UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM 10-Q/A


(Mark
One)


x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for


the
quarter ended September 30, 2008





OR




 ̈ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for


the
transition period from _______ to _______




Commission
file number 000-32231





WINSONIC DIGITAL MEDIA GROUP,
LTD.


(Exact
name of registrant as specified in its charter)





Nevada
            
            52-2236253(State
      or other jurisdiction of incorporation or
              organization)
            
            (I.R.S.
      Employer Identification No.)




101
      Marietta Street, Suite 2600Atlanta,
      Georgia
              (Address
      of principal executive offices)
            
            30303
              (Zip
      Code)




(404)
230-5705


(Registrant’s
telephone number, including area code)





(not
applicable)


(former
name, former address, if changed since last report)





Indicate
by check mark whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 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 past 90 days.
Yes x No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.




Large Accelerated Filer ̈
            Accelerated Filer ̈Non-Accelerated Filer ̈
            Smaller Reporting Companyx(do not check if smaller reporting company)




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


Yes  ̈ No x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date. As of November 10, 2008, 95,421,519
shares of the registrant’s Common Stock, $0.001 par value, were
outstanding.








EXPLANATORY
NOTE
  Winsonic
Digital Media Group, Ltd. is filing this Amendment on Form 10-Q/A (“Form
l0-Q/A”) to our quarterly report for the quarter ended September 30, 2008
initially filed with the U.S. Securities and Exchange Commission (“SEC”) on
November 14, 2008 (the "Original Filing"), solely to include Exhibits 31.1 and
32.1 with the Original Filing. Exhibits 31.1 and 32.1 were mistakenly excluded
from the Original Filing when it was filed on November 14,
2008.









Quarterly Report on Form
10-Q/A


Quarter Ended September 30,
2008





Table of
Contents





PagePART
      I FINANCIAL INFORMATIONItem
      1. Condensed Financial Statements:Condensed
      Consolidated Balance Sheets, September 30, 2008 (Unaudited) and December
      31, 2007 (Audited)
            
            3Condensed
      Consolidated Statements of Operations, for the three and nine month
      periods ended September 30, 2008 and 2007 and from inception (September
      10, 2002) to September 30, 2008 (Unaudited)
            
            4Condensed
      Consolidated Statements of Cash Flows, for the nine months ended September
      30, 2008 and 2007 and from inception (September 10, 2002) to September 30,
      2008 (Unaudited)
            
            5Condensed
      Statement of Stockholders’ Deficit (Unaudited)
            
            6Condensed
      Notes to the Financial Statements (Unaudited)
            
            7Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            
            27Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            35Item
      4T. Controls and Procedures
            
            35PART
      II OTHER INFORMATIONItem
      1. Legal Proceedings
            
            36Item
      1A. Risk Factors
            
            36Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            
            36Item
      3. Defaults Upon Senior Securities
            
            37Item
      4. Submission of Matters to a Vote of Security Holders
            
            37Item
      5. Other Information
            
            37Item
      6. Exhibits
            
            37SIGNATURES
            
            39EXHIBIT
      INDEX





2 OF
39




PART I - FINANCIAL
INFORMATION




Item 1. Financial
Statements.





WINSONIC
DIGITAL MEDIA GROUP, LTD.


(A
DEVELOPMENT STAGE COMPANY)


CONDENSED CONSOLIDATED BALANCE
SHEETS


As of
              
              As ofSeptember 30, 2008
              
              Dec 31, 2007(Unaudited)
              
              (Audited)ASSETSASSETS:Cash
              
              $
              15,125
              
              $
              90,893Accounts
      receivable, net of allowance for doubtful accounts of $219,365 and
      $155,000, respectively
              
              
              22,943
              
              
              103,501Prepaid
      expense
              
              
              91,611
              
              
              38,373Inventory
              
              
              5,533
              
              
              5,994Construction
      in process
              
              
              203,271
              
              
              305,648Other
      current assets
              
              
              8,094
              
              
              8,094Total current
      assets
              
              
              346,577
              
              
              552,503Fixed
      assets, net of accumulated depreciation of $1,014,310 and $908,539,
      respectively:
              
              
              753,569
              
              
              767,190Goodwill
              
              
              263,524
              
              
              263,524Intangibles
              
              
              565,000
              
              
              -Other
      assets
              
              
              542,489
              
              
              486,392TOTAL
    ASSETS
              
              $
              2,471,159
              
              $
              2,069,609LIABILITIES AND
      STOCKHOLDERS’ DEFICITLIABILITIES:Current
      liabilities:Accounts
      payable and accrued expenses
              
              $
              5,187,601
              
              $
              5,588,287Bank
      overdraft
              
              
              3,741
              
              
              -Customer
      deposits
              
              
              287,186
              
              
              333,336Accrued
      payroll and related taxes
              
              
              7,272,332
              
              
              7,011,351Legal
      settlement liabilities
              
              
              268,870
              
              
              1,213,225Due
      to other related parties
              
              
              -
              
              
              1,091Loans
      Payable
              
              
              1,323,156
              
              
              507,518Loans
      Payable-related party
              
              
              307,448
              
              
              201,903Derivative
      liability related to convertible debentures
              
              
              5,269
              
              
              34,466Warrant
      liability related to convertible debentures
              
              
              1,275
              
              
              29,909Line
      of Credit – Advance
              
              
              90,000
              
              
              -Convertible
      debentures 2004/2005
              
              
              36,970
              
              
              35,514Convertible
      debentures, net of debt discount totaling $23,073 and $908,539,
      respectively
              
              
              1,586,529
              
              
              1,223,217Convertible
      debentures – related party, net of debt discount totaling $7,422 and
      $42,017, respectively
              
              
              48,447
              
              
              46,379Notes
      Payable
              
              
              693,272
              
              
              -Notes
      Payable-related party
              
              
              84,956
              
              
              80,950Other
      current liabilities
              
              
              126,448
              
              
              -Total current
      liabilities
              
              
              17,323,500
              
              
              16,307,146Restructuring
      reserve – long term
              
              
              403,725
              
              
              -TOTAL
      LIABILITIES
              
              
              17,727,225
              
              
              16,307,146Stockholders'
      deficit:Preferred
      stock, $0.001 par value, 20,000,000 shares authorized, no shares issued
      and outstanding at September 30, 2008 and December 31, 2007,
      respectively
              
              
              -
              
              
              -Common
      stock, $0.001 par value, 200,000,000 shares authorized, 95,421,519 and
      71,319,648 shares issued and outstanding at September 30, 2008 and
      December 31, 2007
              
              
              95,421
              
              
              71,319Additional
      paid-in capital
              
              
              33,611,279
              
              
              26,520,895Common
      stock receivable
              
              
              -
              
              
              (1,200
              )Accumulated
      deficit during development stage
              
              
              (48,962,766
              )
              
              (40,828,551
              )Total stockholders'
      deficit
              
              
              (15,256,066
              )
              
              (14,237,537
              )TOTAL LIABILITIES AND
      STOCKHOLDERS' DEFICIT
              
              $
              2,471,159
              
              $
              2,069,609




The accompanying notes to the
financial statements should be


read in conjunction with these
Balance Sheets.


3 OF
39


WINSONIC
DIGITAL MEDIA GROUP, LTD.


(A
DEVELOPMENT STAGE COMPANY)


CONSOLIDATED STATEMENTS OF
OPERATIONS


(UNAUDITED)





For the three-months ended
              September 30,
            
            For the nine months ended
              September
      30,
            
            September
              10, 2002
              (Inception)
              to
              September 30,2008
            
            2007
            
            2008
            
            2007
            
            2008REVENUE
            
            $
            91,861
            
            $
            233,181
            
            $
            510,754
            
            $
            1,368,865
            
            $
            2,853,055COST
      OF SALES
            
            
            285,364
            
            
            1,005,093
            
            
            877,946
            
            
            2,785,644
            
            
            4,634,293GROSS
      PROFIT
            
            
            (193,503
            )
            
            (771,912
            )
            
            (367,192
            )
            
            (1,416,779
            )
            
            (1,781,238
            )EXPENSES:Selling,
      general and administrative
            
            
            1,134,170
            
            
            1,826,551
            
            
            3,893,188
            
            
            5,445,225
            
            
            28,563,794Research
      & development
            
            
            35,209
            
            
            66,783
            
            
            190,429
            
            
            201,599
            
            
            675,812Depreciation
      and amortization expense
            
            
            15,425
            
            
            (10,440
            )
            
            47,810
            
            
            13,721
            
            
            1,230,328Total
      expenses
            
            
            1,184,804
            
            
            1,882,894
            
            
            4,131,427
            
            
            5,660,545
            
            
            30,469,934OPERATING
      LOSS
            
            
            (1,378,307
            )
            
            (2,654,806
            )
            
            (4,498,619
            )
            
            (7,077,324
            )
            
            (32,251,172
            )OTHER
      INCOME/(EXPENSES):Interest
      expense
            
            
            (486,102
            )
            
            (3,241,239
            )
            
            (3,056,026
            )
            
            (5,647,111
            )
            
            (13,412,729
            )Interest
      expense – related party
            
            
            (4,769
            )
            
            (41,824
            )
            
            (12,125
            )
            
            (116,683
            )
            
            (351,674
            )Impairment
      of goodwill
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (720,767
            )Legal
      settlement costs
            
            
            (100,750
            )
            
            (1,100,000
            )
            
            (100,750
            )
            
            (1,160,000
            )
            
            (3,425,963
            )Gain
      on legal settlement
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            942,636Unrealized
      (loss) gain on adjustments of derivative and warrant liability to fair
      value of underlying securities
            
            
            3,506
            
            
            (345,454
            )
            
            57,831
            
            
            579,337
            
            
            660,754Interest
      income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            730Other
      income
            
            
            -
            
            
            -
            
            
            (3
            )
            
            (383
            )
            
            119,942Restructuring
      charge
            
            
            (524,523
            )
            
            -
            
            
            (524,523
            )
            
            -
            
            
            (524,523
            )Total
      other income/(expenses)
            
            
            (1,112,638)
            )
            
            (4,037,609
            )
            
            (3,635,596
            )
            
            (6,344,840
            )
            
            (16,711,594
            )NET LOSS
            
            $
            (2,490,945
            )
            $
            (6,692,415
            )
            $
            (8,134,215
            )
            $
            (13,422,164
            )
            $
            (48,962,766
            )Basic
      weighted average number of common shares outstanding
            
            
            90,446,250
            
            
            56,053,950
            
            
            83,936,082
            
            
            51,787,515Net
      loss per basic common share
            
            $
            (0.03
            )
            $
            (0.12
            )
            $
            (0.10
            )
            $
            (0.26
            )





The accompanying notes to the
financial statements should be


read in conjunction with these
Statements of Operations.


4 OF
39


WINSONIC
DIGITAL MEDIA GROUP, LTD.


(A
DEVELOPMENT STAGE COMPANY)


CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS


(UNAUDITED)


For the nine months ended
                September 30,
              
              September 10, 2002
                (Inception) to2008
              
              2007
              
              September 30, 2008CASH FLOWS FROM OPERATING
      ACTIVITIES:Net
      loss
              
              $
              (8,134,215
              )
              $
              (13,422,164
              )
              $
              (48,962,766
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
              
              
              105,772
              
              
              84,554
              
              
              1,288,290Accretion
      of principal and interest related to convertible
debentures
              
              
              811,238
              
              
              1,612,939
              
              
              5,038,029Unrealized
      gain on adjustment of derivative and warrant liability to fair value of
      underlying securities
              
              
              (57,831
              )
              
              (579,337
              )
              
              (660,754
              )Stock
      based compensation
              
              
              401,454
              
              
              1,626,001
              
              
              6,330,906Operating
      expenses paid with stock, options and warrants
              
              
              168,750
              
              
              -
              
              
              1,205,572Consulting
      expenses paid with stock, options and warrants
              
              
              280,600
              
              
              165,850
              
              
              718,250Operating
      expenses paid by note payable
              
              
              -
              
              
              -
              
              
              60,000Interest
      expense paid with stock
              
              
              -
              
              
              -
              
              
              185,621Financing
      costs paid with stock and warrants
              
              
              1,930,724
              
              
              3,647,523
              
              
              5,331,276Financing
      costs related to conversion of loans payable and loans payable –
      related parties
              
              
              -
              
              
              285,424
              
              
              285,424Amortization
      of common stock advances for future services
              
              
              -
              
              
              48,175
              
              
              48,175Interest
      accrued
              
              
              323,402
              
              
              96,719
              
              
              638,978Forgiveness
      of accrued interest - Digital Services International, Inc.
              
              
              -
              
              
              -
              
              
              152,592Provision
      for doubtful accounts
              
              
              550,239
              
              
              -
              
              
              705,239Impairment
      of goodwill
              
              
              -
              
              
              -
              
              
              720,767Loss
      (gain) on legal settlement
              
              
              100,750
              
              
              -
              
              
              (841,886
              )Other
              
              
              -
              
              
              29,732
              
              
              29,032Change
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
              
              
              (19,681
              )
              
              89,913
              
              
              (303,578
              )Decrease
      (increase) in prepaid expenses
              
              
              27,762
              
              
              (59,934
              )
              
              (8,291
              )Decrease
      (increase) in inventory
              
              
              461
              
              
              (1,356
              )
              
              (146
              )Decrease
      (increase) in construction in process
              
              
              102,377
              
              
              44,060
              
              
              (173,307
              )Increase
      in other assets
              
              
              (56,097
              )
              
              (60,816
              )
              
              (300,583
              )Increase
      in advances to related companies
              
              
              -
              
              
              48,570
              
              
              1,091Increase
      in accounts payable and accrued expenses
              
              
              905,951
              
              
              1,099,225
              
              
              6,375,203(Decrease)
      increase in customer deposits
              
              
              (46,150
              )
              
              (90,945
              )
              
              361,044Increase
      in accrued payroll and related taxes
              
              
              714,695
              
              
              2,257,297
              
              
              8,778,402Increase
      (decrease) in legal settlement liabilities
              
              
              (9,920
              )
              
              1,160,000
              
              
              3,322,293Increase
      (decrease) in other liabilities
              
              
              529,082
              
              
              -
              
              
              529,082Net cash used in operating
      activities
              
              
              (1,370,637
              )
              
              (1,918,570
              )
              
              (8,646,045
              )CASH FLOWS FROM INVESTING
      ACTIVITIES:Cash
      acquired through business acquisitions
              
              
              -
              
              
              -
              
              
              16,670Purchase
      of fixed assets
              
              
              (92,151
              )
              
              (140,269
              )
              
              (1,710,041
              )Net cash used in investing
      activities
              
              
              (92,151
              )
              
              (140,269
              )
              
              (1,693,371
              )CASH FLOWS FROM FINANCING
      ACTIVITIES:Increase
      (decrease) in bank overdraft
              
              
              3,741
              
              
              7,829
              
              
              3,741Proceeds
      from loans payable
              
              
              695,250
              
              
              40,000
              
              
              1,320,501Payment
      on loans payable
              
              
              (2,458
              )
              
              -
              
              
              (25,793
              )Proceeds
      from loan payable - related party
              
              
              125,624
              
              
              395,893
              
              
              1,460,228Payment
      on note payable - related party
              
              
              (26,130
              )
              
              (37,000
              )
              
              (376,186
              )Proceeds
      from note payable
              
              
              50,380
              
              
              
              
              
              50,380Payment
      on note payable
              
              
              (28,493
              )
              
              (39,448
              )
              
              (93,306
              )Proceeds
      from Line of credit – advance
              
              
              90,000
              
              
              -
              
              
              90,000Payments
      on convertible debentures
              
              
              -
              
              
              -
              
              
              (64,813
              )Proceeds
      from convertible debentures
              
              
              52,000
              
              
              1,688,474
              
              
              5,335,270Proceeds
      from common stock issued in connection with exercise of
      warrants
              
              
              307,106
              
              
              -
              
              
              469,606Proceeds
      from common stock issued
              
              
              120,000
              
              
              -
              
              
              2,120,100Net cash provided by financing
      activities
              
              
              1,387,020
              
              
              2,055,748
              
              
              10,354,541NET (DECREASE) INCREASE IN
      CASH
              
              
              (75,768
              )
              
              (3,091
              )
              
              15,125CASH, BEGINNING OF
      PERIOD
              
              
              90,893
              
              
              3,506
              
              
              -CASH, END OF
      PERIOD
              
              $
              15,125
              
              $
              415
              
              $
              15,125SUPPLEMENTARY
      INFORMATION:Interest
      paid
              
              $
              34
              
              $
              4,448
              
              $
              54,826Income
      taxes paid
              
              $
              -
              
              $
              -
              
              $
              -NON-CASH
      ACTIVITIES:Forgiveness
      of salary payable to officer
              
              $
              -
              
              $
              -
              
              $
              702,644Forgiveness
      of payroll tax for officer
              
              $
              -
              
              $
              -
              
              $
              20,655Issuance
      of common stock as deposit on lease obligation
              
              $
              -
              
              $
              -
              
              $
              250,000Issuance
      of common stock and stock payable as payment for subsidiaries
      acquired
              
              $
              465,000
              
              $
              -
              
              $
              1,404,528Issuance
      of common stock as payment on notes payable - related
party
              
              $
              -
              
              $
              585,984
              
              $
              896,984Conversion
      of share notes to common stock
              
              $
              535,263
              
              $
              
              
              $
              535,263Issuance
      of common stock and warrants for salary payable and employee
      bonus
              
              $
              538,287
              
              $
              
              
              $
              1,053,961Issuance
      of common stock as payment of note interest
              
              $
              1,917
              
              $
              -
              
              $
              1,917Issuance
      of common stock upon conversion of debentures
              
              $
              -
              
              $
              1,827,115
              
              $
              3,569,218Adjustment
      to paid in capital for accumulated depreciation
              
              $
              -
              
              $
              -
              
              $
              281,481Issuance
      of common stock for legal settlement
              
              $
              934,435
              
              $
              58,000
              
              $
              2,353,320Issuance
      of common stock as payment for accrued financing costs
              
              $
              944,833
              
              $
              -
              
              $
              944,833Issuance
      of common stock as payment for accrued consulting expense
              
              $
              261,000
              
              $
              -
              
              $
              261,000Issuance
      of common stock as exercise of stock options
              
              $
              8,517
              
              $
              -
              
              $
              8,517Issuance of common stock as prepayment of store design
      and hosting
                expenses from new licensing agreement
              
              $
              81,000
              
              $
              -
              
              $
              81,000Issuance of common
      stock for purchase of license rights
              
              $
              100,000
              
              $
              -
              
              $
              100,000




The accompanying notes to financial
statements should be


read in conjunction with these
Statements of Cash Flows.




5 OF
39


WINSONIC
DIGITAL MEDIA GROUP, LTD.


