the Company to the Buyer as an expense  reimbursement  (the "Signing
            Shares").


                                       11

Pursuant  to the  Purchase  Agreement,  the  Company  also  has  entered  into a
Registration  Rights  Agreement,  dated  as  of  ______,  with  the  Buyer  (the
"Registration  Rights  Agreement")  pursuant to which the Company agreed,  among
other things, to register the Purchase Shares,  the Initial Purchase Shares, the
Signing Shares,  and the Commitment  Shares under the Securities Act of 1933, as
amended (the "1933 Act"). In connection with the Company's obligations under the
Purchase  Agreement  and the  Registration  Rights  Agreement,  on _______,  the
Company  filed  a  Registration   Statement   (File  No.   333-_________)   (the
"Registration  Statement")  with the  Securities  and Exchange  Commission  (the
"SEC") relating to the sale of the Purchase Shares, the Initial Purchase Shares,
the Signing Shares and the Commitment Shares.

       In connection with the foregoing, we advise you that: (1) a member of the
SEC's  staff has  advised  us by  telephone  that the SEC has  entered  an order
declaring the Registration  Statement effective under the 1933 Act at _____ P.M.
on __________,  2007, (2) we have no knowledge,  after  telephonic  inquiry of a
member of the SEC's staff,  that any stop order suspending its effectiveness has
been issued or that any  proceedings  for that  purpose are pending  before,  or
threatened by, the SEC, (3) the Commitment  Shares,  the Initial Purchase Shares
and the Signing Shares are available for sale under the 1933 Act pursuant to the
Registration  Statement and the restrictive legend on the Commitment Shares, the
Initial  Purchase  Shares and the  Signing  Shares  may be  removed  and (4) the
Purchase  Shares  are  available  for sale  under the 1933 Act  pursuant  to the
Registration Statement and may be issued without any restrictive legend.



                                    Very truly yours,

                                    [Company Counsel]


                                    By:____________________





CC:    Fusion Capital Fund II, LLC





                                    EXHIBIT B

                        TO REGISTRATION RIGHTS AGREEMENT
                        --------------------------------

     Information About The Investor Furnished To The Company By The Investor
         Expressly For Use In Connection With The Registration Statement


As of the date of the Purchase  Agreement,  Fusion  Capital  beneficially  owned
200,000  shares of common stock of the  Company.  Steven G. Martin and Joshua B.
Scheinfeld, the principals of Fusion Capital, are deemed to be beneficial owners
of all of the shares of common stock owned by Fusion Capital. Messrs. Martin and
Scheinfeld have shared voting and investment power over the shares being offered
under the  prospectus  filed with the SEC in  connection  with the  transactions
contemplated  under the  Purchase  Agreement.  Fusion  Capital is not a licensed
broker dealer or an affiliate of a licensed broker dealer.


FOR IMMEDIATE RELEASE

                 e.DIGITAL CORPORATION ENTERS INTO $8.5 MILLION
               COMMON STOCK PURCHASE AGREEMENT WITH FUSION CAPITAL

(SAN DIEGO, CA - January 8, 2007) - e.Digital  Corporation (OTC: EDIG) a leading
innovator of  proprietary  secure  digital video  technology  and products,  and
patented  technology  in the  utilization  of flash memory in portable  devices,
announced  today  that it has  signed  an $8.5  million  common  stock  purchase
agreement  with  Fusion  Capital  Fund II,  LLC, a  Chicago-based  institutional
investor.  Under the agreement,  the Company sold to Fusion Capital  $250,000 of
its common  stock at a purchase  price of $0.12 per share and has agreed to sell
to Fusion Capital an additional $250,000 of its common stock at a purchase price
of $0.12 per  share on the date that a  registration  statement  related  to the
transaction  is filed with the  Securities and Exchange  Commission  (SEC).  The
Company may sell an  additional  $8.0 million of common stock to Fusion  Capital
from time to time over a 25-month  period after the SEC has  declared  effective
the registration statement related to the transaction. The proceeds will be used
to expand its eVU(TM) mobile entertainment system business, accelerate licensing
efforts of its flash  memory-related  patent  portfolio and for general  working
capital.

Under the agreement, the Company has the right to sell shares of common stock to
Fusion  Capital  from time to time in amounts  between  $80,000  and $1 million,
depending on certain conditions, for up to $8.0 million of additional funds. The
purchase  price of the shares will be based on the  prevailing  market prices of
the Company's  shares at the time of sales without any fixed  discount,  and the
Company  will  control  the  timing  and amount of any sales of shares to Fusion
Capital.  A more detailed  description of the transaction,  as well as copies of
the material agreements, is set forth in the Company's Form 8-K filed today with
the SEC.

Commenting on the Fusion  agreement,  Will Blakeley,  e.Digital's  president and
chief  technology  officer said, "This agreement with Fusion Capital comes at an
opportune  time by providing us with the flexible  financial  backing to help us
grow our business,  fulfill  volume eVU orders,  and increase eVU backlog in the
healthcare,  travel  and  entertainment  industries.  We also  expect  to  focus
resources on licensing our flash memory patent portfolio to the 174 companies we
have identified to date in the cell phone, PDA/Pocket PC, portable A/V recorder,
digital camera,  camcorder and other portable device industries,  that appear to
employ our portfolio."

About e.Digital Corporation: e.Digital is a provider of secure portable Video on
Demand products  including its eVU(TM) mobile  entertainment  system.  e.Digital
also  owns  and  is  pursuing  the   monetization  of  its  portfolio  of  flash
memory-related  patents.  e.Digital's  proprietary  digital technology  platform
employs  its  MicroOS(TM)  operating  system,  Content  Mark-Up  Language  (CML)
application,  LDP  software,   patent-pending  Hardware  Security  technologies,
Digital  Rights  Management  (DRM)  solutions,  Content  Download  applications,
Encryption  and  Content  Protection  solutions,   and  Video  Display  software
applications. For more information about e.Digital and its technology platforms,
please visit the company website at www.edigital.com.



Safe Harbor statement under the Private Securities Litigation Reform of 1995:
All statements made in this document, other than statements of historical fact,
are forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act. You should not place undue reliance on these
statements. We base these statements on particular assumptions that we have made
in light of our industry experience, the stage of product and market
development, expected future developments and other factors that we believe are
appropriate under the circumstances. These forward-looking statements are based
on the then-current expectations, beliefs, assumptions, estimates and forecasts
about the businesses of the Company and the industries and markets in which the
Company operates. These statements are not guarantees of future performance and
involve risks, uncertainties that could cause actual results to differ
materially from those suggested in the forward-looking statements, including but
not limited to the Company's ability to finance its operations through the
Fusion Capital agreement and other means, filing and having the SEC declare
effective the registration statement being prepared in connection with the
Fusion Capital transaction, favorably resolving the complaint filed by digEcor,
Inc. against the Company and certain of its officers and employees, selling its
products, manufacturing and shipping orders in a timely manner, securing
additional business, monetizing its patent portfolio and other risks identified
and discussed in our filings with the Securities and Exchange Commission
("SEC"). Actual outcomes and results may differ materially from what is
expressed or implied by the forward-looking statements. More information about
potential factors that could affect the Company can be found in its most recent
Form 10-K, Form 10-Q and other reports and statements filed with the Securities
and Exchange Commission ("SEC"). e.Digital Corporation disclaims any intent or
obligation to update these or any forward-looking statements, except as
otherwise specifically stated by it.

Note:  eVU and  MicroOS  are  trademarks  of  e.Digital  Corporation.  All other
company, product, and service names are the property of their respective owners.

CONTACT:
e.Digital Corporation: Robert Putnam, (858) 304-3016 ext. 205,
rputnam@edigital.com


================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 8-K

                                 CURRENT REPORT
     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                                December 12, 2006
                Date of Report (Date of earliest event reported)

                              E.DIGITAL CORPORATION
               (Exact name of registrant as specified in charter)

                                    Delaware
                 (State or other jurisdiction of incorporation)

                                     0-20734
                            (Commission File Number)

                                   33-0591385
                        (IRS Employer Identification No.)

                            16770 West Bernardo Drive
                           San Diego, California 92127
                    (Address of principal executive offices)

                                 (858) 304-3016
              (Registrant's telephone number, including area code)

================================================================================


Item 1.01 Entry into a Material Definitive Agreement.

e. Digital Corporation (the "Company") previously issued (i) a 15% Promissory
Note, as amended, in the original principal amount of $750,000.00 and (ii) a 15%
Unsecured Promissory Note in the original principal amount of $290,164.36
(collectively, the "15% Notes") to Davric Corporation ("Davric"). The Company's
aggregate obligation under the 15% Notes inclusive of accrued interest was
$970,752 at November 30, 2006. The 15% Notes were due on December 31, 2006.

