U. S.
Securities and Exchange Commission


Washington,
D. C. 20549





FORM
10-Q





[X]
         QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934


For
the quarterly period ended March 31, 2010





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


For the
transition period from _____ to _____





Commission
File No. 0-50441




CHINA
      DIGITAL ANIMATION DEVELOPMENT INC.
              (Name
      of Registrant in its Charter)New York
            84-1275578(State
      of Other Jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer I.D. No.)15 West
      39thStreet, Suite 14B, New York, NY  10018(Address
      of Principal Executive Offices)





Issuer's
Telephone Number: (212) 391-2688





Indicate
 by check mark  whether the  Registrant  (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the  Securities
Exchange Act of 1934  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 the past 90 days. Yes [X]  No [    ]




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.)  Yes
___     No ___




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
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
 See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)




Large
accelerated filer ___ Accelerated filer ___ Non-accelerated filer ___ Smaller
reporting company  [X]




APPLICABLE
ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of
each of the Registrant's classes of common stock, as of the latest practicable
date:




May 17,
2010


Common
Voting Stock: 20,520,000










CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
 AND
SUBSIDIARIES
 CONSOLIDATED
FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED MARCH 31, 2010





PAGEFINANCIAL
      STATEMENTS:
              1CONSOLIDATED
      BALANCE SHEETS
              2-3CONSOLIDATED
      STATEMENTS OF INCOME
              4CONSOLIDATED
      STATEMENTS OF CHANGE INSTOCKHOLDERS'
      EQUITY
              5CONSOLIDATED
      STATEMENTS OF CASH FLOWS
              6
      & 7NOTES
      TO FINANCIAL STATEMENTS
              8
      - 20





1




CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
  CONSOLIDATED
BALANCE SHEETS





ASSETS
              
              March
      31, 2010
              
              
              June
      30, 2009(Unaudited)Current
      Assets:Cash
      and cash equivalents
              
              $
              2,181,877
              
              
              $
              2,282,786Accounts
      Receivable, net
              
              
              1,122,989
              
              
              
              1,388,599Employee
      advances
              
              
              3,689
              
              
              
              2,234Advanced
      to suppliers
              
              
              -
              
              
              
              1,443,440Down
      payment  for acquisition of company
              
              
              1,250,000
              
              
              
              -Interest
      Receivable
              
              
              137,531
              
              
              
              54,786Prepaid
      Expenses
              
              
              16,667
              
              
              
              84,202Short
      Term Investment
              
              
              2,200,500
              
              
              
              2,191,457Total
      Current Assets
              
              
              6,913,253
              
              
              
              5,256,047Non-current
      AssetsProperty,
      Plant & Equipment, net
              
              
              5,735,095
              
              
              
              3,929,257Land
      use right and other intangible assets, net
              
              
              2,865,140
              
              
              
              1,106,870Total
      Non-current Assets
              
              
              8,600,235
              
              
              
              5,036,127Total
      Assets
              
              $
              15,513,487
              
              
              $
              10,292,174


"
Continued on next page"










2





CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
  CONSOLIDATED
BALANCE SHEETS






LIABILITIES
      AND STOCKHOLDERS' EQUITYMarch
      31, 2010
              
              
              June
      30, 2009(Unaudited)Current
      Liabilities:Accounts
      Payable
              
              $
              57,491
              
              
              $
              29,219Payroll  payable
              
              
              1,823
              
              
              
              -Tax
      Payable
              
              
              254,026
              
              
              
              214,471Loan
      Payable-Related Party
              
              
              106,000
              
              
              
              5,000Accrued
      expenses and other payable
              
              
              82,054
              
              
              
              64,964Total
      Current Liabilities
              
              
              501,394
              
              
              
              313,654Total
      Liabilities
              
              
              501,394
              
              
              
              313,654Stockholders'
      Equity:Common
      Stock,  par value $0.001,  500,000,000 authorized20,510,000 shares and 20,000,000 shares issued, and outstanding,
      respectively
              
              
              20,510
              
              
              
              20,000Additional
      Paid in Capital
              
              
              7,493,207
              
              
              
              6,223,717Accumulated
      other comprehensive income
              
              
              1,814,695
              
              
              
              1,761,978Reserved
      Fund
              
              
              705,738
              
              
              