(A DEVELOPMENT STAGE
COMPANY)


CONDENSED STATEMENT OF
STOCKHOLDERS' DEFICIT


(UNAUDITED)


Common
    Stock
              
              AccumulatedAdvance
              
              DeficitAdditional
              
              Common
              
              Common
              
              for
              
              During
              
              TotalPreferred Stock
              
              Common Stock
              
              Paid-in
              
              Stock
              
              Stock
              
              Future
              
              Development
              
              Stockholders’Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Payable
              
              Receivable
              
              Services
              
              Stage
              
              DeficitBalance, December 31,
      2007
              
              
              -
              
              $
              -
              
              
              71,319,648
              
              $
              71,319
              
              $
              26,520,895
              
              $
              -
              
              $
              (1,200
              )
              $
              -
              
              $
              (40,828,551
              )
              $
              (14,237,537
              )Incentive
      stock option for employees
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              401,454
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              401,454Issuance
      of stock for financing costs
              
              
              -
              
              
              -
              
              
              10,360,699
              
              
              10,361
              
              
              2,839,029
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,849,390Issuance
      of warrants for financing costs
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              26,167
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              26,167Issuance
      of common stock as employee bonus
              
              
              -
              
              
              -
              
              
              1,325,000
              
              
              1,325
              
              
              167,425
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              168,750Issuance
      of stock in DVerb acquisition
              
              
              -
              
              
              -
              
              
              1,500,000
              
              
              1,500
              
              
              463,500
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              465,000Issuance
      of stock in satisfaction of convertible debentures
              
              
              -
              
              
              -
              
              
              2,676,633
              
              
              2,677
              
              
              532,586
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              535,263Issuance
      of stock for consulting services
              
              
              -
              
              
              -
              
              
              2,235,000
              
              
              2,235
              
              
              539,365
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              541,600Issuance
      of stock as payment of loan interest
              
              
              -
              
              
              -
              
              
              3,994
              
              
              4
              
              
              1,913
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,917Issuance
      of stock in lieu of employee salaries
              
              
              -
              
              
              -
              
              
              1,537,962
              
              
              1,538
              
              
              536,749
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              538,287Issuance
      of stock for exercise of stock options
              
              
              -
              
              
              -
              
              
              851,666
              
              
              852
              
              
              7,665
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,517Issuance
      of stock for exercise of warrants
              
              
              -
              
              
              -
              
              
              1,035,534
              
              
              1,035
              
              
              306,071
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              307,106Discount
      allocated to warrant on convertible debt
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              10,550
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              10,550Discount
      allocated to the beneficial conversion feature
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              26,250
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              26,250Shares
      returned to Company
              
              
              -
              
              
              -
              
              
              (2,346,593
              )
              
              (2,347
              )
              
              1,147
              
              
              -
              
              
              1,200
              
              
              -
              
              
              -
              
              
              -Issuance
      of common stock for legal settlement liability
              
              
              -
              
              
              -
              
              
              2,076,521
              
              
              2,077
              
              
              932,358
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              934,435Issuance
      of common stock for license rights and prepaid expenses
              
              
              -
              
              
              -
              
              
              1,645,455
              
              
              1,645
              
              
              179,355
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              181,000Issuance
      of common stock for funds
              
              
              -
              
              
              -
              
              
              1,200,000
              
              
              1,200
              
              
              118,800
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              120,000Net
      loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,134,215
              )
              
              (8,134,215
              )Balance, September 30, 2008
      (Unaudited)
              
              
              -
              
              $
              -
              
              
              95,421,519
              
              $
              95,421
              
              
              33,611,279
              
              
              -
              
              
              -
              
              
              
              
              
              (48,962,766
              )
              
              (15,256,066
              )
  The accompanying notes to the
financial statements should be


read in conjunction with this
Statement of Stockholders’ Deficit.


6 OF
39


WINSONIC DIGITAL MEDIA GROUP,
LTD


(A
DEVELOPMENT STAGE COMPANY)


NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS


September 30,
2008




NOTE 1 - ORGANIZATION AND
PURPOSE





WinSonic
Digital Media Group, Ltd. (the “Company”) is a media distribution solutions
company which historically has focused on distributing digital content to the
public and providing high-speed, high-quality, low-cost solutions that enable
users to view, interact, and listen to all types of audio, online video and
digital TV in full screen format.





During
2006, the Company acquired a 49% equity interest in WinSonic Diversity, LLC and
completed the acquisitions of Automated Interiors, LLC (“AI”), Tytess Design and
Development, Inc. (“Tytess”) and WinSonic Digital Store, Ltd. (formerly DV Photo
Shop, Ltd.) (the “Digital Store”). These actions represent a series of strategic
investments in new markets and new services that expand the offering of the
Company, while complimenting our existing business. Together with our existing
digital distribution platform comprised of the WinSonic Digital Cable Systems
Network, Ltd. networks, we are now able to deliver customized, bundled solutions
to a wider range of customers that include custom wiring, centrally located
utilities, project management, telephone, internet, audio/video and digital
TV.





The
accompanying financial statements have been prepared in accordance with the
Statement of Financial Accounting Standards (“SFAS”) No. 7 “Accounting and
Reporting by Development Stage Enterprises.” A development stage enterprise is
one in which planned principal operations have not commenced; or if its
operations have commenced, there has been no significant revenues derived
therefrom. As of September 30, 2008, the Company has not fully commenced
operations nor has it received significant revenues from its planned principal
operations.





The
accompanying consolidated financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of and for the nine months
ended September 30, 2008 and for all periods presented have been
made.





Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States have been condensed or omitted for purposes of filing interim
financial statements with the Securities and Exchange Commission. The condensed
consolidated financial statements included in this report should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company’s audited financial statements for the year ended
December 31, 2007. The results of operations for the nine months ended September
30, 2008 are not necessarily indicative of the operating results for the full
year.





NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES





Segment and Geographic
Information





In
accordance with the provisions of SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information”, the Company has begun to report in five
reportable operating segments as follows: (i) Digital Media Group (ii) Digital
Distribution Group, (iii) Integrated Services Group, (iv) WinSonic Diversity
Group, and (v) Corporate Group. The Company operates primarily in the greater
Atlanta, Georgia metropolitan area.





As
further described herein, the Company now combines business and financial
activity of its various subsidiary companies and operating divisions within
business segments. The business activity associated with the development,
marketing and sale of digital media & entertainment products and services of
WinSonic Digital Media Group, Ltd., and the Store  are
combined in the Digital Media Group business segment. The business activity of
WinSonic Digital Cable Systems Network, Ltd. shall comprise the Digital
Distribution Group business segment. The business activity of Automated
Interiors, LLC and Tytess Design & Development, LLC are combined in the
Integrated Services Group business segment. The business activity of WinSonic
Diversity, LLC is represented by the WinSonic Diversity Group business segment.
The business activities associated with corporate management, business
development, administration and finance of WinSonic Digital Media Group, Ltd.
are included in the Corporate Group business segment.





Principles of
Consolidation





The
attached condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. The financial statements include the accounts of
the Company’s wholly-owned subsidiaries and its 49%-owned subsidiary WinSonic
Diversity, LLC (“Diversity”). As a certified Minority Business Enterprise,
Diversity enables the Company to qualify for and pursue opportunities with
various entities including the Federal Communications Commission, Public
Utilities Commission, Universal Service, National Telecommunications and
Information Administration, National Information Infrastructure and the
Department of Commerce that focus on providing services to people from all
economic backgrounds. Diversity is focused on developing urban and rural
communities by providing resources and services that improve quality of life.
Diversity has been included in the consolidated financial statements of the
Company in accordance with Financial Accounting Standards Board Interpretation
No. 46, “Consolidation of Variable Interest Entities”. The Company has
determined that Diversity meets the requirements for consolidation based on the
common control of the Company and the fact that Diversity relies exclusively on
the Company to provide financial support. All significant inter-company
transactions have been eliminated in consolidation.




7 OF
39




Basis of
Presentation





Certain
prior year amounts in the financial statements have been reclassified to conform
with the current year presentation. Specifically, the Company reclassified
customer deposits as a liability from accounts receivable and billings on
construction in process to accounts receivable. These reclassifications had no
effect on previously reported net loss. In addition, the Company has removed
from SG&A expenses the R&D and Network operational costs to identify
those business activities of R&D and Cost of Sales.




Use of Estimates





The
preparation of 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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reported period. Actual
results could differ from these estimates.





Fair Value of Financial
Instruments





SFAS No.
107, “Disclosures About Fair Value of Financial Instruments,” requires the
Company to disclose, when reasonably attainable, the fair market values of its
assets and liabilities that are deemed to be financial instruments. The carrying
amounts and estimated fair values of the Company’s financial instruments
approximate their fair value due to their short-term nature.





Earnings (Loss) Per Share
Calculations





“Basic
earnings (loss) per share” excludes any dilutive effects of options, warrants
and convertible securities. “Basic earnings (loss) per share” is computed using
the weighted-average number of outstanding common shares during the applicable
period. “Diluted earnings per share” is computed using the weighted-average
number of common and common stock equivalent shares outstanding during the
period. Common stock equivalent shares are excluded from the computation if
their effect is antidilutive. For all periods presented, the Company has
sustained losses, which would make use of equivalent shares antidilutive and, as
such, the calculation has not been included. Using the treasury stock
method, excluded common stock equivalents are as follows:


Three Months ended September 30,
              
              Nine Months Ended September 30,2008
              
              2007
              
              2008
              
              2007Shares
      issuable under stock options
              
              
              2,010,568
              
              
              2,040,656
              
              
              3,747,715
              
              
              1,702,692Shares
      issuable pursuant to warrants to purchase common stock
              
              
              3,257,690
              
              
              7,438,013
              
              
              3,477,173
              
              
              6,923,102Shares
      issuable pursuant to convertible debt agreements
              
              
              8,154,813
              
              
              7,778,394
              
              
              7,409,704
              
              
              7,454,145Shares
      payable
              
              
              -
              
              
              -
              
              
              -
              
              
              729,03913,423,071
              
              
              17,257,063
              
              
              14,634,592
              
              
              16,808,978




Stock Based Compensation: Stock
Options





The
Company has a stock incentive plan that provides for stock-based employee
compensation, including the granting of stock options to certain key employees
and other individuals. For stock options and warrants issued as compensation,
the Company applies SFAS No. 123(R), “Share-Based Payment,” (“SFAS No 123(R)”)
which requires the recognition of compensation cost based upon the fair value of
stock options at the grant date (using option pricing models), and recognizing
the cost over the period during which the services are provided (vesting
period).





The
Company’s Employee Stock Option activity for the nine months ended September 30,
2008 and 2007 is presented below:




2008
            
            2007Average
            
            
            
            AverageOptions
            
            Exercise Price
            
            Options
            
            Exercise PriceOutstanding
      -Beginning
      of Period
            
            
            9,636,488
            
            $
            0.72
            
            
            9,309,304
            
            $
            0.78Granted
      or Committed
            
            
            1,926,667
            
            
            0.33
            
            
            3,475,000
            
            
            0.65Exercised
            
            
            (851,666
            )
            
            (0.01
            )
            
            -
            
            
            -Canceled
            
            
            (1,000,000
            )
            
            (0.19
            )
            
            (1,335,793
            )
            
            (0.65
            )Outstanding
      -End
      of Period
            
            
            9,711,489
            
            $
            0.76
            
            
            11,448,511
            
            $
            0.68Exercisable
      -End
      of Period
            
            
            9,508,989
            
            $
            0.76
            
            
            9,493,456
            
            $
            0.73




8 OF
39




During
the nine months ended September 30, 2008 and 2007, the Company committed to
issue options to employees for 1,926,667 and 3,475,000 shares of common stock,
respectively. The fair value of the options granted during the nine months ended
September 30, 2008 and 2007 was $616,781 and $1,517,482, respectively. The
Company recorded compensation expense of approximately $401,455 and $1,626,001,
respectively, related to the vesting of the Company’s outstanding options. The
balance of the options granted will be included in the Company’s 2008 Employee
Option plan and will have terms and conditions determined under that
plan.





On
January 4, 2008, the Company issued new offer letters to all current employees.
Pursuant to the offer letters, the Company accelerated the vesting on all
remaining stock options with an exercise price of $1.00 for these employees. The
Company also canceled stock options exercisable into up to 400,000 shares of
common stock with an exercise price of $0.01 because the Company had not
obtained the senior funding necessary for such stock options to become
exercisable. In exchange for the canceled stock options, the Company committed
to issue 400,000 shares of fully vested stock options pursuant to the Company’s
2008 Employee Option plan when the plan is established and approved. As a result
of the acceleration of the stock options with an exercise price of $1.00 and the
cancellation of certain unvested stock options with an exercise price of $0.01,
and the commitment to issue an equal number of new stock options, the Company
recorded additional stock based compensation totaling $193,000 and was reflected
as additional payroll expense in the fourth quarter of 2007. As of September 30,
2008, the Company’s 2008 Employee Option Plan is not yet finalized or
implemented.





Option Pricing
Model





The
Company has elected to utilize the Black-Scholes option valuation model in
deriving fair market values for stock based compensation and embedded
derivatives. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Since the Company’s employee stock options and warrants have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management’s opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.





In
accordance with SFAS No. 123(R), the Company recognized the fair value of the
options in the statement of operations over the vesting
period.  Fair value was determined using
the Black-Scholes option pricing model
based on the following assumptions: risk free interest rate of
2.75% to 4.95%; no dividend yield; volatility factors of the expected market
price of the Company’s stock of 166% to 233%; and weighted average expected life
of the options of three years (for options issued at market and at $1.00 per
share strike price) and one and one-half years (for options issued at $0.01 per
share strike price).





Recently Issued Accounting
Pronouncements





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133,” (SFAS “161”) as amended and interpreted, which requires enhanced
disclosures about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. Disclosing the fair values of
derivative instruments and their gains and losses in a tabular format provides a
more complete picture of the location in an entity’s financial statements of
both the derivative positions existing at period end and the effect of using
derivatives during the reporting period. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Early adoption is permitted. At September 30, 2008, the
Company did not have any derivative instruments or hedging activities.
Management is aware of the requirements of SFAS 161 and will disclose when
appropriate.




In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts - an interpretation of FASB Statement No. 60” SFAS 163
requires that an insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that credit
deterioration has occurred in an insured financial obligation. This Statement
also clarifies how Statement 60 applies to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. This clarification will increase
comparability in financial reporting of financial guarantee insurance contracts
by insurance enterprises. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. SFAS 163 will be effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company does not expect the adoption of SFAS 163 will have a material impact on
its financial condition or results of operation.




9 OF
39




In
May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May be Settled in Cash Upon Conversion (including Partial Cash
Settlement) . The FSP
requires that the liability and equity components of convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement), commonly referred to as an Instrument C under Emerging Issues Task
Force (“EITF”) Issue No. 90-19, “Convertible Bonds with Issuer Options to
Settle for Cash Upon Conversion,” to be separately accounted for in a manner
that reflects the issuer’s nonconvertible debt borrowing rate. The FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and is to be applied retrospectively to all periods
presented (retroactive restatement) pursuant to the guidance in Statement of
Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and
Error Corrections.” The Company has determined the FSP does not impact the
accounting treatment of the Company’s existing convertible notes. As the Company
considers the issuance and terms of convertible debt instruments in the future,
the Company will evaluate the impact that the adoption of FSP APB 14-1 will have
on its consolidated financial statements.




NOTE 3 – MERGERS AND
ACQUISITIONS





The
Company completed no acquisitions during 2007.





On
January 22, 2008, WinSonic Digital Media Group, Ltd. (the “Company”) entered
into a Stock Purchase Agreement (the “SPA”) with Tap It, Inc., a Delaware
Corporation (“Tap It”) pursuant to which the Company agreed to purchase
2,291,667 shares of Tap It’s common stock (the “Initial Shares”) for $550,000
(the “Purchase Price”). The Purchase Price was to be paid through a combination
of (a) cash, (b) the cancellation of promissory notes issued by Tap It to the
Company, and (c) offsetting up to $50,000 of expenses incurred by the Company
related to the transactions contemplated by the SPA and owed to the Company by
Tap It pursuant to a certain provision of the SPA. The Company intended to
purchase the Initial Shares on January 31, 2008. In addition to the Initial
Shares, the SPA also gave the Company the option to purchase an additional
6,041,667 shares of Tap It’s common stock, which option could have been
exercised, in whole or in part, at various times until August 1, 2008. Payments
made in connection with the exercise of this option were to be made through a
combination of (a) cash or (b) the cancellation of promissory notes issued by
Tap It to the Company. The SPA also contained representations and warranties of
each party and certain covenants between the parties typical for a transaction
of this nature. The initial closing of the SPA did not occur as scheduled. As a
result, following discussions among the parties, the SPA was terminated. As of
September 30, 2008, advances totaling $226,704 are being discussed with an
attempt to further negociate with Tap It for a Promissory Note and repayment.
(See “Part I.
Financial Information, Item 1. Financial Statements, Balance Sheet - Other
assets”.)




On April
24, 2008, WinSonic Digital Media Group, Ltd. (the “Company”) entered into an
Asset and Goodwill Purchase Agreement (the “APA”) with Dverb Media Group, Inc.,
a Georgia Corporation (“Dverb Media”) pursuant to which the Company agreed to
issue 1,500,000 shares of WinSonic common stock (the “Purchase Price”) valued at
$465,000. The Purchase Price was to be paid entirely through the issuance of
1,000,000 shares to James E. Thomas and 500,000 shares to the nine (9) Dverb
Media employees and/or supporters for marketing relationships and business
development for the proprietary rights, use and ownership of the existing and
ongoing software development for the Social Networking product “DVERB”. Dverb
Media Group, Inc. became a wholly owned subsidiary of WinSonic and is in the
business segment Digital Media Group.




NOTE 4 - PROPERTY AND
EQUIPMENT, NET





The major
classifications of property and equipment consist of the following as of
September 30, 2008 and December 31, 2007:





September 30,
            
            December 31,2008
            
            2007Computer
      equipment
            
            $
            1,130,510
            
            $
            1,130,510Infrastructure
            
            
            158,400
            
            
            158,400Software
            
            
            115,067
            
            
            109,610Furniture
      & fixtures
            
            
            98,056
            
            
            93,478Automobiles
            
            
            13,500
            
            
            13,500Leasehold
      improvements
            
            
            80,226
            
            
            6,150Equipment
      and tools
            
            
            172,120
            
            
            164,081Less:
      accumulated depreciation
            
            
            (1,014,310
            )
            
            (908,539
            )Net
      Fixed Assets
            
            $
            753,569
            
            $
            767,190





Depreciation
expense for the nine months ended September 30, 2008 and 2007 was $105,772 and
$84,554, respectively.




10 OF
39




NOTE 5 - LOANS
PAYABLE




The
Company had outstanding loans payable to certain individuals who are not related
parties of $1,323,156 and $507,518 as of September 30, 2008 and December 31,
2007, respectively. Proceeds from these loans were used for working capital
purposes. The following is a summary of the loans payable:




September 30,
            
            December 31,Interest Rate
            
            Loans
      Payable
            
            2008
            
            2007Unstated
            
            The
      Company received investment commitments under the terms of warrant
      agreements from eight investors. The investors have requested that the
      Company return their original investment. The Company treats the
      investments as notes payable. During 2006, the Company and the investors
      agreed to convert three of the investments into 6% convertible debentures
      with an attached warrant. The exchanged debentures are convertible at
      $0.40 per share and the warrants are exercisable at $0.40 per share. (See
      Note 6 - Convertible Debentures). Currently five of the original
      Investments are outstanding. No interest has been accrued on the remaining
      notes.
            
            $
            111,000
            
            $
            111,0006.00%
            
            A
      loan consisting of principal of $108,000 with no repayment terms or
      maturity date. Accrued interest payable as of September 30, 2008 and
      December 31, 2007 is $31,067 and $26,203, respectively.
            
            
            139,067
            
            
            134,2036.00%
            
            A
      loan consisting of principal of $40,000 with no repayment terms or
      maturity date. Accrued interest payable as of September 30, 2008 and
      December 31, 2007 is $13,221 and $11,420, respectively.
            
            
            53,221
            
            
            51,4206.00%
            
            The
      Company issued a promissory note for $60,000 with a maturity date of
      October 17, 2007 to a financial consultant in connection with services
      rendered advising the Company on public market issues. Accrued interest
      payable as of September 30, 2008 and December 31, 2007 is $3,393 and $690,
      respectively. The Company is in default on this note.
            
            
            63,393
            
            
            60,69025.00%
            
            The
      Company issued six promissory notes for a total principal balance of
      $220,000 with a maturity date of February 15, 2008. Accrued interest
      payable as of September 30, 2008 and December 31, 2007 is $89,459 and
      $205, respectively. The Company is in default on these notes.
            
            
            309,459
            
            
            150,2056.00%
            
            The
      Company issued five promissory notes with a principal balance of $122,691
      and maturity date of November 30, 2008. Accrued interest payable as of
      September 30, 2008 is $5,824.
            
