**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-KSB**

 

**ANNUAL REPORT UNDER SECTION 13 OR 15(d)**

**OF            THE SECURITIES EXCHANGE ACT OF 1934**

 

| For the Fiscal Year Ended December 31, 2007 | Commission File No. 000-24778 |
|---------------------------------------------|-------------------------------|

 

| **ADS MEDIA GROUP, INC.**                                                                      |
|------------------------------------------------------------------------------------------------|
| (Exact name of Small Business Issuer in its                            charter)                |
|                                                                                           |
| **UTAH**                                                                                       |   | **87-0505222** |
| (State or other jurisdiction ofincorporation or organization)                                  |   | (IRS Employer Identification No.) |
|                                                                                           |
| **12758 Cimarron Path, Suite B-128, San Antonio, Texas                            78249-3426** |
| (Address of principal executive offices)                                                       |
|                                                                                           |
| Issuer’s telephone number: (210)                            655-6613                     |
|                                                                                           |
| Securities registered under Section 12(b) of the                            Exchange Act:      |
| **None**                                                                                       |
|                                                                                           |
| Securities registered under Section 12(g) of the                            Exchange Act:      |
| **Common Stock, par value $.001**                                                              |

 

Check            whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of            the Exchange Act.

| [   | ] Yes | xNo |
|---------------|-------|-----|

 

Check            whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of            the Securities Exchange Act of 1934 during the past 12 months (or for such shorter            period that the registrant was required to file such reports), and (2) has been subject            to such filing requirements for the past 90 days.xYes o            No

 

Check            if there is no disclosure of delinquent filers in response to Item 405 of Regulation            S-B contained in this form, and no disclosure will be contained, to the best of the            registrant’s knowledge, in definitive proxy or information statements            incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form            10-KSB. o

 

Indicate by check mark whether the registrant is a shell company (as            defined in Rule 12b-2 of the Exchange Act). o YesxNo

 

The            issuer’s revenues for the fiscal year ended December 31, 2007, were            $3,434,654.

 

The            aggregate market value of the voting common equity held by non-affiliates of the            registrant on February 29, 2008, was $1,849,747, based on that day's closing price            quotation on the OTC Bulletin Board.

 

The            number of shares of the registrant’s common stock outstanding as of February 29,            2008, was 10,880,867.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

**TABLE OF CONTENTS**

 

|                              |                                                                                                                                                     | Page                   |
|-----------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
| PART I                            |                                                                                                                                                     | 1                      |
| Item 1                            | Description of Business                                                                                                                                  | 1                      |
|                              | Overview

Plan of Operation

Marketing and Distribution

Technology Systems Development

Market Overview

Competition

2006 Equity Investment

Employees | 1

1

3

3

4

5

5

6 |
| Item 2                            | Description of Property                                                                                                                                  | 6                      |
| Item 3                            | Legal Proceedings                                                                                                                                        | 6                      |
|                              |                                                                                                                                                     |                   |
|                              |                                                                                                                                                     |                   |
| PART II                           |                                                                                                                                                     | 6                      |
| Item 4                            | Market for Common Equity and Related Stockholder                            Matters                                                                      | 6                      |
|                              | Dividend Policy

Securities Authorized For Issuance Under Equity                            Compensation Plans                                           | 7

7                   |
|                              | No Recent Sales of Unregistered Securities                                                                                                               | 7                      |
| Item 5                            | Management’s Discussion and Analysis or Plan of                            Operation                                                               | 7                      |
|                              | Risk Factors and Cautionary Statements                                                                                                                   | 7                      |
|                              | Company Development                                                                                                                                      | 8                      |
|                              | Critical Accounting Policies                                                                                                                             | 9                      |
|                              | Results of Operations for the Year Ended December 31,                            2007, as Compared to the Year Ended December 31, 2006                   | 10                     |
|                              | Liquidity and Capital Resources                                                                                                                          | 10                     |
|                              | Changes in Financial Condition                                                                                                                           | 11                     |
|                              | Commitments                                                                                                                                              | 11                     |
|                              | Seasonality                                                                                                                                              | 11                     |
| Item 6                            | Financial Statements                                                                                                                                     | 11                     |
| Item 7                            | Changes In and Disagreements With Accountants on                            Accounting and Financial Disclosure                                          | 11                     |
| Item 7A                           | Controls and Procedures                                                                                                                                  | 12                     |
|                              |                                                                                                                                                     |                   |
| PART III                          |                                                                                                                                                     | 13                     |
| Item 8                            | Directors, Executive Officers, Promoters and Control                            Persons; Compliance With Section 16(a) of the Exchange Act               | 13                     |
|                              | Director and Officer Profiles                                                                                                                            | 13                     |
|                              | Section 16(a) Beneficial Ownership Reporting                            Compliance

Audit Committee

Compensation Committee

Code of Conduct             | 15

15

15

15         |
| Item 9                            | Executive Compensation

Outstanding Equity Awards at Fiscal Year-End

Director Compensation                                                              | 15

16

19             |
| Item 10                           | Security Ownership of Certain Beneficial Owners and                            Management and Related Stockholder Matters                                | 19                     |
| Item 11                           | Certain Relationships and Related                            Transactions                                                                                | 21                     |
| Item 12                           | Exhibits                                                                                                                                                 | 21                     |
| Item 13                           | Principal Accountant Fees and Services                                                                                                                   | 22                     |
|                              |                                                                                                                                                     |
| SIGNATURES                        | 23                                                                                                                                                       |
|                              |                                                                                                                                                     |
| CONSOLIDATED FINANCIAL STATEMENTS | F-1                                                                                                                                                      |

 

 

**PART I**

 

**ITEM            1. DESCRIPTION OF BUSINESS**

 

**Overview**

 

ADS            Media Group, Inc. (“we”, “us”, “our” or the            “Company”), through our wholly owned subsidiary, Alternative Delivery            Solutions, Inc. (“ADS”), is a leading provider of turnkey direct marketing            support services, with an emphasis on alternate (i.e., door to door) delivery.             Alternate delivery involves the creation, packaging and delivery (usually on the doors            of homes) of solo marketing pieces and co-op marketing programs containing between 2            and 7 pieces of direct marketing material            (*e.g*., brochures, coupons,            advertisements and other offerings) to targeted audiences. In addition to alternate            delivery, through outsourcing arrangements, we provide our clients access to full            service direct marketing, printing, list procurement, database management, and            fulfillment.  Our management is combining their expertise and relationships in            direct marketing with sophisticated demographic mapping, tracking, and verification            technology to deliver high quality direct marketing services.  We are based in San            Antonio, Texas, and serve customers throughout the United States.

 

**Plan            of Operation**

 

ADS is            a marketing solutions company that happens to provide door distribution services as our            primary offering. It is this point of differentiation that separates us from the            traditional door delivery marketing company, and allows us to acquire business from the            most recognized names in the United States, as well as top advertising agencies. We            have set out to develop national door direct delivery capabilities that can provide            scale and a high degree of reliability, sophisticated geo-demographic targeting and            mapping capabilities, the full suite of production and mailing services, and            proprietary product solutions in addition to providing single client specific campaign            support. This past year, we have expanded the Yellow Page directory delivery portion of            our business, leveraging our technology and delivery capabilities. Directory publishers            require usage of their Yellow Page products to help renew and sell advertising for            subsequent editions. ADS has the enhanced delivery processes to directly influence            usage by providing faster, more accurate delivery.

 

Building upon the capabilities of commercially available mapping            software, ADS has developed proprietary programs that accelerate the time involved in            this part of the planning process, thereby enabling our customers with time sensitive            data to bring their campaign to market much sooner. Also, these proprietary programs            have kept our overhead costs associated with mapping to a minimum, which improves            margins. For example, a client with multiple locations across the country can receive            information specific to each location in a matter of hours or even minutes, utilizing            our front end mapping engines. This work used to take days, and even weeks, requiring            extensive manual intervention. Speed to market is critical for our clients, and we are            able to provide them with the quick turnaround they need as a result of our proprietary            front end delivery campaign systems, combined with the latest in commercially available            mapping software.

 

ADS has            developed proprietary software to enhance commercially available GPS (Global            Positioning Systems) for the tracking and verification of delivery services. During            2007, ADS launched its “beta” version of “Real Time            Verification” (RTV). This new technology will provide ADS with a distinct            competitive advantage in the distribution industry, once fully implemented. The RTV            system allows ADS to track deliveries in virtual real time, with once a minute updates            of distributor location by individual delivery personnel. The information is relayed to            ADS’ Network Operation Center, with automated updates and alerts regarding            delivery performance. The relative position of each delivery person or crew is plotted            on a delivery map that can be viewed simultaneously by ADS’ clients via the            Internet. No special software is required by the customer in order to see their            deliveries occur in virtual “real time”. The GPS component records the            relative position of each walker carrying a specially designed device, and then            transmits this position to ADS via the wireless network. That information is then            translated into viewable maps for both the company distribution management, and the            client; helping to provide control and feedback of quality distribution performance.            This same technology platform can be utilized by other companies in the distribution            industry, and any business needing to track delivery or personnel. ADS plans to take            this technology to market after it completes its testing and initial            implementation.

 

1

Our            clients also want turn-key services that include printing of their materials. We have            established relationships with prominent print organizations, that when combined with            competitive pricing, allow our clients one stop shopping for their door direct            advertising needs. In dealing directly with client marketing organizations, or with the            agencies that represent them, this total solution approach has resulted in generating            more revenue, while increasing client satisfaction.

 

During            its initial five year history, ADS experienced net losses in 2001 through 2003 and            basically broke even in 2004. During 2005, ADS experienced the best financial            performance since the inception of the Company, primarily driven by strong sales            performance of door delivery programs. A large percentage of the clients throughout            2005 represented repeat business, with some having placed monthly orders since the            fourth quarter of 2004. Other clients were less frequent in their order rate; however,            a few had been advertising with us for over three years. The fiscal year ended December            31, 2005 was the first fiscal year in which we realized a significant net            profit.

 

In            fiscal 2006, we experienced an increase in the number of smaller delivery orders, along            with certain new large volume programs; however, revenue levels of 2006 did not match            those of 2005 (down approximately 12%). Conversely, extraordinary expenses related to            equity funding further impacted profitability for the year end.

Seeking            external sources of funds to accelerate growth of the business required a large portion            of management’s focus during 2006. As a result, we completed a first round of            equity funding during the second quarter of the year, and a second round of equity            funding during the fourth quarter. This capital was sought to help expand ADS’            sales footprint in major cities across the U.S., launch a newly revised version            of*La Canasta de Valores*(Hispanic            targeted advertising cooperative), develop new delivery systems technology platforms,            and to expand the distribution and sales support operations. Some of this expansion            began in 4th quarter of 2006, with the remainder occurring in            2007.

 

Late in            2006 and continuing through the 1st Quarter of 2007, we expanded our            national sales force, hiring sales people in Dallas, Chicago, Los Angeles, Miami and            New York, Later in 2007, additional sales personnel were added in New York and San            Antonio. Correspondingly, sales support personnel were hired. Additional investment was            made to produce new sales collateral, update the company’s brand image (including            our website), and the launch of an extensive advertising campaign promoting ADS and the            company’s Hispanic marketing program,*La Canasta de            Valores*.

 

Despite            the investment in new branding, advertising, additional sales personnel, and the            expansion into new programs and markets, sales for 2007 were off by 29% as compared            with 2006. The sales cycle and ramp-up associated with our new sales team was expected            to occur much sooner than realized in 2007. Though some new customers were acquired            from this investment, most of 2007 revenue was generated from previously established            clients. Also, anticipated national campaigns slated for 2007 from two of our largest            clients failed to come to fruition.

 

The            advertising push did not result in the desired increase in new customers and sales.            However, we are seeing greater recognition of the company within certain client            circles. We plan to continue working on strengthening our expanded sales group’s            performance, bringing to fruition this investment. Again, most of that impact, due to            an elongated sales cycle and learning curve, will be realized in 2008.

 

*La            Canasta de Valores*was launched in October of 2007, though            the revenue, and corresponding financial contribution was other than expected. We will            continue to work on future editions for 2008 given our past experience with the            program, awareness within the advertising community, and the growing opportunity            provided by this market segment.

 

We did            realize greater than expected sales growth in the directory delivery portion of our            business, and efforts were strengthened to address this opportunity. The sales cycle            for directory can be several months, and will have more impact on 2008 and            beyond.

 

Our            business activity in Canada began to expand mid-year, and remained strong throughout            2007. As with the directory side of our business, the full potential has yet to be            realized. We plan on addressing the Canadian market opportunity fully in            2008.

 

 

2

**Marketing and Distribution**

 

During            2006, ADS adopted the trade name ADS Direct Media, designed a new logo, and developed            new marketing materials. In 2007, ADS launched its first advertising campaign,            including special focus on*La Canasta de            Valores*. Additionally, ADS leveraged its public relations            efforts to garner both paid and free exposure in key media outlets. This effort lasted            for the first three quarters of the year, and did not result in any significant sales            in*La Canasta,*or in general. It did;            however, provide ADS with a much higher awareness and recognition with advertising            agencies, media companies, and with some marketing organizations.

 

We have            worked hard over the past several years to provide our customers with the best client            experience possible. This goes beyond providing high quality distribution to include            client services on the front end of every campaign, starting with our comprehensive            geo-demographic targeting and mapping capabilities, delivery tracking and verification            enhancements, commercial printing services, and fulfillment. Our clients are provided            with a “one-stop” buying experience that provides for greater convenience,            better quality and end to end production control, at a very competitive price.            Complimentary to our door delivery solutions is our ability to offer the full line of            direct mail services. Our management staff is comprised of talented direct marketers,            possessing a wealth of experience relative to media and marketing in            general.

 

In            2007, we continued to develop new revenue producing contacts, especially with general            market and Hispanic advertising agencies. An individual with extensive knowledge and            experience in the Hispanic market was brought on board during 2006, as a VP Marketing            and Sales, Hispanic Market. Besides having direct responsibility for launching the            redefined La Canasta program, this individual, through her business associations, has            continued to help raise our visibility within the national Hispanic market.

 

Advertising agencies are always looking for new print media            alternatives. Though door direct has been an established media long before television            and radio, it is considered a new media alternative. Declining response rates and            higher costs associated with traditional media have forced advertisers and their            agencies to look for ways to generate better returns on the media dollar            invested.

 

We have            found new sales relationships that will provide us with better reach into the retail            and consumer packaged goods sectors. This expansion of our sales efforts looks to            leverage the decline of newspaper circulation, and postal rate increases, to provide            alternatives to advertisers looking to reach consumers. Also, we have begun to work            with companies that either publish or sell to publishers, developing new platforms for            sampling and inserts, previously distributed via newspapers or magazines. This change            in the print media landscape will provide fertile ground for ADS in 2008.

 

This            change in strategy has necessitated that we continue to develop new delivery sources            nationally and now internationally. During the 4th quarter of 2007, through            a couple of new sales relationships, we began distributing in central and western areas            of Canada. Alternative postal delivery is widely accepted across all of Canada, with            well developed distribution in the more densely populated eastern provinces. However,            there has been significant growth occurring in provinces like Alberta and westward,            fueled by the oil and gas industry. This has given ADS the opportunity to provide            delivery services in an area that has not been well established by Canadian            distribution companies.

 

**Technology Systems Development**

 

Beginning in 2006, and continuing throughout 2007, we invested in            developing and refining our geo-demographic mapping capabilities. We successfully            developed and launched new proprietary software that automates much of the actions and            labor required during the mapping process. This proprietary software was designed not            only to reduce the man-hours associated with these activities, but just as importantly,            to provide our customers with a tool that would allow them to be involved in            determining their own delivery footprint. We recognized that our clients were            requesting more involvement in determining the actual delivery areas for their            campaigns. This has been especially important for large franchised operations, such as            the quick serve restaurant industry. In these instances, the corporate marketing groups            and their advertising agencies want to allow franchisees control in determining both            the delivery area and their costs, relative to budget, for these types of campaigns. We            now have the capability to provide them with a tool that allows them to manage their            own campaigns - to determine delivery area, the type of

 

3

message/offer used, and the scheduling of distribution. This benefits us            as well, by offsetting the labor costs associated with the development of delivery maps            for these types of campaigns, and allows faster turnaround in the client planning            process. It also provides a user friendly environment for our clients.