On December 12, 2006 the Company and Davric completed an exchange of the 15%
Notes ("Exchange Agreement") for (i) a new 7.5% Convertible Subordinated Term
Note issued by the Company in the principal amount of $970,752.00 due November
30, 2009 (the "Exchange Note") and (ii) 500,000 shares of common stock, $.001
par value of the Company (the "Exchange Shares"). The previous 15% Notes were
cancelled. The Exchange Shares were issued as consideration for extending the
maturity date and reducing the interest rate from 15% to 7.5%.

The Exchange Note is payable by the Company to Davric in monthly principal and
interest installments of $6,000 starting December 2006, increasing to $15,000
starting in February 2007, $30,000 starting in December 2007 and $50,000
starting in December 2008 with maturity November 30, 2009. Commencing with the
February 2007 installment payment, the Company may, 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 shall
be 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
Exchange Note is convertible by Davric at $0.30 per common share beginning
February 1, 2007 and the Company may elect to call the Exchange 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 Exchange Note in full or in minimum parts of $50,000 on ten-day
notice. The Exchange Note may be subordinate to certain future senior
indebtedness as defined in the Exchange Note.

The Company is not obligated to register the Exchange Shares, any Monthly
Installment Shares or any shares issuable on conversion of the Exchange Note.

A complete copy of the Exchange Agreement and the Exchange Note are filed
herewith as Exhibits 99.1 and 99.2, respectively, and are incorporated herein by
reference [except that we do not intend for any person other than Davric to rely
upon the representations and warranties contained in the exhibits]. The summary
of the transaction set forth above does not purport to be complete and is
qualified in its entirety by reference to such exhibits.

Item 1.02 Termination of a Material Definitive Agreement.

Upon completion of the exchange transaction described above, the Company is no
longer obligated on the 15% Notes which are being cancelled. Without the
exchange and the cancellation of the 15% Notes, the Company would have been
obligated to make total payments of approximately $982,300 at December 31, 2006.
The cancelled 15% Notes were last amended effective June 30, 2006 and are
further described in the Company's report on Form 8-K dated July 26, 2006.


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

The Company became obligated on the new 7.5% Convertible Subordinated Term Note
in the principal amount of $970,752.00 effective as of December 1, 2006 as
described above. A description of the material terms of the obligation are
described above. The Company is obligated to make principal and interest
payments, subject to prepayment or conversion in whole or in part, in cash or
shares of common stock in the following amounts:

                  Fiscal year ending:
                           March 31, 2007   $ 42,000
                           March 31, 2008   $240,000
                           March 31, 2009   $440,000
                           March 31, 2010   $398,165

Item 3.02 Unregistered Sales of Equity Securities.

As described above the Company has issued 500,000 shares of its common stock,
$.001 par value as consideration for reducing the interest rate and extending
the maturity date of $970,752 of debt. The Company has also issued a 7.5%
Convertible Subordinated Term Note for debt that was not previously convertible.

The Company paid no placement fees. The Company offered and sold the Exchange
Shares and the Exchange Note without registration under the Securities Act of
1933 to one accredited investor in reliance upon the exemption provided by Rule
506 of Regulation D thereunder. The Exchange Shares and any shares issuable
pursuant to the terms of the Exchange Note may not be offered or sold in the
United States in the absence of an effective registration statement or exemption
from the registration requirements under the Securities Act. An appropriate
legend was placed on the Exchange Shares issued, and will be placed on the
shares issuable pursuant to the terms of the Exchange Note, unless registered
under the Securities Act prior to issuance.

Preferred Stock Conversion and Warrant Exercise
The Company also has issued 1,815,976 shares of common stock upon the conversion
of 1,250 shares of outstanding Series EE preferred stock by two holders. There
are no remaining shares of Series EE preferred stock outstanding. The Company
received $16,000 from one holder exercising a warrant for 200,000 shares of
common stock. The shares of common stock issued by the Company upon conversion
of the preferred stock and exercise of the warrant were registered for resale on
registration statement #333-136096.

Subordinated Note Conversion
At September 30, 2006 the Company had $1,300,000 of convertible 12% Subordinated
Promissory Notes due December 31, 2006, as amended ("Subordinated Notes")
outstanding. Since September 30, 2006 the Company has issued 7,500,000 shares of
common stock upon the voluntary conversion by six holders of an aggregate of
$600,000 principal amount of Subordinated Notes. One director converted $50,000
of the Subordinated Notes into 625,000 shares. The balance of $700,000 is due on
December 31, 2006 unless earlier converted.


Item  9.01 Financial Statements and Exhibits.

(d)   Exhibits:

99.1  Exchange Agreement between the Company and Davric Corporation dated
      December 1, 2006.

99.2  7.5% Convertible Subordinated Term Note issued by the Company to Davric
      Corporation dated December 1, 2006.





                                   SIGNATURES

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



                                         e.DIGITAL CORPORATION

    Date: December 12, 2006              By: /s/ ROBERT PUTNAM
                                         ----------------------------
                                         Robert Putnam, Senior Vice President,
                                         Interim Financial Officer and Secretary
                                         (Principal Financial and Accounting
                                         Officer and duly authorized to sign on
                                         behalf of the Registrant)

                                                                    EXHIBIT 99.1

THE SECURITIES TO WHICH THIS AGREEMENT  RELATES HAVE NOT BEEN  REGISTERED  UNDER
THE  SECURITIES  ACT OF 1933, AS AMENDED (THE  "SECURITIES  ACT"),  OR UNDER ANY
STATE SECURITIES LAWS ("BLUE SKY LAWS"),  AND MAY NOT BE OFFERED OR SOLD WITHOUT
REGISTRATION  UNDER THE  SECURITIES  ACT,  AND AS  REQUIRED  BY BLUE SKY LAWS IN
EFFECT AS TO SUCH  TRANSFER,  UNLESS AN EXEMPTION FROM SUCH  REGISTRATION  UNDER
STATE AND FEDERAL LAW IS AVAILABLE.


                       E X C H A N G E   A G R E E M E N T

                              E.DIGITAL CORPORATION


E.DIGITAL CORPORATION
16770 West Bernardo Drive
San Diego, CA 92127                                             December 1, 2006
                                                                 (Must be dated)
Attention:  Mr. William Blakeley, President


Gentlemen:

      1. Exchange. The undersigned, DAVRIC Corporation,  ("Noteholder"),  hereby
irrevocably transfers, sells, assigns and exchanges as of the above date (a) (i)
that certain 15% Promissory Note, as amended,  in the original  principal amount
of  $750,000.00  due  December  31,  2006 and (ii) that  certain  15%  Unsecured
Promissory Note in the original principal amount of $290,164.36 due December 31,
2006  (collectively,  the "15%  Notes")  issued  by  E.DIGITAL  CORPORATION.,  a
Delaware corporation (the "Company") for (b) (i) a 7.5% Convertible Subordinated
Term Note issued by the Company in the original  principal amount of $970,752.00
due:  November 30, 2009 (the "Exchange  Note") and (ii) 500,000 shares of common
stock,  $.001 par value of the Company (the "Exchange  Shares" and  collectively
with the Exchange  Note,  the "Exchange  Securities").  This exchange is made in
accordance  with and is subject  to the terms of this  Exchange  Agreement,  the
Company's  Certificate  of  Incorporation  and Bylaws and Section  351(g) of the
Internal  Revenue  Code of 1986,  as  amended  and the  regulations  promulgated
thereunder. Upon execution of this Exchange Agreement and the acceptance thereof
by the Company,  the undersigned hereby irrevocably  delivers and tenders to the
Company,  the 15% Notes,  as amended,  for  cancellation,  free and clear of all
liens,  claims and  encumbrances and when delivered in accordance with the terms
hereof  shall  irrevocably  deliver and tender the  Exchange  Securities  to the
Noteholder,  mutual  receipt  of  which  is  acknowledged  and  accepted  by the
Noteholder  and the Company.  This exchange is intended to constitute a tax-free
exchange  in  accordance  with and  subject  to Section  351(g) of the  Internal
Revenue Code.