            
            128,516
            
            
            -6.00%
            
            The
      Company issued one promissory note for $100,000 with a maturity date of
      April 13, 2008. Accrued interest payable as of September 30, 2008 is
      $5,852. The Company is in default on this note.
            
            
            105,852
            
            
            -6.00%
            
            The
      Company issued one promissory note for $35,000 with a maturity date of
      April 25, 2008. Accrued interest payable as of September 30, 2008 is $961.
      The Company is in default on this note.
            
            
            35,961
            
            
            -6.00%
            
            The
      Company issued seven promissory notes with a principal balance of $180,000
      and maturity date of November 30, 2008. Accrued interest payable as of
      September 30, 2008 is $7,856.
            
            
            187,858
            
            
            -6.00%
            
            The
      Company issued two promissory notes with a principal balance of $26,059
      with a maturity date of June 30, 2008. Accrued interest payable as of
      September 30, 2008 is $919. The Company is in default on these
      notes.
            
            
            26,978
            
            
            -6.00%
            
            The
      Company issued a promissory note with a principal balance of $2,458 with a
      maturity date of September 19, 2008. The note balance as of September 30,
      2008 is $0.
            
            
            -
            
            
            -6.00%
            
            The
      Company issued five promissory notes with a principal balance of
      $159,041and maturity date of December 31, 2008. Accrued interest payable
      as of September 30, 2008 is $2,810.
            
            
            161,851
            
            
            -Total
      Loans Payable
            
            $
            1,323,156
            
            $
            507,518




11 OF
39




During
the third quarter of 2008, the Company borrowed a total of $2,458 and repaid one
loan during the quarter for $2,458 including interest from unrelated parties. In
connection with these loans, the Company issued an aggregate of 32,780 shares of
its common stock as security assignment and recorded financing costs totaling
$3,934. (See “Note 16 – Subsequent Events” for further details.)




NOTE 6 - CONVERTIBLE
DEBENTURES




2004/2005
Agreements : During
December 2004 and January 2005, the Company received an aggregate of $1,015,000
from the issuance of convertible notes and warrants. The offering was made to
accredited investors. The convertible notes, which accrued interest of 6% per
annum, were due in December 2005 or upon the occurrence of certain events
relating to potential changes in the capital structure of the Company. In
connection with the issuance of the convertible notes, warrants to purchase up
to 1,450,000 shares of the Company’s common stock at an exercise price of $0.70
per share were issued to the accredited investors.





On
December 15, 2005, the maturity dates of these convertible notes were extended
to June 30, 2006. Following the amendments to the convertible notes, the
noteholders had the right to convert the face value of the notes into common
stock of the Company at the lower of $0.40 per share or 85% of the market value
of the common stock at the time of conversion. Additionally, the amendments
reduced the exercise price of the warrants to $0.40 per share.





Prior to
December 31, 2007, all but one of the noteholders agreed to convert their notes,
plus accrued interest, into common stock of the Company at the rate of $0.40 per
share. The Company has continued to accrue interest on the one remaining note
through September 30, 2008. In the aggregate, the Company has issued a total of 2,680,627 shares
of its restricted common stock in connection with the conversion of these
notes.





During
the nine months ended September 30, 2008, the Company issued 500,000 shares of
its restricted common stock related to the exercise of warrants with proceeds
totaling $200,000. The Company has issued a total of 900,000 shares of its
restricted common stock in connection with the exercise of warrants related to
these notes.




The
issuance of these convertible notes and warrants would normally be recorded as
equity obligations. However, due to the indeterminate number of shares which
might be issued upon conversion, the Company is required to record a liability
relating to the outstanding warrants and the embedded derivative of the
convertible notes (included in the current liabilities as “derivative
liability”). As of September 30, 2008, the contingency related to the conversion
pricing which caused the indeterminate share calculation was resolved with the
conversion of all but one of the convertible notes. The following table
summarizes the convertible notes and related warrants and embedded derivative
liabilities at September 30, 2008 and December 31, 2007:





September 30,
            
            December 31,2008
            
            2007Derivative
      liability
            
            $
            5,269
            
            $
            34,466Warrant
      liability
            
            
            1,275
            
            
            29,909Convertible
      debentures
            
            
            36,970
            
            
            35,514Subtotal
            
            
            43,514
            
            
            99,889Adjustment
      of derivative and warrant liability to fair value
            
            
            660,755
            
            
            602,923Accretion
      of principal and interest related to convertible
debentures
            
            
            310,731
            
            
            312,188Total
      Proceeds from convertible debentures
            
            
            1,015,000
            
            
            1,015,000Plus:
      Accrued interest
            
            
            114,407
            
            
            112,951Less:
      Notes and interest converted
            
            
            (1,092,437
            )
            
            (1,092,437
            )Total
      Convertible debentures
            
            
            36,970
            
            
            35,514Less:
      Current portion of convertible debentures
            
            
            (36,970
            )
            
            (35,514
            )Total
      Non-Current Convertible Debentures
            
            $
            -
            
            $
            -




12 OF
39




Post 2004/2005
Agreements: During
2005, 2006 and 2007 the Company entered into a series of agreements with
accredited investors, pursuant to which the Company issued convertible
debentures, as further described below. The debentures, which include interest
of 6.0% per annum, mature 12 months from the issue date, and are convertible
into restricted shares of the Company’s common stock at conversion prices
between $0.20 and $0.40 per share. In connection with the issuance of the
debentures, warrants were issued to the accredited investors which are
exercisable for a period of three years at exercise prices between $0.20 and
$0.40 per share.





During
the nine months ended September 30, 2008, the Company issued to four accredited
investors an aggregate of $52,000 in 6% Convertible Subordinated Promissory
Notes and warrants to purchase up to 130,000 shares of the Company’s common
stock. The convertible notes, which accrue interest at 6%, mature in the first
quarter of 2009. The investors have the option, at any time prior to payment or
conversion, to convert any unpaid principal and interest into shares of common
stock at a price per share equal to $0.20. In addition, the notes are
convertible if the Company completes an equity financing which raises proceeds
of at least $3,000,000 or if the Company completes certain specified
transactions. The notes include covenants and events of default which are
customary for promissory notes of this nature. The notes also provide the
investors certain piggy-back registration rights with respect to the shares of
common stock into which the notes are convertible. The warrants, which have an
exercise price of $0.40 per share, expire in the first quarter of 2009. The
warrants may be exercised at any time prior to expiration and provide the
investors certain piggy-back registration rights with respect to the shares of
common stock into which the warrants are exercisable.





During
the nine months ended September 30, 2008, nineteen holders of convertible
debentures converted $503,825 in principal and $31,438 of accrued interest into
an aggregate of 2,676,633 shares of restricted common stock.





As a
result of the foregoing, as of September 30, 2008, the Company had 65
convertible debentures outstanding. The outstanding convertible debentures
represented a note balance of $1,665,470 and a potential obligation for the
Company to issue 8,327,354 shares of common stock.





In
connection with the convertible debentures described above, as of September 30,
2008, the Company has issued warrants to purchase 16,796,208 shares of common
stock at exercise prices ranging from $0.20 to $0.50, equaling a potential
aggregate funding for the Company of $4,450,307. These warrants have expiration
dates between July 5, 2008 and July 26, 2010. During the nine months ended
September 30, 2008, the Company issued 1,035,534 shares of common stock related
to the exercise of warrants with proceeds totaling $307,106.





The
following table summarizes the outstanding convertible debentures and related
warrants:





Summary of Post 2004/2005 Debentures & Warrants
            
            Convertible Notes
            
            WarrantsProceeds
            
            Shares
            
            Proceeds
            
            SharesTotal
      outstanding at December 31, 2007
            
            
            2,074,528
            
            
            10,372,642
            
            
            -
            
            
            16,666,208Proceeds
      received during 2008
            
            
            52,000
            
            
            260,000
            
            
            -
            
            
            730,000Accrued
      Interest
            
            
            74,205
            
            
            371,345
            
            
            -
            
            
            -Conversions
      during 2008
            
            
            (535,263
            )
            
            (2,676,633
            )
            
            -
            
            
            -Warrants
      exercised
            
            
            -
            
            
            -
            
            
            107,106
            
            
            (535,534
            )Warrants
      expired
            
            
            -
            
            
            -
            
            
            -
            
            
            (941,250
            )Total
      outstanding at September 30, 2008
            
            $
            1,665,470
            
            
            8,327,354
            
            $
            107,106
            
            
            15,919,424





The
Company has determined that the convertible debentures contain a beneficial
conversion feature and qualify for treatment under Emerging Issue Task Force No.
00-27. The estimated fair value of the warrants of $7,462,588 has been
determined using Black-Scholes option pricing model under the following
assumptions: stock price volatility ranging from 131% to 377%; risk free
interest rate of 3.5% to 4.5%; dividend yield of 0%; and a one to three year
term. The face amount of the convertible debentures (i.e., 4,502,907 was
proportionately allocated to the convertible debentures and the warrants in the
amount of $1,878,719 and $2,624,188, respectively.) The convertible debentures
proportionate allocation factor was then further allocated between the
convertible debentures and the beneficial conversion feature and $1,661,310 was
allocated to the beneficial conversion feature and the balance of $217,409 was
allocated to the convertible debentures. The combined total value of the
warrants and the beneficial conversion feature amounting to $4,285,498 has been
accounted for as a debt discount which is being amortized and treated as
interest expense over the term of the convertible debentures. For the nine
months ended September 30, 2008 and 2007, the Company amortized a total of
$811,237 and $1,612,939, respectively. The discounts and amortization are
summarized in the following table:





13 OF
39





September 30,
            
            December 31,2008
            
            2007BCF
      discount to Paid in capital
            
            $
            (1,661,310
            )
            $
            (1,635,061
            )Warrant
      Discount to Paid in capital
            
            
            (2,624,188
            )
            
            (2,613,638
            )Proceeds
      from convertible debentures
            
            
            4,502,907
            
            
            4,450,907Subtotal
            
            
            217,409
            
            
            202,208Deduct
      value converted to common stock
            
            
            (2,896,835
            )
            
            (2,393,011
            )Convertible
      debt not subject to accretion converted to stock
            
            
            (2,000
            )
            
            (2,000
            )Principal
      payments made
            
            
            (57,145
            )
            
            (57,145
            )Balance
      of convertible debt not subject to accretion
            
            
            (215,409
            )
            
            (200,208
            )Total
      discount to accrete
            
            
            1,331,518
            
            
            1,798,543Interest
      expense on convertible debentures - Amortized
            
            
            (1,301,024
            )
            
            (993,611
            )Interest
      expense on convertible debentures - Accrued
            
            
            (118,543
            )
            
            (75,777
            )Convertible
      debt not subject to accretion
            
            
            (215,409
            )
            
            (200,208
            )Total
      Current Liability
            
            $
            (1,634,976
            )
            $
            (1,269,596
            )





Defaults on Convertible
Debentures





As of
September 30, 2008, 53 convertible debentures totaling $1,357,031 were in
default. (See “Note 16 – Subsequent Events” for further details.)





NOTE 7 - RELATED PARTY
TRANSACTIONS





Loans Payable - Related
Party





During
the nine months ended September 30, 2008, the Company borrowed funds for
operational expenses of $125,624 from related parties and each Promissory Note
bears 6% annum interest rate and becomes due December 31, 2008 with the
exception of one note being due November 30, 2008. In connection with the loans,
the Company issued 960,341 shares of its common stock to the related parties and
recognized $162,202 in financing costs.





On April
18, 2006, the Company acquired the outstanding membership interests of AI and
assumed an unsecured, interest free loan payable to an officer for various cash
advances, expenses paid and assets transferred to AI by the officer. The note
totaling $80,950 was due on December 4, 2007 and bears interest at 6% per annum
from that date. The Company is in default on this note. As of September 30,
2008, the Company has accrued a total of $4,006 in interest related to this
debt.





Loans from
Founder





2007 : During
the year ended December 31, 2007, the CEO of the Company entered into certain
loan transactions with certain third parties and in turn has loaned an aggregate
of $428,393 to the Company. During the year ended December 31, 2007, the Company
accrued interest on the outstanding principal balance of these loans in the
amount of $7,494. As a condition to the loan transactions with such third
parties, the CEO has assigned or committed to assign to such third parties an
aggregate of 2,948,474 of his personal shares of the Company’s common stock.
During the twelve months ended December 31, 2007, the Company repaid loan
amounts of $72,086 including accrued interest, and issued 600,000 shares of the
Company’s common stock to third parties on behalf of the CEO in exchange for
debt forgiveness from the CEO in the amount of $179,971. As of September 30,
2008, the outstanding balance of these loans was $164,405 in principal
and $6,829 in accrued interest.





During
the fourth quarter of 2007, the Company issued to the CEO of the Company an
aggregate of $45,917 in 6% Convertible Subordinated Promissory Notes and
warrants to purchase up to 114,791 shares of the Company’s common stock. The two
convertible notes with balances of $40,917 and $5,000, which accrue interest at
6%, mature on October 30, 2009 and November 11, 2009, respectively. The CEO has
the option, at any time prior to payment or conversion, to convert any unpaid
principal and interest into shares of common stock at a price per share equal to
$0.20. In addition, the notes are convertible if the Company completes an equity
financing which raises proceeds of at least $3,000,000 or if the Company
completes certain specified transactions. The notes include covenants and events
of default which are customary for promissory notes of this nature. The notes
also provide the CEO certain piggy-back registration rights with respect to the
shares of common stock into which the notes are convertible. The warrants, which
have an exercise price of $0.40 per share, expire on October 30, 2009 and
November 11, 2009. The warrants may be exercised at any time prior to expiration
and provide the CEO certain piggy-back registration rights with respect to the
shares of common stock into which the warrants are exercisable. As of September
30, 2008, the outstanding balance of these notes was $45,917 in principal
and $2,530 in accrued interest.




14 OF
39




2006: During
2006, the CEO of the Company advanced $20,000 to the Company on an interest-free
basis. During 2006, $15,000 was repaid leaving an unpaid obligation of $5,000 as
of September 30, 2008.





2005 : On
September 15, 2005, the Company received a loan of $80,000 from the CEO. Under
the terms of the promissory note governing the loan, interest accrues at 10% per
annum, with principal and interest payable on December 1, 2005. Unpaid principal
and interest after December 1, 2005 is subject to additional interest of 5% in
excess of the rate otherwise applicable to the unpaid balance. During 2006, the
Company issued 400,000 shares of restricted common stock to repay the principal
of the loan and the balance of the accrued interest does not accrue additional
interest. The balance of the accrued interest payable at September 30, 2008 was
$13,074.




Share issuances


During
the nine months ended September 30, 2008, the Company cancelled 500,000 shares
of the Company’s restricted common shares issued during 2007 in anticipation of
closing a financing transaction with a related party, WinSonic Diversity, which
did not materialize. The Company also cancelled 700,000 shares of the Company’s
restricted common shares issued to the CEO in 2007 for certain financing
transactions in excess of the correct amount of shares.





NOTE 8 – OTHER NOTES
PAYABLES





On April
29, 2008, the Company entered into a loan agreement with Neighborhood Community
Bank, assuming the responsibility for a loan originally entered into by Colonel
McCrary Trucking, LLC and guaranteed by Winston Johnson. A loan in the amount of
$500,000 was originally entered into by Colonel McCrary Trucking, LLC for
working capital in preparation for the WinSonic Diversity, LLC, WinSonic Digital
Media Group, Ltd. and Colonel McCrary Trucking, LLC transaction with WinSonic
McCrary, LLC. Winston Johnson entered into a personal guarantee with
Neighborhood Community Bank, pledging 2,000,000 of his personal shares. The
Asset Purchase Agreement for the proposed transaction with WinSonic McCrary, LLC
expired in accordance with its terms during first quarter 2008. Colonel McCrary
Trucking, LLC defaulted on the original loan and Neighborhood Community Bank
sought to collect the balance from the personal guarantee of Winston Johnson.
Since the loan was originally related to a potential acquisition of the Company,
Mr. Johnson transferred responsibility for the loan to the Company. As of
September 30, 2008, the balance of the loan is $461,206, bears interest at 6%
and matures on December 31, 2008. The Company paid the initial loan
closing fees and interest payments as required, but has not made any scheduled
payments since then and the loan is currently in default. The Company is in the
process of filing a lien on the assets of Colonel McCrary Trucking LLC for
recovery of the loan balance.





On April
30, 2008, the Company entered into a loan agreement with a group of consultants
and former employees for payment of services received by the Company during the
first quarter of 2008. The loan agreement reclassifies previously recorded
accrued payroll and accounts payable to a note payable in the amount of $116,897
which bears interest at 6% per annum. The note provides for payments to the
group as follows: $8,068 upon execution; $9,401 on May 31, 2008; $20,134 on June
30, 2008; $47,003 on July 31, 2008 and $9,401 on August 15, 2008. The balance of
the note ($22,890) relates to the payroll taxes to be withheld for the employees
and is payable to the Internal Revenue Service and state taxing authorities on a
pro-rata basis on the same dates as the payments to the group. The Company met
the first three obligations per the terms of the Note. However, the Company did
not make the third quarter payments and the loan agreement had a stipulation
clause for severance payments to become due and payable when the note became in
default as well as the interest rate changing to 12% per annum. With the
changes, as of September 30, 2008, the balance of the loan is $181,686 including
accrued interest.





NOTE 9 – MATERIAL
AGREEMENTS





On April
2, 2008, WinSonic Digital Media Group, Ltd. and WinSonic Digital Cable Systems
Network (a subsidiary) entered into a Memorandum of Understanding (“MOU”) with
Sosiate, Inc. to set forth guidelines and basis for a relationship among the
companies. The companies believe that this relationship may lead to a variety of
revenue opportunities; whereby, WinSonic can provide global facilities-based
digital distribution co-location and network services for the Jamroom, an
internet-based social network owned by Sosiate. There is no assigned value to
this agreement at this time.





On July
26, 2008, the Company signed an MOU with Swagg Media Group, Inc. (“Swagg Media”)
that outlines a “partnership” between the Company and Swagg Media. This MOU
expresses the parties intentions regarding the establishment of a joint
marketing program, a technology deployment program, equity investments by the
parties, and defines the technology and services provided by each party, the
operational roles and responsibilities, and the first phase
implementation.





On July
29, 2008, the Company signed an MOU with RainySongs Group, Inc. (“RainySongs”)
that outlines a potential “partnership” between the Company and RainySongs. This
MOU expresses the parties intentions to develop, provide and deploy transport,
applications services, and regulated and unregulated distribution services to
the entertainment industry, and to such other industries or governmental
agencies mutually agreed to by the parties.




15 OF
39




On July
10, 2008, the Company entered into a Consulting Agreement with Burton Goldstein
& CO., LLC for media and entertainment label and artist business development
services.





On July
14, 2008, the Company and Hallmark Investments, Inc. terminated the Investment
Placement Agent agreement; whereby, Hallmark would no longer have the
exclusivity on securing financing for the Company. The agreement was deemed null
and void as of the signing date of July 14, 2008.





On July
30, 2008, the Company entered into a Consulting Agreement with Troy Mathews for
marketing product evaluation and positioning, SWOT analysis, customer analysis
by product category, channel/distribution strategy, and other go-to-market
strategy development.





On August
1, 2008, the Company entered into a Software Programming services contract with
JECR, Inc. (“JECR”); whereby, JECR will provide 3D Social Networking Application
services preparing for the First User Trial. As part of the compensation
arrangements, the Company issued 150,000 shares of restricted common
stock.





On August
6, 2008, the Company entered into a Consulting Agreement with IT/IS Telecom
Solutions. Under the Agreement, the IT/IS team was to provide: (1) additional
perspectives and insight into the overall goals and objectives driving the WDMG
business plan and how the company might deal with its various corporate
objectives, and (2) Subject Matter Experts (SMEs) to assist in the overall
development effort. On November 12, 2008, IT/IS Telecom Solutions terminated its
Agreement with the Company. As of the date of termination, the Company had never
determined any Statement of Work (SOW) plans or authorized IT/IS Telecom
Solutions to work on any projects.