 

ADS has            developed proprietary software to enhance commercially available GPS (Global            Positioning Systems) for the tracking and verification of delivery services. During            2007, ADS launched its “beta” version of “Real Time            Verification” (RTV). This new technology provides ADS with a distinct competitive            advantage in the distribution industry, once fully implemented. The RTV system allows            ADS to track deliveries in virtual real time, with once a minute updates of distributor            location by individual delivery personnel. The information is relayed to ADS’            Network Operation Center, with automated updates and alerts regarding delivery            performance. The relative position of each delivery person or crew is plotted on a            delivery map that can be viewed simultaneously by ADS’ clients via the Internet.            No special software is required by the customer in order to see their deliveries occur            in virtual “real time”. The GPS component records the relative position of            each walker carrying a specially designed device, and then transmits this position to            ADS via the wireless network. That information is then translated into viewable maps            for both the company distribution management, and the client...helping to provide            control and feedback of quality distribution performance. This same technology platform            can be utilized by other companies in the distribution industry, and any business            needing to track delivery or personnel. ADS plans to take this technology to market            after it completes its testing and initial implementation.

 

In            2007, we launched our newly branded website on the Internet, still at our original            address at www.adsmediagroup.com. The site reflects the new company logo, and our new            branding for ADS Direct Media, along with an enhanced*Veritrac*portal for our clients to monitor            their delivery status and to view “Real Time Verification.”

 

**Market Overview**

 

Ever            increasing postage rates, combined with lower response from direct mail programs, have            created an ideal market opportunity for door distribution programs. Similarly,            newspapers are seeing declines in readership. The percentage of adults reading the            Sunday newspaper has gone down each year, from 2000 through 2007. The Hispanic            population is the fastest growing segment of the population according the U.S. Census            Bureau; however, the total number of Hispanics reading the Sunday newspaper has also            gone down each year since 2000, representing only 34.5% of the identified adult            Hispanic population in 20061. Meanwhile, rates for newspaper advertising            continue to rise.

 

Advertisers are looking for better reach and return, and alternate            delivery provides both. We have access to a national network of delivery resources,            providing door-to-door delivery, and can extend this reach utilizing other delivery            vendors capable of supplementing the existing delivery network on a city specific            basis. Depending on customer requirements, delivery can be performed anywhere in the            United States, Mexico, Canada, and Puerto Rico. Canada is providing the most immediate            growth for ADS, with deliveries occurring regularly in central and western regions of            the country.

 

The            need for timely and accurate delivery of Yellow Page directories, and Publishers’            willingness to invest in such, has provided increased opportunity for ADS to leverage            its delivery capabilities. Despite the growth of Internet Yellow Pages usage, the            printed directory world continues to thrive, as demonstrated by new Publishers            continuing to enter the market, providing a rich environment for ADS going            forward.

 

We            believe that our ability to offer both direct mail and alternate delivery programs            gives us a distinct competitive advantage. The vast majority of alternate delivery            companies only provide door distribution services, and the same is true with companies            in the direct mail business. We have assembled a network of strategic partnerships and            vendor relationships that allow it the flexibility to provide customized solutions to            meet any direct marketing need a client may have. These capabilities make it possible            to provide event marketing services and directory distribution as well.

 

1 Source: Scarborough Research Top 50 Market Reports            1998-2006, Sunday Newspaper Research Trends – Race/Ethnicity

 

4

**Competition**

 

The            advertising market in general, and the alternative delivery market specifically, are            highly competitive, with a proliferation of existing groups at local and regional            levels, offering similar services to ours. This is true with the directory delivery            industry, and in alternative distribution throughout Canada. In addition to being            highly competitive, these markets are subject to rapid innovation and technological            change, shifting consumer preferences and frequent new product and service            introductions. Additionally, competition exists from traditional products and services            offered through other marketing mediums and channels, such as newspaper, other print            media, television, radio, billboard and internet sites.

 

While            we believe that we can develop a market niche and differentiate ourselves from our            competition by providing customers with the ability to deliver their marketing and            advertising in multiple geographic markets and benefit from dealing with one firm (ADS)            instead of many individual firms in every geographic market where deliveries are            desired, we may be susceptible to attempts by others to duplicate our efforts. It is            possible that other parties with greater resources will be able to replicate, or            improve upon, our business concepts and become market leaders, potentially reducing our            future earnings and business opportunities.

 

**2006            Equity Investment**

 

In June            and October 2006, Roaring Fork Capital SBIC, L.P. (“Roaring Fork”) and            Charter ADS Media, L.P. (“Charter ADS”), respectively, purchased an            aggregate of 6,281,062 shares of common stock and a warrant to purchase an additional            1,256,214 common shares at an exercise price of $0.80 per share for a total purchase            price of $4,000,000 (the “2006 venture capital investment”). We used part            of the proceeds of these investments to reduce our accounts payable, and we expect to            use the remainder to invest in program marketing and sales personnel, improve our            information technology system, increase our administrative staff and fund the further            development of our La Canasta program.

 

In            connection with the 2006 venture capital investment, we also paid investment fees of            $225,000 and issued 376,864 shares of our common stock to First Continental Capital,            LP, for their services in connection with the sale and paid $50,000 to the 2006            investors to reimburse their legal expenses.

 

The            2006 venture capital investment agreement, as amended, required us to file a            registration statement with the SEC to register 500,000 of the shares sold under it by            February 14, 2007 and to register the remaining shares sold under it during the            remainder of 2007 as market and regulatory conditions permit. The investment agreement            also provides the 2006 investors with “piggyback” rights to participate in            any future registrations we may file to sell our shares.

 

The            2006 venture capital investment agreement contained certain other covenants and            requirements for our business and operations, including the following:

 

|   | **•** | We expanded our board of directors to five members and                            elected three independent directors who are acceptable to the 2006                            investors. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We adopted a one-for-five reverse stock split of our                            capital stock. |
|--------|------------|------------------------------------------------------------------------------------------------|

|   | **•** | We obtained key man life insurance policies on our two                            key executives, Mr. Doyal and Mr. Schell, for $2,000,000 each and                            agreed to maintain the policies in existence for at least two                            years. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We granted the 2006 investors a right of first refusal                            on all sales of equity securities prior to November 30, 2008,*pro rata*according to their                            proportionate ownership of our equity. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We agreed not to declare or pay any dividends or                            distributions on our capital stock prior to November 30, 2008, without                            the approval of holders of a majority of the stock bought pursuant to                            the 2006 venture capital investment agreement. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We agreed not to issue, to employees or consultants,                            additional shares of stock or options in excess of 40% of the shares of                            common stock outstanding immediately after the final closing of the                            offering. We agreed to issue options to purchase 80% of that authorized                            option pool to our two key employees and to reserve the remaining 20%                            of the option pool for our remaining employees and                            consultants. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

5

Roaring            Fork is a small business investment company, and in connection with their investment we            entered into a Small Business Administration Compliance Agreement which requires us to            use the proceeds of the 2006 venture capital investment and otherwise conduct our            business in accord with regulations adopted by the SBA for operations of small            businesses. We believe that the SBA regulations place no material constraints on us            which would require us to alter our existing business plan.

 

In            preparation for the 2006 venture capital investment, we also issued options to purchase            1,060,338 shares of common stock at $0.65 per share to certain of our key employees in            settlement of claims for compensation which was deferred in 2003, 2004, 2005 and 2006.            We also issued 366,597 shares to creditors in settlement of outstanding indebtedness of            $201,627.

 

No            additional equity capital was raised in 2007.

 

**Employees**

 

On            December 31, 2007, ADS Media and its subsidiary had twenty-six full-time employees,            including ten in sales and marketing, nine in distribution and fulfillment services and            seven in general and administrative functions. In addition, we routinely engage outside            contractors to perform fulfillment and distribution operations.

 

**ITEM            2. DESCRIPTION OF PROPERTY**

 

ADS            leases approximately 6,600 square feet of office/warehouse space at 12758 Cimarron            Path, Suite B-128, San Antonio, Texas 78249.  The lease is for a period of three            (3) years and five (5) months ending in September 2008. We own no real            property.

 

**ITEM            3. LEGAL PROCEEDINGS**

 

On July            2, 2004, RR Donnelley Receivables, Inc., sued ADS to collect a sworn account in the            amount of $28,504, plus attorney fees and expenses. ADS responded with a general denial            and a counterclaim for breach of contract regarding a partnership with the plaintiff in            Mexico. In November 2005, the counterclaim was dismissed on jurisdictional grounds. The            suit on the sworn account remains pending, but no activity has taken place since            November 2005.

 

**PART II**

 

**ITEM            4. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

From            January 1, 2004, to February 5, 2007, our common stock traded in the Pink Sheets            Electronic Quotation System under the symbol*ADSM*until January 19, 2007, and under the symbol*AMGU*after January 19, 2007. On February 6,            2007, our common stock began trading on the OTC Bulletin Board, also under the            symbol*AMGU*.

 

The            following table sets forth the range of high and low bid prices of the Common Stock for            the periods indicated. Quotations reflect inter-dealer prices, without retail mark-up,            mark-down or commission, and may not represent actual transactions. Our stock is thinly            traded. On many days no trades occur in our shares. The prices below have been adjusted            to reflect a one-for-five reverse stock split that took effect on January 22,            2007.

 

|   | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter |
|--------|-------------|-------------|-------------|-------------|
|   | High        | Low         | High        | Low         | High | Low | High | Low |
|   |        |        |        |        |   |   |   |   |
| 2006   | 0.40        | 0.15        | 0.45        | 0.20        | 2.00 | 0.20 | 1.75 | 0.55 |
| 2007   | 5.00        | 0.60        | 0.75        | 0.49        | 0.60 | 0.43 | 0.60 | 0.20 |

 

6

As of            December 31, 2007, there were approximately 500 shareholders of record for our common            stock, which figure does not take into account those shareholders whose certificates            are held in the name of broker-dealers.

 

**Dividend Policy**

 

We have            not declared or paid cash dividends or made distributions in the past, and we do not            anticipate that we will pay cash dividends or make distributions in the foreseeable            future. We currently intend to retain and reinvest future earnings to finance            operations. Holders of the preferred shares are entitled to receive redemption payments            before we may pay any dividends on our common stock. Under the 2006 venture capital            investment agreement, we may not pay any dividends on our stock prior to November 30,            2008, without the consent of the holders of a majority of the shares purchased under            the 2006 venture capital investment agreement.

 

**Securities Authorized For Issuance Under Equity Compensation            Plans**

 

As of            December 31, 2007, we had issued the following number of shares and options to            employees under compensation plans.

 

| Plan Category                                                                             | Number of securities to be issued upon exercise of                            outstanding options, warrants and rights | Weighted average exercise price of outstanding options,                            warrants and rights | Number of securities remaining available for future                            issuance |
|-------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|
|                                                                                      | (a)                                                                                                                    | (b)                                                                                                    | (c)                                                                                     |
| Equity compensation plans approved by security holders                            (1)     |  

3,486,240                                                                                                      |  

$0.65                                                                                          |  

871,544                                                                         |
| Equity compensation plans not approved by security                            holders (2) |  

1,060,338                                                                                                      | 0.65                                                                                                   | -                                                                                       |
| Total                                                                                     | 4,546,578                                                                                                              | $0.65                                                                                                  | 871,544                                                                                 |

 

| (1) | At the December 2006 shareholders’ meeting the                            shareholders adopted a new 2006 Stock Option and Incentive Plan, which                            is the only currently authorized equity compensation plan.*See ITEM 10, EXECUTIVE COMPENSATION – 2006                            Employee Stock Option and Incentive Plan.* |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (2) | In June 2006, we issued options to purchase 1,060,338                            shares of stock to four employees in settlement of claims for unpaid                            compensation accrued from fiscal 2003 through 2006. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**No            Recent Sales of Unregistered Securities**

 

We sold no unregistered equity securities in 2007.

 

**ITEM            5. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF            OPERATIONS.**

 

The            following discussion and analysis should be read in conjunction with the consolidated            financial statements and notes thereto included in this prospectus. The consolidated            financial statements and related footnotes included herein include the financial            statements of ADS.

 

**Risk            Factors and Cautionary Statements**

 

When            used in this document and in documents incorporated herein by reference, the words            “anticipates,” “believes,” “estimates,”            “expects,” “intends,” “plans,”            “potential,” or “continue,” “may,”            “will,” “should,” and similar expressions are intended to            identify forward-looking statements. ADS Media wishes to advise readers that actual            results may differ substantially from such forward-looking statements. Forward-looking            statements involve risks

 

7

and            uncertainties that could cause actual results to differ materially from those expressed            in or implied by the statements, including, but not limited to, the following: the            ability of ADS Media to continue as a viable concern, the ability of ADS Media to            obtain financing in order to implement its business plan and other risks detailed in            ADS Media’s periodic report filings with the Securities and Exchange            Commission.

 

**Company Development**

 

Our            subsidiary, ADS, was incorporated in 2001. In early 2003, ADS was acquired by ADS            Media, formerly known as National Health and Safety Corporation (NHLT), whose common            stock was publicly traded on the OTC Bulletin Board. At the time of the acquisition,            ADS needed capital to implement its business plan to build a multi-city advertising            door delivery organization, and it was thought that ADS Media would be better able to            attract outside equity investments as a public company. In 2003 we raised $480,000 from            sales of stock in transactions associated with the acquisition.

 

However, after the acquisition in early 2003, we did not attract            significant additional cash investments. Because we did not obtain new investments, we            could not implement our business plan as scheduled, incurred substantial past due            accounts payable, curtailed compensation and were forced to forego needed staff            expansion.

 

In 2004            and 2005, we raised no significant cash from sale of equity and funded almost all            operations internally. As a result, our ability to develop and execute sales programs            was severely curtailed. We did not have adequate staff or financial resources to take            advantage of all marketing programs that were presented to us, to plan for growth, to            conduct extensive external marketing efforts for our program or to adequately staff our            financial reporting operations. We continued to develop our business relying on            internal financing. In 2006, we raised $4 million from venture capital investments. We            paid or settled many outstanding, past due debts, and we expect to use the proceeds to            aggressively implement our business plan.*See Item 1,            Description of Business – Plan of Operation*and*Recent Equity Investment.*

 

We have            incurred total operating losses from inception through 2003, but we steadily improved            performance and posted our first truly positive fiscal results in 2005 after basically            breaking even in 2004. The results for 2006 were slightly below break even, and            significant losses incurred in 2007; however, significant investment dollars were spent            in support of certain marketing programs, to address some infrastructure requirements            for our planned growth, and to hire a direct sales force. The following table            summarizes our results for the last four years.

 

Selected Financial Data

 

|                                       | As of December 31,                                                  |
|--------------------------------------------|---------------------------------------------------------------------|
|                                       | 2007                                                                | 2006 | 2005 | 2004 |
| Income Statement Data:                     |                                                                |   |   |   |
| Revenues                                   | $ 3,434,654                                               | $ 4,824,614  | $ 5,477,086  | $ 3,668,871  |
| Cost of goods sold                         | 2,307,500                                                      | 3,000,207  | 3,554,352  | 2,594,344  |
| Net income (loss)                          | (2,238,577)                                                         | (42,370) | 298,172  | 1,095  |
| Basic earnings (loss) per share            | $          (0.28) | $          (0.01) | $          0.08  | $          0.00  |
|                                       |                                                                |   |   |   |
| Balance Sheet Data:                        |                                                                |   |   |   |
| Current assets                             | 2,035,388                                                      | 4,750,157  | 1,003,780  | 701,121  |
| Total assets                               | 2,330,953                                                      | 5,043,146  | 1,276,473  | 977,045  |
|                                       |                                                                |   |   |   |
| Current liabilities                        | 264,917                                                        | 737,646  | 1,525,629  | 1,553,174  |
| Total liabilities                          | 264,917                                                        | 738,533  | 1,529,681  | 1,555,385  |
| Total shareholders’ equity (deficit) | $   2,066,036                                   | $   4,304,613  | $   (253,208) | $   (578,340) |

 

 

8

**Critical Accounting Policies**

 

Our            financial statements were prepared in accordance with generally accepted accounting            principles in the United States, which require us to make estimates and judgments that            affect the reported financial position and results of operations during the reporting            period. Our estimates and judgments are continually evaluated based on available            information and experience. Because the use of estimates is inherent in the financial            reporting process, actual results could differ from estimates. If there is a            significant unfavorable change to current conditions, it likely will result in a            material adverse impact to our business, operating results and financial            condition.