      2. Acceptance of Exchange.  This Exchange Agreement does not constitute an
offer by the Company to sell the Exchange  Securities to the undersigned,  nor a
solicitation of any offer from the  undersigned to buy the Exchange  Securities,
and shall be deemed  accepted  by the  Company  only  when  countersigned  by an
executive officer of the Company. The Company may reject this Exchange, in whole
or in part, for any reason in its sole discretion.  I understand the Company has
agreed to  accept  or reject  this  Exchange  within 15 days of  receipt  by the
Company of this duly executed Exchange  Agreement together with the original 15%
Notes,  for  cancellation in the manner set forth above.  After such 15 days, if
not accepted by the Company,  I may revoke this Exchange  Agreement by notice in
writing.


      3.  Representations  and  Warranties  of the Company.  The Company  hereby
represents and warrants to Noteholder as of the date of this Exchange  Agreement
as follows:

         (a)  Authorization;  Binding  Obligations.  All corporate action on the
part of the Company, its officers,  directors and stockholders necessary for the
authorization of this Exchange Agreement,  the performance of all obligations of
the Company hereunder and thereunder at the Closing and the authorization, sale,
issuance and delivery of the Exchange  Securities pursuant hereto has been taken
or will be taken prior to the Closing.  The Exchange Agreement when executed and
delivered,  will be valid and binding  obligations of the Company enforceable in
accordance  with its terms,  except (a) as  limited  by  applicable  bankruptcy,
insolvency,  reorganization,  moratorium  or other laws of  general  application
affecting enforcement of creditors' rights; and (b) general principles of equity
that restrict the availability of equitable remedies.

         (b) Compliance with Other Instruments.  The Company is not in violation
or default of any term of its Certificate of Incorporation or Bylaws,  or of any
provision  of  any  mortgage,  indenture,  contract,  agreement,  instrument  or
contract  to which  it is  party  or by  which  it is bound or of any  judgment,
decree,  order,  writ or, to its  knowledge,  any  statute,  rule or  regulation
applicable  to the  Company  which would  materially  and  adversely  affect the
business, assets, liabilities, financial condition or operations of the Company.
The execution,  delivery,  and  performance of and compliance with this Exchange
Agreement and the issuance of the Exchange Securities pursuant hereto, will not,
with or without  the  passage  of time or giving of  notice,  result in any such
material  violation,  or be in conflict  with or  constitute a default under any
such term, or result in the creation of any mortgage,  pledge, lien, encumbrance
or charge upon any of the properties or assets of the Company or the suspension,
revocation,   impairment,  forfeiture  or  nonrenewal  of  any  permit  license,
authorization or approval applicable to the Company,  its business or operations
or any of its assets or properties.

         (c) Litigation.  There is no action, suit,  proceeding or investigation
pending or to the Company's  knowledge  currently  threatened in writing against
the Company that questions the validity of this Exchange  Agreement or the right
of the  Company  to  enter  into any of such  agreement,  or to  consummate  the
transactions  contemplated  hereby or  thereby,  or which might  result,  either
individually or in the aggregate,  in any material adverse change in the assets,
condition or affairs of the Company,  financially or otherwise, or any change in
the current equity ownership of the Company, nor is the Company aware that there
is any basis for the foregoing.

         (d) Compliance with Laws; Permits. To its knowledge, the Company is not
in violation of any applicable statute, rule,  regulation,  order or restriction
of any domestic or foreign  government or any  instrumentality or agency thereof
in respect of the conduct of its  business or the  ownership  of its  properties
which  violation  would  materially and adversely  affect the business,  assets,
liabilities,  financial  condition or operations of the Company. No governmental
orders,  permissions,  consents,  approvals or authorizations are required to be
obtained  and no  registrations  or  declarations  are  required  to be filed in
connection  with the execution  and delivery of this Exchange  Agreement and the
issuance of the  Exchange  Securities,  except such as has been duly and validly
obtained or filed,  or with  respect to any filings  that must be made after the
Closing, as will be filed in a timely manner.

      4. Representations and Warranties of Noteholder.  With full knowledge that
the Company and its officers,  directors and controlling persons will be relying
upon the  following,  among other things,  in  determining  that the transfer of
Exchange  Securities  to me in exchange for my 15% Notes will be exempt from the
registration requirements of the Securities Act, and applicable state securities
laws, I represent and warrant to the Company that:

         (a) Company Information. I understand that I and my adviser(s) have had
a  reasonable  opportunity  to ask  questions  of and receive  answers  from the
Company, or a person or persons acting on its behalf,  concerning my election to
exchange the 15% Notes for the Exchange Securities,  and all such questions have
been answered to my or their full  satisfaction.  I acknowledge and agree that I
have been provided with, or offered complete access to,  information  concerning
the Company, its business,  financial condition and prospects,  and the offering
of the Exchange  Securities,  equivalent to such  information as would have been
contained in a registration of the Exchange Securities under the Securities Act.
I acknowledge that no  representations or warranties have been made to me by the
Company  or  persons   acting  on  behalf  of  the   Company,   other  than  the
representations set forth in this Exchange Agreement.

                                       2

         (b) Restricted  Securities.  I acknowledge that the Exchange Securities
have  not been  registered  under  the  Securities  Act,  in  reliance  upon the
exemption  from  registration  provided  by Rule 506 of  Regulation  D under the
Securities  Act, and under the  securities  or blue sky laws of any state or any
rules or regulations promulgated  thereunder,  on the grounds that the offer and
sale of such security to me is a transaction not involving any public  offering.
The Exchange  Securities which I am acquiring  hereby,  as well as any shares of
common stock issuable upon the conversion of the Exchange Note, are  "restricted
securities,"  as that term is defined in Rule 144(a) under the Securities Act. I
acknowledge and understand that the Exchange Securities and any shares of common
stock issuable upon the conversion of the Exchange  Note, are  unregistered  and
must be held by me indefinitely,  unless they are subsequently  registered under
the Securities Act or an exemption from such registration is available for their
resale.  I understand  and agree that the prior  written  consent of the Company
will be necessary for any transfer by me of the Exchange Securities, in whole or
in part,  unless the Exchange  Securities  have been duly  registered  under the
Securities  Act or the  transfer is made in  accordance  with Rule 144 under the
Securities Act.

         (c) Legend.  I understand  and agree that the Exchange  Securities,  as
well as any shares of common stock  issuable upon the conversion of the Exchange
Note, shall, unless and until removed in accordance with applicable law, contain
a legend substantially in the following form, which I have read and understand:

               "These  securities have not been registered under the
               Securities  Act of 1933,  as amended (the "Act"),  or
               under any state  securities laws, and are "restricted
               securities"  as  defined  in Rule 144  under the Act.
               These   securities   may   not  be   offered,   sold,
               transferred,  pledged or  hypothecated in the absence
               of  an  effective  registration  statement  for  such
               securities  under the Act or an  opinion  of  counsel
               satisfactory  to the Company that an  exemption  from
               such registration is available."

         (d)  Registration.  I  understand  that  only  the  Company  can file a
registration statement under the Securities Act covering the Exchange Securities
or any shares of common stock issuable upon the conversion of the Exchange Note.

         (e)  Noteholder  Can Bear Economic Risk. I represent and warrant to the
Company in connection  with my exchange of the 15% Notes and the  acquisition of
the Exchange  Securities  that (i) I have  adequate  means of  providing  for my
current needs and possible personal contingencies,  and this investment will not
necessitate any change in my standard of living, (ii) I have no present need for
liquidity  in this  investment,  (iii) I am able to bear the  economic  risks of
investment in the Exchange Securities for an indefinite period, and (iv) at this
time could afford a complete loss of this investment.

         (f) Investment Has Substantial  Risk. I recognize that an investment in
the Exchange Securities is speculative and involves a high degree of risk.

         (g)  Acquisition  For Own Account;  Able to Protect Own  Interest.  The
Exchange  Securities  are  being  acquired  solely  for  my  own  account,   for
investment,  and not for the  account  of any  other  person  and not  with  any
intention to make any distribution or public offering of such securities. I (and
if I am an entity,  then the individual  making this  investment  decision on my
behalf),  alone  or  together  with  my  adviser(s),  have  such  knowledge  and
experience in financial, tax and business matters as to enable me to utilize the
information  made  available  to me in order to evaluate the merits and risks of
the  prospective  investment  in the  Exchange  Securities  to make an  informed
investment decision with respect thereto.