              341,524Retained
      Earnings
              
              
              4,977,943
              
              
              
              3,822,758Total
      Stockholders' Equity
              
              
              15,012,093
              
              
              
              12,169,977Total
      Liabilities and Stockholders' Equity
              
              $
              15,513,487
              
              
              $
              12,483,631










3


CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF INCOME
  FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2010 AND 2009
 (UNAUDITED)





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009Revenues
              
              $
              1,679,143
              
              
              $
              966,163
              
              
              $
              4,057,433
              
              
              $
              3,471,131Cost
      of Goods Sold
              
              
              437,675
              
              
              
              142,025
              
              
              
              1,356,440
              
              
              
              455,160Gross
      Profit
              
              
              1,241,467
              
              
              
              824,138
              
              
              
              2,700,993
              
              
              
              3,015,971Operating
      Expenses:Sales
      Expenses
              
              
              68,357
              
              
              
              54,588
              
              
              
              202,731
              
              
              
              209,301General
      and Administrative Expenses
              
              
              317,647
              
              
              
              178,842
              
              
              
              683,626
              
              
              
              464,500Total
      Operating Expenses
              
              
              386,004
              
              
              
              233,431
              
              
              
              886,357
              
              
              
              673,801Income
      from Operations before Other Incomeand (expenses) -
      Continued
              
              
              855,463
              
              
              
              590,708
              
              
              
              1,814,636
              
              
              
              2,342,170Other
      Income and (Expense):Interest
      income
              
              
              82,491
              
              
              
              1,211
              
              
              
              251,039
              
              
              
              14,256Gains
      from Disposal of Fixed Assets
              
              
              -
              
              
              
              -
              
              
              
              (26
              )
              
              
              -Other
      expense
              
              
              -
              
              
              
              290
              
              
              
              -
              
              
              
              240Total
      Other Income and (Expense)
              
              
              82,491
              
              
              
              1,501
              
              
              
              251,013
              
              
              
              14,496Income
      Before Income Taxes
              
              
              937,954
              
              
              
              592,208
              
              
              
              2,065,649
              
              
              
              2,356,665Provision
      For Income Taxes
              
              
              246,718
              
              
              
              154,458
              
              
              
              546,250
              
              
              
              612,364Income
      After Provision for Income Taxes
              
              
              691,236
              
              
              
              437,750
              
              
              
              1,519,399
              
              
              
              1,744,301Discontinued
      OperationsProfit
      from Operations of Discontinued Component
              
              
              -
              
              
              
              25,625
              
              
              
              -
              
              
              
              58,441Income
      from Discontinued Operations
              
              
              
              
              
              
              25,625
              
              
              
              
              
              
              
              58,441Net
      Income
              
              
              691,236
              
              
              
              463,375
              
              
              
              1,519,399
              
              
              
              1,802,742Other
      Comprehensive IncomeForeign
      Currency Translation Adjustment
              
              
              253
              
              
              
              135,767
              
              
              
              52,717
              
              
              
              179,730Net
      Comprehensive Income
              
              
              691,489
              
              
              
              599,142
              
              
              
              1,572,116
              
              
              
              1,982,472Basic
      and diluted income per share
              
              
              0.03
              
              
              
              0.02
              
              
              
              0.07
              
              
              
              0.09Weighted
      average common shares outstanding
              
              
              20,510,000
              
              
              
              20,000,000
              
              
              
              20,510,000
              
              
              
              20,000,000












4





CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY






AccumulatedCommon Stock par
              
              
              Additional
              
              
              Other
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              Totalvalue
      $.0001
              
              
              Paid
      in
              
              
              Comprehensive
              
              
              Retained
              
              
              Reserved
              
              
              Comprehensive
              
              
              Minority
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Income
              
              
              Earnings
              
              
              Fund
              
              
              Income
              
              
              Interest
              
              
              EquityBalance
      - June 30, 2008
              
              
              20,000,000
              
              
              $
              20,000
              
              
              $
              6,223,717
              
              
              $
              1,645,487
              
              
              $
              1,600,427
              
              
              $
              112,241
              
              
              
              
              
              $
              64,259
              
              
              $
              9,666,131Comprehensive
      incomeNet
      income for the twelve months
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,451,614
              
              
              
              
              
              
              