 

Our            significant accounting policies and methods used in the preparation of the consolidated            financial statements are discussed in Note A to the Notes to Financial Statements for            the years ended December 31, 2007 and 2006, beginning on page F-1. We believe that, of            its significant accounting policies, the following may involve a higher degree of            judgment and complexity:

|   | - | Concentration of credit risk and accounts                            receivable; |
|--------|---|----------------------------------------------------------------------------------|

|   | - | Stock-based compensation |
|--------|---|--------------------------|

|   | - | Asset impairment; and |
|--------|---|-----------------------|

|   | - | Goodwill. |
|--------|---|-----------|

 

Concentration of Credit Risk and Accounts            Receivable: Generally our customers pay 50% – 70% of            the total fee in advance and the remaining portion within 45 days of completion of            services. Our business model generally requires a deposit by the customer; however, in            some cases, we will give minimal credit terms to customers if they have an established            and good payment history with us. We extend unsecured credit in the normal course of            business to virtually all of our customers. In the event of non-performance of accounts            receivable, its maximum exposure is the recorded amount shown on the balance sheets.            Concentration of credit risk and failure to collect accounts receivable have not            presented significant problems.

 

We            establish an allowance for doubtful accounts based upon factors surrounding the credit            risk of specific customers.

 

Stock-Based Compensation: Effective January            1, 2006, we adopted SFAS No. 123R (Revised 2004), "Share-Based Payment", which requires            that the compensation cost relating to share-based payment transactions be recognized            in financial statements based on the provisions of SFAS 123 issued in 1995. We have            adopted this statement using the modified prospective method of implementation, whereby            the prospective method records the compensation expense from the implementation date            forward, but leaves prior periods unchanged.

 

We            recorded $0 and $269,312 , respectively, in compensation expense relating to            share-based payments in 2007 and 2006.

 

Asset Impairment: We review long-lived            assets for impairment whenever events or changes in circumstances indicate that the            carrying amount of an asset may not be recoverable. If impairment indicators are            present and the estimated future undiscounted cash flows are less than the carrying            value of the long-lived assets, the carrying value is reduced to the estimated fair            value as measured by the discounted cash flows. We have not experienced any events or            changes that would indicate that the carrying amounts of any of our long-lived assets            might not be recoverable.

 

Goodwill: We assess the carrying value of            goodwill annually and when factors are present that indicate an impairment may have            occurred. Goodwill is considered impaired and a loss is recognized when its carrying            value exceeds its implied fair value. Factors that are considered important which could            trigger an impairment review include the following:

|   | - | significant underperformance relative to expected                            historical or projected future operating results; |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------|

|   | - | significant changes in the manner or use of the acquired                            assets or the strategy for our overall business; |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------|

|   | - | significant negative industry or economic                            trends; |
|--------|---|------------------------------------------------------------------------------|

|   | - | significant decline in stock price for a sustained                            period; and |
|--------|---|-------------------------------------------------------------------------------------------|

|   | - | our market capitalization relative to net book                            value. |
|--------|---|----------------------------------------------------------------------------------|

 

9

Each            year we assess the realizability of the recorded goodwill and other intangibles in            accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill            and Other Intangible Assets". At December 31, 2007 and 2006, the analysis indicated            that goodwill of $250,000, attributed to the value of a publicly traded            “shell” company which we acquired, was not impaired. We will continue to            test goodwill and intangibles on a consistent measurement date unless events occur or            circumstances change between annual impairment tests that would more likely than not            reduce fair value below their carrying value.

 

**Results of Operations for the Year Ended            December** **31, 2007, as Compared            to the Year Ended December** **31,            2006**

 

In the            second and fourth quarters of 2006, we raised significant new equity funding. With this            new funding we have invested in new program support, various infrastructure projects,            and have hired our first national direct sales force. This investment spending resulted            in losses for 2006 and 2007 but was necessary to achieve our future growth            plans.

 

Revenues. Revenues decreased $1,389,960, or            29%, to $3,434,654 from $4,824,614. The decrease was primarily due to the decline in            sales of our two largest customers from 2006. The Company generated additional            customers in 2007, but it did not make up for the decline of these two            clients.

 

Cost            of Goods Sold. Cost of goods sold decreased $692,707 or 23%,            to $2,307,500 from $3,000,207. The decrease corresponded to our decline in revenues and            slightly smaller overall margin in 2007.

 

Gross Profit. Gross profit decreased            $697,253, or 38%, to $1,127,154 from $1,824,407. The decrease was primarily attributed            to the decrease in revenues combined with margins declining as a result of selling            products with lower individual gross profit in an effort to generate additional repeat            business from newer customers. The gross profit margin percentage decreased to 33% in            2007 from 38% in 2006.

 

Selling, administrative and other operating            expenses. Selling, administrative and other operating            expenses increased $1,144,913, or 49%, to $3,484,863 from $2,339,950. The increase was            primarily due to a full year of expenses associated with building our business and            operational infrastructure, including salaries and wages, professional fees associated            with the Company’s financial statement audits and related regulatory filings, and            marketing services.

 

Income from operations. Results from            operations decreased $1,842,166 to an operating loss of $2,357,709 from an operating            loss of $515,543. The decrease was primarily due to the decrease in revenues and            related gross profit, and the increase in operating expenses.

 

Other income (expense). Net other expense            (income) increased $92,680 to income of $111,113 from income of $18,433. Interest            expense decreased $11,232, or 89%, to $1,341 from $12,573. Interest income increased            $81,448 to income of $112,454 from income of $31,006. This increase resulted from            interest earned on the 2006 equity funding, pending investment of those funds in the            business, as well as a reduction in debt.

 

We            recorded extraordinary gain of $8,019 from the extinguishment of liabilities in 2007.            The liabilities included deferred salary amounts owed to a former employee. The gain            occurred when this employee invalidated his agreement with the Company by violating the            non-compete clause of his separation agreement.

 

Net            loss. Net loss increased $2,196,207, to a loss of $2,238,577            from a loss of $42,370. The increase was primarily due to the decrease in revenues and            related gross profit, the increase in selling, administrative and other operating            expenses, offset slightly by the increase in other income.

 

**Liquidity and Capital Resources**

 

ADS            Media’s working capital needs have historically been satisfied primarily through            financing activities including private loans and raising capital through equity            investments from individual investors. In 2006, significant equity funding was raised            from two sources. Our near term liquidity requirements will be met from these new            equity funds and generated cash flow. We believe future operations can be financed at            least in part from cash flow, but additional investment from outside investors may be            required to fund expansion into new geographic areas and to launch new product            initiatives.

 

10

ADS            Media had cash and cash equivalents of $1,477,342 as of December 31, 2007,            compared to $3,354,597 as of December 31, 2006.

 

Working            capital (measured by current assets less current liabilities) at December 31, 2007, was            $1,770,471 compared to $4,012,511 at December 31, 2006. This decrease in working            capital was primarily due to use of cash and a decrease in accounts            receivables.

 

**Changes in Financial Condition**

 

For the            year ended December 31, 2007, cash used for operating activities totaled $1,852,116.            This provision of funds was primarily due to a cash loss from operations of $2,193,747,            decreased by a working capital change of $341,631. For the year ended December 31,            2006, cash used for operating activities totaled $768,322. This provision of funds was            primarily due to a cash loss from operations of $244,604, increased by a working            capital change of $523,718. Additionally, net cash proceeds of $3,791,608 were provided            from the sale of common stock.

 

For the            years ended December 31, 2007 and 2006, cash used in investing activities was $21,974            and $34,839, respectively, in each case for capital expenditures.

 

For the            year ended December 31, 2007, cash used in financing activities totaled $3,165            primarily due to payments on our capital lease. For the year ended December 31, 2006,            cash provided from financing activities totaled $3,711,616, primarily due to the            proceeds from the sale of common stock, partially offset by payments on notes payable            and capital lease obligations.

 

**Commitments**

 

Historically, our only long term commitment has consisted of our office            lease, which expires in September 2008. The current lease cost is $4,993 per month for            the first three months of 2008 and $5,128 per month for the final five months. Monthly            operating expenses (including amounts for taxes, insurance, and common area            maintenance) are in addition to the base monthly rent. The property is adequately            covered by insurance.

 

**Seasonality**

 

Our            business historically has not been seasonal.

 

**ITEM            6. FINANCIAL STATEMENTS.**

 

The            information required by this item is set forth in ADS Media’s Consolidated            Financial Statements and Notes thereto beginning at page F-1 of this report.

 

**ITEM** **7.            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL            DISCLOSURE.**

 

There are no disagreements with Accountants on Accounting and Financial            Disclosure.

 

During            the year, our auditors, Sprouse & Anderson, LLP, merged with the firm of Padgett,            Stratemann & Co., LLP. At the time of the merger, our audit committee approved            a mutual agreement with our independent auditor to terminate Sprouse &            Anderson’s engagement as our independent auditor and to engage their successor            firm, Padgett, Stratemann & Co., LLP as our new auditor. We expect to maintain            a continuity of auditing experience and personnel.

 

At the            time of terminating the audit engagement, there were no disagreements between us and            Sprouse & Anderson on any matter of accounting principles or practices,            financial statement disclosure, or auditing scope or procedure, which, if not resolved            to Sprouse & Anderson’s satisfaction, would have caused it to make            reference to the subject matter of the disagreement in connection with its report.            Sprouse & Anderson reported on our financial statements for the fiscal years            from 2001 through 2006.

 

11

The            auditor’s reports on our financial statements during the two most recent fiscal            years contained no adverse opinion or disclaimer of opinion and were not modified as to            uncertainty, audit scope, or accounting principles.

 

**ITEM** **7A.            CONTROLS AND PROCEDURES.**

 

**Disclosure Controls**

 

Under            the supervision and with the participation of our management, including our principal            executive officer and principal financial officer, we conducted an evaluation of the            effectiveness of the design and operation of our disclosure controls and procedures, as            defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as            of December 31, 2007. Based on that evaluation, our management, including the CEO and            CFO, concluded that our disclosure controls and procedures were effective as of            December 31, 2007.

 

**Management’s Report on Internal Control over Financial            Reporting**

 

Our            management is responsible for establishing and maintaining adequate internal control            over financial reporting to provide reasonable assurance regarding the reliability of            our financial reporting and the preparation of financial statements for external            purposes in accordance with generally accepted accounting principles. Internal control            over financial reporting includes those policies and procedures that (i) pertain to the            maintenance of records that in reasonable detail accurately and fairly reflect the            transactions and dispositions of the assets of the company, (ii) provide reasonable            assurance that transactions are recorded as necessary to permit preparation of            financial statements in accordance with generally accepted accounting principles, and            that our receipts and expenditures are being made only in accordance with            authorizations of our management and directors; and (iii) provide reasonable assurance            regarding prevention or timely detection of unauthorized acquisition, use or            disposition of our assets that could have a material effect on the financial            statements.

 

From            the third quarter of 2003 through fiscal 2006, we were unable to pay for the costs to            employ a chief financial officer who was familiar with accounting procedures and            auditing standards for publicly held companies. We did not file our quarterly and            annual reports with the SEC on time for fiscal 2003, 2004 or the first three quarters            of 2005. We filed all past due reports with the SEC in the first quarter of 2006. Our            2005 and 2006 annual reports and our quarterly reports for 2006 were timely filed, but            the lack of a separate CFO and CEO still constituted a material weakness in internal            control in 2006.

 

We            retained the services of Tatum, LLC, to provide interim CFO and Controllership support            during the second half of 2006 and the first quarter of 2007. We hired a permanent CFO            during the first quarter of 2007, to improve our controls and procedures for 2007 and            future reporting periods.

 

Management assessed our internal control over financial reporting as of            December 31, 2007, which was the end of our fiscal year. Management based its            assessment on criteria established in the SEC Commission Guidance Regarding            Management’s Report on Internal Control Over Financial Reporting Under Section            13(a) or 15(d) of the Securities Exchange Act of 1934. The guidance sets forth an            approach by which management can conduct a top-down, risk-based evaluation of internal            control over financial reporting. Management’s assessment included an evaluation            of risks to reliable financial reporting, whether controls exist to address those risks            and evaluated evidence about the operation of the controls included in the evaluation            based on its assessment of risk.

 

Based on our assessment, management has concluded that our internal            control over financial reporting was effective as of the end of the fiscal year to            provide reasonable assurance regarding the reliability of financial reporting and the            preparation of financial statements for external reporting purposes in accordance with            generally accepted accounting principles.

 

This            annual report does not include an attestation report of the company’s registered            public accounting firm regarding internal control over financial reporting.            Management’s report was not subject to attestation by the company’s            registered public accounting firm pursuant to temporary rules of the Securities and            Exchange Commission that permit the company to provide only management’s report            in this annual report. Our independent

 

12

registered public accounting firm, Padgett Stratemann & Co. LLP,            audited our consolidated financial statements, and will be required to independently            assess the effectiveness of our internal control over financial reporting as of            December 31, 2008.

 

**Changes in Internal Control over Financial Reporting**

 

During            the time period covered by this report, there were no changes in our internal control            over financial reporting.

 

**PART III**

 

**ITEM            8. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE            GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.**

 

The            following table sets forth the names, ages and positions held by our directors and            executive officers.

 

| **Name**                                                    | **Age***   | **Positions Held**                                                                                                                                                      |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        |       |                                                                                                                                                                    |
| Clark R. (Dub) Doyal                                        | 59         | Chairman, Chief Executive Officer, President and                            Director, Chairman and Chief Executive Officer of subsidiary                            ADS |
| James D. (Jim) Schell                                       | 48         | Vice President, Secretary, Treasurer and Director,                            President of subsidiary ADS                                                               |
| Gary J. Davis                                               | 54         | Director                                                                                                                                                                |
| James C. Mickey                                             | 51         | Director                                                                                                                                                                |
| Bryceon J. Sumner, Jr.

Richard S. Neely

Ernest W. Bromley | 51

48

56 | Director

Director

Director                                                                                                                                            |

 

* Age            of directors and executive officers is determined as of December 31, 2007.

 

All            directors hold office until the next annual meeting of shareholders and serve until            their successors have been duly elected and qualified. There are no agreements with            respect to the election of directors. The board of directors appoints officers annually            and each executive officer serves at the discretion of the board of            directors.

 

**Director and Officer Profiles**

 

Clark            R. (Dub) Doyal is our Chairman, Chief Executive Officer, President and a            Director.  Mr. Doyal is also the Chairman and Chief Executive Officer of            ADS.  Mr. Doyal has over 30 years experience in printing and direct marketing,            having owned and built a number of successful companies during his career that provided            marketing services. In 1981, Mr. Doyal started a business called Clear Visions Printing            and Mailing, to compete with almost 140 other printers in San Antonio.  In 1995,            Mr. Doyal sold Clear Visions to Consolidated Graphics, after taking the company to the            number one spot in San Antonio. Since then, Mr. Doyal has built and sold his interest            in a couple of companies in the alternate delivery industry, including one in Mexico            City called Quicklink, SA, which provided door distribution to over 600,000 households            on a weekly basis.  In late 1998, Mr. Doyal formed Delivery and Communications,            Inc., a local and regional supplier of door delivery services, and sold his interest in            that company prior to forming ADS in 2001 to specifically serve the growing demand for            national door direct delivery.  Mr. Doyal attended Louisiana State            University.

 

James            D. (Jim) Schellis our Vice President, Secretary, Treasurer and a            Director.  He is also President of ADS, and was recruited to lead the effort to            build national client relationships, along with providing marketing support specific to            ADS's product development and marketing strategy. He joined ADS in November 2001. For            the 20 years before his move to ADS, Mr. Schell worked for SBC Communications, Inc.,            focusing on development and implementation of numerous regional and national product            initiatives. He also spent 8 years managing regional sales operations for Southwestern            Bell Yellow Pages. Mr. Schell received his B.B.A. in Marketing from Texas Tech            University.

 

13

Gary J.            Davisis a Director.  Mr. Davis is the President of First            Advisors, Inc., of Austin, Texas, which is involved in business consulting and private            capital investment in start-up and early stage companies.  Mr. Davis founded First            Advisors, Inc. in 1996.  Mr. Davis has spent a major portion of his career over            the past 33 years in a wide range of capital raising endeavors, including debt and            equity for real estate ventures and private equity capital for business ventures.            Additionally, Mr. Davis continues to be an active real estate investor in projects            throughout Texas. Mr. Davis previously was the chairman, president and CEO of NHLT from            February 9, 2001, to January 30, 2003, and has served on the board of directors of NHLT            and ADS Media from 2001 to the present. He is an independent member of the board of            directors.