On
September 15, 2008, the Company entered into non-binding Term Sheet for a
minimum of $250,000 Loan facility with the Simmons-Richardson Group to be
secured by issuance of 250,000 shares of restricted common stock to be followed
by a Convertible Secured Debenture Purchase Agreement upon formal execution of
the agreement. This agreement is for providing bridge financing dedicated to the
launch of specific revenue generating projects. Terms of the loan facility allow
the investment group to appoint one director to the board of directors. These
investors have commenced assisting WinSonic in recruiting and appointing key
technical positions and management. (See “Note 16 – Subsequent Events” for
further details.)




On September 16, 2008, the Company entered into a Rights
Agreement Addendum which updated the prior March 20, 2008 agreement between
WinSonic Digital Media Group, Ltd. and Blue Pie Productions Pty Ltd (“BPP”)
pursuant to which BPP granted the Company an exclusive license to reproduce,
commercialize, maintain and market select BPP products, goods and services such
as: Distribution model, Blue Pie Sonic branding product, Blue Pie Music license
product, Blue Pie and Magic Blue Creative Social networking product, Blue Pie
Banner Ad and Graphic product, Magic Blue Creative web development, eCommerce
and information systems, and Blue Pie Vault Digital Music Store within the
United States and Canada (North America territory). The prior rights agreement
is converted to a non-exclusive license for (remains thirty-six months) to sell
the Blue Vault Digital stores and WinSonic will represent the Blue Pie catalogue
for North America with full rights to engage and develop new markets for the
exploitation of the Blue Pie digital entertainment catalogue of music, video,
games, film and data. In addition, a Digital Store Agreement was executed on
September 16, 2008 between Blue Vault Digital Pty, Ltd. and WinSonic Digital
Media Group, Ltd and WinSonic Cable Networks, Ltd. in which Blue Vault Digital
will build the “WinSonic” branded music store. In consideration for the services
and rights under the amended Rights Agreement and the Digital Store Agreement,
the Company agreed to pay a total of $294,000 for the Non-exclusive License
rights, new WinSonic Digital Store build, hosting and database management, and
training. The payment comprised of $181,000 being paid upon contract signing
with the issuance of 1,645,455 shares of restricted common stock, a cash payment
of $50,000 becoming due ninety days after the execution of the amended
agreement, and the remaining $63,000 due quarterly over the following year for
hosting and database management support charges. Of the $181,000 payment,
$100,000 was classified as an Intangible asset - License rights and $81,000 was
classified as Prepaid expenses.





On
September 30, 2008, the Company entered into a Content Licensing Agreement
between Isolation Network, Inc. (d/b/a “INgrooves and “ONE” Digital
Distribution) and WinSonic Digital Media Group, Ltd. for which WinSonic will be
permitted to sell permanent digital transmissions of content and be granted the
non-exclusive right to sell eMasters to the End-Users. In consideration for the
delivery of content files from INgrooves and ONE Digital Distribution, a total
of $50,000 one time fee with $25,000 due upon execution of contract and then the
remaining $25,000 due no later than ninety days thereafter.




NOTE 10 - STOCKHOLDERS’
EQUITY





Effective
June 22, 2007, the Company increased the number of shares of common stock the
Company is authorized to issue from 50,000,000 to 200,000,000 and increased the
number of shares of preferred stock the Company is authorized to issue from
5,000,000 to 20,000,000.





During
the nine months ended September 30, 2008, the Company issued 10,360,699
restricted shares of the Company’s common stock valued at $2,849,390 in
connection with certain financing transactions (the costs of 1,800,000 of these
shares were accrued as financing costs at December 31, 2007). In addition,
approximately 19 holders of the Company’s convertible debentures were contacted
and agreed in writing to convert their debentures into restricted shares of the
Company’s common stock at $0.20 per share (See “Note 6 – Convertible Debentures”
for further details regarding these conversions.). Based on these agreements,
the Company converted $503,825 of principal and $31,438 of accrued interest on
these debentures in exchange for the issuance of 2,676,633 restricted shares of
the Company’s common stock.







16 OF
39




During
the nine months ended September 30, 2008, the Company issued an aggregate
of 2,235,000 restricted shares valued at $541,600 of its common stock as
payment for consulting services.




During the nine months ended September 30, 2008, the Company
issued 1,645,455 restricted shares valued at $181,000 of its common stock as
partial consideration of $100,000 in license rights and $81,000 as payment of
store build and hosting support charges.





During
the nine months ended September 30, 2008, the Company issued an aggregate of
1,500,000 restricted shares valued at $465,000 of its common stock in connection
with the DVerb acquisition (See “Note 3 - Mergers and
Acquisitions”).





During
the nine months ended September 30, 2008, the Company issued 851,666 and
1,035,534 restricted shares of the Company’s common stock in connection with the
exercise of stock options and warrants, respectively. The proceeds from the
exercise of these options and warrants totaled $315,623.





During
the nine months ended September 30, 2008, the Company issued an aggregate of
1,537,962 restricted shares valued at $538,287 of its common stock as payment
for employee salaries and 1,325,000 restricted shares of its common stock valued
at $168,750 as payment for employee bonuses.





During
the year ended December 31, 2007, the Company issued 500,000 shares of the
Company’s restricted common shares in anticipation of closing a financing
transaction which did not materialize. The shares were canceled in January 2008.
During the year ended December 31, 2007, the Company also issued 700,000 shares
of the Company’s restricted common shares to reimburse the CEO for certain
financing transactions in excess of the correct amount of shares. The shares
were canceled in March 2008. The Company also canceled 1,146,593 shares of its
restricted common stock previously issued in connection with the Tytess
acquisition. The Company recorded the transaction at par value and no gain or
loss was recognized by the Company.





The
Company also issued 2,076,521 to Rosemary Nguyen pursuant to a settlement
agreement (See “Note 11- Summary of Legal Proceedings”).





The
following table summarizes, by date, the stock transactions for the nine months
ended September 30, 2008:





Price per
            
            Cost ofDate of Share Issuance
            
            Shares
            
            Share
            
            SharesShares issued in connection
      with certain financing transactions:01/02/2008
            
            
            25,000
            
            
            0.61
            
            $
            15,25001/02/2008
            
            
            175,000
            
            
            0.51
            
            
            89,25001/09/2008
            
            
            500,000
            
            
            0.60
            
            
            300,00001/15/2008
            
            
            375,000
            
            
            0.46
            
            
            172,50001/15/2008
            
            
            725,000
            
            
            0.51
            
            
            369,75001/15/2008
            
            
            500,000
            
            
            0.19
            
            
            95,00004/02/2008
            
            
            40,000
            
            
            0.30
            
            
            12,00004/07/2008
            
            
            1,831,860
            
            
            0.25
            
            
            457,96504/07/2008
            
            
            88,589
            
            
            0.39
            
            
            34,55004/08/2008
            
            
            175,000
            
            
            0.34
            
            
            59,50004/08/2008
            
            
            1,236,243
            
            
            0.38
            
            
            469,77204/09/2008
            
            
            44,471
            
            
            0.39
            
            
            17,34305/14/2008
            
            
            225,000
            
            
            0.38
            
            
            84,00006/02/2008
            
            
            207,600
            
            
            0.24
            
            
            49,82406/10/2008
            
            
            66,353
            
            
            0.29
            
            
            19,24206/10/2008
            
            
            869,329
            
            
            0.20
            
            
            173,86606/17/2008
            
            
            300,000
            
            
            0.20
            
            
            60,00006/23/2008
            
            
            150,000
            
            
            0.19
            
            
            28,50006/26/2008
            
            
            300,000
            
            
            0.17
            
            
            51,00008/26/2008
            
            
            532,780
            
            
            0.12
            
            
            63,93508/28/2008
            
            
            243,817
            
            
            0.12
            
            
            29,25808/29/2008
            
            
            280,532
            
            
            0.12
            
            
            33,66408/31/2008
            
            
            500,000
            
            
            0.12
            
            
            60,00009/04/2008
            
            
            750,000
            
            
            0.11
            
            
            82,50009/19/2008
            
            
            100,000
            
            
            0.10
            
            
            10,00009/29/2008
            
            
            119,125
            
            
            0.09
            
            
            10,72110,360,699
            
            
            
            
            $
            2,849,390Shares issued for payment of
      loan interest:01/15/2008
            
            
            3,994
            
            
            0.48
            
            
            1,917Shares issued for conversion of
      convertible debentures:01/02/2008
            
            
            60,038
            
            
            0.20
            
            $
            11,94501/15/2008
            
            
            105,507
            
            
            0.20
            
            
            21,10103/11/2008
            
            
            2,064,332
            
            
            0.20
            
            
            412,86604/02/2008
            
            
            388,483
            
            
            0.20
            
            
            77,69604/10/2008
            
            
            58,273
            
            
            0.20
            
            
            11,6552,676,633
            
            
            
            
            $
            535,263Shares issued for payment of
      consulting services:01/02/2008
            
            
            250,000
            
            
            0.46
            
            $
            115,00001/02/2008
            
            
            100,000
            
            
            0.50
            
            
            50,00002/14/2008
            
            
            100,000
            
            
            0.38
            
            
            38,00004/02/2008
            
            
            150,000
            
            
            0.64
            
            
            96,00005/15/2008
            
            
            150,000
            
            
            0.35
            
            
            52,50006/10/2008
            
            
            300,000
            
            
            0.20
            
            
            60,00008/05/2008
            
            
            150,000
            
            
            0.15
            
            
            22,50008/27/2008
            
            
            200,000
            
            
            0.11
            
            
            22,00009/04/2008
            
            
            485,000
            
            
            0.11
            
            
            53,35009/29/2008
            
            
            350,000
            
            
            0.09
            
            
            32,2502,235,000
            
            
            
            
            $
            541,600Shares canceled that were
      previously issued for 2006 acquisitions:03/28/2008
            
            
            (1,146,593
            )
            
            0.001
            
            $
            (1,147
            )Shares issued in connection
      with DVerb acquisition:04/24/2008
            
            
            1,500,000
            
            
            0.31
            
            $
            465,000Shares issued in connection
      with exercise of warrants:01/10/2008
            
            
            500,000
            
            
            0.40
            
            $
            200,00003/11/2008
            
            
            420,534
            
            
            0.20
            
            
            84,10604/11/2008
            
            
            115,000
            
            
            0.20
            
            
            23,0001,035,534
            
            
            
            
            $
            307,106Shares issued in connection
      with exercise of stock options:01/23/2008
            
            
            150,000
            
            
            0.01
            
            $
            1,50003/28/2008
            
            
            500,000
            
            
            0.01
            
            
            5,00004/11/2008
            
            
            100,000
            
            
            0.01
            
            
            1,00004/16/2008
            
            
            35,000
            
            
            0.01
            
            
            35004/23/2008
            
            
            33,333
            
            
            0.01
            
            
            33306/30/2008
            
            
            33,333
            
            
            0.01
            
            
            334851,666
            
            
            
            
            $
            8,517Shares issued for employee
      bonus:03/28/2008
            
            
            575,000
            
            
            0.15
            
            $
            86,25009/04/2008
            
            
            750,000
            
            
            0.11
            
            
            82,5001,325,000
            
            
            
            
            $
            168,750Shares issued for employee
      compensation:05/20/2008
            
            
            1,113,633
            
            
            0.35
            
            
            389,77206/04/2008
            
            
            424,329
            
            
            0.35
            
            
            148,5151,537,962
            
            
            
            
            $
            538,287Shares issued for
      funds:07/23/2008
            
            
            100,000
            
            
            0.10
            
            $
            10,00007/24/2008
            
            
            500,000
            
            
            0.10
            
            
            50,00007/25/2008
            
            
            100,000
            
            
            0.10
            
            
            10,00008/26/2008
            
            
            500,000
            
            
            0.10
            
            
            50,0001,200,000
            
            
            
            
            $
            120,000Shares issued in
      error:02/01/2008
            
            
            (500,000
            )
            
            0.001
            
            $
            (500
            )03/28/2008
            
            
            (700,000
            )
            
            0.001
            
            
            (700
            )(1,200,000
            )
            
            
            
            $
            (1,200
            )Shares issued for
      license rights and prepaid expenses:1,645,455
            
            
            0.11
            
            $
            181,00009/16/2008
            
            
            1,645,455
            
            
            
            
            $
            181,000Shares issued for legal
      settlement:01/23/2008
            
            
            2,076,521
            
            
            0.45
            
            $
            934,435




17 OF
39




The
Company neither received nor paid any commissions in connection with the
issuances of securities described above. The Company believes that the issuance
of such securities was exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to the provisions of Section 4(2)
of the Securities Act.





Convertible Notes and
Warrants:





Since
inception, the Company has issued convertible notes together with warrants to
fund current operations and other transactions. The notes accrue interest at 6%
per annum and mature on various dates or upon the occurrence of certain events
relating to the capital structure of the Company.





The
following table summarizes the Company’s warrant activities for the period from
January 1, 2008 to September 30, 2008:





Number of
              Warrants
            
            Weighted Average
              Exercise PriceBalance
      as of December 31, 2007
            
            
            18,803,708
            
            
            0.28Warrants
      issued
            
            
            730,000
            
            
            0.24Warrants
      exercised
            
            
            (1,035,534
            )
            
            (0.30
            )Warrants
      expired
            
            
            (941,250
            )
            
            (0.29
            )Balance
      as of September 30, 2008
            
            
            17,556,924
            
            $
            0.28





These
warrants have expiration dates between October 11, 2008 and July 26,
2010.





In
addition, the Company has issued warrants in connection with certain consulting
agreements. The following table summarizes the Company’s warrant activities
related to consulting agreements from January 1, 2008 to September 30,
2008:





Number of
              Warrants
            
            Weighted Average
              Exercise PriceBalance
      as of December 31, 2007
            
            
            1,052,354
            
            $
            0.32Warrants
      issued
            
            
            -
            
            
            -Warrants
      exercised
            
            
            -
            
            
            -Warrants
      expired
            
            
            (350,000
            )
            
            (0.70
            )Balance
      as of September 30, 2008
            
            
            702,354
            
            $
            0.14





These
warrants have expiration dates between January 31, 2009 and September 10,
2009.





18 OF
39




NOTE 11 - SUMMARY OF LEGAL
PROCEEDINGS




From time
to time, the Company is involved in litigation with customers, vendors,
suppliers and others in the ordinary course of business, and a number of such
claims may exist at any given time. All such existing proceedings are not
expected to have a material adverse impact on the Company’s results of
operations or financial condition.





An
estimated liability of $268,870 and $1,213,225 for legal settlements was
recorded as of September 30, 2008 and December 31, 2007, respectively. Included
in the estimated liability for legal settlements as of September 30, 2008 is a
general accrual of $148,870 for claims threatened and not yet filed. Other than
as described below and in “Note 15 - Subsequent Events”, the Company is not
currently involved in any legal proceedings that may be deemed to be material to
our financial condition.




Collazo vs. Media and
Entertainment.com (Superior Court of CA, Los Angeles County - complaint filed March 22,
2004)





This is
an action brought by the Company seeking a constructive trust and injunctive
relief against Caesar Collazo, a former officer of the Company, who allegedly
stole proprietary property and solicited the Company’s clients. In his response
to the complaint, Mr. Collazo counter-sued for breach of employment agreement.
The parties reached a settlement on April 11, 2005, wherein, the Company agreed
to issue 900,000 shares of common stock to Mr. Collazo as of September 20, 2002
and to pay his attorney fees of $120,000. The shares of common stock were valued
as of the settlement date, and accordingly, 900,000 shares of common stock, as
well as, $120,000 of attorney fees, were charged as expenses in
2004.





On March
16, 2006, the Company issued 900,000 restricted shares of common stock to Mr.
Collazo in settlement of this matter; however, pursuant to a motion filed by Mr.
Collazo, the Court entered a judgment in July 2006 ordering the Company to
reissue the 900,000 shares of common stock to Mr. Collazo as of
September 20, 2002 without the restrictions.  The Company did not reissue
the stock to Mr. Collazo due to the existence of an attorney’s lien on Mr.
Collazo’s judgment in this matter and because the Company believed that Collazo
had not returned the initial shares of stock. On May 16, 2008, the Superior
Court of Fulton County, Georgia (Collazo v. WDMG, No. 2008-CV-147069)
domesticated the California judgment. On or about May 17, 2008, Collazo filed a
motion for contempt because the Company had not issued the unrestricted shares.
On June 13, 2008, the Fulton County Superior Court entered an Order requiring
the Company to pay Collazo $702,000 plus interest pursuant to the relief
requested in Collazo’s motion for contempt. On July 11, 2008, the Company filed
its notice of intent to appeal the June 13th Order to the Georgia Court of
Appeals. As of the date of this Report, no other significant action has been
taken in this matter.




Yellowbrix, Inc. vs. Media and
Entertainment.com (Superior Court of CA, Los Angeles County - complaint filed September 16,
2004)





This is a
collection suit for $19,800. The disputed amount was expensed in general and
administrative expense in 2004 and accrued within accounts payable of the
Company as of September 30, 2008.





On July
25, 2006, the Company learned that a judgment had been entered against it in
this matter on February 15, 2006. The judgment amount included the $19,800 in
controversy, plus $3,000 in attorney fees. As of the date of this report,
Yellowbrix has not sought to enforce the judgment.





Dell Marketing, LP vs. WinSonic
Holdings, Ltd. (District Court of Travis County, Texas - complaint filed December 13,
2004)





On or
about April 17, 2006, the Company was notified of a default judgment rendered
against it in a collection suit in Travis County, Texas in the amount of
$474,285 plus $90,000 in attorney fees. The entire amount of the judgment and
attorney’s fees have been expensed as a general and administrative expense and
accrued within accounts payable as of September 30, 2008.





On July
27, 2006, the Company received notice that the judgment had been domesticated in
the state of Georgia as of July 21, 2006. As of the date of this report, no
other significant action has been taken in this matter.





Netscaler Inc. vs. WinSonic Holdings,
Ltd. (Superior Court of CA, Los Angeles County - complaint filed May 16,
2005)





The
disputed amount of $75,000 in this collection lawsuit was expensed as a general
and administrative expense in 2004 and accrued within accounts payable at March
31, 2008. The parties reached a settlement in March of 2006, pursuant to which
the Company agreed to pay the sum of $75,000 in three (3) installment payments
of $25,000, commencing in June 2006, in exchange for the dismissal of the
action. On August 15, 2006, Netscaler filed a declaration to set aside the
dismissal and to enter judgment in the amount of $100,769 against the Company.
As of the date of this report, no further action has been taken in this
matter.




19 OF
39




Attorney Collection Services vs.
WinSonic Holdings, Ltd. (Superior Court of CA, Los Angeles County - complaint filed June 30,
2004)





The
disputed amount of $25,000 in this collection lawsuit was expensed as a general
and administrative expense in 2005 and accrued within accounts payable as of
March 31, 2008. On September 15, 2006, this matter was dismissed by the court;
however, the plaintiff has indicated that it will either file a motion to set
aside the dismissal or bring a new action. As of the date of this report, no
further action has been taken in this matter.





Eric Young vs. WinSonic Digital Media
Group, Ltd. (State
Court of Fulton County, Georgia - complaint filed January 11, 2007)





This was
an action for breach of contract brought by Eric Young, a former chief financial
officer and member of the Board of Directors of the Company. Mr. Young sought
damages totaling $354,784, which included $103,934 in unpaid wages, $50,850 in
unpaid consulting fees and an additional $200,000 in severance payments. The
Company filed its response to the complaint on February 12, 2007, in which the
Company asserted a counterclaim for breach of fiduciary duty and unjust
enrichment.