         (h) Authority;  Residence. I, if a corporation,  partnership,  trust or
other entity,  have full power and authority to execute this Exchange Agreement,
to make all  representations,  warranties  and covenants set forth herein and to
acquire and hold the Exchange  Securities,  and have my principal  office as set
forth on the signature page hereof;  and this entity has not been formed for the
specific purpose of acquiring the Exchange Securities.  I, if an individual,  am
at least 21 years of age,  and I reside at the place set forth on the  signature
page hereof.  The  undersigned is a "United States Person" within the meaning of
Section 7701(a)(30) of the Internal Revenue Code.

                                       3

         (i) Reliance by Company.  All information  which I have provided to the
Company is correct and complete as of the date set forth above and may be relied
upon by the  Company  in  determining  the  availability  of an  exemption  from
registration  under federal and state  securities  laws in  connection  with the
offering of securities  as described  herein and, if there should be any adverse
change in such information  prior to this Exchange  Agreement being accepted,  I
will immediately provide the Company with such information.

         (j) No General  Solicitation or Advertising.  I have not been solicited
by the  Company or anyone on its behalf by any form of general  solicitation  or
general  advertising,  including  but  not  limited  to (i)  any  advertisement,
article, notice or other communication  published in any newspaper,  magazine or
similar media or broadcast  over  television or radio,  or made  available  over
telephone lines by any information service, or (ii) any seminar or meeting whose
attendees  had been  invited  by any means of  general  solicitation  or general
advertising.

         (k) Investment Intent. The Exchange Securities and any shares of common
stock  issuable upon the conversion of the Exchange Note, are being acquired for
long-term investment only for my own account and not with a view to, or for sale
in  connection  with,  any  distribution  thereof.  I do not  have  any  present
intention of  distributing  or selling the Exchange  Securities or any shares of
common stock  issuable upon the  conversion of the Exchange Note or any interest
therein.

         (l)   Ownership;   Title.   Noteholder  is  the  owner  of  record  and
beneficially of the 15% Notes.  All of the 15% Notes are owned by the Noteholder
free  and  clear of any  claim,  levy,  charge,  pledge,  hypothecation,  trust,
security  interest,  proxy,  voting  arrangement,   conditional  sale  or  title
retention contract,  or other encumbrance or restriction of any kind,  including
restrictions affecting voting rights,  transferability or incidents of record or
beneficial  ownership  (any  of  which  being  referred  to  as a  "Lien").  The
consummation  by the  Noteholder of the exchange of the 15% Notes will convey to
the  Company  good and  marketable  title to the 15% Notes free and clear of all
Liens. There are no other agreements or understandings in effect with respect to
the  transfer  of the 15%  Notes  to  which  Noteholder  is a party  or is bound
thereto.

         (m) No Conflicts. The execution, delivery and performance by Noteholder
of this Agreement and any other  agreement  executed by Noteholder in connection
herewith  and  the  transactions  (and  the  consummation  of the  transactions)
contemplated hereby and thereby will not: (i) violate or conflict with any laws,
rules or regulations of any  governmental  authority;  (ii) result in the breach
of, or constitute a default  (with or without  notice or lapse of time, or both)
under, or require any consent under,  any provision of (a) any debt  instrument,
indenture,  mortgage  agreement or other  instrument or arrangement to which the
Noteholder  is a party or by which any of the 15% Notes owned by the  Noteholder
is bound or (b) any judgment,  order or decree by which the  Noteholder is bound
or by which any of the 15% Notes owned by the  Noteholder  is bound or affected,
or (iii) result in the  imposition  of any Lien on any of the 15% Notes owned by
the Noteholder.

      5.  Indemnification.  I agree  to  indemnify  and hold  the  Company,  its
officers,  directors  and every  person who  "controls"  the Company  within the
meaning of Section 15 of the Securities  Act  ("controlling  persons")  harmless
from and against all damages,  losses, costs and expenses (including  reasonable
attorneys' fees) which they or any one of them may incur by reason of my failure
to  fulfill  or my  breach of any of the terms or  conditions  of this  Exchange
Agreement, or by reason of any breach of or the falsity,  inaccuracy, or failure
of any  representation  or  warranty  made by me  herein,  made in any  document
provided by me to the Company in  connection  with this  Exchange,  or otherwise
made by me orally or in writing to the Company.

      6. Proceedings.  In the event that any cause of action, litigation,  legal
proceeding or  arbitration  proceeding  arises out of or in any way results from
this Exchange Agreement for or acquisition of Exchange Securities (collectively,
the "Proceeding") in which the undersigned is an adverse party to the Company or
any director,  officer or controlling  person thereof,  the  undersigned  agrees
that:

         (a) he will  produce,  upon  the  Company's  request  such  statements,
returns and purchase and sale information as are directly  relevant and material
to his  investment  sophistication,  knowledge  and  experience  in business and
financial matters,  ability to evaluate the risks and merits of investing in the
Exchange Securities and his status as an accredited investor; and that

                                       4

         (b) the party or parties not  prevailing in such  Proceeding  shall pay
all costs whatever,  including reasonable attorney fees, incurred in the defense
or  prosecution  of  any  such  Proceeding  by  the  party  or  parties  therein
prevailing,  it being further agreed that the undersigned will pay all costs and
reasonable attorney fees incurred by any officer, director or controlling person
of the Company who or which prevails in the defense of any Proceeding  initiated
by the undersigned. The undersigned further admits and agrees that the documents
and records to be produced  pursuant to subparagraph  (a) of this Section 6 will
not pose an undue  burden upon him nor unduly  intrude upon his right of privacy
and are  necessary  to the  defense of the  Proceeding  by the  Company  and any
directors, officers or controlling persons thereof involved in the Proceeding.

      7. Accredited  Investor Status.  The undersigned is an entity in which the
sole equity owner is an accredited investor.

      8. Financial Sophistication. I have prior investment experience, including
investments in  non-registered  securities,  or have employed the services of an
investment  advisor,  attorney  or  accountant  to  read  all of  the  documents
furnished or made  available by the Company and to evaluate the merits and risks
of an investment in the Exchange Securities on my behalf. I recognize the highly
speculative  nature of this  investment,  and that I must be able to bear and am
able to bear the economic risk I hereby assume.

      9.  City and State  Information.  This  Exchange  Agreement  for  Exchange
Securities was made by me solely in the CITY of Henderso STATE of Nevada.

      10. Type of Ownership:  Noteholder is a  corporation  organized  under the
laws of the State of Nevada.

      11.  Arbitration.  Any  controversy  or claim  relating  to this  Exchange
Agreement  or my  investment  in the  Exchange  Securities  shall be resolved by
arbitration  pursuant to and run in accordance with the rules then prevailing of
the American Arbitration Association.  Any such arbitration shall be held in San
Diego County,  California.  The  prevailing  party in the  arbitration  shall be
entitled to an award of all expenses and reasonable  attorneys' fees incurred in
bringing or defending the arbitration.

      12.  Blue Sky  Qualification.  The  undersigned's  right to  purchase  the
Exchange Securities under this Exchange Agreement is expressly  conditioned upon
the  exemption  from  qualification  of the  offer  and  sale  of  the  Exchange
Securities from applicable  Federal and State securities laws. The Company shall
not be required to qualify this  transaction  under the  securities  laws of any
jurisdiction  and,  should  qualification  be  necessary,  the Company  shall be
released from any and all obligations to maintain its offer, and may rescind any
sale contracted, in the jurisdiction.

      13. Use of Pronouns.  All pronouns and any variations  thereof used herein
shall be deemed to refer to the masculine,  feminine, neuter, singular or plural
as the identity of the person or persons referred to may require.

      14. Miscellaneous.

         (a) I agree not to transfer or assign this Exchange  Agreement,  or any
interest  herein,  and  further  agree that any  transfer or  assignment  of the
Exchange  Securities  shall  be  made  only in  accordance  with  this  Exchange
Agreement and all applicable laws. I agree that this exchange is irrevocable and
that I may not  cancel,  terminate  or revoke  this  Exchange  Agreement  or any
agreement made by me hereunder.

         (b)   Notwithstanding   any   of   the   representations,   warranties,
acknowledgments  or  agreements  made  herein by me, I do not  thereby or in any
other manner waive any rights  granted to me under  federal or state  securities
laws.  I stipulate  and agree,  however,  that the  operation  of this  Exchange
Agreement  will not  result in a waiver  of such  rights.  All  representations,
warranties,  covenants and  undertakings  made by me in this Exchange  Agreement
shall  survive the  Company's  acceptance  of this  Exchange  Agreement  and the
issuance and delivery of the Exchange Securities.