              2,451,614
              
              
              
              
              
              
              
              2,451,614Reserved
      Fund
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (229,283
              )
              
              
              229,283
              
              
              
              
              
              
              
              
              
              
              
              -Other
      comprehensive income, net of taxForeign
      currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              116,491
              
              
              
              
              
              
              
              
              
              
              
              116,491
              
              
              
              
              
              
              
              116,491Decrease
      in Minority Interest
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (64,259
              )
              
              
              (64,259
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,568,105Balance
      - June 30, 2009
              
              
              20,000,000
              
              
              
              20,000
              
              
              
              6,223,717
              
              
              
              1,761,978
              
              
              
              3,822,758
              
              
              
              341,524
              
              
              
              
              
              
              
              -
              
              
              
              12,169,977Additional
      shares issued
              
              
              510,000
              
              
              
              510
              
              
              
              1,269,490
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,270,000.00Comprehensive
      incomeNet
      income for the nine months
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,519,399
              
              
              
              
              
              
              
              1,519,399
              
              
              
              
              
              
              
              1,519,399Reserved
      Fund
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (364,214
              )
              
              
              364,214
              
              
              
              -
              
              
              
              
              
              
              
              -Other
      comprehensive income, net of taxForeign
      currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              52,717
              
              
              
              
              
              
              
              
              
              
              
              52,717
              
              
              
              
              
              
              
              52,717Decrease
      in Minority Interest
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,572,116Balance
      - March 31, 2010
              
              
              20,510,000
              
              
              $
              20,510
              
              
              $
              7,493,207
              
              
              $
              1,814,695
              
              
              $
              4,977,943
              
              
              $
              705,738
              
              
              
              
              
              
              $
              -
              
              
              $
              15,012,093










5




CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
  FOR THE NINE MONTHS ENDED MARCH 31,
2010 AND 2009


March
      31, 2010
              
              
              March
      31, 2009(Unaudited)Cash
      Flows From Operating Activities:Net
      Income
              
              $
              1,519,399
              
              
              $
              1,802,742Adjustments
      To Reconcile Net Income To Net CashDepreciation
      and Amortization Expense
              
              
              606,077
              
              
              
              300,933(Increase)
      or Decrease in Current Assets:Accounts
      Receivable
              
              
              265,610
              
              
              
              57,347Inventories
              
              
              -
              
              
              
              (312,942
              )Prepaid
      Expenses
              
              
              67,535
              
              
              
              9,201Advanced
      to Suppliers
              
              
              1,443,440
              
              
              
              291,125Interest
      Receivable
              
              
              (82,745
              )
              
              
              -Employee
      Advanced
              
              
              (1,456
              )
              
              
              141,916Increase
      or (Decrease) in Current Liabilities:Accounts
      Payable
              
              
              28,271
              
              
              
              4,428Advanced
      from Customers
              
              
              -
              
              
              
              80,449Taxes
      Payable
              
              
              39,555
              
              
              
              (394,655
              )Payroll  payable
              
              
              1,823
              
              
              
              (3,843
              )Accrued
      Expenses and Other Payables
              
              
              17,091
              
              
              
              (59,878
              )Net
      Cash Provided by Operating Activities
              
              
              3,904,600
              
              
              
              1,916,822Cash
      Flows From Investing Activities:Purchases
      of Property and Equipment
              
              
              (2,240,436
              )
              
              
              (1,500,558
              )Purchases
      of Intangible Assets
              
              
              (1,907,100
              )
              
              
              -Investment-Long
      Term
              
              
              (9,043
              )
              
              
              -Net
      Cash Used in Investing Activities
              
              
              (4,156,579
              )
              
              
              (1,500,558
              )




"
Continued on next page"










6




CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
  FOR THE NINE MONTHS ENDED MARCH 31,
2010 AND 2009





Cash
      Flows From Financing Activities:
              
              March
      31, 2010
              
              
              March
      31, 2009(Unaudited)Proceeds
      from Related Party Borrowing
              
              
              101,000
              
              
              
              -Net
      Cash Used in Financing Activities
              
              
              101,000
              
              
              
              -Effect
      of exchange rate changes on cash and cash equivalents
              
              
              50,070
              
              
              
              131,012Increase
      (Decrease) in Cash and Cash Equivalents
              
              
              (100,909
              )
              