The
parties entered into a settlement and release agreement on November 5, 2007,
pursuant to which the Company issued to plaintiff a warrant to purchase up to
380,000 shares of restricted shares of the Company’s common stock with an
exercise price of $1.00 per share and an expiration date of December 9, 2010 and
to remove the restrictive legend for the previously issued 500,000 shares. In
addition, the Company is required to pay:




(a)
            on
      or before November 7, 2007, (i) $15,000 to Mr. Young and (ii) $1,000 to
      Mr. Young’s counsel, Beverly Adams;


(b)
            on
      or before November 27, 2007, (i) $15,000 to Mr. Young and (ii) $1,000 to
      Mr. Young’s counsel;


(c)
            on
      or before December 27, 2007, (i) $15,000 to Mr. Young and (ii) $1,000 to
      Mr. Young’s counsel;


(d)
            on
      or before January 27, 2008, (i) $25,000.to Mr. Young and (ii) $1,000
      to Mr. Young’s counsel; and


(e)
            on
      or before February 27, 2008, (i) $180,000 to Mr. Young and (ii) $1,000 to
      Mr. Young’s counsel.




As of the
date of this report, the Company has paid $30,000 to Mr. Young and $2,000 to his
counsel. The Company is currently in default on this settlement agreement and as
a result the Company believes this matter remains open.





McKenney’s, Inc. vs. WinSonic Digital
Media Group, Ltd. (State
Court of Fulton County, Georgia - complaint filed March 21, 2007)





This is
an action for breach of contract against the Company. The disputed amount of
$56,527 was capitalized as computer equipment in 2006 and accrued within
accounts payable of the Company as of March 31, 2008. The Company was served
with the summons and complaint on April 4, 2007 and filed its answer and
defenses on May 15, 2007. Plaintiff subsequently filed a motion to strike the
Company’s answer and moved for summary judgment. During the third quarter of
2007, the Company responded to the motions to strike the Company’s answer and
for summary judgment and has requested oral arguments on the summary judgment
motion. As of the date of this filing no other significant action has been taken
in this matter.





Phillip Ghee v. WinSonic Digital
Media Group, Ltd. and WinSonic Diversity, LLC (Superior Court of Ga., Fulton County – complaint filed October 19,
2007).





This is
an action for breach of contract by Phillip Ghee, a former employee of the
Company. Mr. Ghee seeks damages of $236,000, which includes amounts for alleged
salary, alleged deferred earnings, and an alleged severance package as set forth
in Mr. Ghee’s written employment agreement with the Company dated March 25,
2006. The complaint also seeks damages for the undetermined value of alleged
unused vacation time and vested stock options. The complaint further alleges
that on or about October 2, 2006, Mr. Ghee entered into new employment
agreements with defendants that split the responsibilities outlined in the March
2006 employment agreement between the two defendants. On December 3, 2007, the
Company filed its answer which disputed the amount allegedly owed to Mr. Ghee.
The Company responded to Mr. Ghee’s initial discovery requests on June 16, 2008.
On July 30, 2008, Mr. Ghee filed an Amended Complaint in which he added a claim
for fraud and now seeks punitive damages. On August 13, 2008, the Company filed
its Answer to the Amended Complaint which denied the fraud claim and disputed
the amount alleged owed to Mr. Ghee. As of the date of this filing, no other
significant action has been taken in this matter.





Context Ventures, Inc. v. WinSonic
Digital Media Group, Ltd. (State
Court of Fulton County, State of Georgia)





This is
an action for garnishment against the Company based on an alleged debt of
$240,000 owed by the Company’s CEO, Winston Johnson. The Company defaulted on
responding to the garnishment action, which opened the Company to liability for
payment of Mr. Johnson’s alleged debt. On October 3, 2007, the Company moved to
open the default. Context Ventures, Inc. opposed the opening of the default on
January 11, 2008. The Company files amended answers every 45 days to the
garnishment action to update the Court regarding the status of Mr. Johnson’s
employment compensation. As of the date of this filing, no other significant
action has been taken in this matter, but an amended agreement is in process for
mid October, 2008 for the reduced debt amount and payment terms.




20 OF
39




Cheryl Lee and Bruce Lee v. Winsonic
Digital Media Group, Ltd., et al. (Superior Court of Fulton County, Georgia, 2008-CV-147282 – Complaint filed
February 29, 2008)





This is
an action for breach of contract and constructive fraud against the Company
based on actions by the Company’s subsidiary, Defendant Tytess Design and
Development, Inc. Plaintiffs seek compensatory damages of $691,707, as well as
punitive damages and attorney’s fees. The dispute involves a contract between
Tytess and Plaintiffs regarding the construction of a home for Plaintiffs. The
Company did not answer Plaintiffs’ Complaint. As of the date of this filing, no
other significant action has been taken in this matter.




NOTE 12 - GOING
CONCERN





These
financial statements have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the
normal course of business. As of September 30, 2008, the Company has had
accumulated losses of $48,962,766 from operations since inception. The Company’s
ability to continue as a going concern is contingent upon the successful
completion of additional financing arrangements and its ability to achieve and
maintain profitable operations. Management plans to raise equity capital to
finance the operating and capital requirements of the Company. Amounts raised
will be used for further development of the Company’s products, to provide
financing for marketing and promotion, to secure additional property and
equipment, and for other working capital purposes. While the Company is
expending its best efforts to achieve the above plans, there is no assurance
that any such activity will generate funds that will be available for
operations. The Company’s financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





NOTE 13 - COMMITMENTS AND
CONTINGENCIES





Employment
Agreements





On
October 8, 2004, the Company entered into a binding offer letter with Winston
Johnson, as Chairman and CEO. Under the terms of employment, Mr. Johnson was to
receive a base salary of $290,000 per annum, with $7,000 per month deferred
until the next funding occurs or January 1, 2005, whichever occurred first. Mr.
Johnson was eligible for an annual incentive bonus based on performance. The
agreement was terminable at will with or without cause (as defined in the offer
letter). As of March 30, 2007, Mr. Johnson’s salary was reduced to zero until
the Company’s common stock began trading on the OTCBB. Mr. Johnson’s salary was
restored as of October 1, 2007.  The employment agreement of October 8,
2004 also provided for the grant of incentive or non-statutory stock options to
purchase 1,000,000 shares of common stock for $1.00 per share. These options are
fully vested.




On
November 5, 2005, the Company entered into a binding offer letter with Eric
Young, as Chief Operating Officer and Chief Financial Officer. Under the terms
of his employment, Mr. Young was to receive a base salary and certain stock
options, in each case, as set forth in the offer letter. As was disclosed on the
Company’s Form 8-K filed on August 24, 2006, Mr. Young resigned on August 1,
2006 to pursue other opportunities. Thereafter, Mr. Young filed suit against the
Company concerning the number of options that vested upon his resignation and
the expiration of the exercise period of said options. See “Note 9 – Summary of
Legal Proceedings”





Effective
June 6, 2006, Joseph Morris succeeded Eric Young as Chief Operating Officer
of the Company. Previously, Mr. Morris served as Chief Operating
Officer of AI, which was acquired on April 18, 2006.  Mr. Morris'
initial base salary was $150,000 per annum. As an employment incentive, Mr.
Morris was granted stock options to purchase 50,000 shares of the Company’s
Common Stock at an exercise price of $0.01, of which 1/3 vested immediately, 1/3
at the closing of the next round of funding, and the remaining 1/3 when the
Company’s common stock resumed trading on the OTCBB. Additionally, Mr. Morris
was granted stock options to purchase 100,000 of the Company's common stock at
an average price of $1.00 per share, of which 10% vested immediately and the
remaining 90% vested at the rate of 1/12 th per
month for twelve months. The fair value of the options granted totaled $53,329.
On March 12, 2007, Mr. Morris’ base salary was increased to $200,000 per annum
and he was granted additional stock options to purchase 200,000 shares of the
Company’s common stock at an exercise price of $0.01, of which 1/3 vested
immediately, 1/3 at the closing of the next round of funding, and the remaining
1/3 when the Company’s common stock resumed trading on the OTCBB. Additionally,
on March 12, 2007, Mr. Morris was granted additional stock options to purchase
400,000 shares of the Company's common stock at an average price of $1.00 per
share, of which 10% vested immediately and the remaining 90% will vest at the
rate of 1/12 th per
month for twelve months. The fair value of the additional options granted
totaled $232,441. Effective December 7, 2007, Joseph Morris resigned from the
Company as Chief Operating Officer.





The
Company has negotiated a separation agreement with Mr. Morris. The separation
agreement provided for the Company to pay Mr. Morris $3,000 upon execution (and
has been paid), $100,000 on December 31, 2008 and $150,000 on December 31, 2009.
In addition, the severance agreement provides Mr. Morris the opportunity to
exercise 250,000 of his $0.01 options and 462,500 of his $1.00 options that were
previously granted to him.




Effective
August 8, 2006, Jeffrey L. Burke was hired as Executive Vice President of the
Company. Mr. Burke's base salary was $270,000 per annum. As an employment
incentive, Mr. Burke was granted stock options to purchase 750,000 shares of the
Company’s common stock at an exercise price of $0.01, of which 1/3 vested
immediately, 1/3 at the closing of the next round of funding, and the remaining
1/3 when the Company’s common stock resumed trading on the OTCBB. Additionally,
Mr. Burke was granted options to purchase 500,000 of the Company's Common Stock
at an average price of $1.00 per share, of which 10% vested immediately and the
remaining 90% vested at the rate of 1/12 th per
month for twelve months and subject to the implementation of the Company’s 2008
Employee Option Plan. The fair value of the options granted totaled $481,492.
Effective December 13, 2007, Jeffrey Burke resigned from the Company as
Executive Vice President.




21 OF
39




The
Company is still in the process of negotiating the final separation agreement
with Mr. Burke.





Following
Mr. Morris’ resignation, effective December 16, 2007, the Company appointed
Bobby Reed to the position of Vice President of Operations. Mr. Reed’s base
salary was $180,000 per annum. As an employment incentive, Mr. Reed was granted
stock options to purchase 400,000 shares of the Company’s common stock at fair
value in the Company’s 2008 option plan when the plan is created and approved.
For accounting purposes, management has treated the options similar to the $1.00
options previously issued to employees. The options granted vested 10%
immediately and the remaining 90% vested at the rate of 1/12 th per
month for twelve months. The fair value of the options granted totaled $184,400.
Effective April 21, 2008, Mr. Reed’s position was eliminated.





The
Company has negotiated a separation agreement with Mr. Reed. The separation
agreement provided for the Company to pay Mr. Reed $13,457 in the form of stock
on May 1, 2008 (certificate was issued), $13,457 in equal monthly installments
beginning January 2009, $12,753 on June 30, 2008, $12,423 on July 31, 2008 and
$12,423 on August 31, 2008. In addition the severance agreement provides Mr.
Reed the opportunity to exercise $400,000 of his options that were previously
granted to him. As of September 30, 2008, the Company has not made an
installment payment.





During
the year ended December 31, 2007, the Company suspended the accrual of certain
salary deferrals, which were provided for in employment agreements, from March
30, 2007 until the Company began trading on the OTCBB. In addition, all employee
vacation grants were reduced from four weeks to two weeks. In accordance with
this policy, deferred salary amounts were not accrued from March 30, 2007 to
September 1, 2007 and were considered to be forfeited. This action taken by the
Company resulted in a savings of approximately $487,000.





On
January 4, 2008, the Company issued new employment agreements to all current
employees. In the employment agreements, the Company accelerated the vesting on
all remaining $1.00 options for these employees. The Company also canceled
options totaling 400,000 shares equal to the remaining one third of the $0.01
options held by current employees, related to obtaining senior funding that has
not occurred. In exchange for the canceled options, the Company committed to
issue 400,000 shares of fully vested replacement options at fair value in the
Company’s 2008 option plan when the plan is created and approved. As a result of
the acceleration of the $1.00 options and the cancellation of certain unvested
$0.01 options and commitment to re-issue an equal number of market value
options, the Company recorded additional stock based compensation totaling
$193,000. In addition, during the year ended December 31, 2007, the Company
achieved a milestone by trading its stock on the OTCBB. This milestone triggered
the vesting of an additional one third of all outstanding $0.01 options and the
Company recorded additional stock based compensation expense totaling $375,000
related to this vesting the third quarter of 2007.





During
the year ended December 31, 2007, and as a result of the issuance of the new
employment agreements, the Company terminated 17 employees, adjusted the
salaries of 12 employees, accepted the resignation of six employees whose
positions were not replaced and cancelled the contract of a consultant. These
actions are expected to result in additional savings of approximately $3,430,000
per year. In connection with the above actions, the Company recorded severance
costs of $1,714,000 during the fourth quarter of 2007. On May 1, 2008, the
Company issued 1,537,962 shares of restricted stock to ten current and
ex-employees to further reduce prior liabilities for deferred and unpaid
salaries.





During
May 2008, three accounting personnel resigned and in June 2008, the Company
entered into three Accounting contract agreements for services of a Chief
Accounting Officer, Senior Accounting Manager, and for Payroll and Sales Tax
accounting support.




Payroll and Sales Tax
Liabilities





Automated
Interiors has not remitted its sales taxes for 2006, 2007 and 2008. In addition,
the Company and its subsidiaries have not remitted payroll taxes withheld from
their employees’ checks and the companies’ matching portion to the Internal
Revenue Service and various state taxing authorities. The Company has accrued
interest and penalties up to and including September 30, 2008. Sales tax payable
as of September 30, 2008 total $145,883 (including penalties and interest) is
included in the accompanying balance sheet in the line item “Accounts payable
and accrued expenses”. Total
payroll taxes withheld and Company matching amounts as of September 30, 2008
totaled $2,171,047 (including penalties and interest of $360,000). This amount
is included in the accompanying balance sheet in the line item “Accrued payroll
and related taxes”.





These
liabilities, until paid, will continue to increase by additional penalties and
interest accruals. The Company is currently in negotiations with the taxing
authorities to establish payment plans. Effective July 1, 2008, all payroll
taxes are being appropriately withheld per pay period and the tax deposits are
being held in a designated payroll account for timely remittance.




22 OF
39




Lease Agreements





Centennial Tower Office Lease
Agreement





On
October 12, 2005, the Company entered into a 132 month commercial lease
agreement effective as of November 1, 2005 with Atlanta Centennial, LLC for
approximately 9,415 square feet of rentable space. The space is located in Suite
2600 on the 26 th floor of
the Centennial Tower, located at 101 Marietta Street in Atlanta, Georgia and is
used as the Company’s corporate headquarters to house its executives and
general, clerical and administrative personnel.





Concurrently
with the execution of the Lease, the Company issued a Fixed Price Secured
Convertible Note in the principal sum of $250,000 representing an increased
security deposit requirement bearing simple interest at 9% per annum, payable
monthly in arrears in cash or registered stock at the Company’s option, from
December 1, 2005 through the earlier of (a) the maturity date, i.e., June 1,
2006, (b) the prepayment date, i.e., the date on which the outstanding principal
amount of the Note is repaid in full prior to the maturity date, or (c) the date
on which the outstanding principal amount of the Note is automatically
converted.





On
October 12, 2005, the Company paid $16,476 as deposit on the office space. On
December 14, 2005, the note was converted into 925,927 shares of the Company’s
common stock valued at $250,000 or $0.27 per share.





The lease
agreement was amended on February 23, 2006, to include expanded rental space of
9,415 square feet, bringing the total rental square feet to 18,800.





55 Marietta Street Office Lease
Agreements





On
February 8, 2007, the Company entered into a Telecom/Office Lease Agreement and
First Amendment to Lease agreement with Bank Building Limited Partnership for
approximately 12,080 square feet of rentable space located at 55 Marietta Street
in Atlanta, Georgia.





The term
of the lease commenced on May 1, 2007 and expires on April 30, 2017. An
improvement allowance of $123,000 has been provided to the Company, of which the
unused portion after May 1, 2008 may be applied to base monthly rental at the
Company’s sole option.





Under
this lease, the Company was required to remit to the landlord, upon execution of
the lease, a security deposit in the amount of $17,566 and first month’s rental
payment in the amount of $8,778. Thereafter, the Company is obligated to make
monthly rental payments in the amount of $8,778 from May 1, 2007 to February 28,
2008; $17,566 from March 1, 2008 to April 30, 2012; and $19,127 from May 1, 2012
through termination. In addition to the monthly rent, the Company is responsible
for its share of the operating expenses, utilities, taxes and other costs and
expenses associated with the leased premises.




The
Company will use this space to operate WDCSN’s network operations, data center,
broadcast controls, switch site and application development lab. In addition,
the space shall be utilized by the Company to house its network services billing
and provisioning departments and for training its current and future
staff.





Additionally,
on June 22, 2006, the Company entered into a two-year lease agreement with JT
Communications, LLC for the exclusive right to use a cabinet and the
non-exclusive right to use the office space located on JT Communications’
premises on the 5 th floor of
55 Marietta Street in Atlanta, Georgia. The term of the lease commenced on July
1, 2006 and expires on June 30, 2008; however, it is subject to automatic
renewals for a one-year periods on the same terms and conditions, unless the
Company notifies JT Communications that it does not want to renew. The Company
abandoned the office space in May of 2007 and will be responsible for the lease
through June 30, 2008. As of September 30, 2008, $16,689 is due and
payable.





ProLogis-Macquarie U.S. LLC Office
Lease Agreement





On May
23, 2007, AI entered into a Lease Agreement with ProLogis-Macquarie U.S. LLC for
approximately 11,006 square feet of rentable space located at 5290 Westgate
Drive Suite B, Atlanta, Georgia 30336. The lease commenced on June 1, 2007 and
continues through May 31, 2012. AI planned to use the space to house its
Logistics Management Center and for training purposes. Under the lease, AI is
obligated to pay base monthly rents of $2,430 per month in the first year,
$2,503 per month in the second year, $2,579 per month in the third year, $2,656
per month in the fourth year and $2,736 per month in the fifth year. During the
third quarter of 2007, AI abandoned the space and will be responsible for the
lease until the space is leased to another party. During the third quarter of
2008, a restructuring charge of $163,504 was recorded related to the outstanding
obligation.




Landquest IV, LLC Office Lease
Agreement





In June
2007, the Company entered into a Lease Agreement with Landquest IV, LLC for
approximately 2,490 square feet of rentable space located at 3560 Camp Creek
Parkway, Suite 130, East Point, Georgia 30344. The lease commences in October
2007 and continues through September of 2012. The Company has abandoned the
space, which it originally intended to use for retail sale of electronic
equipment. Under the lease, the Company is obligated to pay base monthly rents
of $5,810 per month.  During
the third quarter of 2008, a restructuring charge of $361,019 was recorded
related to the outstanding obligation.




23 OF
39




As of
September 30, 2008, approximate future commitments under the Company’s leases
are as follows:





Year
            
            Amount2008
            
            $
            228,2632009
            
            
            778,5492010
            
            
            791,3772011
            
            
            804,5952012
            
            
            794,8602013
      through 2017
            
            
            2,789,053Total
            
            $
            6,186,697





Rent
expense totaled $527,240 and $470,169 for the nine months ended September 30,
2008 and 2007, respectively.





NOTE 14 – SEGMENT
INFORMATION





In
accordance with the provisions of SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information”, the Company has elected to report in
five reportable operating segments, including: (i) Digital Media Group (ii)
Digital Distribution Group, (iii) Integrated Services Group, (iv) WinSonic
Diversity Group, and (v) Corporate Group.





As
further described herein, the Company now combines business and financial
activity of its various subsidiary companies and operating divisions within
business segments. The business activity associated with the development,
marketing and sale of digital media & entertainment products and services of
WinSonic Digital Media Group, Ltd., and the Store  are
combined in the Digital Media Group business segment. The business activity of
WinSonic Digital Cable Systems Network, Ltd. shall comprise the Digital
Distribution Group business segment. The business activity of Tytess Design
& Development, LLC and  Automated Interiors, LLC are combined in the Integrated Services Group business
segment. The business activity of WinSonic Diversity, LLC is represented by the
WinSonic Diversity Group business segment. The business activities associated
with corporate management, administration and finance of WinSonic Digital Media
Group, Ltd are included in the Corporate Group business segment.