         (c) This Exchange Agreement  constitutes the entire agreement among the
parties  hereto  with  respect  to the  subject  matter  hereof  and,  except as
otherwise set forth in Section 15(i),  may be amended only by a writing executed
by both  parties.  This  Exchange  Agreement  shall be  enforced,  governed  and
construed in all respects in accordance with the laws of the State of California
applicable to contracts  between  residents of such state entered into and to be
performed entirely within such state.

                                       5

         (d) I acknowledge  that this Exchange  Agreement does not constitute an
offer to me to buy,  an offer of sale,  or  solicitation  of an offer to buy the
Exchange  Securities,  and that I shall have no right  whatever  to acquire  any
Exchange  Securities until this Exchange Agreement  affirmatively is accepted by
the  Company.  Neither  the mere  passage of time nor  failure of the Company to
reject this Exchange Agreement shall constitute acceptance hereof.

         (e)  Wherever  the  pronouns  he,  his or him  appear in this  Exchange
Agreement,  they shall  include the feminine  and neuter  genders as well as the
masculine and apply equally to individual  and entity  undersigneds,  unless the
context clearly requires otherwise.

         (f) Notices  between the parties shall be effective  only if in writing
and delivered:  if to the Company,  to the address on the first page hereof; and
if to me, to the address on the  signature  page  hereof;  or to any  subsequent
address provided in writing by either party.

         (g) This  Exchange  Agreement  shall be  binding  upon and inure to the
benefit of the parties and their respective  heirs,  administrators,  executors,
legal  representatives,  successors  and permitted  assigns.  By executing  this
Exchange Agreement, I represent that I have carefully read it in its entirety.

         (h) I  understand  and  acknowledge  that this  exchange  for  Exchange
Securities shall be irrevocable until accepted or rejected by the Company (other
than described in Paragraph 2), that it may not be canceled or revoked by me and
that upon the Company's  acceptance of this Exchange Agreement I will be legally
bound to take the  Exchange  Securities  on the terms and  conditions  set forth
herein.


                              ********************

                                       6


IN WITNESS WHEREOF, I the undersigned Noteholder, or a person duly authorized to
act for me in the premises, has executed this Exchange Agreement by signature on
the following  Signature Page and initialed this and every preceding page hereof
on the date first above written, in the City and State shown under Section 10 of
this Exchange Agreement above.

                             *** Signature Page ***


Noteholder                                      DAVRIC Corporation


Auth. Person's Signature                        /s/ JERRY E. POLIS

Authorized Person's  Name & Title               Jerry E. Polis, President

Address of Principal Office                     980 American Pacific Drive, #111

                                                Henderson, Nevada 89014

Organized under laws of State or Country        Nevada

Telephone  (702)734-1888                        Fax No. (702)737-6900

Federal Tax I.D. Number   ________________________________


               **************************************************

                    Noteholder: Do Not Write Below This Line

Accepted: _____X_____                                X        /s/ ROBERT PUTNAM
                                                              Signature

Rejected: _______                                    Name:    ROBERT PUTNAM

DATED, December 12, 2006                             Title: Secretary


                                                                    EXHIBIT 99.2

THIS NOTE HAS NOT BEEN  REGISTERED  UNDER THE UNITED  STATES  SECURITIES  ACT OF
1933,  AS AMENDED  (THE "ACT"),  OR UNDER ANY STATE  SECURITIES  LAWS,  AND IS A
"RESTRICTED  SECURITY"  AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT.  THIS
NOTE MAY NOT BE  OFFERED,  SOLD,  TRANSFERRED,  PLEDGED OR  HYPOTHECATED  IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT
OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.


                          (ALL AMOUNTS IN U.S. DOLLARS)

                              E.DIGITAL CORPORATION

                     7.5% CONVERTIBLE SUBORDINATED TERM NOTE

                    Due: November 30, 2009 ("Maturity Date")

Note Date: December 1, 2006                                       US $970,752.00
San Diego, California

         FOR VALUE RECEIVED,  e.Digital  Corporation,  the undersigned  Delaware
corporation  (together with all successors,  the "Company"),  hereby promises to
pay to the order of

         Payee:            DAVRIC CORPORATION
                           ------------------
                           or its successors or assigns
                            (collectively, "Noteholder") at

         Address:          980 American Pacific Drive, #111
                           Henderson, Nevada 89014

or at such other address or addresses as Noteholder may  subsequently  designate
in writing to the Company,  the principal sum of Nine Hundred  Seventy  Thousand
Seven Hundred  Fifty-Two and 00/100  Dollars  ($970,752.00),  due and payable in
thirty-six  (36) monthly  installments of principal and interest (in the monthly
installment  payment amounts listed on Exhibit A - Amortization Table) including
simple  interest  thereon  computed  at the rate of seven and  one-half  percent
(7.50%) per annum, in lawful monies of the United States of America,  subject to
earlier  prepayment  or  conversion  pursuant to the terms  hereof.  The monthly
installments  of principal  and  interest  shall be due within five (5) business
days of the  last  day of each  month  but if such  due  date  should  fall on a
national  holiday,  payment shall be due on the  following  business day (each a
"Due Date").

         1.  Payment.  Any  payment  shall be deemed  timely made if received by
Noteholder  within ten (10)  calendar  days of the due date.  Payments  received
shall be imputed  first to late or penalty  charges,  if any,  then due, next to
interest payments then due, and next to the principal balance.

         An  "Event of  Default"  occurs  if (a) the  Company  does not make the
payment of  interest  or  principal  of this Note when the same  becomes due and
payable and such default  shall  continue for a period of fifteen (15)  calendar
days,  (b) the Company fails to comply with any of its other  agreements in this
Note that do not otherwise have separate remedies or provisions and such failure
continues for the period and after the notice  specified  below, (c) pursuant to
or within the  meaning  of any  Bankruptcy  Law (as  hereinafter  defined),  the
Company:  (i) commences a voluntary case; (ii) consents to the entry of an order
for relief against it in an involuntary  case; (iii) consents to the appointment
of a Custodian (as hereinafter defined) of it or for all or substantially all of
its property or (iv) makes a general assignment for the benefit of its creditors
or (v) a court of  competent  jurisdiction  enters an order or decree  under any
Bankruptcy  Law that:  (A) is for relief  against the Company in an  involuntary
case; (B) appoints a Custodian of the Company or for all or substantially all of
its  property or (C) orders the  liquidation  of the  Company,  and any order or
decree  remains  unstayed and in effect for a period of sixty (60) days. As used
herein,  the term  "Bankruptcy  Law" means Title 11 of the United States Code or
any similar federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee,  liquidator or similar official under any
Bankruptcy Law.


         A default  above is not an Event of Default until  Noteholder  notifies
the Company of such default and the Company does not cure it within  thirty (30)
days after receipt of such notice,  which must specify the default,  demand that
it be  remedied  and state  that it is a  "Notice  of  Default."  If an Event of
Default  occurs  and is  continuing,  the  Noteholder  hereof  by  notice to the
Company,  may declare the  principal of and accrued  interest on this Note to be
due and payable immediately;  provided, however, that the Noteholder, by written
notice  to  the  Company,  may  rescind  and  annul  such  declaration  and  its
consequences.

         2.  Installment  Payments  in Cash or Shares of Common  Stock.  Monthly
installment  payments  shall be payable in cash,  or starting  with the February
2007 installment  payment,  the Company may elect to make an installment payment
either in cash or in shares of its common stock,  $.001 par value per share (the
"Common Stock"), subject to Section 2.3. Payment in cash shall be payable on the
Due Date to the address of the Noteholder.

            2.1.  Payment in Shares of Common Stock. As long as the requirements
of  Section  2.3 are met,  the  Company  may  elect  by  written  notice  to the
Noteholder on or before the Due Date of a monthly  installment  date to make the
payment in shares of Common Stock of the  Company.  The number of fully paid and
nonassessable  shares  of  Common  Stock to be  issued  shall be  determined  by
dividing  the  monthly  installment  payment  amount  for the  applicable  month
specified  in Exhibit A by the Monthly  Share Price (as defined  below)  rounded
down to the nearest full share (the "Monthly Installment  Shares").  As promptly
as  practicable  after the  monthly  installment  Due Date,  the  Company at its
expense will issue and deliver to the  Noteholder a certificate  for the Monthly
Installment Shares.