 

James            C. Mickey was elected a Director of ADS Media in December 2006. He has more than 25            years’ experience in sales and management within the telecommunications industry.            Mr. Mickey is the COO of Pocket Communications. Prior to joining Pocket, Mickey was the            President of Movida Communications, a prepaid provider marketing to the Hispanic            market. He began his career at Movida as the Sr. VP Sales and Marketing in 2006. While            at Movida the company became the fastest growing MVNO in the industry. From 1996            through 2005 he served in sales management positions for Sprint Communications,            including National Vice President for Sprint Retail Stores and Operations (2004 –            2005), Region President, Southwest and Southeast Regions (2000 – 2003) and Area            Vice President for Sprint PCS (1996 – 2000). Prior to joining Sprint, he served            in sales and management positions at AT&T and Southwestern Bell from 1979 through            1996. He holds a BBA in Marketing / Management from the University of Texas at San            Antonio. He is an independent member of our board of directors.

 

Bryceon            J. Sumner was elected a Director of ADS Media in December 2006. Mr. Sumner is the EVP,            CFO and COO of Exhibitgroup. Exhibitgroup specializes in the custom design,            construction, installation and warehousing of exhibition and event exhibits and            displays, primarily for corporate customers in North America, the UK and Europe. In            2005 and 2006, Mr. Sumner served as chief executive officer of Jensen Family Office, a            private equity group in Dallas, Texas, with more than $500 million in assets under            management. While serving as CEO of Jensen Family Office, Mr. Sumner assisted its            owner, Ron Jensen, and later Mr. Jensen’s estate, by also serving as CEO of            Integrated Disability Resources, Inc. (“IDR”), a third party administrator            owned by the Jensen family interests, and in filing voluntary bankruptcy proceedings            for IDR in early 2006. From 1998 through 2005, Mr. Sumner served as chief financial            officer of Rapp Collins Worldwide LP, Dallas, Texas, a subsidiary of Omnicom (NYSE).            From 1996 to 1998, Mr. Sumner served as chief financial officer of Processors LTD, now            Processors USF, a reverse logistics company. Mr. Sumner is a certified public            accountant. He holds a BBA in accounting from the University of Georgia and a Masters            degree in professional accounting from the University of Texas at Austin. He is an            independent member of the board of directors.

 

Richard            S. Neely was elected a Director of ADS Media in March 2007. Mr. Neely is Chief            Financial Officer of Charter Holdings, a Dallas-based diversified real estate and            equity investment company involved in the ownership of commercial real estate            properties and operating companies. In addition to his involvement with real estate            investments, he oversees several equity investments and is a board advisor to MCrowd            Restaurant Group, a Dallas-based restaurant chain. His prior assignments include            charitable gift planner for Baylor Health Care System Foundation, commercial real            estate appraiser, and founding employee of Lomas & Nettleton Advisory Group (now            Invesco Real Estate Advisors). Neely is an active member of the Financial Executives            International organization and a member of the Rotary Club of Dallas and the Highland            Park United Methodist Church. He is a graduate of Southern Methodist University, where            he earned a bachelor of business administration degree and an MBA. He is an independent            member of our board of directors.

 

Ernest            W. Bromley was elected a Director of ADS Media in April 2007. Mr. Bromley is Chairman            of the Board and CEO of Bromley Communications, a leading provider of marketing            communications services to major U.S. brands seeking to gain market share in the            Hispanic community. Bromley Communications’ client list has included such            companies as General Mills, Procter & Gamble, Burger King, Continental Airlines,            Coors, Astra-Zeneca, Payless ShoeSource, and Nestle. Prior to joining Bromley            Communications, Bromley was an economics instructor at the University of Texas at San            Antonio. Bromley currently serves on the board of Judson Montessori School board of            directors, San Antonio Symphony Board, NALAC, the Mitchell Lake Audubon Center, and the            Greater San Antonio Chamber of Commerce Central Area Council. He holds a bachelor of            arts in political science and an MBA from the University of Texas at San Antonio. He is            an independent member of our board of directors.

 

14

**Section 16(a) Beneficial Ownership Reporting            Compliance**

 

Section 16(a) of the Securities Exchange Act of 1934 requires our            executive officers, directors and persons who beneficially own more than 10% of our            common stock to file reports of ownership and changes in ownership with the Securities            and Exchange Commission. These persons are required by the Securities and Exchange            Commission regulations to provide us with copies of all Section 16(a) forms that they            file.

 

Two of            our new directors, Ernest Bromley and Richard Neely; and our CFO, Michael Wofford; were            late in filing their initial ownership reports on Form 3. Mr. Bromley owns no equity            securities in the company. Mr. Neely owns none of our equity securities, though he an            officer of the general partner of the investor that made the equity investment in our            company in October 2006. Mr. Wofford owns less than .02% of equity securities. Based            solely upon a review of the copies of the forms furnished to us, or representations            from certain reporting persons that no reports were required, we believe that            no other persons failed to file required reports on a timely basis during or in respect            of 2007.

 

**Audit Committee**

 

Our            audit committee is composed of Bryceon Sumner, chair, Gary Davis, and Ernest Bromley,            all of whom are independent members of our board of directors as defined by NASDAQ            Stock Market Rule 4200(a)(15). The board has determined that Mr. Sumner qualifies as an            audit committee financial expert, as defined in Regulation S-B, Item 407(d)(5)(ii)            promulgated by the SEC.

 

The            audit committee operates under a charter approved by the board of directors. The audit            committee charter requires, among other things, that the audit committee must approve            the selection of our independent auditor and must pre-approve all services provided to            us by the independent auditor. A copy of the audit committee charter is filed with the            SEC as an exhibit to our 2006 annual report on Form 10-KSB.

 

**Compensation Committee**

 

Our            compensation committee is composed of James Mickey, chair, Gary Davis, and Richard            Neely, of whom are independent members of our board of directors as defined by NASDAQ            Stock Market Rule 4200(a)(15).

 

**Code            of Conduct**

 

We have            adopted a code of conduct which applies to our officers, directors and employees. We            have posted the code on our website, www.adsmediagroup.com.

 

**ITEM            9. EXECUTIVE COMPENSATION.**

 

The            following table summarizes the compensation of our chief executive officer and our            other most highly compensated executive officers (the “Named Executive            Officers”) during 2007.

 

| Name                        | Year   | Salary($)  | Bonus($) | Option Awards (1)($) | Total($) |
|-----------------------------|--------|-----------------|----------|----------------------|----------|
| Clark R. (Dub) Doyal,       | 2007   | $210,231        | $0       | $0                   | $210,231 |
| Chief Executive Officer (2) | 2006   | 184,000         | 40,000   | 315,258              | 539,258  |
|                        | 2005   | 289,169         | 0        | 0                    | 289,169  |
|                        |   |            |     |                 |     |
| James D. (Jim) Schell,      | 2007   | 210,231         | 0        | 0                    | 210,231  |
| Vice President, Secretary,  | 2006   | 184,000         | 35,000   | 256,283              | 475,233  |
| Treasurer (3)               | 2005   | 250,769         | 0        | 0                    | 250,769  |
|                        |   |            |     |                 |     |
| Michael Wofford             | 2007   | 118,269         | 0        | 0                    | 118,269  |
| Chief Financial Officer     |   |            |     |                 |     |

15

(1)  We have adopted FAS 123R, accounting for the compensation            cost relating to share-based payment transactions, using the modified prospective            method of implementation, whereby the prospective method records the compensation            expense from the implementation date forward, but leaves prior periods            unchanged.*See Consolidated Financial Statements, Note A            – General and Summary of Significant Accounting Policies – Stock Based            Compensation.*

 

(2)  Includes $130,669 in salary voluntarily deferred in 2005            by Mr. Doyal. In June 2006, Mr. Doyal agreed to accept options to purchase common stock            at $0.65 per share in lieu of deferred salary through May 31, 2006. Mr. Doyal received            options to purchase 584,473 shares of stock in lieu of total deferred salary of            $408,970.*See, Certain Relationships and Related            Transactions.*

 

(3)  Includes $62,769 in salary voluntarily deferred in 2005            by Mr. Schell. These salary deferrals were settled in 2006 with the issuance of stock            options in lieu of deferred compensation. Mr. Schell received options to purchase            393,616 shares of stock in lieu of total deferred salary of $275,423.*See ITEM 11, Certain Relationships and Related            Transactions.*

 

Employment Agreements. In June 2006, we            entered into new employment agreements with our key executives, Mr. Doyal and Mr.            Schell. Each agreement is for a term of three years from June 16, 2006, at salaries of            $200,000 in year one, $220,000 in year two and $242,000 in year three. The agreements            provide for payment of performance bonuses if our Company meets performance criteria to            be set by the board of directors. The agreements provide for twelve months’            severance pay and a prorated bonus in the event the executive is terminated without            cause. We make available to the executives the same employee benefits generally made            available to other managers and employees. The agreements contain non-competition            clauses for 12 months after termination of the agreement and provisions regarding            confidentiality of company information.

 

Key            Man Insurance. As required by the 2006 venture capital            investment agreement, we maintain key man life insurance on Mr. Doyal and Mr. Schell in            the amount of $2 million on each executive through at least November 30,            2008.

 

**Outstanding Equity Awards at Fiscal Year-End**

 

No            stock awards were made to the Named Executive Officers, and none were outstanding, at            December 31, 2007. The following table shows the number of options held at            December 31, 2007, by the Named Executive Officers.

 

| Name                   | Number of Securities Underlying Unexercised                            Options(#)Exercisable | Number of Securities Underlying Unexercised                            Options(#)Unexercisable | Equity Incentive Plan Awards: Number of Securities                            Underlying Unexercised Unearned Options(#) | Option Exercise Price($) | Option Expiration Date |
|------------------------|----------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|--------------------------|------------------------|
| Clark R. (Dub) Doyal*  | 1,020,253                                                                                    | 0                                                                                              | 1,307,339                                                                                                                | $0.65                    | 6/20/2016              |
| James D. (Jim) Schell* | 829,396                                                                                      | 0                                                                                              | 1,307,339                                                                                                                | $0.65                    | 6/20/2016              |

 

* All            listed options were granted in 2006 at an exercise price of $0.65 per share. Mr. Doyal            received options to purchase 584,473 shares in settlement of past compensation claims            which had been deferred and options to purchase a total of 435,780 shares pursuant to            our 2006 Incentive Plan. Mr. Schell received options to purchase 393,616 shares in            settlement of past compensation claims which had been deferred and options to purchase            a total of 435,780 shares pursuant to our 2006 Incentive Plan.

 

The            fair value of unvested stock options for Mr. Doyal and Mr. Schell is $80,794 each, for            a total of $161,588.

 

 

16

2006            Employee Stock Option and Incentive Plan

 

Our            directors and stockholders adopted a stock option and incentive plan in 2006. Awards            under the plan may be in the form of stock options, restricted stock grants, or stock            appreciation rights. The purpose of the plan is to advance our interests and those of            our stockholders by affording our employees, officers, directors, and key consultants            an opportunity to acquire or increase their proprietary interests in our company,            permitting them to participate in our success and growth.

 

The            plan permits the issuance of incentive stock options, as defined within the meaning of            Section 422 of the Internal Revenue Code of 1986, as amended (“ISOs”) that            receive favorable tax treatment under the Internal Revenue Code. To qualify for such            favorable treatment, the plan must, among other things, be approved by our shareholders            within 12 months of its adoption by our directors. The plan was adopted by a majority            of our shareholders at the December 2006 shareholders’ meeting. The plan also            permits issuance of non-statutory stock options which do not qualify as ISOs under the            Internal Revenue Code.

 

*Common Stock Subject to the Plan.*The            current maximum number of shares of common stock that may be issued under the plan is            4,357,784 shares. The 2006 venture capital investment agreement provides that we cannot            reserve additional shares for issuance under the plan without the consent of holders of            a majority of the shares that were sold pursuant to the 2006 venture capital investment            agreement. We may use either authorized and unissued shares or treasury shares to            fulfill option awards, subject to adjustment in accordance with anti-dilution            provisions contained in the plan. All shares of common stock subject to the plan may be            issued in any combination of ISOs, nonstatutory stock options, restricted stock, stock            purchase rights or stock appreciation rights.

 

*Term            of the Plan.*The term of the plan is 10 years, or until June            15, 2016, unless terminated earlier as provided in the plan. No ISO may be granted more            than ten years after June 15, 2006. The plan may be abandoned or terminated at any time            by the our directors, except with respect to options, restricted stock or stock            purchase rights then outstanding under the plan.

 

*Eligibility.*All of our directors,            officers, employees, including but not limited to executive personnel, as well as our            key consultants and advisors, are eligible to be granted options under the            plan.

 

*Administration of the Plan.*The plan will            be administered either by the board of directors or by a committee consisting of at            least one director appointed by the board of directors (in either case, the            “Administrator”). The Administrator selects the individuals to whom            options, restricted stock or stock purchase rights are to be granted, the number of            shares to be granted and any other terms and conditions specified under the plan,            including, but not limited to, the exercise price, the times at which options or stock            purchase rights shall become vested, the times at which options or stock purchase            rights shall become exercisable and the duration of the exercise periods.

 

*Terms of Options.*The exercise price of            each option issued under the plan shall be determined by the administrator and shall            not be less than fair market value of the common stock as of the date the option is            granted; provided, however, that the exercise price of an ISO granted to any person            owning at least 10% of the total combined voting power of all classes of our stock or            any of our parents or subsidiaries shall not be less than 110% of the fair market value            on the date the option is granted. The exercise period of each option shall be            determined by the Administrator; provided, however, that an no option shall be            exercisable after the expiration of ten years from the date of the option grant. In            addition, except in the case of death or disability, no option granted to an individual            who is subject to the provisions of Section 16 of the Exchange Act may be exercisable            prior to the expiration of three months from the date of the option grant.

 

In the            case of ISOs, the fair market value of stock with respect to which ISOs are exercisable            for the first time during any calendar year by any participant in the plan may not            exceed $100,000, such value being determined at the time the options are granted, as            provided by the terms of Section 422 of the Internal Revenue Code. To the extent the            value of the underlying stock (determined in accordance with the previous sentence)            exceeds $100,000, such excess options shall be treated as nonstatutory stock            options.

 

After            an option becomes exercisable, it may be exercised at any time as to any or all full            shares that have become purchasable under the terms of the option. The exercise price            of options granted under the plan may be made in

 

17

whole            or in part through the surrender of previously held shares of common stock at the fair            market value thereof or through the authorization to withhold shares of stock otherwise            issuable upon exercise of the option.

 

No            option shall be transferable other than by will or the laws of descent and            distribution, or in the case of non-incentive stock options, pursuant to a Qualified            Domestic Relations Order, and no option shall be transferable by an individual who is            subject to the provisions of Section 16 of the Exchange Act prior to stockholder            approval of the plan. The Administrator shall have the power to specify with respect to            each grant of options the effect upon such grantee’s rights of the termination of            such grantee’s employment or services with us, and the Administrator may            determine at the time of grant that such options shall become exercisable on an            accelerated basis following a change of control with respect us. Nothing in the plan            shall confer on any person any right to continue in the employ of us or any of our            subsidiaries or shall interfere in any way with the right of us or any of our            subsidiaries to terminate such person’s employment at any time.

 

*Options Granted to Key Executives under Plan.*When the plan was adopted by the board, and as agreed in the 2006            venture capital investment agreement, our key executives, Mr. Doyal and Mr. Schell,            each received non-statutory stock options to purchase 1,743,120 shares of stock under            the plan. Twenty-five percent (25%) of these options vested and became exercisable upon            issuance. The remaining 75% vest in June 2008 and 2009 only if the Company meets            minimum performance targets. These options become exercisable, if at all, 50% upon            vesting and 50% one year from when they vest. The Company did not meet the 2006 minimum            performance targets, so the options originally scheduled to vest in June 2007 did not            vest at that time; however, these options may still vest in 2008 or 2009 if future            performance targets are met.

 

*Terms of Stock Bonuses and Restricted Stock.*Until any restrictions upon stock bonuses restricted stock awarded to a            grantee under the plan have lapsed, such shares shall not be transferable other than by            will or the laws of descent and distribution, or pursuant to a Qualified Domestic            Relations Order, nor shall they be delivered to the grantee. The Administrator shall            have the power to specify with respect to each award of restricted stock the effect            upon such grantee’s rights of the termination of such grantee’s employment            with us. The purchase price of restricted stock shall be determined by the            Administrator but must be at least 100% of fair market value on the date of such award.            The Administrator may determine at the time of award that such restricted stock shall            become fully vested following a change of control with respect to us.