The
following tables summarize segment information for the periods ended September
30, 2008 and 2007:




Three Months Ended September 30, 2008Digital
            
            Digital
            
            Integrated
            
            WinSonicMedia
            
            Distribution
            
            Services
            
            Diversity
            
            CorporateGroup
            
            Group
            
            Group
            
            Group
            
            Group
            
            TotalRevenue
            
            $
            -
            
            $
            -
            
            $
            91,861
            
            $
            -
            
            $
            -
            
            $
            91,861Gross
      profit
            
            
            -
            
            
            (215,182
            )
            
            20,030
            
            
            -
            
            
            1,649
            
            
            (193,503
            )Operating
      expenses
            
            
            47,892
            
            
            4,703
            
            
            130,598
            
            
            62,122
            
            
            939,489
            
            
            1,184,804Loss
      from operations
            
            
            (47,892
            )
            
            (219,885
            )
            
            (110,568
            )
            
            (62,122
            )
            
            (937,840
            )
            
            (1,378,307
            )Net
      loss
            
            
            (47,907
            )
            
            (220,014
            )
            
            (644,307
            )
            
            (69,022
            )
            
            (1,509,695
            )
            
            (2,490,945
            )Total
      assets
            
            
            (627,593
            )
            
            (2,028,534
            )
            
            (133,234
            )
            
            (173,890
            )
            
            5,434,410
            
            
            2,471,159




Three Months Ended September 30, 2007Digital
            
            Digital
            
            Integrated
            
            WinSonicMedia
            
            Distribution
            
            Services
            
            Diversity
            
            CorporateGroup
            
            Group
            
            Group
            
            Group
            
            Group
            
            TotalRevenue
            
            $
            7,027
            
            $
            -
            
            $
            219,654
            
            $
            -
            
            $
            6,500
            
            $
            233,181Gross
      profit
            
            
            3,700
            
            
            (179,306
            )
            
            (601,800
            )
            
            -
            
            
            5,494
            
            
            (771,912
            )Operating
      expenses
            
            
            101,929
            
            
            49,966
            
            
            462,137
            
            
            -
            
            
            1,268,862
            
            
            1,882,894Loss from
      operations
            
            
            (98,229
            )
            
            (229,272
            )
            
            (1,063,937
            )
            
            -
            
            
            (1,263,368
            )
            
            (2,654,806
            )Net
      income (loss)
            
            
            (98,229
            )
            
            (229,898
            )
            
            (1,082,625
            )
            
            -
            
            
            (5,281,663
            )
            
            (6,692,415
            )Total
      assets
            
            
            (101,046
            )
            
            (1,063,352
            )
            
            1,262,592
            
            
            -
            
            
            2,469,651
            
            
            2,567,845




24 OF
39




Nine months ended September 30, 2008Digital
            
            Digital
            
            Integrated
            
            WinSonicMedia
            
            Distribution
            
            Services
            
            Diversity
            
            CorporateGroup
            
            Group
            
            Group
            
            Group
            
            Group
            
            TotalRevenue
            
            $
            2,567
            
            $
            -
            
            $
            508,187
            
            $
            -
            
            $
            -
            
            $
            510,754Gross
      profit
            
            
            1,781
            
            
            (412,309
            )
            
            43,336
            
            
            -
            
            
            -
            
            
            (367,192
            )Operating
      expenses
            
            
            245,235
            
            
            11,366
            
            
            416,546
            
            
            583,889
            
            
            2,874,391
            
            
            4,131,427Loss
      from operations
            
            
            (243,454
            )
            
            (423,675
            )
            
            (373,210
            )
            
            (583,889
            )
            
            (2,874,391
            )
            
            (4,498,619
            )Net
      loss
            
            
            (243,471
            )
            
            (423,803
            )
            
            (925,536
            )
            
            (602,346
            )
            
            (5,939,059
            )
            
            (8,134,215
            )Total
      assets
            
            
            (627,593
            )
            
            (2,028,534
            )
            
            (133,234
            )
            
            (173,890
            )
            
            5,434,410
            
            
            2,471,159




Nine months ended September 30, 2007Digital
              
              Digital
              
              Integrated
              
              WinSonicMedia
              
              Distribution
              
              Services
              
              Diversity
              
              CorporateGroup
              
              Group
              
              Group
              
              Group
              
              Group
              
              TotalRevenue
              
              $
              14,530
              
              $
              4,000
              
              $
              1,343,835
              
              $
              -
              
              $
              6,500
              
              $
              1,368,865Gross
      profit
              
              
              6,770
              
              
              (1,020,402
              )
              
              (408,641
              )
              
              -
              
              
              5,494
              
              
              (1,416,779
              )Operating
      expenses
              
              
              300,503
              
              
              103,257
              
              
              1,347,026
              
              
              -
              
              
              3,909,759
              
              
              5,660,545Loss
      from operations
              
              
              (293,733
              )
              
              (1,123,659
              )
              
              (1,755,667
              )
              
              -
              
              
              (3,904,265
              )
              
              (7,077,324
              )Net
      income (loss)
              
              
              (293,732
              )
              
              (1,124,286
              )
              
              (1,778,615
              )
              
              -
              
              
              (10,225,531
              )
              
              (13,422,164
              )Total
      assets
              
              
              (101,046
              )
              
              (1,063,352
              )
              
              1,262,592
              
              
              -
              
              
              2,469,651
              
              
              2,567,845





NOTE 15 – RESTRUCTURING AND IMPAIRMENT
CHARGES




The
Company abandoned two facilities (see NOTE 13 - COMMITMENTS AND CONTINGENCIES,
Lease Agreements) as part of its cost reduction program implemented in 2008.
This action resulted in a restructuring charge of approximately $524,523 in the
third quarter of 2008 related to lease commitments. The Company has not made any
payments in 2008 and does not expect to make any payments until the third
quarter of 2009.




AmountBalance
      as of December 31, 2007
            
            $
            -Q3
      2008 restructuring charge
            
            
            524,523Q3
      2008 payments
            
            
            -Balance
      as of September 30, 2008 (unaudited)
            
            $
            524,523




NOTE 16 - SUBSEQUENT
EVENTS





Defaults on Convertible
Debentures





As of
November 12, 2008, the Company had contacted most of the Investor Convertible
noteholders, and 19 of the Company’s convertible debentures had matured without
conversion, extension, or repayment and were in default totaling
$914,517.





Defaults on Loan
Payable





As of
November 12, 2008, the Company had contacted most of the Loan noteholders, the
majority of which executed note admendments extending the maturity dates, and
only 5 of the Company’s loan payable notes were in default totaling
$127,124.





Defaults on Note
Payable





On
October 21, 2008 the Company received a notice from the State Court of Fulton
County for Lasier et al v. WinSonic Digital Media Group, Ltd. Civil File Action
No. 08VF004614F, for a court date of November 18, 2008. As of July 1, 2008, the
Company became in default on the First Philadelphia Group (“Group’) loan
agreement with a group of consultants and former employees for payment of
services received by the Company during the first quarter of 2008. The amounts
in default are for the payments (and interest) due for the principal sums of
$20,134 on June 30, 2008, $47,003 on July 31, 2008 and $9,401 on August 15, 2008
and with estimated additional amount being due for $100,750 per the default
clause in the loan agreement. The Company has been in discussion with the
“Group” stating its intentions to make final payments upon funding.




Stock Activity





Since
September 30, 2008, the Company has not issued or committed to issue any shares
of its restricted common stock.




25 OF
39




Material
Agreements





During
October 2008, the Company has entered into numerous Memorandum of Understanding
Agreements (“MOU”) in connection with securing revenue contracts (hosting
digital ready service), developing company business plans, and other business
development activities.





On
October 14, 2008, the Company entered into a confidential Term Sheet with
Kaival, LLC for cash investment funds of $1,500,000 and a revolving Line of
Credit for $5,000,000. A total of 20,000,000 shares of Common and Preferred
Stock will be issued in addition to the repayment terms of the Line of Credit
with an annum interest rate of prime plus one percent, two designated board
seats, and a business strategy person to be involved in the business decisions
involving finance and marketing.





On
October 15, 2008, the WinSonic Digital Cable Networks, Ltd. entered into a
Mutual Confidentiality Agreement (MCA) with Net-Structure Asset Management
Solutions, LLC to explore one or more business relationships or transactions
together.





On
October 15, 2008, the Company entered into a Consulting Agreement with Jumpstart
Marketing, Inc.; whereby, Jumpstart will act as a consultant to WinSonic
assisting with the procurement of digital catalog content databases enabling
WinSonic to market downloadable or streaming music, software, video games,
movies, television shows, etc. to the consumer and commercial
markets.





On
October 15, 2008, there was an amended agreement for Context
Ventures, Inc. v. WinSonic Digital Media Group, Ltd . (State
Court of Fulton County, State of Georgia). This is
an action for garnishment against the Company based on an alleged debt of
$240,000 owed by the Company’s CEO, Winston Johnson. The Company defaulted on
responding to the garnishment action, which opened the Company to liability for
payment of Mr. Johnson’s alleged debt. On October 3, 2007, the Company moved to
open the default. Context Ventures, Inc. opposed the opening of the default on
January 11, 2008. The Company files amended answers every 45 days to the
garnishment action to update the Court regarding the status of Mr. Johnson’s
employment compensation. Within ten days of the execution of the revised
agreement, dated October 15, 2008, Mr. Johnson and Mr. Hoover will file a
consent order in the Georgia Action for the settlement agreement on the shares
of stock. This agreement states the reduced debt amount for a total of $240,000
and payment terms for $80,000 each due on October 30, 2008, November 30, 2008,
and December 30, 2008.





On
October 17, 2008, the Company entered into a Convertible Secured Debenture
Purchase Agreement (replaced the initial non-binding Term Sheet dated September
15, 2008) for a minimum of $250,000 investment funding. This agreement is for
providing bridge financing dedicated to the launch of specific revenue
generating projects. Terms of the loan facility allow the investment group to
appoint one director to the board of directors. These investors have commenced
assisting WinSonic in recruiting and appointing key technical positions and
management. In addition, the Company has committed to reserving 2,083,333 shares
of common stock for the issuance upon conversion of the Convertible Debenture
and 2,083,333 shares of common stock for issuance upon exercise of the
Warrants.





On
November 3, 2008, the Company entered into a Consulting Agreement with Viard
Consulting Services to assist in its compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. Viard Consulting Services is a global consulting and
internal audit firm composed of experts specializing in compliance, risk and
advisory services. The services to be provided under this Agreement include, but
are not limited to the following:


1)
            Identify
      the various business cycles of the Company’s various business cycles and
      conduct a risk assessment on each
cycle.


2)
            Conduct
      a full review of the management governance
  process.


3)
            Assemble
      a project team to conduct an evaluation of the
  project


4)
            Define
      significant processes, materiality and
fraud.


5)
            Document
      and evaluate internal control at the entity-wide
  level.


6)
            Help
      management develop policies and
procedures


7)
            Document
      and evaluate procedures and processes at transaction
  level


8)
            Evaluate
      overall the effectiveness of internal
controls.


9)
            Develop
      independent testing procedures.


10)
            Execute
      testing procedures.


11)
            Identify
      deficiencies.


12)
            Establish
      a remediation plan and coordinate implementation
  thereof.


13)
            Conduct
      re-testing as required.


14)
            Summarize
      findings and report to the Board of Directors and management as
      required.


15)
            Assist
      management with questions raised by the external
  auditors





On
November 12, 2008, IT/IS Telecom Solutions terminated its Agreement with the
Company. As of the date of termination, the Company had never determined any
Statement of Work (SOW) plans or authorized IT/IS Telecom Solutions to work on
any projects.


Previously,
On August 6, 2008, the Company entered into a Consulting Agreement with IT/IS
Telecom Solutions. Under the Agreement, the IT/IS team was to provide: (1)
additional perspectives and insight into the overall goals and objectives
driving the WDMG business plan and how the company might deal with its various
corporate objectives, and (2) Subject Matter Experts (SMEs) to assist in the
overall development effort.




26 OF
39




Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations





Forward-Looking
Statements





This
report contains forward-looking statements about our business, financial
condition and prospects that reflect management’s assumptions and beliefs based
on information currently available. We can give no assurance that the
expectations indicated by such forward-looking statements will be realized. If
any of our management’s assumptions should prove incorrect, or if any of the
risks and uncertainties underlying such expectations should materialize, our
actual results may differ materially from those indicated by the forward-looking
statements.




The key
factors that are not within our control and that may have a direct bearing on
operating results include, but are not limited to, acceptance of our services,
our ability to attract customers, our ability to raise capital, the retention of
key employees and changes in the regulation of our industry.




There may
be other risks and circumstances that management may be unable to predict. When
used in this Interim Report, words such as, “believe,” “expect,” “intend,”
“plan,” “anticipate,” “foresee,” “likely,” “will,” “goal,” “target,” “estimate”
and similar expressions are intended to identify forward-looking statements, as
defined in Section 21E of the Securities Exchange Act of 1934, although there
may be certain forward-looking statements not accompanied by such
expressions.





Segment Reporting
Disclosures





In
accordance with the provisions of SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information”, the Company has elected to report in
five reportable operating segments, including: (i) Digital Media Group (ii)
Digital Distribution Group, (iii) Integrated Services Group, (iv) WinSonic
Diversity Group, and (v) Corporate Group.




As
further described herein, the Company now combines business and financial
activity of its various subsidiary companies and operating divisions within
business segments. The business activity associated with the development,
marketing and sale of digital media & entertainment products and services of
WinSonic Digital Media Group, Ltd., and the Digital Store are combined in the
Digital Media Group business segment. The business activity of WinSonic Digital
Cable Systems Network, Ltd. shall comprise the Digital Distribution Group
business segment. The business activity of Automated Interiors, LLC and Tytess
Design & Development, LLC are combined in the Integrated Services Group
business segment. The business activity of WinSonic Diversity, LLC is
represented by the WinSonic Diversity Group business segment. The business
activities associated with corporate management, administration and finance of
WinSonic Digital Media Group, Ltd. are included in the Corporate Group business
segment.





The
diagram below depicts the Company’s segment structure.





Business Segment Group
            
            Business UnitDigital
      Media Group
            
            ·WinSonic Digital Media Group, Ltd.
              ·WinSonic Digital Store, LLCDigital
      Distribution Group
            
            ·WinSonic Digital Cable Systems Network, Ltd.Integrated
      Services Group
            
            ·Automated Interiors, LLC
              ·Tytess Design & Development, LLCWinSonic
      Diversity Group
            
            ·WinSonic Diversity, LLCCorporate
      Group
            
            ·WinSonic Digital Media Group, Ltd.
              ·Intercompany Eliminations





As a
“development stage company” the Company has not commenced material commercial
operations. As of September 30, 2008, the Company has recorded $2,853,055 of
revenue since inception. During the three and nine month periods ended September
30, 2008, the consolidated operations of the Company yielded revenue of $91,861
and $510,754, respectively.





General





The 2007
fiscal year was a year of transition for us as we integrated the various
companies we acquired and/or merged with during prior periods, continued the
development of our Digital Media Group product offerings, restructured certain
of our senior management team and raised additional working capital to continue
to fund our operations for the period.




27 OF
39




Based on
the actions taken in 2008, we believe we are now positioned in 2009 to
capitalize on our relationships in the entertainment and communication
industries to own and control the digital rights and distribution of as much
music and video content as possible. In addition, we plan to leverage our
preferential communication licenses, interconnection, co-location, and wholesale
pricing agreements with global service providers to reliably and cost
effectively distribute its digitally formatted voice, video and data products
and services. We also plan to fully protect our developing intellectual property
and Internet– based browser applications and once ready for market, allow us to
capitalize on the rapidly expanding social networking, virtual reality and
e-commerce markets.




Consolidated Results of
Operations





The
following table includes the consolidated information for the operations of the
Company for the three and nine month periods ended September 30, 2008 and
2007:


Three Months Ended September 30,
              
              Nine months ended September 30,2008
              
              2007
              
              2008
              
              2007(Unaudited)
              
              (Unaudited)
              
              (Unaudited)
              
              (Unaudited)Revenue
              
              $
              91,861
              
              $
              233,181
              
              $
              510,754
              
              $
              1,368,865Gross
      profit
              
              
              (193,503
              )
              
              (771,912
              )
              
              (367,192
              )
              
              (1,416,779
              )Expenses
              
              
              1,184,804
              
              
              1,882,894
              
              
              4,131,427
              
              
              5,660,545Operating
      loss
              
              
              (1,378,307
              )
              
              (2,654,806
              )
              
              (4,498,619
              )
              
              (7,077,324
              )Other
      income/(expense), net
              
              
              (1,112,638
              )
              
              (4,037,609
              )
              
              (3,635,596
              )
              
              (6,344,840
              )Net
      loss
              
              
              (2,490,945
              )
              
              (6,692,415
              )
              
              (8,134,215
              )
              
              (13,422,164
              )Loss
      per basic and diluted common share
              
              $
              (0.03
              )
              $
              (0.12
              )
              $
              (0.10
              )
              $
              (0.26
              )




Consolidated
results of operations for the three months ended September 30, 2008 generated
$91,861 in revenues, representing a 61% decrease from the reported $233,181 in
revenues for the same period in 2007. All of the 2008 revenue was derived from
our Integrated Services Group activities consisting of Automated Interiors and
Tytess which was comparable to the same period in 2007. The decrease in revenues
for the three months ended September 30, 2008 as compared to the same period in
2007 is related to suspending all work on construction projects for Tytess and a
decrease in revenues for Automated Interiors. For the three months ended
September 30, 2007, Tytess generated $64,382 in revenue and none for the same
period in 2008. Automated Interiors revenues declined from $155,272 in 2007 to
$91,861 in 2008, as AI still faces the cash flow and staffing challenges that
have prevented it from being able to complete jobs to allow for greater revenue
recognition in 2008. Digital Store revenues were $7,027 in 2007 and Corporate
Group had revenue of $6,500 in 2007.





The
aggregate net loss for the nine months ended September 30, 2008 was $8,134,215
compared to a loss of $13,422,164 for the same period in 2007. Of this 2008
amount, $883,804, or 11% of the total, was derived from our Integrated Services
Group, which included a restructuring charge of $524,523 for two leased
facilities. The balance was generated through our (1) Digital Media Group which
generated a loss of $424,471 of the total (2) our Digital Distribution Network
Group, which generated a loss of $423,803, of the total, (3) our WinSonic
Diversity Group, which generated a loss of $602,346 and (4) our Corporate Group
which generated a loss of $5,828,700.





Operating
Expenses





As
further detailed below, $4,131,427 in the operating expenses for the nine months
ended September 30, 2008, includes $1,448,853 in non-cash accruals and one-time
items (bad debt expense, stock-based compensation, consulting and depreciation).
With the termination of certain personnel during the fourth quarter of 2007 and
first quarter of 2008, adjustment of salaries on a going-forward basis and the
elimination of certain non-essential expenses, the current plan for monthly
average operating expense is estimated to be $240,000, prior to legal expenses
and audit retainers, which would be a decrease from the 2007 monthly average of
$915,000. Operating expenses decreased from second quarter 2008 by 26% or
$422,547 to $1,184,804 for the three months ended September 30, 2008, and
compared to $1,882,894 for the same period in the prior year, representing a
decrease of 37%. The decrease was comprised of a decrease in payroll expense,
partially offset by higher consulting and contract services, depreciation and
amortization expense, as further discussed below.




28 OF
39




A
breakdown of consolidated operating expenses for the three and nine month
periods ended September 30, 2008 and 2007 is set forth below.