            2.2.  Monthly Share Price. The "Monthly Share Price" for any monthly
installment that the Company elects to pay in shares of Common Stock rather than
cash shall be computed as the  arithmetic  average of the closing prices for the
last five (5)  trading  days of the  applicable  month.  This  average  shall be
rounded to the  nearest  one-tenth  of a cent for  computation  of the number of
shares in Section 2.1.

            2.3.  Requirements  and  Limitations.  If  the  Note  is in  default
payments  may only be made in cash and not in shares.  If the  computed  Monthly
Share  Price is less  than  $0.10 per share  (as  adjusted  comparable  with the
Conversion  Price  adjustment set forth in Section 4.6 herein) then such monthly
installment  payment must be paid in cash and not in shares of Common Stock. The
Company may only elect share  payment if its shares of Common  Stock are regular
trading on the over-the-counter  market or on an exchange where the Common Stock
of the Company is then traded and the shares have not been  suspended  or halted
from trading at any time during the respective installment payment month.

         3.  Prepayment.  The  Company may prepay this Note at any time and from
time to time, in whole or in part,  minimum prepayment of Fifty Thousand Dollars
($50,000),  without the prior written agreement of Noteholder, upon ten (10) day
written notice to Noteholder. Any prepayment of this Note shall be applied first
to any installment payment then due, then to any other accrued interest and then
against principal.  Any partial prepayment shall not modify the timing or amount
of  scheduled  monthly  installments  until the Note is fully paid.  The Company
shall furnish the Noteholder an amended Exhibit A upon each partial  prepayment.
Upon payment in full of the principal amount of this Note and interest  thereon,
the Noteholder shall surrender this Note for cancellation.

         4. Conversion.

            4.1  Voluntary  Conversion.  The  Noteholder  has the right,  at the
Noteholder's  option,  at any time  beginning  February  1,  2007,  and prior to
payment  in full  of the  principal  balance  of this  Note at  Maturity  or any
prepayment  date,  to convert this Note, in  accordance  with the  provisions of
Section 5.2.1  hereof,  in whole or in part,  into shares of Common  Stock.  The
number  of  shares  of  Common  Stock  into  which  this  Note may be  converted
("Conversion  Shares")  shall be determined by dividing the aggregate  principal
amount of the Note by the  Conversion  Price (as defined below) in effect at the
time of such conversion.  The initial  Conversion Price shall be equal to thirty
cents ($0.30).

                                      -2-

         4.2 Conversion Procedure.

            4.2.1  Notice of  Conversion  Pursuant  to Section  4.1.  Before the
Noteholder  shall be entitled to  voluntarily  convert  this Note into shares of
Common Stock,  it shall give five day advance  written  notice by mail,  postage
prepaid or courier,  to the Company at its principal  corporate  office,  of the
election  to convert  the same  pursuant to this  Section  4.2,  and shall state
therein the name or names in which the certificate or certificates for shares of
Common  Stock  are to be  issued.  Unless  waived  by the  Company  in its  sole
discretion, the minimum conversion amount accepted by the Company for conversion
hereunder shall be the lesser of: a Fifty Thousand Dollars  ($50,000)  principal
balance on the Note, or the remaining principal balance on the Note. The Company
shall,  as soon as practicable  after the fifth day from the date of the written
notice,  issue  and  deliver  at such  office to the  Noteholder  of this Note a
certificate  or  certificates  for the number of shares of Common Stock to which
the  Noteholder  of this Note shall be entitled as  aforesaid.  Such  conversion
shall be deemed to have been made on the close of business on the fifth day from
the date of written  notice,  and the person or persons  entitled to receive the
shares of Common Stock  issuable upon such  conversion  shall be treated for all
purposes as the record  holder or holders of such  shares of Common  Stock as of
such  date.  Any  partial  conversion  shall not  modify the timing or amount of
scheduled monthly  installments  until the Note is fully paid. The Company shall
furnish the Noteholder an amended Exhibit A upon each partial conversion.

            4.2.2  Delivery of Stock  Certificates.  As promptly as  practicable
after the  conversion  of this Note,  the Company at its expense  will issue and
deliver to the  Noteholder of this Note a certificate  or  certificates  for the
number of full shares of Common Stock issuable upon such conversion.

         4.3 Mechanics and Effect of Conversion.  No fractional shares of Common
Stock  shall be issued  upon  conversion  of this Note.  In lieu of the  Company
issuing any  fractional  shares to the  Noteholder  upon the  conversion of this
Note,  the  Company  shall  pay to the  Noteholder  the  amount  of  outstanding
principal  that is not so converted,  such payment to be in the form as provided
below.  Upon the full conversion of this Note pursuant to Section 5.1 above, the
Noteholder shall surrender this Note, duly endorsed,  at the principal office of
the Company. At its expense, the Company shall, as soon as practicable after the
notice period,  issue and deliver to such Noteholder at such principal  office a
certificate  or  certificates  for the number of shares of such Common  Stock to
which the  Noteholder  shall be  entitled  upon such  conversion  (bearing  such
legends as are required  hereby and by applicable  state and federal  securities
laws in the opinion of counsel to the Company)..

         4.4  Limitation  on  Issuance  of  Voluntary   Conversion  Shares:  The
Noteholder  may not convert  the Note into shares of Common  Stock to the extent
such  conversion  would result in the  Noteholder,  together  with any affiliate
thereof,  beneficially owning (as determined in accordance with Section 13(d) of
the  Securities  Exchange Act of 1934, as amended (the  "Exchange  Act") and the
rules thereunder) in excess of 4.999% of the then issued and outstanding  shares
of Common Stock.  The Noteholder shall have the sole authority and obligation to
determine  whether the restriction  contained in this Section applies and to the
extent that the  Noteholder  determines  that the  limitation  contained in this
Section applies,  the determination of the number of shares convertible shall be
in the sole discretion of the Noteholder.  The provisions of this Section may be
waived by the Noteholder upon not less than 61 days prior notice to the Company.

         4.5 Mandatory  Conversion.  The Company has the right, at the Company's
option,  at any time after  February 1, 2007 but prior to the payment in full of
the  principal  balance of this Note,  to require  that  Noteholder  convert the
entire  principal  balance of this Note and related  interest  due,  into Common
Stock of the  Company in the event that the  closing  sales  price of the Common
Stock of the Company is at least $0.40 per share (as adjusted in accordance with
the Conversion  Price  adjustment set forth in Sections 4.6 herein) for ten (10)
consecutive  days of  regular  trading on the  over-the-counter  market or on an
exchange where the Common Stock of the Company is then traded, at the Conversion
Price then in effect on the last  trading day of such ten (10) day  period.  Any
notice shall be provided within ten (10) days after the end of any such ten (10)
day period.  The failure of the Company to exercise  this  Mandatory  Conversion
right for any such trading  period shall not preclude the exercise of this right
for any future such trading period.  The mandatory  conversion shall be effected
on the 90th day after  notice with all interest and  principal  payments  abated
during such 90 day period.  The person or persons entitled to receive the shares
of Common Stock issuable upon such Mandatory  Conversion shall not be treated as
the record  holder or holders of such  shares of Common  Stock  until the end of
such 90 day period. However, the parties may mutually waive such ninety (90) day
period and the  Company  shall then  issue such  shares in the manner  otherwise
provided in this Section 4.

                                      -3-

         4.6 Conversion Price Adjustments.

            4.6.1  Adjustments for Stock Splits and  Subdivisions.  In the event
the  Company  should at any time or from time to time after the date of issuance
hereof fix a record date for the  effectuation  of a split or subdivision of the
outstanding  shares of Common  Stock or the  determination  of holders of Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of  Common  Stock or other  securities  or rights  convertible  into,  or
entitling  the holder  thereof to receive  directly  or  indirectly,  additional
shares of Common Stock (hereinafter  referred to as "Common Stock  Equivalents")
without payment of any consideration by such holder for the additional shares of
Common Stock or the Common Stock Equivalents (including the additional shares of
Common Stock  issuable upon  conversion or exercise  thereof),  then, as of such
record date (or the date of such dividend distribution,  split or subdivision if
no  record  date  is  fixed),  the  Conversion  Price  of  this  Note  shall  be
appropriately  decreased so that the number of shares of Common  Stock  issuable
upon  conversion  of this Note shall be increased in proportion to such increase
of outstanding shares.

            4.6.2  Adjustment for Reverse Stock Splits.  If the number of shares
of Common Stock  outstanding at any time after the date hereof is decreased by a
combination  of the  outstanding  shares of Common  Stock,  then,  following the
record date of such  combination,  the  Conversion  Price for this Note shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion  hereof  shall  be  decreased  in  proportion  to  such  decrease  in
outstanding shares.