 

*Terms of Stock Purchase Rights.*Stock            purchase rights may be issued either alone, in addition to, or in tandem with other            awards granted under the plan and/or cash awards made outside the plan, the terms of            which are determined at the discretion of the Administrator. The Restricted Stock            Purchase Agreement shall grant us a repurchase option exercisable upon the voluntary or            involuntary termination of the purchaser’s service with us for any reason            (including death or disability). The purchase price for shares repurchased pursuant to            the Restricted Stock Purchase Agreement shall be the original price paid by the            purchaser and may be paid by cancellation of any indebtedness of the purchaser to us.            The repurchase option shall lapse at a rate determined by the Administrator. Once the            Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to            those of a stockholder, and shall be a stockholder when his or her purchase is entered            upon the records of our duly authorized transfer agent.

 

*Federal Tax Consequences of Options.*Under            current federal income tax laws, options granted under the plan will generally have the            following consequences. The holder of a nonstatutory stock option recognizes no income            for federal income tax purposes upon the grant of such option, and therefore we receive            no deduction at such time. At the time of exercise, however, the grantee generally will            recognize income, taxable at ordinary income, to the extent that the fair market value            of the shares received on the exercise date exceeds the nonstatutory stock option            exercise price. We will be entitled to a corresponding deduction for federal income tax            purposes in the year in which the nonstatutory stock option is exercised so long as            either Section 162(m) is inapplicable or its requirements are met. If the shares are            held for at least one year and one day after exercise, long-term capital gain will be            realized upon disposition of such shares to the extent the amount realized on such            disposition exceeds their fair market value as of the exercise date.

 

If a            grantee is awarded an ISO, no income will be recognized for federal income tax purposes            at the time of grant or exercise, and we will not receive any corresponding deduction.            The excess of fair market value of the shares of common stock received at the date of            exercise over the exercise price will become an item of tax preference for the grantee            for purposes of the grantee’s alternative minimum tax in the year of exercise,            however. The grantee will be

 

18

subject            to federal income tax when the grantee sells the shares acquired upon the exercise of            the ISO. If the grantee holds the shares for more than two years from the date of grant            and more than one year from the date the shares were transferred to that person, any            gain will be taxed as long-term capital gain. We will not be entitled to any deduction            for federal income tax purposes as to any amount taxed as long-term capital gain in            connection with the sale of shares acquired upon the exercise of an ISO. We will,            however, be entitled to a corresponding deduction for federal income tax purposes for            any amount taxed as ordinary income.

 

*Amendment of the Plan.*The board of            directors may at any time terminate the plan, and may at any time and in any respect            amend the plan; provided, however, that the board (unless its actions are approved or            ratified by our stockholders within twelve months of the date that the board amends the            plan) may not amend the plan to (i) increase the total number of shares of common stock            issuable pursuant to ISOs under the plan or materially increase the number of shares of            common stock subject to the plan; (ii) change the class of employees eligible to            receive ISOs that may participate in the plan or materially change the class of person            that may participate in the plan; or (iii) otherwise materially increase the benefits            accruing to participants under the plan. No termination, amendment or modification of            the plan shall adversely affect options, stock purchase rights or restricted stock then            outstanding under the plan without the consent of the grantee or his legal            representative.

 

**Director Compensation**

 

The            following table summarizes the compensation paid to non-employee directors in            2007.

 

|           | Fees Earned or Paid in Cash | Stock Awards | Option Awards | Total                  |
|----------------|-----------------------------|--------------|---------------|------------------------|
| Name           | ($)                         | ($)          | ($)           | ($)                    |
| Gary Davis     | $3,000                      | -            | -             | $3,000                 |
| James Mickey   | $1,000                      | -            | -             | $1,000                 |
| Bryceon Sumner | $1,500                      | -            | -             | $1,500                 |
| Richard Neely  | $2,000                      | -            | -             | $2,000                 |
| Ernest Bromley | $   500      | -            | -             | $   500 |

 

**ITEM            10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED            STOCKHOLDER MATTERS.**

 

The            following table shows, as of December 31, 2007, the beneficial ownership of our common            stock held by (i) each person who is known by us to beneficially own more than 5% of            the outstanding shares of any class of our voting securities; (ii) each of our            directors; (iii) each of our Named Executive Officers; and (iv) all of our directors            and Named Executive Officers as a group. Unless indicated otherwise, the address of            each person listed below is c/o ADS Media Group, Inc., 12758 Cimarron Path, Suite            B-128, San Antonio, Texas, 78249.

 

 

| **Name of Beneficial Owners**                                                                        | **Number of Shares****Beneficially Owned (1)** | **Percentage of****Ownership** |
|------------------------------------------------------------------------------------------------------|------------------------------------------------|--------------------------------|
|                                                                                                 |                                           |                           |
| Roaring Fork Capital SBIC, L.P. (2)

5350 S. Roslyn St. Suite 380

Greenwood Village, Colorado 80111 | 3,768,638                                      | 32.75%                         |
| Charter ADS Media, L.P. (3)

1845 Woodall Rogers Freeway

Dallas, Texas 75201                        | 3,768,638                                      | 32.75%                         |
| Bryan T Forman                                                                                       | 1,442,410                                      | 14.23%                         |
| 400 W. 1st Street                                                                                    |                                           |                           |
| Tyler, Texas 75701                                                                                   |                                           |                           |

 

19

|                                                                                   | **Number of Shares****Beneficially Owned (1)** | **Percentage of****Ownership** |
|----------------------------------------------------------------------------------------|------------------------------------------------|--------------------------------|
|                                                                                   |                                           |                           |
| **Executive Officers and Directors:**                                                  |                                           |                           |
| Clark R. “Dub” Doyal (4)                                                   | 2,003,258                                      | 16.83%                         |
| James D. (Jim) Schell (5)                                                              | 1,200,214                                      | 10.22%                         |
| Gary J. Davis (6) (7)

3811 Bee Cave Rd, Suite 210

Austin, Texas 78746                | 668,769                                        | 6.15%                          |
| All Executive Officers and Directors as a Group (5                            persons) | 3,872,241                                      | 30.34%                         |

 

| (1) | Under SEC rules, we calculate the percentage ownership                            of each person who owns exercisable options or warrants by adding the                            number of exercisable options or warrants for that person to the number                            of total shares outstanding, and dividing that result into the total                            number of shares and exercisable options or warrants owned by that                            person. On December 31, 2007, we had 10,880,867 shares of common stock                            issued and outstanding excluding shares issuable on exercise of options                            and warrants and conversion of preferred stock. Pursuant to the                            rules of the Securities and Exchange Commission, a person or group                            is deemed to have “beneficial ownership” of any shares with                            regard to which such person or group has or shares voting or investment                            power or has or shares the right to acquire such power within 60 days                            of December 31, 2007, such as pursuant to the conversion or exchange of                            securities or the exercise of stock options or warrants. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (2) | Roaring Fork’s holdings include stock issuable on                            exercise of warrants to purchase 628,107 shares at $0.80 per share                            expiring June 20, 2011. Roaring Fork is managed by Roaring Fork Capital                            Management, L.L.C., whose managers are G. Michael Machens, Eugene C.                            McColey and James T. Rothe. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (3) | Charter ADS Media’s holdings include stock                            issuable on exercise of warrants to purchase 628,107 shares at $0.80                            per share expiring June 20, 2011. Charter ADS Media is managed by                            Charter Venture Partners, L.P. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (4) | Mr. Doyal’s holdings include stock issuable on                            exercise of options to purchase 1,020,253 shares. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------|

             

| (5) | Mr. Schell’s holdings include stock issuable on                            exercise of options to purchase 829,396 shares and warrants to purchase                            31,112 shares. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (6) | Mr. Davis is the President of two co-general partners of                            ADS Equity Partners, L.P. (“ADS Equity”), which owns                            380,509 shares of our common stock. Because he has joint power to vote                            the shares owned by ADS Equity, he may be deemed to be beneficial owner                            of all the common stock owned by ADS Equity pursuant to Rule 13d-3                            promulgated under the Securities and Exchange Act of 1934, as                            amended. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (7) | Includes 18,000 shares issuable on the exercise of                            options, 118,115 shares held by partnerships in which Mr. Davis is a                            partner, and 52,856 shares held by a corporation of which Mr. Davis is                            the sole shareholder. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**ITEM** **11.            CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

In June            2006, we issued options to purchase 584,473 shares of common stock at $0.65 per share            to Mr. Doyal and 393,616 shares of common stock to Mr. Schell in lieu of payment of            employment compensation of $408,970 to Mr. Doyal and $275,423 to Mr. Schell that was            deferred in the years 2003 through 2006. In addition, we issued options for 82,249            shares at $0.65 per share to two additional employees for deferred compensation of            $57,551. The option issuances were approved by our board of directors and were            negotiated in connection with the negotiation of the 2006 venture capital            investment.

 

 

20

**ITEM** **12.            EXHIBITS**

 

| 3.1    | Amended and Restated Articles of Incorporation of ADS                            Media Group, Inc. (“AMGU”), incorporated by reference to                            Exhibit 3.1 of the Registration Statement on Form SB-2 filed with the                            SEC on February 14, 2007, File No. 333-140721                                                     |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2    | Amended Bylaws, incorporated by reference to Exhibit 3.2                            of the Registration Statement on Form SB-2 filed with the SEC on                            February 14, 2007, File No. 333-140721                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1    | Certificate of Designation in respect of Series A                            Preferred Stock of AMGU, filed with the Secretary of State of Utah on                            January 30, 2001, incorporated by reference to Exhibit 4.1 to our Form                            8-K/A filed with the SEC on March 28, 2001                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2    | Articles of Amendment of the Certificate of Designation                            in respect of Series A Preferred Stock of AMGU, filed with the                            Secretary of State of Utah on January 31, 2003, incorporated by                            reference to Exhibit 4.1 to our Form 8-K filed with the SEC on February                            11, 2003 |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3    | Certificate of Designation in respect of Series B                            Preferred Stock of AMGU, filed with the Secretary of State of Utah on                            January 30, 2001, incorporated by reference to Exhibit 4.2 to our Form                            8-K/A filed with the SEC on March 28, 2001                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.4    | Articles of Amendment of the Certificate of Designation                            in respect of Series B Preferred Stock of AMGU, filed with the                            Secretary of State of Utah on January 31, 2003, incorporated by                            reference to Exhibit 4.1 to our Form 8-K filed with the SEC on February                            11, 2003 |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1   | Amended and Restated Common Stock and Warrant Purchase                            Agreement (October 25, 2006), incorporated by reference to Exhibit 3.1                            of our Form 8-K filed with the SEC on October 31, 2006                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2   | Warrant Agreement between AMGU and Roaring Fork (June                            16, 2006), incorporated by reference to Exhibit 3.2 of our Form 8-K                            filed with the SEC on June 22, 2006                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3   | Addendum to Amended and Restated Common Stock and                            Warrant Purchase Agreement (October 25, 2006), incorporated by                            reference to Exhibit 3.2 of our Form 8-K filed with the SEC on October                            31, 2006.                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4+  | First Amendment to Common Stock and Warrant Purchase                            Agreement (February 15, 2007)                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5   | Employment Agreement between AMGU and Clark R. Doyal                            (June 16, 2006) , incorporated by reference to Exhibit 10.8 of our Form                            10-QSB filed with the SEC on November 13, 2006                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6   | Employment Agreement between AMGU and James D. Schell                            (June 16, 2006) , incorporated by reference to Exhibit 10.9 of our Form                            10-QSB filed with the SEC on November 13, 2006                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.7   | Stock Option Agreement between AMGU and Clark R. Doyal                            (June 16, 2006), incorporated by reference to Exhibit 10.6 of the                            Registration Statement on Form SB-2 filed with the SEC on February 14,                            2007, File No. 333-140721                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8   | Stock Option Agreement between AMGU and James D. Schell                            (June 16, 2006) , incorporated by reference to Exhibit 10.7 of the                            Registration Statement on Form SB-2 filed with the SEC on February 14,                            2007, File No. 333-140721                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9   | 2006 Incentive Stock Option Plan, incorporated by                            reference to Exhibit B of our Definitive Schedule 14A and proxy                            statement filed with the SEC on November 20, 2006                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 10.10  | Non-Statutory Stock Option Agreement between AMGU and                            James D. Schell (June 16, 2006), incorporated by reference to Exhibit                            3.4 of our Form 8-K filed with the SEC on October 31, 2006                                                                                                                                        |

 

21

| 10.11                                                                                 | Non-Statutory Stock Option Agreement between AMGU and                            Clark R. Doyal (June 16, 2006) , incorporated by reference to Exhibit                            3.5 of our Form 8-K filed with the SEC on October 31, 2006                                                                                        |
|---------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                  |                                                                                                                                                                                                                                                                                                                                |
| 10.12                                                                                 | Non-Statutory Stock Option Agreement between AMGU and                            James D. Schell (October 25, 2006), incorporated by reference to                            Exhibit 3.6 of our Form 8-K filed with the SEC on October 31,                            2006                                                          |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                |
| 10.13                                                                                 | Non-Statutory Stock Option Agreement between AMGU and                            Clark R. Doyal (October 25, 2006), incorporated by reference to Exhibit                            3.7 of our Form 8-K filed with the SEC on October 31, 2006                                                                                      |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                |
| 10.14                                                                                 | Form of Warrant Agreement for warrants issued pursuant                            to the Amended and Restated Common Stock and Warrant Purchase Agreement                            (October 25, 2006), incorporated by reference to Exhibit 3.3 of our                            Form 8-K filed with the SEC on October 31, 2006 |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                |
| 14.1                                                                                  | Code of Conduct, incorporated by reference to Exhibit                            14.1 of our Form 10-KSB filed with the SEC on April 2, 2007                                                                                                                                                                                        |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                |
| 21.1+                                                                                 | List of Subsidiaries                                                                                                                                                                                                                                                                                                                |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                |
| 31.1+                                                                                 | Certification of the Chief Executive Officer and Chief                            Financial Officer of ADS Media required by Section 302 of the                            Sarbanes-Oxley Act of 2002                                                                                                                          |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                |
| 32.1+                                                                                 | Certification of Chief Executive Officer and Chief                            Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted                            Pursuant to Section 906 of the Sarbanes-Oxley Act of                            2002                                                            |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                |
| 99.1                                                                                  | Audit Committee Charter, incorporated by reference to                            Exhibit 99.1 of our Form 10-KSB filed with the SEC on April 2,                            2007                                                                                                                                                     |
|                                                                                  |                                                                                                                                                                                                                                                                                                                                |
| +     Filed with this Form                            10-KSB |

 

**ITEM** **13.            PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

 

**Audit Fees**

 

Our            independent auditors for fiscal 2006 and 2007 were Sprouse & Anderson, LLP, who            merged into Padgett, Stratemann & Co., LLP in late 2007.

 

The            fees billed to ADS Media by Sprouse & Anderson, LLP, now Padgett, Stratemann &            Co., LLP, are shown in the table below.

 

 

|               | **Year Ended****December 31,** |                |
|--------------------|--------------------------------|---------------------|
|               | **2007**                       | **2006**            |   |
|               |                           |                |   |
| Audit fees         | $  33,500            | $  33,000 |   |
| Audit-related fees |                           | 1,250               |   |
| Tax fees           | 3,000                          | 2,500               |   |
| All other fees     | —                        | —             |   |
|               | $  36,500            | $  36,750 |   |

 

Audit            fees consist of fees billed for professional services for the audit of ADS            Media’s annual financial statements, reviews of the financial statements included            in ADS Media’s quarterly reports and services that are normally provided in            connection with statutory and regulatory filings.

 

22

Audit-related fees consist of fees billed for assurance and related            services that are reasonably related to the performance of the audit or review of ADS            Media’s consolidated financial statements and are not reported under “Audit            Fees.”

 

Tax            fees consist of fees billed for professional services for tax compliance, tax advice            and tax planning.

 

All            other fees consist of fees for products and services other than for services reported            above.

 

**Pre-Approval Policy and Procedures**

 

In 2007            it was the Board of Director’s policy to pre-approve all services provided by            Sprouse & Anderson, LLP, now Padgett, Stratemann & Co., LLP. All services            provided by Sprouse & Anderson, LLP, now Padgett, Stratemann & Co., LLP during            the years ended December 31, 2007 and 2006 were pre-approved by the Board of            Directors.

 

The            board has appointed an audit committee for 2007.*See, Item 8,            Directors and Executive Officers of the Registrant – Audit Committee.*The audit committee charter provides that the audit committee has            authority to appoint the auditor and requires that the audit committee pre-approve all            services provided by the company’s independent accountant.

 

As of            the date of this filing, ADS Media’s current policy is to not engage Sprouse            & Anderson, LLP, now Padgett, Stratemann & Co., LLP to provide, among other            things, bookkeeping services, appraisal or valuation services, or internal audit            services. The policy provides that ADS Media engage Sprouse & Anderson, LLP, now            Padgett, Stratemann & Co., LLP to provide audit, tax, and other assurance services,            such as review of SEC reports or filings.