              
              547,277Cash
      and Cash Equivalents -Beginning Balance
              
              
              2,282,786
              
              
              
              4,740,675Cash
      and Cash Equivalents - Ending Balance
              
              $
              2,181,877
              
              
              $
              5,287,952Supplemental
      Disclosures of Cash Flow Information:Cash
      Paid During The Years for:Interest
      Paid
              
              
              -
              
              
              
              -Income
      Taxes Paid
              
              $
              515,968
              
              
              $
              882,335








7




CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)





1.  ORGANIZATION
AND BASIS OF PRESENTATION




On
January 30, 2009, Maui General Store, Inc. (the “Company”) changed its name to
“China Digital Animation Development, Inc. (CHDA)” to reflect the reverse merger
of Heilongjiang Hairong Science and Technology Development Co., Ltd. (“Hairong”)
into the Company.




On
November 12, 2008 the Company acquired the outstanding capital stock of RDX
Holdings Limited ("RDX"), a corporation organized under the laws of the British
Virgin Islands. The acquisition was effected by a share exchange between Fu
Qiang and Su Jianping, the shareholders of RDX, and the Company (the "Share
Exchange"). In exchange for the capital stock of RDX, the Company issued
14,400,000 shares of its common stock to the Messrs. Fu and Su, the issued
shares represented 72% of the outstanding shares of the Company.




RDX is
engaged in the business of managing the assets and operations of Hairong, a
joint stock company organized under the laws of The People's Republic of China.
Hairong is primarily engaged in animation design and development and in
the  production and presentation of cultural events. Hairong operates
its business primarily in the PRC with its headquarters in Harbin city,
Heilongjiang province.




On
October 1, 2007, Hairong purchased 70% of the shareholders’ equity of an
advisory consulting firm, Fortune Global Investment Advisory Co., Ltd (the
“FGIA”). On January 1, 2009 the Company purchased the remaining 30% of the
shareholders’ equity of FGIA without any consideration or currency equivalents
under a transfer agreement.  On May 13, 2009, Hairong sold 100% of
FGIA for the cash amount of $219,036. Hairong is responsible for all the debt
and liabilities incurred up to the transferring date, May 13, 2009.






On June
27, 2008, RDX Holdings entered into five agreements with Hairong and with the
equity owners in Hairong. Collectively, the agreements provide RDX exclusive
control over the business of Hairong, the right to all revenues obtained by
Hairong, and responsibility for all of the expenses incurred by Hairong. The
relationship is one that is generally identified as "entrusted
management."





8




CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)





2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Reclassification





Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications had no effect on reported total assets,
liabilities, stockholders’ equity or net income.




Use of estimates




In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of
inventories.  Actual results could differ from those
estimates.




Cash
and cash equivalents




For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. The Company maintains cash and cash equivalents with financial
institutions in the PRC. The Company performs periodic evaluation of the
relative credit standing of financial institutions that are considered in the
Company’s investment strategy.




Bad
debt reserves




The
carrying amount of accounts receivable is reduced by a valuation allowance. The
Company's policy is that for accounts receivable amounts that are aged between 6
months and 12 months, the Company records a 3% bad debt reserve.  If
the receivable is aged over 12 months, the Company reserves 5% of the account as
a bad debt allowance. In addition, the Company reviews balances in excess of
payment terms.  Based on this review, which includes customer credit
worthiness and history, general economic conditions and changes in customer
payment patterns, the Company estimates the portion, if any, of the balance that
will not be collected and records that amount as an additional reserve.
Management reviews its valuation allowance on a semi-annual basis.





9




CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




Concentration
of credit risk




Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents and accounts and other
receivables. As of March 31, 2010, major banks located in the PRC held
substantially all the Company’s cash and cash equivalents. Hairong’s management
believes they are all of high credit quality. With respect to accounts
receivable, the management extends credit based on an evaluation of the
customer’s financial condition and customer payment practices to minimize
collection risk on accounts receivable.




Inventories




Inventories
are stated at lower of cost, as determined on a weighted average basis, or
market value. As the company changed its business to animation, it will not hold
any inventories anymore.





Construction
in progress




Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
The useful life is 20 years.