         5.  Subordination.  The  indebtedness  evidenced by this Note is hereby
expressly  subordinated,  to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of the Company's  Senior
Indebtedness,  as  hereinafter  defined;  provided,  however,  that the  maximum
aggregate amount of the Company's Senior  Indebtedness to which the indebtedness
evidenced  by this Note  shall be  subordinated  shall not  exceed  Two  Million
Dollars  ($2,000,000).  The  Company  may,  however,  in its sole  and  absolute
discretion,  incur and/or have outstanding from time to time Senior Indebtedness
in excess of the amount stated in the immediately  preceding  sentence,  and the
existence  of  such  Senior  Indebtedness  shall  not  diminish  in any  way the
subordination of the indebtedness evidenced by this Note.

         As used in this Note,  the term  "Senior  Indebtedness"  shall mean the
principal of and unpaid accrued interest on: (a) all indebtedness of the Company
to banks,  insurance companies or other financial institutions regularly engaged
in the  business of lending  money,  which is for money  borrowed by the Company
(whether or not secured and whether or not  existing as of the date of this Note
or hereafter  incurred);  and (b) any such  indebtedness  issued in exchange for
such Senior  Indebtedness,  or any indebtedness arising from the satisfaction of
such Senior Indebtedness by a guarantor.

         If there should occur any receivership,  insolvency, assignment for the
benefit of creditors,  bankruptcy,  reorganization or arrangement with creditors
(whether or not pursuant to bankruptcy or other insolvency laws), sale of all or
substantially  all  of  the  assets,  dissolution,   liquidation  or  any  other
marshalling of the assets and liabilities of the Company,  or if this Note shall
be declared  due and payable  upon the  occurrence  of an event of default  with
respect  to any  Senior  Indebtedness,  then (a) no amount  shall be paid by the
Company in  respect of the  principal  of or  interest  on this Note at the time
outstanding,  unless  and  until  the  principal  and  interest  on  the  Senior
Indebtedness  then outstanding  shall be paid in full; and (b) no claim or proof
of claim shall be filed with the Company by or on behalf of the Noteholder  that
shall  assert any right to receive any  payments in respect of the  principal of
and  interest  on  this  Note,  except  subject  to the  payment  in full of the
principal of and interest on all of the Senior Indebtedness then outstanding. If
there occurs an event of default that has been  declared in writing with respect
to any  Senior  Indebtedness,  or in  the  instrument  under  which  any  Senior
Indebtedness is outstanding,  permitting the holder of such Senior  Indebtedness
to accelerate the maturity thereof, then, unless and until such event of default
shall have been cured and  waived or shall have  ceased to exist,  or all Senior
Indebtedness  shall have been paid in full,  no payment shall be made in respect
of the  principal  of or interest on this Note,  unless  within three (3) months
after the  happening  of such event of  default,  the  maturity  of such  Senior
Indebtedness shall not have been accelerated.

                                      -4-


         Subject to the rights,  if any,  of the holders of Senior  Indebtedness
under this Section 5 to receive cash,  securities and other properties otherwise
payable or deliverable to the  Noteholder,  nothing  contained in this Section 6
shall impair,  as between the Company and the Noteholder,  the obligation of the
Company,  subject to the terms and conditions  hereof,  to pay to the Noteholder
the  principal  hereof and  interest  hereon as and when the same become due and
payable,  or  shall  prevent  the  Noteholder,   upon  default  hereunder,  from
exercising  all rights,  powers and  remedies  otherwise  provided  herein or by
applicable law.

         Subject to the  payment in full of all  Senior  Indebtedness  and until
this Note  shall be paid in full,  the  Noteholder  shall be  subrogated  to the
rights of the  holders  of Senior  Indebtedness  (to the extent of  payments  or
distributions previously made to such holders of Senior Indebtedness pursuant to
the provisions of this Section 5) to receive payments or distributions of assets
of the  Company  applicable  to the Senior  Indebtedness.  No such  payments  or
distributions  applicable  to the Senior  Indebtedness  shall,  as  between  the
Company and its creditors, other than the holders of Senior Indebtedness and the
Noteholder,  be deemed to be a payment  by the  Company to or on account of this
Note; and for the purposes of such subrogation,  no payments or distributions to
the holders of Senior  Indebtedness  to which the  Noteholder  would be entitled
except for the  provisions  of this Section 6 shall,  as between the Company and
its creditors, other than the holders of Senior Indebtedness and the Noteholder,
be  deemed  to be a  payment  by the  Company  to or on  account  of the  Senior
Indebtedness.

         By its acceptance of this Note,  the  Noteholder  agrees to execute and
deliver such  documents as may be requested  from time to time by the Company or
the  lender of any  Senior  Indebtedness  in order to  implement  the  foregoing
provisions of this Section 5.

         6. Representations and Warranties of Noteholder.

            6.1.  Noteholder  Bears  Economic Risk.  Noteholder has  substantial
experience in  evaluating  and investing in private  placement  transactions  of
securities in companies similar to the Company and can afford a complete loss of
its  investment.  Noteholder  must  bear the  economic  risk of this  investment
indefinitely unless the Note or the Conversion Shares or the Monthly Installment
Shares are  registered  pursuant  to the  Securities  Act or an  exemption  from
registration  is  available.  Noteholder  understands  that the  Company  has no
intention or obligation of  registering  the Note, the  Conversion  Shares,  the
Monthly  Installment  Shares or any shares of its Common Stock.  Noteholder also
understands  that there is no assurance  that any  exemption  from  registration
under the  Securities  Act will be available and that,  even if available,  such
exemption  may not  allow  Noteholder  to  transfer  all or any  portion  of the
Conversion  Shares,  the  Monthly  Installment  Shares  or the  Note  under  the
circumstances, in the amounts or at the times Noteholder might propose.

            6.2.  Acquisition for Own Account.  Noteholder is acquiring the Note
and the Conversion  Shares and any Monthly  Installment  Shares for Noteholder's
own account for investment only, and not with a view towards their distribution.

            6.3. Noteholder Can Protect Its Interest. Noteholder represents that
it has such knowledge and experience in business and financial  matters as to be
capable of evaluating the merits and risks of the investment and has the ability
to bear the economic  risks of its  investment,  and by reason of its, or of its
management's,  business or financial experience,  Noteholder has the capacity to
protect its own interests in connection  with the  transactions  contemplated in
this Note agreement.

            6.4.  Accredited  Investor.  Noteholder  represents  that  it  is an
accredited investor within the meaning of Regulation D under the Securities Act.

            6.5.  Company  Information.  Noteholder  has  received  and read the
Company's SEC filings for the last twelve  months.  Noteholder  has also had the
opportunity  to ask  questions  of and receive  answers from the Company and its
management regarding the terms and conditions of this investment.

                                      -5-

            6.6.  Rule 144.  Noteholder  acknowledges  and agrees that the Note,
and, if issued, the Conversion Shares or Monthly Installment Shares must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. Noteholder has been advised or
is aware of the provisions of Rule 144  promulgated  under the Securities Act as
in effect from time to time, which permits limited resale of shares purchased in
a  private  placement  subject  to  the  satisfaction  of  certain   conditions,
including,  among other  things:  the  availability  of certain  current  public
information  about the  Company,  the resale  occurring  following  the required
holding  period  under Rule 144 and the number of shares  being sold  during any
three-month period not exceeding specified limitations. Noteholder is aware that
there is no assurance there will be a public market for resale of shares or that
any resales will be eligible for resale under Rule 144 or otherwise.

            6.7.  Legend.  The  Noteholder   understands  and  agrees  that  all
certificates  evidencing the Conversion Shares or Monthly  Installment Shares to
be issued to the Noteholder may bear the following legend:

            THESE  SECURITIES  HAVE NOT BEEN  REGISTERED  UNDER  THE
            SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY
            NOT BE SOLD,  OFFERED FOR SALE,  PLEDGED OR HYPOTHECATED
            IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
            TO THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL
            SATISFACTORY TO THE CORPORATION  THAT SUCH  REGISTRATION
            IS NOT REQUIRED.