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

| Date:  | March 28, 2008 | ADS Media Group, Inc.   |
|--------|----------------|-------------------------|
|   |           |                    |
|   |           | By: /s/ Clark R. Doyal  |   |
|   |           | Clark R. Doyal          |
|   |           | Chief Executive Officer |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,            this report has been signed by the following persons on behalf of the registrant and in            the capacities and on the dates indicated.

 

 

| Name                  | Title                                                                                           | Date                                                                                                               |
|-----------------------|-------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|
|                  |                                                                                            |                                                                                                               |
| /s/ Clark R. Doyal    |                                                                                            | Chairman, Chief Executive Officer, President and                            Director (Principal Executive Officer) | March 28, 2008 |
| Clark R. Doyal        |                                                                                            |
|                  |                                                                                            |                                                                                                               |
| /s/ James D. Schell   |                                                                                            | Vice President, Secretary, Treasurer and                            Director                                       | March 28, 2008 |
| James D. Schell       |                                                                                            |
|                  |                                                                                            |                                                                                                               |
| /s/ Michael Wofford   | Chief Financial Officer (Principal Financial and                            Accounting Officer) | March 28, 2008                                                                                                     |
| Michael Wofford       |                                                                                            |
|                  |                                                                                            |                                                                                                               |
| /s/ Ernest W. Bromley | Director                                                                                        | March 28, 2008                                                                                                     |
| Ernest W. Bromley     |                                                                                            |                                                                                                               |

 

23

|                 |   |     |
|----------------------|--------|----------|
| /s/ Gary J. Davis    |   | Director | March 28, 2008 |
| Gary J. Davis        |   |
|                 |   |     |
| /s/ James C. Mickey  |   | Director | March 28, 2008 |
| James C. Mickey      |   |     |   |
|                 |   |     |   |
| /s/ Richard S. Neely |   | Director | March 28, 2008 |
| Richard S. Neely     |   |     |   |
|                 |   |     |   |
| /s/ Bryceon Sumner   |   | Director | March 28, 2008 |
| Bryceon Sumner       |   |
|                 |   |     |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

| INDEPENDENT AUDITORS’ REPORT OF PADGETT,                            STRATEMANN & CO., LLP | F-2    |
|-----------------------------------------------------------------------------------------------------|--------|
|                                                                                                |   |
| CONSOLIDATED BALANCE SHEETS                                                                         | F-3    |
|                                                                                                |   |
| CONSOLIDATED STATEMENTS OF OPERATIONS                                                               | F-5    |
|                                                                                                |   |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY                            (DEFICIT)          | F-6    |
|                                                                                                |   |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                                                               | F-7    |
|                                                                                                |   |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                          | F-9    |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-1

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the            Board of Directors and Shareholders

ADS            Media Group, Inc.

San            Antonio, Texas

 

We have            audited the accompanying consolidated balance sheets of ADS Media Group, Inc. (the            “Company”) as of December 31, 2007 and 2006, and the related consolidated            statements of operations, shareholders’ equity (deficit) and cash flows for the            years then ended.  These consolidated financial statements are the responsibility            of the Company's management.  Our responsibility is to express an opinion on these            financial statements based on our audits.

 

We            conducted our audits in accordance with the standards of the Public Company Accounting            Oversight Board (United States).  Those standards require that we plan and perform            the audits to obtain reasonable assurance about whether the financial statements are            free of material misstatement.  The Company is not required to have, nor were we            engaged to perform, an audit of its internal control over financial reporting. Our            audit included consideration of internal control over financial reporting as a basis            for designing audit procedures that are appropriate in the circumstances, but not for            the purpose of expressing an opinion on the effectiveness of the Company’s            internal control over financial reporting. Accordingly, we express no such opinion. An            audit also includes examining, on a test basis, evidence supporting the amounts and            disclosures in the financial statements.  An audit also includes assessing the            accounting principles used and significant estimates made by management, as well as            evaluating the overall financial statement presentation.  We believe that our            audits provide a reasonable basis for our opinion.

 

In our            opinion, the consolidated financial statements referred to above present fairly, in all            material respects, the financial position of ADS Media Group, Inc. as of December 31,            2007 and 2006, and the results of its operations and its cash flows for the years then            ended in conformity with accounting principles generally accepted in the United            States.

 

The            accompanying financial statements have been prepared assuming that the Company will            continue as a going concern. As discussed in Note A to the financial statements, the            Company has a negative cash flow from operations and has incurred net losses in the            past two years. These conditions raise substantial doubt about the Company’s            ability to continue as a going concern. Management’s plans in regard to these            matters are also described in Note A The financial statements do not include any            adjustments that might result from the outcome of this uncertainty.

 

Padgett, Stratemann & Co., LLP

Austin,            Texas

March            28, 2008

 

 

 

 

 

 

 

 

F-2

**ADS MEDIA GROUP, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

|                                                                                                                                     | **December 31,** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------------|
|                                                                                                                                     | **2007**         | **2006** |
|                                                                                                                                     |             |   |
| CURRENT Assets                                                                                                                           |             |   |
| Cash and cash equivalents                                                                                                                | $                | 1,477,342 | $ | 3,354,597  |
| Accounts receivable (net of allowance for doubtful                            accounts of $32,008 in  2007 and $9,932 in 2006) | 325,714          | 1,259,850  |
| Prepaid expenses                                                                                                                         | 221,419          | 128,967  |
| Other current assets                                                                                                                     | 10,913           | 6,743  |
|                                                                                                                                     |             |   |
| Total current assets                                                                                                                     | 2,035,388   | 4,750,157  |
|                                                                                                                                     |             |   |
| PROPERTY AND EQUIPMENT                                                                                                                   |             |   |
| Furniture and fixtures                                                                                                                   | 40,674      | 36,870  |
| Computer equipment and software                                                                                                          | 93,045      | 74,875  |
| Less: accumulated depreciation                                                                                                           | (95,076)         | (75,678) |
|                                                                                                                                     |             |   |
| Total property and equipment, net                                                                                                        | 38,643      | 36,067  |
|                                                                                                                                     |             |   |
| GOODWILL                                                                                                                                 | 250,000     | 250,000  |
|                                                                                                                                     |             |   |
| OTHER ASSETS                                                                                                                             | 6,922       | 6,922  |
|                                                                                                                                     |             |   |
| TOTAL ASSETS                                                                                                                             | $                | 2,330,953 | $ | 5,043,146  |

 

 

 

 

 

 

 

 

 

 

 

 

 

The            accompanying notes are an integral part of these consolidated financial            statements.

 

F-3

**ADS MEDIA GROUP, INC.**

**CONSOLIDATED BALANCE SHEETS (continued)**

 

 

|                                                                                                                                                                                       | **December 31,**                                         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------|
|                                                                                                                                                                                       | **2007**                                                 | **2006** |
|                                                                                                                                                                                       |                                                     |   |
| CURRENT LIABILITIES                                                                                                                                                                        |                                                     |   |
| Accounts payable                                                                                                                                                                           | $       116,837  | $       257,717  |
| Customer advance payments                                                                                                                                                                  | 3,650                                               | 89,804  |
| Accrued salaries and wages                                                                                                                                                                 | 95,348                                              | 110,643  |
| Accrued liabilities                                                                                                                                                                        | 47,822                                              | 267,887  |
| Other current liabilities                                                                                                                                                                  | 373                                                      | 8,430  |
| Obligations under capital leases                                                                                                                                                           | 887                                                      | 3,165  |
|                                                                                                                                                                                       |                                                     |   |
| Total current liabilities                                                                                                                                                                  | 264,917                                                  | 737,646  |
|                                                                                                                                                                                       |                                                     |   |
| Obligations under capital leases, long-term                                                                                                                                                | —                                                  | 887  |
|                                                                                                                                                                                       |                                                     |   |
| Total liabilities                                                                                                                                                                          | 264,917                                                  | 738,533  |
|                                                                                                                                                                                       |                                                     |   |
| Commitments and contingencies                                                                                                                                                              |                                                     |   |
|                                                                                                                                                                                       |                                                     |   |
| SHAREholders' equity (DEFICIT)                                                                                                                                                             |                                                     |   |
| Preferred stock series A, $0.001 par value, 40,000                            shares authorized; 2,723 and 2,723 shares issued and outstanding,                            respectively    | 3                                                   | 3  |
| Preferred stock series B, $0.001 par value, 6,000 shares                            authorized; 33 and 33 shares issued and outstanding,                            respectively           | —                                             | —  |
| Common stock, $0.001 par value, 100,000,000 shares                            authorized; 10,880,867 and 10,880,867 shares issued and outstanding,                            respectively | 10,881                                                   | 10,881  |
| Additional paid-in capital                                                                                                                                                                 | 6,735,101                                                | 6,735,101  |
| Accumulated deficit                                                                                                                                                                        | (4,679,949)                                              | (2,441,372) |
|                                                                                                                                                                                       |                                                     |   |
| Total shareholders’ equity (deficit)                                                                                                                                                 | 2,066,036                                                | 4,304,613 |
|                                                                                                                                                                                       |                                                     |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                            (DEFICIT)                                                                                                      | $     2,330,953                 | $     5,043,146  |

 

 

 

 

 

 

 

The            accompanying notes are an integral part of these consolidated financial            statements.

 

F-4

**ADS MEDIA GROUP, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

 

|                                                                                | **For the year ended****December 31,**                                                |
|-------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
|                                                                                | **2007**                                                                              | **2006** |
|                                                                                |                                                                                  |   |
| REVENUES                                                                            | $   3,434,654                                                          | $    4,824,614  |
|                                                                                |                                                                                  |   |
| COST OF GOODS SOLD                                                                  | 2,307,500                                                                             | 3,000,207  |
|                                                                                |                                                                                  |   |
| Gross profit                                                                        | 1,127,154                                                                             | 1,824,407  |
|                                                                                |                                                                                  |   |
| SELLING, ADMINISTRATIVE AND OTHER   OPERATING EXPENSES               | 3,484,863                                                                             | 2,339,950 |
|                                                                                |                                                                                  |   |
| Income (Loss) from operations                                                       | (2,357,709)                                                                           | (515,543)  |
|                                                                                |                                                                                  |   |
| OTHER INCOME (EXPENSE)                                                              |                                                                                  |   |
| Interest expense                                                                    | (1,341)                                                                               | (12,573) |
| Interest and other income                                                           | 112,454                                                                          | 31,006  |
|                                                                                |                                                                                  |   |
| Total other income (expense)                                                        | 111,113                                                                               | 18,433 |
|                                                                                |                                                                                  |   |
| Income (Loss) before income taxes and extraordinary                            item | (2,246,596)                                                                           | (497,110)  |
|                                                                                |                                                                                  |   |
| INCOME TAXES                                                                        | —                                                                          | —  |
|                                                                                |                                                                                  |   |
| Income (Loss) before extraordinary item                                             | (2,246,596)                                                                           | (497,110)  |
|                                                                                |                                                                                  |   |
| EXTRAORDINARY ITEM                                                                  |                                                                                  |   |
| Gain on extinguishment of liabilities                                               | 8,019                                                                            | 454,740 |
| NET INCOME (LOSS)                                                                   | $    (2,238,577)                                                       | $      (42,370)  |
|                                                                                |                                                                                  |   |
|                                                                                |                                                                                  |   |
| NET INCOME (LOSS) PER SHARE, basic                                                  | $             (0.21) | $              (0.01)  |
|                                                                                |                                                                                  |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING,                            basic     | 10,880,867                                                                            | 6,439,802 |
|                                                                                |                                                                                  |   |
|                                                                                |                                                                                  |   |
| NET INCOME (LOSS) PER SHARE, diluted                                                | $             (0.21) | $            (0.01)  |
|                                                                                |                                                                                  |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING,                            diluted   | 10,880,867                                                                            | 6,439,802 |

 

 

 

 

 

The            accompanying notes are an integral part of these consolidated financial            statements.

F-5

**ADS MEDIA GROUP, INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY            (DEFICIT)**

 

 

|                                                                                  | Preferred Stock |   | Common Stock    |   | Additional      |   |            |   |            |
|---------------------------------------------------------------------------------------|-----------------|--------|-----------------|--------|-----------------|--------|-----------------|--------|-----------------|
|                                                                                  |            |   |            |   |            |   |            |   | Paid-In         |   | Accumulated |   |   |
|                                                                                  | Shares          |   | Par Value       |   | Shares          |   | Par Value       |   | Capital         |   | Deficit |   | Total |
| Balance at December 31, 2005                                                          | 2,756           |   | $ 3             |   | 3,819,161       |   | $ 3,819         |   | $ 2,141,972     |   | $ (2,399,002) |   | $ (253,208) |
|                                                                                  |            |   |            |   |            |   |            |   |            |   |   |   |   |
| Conversion of notes payable into Common stock                                         |  

— |   |  

— |   |  

366,597 |   |  

367     |   |  

201,260 |   |  

— |   | 201,627 |
| Common stock issued for services                                                      | —         |   | —         |   | 37,183          |   | 37              |   | 9,963           |   | — |   | 10,000 |
| Common stock issued for cash                                                          | —         |   | —         |   | 6,657,926       |   | 6,658           |   | 3,784,950       |   | — |   | 3,791,608 |
| Issuance of stock options in lieu of deferred                            compensation | —         |   |  

— |   | —         |   |  

— |   | 327,644         |   | — |   | 327,644 |
| Stock option compensation expense under                            FAS123R            | —         |   |  

— |   | —         |   |  

— |   | 269,312         |   | — |   | 269,312 |
| Net income for the year                                                               | —         |   | —         |   | —         |   | —         |   | —         |   | (42,370) |   | (42,370) |
|                                                                                  |            |   |            |   |            |   |            |   |            |   |   |   |   |
| Balance at December 31, 2006                                                          | 2,756           |   | $ 3             |   | 10,880,867      |   | $ 10,881        |   | $ 6,735,101     |   | $ (2,441,372) |   | $ 4,304,613 |

 

| Net income (Loss) for the year | — |   | — |   | — |   | — |   | — |   | (2,238,577) |   | (2,238,577) |
|--------------------------------|---------|--------|---------|--------|---------|--------|---------|--------|---------|--------|-------------|--------|-------------|

 

| Balance at December 31, 2007 | 2,756 |   | $ 3 |   | 10,880,867 |   | $ 10,881 |   | $ 6,735,101 |   | $ (4,679,949) |   | $ 2,066,036 |
|------------------------------|-------|--------|-----|--------|------------|--------|----------|--------|-------------|--------|---------------|--------|-------------|

 

 

 

 

 

 

 

The            accompanying notes are an integral part of these consolidated financial            statements.

 

F-6

**ADS MEDIA GROUP, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

|                                                                                                         | **For the year ended****December 31,**                             |
|--------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|
|                                                                                                         | **2007**                                                           | **2006** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                        |                                                               |   |
| Net income (loss)                                                                                            | $         (2,238,577) | $         (42,370) |
| Adjustments to reconcile net income to net cash provided                            by operating activities: |                                                               |   |
| Bad debt expense (recovery)                                                                                  | 33,489                                                             | (41,349) |
| Depreciation expense                                                                                         | 19,398                                                             | 14,543 |
| Issuance of common stock and warrants for                            services                                | —                                                            | 10,000 |
| Issuance of warrants in connection with obtaining debt                            financing                  | —                                                            | 0 |
| Compensation expense from issuance of stock                            options                               | —                                                            | 269,312 |
| Gain on extinguishment of liabilities                                                                        | (8,019)                                                            | (454,740) |
| (Increase) decrease in assets:                                                                               |                                                               |   |
| Accounts receivable                                                                                          | 900,647                                                            | (718,379) |
| Prepaid expenses and other assets                                                                            | (96,622)                                                           | (78,195) |
| Increase (decrease) in liabilities:                                                                          |                                                               |   |
| Accounts payable and accrued expenses                                                                        | (376,278)                                                          | 194,102 |
| Customer advance payments                                                                                    | (86,154)                                                           | 78,754 |
|                                                                                                         |                                                               |   |
| Total adjustments                                                                                            | 386,461                                                            | (725,952) |
|                                                                                                         |                                                               |   |
| Net cash provided by (used for) operating                            activities                              | (1,852,116)                                                        | (768,322) |
|                                                                                                         |                                                               |   |
| CASH FLOW FROM INVESTING ACTIVITIES:                                                                         |                                                               |   |
| Capital expenditures                                                                                         | (21,974)                                                           | (34,839) |
|                                                                                                         |                                                               |   |
| Net cash used in investing activities                                                                        | (21,974)                                                           | (34,839) |
|                                                                                                         |                                                               |   |
| CASH FLOW FROM FINANCING ACTIVITIES:                                                                         |                                                               |   |
| Proceeds from the issuance of common stock                                                                   | —                                                       | 3,791,608  |
| Payments on notes payable                                                                                    | —                                                            | (40,653) |
| Payments on notes payable – related                            parties                                 | —                                                            | (34,498) |
| Payments on capital lease obligations                                                                        | (3,165)                                                            | (4,841) |
|                                                                                                         |                                                               |   |
| Net cash provided by (used in) financing                            activities                               | (3,165)                                                            | 3,711,616 |
|                                                                                                         |                                                               |   |
| NET INCREASE (DECREASE) IN CASH AND CASH                            EQUIVALENTS                              | (1,877,255)                                                        | 2,908,455 |
|                                                                                                         |                                                               |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF                            PERIOD                                    | 3,354,597                                                          | 446,142 |
|                                                                                                         |                                                               |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                     | $       1,477,342               | $       3,354,597 |

 

 

 

 

The            accompanying notes are an integral part of these consolidated financial            statements.