Property
and equipment




Property
and equipment are stated at cost, net of accumulated
depreciation.  Maintenance, repairs and betterments, including
replacement of minor items, are charged to expense; major additions to physical
properties are capitalized. Depreciation and amortization are provided using the
straight-line method over the following estimated useful lives:




Buildings
      and improvements
            40
      yearsMachinery,
      equipment and automobiles
            5-10
      years





Intangible
assets




Intangible
assets consist of “rights to use land” and “animation software.” According to
the law of China, the government owns all the land in China. Companies or
individuals are authorized to possess and use the land onlythrough land use
rightsgranted by
the Chinese government. Land use rights are being amortized using the
straight-line method over the lease term of 50 years. The method to amortize
intangible assets is a 50-year straight-line method.





10




CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)





2. 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




Intangible
assets (continued)




The
Company also evaluates intangible assets for impairment, at least on an annual
basis and whenever events or changes in circumstances indicate that the carrying
value may not be recoverable from its estimated future cash
flows.  Recoverability of intangible assets, other long-lived assets
and goodwill is measured by comparing their net book value to the related
projected undiscounted cash flows from these assets, considering a number of
factors including past operating results, budgets, economic projections, market
trends and product development cycles. If the net book value of the asset
exceeds the related undiscounted cash flows, the asset is considered impaired,
and a second test is performed to measure the amount of impairment
loss.




Income
taxes




Hairong
accounted for income tax under the provisions of ASC 740 "Accounting for Income
Taxes", which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns.  Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, whenever necessary,
against net deferred tax assets when it is more likely than not that some
portion or the entire deferred tax asset will not be realized. There are no
deferred tax amounts at March 31, 2010.




Revenue
recognition




The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104.  Sales revenue is recognized when the services
are provided and the contracts are performed.




Fair
value of financial instruments




The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.


11




CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)





2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Foreign
currency translation




Hairong’s
functional currency is the Renminbi (“RMB”). Foreign currency transactions are
translated at the applicable rates of exchange in effect at the transaction
dates. Monetary assets and liabilities denominated in foreign currencies at the
balance sheet date are translated at the applicable rates of exchange in effect
at that date. Revenues and expenses are translated at the average exchange rates
in effect during the reporting period. Translation adjustments arising from the
use of different exchange rates from period to period are included as a
component of stockholders' equity as "Accumulated Other Comprehensive
Income".  Gains and losses resulting from foreign currency
translations are included in Accumulated Other Comprehensive
Income.




Statement
of cash flows




In
accordance with Accounting Standards Codification ASC 230, “Statement of Cash
Flows,” cash flows from the Company’s operations is calculated based upon the
local currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.




Earnings
(Loss) per share




Basic
earnings (loss) per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
There are no common stock equivalents available in the computation of earnings
(loss) per share at March 31, 2010.




Reserve
Fund




Before
June 20, 2006, Hairong was required to transfer 15% of its profit after
taxation, as determined in accordance with Chinese accounting standards and
regulations, to the surplus reserve fund. Subject to certain restrictions set
out in the Chinese Companies Law, the surplus reserve fund may be distributed to
stockholders in the form of share bonus issues and/or cash dividends. After June
30, 2006, such reserve is no longer mandatory under the Chinese Law. However,
the board of the Company decided that as long as the Company is making profit,
the Company will follow the old rule to make a reserve.





12





CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)




2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)




Comprehensive
Income




Comprehensive
income is defined to include changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. Comprehensive income includes net income and the foreign currency
translation gain, net of tax.




New
accounting pronouncements




In June
2009, the FASB issued ASC 810, “Amendments to FASB Interpretation No. 46(R),”
which changes the approach to determining the primary beneficiary of a variable
interest entity (“VIE”) and requires companies to more frequently assess whether
they must consolidate VIEs. ASC 810 is effective for annual periods beginning
after November 15, 2009. The Company does not expect the adoption of ASC 810
will have a material effect on the Company’s financial condition, results of
operations or cash flows.




In May
2009, the FASB issued ASC 855, “Subsequent Events,” which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. ASC 855 is effective for interim reporting periods ending after
June 15, 2009. The adoption of ASC 855 did not have a material effect on the
Company’s financial condition, result of operations or cash flows.