         7. Replacement.  If this Note becomes worn, defaced or mutilated but is
still substantially intact and recognizable,  the Company or its agent may issue
a new Note in lieu hereof upon its surrender.  Where the Noteholder  claims that
the Note has been lost, destroyed or wrongfully taken, the Company shall issue a
new  Note of like  tenor  in place of the  original  Note if the  Noteholder  so
requests by written  notice to the Company  together  with an  affidavit  of the
Noteholder setting forth the facts concerning such loss, destruction or wrongful
taking and such other  information in such form with such proof or  verification
as the Company may request.  The Company in addition  may  require,  at its sole
discretion,  indemnification  and/or an indemnity bond in such amount and issued
by such surety as the Company deems satisfactory.

         8. Attorneys Fees. If the indebtedness  represented by this Note or any
part  thereof  is  collected  in  bankruptcy,  receivership  or  other  judicial
proceedings  or if this Note is placed in the hands of attorneys for  collection
after  default,  the Company  agrees to pay, in  addition to the  principal  and
interest payable hereunder, reasonable attorneys' fees and costs incurred by the
Noteholder.

         9. Notice. Any notice, demand, consent or other communication hereunder
shall be in writing  addressed to the Company at its principal office or, in the
case of Noteholder,  at Noteholder's  address  appearing above, or to such other
address as such party  shall have  theretofore  furnished  by like  notice,  and
either served personally,  sent by express,  registered or certified first class
mail, postage prepaid, sent by facsimile transmission, or delivered by reputable
commercial  courier.  Such notice shall be deemed  given (a) when so  personally
delivered,  or (b) if mailed as  aforesaid,  five (5) days  after the same shall
have  been  posted,  or (c) if sent by  facsimile  transmission,  as soon as the
sender  receives  written or telephonic  confirmation  that the message has been
received and such facsimile is followed the same day by mailing by prepaid first
class mail, or (d) if delivered by commercial courier, upon receipt.

         10. Waiver. The Company hereby waives present,  demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor. No
delay on the part of Noteholder in exercising any right  hereunder shall operate
as a waiver of such right or any other right.

         11.  Governing  Law.  This Note shall be governed by and  construed  in
accordance  with the laws of the State of  California  applicable  to  contracts
between residents of such state entered into and to be performed entirely within
such state.

         12.  Severability.  Each provision of this Note shall be interpreted in
such  manner as to be  effective  and valid  under  applicable  law,  but if any
provision of this Note is held to be prohibited  by or invalid under  applicable
law, such provision shall be ineffective  only to the extent of such prohibition
or invalidity, without invalidating the remainder of this Agreement.

                                      -6-

         IN WITNESS WHEREOF,  the undersigned Company has executed this Note and
has affixed hereto its corporate seal.

                                               E.DIGITAL CORPORATION,
                                               a Delaware corporation


                                               By: /s/ ROBERT PUTNAM
                                                        Robert Putnam
                                                   Vice President and Secretary
Acknowledged and Agreed:

DAVRIC CORPORATION


/s/ JERRY E. POLIS
By: Jerry E. Polis, President



                                      -7-



                                                                       EXHIBIT A
                                                              AMORTIZATION TABLE

Principal                      970,752.00
Annual Interest Rate                7.50%
Monthly Amortization          Varies


                                                                              Monthly           Method
         Month              Beginning                                       Installment           of              Ending
        End Date             Balance         Interest        Principal        Payment           Payment          Balance
       12/31/2006              970,752.00        6,067.20          (67.20)        6,000.00     Cash Only           970,819.20
       1/31/2007               970,819.20        6,067.62          (67.62)        6,000.00     Cash Only           970,886.82
       2/28/2007               970,886.82        6,068.04        8,931.96        15,000.00  Cash or Shares(1)      961,954.86
       3/31/2007               961,954.86        6,012.22        8,987.78        15,000.00  Cash or Shares(1)      952,967.08
       4/30/2007               952,967.08        5,956.04        9,043.96        15,000.00  Cash or Shares(1)      943,923.12
       5/31/2007               943,923.12        5,899.52        9,100.48        15,000.00  Cash or Shares(1)      934,822.64
       6/30/2007               934,822.64        5,842.64        9,157.36        15,000.00  Cash or Shares(1)      925,665.29
       7/31/2007               925,665.29        5,785.41        9,214.59        15,000.00  Cash or Shares(1)      916,450.69
       8/31/2007               916,450.69        5,727.82        9,272.18        15,000.00  Cash or Shares(1)      907,178.51
       9/30/2007               907,178.51        5,669.87        9,330.13        15,000.00  Cash or Shares(1)      897,848.38
       10/31/2007              897,848.38        5,611.55        9,388.45        15,000.00  Cash or Shares(1)      888,459.93
       11/30/2007              888,459.93        5,552.87        9,447.13        15,000.00  Cash or Shares(1)      879,012.80
       12/31/2007              879,012.80        5,493.83       24,506.17        30,000.00  Cash or Shares(1)      854,506.63
       1/31/2008               854,506.63        5,340.67       24,659.33        30,000.00  Cash or Shares(1)      829,847.30
       2/28/2008               829,847.30        5,186.55       24,813.45        30,000.00  Cash or Shares(1)      805,033.85
       3/31/2008               805,033.85        5,031.46       24,968.54        30,000.00  Cash or Shares(1)      780,065.31
       4/30/2008               780,065.31        4,875.41       25,124.59        30,000.00  Cash or Shares(1)      754,940.72
       5/31/2008               754,940.72        4,718.38       25,281.62        30,000.00  Cash or Shares(1)      729,659.09
       6/30/2008               729,659.09        4,560.37       25,439.63        30,000.00  Cash or Shares(1)      704,219.46
       7/31/2008               704,219.46        4,401.37       25,598.63        30,000.00  Cash or Shares(1)      678,620.84
       8/31/2008               678,620.84        4,241.38       25,758.62        30,000.00  Cash or Shares(1)      652,862.22
       9/30/2008               652,862.22        4,080.39       25,919.61        30,000.00  Cash or Shares(1)      626,942.60
       10/30/2008              626,942.60        3,918.39       26,081.61        30,000.00  Cash or Shares(1)      600,861.00
       11/30/2008              600,861.00        3,755.38       26,244.62        30,000.00  Cash or Shares(1)      574,616.38
       12/31/2008              574,616.38        3,591.35       46,408.65        50,000.00  Cash or Shares(1)      528,207.73
       1/31/2009               528,207.73        3,301.30       46,698.70        50,000.00  Cash or Shares(1)      481,509.03
       2/28/2009               481,509.03        3,009.43       46,990.57        50,000.00  Cash or Shares(1)      434,518.46
       3/31/2009               434,518.46        2,715.74       47,284.26        50,000.00  Cash or Shares(1)      387,234.20
       4/30/2009               387,234.20        2,420.21       47,579.79        50,000.00  Cash or Shares(1)      339,654.41
       5/31/2009               339,654.41        2,122.84       47,877.16        50,000.00  Cash or Shares(1)      291,777.25
       6/30/2009               291,777.25        1,823.61       48,176.39        50,000.00  Cash or Shares(1)      243,600.86
       7/31/2009               243,600.86        1,522.51       48,477.49        50,000.00  Cash or Shares(1)      195,123.37
       8/31/2009               195,123.37        1,219.52       48,780.48        50,000.00  Cash or Shares(1)      146,342.89
       9/30/2009               146,342.89          914.64       49,085.36        50,000.00  Cash or Shares(1)       97,257.53
       10/31/2009               97,257.53          607.86       49,392.14        50,000.00  Cash or Shares(1)       47,865.39
       11/30/2009               47,865.39          299.16       47,865.39        48,164.55  Cash or Shares(1)               -


Total Payments                                 149,412.55      970,752.00     1,120,164.55
                                          =================================================

(1) subject to terms of the Note agreement.



                              NOTICE OF CONVERSION

                              e.DIGITAL CORPORATION
                     7.5% CONVERTIBLE SUBORDINATED TERM NOTE

                   (To Be Signed Only Upon Conversion of Note)



eDIGITAL CORPORATION

The undersigned,  the Noteholder of the foregoing Note,  hereby  surrenders such
Note for conversion into shares of Common Stock of e.DIGITAL CORPORATION, to the
extent of $ _________ unpaid principal amount of such Note and related interest,
and requests that the certificates for such shares be issued in the name of, and
delivered to, whose address is _________________________________________________
________________________________________________________________,


Dated:
      ----------------------


                                             -----------------------------------
                                             (Signature  must  conform in all
                                              respects to name of Holder as
                                              specified on the face of the Note)


                                             -----------------------------------
                                             (Address)


                                      -9-