 

F-7

**ADS MEDIA GROUP, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)**

 

 

|                                                                                  | **For the year ended****December 31,** |
|---------------------------------------------------------------------------------------|----------------------------------------|
|                                                                                  | **2007**                               | **2006** |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW                            INFORMATION:         |                                   |   |
|                                                                                  |                                   |   |
| Cash paid for interest                                                                | $                                      | 494 | $ | 4,194 |
|                                                                                  |                                   |   |
|                                                                                  |                                   |   |
| NON-CASH INVESTING AND FINANCING ACTIVITY:                                            |                                   |   |
|                                                                                  |                                   |   |
| Issuance of stock options in lieu of deferred                            compensation | $                                      | — |   | 327,664 |
|                                                                                  |                                   |   |   |   |
|                                                                                  |                                   |   |
| Conversion of notes payable into common stock                                         | $                                      | — | $ | 201,627 |
|                                                                                  |                                   |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

The            accompanying notes are an integral part of these consolidated financial            statements.

 

 

 

 

 

F-8

**NOTE            A – GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Description of Business and Basis of Presentation**

 

ADS            Media Group, Inc. (the “Company” or “ADS Media”), through its            wholly owned subsidiary Alternative Delivery Solutions, Inc. dba ADS Direct Media            (“ADS”), is a leading provider of turnkey direct marketing support            services, with an emphasis on alternate (i.e., door to door) delivery.  Services            provided include the creation, packaging and delivery of direct marketing materials            (e.g., brochures, coupons, advertisements, Yellow Page directories, etc.) to targeted            audiences. In addition to alternate delivery, ADS provides its clients direct            marketing, printing, list procurement, database management and fulfillment services,            primarily through outsourcing arrangements with third party vendors.  The Company            is based in San Antonio, Texas and serves customers and markets throughout the United            States.

 

**Principles of Consolidation**

 

The            accompanying consolidated financial statements include the financial statements of the            Company and its wholly owned subsidiary, ADS. All intercompany balances and            transactions have been eliminated in consolidation.

 

**Going Concern**

 

The            Company has negative cash flow from operations and has several years of net losses.            These factors raise substantial doubt about the Company’s ability to continue as            a going concern. The financial statements do not include any adjustments that may be            necessary if the Company is unable to continue as a going concern.

 

As of            December 31, 2007, the Company has working capital of $1,770,471. Management is            currently in negotiations with potential customers that will provide the needed sales            revenues to maintain the necessary working capital throughout 2008. Management believes            that the investment in, an its use of GPS Technology can lead to increased sales in all            segments of the business.

 

**Cash            and Cash Equivalents**

 

Cash            and cash equivalents include cash on hand and on deposit and highly liquid debt            instruments with original maturities of three months or less. At December 31, 2007 and            2006, cash and cash equivalents exceed FDIC limits by $1,501,979 and $3,449,574,            respectively.

 

**Concentration of Credit Risk and Accounts Receivable**

 

The            Company extends unsecured credit in the normal course of business to virtually all of            its customers. Management has provided an allowance for doubtful accounts which            reflects its opinion of amounts which may ultimately become uncollectible. In the event            of non-performance of accounts receivable, the maximum exposure to the Company is the            recorded amount shown on the balance sheets. Concentration of credit risk and failure            to collect accounts receivable have not presented significant problems to the            Company.

 

**Property and Equipment**

 

Property and equipment are recorded at cost. Depreciation is computed on            property and equipment using the straight-line method over the expected useful lives of            the assets, which are generally three years for computer equipment and five years for            furniture and fixtures. Repairs and maintenance costs are expensed as incurred and            improvements are capitalized. Depreciation expense for the years ended December 31,            2007 and 2006 was $19,398 and $14,543, respectively.

 

**Goodwill**

 

Goodwill represents the excess purchase price over fair value of assets            acquired in the acquisition of ADS by NHLT on January 31, 2003 in the amount of            $700,000. Goodwill is being accounted for in accordance with Statement of Financial            Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible            Assets.” This pronouncement

             

F-9

decrees            that goodwill be reviewed for impairment rather than amortized, on an annual basis,            beginning on January 1, 2002.

 

The            Company assesses the carrying value of goodwill annually and when factors are present            that indicate an impairment may have occurred. Goodwill is considered impaired and a            loss is recognized when its carrying value exceeds its implied fair value. Factors that            are considered important which could trigger an impairment review include the            following:

|   | - | significant underperformance relative to expected                            historical or projected future operating results; |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------|

|   | - | significant changes in the manner or use of the acquired                            assets or the strategy for our overall business; |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------|

|   | - | significant negative industry or economic                            trends; |
|--------|---|------------------------------------------------------------------------------|

|   | - | significant decline in stock price for a sustained                            period; and |
|--------|---|-------------------------------------------------------------------------------------------|

|   | - | our market capitalization relative to net book                            value. |
|--------|---|----------------------------------------------------------------------------------|

 

Each            year the Company assesses the realizability of the recorded goodwill and other            intangibles in accordance with SFAS No. 142. At December 31, 2003, the analysis            indicated that goodwill of $450,000 was impaired. As a result, for the year ended            December 31, 2003, the Company impaired its stated goodwill value by $450,000 from            $700,000 to $250,000. At December 31, 2007, 2006, 2005, and 2004, the analysis            indicated that there was no further impairment of goodwill. The Company will continue            to test on a consistent measurement date unless events occur or circumstances change            between annual impairment tests that would more likely than not reduce fair value below            its carrying value.

 

**Revenue Recognition**

 

The            Company recognizes revenue upon completion of a project for fulfillment revenues, upon            mailing of product for direct mail revenues and upon delivery of product to consumer            for alternative delivery revenue. Services are generally not subject to "rights of            return" unless the Company did not perform services in accordance with the sales            order.

 

**Advertising**

 

Advertising costs are expensed as incurred. At December 31, 2007 and            2006, advertising expenses were $149,520 and $12,166, respectively.

 

**Income Taxes**

 

The            Company records income taxes in accordance with SFAS No. 109 "Accounting for Income            Taxes." Under this method, deferred tax assets and liabilities are recognized for the            future tax consequences attributable to differences between the consolidated financial            statement carrying amount of existing assets and liabilities and their respective tax            bases, including operating loss carryforwards. Deferred tax assets and liabilities are            measured using enacted tax rates expected to apply to taxable income in the years in            which those temporary differences are expected to be recovered or settled. Valuation            allowances are established when necessary to reduce deferred tax assets to the amount            expected to be realized.

             

In            June 2006, the FASB issued Interpretation No. 48, “Accounting for            Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”            (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in            an enterprise’s financial statements in accordance with FASB Statement            No. 109, “Accounting for Income Taxes,” by prescribing a recognition            threshold and measurement attribute for the financial statement recognition and            measurement of a tax position taken or expected to be taken in a tax return. If a tax            position is more likely than not to be sustained upon examination, then an enterprise            would be required to recognize in its financial statements the largest amount of            benefit that is greater than 50% likely of being realized upon ultimate settlement. The            adoption of FIN 48 effective January 1, 2007 did not materially affect our            financial position or results of operations.

 

 

F-10

**Preferred and Common Stock Split**

             

On January 22, 2007, the Company effected a one-for-five reverse stock            split to shareholders of record as of

that date. All share and per share information has been retroactively            adjusted to reflect the stock split.

             

**Earnings Per Common Share**

             

Basic            earnings per common share is computed by dividing income available to common            shareholders by the weighted-average number of shares of common stock outstanding            during the period. Diluted earnings per common share is computed by dividing income            available to common shareholders by the weighted-average number of shares of common            stock outstanding during the period increased to include the number of additional            shares of common stock that would have been outstanding if the dilutive potential            shares of common stock had been issued. The dilutive effect of outstanding options and            warrants is reflected in diluted earnings per share by application of the treasury            stock method. Under the treasury stock method, an increase in the fair market value of            the Company’s common stock can result in a greater dilutive effect from            outstanding options and warrants. Additionally, the exercise of employee stock options            and warrants can result in a greater dilutive effect on earnings per share.

 

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

| **Fiscal** **years** **ended December 31:**                          |   |   |            | **2007** |   | **2006** |      |   |
|--------------------------------------------------------------------------------|--------|--------|-----------------|----------|--------|----------|-----------|--------|
|                                                                           |   |   |            |     |   |     |
| BASIC EARNINGS (LOSS) PER                            SHARE                     |   |   |            |     |   |     |      |   |
| Income (loss) before                            extraordinary item             |   | $      | (0.21)          |     |   | $        | (0.08)    |   |   |   |
| Extraordinary                            gain                                  |   |   |  

— |     |   |     | 0.07      |   |   |   |
| Net Income                            (loss)                                   |   | $      | (0.21)          |     |   | $        | (0.01)    |   |   |   |
| DILUTED EARNINGS (LOSS)                            PER SHARE                   |   |   |            |     |   |     |      |   |
| Income (loss) per                            share                             |   | $      | (0.21)          |     | X      | $        | (0.08)    |   |   |   |
| Extraordinary                            gain                                  |   |   | —         |     |   |     | 0.07      |   |   |   |
| Net income                            (loss)                                   |   | $      | (0.21)          |     |   | $        | (0.01)    |   |   |   |
| Weighted average shares                            outstanding – basic   |   |   | 10,880,867      |     |   |     | 6,439,802 |   |   |   |
| Weighted average shares                            outstanding – diluted |   |   | 10,880,867      |     |   |     | 6,439,802 |   |   |   |

 

However, because the Company incurred a loss in 2007 and 2006, the            inclusion of those potential common shares – 1,840,512 warrants and 4,546,578            stock options – in the calculation of diluted loss per-share would have an            anti-dilutive effect. Therefore, basic and diluted per-share amounts are the same in            2007 and 2006.

 

**Stock-Based Compensation**

 

Effective January 1, 2006, the Company adopted SFAS No. 123            (revised 2004) (“SFAS No. 123R”),*Share-Based            Payment*, which addresses the accounting for stock-based            payment transactions in which an enterprise receives employee services in exchange for            (a) equity instruments of the enterprise or (b) liabilities that are based on            the fair value of the enterprise’s equity instruments or that may be settled by            the issuance of such equity instruments. SFAS No. 123R eliminates the ability to            account for stock-based compensation transactions using the intrinsic value method            under Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*,            and instead generally requires that such transactions be accounted for using a            fair-value-based method. The Company uses the Black-Scholes option-pricing model to            determine the fair-value of stock-based awards under SFAS No. 123R, consistent            with that used for pro forma disclosures under SFAS No. 123,*Accounting for Stock-Based Compensation*.            The Company has elected to use the modified prospective transition method as permitted            by SFAS No. 123R and accordingly prior periods have not been restated to reflect            the impact of SFAS No. 123R. The modified prospective transition method requires            that stock-based compensation expense be recorded for all new and unvested stock            options, restricted stock, restricted stock units, and employee stock purchase plan            shares that are ultimately expected to vest as the requisite service is rendered            beginning on January 1, 2006. Stock-based compensation expense for awards granted prior            to January 1, 2006 is based on the grant-date fair-value as

 

F-11

determined under the pro forma provisions of SFAS No. 123. The            Company recognized stock-based compensation expense of $0 and $269,312 during 2007 and            2006, respectively.

As of            December 31, 2007, $161,588 of total unrecognized compensation cost related to stock            options is expected to be recognized, if certain performance-based goals are achieved,            over a weighted-average period of 1.5 years.

 

The            Company accounts for equity instruments issued to non-employees in accordance with the            provisions of SFAS No. 123R and Emerging Issues Task Force ("EITF") Issue No. 96-18,            "Accounting for Equity Instruments That Are Issued to Other Than Employees for            Acquiring, or in Conjunction with Selling, Goods or Services." All transactions in            which goods or services are the consideration received for the issuance of equity            instruments are accounted for based on the fair value of the consideration received or            the fair value of the equity instrument issued, whichever is more reliably measurable.            The measurement date of the fair value of the equity instrument issued is the earlier            of the date on which the counterparty's performance is complete or the date on which it            is probable that performance will occur.

 

**Fair            Value of Financial Instruments**

 

The            carrying value of cash equivalents, accounts receivable, accounts payable and accrued            liabilities approximate fair value because of their short-term nature.

 

**Use            of Estimates**

 

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

 

**Recently Issued Accounting Pronouncements**

 

In            September 2006, the Financial Accounting Standards Board issued Statement of Financial            Accounting Standards No. 157 “Fair Value Measurements” (SFAS 157,) which            provides expanded guidance for using fair value to measure assets and liabilities. SFAS            157 establishes a hierarchy for data used to value assets and liabilities, and requires            additional disclosures about the extent to which a company measures assets and            liabilities at fair value, the information used to measure fair value, and the effect            of fair value measurements on earnings. Implementation of SFAS 157 is required on            January 1, 2008. We are currently evaluating the impact of adopting SFAS 157 on the            financial statements.

 

On            September 13, 2006, the Securities Exchange Commission (SEC) issued Staff Accounting            Bulletin No. 108 (SAB 108,) which establishes an approach that requires quantification            of financial statement errors based on the effects of the error on each of the            company’s financial statements and the related disclosures. SAB 108 requires the            use of a balance sheet and an income statement approach to evaluate whether either of            these approaches results in quantifying a misstatement that, when all relevant            quantitative and qualitative factors are considered, is material. The Company does not            expect the adoption of SAB 108 to have an impact on the Company’s financial            statements.

 

On            September 29, 2006, the Financial Accounting Standards Board issued Statement of            Financial Accounting Standards No. 158 “Employers’ Accounting for Defined            Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements            No. 87, 88, 106, and 132(r)” (SFAS 158.) The Statement requires the recognition            of the overfunded or underfunded status of a defined benefit postretirement plan as an            asset or liability on the balance sheet and the recognition of the changes of the            funded status in the year in which the changes occur through comprehensive income.            Implementation of SFAS 158 is required as of the end of the fiscal year ending after            December 15, 2006. The adoption of SFAS 158 did not have an impact on the            Company’s financial statements because the Company does not currently have any            defined benefit pension or other postretirement benefit plans.

 

In            February 2007, the FASB issued Statement of Financial Accounting Standards No. 159            “The Fair Value Option for Financial Assets and Financial Liabilities”            (SFAS 159) that provides an option to report selected financial assets

 

F-12

and            liabilities at fair value. SFAS 159 also establishes presentation and disclosure            requirements designed to facilitate comparisons between companies that choose different            measurement attributes for similar types of assets and liabilities. SFAS 159 is            effective for the second fiscal year beginning after November 15, 2007. We are            currently evaluating the impact of SFAS 159 on the Company.

 

In            December 2007, the Financial Accounting Standards Board issued Statement of Financial            Accounting Standards No. 160 “Noncontrolling Interest in Consolidated Financial            Statements – an Amendment of ARB 51” (SFAS 160). SFAS 160 clarifies that a            noncontrolling interest in a subsidiary is an ownership interest in the consolidated            entity that should be reported as equity in the consolidated financial statements. It            also requires consolidated net income to be reported at amounts that include the            amounts attributable to both the parent and the noncontrolling interest, and requires            disclosure, on the face of the consolidated statement of income, of the amounts of            consolidated net income attributable to the parent and to the noncontrolling interest.            SFAS 160 is effective for fiscal years, and interim periods within those fiscal years,            beginning on or after December 15, 2008. Earlier adoption is prohibited. We are            currently evaluating the impact on the financial statements.