Three Months Ended September 30,
              
              Nine months ended September 30,2008
              
              2007
              
              2008
              
              2007(Unaudited)
              
              (Unaudited)
              
              (Unaudited)
              
              (Unaudited)Operating
      ExpensesSelling,
      general and administrative
              
              $
              709,175
              
              $
              770,877
              
              $
              2,139,183
              
              $
              1,060,264Research
      and development
              
              
              35,209
              
              
              27,975
              
              
              112,383
              
              
              47,381Payroll
      expense - SG&A
              
              
              424,995
              
              
              1,055,674
              
              
              1,754,005
              
              
              4,384,961Payroll
      expense - R&D
              
              
              -
              
              
              38,808
              
              
              78,046
              
              
              154,218Depreciation
      and amortization expense
              
              
              15,425
              
              
              (10,440
              )
              
              47,810
              
              
              13,721Total
      Operating Expenses
              
              $
              1,184,804
              
              $
              1,882,894
              
              $
              4,131,427
              
              $
              5,660,545





Selling, general and administrative
expense





SG&A
expense increased by $1,078,919 for the nine months ended September 30, 2008
compared to the same period in 2007, primarily higher consulting and contract
service fees, including non-cash compensation costs, and general office
expenses.




Included
in SG&A expense for the nine months ended September 30, 2008 is bad debt
expense of $550,239. Bad debt expense is a non-cash expense item, related to the
recognition of uncollectible accounts receivable for Automated Interiors and a
$450,000 write-off of a receivable from Colonel McCrary Trucking,
LLC.





Research and development
expense





R&D
expenses for the nine months ended September 30, 2008 were related to the
Digital Media Group activities, including consulting costs, in preparation of
the planned commercial launch of our social networking web
environment.





Payroll expense – SG&A and
R&D





Payroll
expense decreased $2,707,128 during the nine months ended September 30, 2008
compared to the same period in 2007. The decrease is related to a decrease in
stock based compensation and an overall decrease in employees due to initiatives
begun in the last half of 2007 and up through second quarter 2008.





Monthly
payroll expense averaged $328,000 for the year-ended December 31, 2007 and for
the last two quarters of 2007 the average was approximately $264,000 per month.
The average was lower towards the end of the year due to the elimination of
certain personnel and the elimination of the deferred payroll accrual. Payroll
and payroll related expenses are $1,832,051 for the first three quarters of 2008
(trending toward a monthly average of $153,000), due to the personnel changes
and the adjustment of salaries that was implemented on January 4,
2008.





SFAS
123(R) requires the Company to recognize expense for the fair value of the
options granted over the vesting period as additional payroll expense. Pursuant
to SFAS 123(R), the Company recognizes the expense of employee incentive options
that vest during the reporting period.  Stock based compensation, a
non-cash expense, incurred during the nine months ended September 30, 2008 was
$487,704 compared with $1,626,001 for the same period in the prior year. On
January 4, 2008, the Company issued new offer letters to all current employees.
Pursuant to the offer letters, the Company accelerated the vesting on all
remaining stock options with an exercise price of $1.00 for these employees. The
Company also canceled stock options exercisable into up to 400,000 shares of
common stock with an exercise price of $0.01 because the Company had not
obtained the senior funding necessary for such stock options to become
exercisable. In exchange for the canceled stock options, the Company committed
to issue 400,000 shares of fully vested stock options pursuant to the Company’s
2008 option plan when the plan is established and approved. All options granted
prior to that date were fully vested and expensed as of December 31, 2007. The
expense for options that have vested during the nine months ended September 30,
2008 relate only to the options that have been granted subsequent to December
31, 2007.





Depreciation and
amortization





Depreciation
and amortization expense for the three months ended September 30, 2008 totaled
$15,425 compared to $11,000 (pre-adjustment) for the same period in 2007 and is
a non-cash expense related to historical capital asset purchases. In the third
quarter of 2007 there was a $(21,440) adjustment to depreciation to remove
personal vehicles from AI’s records . Depreciation associated with WDCSN has been reclassified and is in the Cost of
Operations of $57,886 for the nine months ending September 2008.





Other
Income/(Expense)





Other
income/(expense) totaled $(1,112,638) for the three months ended September 30,
2008 compared to $(4,037,609) during the same period in 2007. Other
income/(expense) was comprised of primarily non-cash items. The consolidated
breakdown of other income/(expense) for the three and nine months ended
September 30, 2008 and 2007 is provided for below.




29 OF
39


Three Months Ended September 30,
              
              Nine months ended September 30,2008
              
              2007
              
              2008
              
              2007(Unaudited)
              
              (Unaudited)
              
              (Unaudited)
              
              (Unaudited)Other
      income/(expense):Interest
      expense
              
              $
              (486,102
              )
              $
              (3,241,239
              )
              $
              (3,056,026
              )
              $
              (5,647,111
              )Interest
      expense - related party
              
              
              (4,769
              )
              
              (41,824
              )
              
              (12,125
              )
              
              (116,683
              )Legal
      settlement cost
              
              
              (100,750
              )
              
              (1,100,000
              )
              
              (100,750
              )
              
              (1,160,000
              )Unrealized
      gain on adjustment of derivative and warrant liability to fair value of
      underlying securities
              
              
              3,506
              
              
              345,454
              
              
              57,831
              
              
              579,337Other
      Expense
              
              
              (524,523
              )
              
              -
              
              
              (524,526
              )
              
              (383
              )Total
      other income/(expense)
              
              $
              (1,112,638
              )
              $
              (4,037,609
              )
              $
              (3,635,596
              )
              $
              (6,344,840
              )


Interest
expense and related-party interest expense totaled $490,871 during the three
months ended September 30, 2008 compared to $3,283,063 during the same period in
2007 and is comprised of non-cash items. The interest expense relates to the
required accounting treatment for discounted convertible debt with detachable
warrants and shares or additional warrants issued in connection with financing
transactions. The increase is related to higher finance costs related to shares
issued in financing transactions offset by lower accretion of the discount on
convertible debt with detachable warrants.





Under
GAAP, the Company is required to record the warrants and the embedded derivative
of the related convertible debentures as liabilities. Changes in the value of
these liabilities are reflected on the Company’s income statement as
“ Unrealized gain (loss) on adjustment
of derivative and warrant liability to fair value of underlying
securities. ” For the
three months ended September 30, 2008, the Company recorded an unrealized gain
of $3,506 compared to an unrealized gain of $345,454 for the same period in 2007
from the adjustment of these liabilities. The decrease in gain for the three
months ended September 30, 2008 compared to the same period in 2007 is related
to the prior year liability adjustments during that period.





Management
of the Company expects that, due to the volatile nature of the price of the
Company’s common stock price, the Company’s derivative and warrant liabilities
will be correspondingly volatile and, as a result, will cause the reported net
income (loss) of the Company to fluctuate in such a manner as to make direct
comparisons, between reporting periods, difficult. Therefore as long as the
derivative and warrant liabilities exist, the reported operating income (loss)
should be a more accurate reference for the true performance of the
Company.




The table
below identifies the consolidated total expenses and total other
income/(expense) by cash and non-cash expenses.


Three Months Ended September 30, 2008
              
              Three Months Ended September 30, 2007Unaudited
              
              Cash
              
              Non-Cash
              
              Total
              
              Cash
              
              Non-Cash
              
              TotalTotal
      expenses
              
              $
              811,640
              
              $
              373,164
              
              $
              1,184,804
              
              $
              1,228,603
              
              $
              654,291
              
              $
              1,882,894Total
      otherincome/(expense)
              
              
              -
              
              
              (1,112,638
              )
              
              (1,112,638
              )
              
              -
              
              
              (4,037,609
              )
              
              (4,037,609
              )Total
              
              $
              811,640
              
              $
              1,485,802
              
              $
              2,297,442
              
              $
              1,228,603
              
              $
              4,691,900
              
              $
              5,920,503
 Nine months ended September 30, 2008
                
                Nine months ended September 30, 2007Unaudited
                
                Cash
                
                Non-Cash
                
                Total
                
                Cash
                
                Non-Cash
                
                TotalTotal
      expenses
                
                $
                2,682,574
                
                $
                1,448,853
                
                $
                4,131,427
                
                $
                3,854,973
                
                $
                1,805,572
                
                $
                5,660,545Total
      other income/(expense)
                
                
                (3
                )
                
                (3,635,593
                )
                
                (3,635,596
                )
                
                (383
                )
                
                (6,344,457
                )
                
                (6,344,840
                )Total
                
                $
                2,682,577
                
                $
                5,084,446
                
                $
                7,767,022
                
                $
                3,855,356
                
                $
                8,150,029
                
                $
                12,005,385
 
 30 OF
39


Business Segment Results of
Operations
 
 The
following tables include the separate and consolidated business segment
information for the operations of the Company for the three and nine month
periods ended September 30, 2008 and 2007:
 
 Three Months Ended September
      30, 2008Digital
              
              Digital
              
              Integrated
              
              WinSonic(Unaudited)
              
              Media
              
              Distribution
              
              Services
              
              Diversity
              
              CorporateGroup
              
              Group
              
              Group
              
              Group
              
              Group
              
              TotalRevenue
              
              $
              -
              
              $
              -
              
              $
              91,861
              
              $
              -
              
              $
              -
              
              $
              91,861Gross
      profit
              
              
              -
              
              
              (215,182
              )
              
              20,030
              
              
              -
              
              
              1,649
              
              
              (193,503
              )Operating
      expenses
              
              
              47,892
              
              
              4,703
              
              
              130,598
              
              
              62,122
              
              
              939,489
              
              
              1,184,804Loss
      from operations
              
              
              (47,892
              )
              
              (219,885
              )
              
              (110,568
              )
              
              (62,122
              )
              
              (937,840
              )
              
              (1,378,307
              )Net
      loss
              
              
              (47,907
              )
              
              (220,014
              )
              
              (644,307
              )
              
              (69,022
              )
              
              (1,509,695
              )
              
              (2,490,945
              )
 
 Three Months Ended September 30, 2007Digital
              
              Digital
              
              Integrated
              
              WinSonicMedia
              
              Distribution
              
              Services
              
              Diversity
              
              CorporateGroup
              
              Group
              
              Group
              
              Group
              
              Group
              
              TotalRevenue
              
              $
              7,027
              
              $
              -
              
              $
              219,654
              
              $
              -
              
              $
              6,500
              
              $
              233,181Gross
      profit
              
              
              3,700
              
              
              (179,306
              )
              
              (601,800
              )
              
              -
              
              
              5,494
              
              
              (771,912
              )Operating
      expenses
              
              
              101,929
              
              
              49,966
              
              
              462,137
              
              
              -
              
              
              1,268,862
              
              
              1,882,894Loss from
      operations
              
              
              (98,229
              )
              
              (229,272
              )
              
              (1,063,937
              )
              
              -
              
              
              (1,263,368
              )
              
              (2,654,806
              )Net
      income (loss)
              
              
              (98,229
              )
              
              (229,898
              )
              
              (1,082,625
              )
              
              -
              
              
              (5,281,663
              )
              
              (6,692,415
              )
 Nine months
      ended September 30, 2008Digital
                
                Digital
                
                Integrated
                
                WinSonicMedia
                
                Distribution
                
                Services
                
                Diversity
                
                CorporateGroup
                
                Group
                
                Group
                
                Group
                
                Group
                
                TotalRevenue
                
                $
                2,567
                
                $
                -
                
                $
                508,187
                
                $
                -
                
                $
                -
                
                $
                510,754Gross
      profit
                
                
                1,781
                
                
                (412,309
                )
                
                43,336
                
                
                -
                
                
                -
                
                
                (367,192
                )Operating
      expenses
                
                
                245,235
                
                
                11,366
                
                
                416,546
                
                
                583,889
                
                
                2,874,391
                
                
                4,131,427Loss
      from operations
                
                
                (243,454
                )
                
                (423,675
                )
                
                (373,210
                )
                
                (583,889
                )
                
                (2,874,391
                )
                
                (4,498,619
                )Net
      loss
                
                
                (243,471
                )
                
                (423,803
                )
                
                (925,536
                )
                
                (602,346
                )
                
                (5,939,059
                )
                
                (8,134,215
                )


Nine months
      ended September 30, 2007Digital
              
              Digital
              
              Integrated
              
              WinSonicMedia
              
              Distribution
              
              Services
              
              Diversity
              
              CorporateGroup
              
              Group
              
              Group
              
              Group
              
              Group
              
              TotalRevenue
              
              $
              14,530
              
              $
              4,000
              
              $
              1,343,835
              
              $
              -
              
              $
              6,500
              
              $
              1,368,865Gross
      profit
              
              
              6,770
              
              
              (1,020,402
              )
              
              (408,641
              )
              
              -
              
              
              5,494
              
              
              (1,416,779
              )Operating
      expenses
              
              
              300,503
              
              
              103,257
              
              
              1,347,026
              
              
              -
              
              
              3,909,759
              
              
              5,660,545Loss
      from operations
              
              
              (293,733
              )
              
              (1,123,659
              )
              
              (1,755,667
              )
              
              -
              
              
              (3,904,265
              )
              
              (7,077,324
              )Net
      income (loss)
              
              
              (293,732
              )
              
              (1,124,286
              )
              
              (1,778,615
              )
              
              -
              
              
              (10,225,531
              )
              
              (13,422,164
              )




Digital Media
Group





For the
three months ended September 30, 2008, Digital Media Group included the
operations of the Digital Store and the R&D activities related to the
Digital Media Group’s preparation of the planned commercial launch of its social
networking web environment. The increase in operating expenses for the Digital
Media Group is primarily related to the increase in R&D
activities.





Digital Distribution
Group





During
late 2006, the Company accelerated its preparation to begin full operation of
its Network. The costs incurred during the three months ended September 30, 2008
represent the personnel and facilities costs associated with those efforts.
Since the Network did not achieve full operations in 2007, the Company
eliminated certain non-essential personnel during 2007. In addition, on January
4, 2008, the Company implemented further personnel changes and made certain
salary adjustments to further cut the costs associated with the Digital
Distribution Group. These cost reductions are reflected in the operating
expenses for the three months ended September 30, 2008. The Company will
increase personnel, as needed, when the Digital Distribution Group becomes fully
operational.


31 OF
39





Integrated Services
Group




The
decrease in revenues for the three months ended September 30, 2008 as compared
to the same period in 2007 is related to suspending all work on construction
projects for Tytess and a decrease in revenues for Automated Interiors. For the
three months ended September 30, 2007, Tytess generated $64,382 in revenue and
none for the same period in 2008. Automated Interiors revenues declined from
$155,272 in 2007 to $91,861 in 2008, as AI still faces cash flow and staffing
challenges that have prevented it from being able to complete jobs to allow for
greater revenue recognition in 2008. The decrease in revenues for Tytess has
been a result of construction being halted due to projected cost over-runs and
the expanded completion time frames estimated to perform the contracts. Since
Tytess uses the percentage of completion method for revenue recognition, no
further revenue could be recognized until construction resumes, which has not
happened. In addition, Automated Interiors encountered a slow-down during the
last half of 2007 in its revenue due to cash flow and staffing challenges and
has been unable to complete jobs to allow for revenue recognition. The situation
has continued in 2008. Since Automated Interiors recognizes revenue on the
completed contract method, it is necessary to complete the project to recognize
any revenue associated with the project, regardless of how close to completion
the project actually is or how much cash has actually been received on the
project.





The gross
margin for Automated Interiors for the three months ended September 30, 2008 was
$20,030, compared to $52,852 in the second quarter and a negative $29,546 in the
first quarter. Automated Interiors continues to have cash flow and staffing
challenges which have not allowed it to timely complete jobs to allow for
revenue recognition.





Total
operating costs have decreased for the three months ended September 30, 2008
compared to the same period in 2007. The decrease is primarily comprised of
$87,258 for Tytess and the balance is related to Automated Interiors. Since
Tytess has suspended all work on its construction projects, the Company has
terminated all general and administrative employees and eliminated all related
costs. The decrease for Automated Interiors is mainly comprised by a decrease in
payroll and related employee expenses. Payroll and related expenses have
decreased due to certain personnel changes and the adjustment of salaries that
was implemented on January 4, 2008.





WinSonic Diversity
Group





WinSonic
Diversity Group’s operations were not consolidated until the fourth quarter of
2007. The operating expenses for the three months ended September 30, 2008
consisted of occupancy costs totaling $20,000, certain consulting costs totaling
$40,000 and interest and late fees on the assumed Colonel McCrary LLC debt of
$9,000.





Corporate Group





The
Corporate business segment includes all indirect costs of our operations,
including costs associated with executive management, business development,
administration, finance, insurance, office facilities and human
resources.





Operating
expenses for the Corporate Group decreased by $329,373 during the three months
ended September 30, 2008 compared to the same period in 2007. The decrease was
primarily related to a decrease in reduction in payroll and various minor
decreases in office related supplies and services in other expense
items.





On
January 4, 2008, the Company issued new offer letters to all current employees.
Pursuant to the offer letters, the Company accelerated the vesting on all
remaining stock options with an exercise price of $1.00 for these employees. The
Company also canceled stock options exercisable into up to 400,000 shares of
common stock with an exercise price of $0.01 because the Company had not
obtained the senior funding necessary for such stock options to become
exercisable. In exchange for the canceled stock options, the Company committed
to issue 400,000 shares of fully vested stock options pursuant to the Company’s
2008 option plan when the plan is established and approved. All options granted
prior to that date were fully vested and expensed as of December 31, 2007. The
expense for options that have vested during the three months ended September 30,
2008 relate only to the options that have been granted subsequent to December
31, 2007.





Liquidity and Capital
Resources





The
Company had a working capital deficit of $16,976,923 as of September 30, 2008,
compared to a deficit of $15,754,643 as of December 31, 2007.





If the
Company is unable to generate sufficient sustainable revenues or obtain
additional financing to meet its financial obligations, it will have to further
reduce its operations, and the Company will not be able to continue as a going
concern. The Company’s independent accountants have indicated in their report
for the year ended December 31, 2007 that there is substantial doubt about the
Company’s ability to continue as a going concern without increased revenues and
additional financing.





During
the nine months ended September 30, 2008, the Company used $1,370,637 in
its operating activities, compared with $1,918,570 for the same period in
2007.





During
the nine months ended September 30, 2008 the Company’s investing activities used
$92,151 for the purchase of fixed assets, compared to $140,269 for the same
period in 2007.


32 OF
39





During
the nine months ended September 30, 2008 the Company’s financing activities
generated $1,387,020 compared to $2,055,748 for the same period in 2007. The
funds generated from the Company’s financing activities during the nine
months ended September 30, 2008 consists primarily of proceeds from loans
payable of $695,250, proceeds from Company’s common stock of $307,106, proceeds
from share issuance of $120,000 and an increase in the bank overdraft in the
amount of $3,741. For the same period in 2007, the Company raised $40,000 from
loans payable, $395,893 from loans payable - related party (net of repayments),
proceeds from share notes of $1,688,474, and an increase in the bank overdraft
in the amount of $7,829.





From
inception, the Company has raised $10,354,541 to fund operations.  Of the
total funds raised, $8,646,045 was used to provide the necessary resources for
the development stage operations of the Company and $1,693,371 was used to
purchase fixed assets. The funds include $5,740,063 which was raised through
convertible debentures and warrants, $2,490,637 which was raised through loans
(net of repayments), and $3,741 from an increase in the bank overdraft. 
The Company also raised $2,120,100 from the issuance of common
stock.





During
the nine months ended September 30, 2008 the Company’s net cash position
decreased by $75,768.





During
the remainder of 2008, the Company anticipates the monthly cash requirements
will be at least $240,000, excluding legal and auditing fees. The Company
is in the process of negotiating funding to meet these requirements. There can
be no assurance; however, that the Company will be able to obtain this funding
or as to the terms of any such funding.