 

**NOTE            C – CAPITAL LEASE OBLIGATIONS**

 

The            Company is leasing certain equipment under capital leases. Capital leases payable at            December 31, 2007 and 2006 consisted of the following:

 

|                                                                                                  |   | ******2007****** |    | ******2006****** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------|---------|------------------|--------|
| Capital leases for equipment due in monthly                            installments through 2008 |   | $                | 915     |             | $      | 4,574 |   |
|                                                                                                  |   |             |    |             |   |   |   |
| Less interest                                                                                         |   |             | 28      |             |   | 522 |   |
| Less current portion                                                                                  |   |             | 887     |             |   | 3,165 |   |
|                                                                                                  |   |             |    |             |   |   |   |
| Obligations under capital leases, long-term                                                           |   | $                | — |             | $      | 887 |   |

 

Scheduled maturities for capital lease obligations for the years ended            December 31, are as follows:

 

|   |   |   |   |
|--------|--------|--------|--------|
| 2008   | $      | 887    |   |
|   |   |   |   |
|   |   |   |   |
| Total  | $      | 887    |   |

 

The            cost and accumulated depreciation of assets acquired under capital leases at December            31, 2007 and 2006, are as follows:

 

|                                     | ******2007****** |   | ******2006****** |   |
|------------------------------------------|------------------|--------|------------------|--------|
|                                     |             |   |             |   |   |   |
| Cost                                     | $                | 18,986 |             | $      | 18,986 |   |
| Accumulated depreciation                 |             | 18,522 |             |   | 15,735 |   |
|                                     |             |   |             |   |   |   |
| Net leased property under capital leases | $                | 464    |             | $      | 3,251 |   |

 

**NOTE            D – PREFERRED STOCK**

 

Series            A

 

The            Company is authorized to issue up to 40,000 shares of Series A Preferred Stock, par            value $.001 per share, of which 2,723 shares were issued and outstanding as of December            31, 2007 and 2006. Each Series A share has a $5.00 liquidation preference and            preference over Series B Preferred Stock, Common Stock and all other series            of

 

F-13

stock            ranking junior to Series A. Each share of Series A is convertible, at the option of the            holder, into five (5) shares of Common Stock at such times and in such amounts as            stated in the Certificate of Designation. The holders of Series A stock are entitled to            vote together with the holders of Series B and Common Stock and are entitled to one (1)            vote for each share of Common Stock which would be held by them if all of their shares            of Series A were converted into shares of Common Stock.

 

Series            B

 

The            Company is authorized to issue up to 6,000 shares of Series B Preferred Stock, par            value $.001 per share, of which 33 shares were issued and outstanding as of December            31, 2007 and 2006. Each Series B share has a $5.00 liquidation preference that is            subordinate to Series A but in preference to Common Stock and all other series of stock            ranking junior to Series B. Each Series B share is convertible at the option of the            holder into five (5) shares of Common Stock at such times and in such amounts as stated            in the Certificate of Designation. The holders of Series B stock are entitled to vote            together with the holders of Series A and Common Stock and are entitled to one (1) vote            for each share of Common Stock which would be held by them if all of their shares of            Series B were converted into shares of Common Stock.

 

**NOTE            E - COMMON STOCK**

 

All of these securities were issued in privately negotiated transactions            effected in reliance on the exemption contained in Section 4(2) of the Securities            Act.

 

In            2006, the Company issued 7,061,706 shares of common stock in exchange for net            investment proceeds of $3,791,608, for consulting services of $10,000, and conversion            of notes payable and accrued interest of $201,627.

 

In            2007, the Company did not issue shares of its common stock.

 

**NOTE            F – STOCK WARRANTS**

 

In            2006, the Company issued warrants to purchase up to 1,256,214 shares of common stock in            conjunction with the equity investment. These warrants enable the holder to purchase            shares of the Company’s common stock at an exercise price of $0.80 per share            through 2011.

 

Also in            2006, the Company issued 5,000 shares of common stock and warrants to purchase up to            5,000 shares of common stock in exchange for consulting services. These warrants enable            the holder to purchase shares of the Company’s common stock at an exercise price            of $0.60 per share through 2008.

 

The            following is a summary of outstanding warrants:

 

|                                           | ******Number of******

******Shares****** | ******Exercise Price****** |
|-------------------------------------------|-------------------------------------------|----------------------------|
|                                      |                                      |                       |
| Warrants outstanding at January 1, 2006   |                                      | 611,481               | $ | 0.60 – 0.90 |
|                                      |                                      |                       |   |   |
| Granted                                   |                                      | 1,261,214                  |   | 0.60 – 0.80 |
| Exercised                                 |                                      | 32,183                     |   | 0.65 |
| Canceled                                  |                                      | —                    |   |   |
|                                      |                                      |                       |   |   |
| Warrants outstanding at December 31, 2006 |                                      | 1,840,512             | $ | 0.60 – 0.90 |
|                                      |                                      |                       |   |   |
| Granted                                   |                                      | —                    |   |   |
| Exercised                                 |                                      | —                    |   |   |
| Canceled                                  |                                      | —               |   |   |
|                                      |                                      |                       |   |   |
| Warrants outstanding at December 31, 2007 |                                      | 1,840,512             | $ | 0.60 – 0.90 |

 

F-14

**NOTE            G – STOCK OPTIONS**

 

In            2006, the Company’s Board of Directors adopted a 2006 Stock Option and Incentive            Plan which provides for granting stock options and/or restricted stock awards to            employees, directors and consultants of the Company as employment incentives. The Plan            was approved by the shareholders at a shareholders’ meeting held on December 27,            2006.

 

In            2006, the Company granted two key employees non-statutory stock options to purchase a            total of 3,486,240 shares of common stock at an exercise price of $0.65 per share under            the plan. However, only 871,562 (25%) of these options became exercisable and vested            immediately on grant. The remaining 75% will vest over the next three years only if the            key employees remain employed by the Company and if the company attains certain            performance goals. If these options vest, 50% of the options become exercisable upon            vesting, and the remaining 50% are exercisable one year after vesting. Early exercise            provisions apply in the case of a change of control of the corporation. The Company            recognized stock compensation expense of $269,312 as a result of this issuance. The key            employees have not paid any consideration other than their continued service to the            Company for these options. These options expire on June 20, 2016.

 

Also in            2006, the Company granted non-statutory stock options to purchase 1,060,338 shares of            common stock, valued at $327,644, to settle claims for compensation of past services            totaling $741,944. These stock options vested immediately, enable the holders to            purchase shares of the Company’s common stock at an exercise price of $0.65 per            share, and expire on June 20, 2016. The Company realized an extraordinary gain of            $414,300 related to the issuance of these stock options and cancellation of deferred            compensation.

 

In            2007, 50,000 options expired, these options had an exercise price of $0.50.

 

As of            December 31, 2007, a total of 4,546,578 stock options were outstanding, at an exercise            price of $0.65 per share, of which 1,931,900 were vested and exercisable.

 

The            following table summarizes information about stock options outstanding, all of which            are expected to ultimately vest, and those options currently exercisable under all four            stock option plans at December 31, 2007:

 

|                      | ******Options Outstanding******  | ******Options Exercisable******                           |
|---------------------------|----------------------------------|-----------------------------------------------------------|
|                      |                             |                                                      |   |   |
| Range of

Exercise Prices | Number

Outstanding

at 12/31/07 | Wgtd.  Avg.

Remaining 

Contractual

Life | Wgtd. Avg.

Exercise Price | Number

Exercisable

at 12/31/07 | Wgtd.  Avg.

Remaining 

Contractual

Life | Wgtd. Avg.

Exercise Price |
|                      |                        |                                                      |   |   |   |   |
|                      |                             |                                                      |   |   |   |   |
| $0.65                     | 4,546,578                        | 8.5 Years                                                 | $0.65 | 1,931,900 | 8.5 Years | $0.65 |
|                      |                             |                                                      |   |   |   |   |
| Total                     | 4,546,578                        | 8.5 Years                                                 | $0.65 | 1,931,900 | 8.5 Years | $0.65 |
|                      |                             |                                                      |   |   |   |   |
| Aggregate intrinsic value |                             | $0                                                        |   |   | $0 |   |

 

Aggregate intrinsic value represents the value of the Company’s            closing stock price on the last trading day of the fiscal period in excess of the            exercise price multiplied by the number of options outstanding or exercisable. The            total intrinsic value of options exercised during the years ended December 31, 2007 and            2006 was $0 and $0, respectively.

 

The            following is a summary of outstanding stock options:

 

 

F-15

 

|                                     | ******Number of******

******Shares****** |      | ******Weighted Average Exercise                            Price****** |   |
|------------------------------------------|-------------------------------------------|-----------|------------------------------------------------------------------------|--------|
|                                     |                                      |      |                                                                   |   |
| Options outstanding at January 1, 2006   |                                      | 50,000    |                                                                   | $      | 0.50 |   |
|                                     |                                      |      |                                                                   |   |   |   |
| Granted                                  |                                      | 4,546,578 |                                                                   |   | .65 |   |
| Exercised                                |                                      | —   |                                                                   |   | — |   |
| Canceled                                 |                                      | —   |                                                                   |   | — |   |
|                                     |                                      |      |                                                                   |   |   |   |
| Options outstanding at December 31, 2006 |                                      | 4,596,578 |                                                                   | $      | 0.65 |   |
|                                     |                                      |      |                                                                   |   |   |   |
| Granted                                  |                                      | —   |                                                                   |   | — |   |
| Exercised                                |                                      | —   |                                                                   |   | — |   |
| Canceled                                 |                                      | 50,000    |                                                                   |   | 0.50 |   |
|                                     |                                      |      |                                                                   |   |   |   |
| Options outstanding at December 31, 2007 |                                      | 4,546,578 |                                                                   | $      | 0. 65 |   |

 

The            weighted average grant-date fair value of options granted during the year ended            December 31, 2006 was $.30. No options were granted during the year ended December 31,            2007.

 

The            summary of the changes in non-vested stock options outstanding during the year ended            December 31, 2007 is presented below:

 

|                                     | **Year Ended****December 31, 2007** |
|------------------------------------------|-------------------------------------|
|                                     | **Number** **of****Shares**    | **Weighted-****Average****Grant** **Date****Fair Value** |
| Nonvested balance at beginning of period | 2,614,678                           | $ | .65 |
| Granted                                  | —                             | $ | — |
| Forfeited                                | —                             | $ | — |
| Vested                                   | —                             | $ | — |
| Nonvested balance at end of period       | 2,614,678                           | $ | .65 |

 

**NOTE            H – OPERATING LEASE OBLIGATIONS**

 

The            Company leases office and warehouse space and certain equipment under operating lease            agreements having terms expiring at various dates through August 2008. The future            minimum annual payments required under the leases at December 31, 2007 are as            follows:

 

|        |   |   |   |   |
|--------|--------|--------|--------|--------|
| 2008   |   |   | 44,565 |   |
| 2009   |   |   | 1,974  |   |
|   |   |   |   |   |
| Total  |   | $      | 46,539 |   |

 

Rental            and other related expenses for the above leases for the years ended December 31, 2007            and 2006 were approximately $66,000 and $61,000, respectively.

 

 

F-16

**NOTE            I – INCOME TAXES**

 

As of            December 31, 2007, the Company had a net deferred tax asset of approximately $4.7            million principally arising from net operating loss carryforwards for income tax            purposes. The Company has established a valuation allowance equal to the net deferred            tax asset as of December 31, 2007. At December 31, 2007 the Company had net operating            loss carryforwards of approximately $13 million that will begin to expire in 2014            through 2022. 

 

The            Company’s reverse acquisition in 2003 and subsequent issuances of stock have            effected ownership changes under Internal Revenue Code Section 382. The ownership            changes resulting from this reorganization will likely limit the Company’s            ability to utilize a significant portion of the net operating loss carryforwards            generated before the changes in ownership.

 

|                                       | **2007**      |   | **2006**      |
|--------------------------------------------|---------------|--------|---------------|
| Deferred tax asset (liabilities):          |          |   |          |
| Net operating loss carryforward            | $ 4,425,918   |   | $ 3,675,338   |
| Depreciation                               | (123)         |   | (381)         |
| Allowance for doubtful accounts            | 10,883        |   | 3,377         |
| Option Compensation                        | 202,965       |   | 202,965       |
| Other                                      | —       |   | 170           |
| Accrued expenses not deductible until paid | 14,256        |   | 26,881        |
|                                       |          |   |          |
| Net total deferred tax asset               | $ 4,653,899   |   | $ 3,908,350   |
|                                       |          |   |          |
| Valuation allowance                        | $ (4,653,899) |   | $ (3,908,350) |
|                                       |          |   |          |
| Net deferred tax asset                     | $ —     |   | $ —     |

 

**NOTE            K – EXTRAORDINARY GAIN**

 

In            2006, the Company granted certain key employees non-statutory stock options to purchase            1,060,338 shares of common stock, valued at $327,644, in lieu of payment of deferred            compensation which they had foregone since 2002. In accordance with Statement of            Financial Accounting Standards ("SFAS") No. 140 "Accounting for Transfers and Servicing            of Financial Assets and Extinguishments of Liabilities – a replacement of FASB            Statement 125", a liability is to be derecognized if the debtor is legally released            from being the primary obligor under the liability either judicially or by the            creditor. Based upon the signed stock option agreements, whereby the employees legally            released the company from its obligation to pay them their deferred compensation, the            Company realized an extraordinary gain of $414,300 in the second quarter of 2006            related to the grant of these stock options and cancellation of deferred            compensation.

 

Also in            2006, the Company entered into a settlement agreement with a former employee on the            payment of deferred compensation, which they had foregone from 2003 through 2006 while            an employee of the company, for payments totaling $181,884. Based upon the signed            release agreement and in accordance with SFAS No. 140, whereby the employee legally            released the company from its obligation to pay them their full deferred compensation,            effective in the second quarter of 2006, the Company adjusted the deferred compensation            liability to this former employee and realized an extraordinary gain of $40,440 related            to the cancellation of deferred compensation.

 

In            2007, the Company recognized an extraordinary gain related to the 2006 gain realized            with regards to the aforementioned former employee. This former employee violated the            non-compete portion of the agreement in 2007 resulting in the company not having to            make its final deferred payment, thus resulting in a $8,019 extraordinary            gain.

 

 

 

F-17

**NOTE            L – COMMITMENTS AND CONTINGENCIES**

 

**Litigation**

 

The            Company may become involved from time to time in litigation on various matters, which            are routine to the conduct of its business. The Company believes that none of these            actions, individually or in the aggregate, will have a material adverse effect on its            financial position or results of operations, though any adverse decision in these cases            or the costs of defending or settling such claims could have a material effect on its            business.

 

On July            2, 2004, RR Donnelley Receivables, Inc. sued ADS to collect a sworn account in the            amount of $28,504, plus attorney fees and expenses. ADS responded with a general denial            and a counterclaim for breach of contract regarding a partnership with the plaintiff in            Mexico. In November 2005, the counterclaim was dismissed on jurisdictional grounds. The            suit on the sworn account remains pending, but no activity has taken place since            November 2005. These amounts have been accrued for in these financial            statements.

 

**Employment Agreements**

 

In June            2006, we entered into new employment agreements with two key executives. Each agreement            is for a term of three years from June 16, 2006, at salaries of $200,000 in year one,            $220,000 in year two and $242,000 in year three. The agreements provide for payment of            performance bonuses if our Company meets performance criteria to be set by the board of            directors. The agreements provide for twelve months’ severance pay and a prorated            bonus in the event the executive is terminated without cause. The agreements contain            non-competition clauses for 12 months after termination of the agreement and provisions            regarding confidentiality of Company information.

 

**NOTE            M – RELATED PARTY TRANSACTIONS**

 

In            2006, the officers converted accumulated deferred compensation of $684,393, including            deferred compensation of $90,166 for 2006, into stock options valued at $302,229 and            the remainder of the deferred compensation was realized as an extraordinary            gain.

 

There            were no related party transactions in 2007.

 

**NOTE            N – CONCENTRATION OF RISKS**

 

One            customer totaled approximately 46% of the Company’s revenues for the year            ended December 31, 2006. In 2007 this same customer only accounted for 26% of total            2007 revenue. Concentration of credit risk and failure to collect accounts receivable            have not presented significant problems to ADS Media. With a significant amount of the            Company’s revenues generated by a few major customers, the loss of one of these            customers could have a material adverse effect on our business, operating results and            financial condition.

 

 

 

 

 

 

 

 

 

F-18