Continuing
Operations




The
markets in which the Company operates include a large number of companies
competing for customers and market share both domestically and internationally.
The Company’s competitors include other digital service providers, home
automation companies, and architectural and design firms. Some of the Company’s
competitors may develop competing products and services that offer better
pricing or that reach the market in advance of the Company’s offerings. Some
competitors also have or may develop greater financial and other resources than
the Company, with enhanced ability to compete for market share, in some
instances through significant economic incentives to secure contracts. Some also
may be better able to compete for skilled professionals. Any of these factors
could have an adverse effect on the Company’s business. Future results will
depend on the Company’s ability to mitigate the effects of aggressive
competition on revenues, pricing and margins and on the Company’s ability to
attract and retain talented people.





The
Company’s future results will depend in part on the success of its ability to
profitably grow revenues under existing contracts and to control costs through
the development and use of low-cost subcontractors, partnering and sourcing
models. The Company’s current contracts are multiyear engagements under which
the Company will provide project management, site construction, architectural
and engineering services, and installation services for larger digital service
providers. The planned expansion includes, among other things, commercial
operations where the Company will deliver digital services across several
platforms, the integration and continued growth of Automated Interiors, Tytess,
WinSonic Diversity and the Digital Store. With potential joint ventures, such as
NATVN, the Company’s facilities-based network and current service contracts are
expected to provide a base of recurring revenue. The Company will need to have
available sufficient financial resources in order to take on these obligations
and make these investments.





The
Company has, to date, focused almost exclusively upon the startup phase of its
operations. To that end, management has focused on identifying and retaining key
employees to provide the support necessary as operations move to revenue
generation and expansion. The Company’s priorities for the next year of
operations are to expand our human resources to adequately service our existing
contracts and to reach a sustainable profitability level. As we expand our
operations with the expectation of growing revenue from our activities, we may
elect to hire additional salaried or hourly employees to operate certain aspects
of our business.





While
management expects revenue generation to increase, the Company expects to
operate with a deficit in cash flows for the next few months. The deficit, which
arises primarily from payroll obligations, may be satisfied through a
combination of employee salary deferrals and through cash raised primarily from
the placement of the Company’s securities (either directly or through
convertible debt offerings).





Management
intends to focus substantial efforts on the funding of the current projects and
operational deficit during the next few months. The funding effort will proceed
at the same time as commercial operations continue. The Company believes that
the current management team has the applicable skills to handle the challenge of
covering the cash deficit and developing profitable operations. There is no
guarantee that any such financings can be obtained or, if obtained, that such
financings will be on adequate or reasonable terms.





Critical Accounting
Policies





Basis of
Accounting





The
Company's policy is to prepare its financial statements pursuant to the accrual
basis of accounting. The Company’s year end is December 31.


33 OF
39





Use of
Estimates





The
preparation of 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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reported period. Actual
results could differ from those estimates.




Stock Based
Compensation





In
December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard replaces SFAS No. 123 and
supersedes APB Opinion No. 25, “Accounting for Stock-based compensation.” This
standard requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. This eliminates the exception to account for such
awards using the intrinsic method previously allowable under APB Opinion No. 25.
SFAS No. 123(R) will be effective for interim or annual reporting periods
beginning on or after June 15, 2005.





For stock
options and warrants issued as compensation and reported in periods beginning
after December 15, 2005, the Company applies SFAS No. 123(R), “Share-Based
Payment,” which requires the recognition of compensation cost based upon the
fair value of stock options at the grant date (using option pricing models), and
recognizing the cost over the period during which the services are provided
(vesting period).





During
the three months ended September 30, 2008 and 2007, the Company committed to
issue options to employees for 0 and 635,108 shares of common stock,
respectively. The fair value of the options granted during the three months
ended September 30, 2008 and 2007 was $0 and 2,833, respectively. The Company
recorded compensation expense of $104,331 for September 30, 2008 related to the
vesting of the Company’s outstanding options. The balance of the options granted
will be included in the Company’s 2008 Employee option plan and will have terms
and conditions determined under that plan.





On
January 4, 2008, the Company issued new offer letters to all current employees.
Pursuant to the offer letters, the Company accelerated the vesting on all
remaining stock options with an exercise price of $1.00 for these employees. The
Company also canceled stock options exercisable into up to 400,000 shares of
common stock with an exercise price of $0.01 because the Company had not
obtained the senior funding necessary for such stock options to become
exercisable. In exchange for the canceled stock options, the Company committed
to issue 400,000 shares of fully vested stock options pursuant to the Company’s
2008 option plan when the plan is established and approved. As a result of the
acceleration of the stock options with an exercise price of $1.00 and the
cancellation of certain unvested stock options with an exercise price of $0.01,
and the commitment to issue an equal number of new stock options, the Company
recorded additional stock based compensation totaling $193,000 and was reflected
as additional payroll expense in the fourth quarter of 2007.





Revenues and Expenses
Recognition





The
Company is a development stage company and has not had significant revenues to
date. Revenues for the Company are recognized upon rendering services to
customers. Costs and expenses are recognized during the period in which they are
incurred





Within
the Company’s Integrated Services business segment, Tytess has elected to
recognize revenue on a percentage of contract completion method. This method
requires Tytess to do progress billings based upon completion of preset
milestones. Revenues and expenses for each milestone are recognized as each
milestone has been completed.





In
addition, within the Company’s Integrated Services business segment, Automated
Interiors has elected to recognize revenue on a completed contract method. The
completed contract  method
requires Automated Interiors to defer revenue and expense recognition until the
contract has been substantially completed. Management has determined that the
completed contract method of accounting more accurately reflects the nature of
Automated Interiors’ business. Due to the volatile nature of electronic
components, significant uncertainty may exist with respect to the total cost of
performing a contract and the ultimate amount of profit to be recognized
thereon. Automated Interiors has developed criteria for determining whether a
project should be recorded as a sale. The criteria for recording a sale are that
the installation has been completed, all costs of design and installation have
been accrued or paid and there are no material contingent obligations
outstanding.





In
connection with the utilization of the completed contract method of revenue
recognition for the consolidated financial statements, Automated Interiors
maintains a work in progress account for costs of jobs in progress. All costs
directly associated with the completion of a contract are accumulated as charges
to construction in progress prior to completion of the jobs. Upon completion of
a contract, all related costs charged to construction in progress are
transferred to cost of goods sold.




Within
the Company’s Digital Media business segment, revenues for the Digital Store are
recognized upon rendering services to customers. Costs and expenses are
recognized during the period in which they are incurred.


34 OF
39





Recently Issued Accounting
Pronouncements





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133,”
(SFAS “161”) as amended and interpreted, which requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. Disclosing the fair values of derivative
instruments and their gains and losses in a tabular format provides a more
complete picture of the location in an entity’s financial statements of both the
derivative positions existing at period end and the effect of using derivatives
during the reporting period. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Early adoption is permitted.




At
September 30, 2008, the Company did not have any derivative instruments or
hedging activities.




In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts - an interpretation of FASB Statement No. 60,” SFAS 163
requires that an insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that credit
deterioration has occurred in an insured financial obligation. This Statement
also clarifies how Statement 60 applies to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. This clarification will increase
comparability in financial reporting of financial guarantee insurance contracts
by insurance enterprises. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. SFAS 163 will be effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company does not expect the adoption of SFAS 163 will have a material impact on
its financial condition or results of operation.
  In
May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May be Settled in Cash Upon Conversion (including Partial Cash
Settlement) . The FSP
requires that the liability and equity components of convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement), commonly referred to as an Instrument C under Emerging Issues Task
Force (“EITF”) Issue No. 90-19, “Convertible Bonds with Issuer Options to
Settle for Cash Upon Conversion,” to be separately accounted for in a manner
that reflects the issuer’s nonconvertible debt borrowing rate. The FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and is to be applied retrospectively to all periods
presented (retroactive restatement) pursuant to the guidance in Statement of
Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and
Error Corrections.” The Company has determined the FSP does not impact the
accounting treatment of the Company’s existing convertible notes. As the Company
considers the issuance and terms of convertible debt instruments in the future,
the Company will evaluate the impact that the adoption of FSP APB 14-1 will have
on its consolidated financial statements.




Off-Balance Sheet
Arrangements





As of
September 30, 2008, the Company has not engaged in any off-balance sheet
arrangements. Currently, management does not anticipate that the Company will be
engaging in off-balance sheet arrangements in the foreseeable
future.




Item 3. Quantitative and Qualitative
Disclosures About Market Risk





The
Company is subject to certain market risks, including changes in interest rates
and currency exchange rates.  The Company does not undertake any specific
actions to limit those exposures.





Item 4T. Controls and
Procedures.





Our
management team, under the leadership and with the participation of our Chief
Executive Officer (who is also our Chief Financial Officer), evaluated the
effectiveness 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. The evaluation was performed based on criteria established by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Based on this evaluation, our management concluded that our
disclosure controls and procedures were not effective, we found one area of
potential deficiency or material weakness to be addressed in the Company's
internal controls, as of December 31, 2007, continuing into 2008, to ensure that
information required to be disclosed by us in the reports that we file or submit
to the SEC is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. This material weakness was
identified previously and through the third quarter as a shortcoming
in communication from the Chief Executive Officer (who is also our Chief
Financial Officer). Specifically, the second quarter ledger entry was regarding
one Board Consent Shares for a Shareholder agreement from first quarter that was
not submitted to the accounting staff timely for the first quarter recording of
such transactions. These findings to date have generally been considered to be
immaterial in value, but the discovery of these items would indicate internal
controls were not strong enough in those prior periods to prevent these errors
from occurring. Since December 2007 and during the nine months of 2008,
numerous procedures and controls have been implemented by management including
enhanced employee file management, formation of an audit committee, and improved
communication between the CEO/CFO and the accounting staff on all financial and
operational transactions.





Our
management team is diligently developing and implementing additional controls
and procedures to ensure that such information required for disclosure is
recorded, processed, summarized and reported timely and accurately. With the
addition of the Vice President of Finance, Chief Accounting Officer, and other
accounting staff added since 2007, the Company has greatly improved its internal
control over financial reporting during the nine months ended September 30,
2008.





Our
management team is diligently developing and implementing additional controls
and procedures to ensure that such information required for disclosure is
recorded, processed, summarized and reported timely and accurately. To date, our
efforts have focused upon replacing our Chief Financial Officer, who resigned in
2006. The resignation of our CFO has exacerbated an existing problem of
sufficiency of accounting personnel. In addition to the Vice President of
Finance/CFO employee, we are currently using consultants for key accounting
positions while waiting for significant funding to have them enter into
permanent employment agreements with the Company.





In
connection with the growth of the Company, we have instituted a policy of early
review of accounting systems and personnel of all potential acquisitions to
discern their reporting systems and the effect such reporting will have on the
consolidation of operations. The companies that we have considered for
acquisitions have been private companies and have not typically maintained the
types of control and reporting procedures that are required of public companies.
As such, depending upon the materiality of the operations of the acquisition,
compared to our total assets and revenues, it is possible that the acquisition
of private subsidiaries may lead to errors in reporting.




With the
addition of a Vice President of Finance, Chief Accounting Officer (consultant)
and other consulting accounting staff during 2008, the Company has greatly
improved its internal control over financial reporting during the nine months
ended September 30, 2008.


35 OF
39





On
November 3, 2008, the Company entered into a Consulting Agreement with Viard
Consulting Services to assist in its compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. Viard Consulting Services is a global consulting and
internal audit firm composed of experts specializing in compliance, risk and
advisory services. The services to be provided under this Agreement include, but
are not limited to the following:





1)
            Identify
      the various business cycles of the Company’s various business cycles and
      conduct a risk assessment on each
cycle.


2)
            Conduct
      a full review of the management governance
  process.


3)
            Assemble
      a project team to conduct an evaluation of the
  project


4)
            Define
      significant processes, materiality and
fraud.


5)
            Document
      and evaluate internal control at the entity-wide
  level.


6)
            Help
      management develop policies and
procedures


7)
            Document
      and evaluate procedures and processes at transaction
  level


8)
            Evaluate
      overall the effectiveness of internal
controls.


9)
            Develop
      independent testing procedures.


10)
            Execute
      testing procedures.


11)
            Identify
      deficiencies.


12)
            Establish
      a remediation plan and coordinate implementation
  thereof.


13)
            Conduct
      re-testing as required.


14)
            Summarize
      findings and report to the Board of Directors and management as
      required.


15)
            Assist
      management with questions raised by the external
  auditors




The
Company issued 1,645,455 restricted shares of common stock as payment for
license rights and prepaid hosting expenses. The Company issued 2,076,521
restricted shares of common stock as payment per legal settlement. The Company
issued 1,200,000 restricted shares of common stock for cash consideration. The
Company issued 1,500,000 restricted shares of common stock as consideration for
the purchase of intangible asset.




Our
management, including our Chief Executive Officer, does not expect that our
disclosure controls and procedures or our internal controls over financial
reporting are or will be capable of preventing or detecting all errors and all
fraud. Any control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system’s objectives
will be met. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management’s override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
our stated goals under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are subject to
risks.




Part II - Other
Information




Item 1. Legal
Proceedings





See “Note
11 - Summary of Legal Proceedings” and “Note 16 - Subsequent Events” for a
description of the Company’s legal proceedings. Other than as described in such
notes, the Company is not currently involved in any legal proceedings that may
be deemed to be material to our financial condition.




Item 1A Risk
Factors





Not applicable




Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds





During
the nine months ended September 30, 2008, the Company received proceeds of
$52,000 from the issuance of convertible debentures to four accredited
investors. In connection with the issuance of such convertible debentures, the
Company also issued warrants to purchase an aggregate of up to 130,000 shares of
common stock of the Company. We neither received nor paid any commissions in
connection with the issuance of these securities. We believe that the issuance
of such securities was exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to the provisions of Section 4(2)
of the Securities Act.




During
the nine months ended September 30, 2008, the Company issued an aggregate of
24,101,871 restricted shares of common stock as further described below. The
Company issued 10,360,699 restricted shares of common stock in connection with
certain financing transactions. The Company issued an aggregate of 2,676,633
restricted shares of common stock to nineteen holders of the Company’s
convertible debentures who converted such debentures. The Company issued
2,235,000 restricted shares of common stock as payment for consulting services.
The
Company issued 1,645,455 restricted shares of common stock as payment for
license rights and prepaid hosting expenses. The Company issued 2,076,521
restricted shares of common stock as payment per legal settlement. The Company
issued 1,200,000 restricted shares of common stock for cash consideration. The
Company issued 1,500,000 restricted shares of common stock as consideration for
the purchase of intangible asset. The Company issued 1,035,534 and
851,666 in connection with the exercise of warrants and options, respectively.
The Company issued 2,862,962 shares as employee compensation. In addition the
Company received back into the treasury 1,146,593 shares previously issued for
the acquisition of Tytess and 1,200,000 shares which were issued in error in
2007. We neither received nor paid any commissions in connection with the
issuance of these securities. We believe that the issuance of such securities
was exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to the provisions of Section 4(2) of the Securities
Act.


36 OF
39





Item 3. Defaults Upon Senior
Securities





As of
September 30, 2008, 10 loans payable totaling $505,682 are in default, 53 of the
Company’s share notes payable totaling $1,357,031 are in default, the Company’s
Short-Term Promissory Note for $181,686 is in default, and one of the Company’s
loans payable - related party in the amount of $84,956 is in
default.




Item 4. Submission of Matters to a
Vote of Security Holders





None




Item 5. Other
Information





None





Item 6.
Exhibits.





10.1
            
            Form
      of Loan Agreement and Security Assignment and Form of Promissory Note
      dated April 8, 2008.10.2
            
            Form
      of Loan Agreement and Security Assignment and Form of Promissory Note
      dated April 17, 2008.10.3
            
            Assets
      and Goodwill Purchase Agreement by and between WinSonic Digital Media
      Group, Ltd. and Dverb Media Group dated April 24, 2008.10.4
            
            Loan
      Bank Agreement dated April 29, 2008 by and between WinSonic Digital Media
      Group, Ltd. and Neighborhood Community Bank for original loan entered into
      by Colonel McCrary Trucking, LLC.10.5
            
            Form
      of Loan Agreement and Security Assignment and Form of Promissory Note
      dated April 30, 2008 by and between WinSonic Digital Media Group, Ltd. and
      First Philadelphia, LLC.10.6
            
            Form
      of Loan Agreement and Security Assignment and Form of Promissory Note
      dated June 2-10, 2008 (due June 30, 2008).10.7
            
            Form
      of Loan Agreement and Security Assignment and Form of Promissory Note
      dated June 2-10, 2008 (due December 31, 2008).10.8
            
            Form
      of Loan Agreement and Security Assignment and Form of Promissory Note
      Senior Debt dated June 16-23, 2008 (due December 31,
  2008).10.9
            
            Form
      of Consulting Accounting Services - COA June 17, 2008.10.10
            
            Form
      of Equity Agreement and Security Assignment dated July 23-30,
      2008.10.11
            
            Form
      of Memorandum (MOU) Agreement Swagg Media dated July 26,
    2008.10.12
            
            Form
      of Memorandum (MOU) Agreement RainySongs dated July 29,
    2008.10.13
            
            Form
      of Consulting Business Development Svcs- B Goldstein July 10,
      2008.10.14
            
            Form
      of Contract Software Programming Svcs- JECR, Inc. August 1,
      2008.10.15
            
            Form
      of Consulting Executive Business Planning & Business Development Svcs-
      IT/IS August 6, 2008.


37 OF
39





10.16
            
            Form
      of Consulting Placement Agent Terminate Svcs- Hallmark Investments, Inc.
      July 14, 2008.*10.17
            
            Form
      of Loan Agreement and Security Assignment and Form of Promissory Note
      dated August 28, 2008 (due December 31, 2008).*10.18
            
            Form
      of Loan Agreement and Security Assignment and Form of Promissory Note
      dated August 29, 2008 (due December 31, 2008).*10.19
            
            Form
      of Equity Agreement and Security Assignment dated August 26,
      2008.*10.20
            
            Form
      of Equity Agreement and Security Assignment dated August 26,
      2008.*10.21
            
            Form
      of Equity Agreement and Security Assignment dated August 28,
      2008.*10.22
            
            Form
      of Equity Agreement and Security Assignment dated September 29,
      2008.*10.23
            
            Distribution
      Rights Agreement dated March 20, 2008 between Blue Pie Productions Pty,
      Ltd. and WinSonic Digital Media Group, Ltd., and WinSonic Digital Cable
      Networks, Ltd. as amended by Rights Agreement Addendum dated September 16,
      2008.*10.24
            
            Content
      Licensing Agreement dated September 30, 2008 between Isolation Network,
      Inc.
              d/b/a
      INgrooves and ONE Digital Distribution and WinSonic Digital Media Group,
      Ltd.*10.25
            
            Digital
      Store Agreement dated September 16, 2008 between Blue Vault Digital Pty,
      Ltd. and WinSonic Digital Media Group, Ltd. and WinSonic Digital Cable
      Systems Network, Ltd.*10.26
            
            Form
      of a Confidential Term Sheet Kaival, LLC dated October 14,
      2008.*10.27
            
            Form
      of a Mutual Confidentiality Agreement (MCA) Net-Structure Asset Management
      Solutions, LLC and WinSonic Cable Networks, Ltd. dated October 15,
      2008.*10.28
            
            Form
      of a Consulting Agreement Jumpstart Marketing, Inc. And WinSonic Digital
      Media Group, Inc. dated October 15, 2008.*10.29
            
            Form
      of a Convertible Secured Debenture Purchase Agreement dated October 17,
      2008.*31.1
            
            Certification
      pursuant to 17 CFR 240.13a-14 promulgated under Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes- Oxley Act of 2002.99.1
            
            Form
      of Letter Board Member Resignation Effective April 17,
    2008.





* Filed
herewith


(10.1-10.16
Previously filed)


38 OF
39





Signatures





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




WINSONIC DIGITAL MEDIA
      GROUP, LTD.
              (Registrant)November
      14, 2008
            
            /s/
      Winston JohnsonWinston
      Johnson
              Chairman
      & CEO
              (Principal
      Executive Officer and Principal Financial
  Officer)


39 OF
39