In April
2009, the FASB issued ASC 270, “Interim Disclosures about Fair Value of
Financial Instruments,” which requires quarterly disclosures of the fair value
of all financial instruments that are not reflected at fair value in the
financial statements, as well as additional disclosures bout the method(s) and
significant assumptions used to estimate the fair value. Prior to the issuance
of this FSP, such disclosures, including quantitative and qualitative
information about fair value estimates, were only required on an annual basis.
ASC 270 is effective for interim reporting periods ending after June 15, 2009.
The adoption of ASC 270 did not have a material effect on the Company’s
disclosures.





13





CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)




2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)




New
accounting pronouncements




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” The current GAAP hierarchy, as set forth in the American
Institute of Certified Public Accountants (AICPA) Statement on Auditing
Standards No. 69, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles, has been criticized because (1) it is directed
to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB
Statements of Financial Accounting Concepts. The FASB believes that the GAAP
hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented inconformity with GAAP.
Accordingly, the FASB concluded that the GAAP hierarchy should reside in the
accounting literature established by the FASB and is issuing this Statement to
achieve that result. This Statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The adoption of FASB 162 is not expected to have a
material impact on the Company’s financial position.




In April
2008, the FASB issued ASC 350-3, “Determination of the Useful Life of Intangible
Assets,” which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under ASC 350-3, “Goodwill and Other Intangible
Assets.” The intent of this FSP is to improve the consistency between the useful
life of a recognized intangible asset under ASC 350-3 and the period of expected
cash flows used to measure the fair value of the asset under ASC 805. ASC 350-3
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after ecember 15, 2008. The adoption of ASC 350-3 did not have
an effect on the Company’s financial condition, results of operations or cash
flows.




3.  ACCOUNTS  RECEIVABLE




Accounts
receivable are uncollateralized, non-interest bearing customer obligations
typically due under terms requiring payment from the invoice
date.  Payments of accounts receivable are allocated to the specific
invoices identified on the customer’s remittance advice or, if unspecified, are
applied to the oldest unpaid invoices. As of March 31, 2010 and June 30, 2009,
the net accounts receivable were $1,122,989 and $1,388,599,
respectively.





14





CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)




4.  DOWN PAYMENT FOR
ACQUISITION




On
November 11, 2009 the Company entered into an agreement to acquire Chongqing
Dinv Ares Filming Production Co., Ltd. (“Dinv Ares”) in exchange for one million
shares of the Company’s common stock. The agreement requires partial payment
pending satisfaction of the conditions to closing. On March 15, 2010, Company
issued 500,000 shares of common stock as a down payment.  The down
payment was recorded at the market value of the stock which was at $2.50 per
share. As of March 31, 2010, the book value of the down payment was
$1,250,000.




5.  ADVANCED TO
SUPPLIERS




Hairong
makes advance payments to certain suppliers which provide services to the
company for animation design and development. The advances to suppliers were $0
and $1,443,440 as of March 31, 2010, and June 30, 2009,
respectively.





6.
SHORT TERM INVESTMENT




On April
24, 2009, the Company deposited $ 2,200,500 with an investment management
company and signed a one year agreement for an annual interest rate of 15% on
this deposit. The interest is payable semiannually. During the three and nine
months ended March 31, 2010, the Company accrued interest in the amount of $
82,491 and $247, 305, of which $137, 531 remained unpaid as of March 31,
2010.







7
.. PROPERTY, PLANT & EQUIPMENT, NET




Property,
Plant & Equipment consisted of the following:





March
      31, 2010
            
            
            June
      30, 2009Building
      and Improvement
            
            $
            3,232,057
            
            
            $
            1,785,983Machinery
      & Equipment
            
            
            -
            
            
            
            831,180Office
      Furniture & Equipment
            
            
            1,417,991
            
            
            
            612,105Vehicles
            
            
            353,552
            
            
            
            352,099Construction
      in progress
            
            
            1,466,000
            
            
            
            1,459,975Total
      Property
            
            
            6,469,600
            
            
            
            4,210,162Accumulated
      depreciation
            
            
            (734,504
            )
            
            
            (280,905
            )Total
      Property, net
            
            $
            5,735,095
            
            
            $
            3,929,257




Depreciation
expense for the three months ended March 31, 2010 was $270,308. Depreciation
expense for the nine months ended March 31, 2010 was $452,795.





15





CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)







8.  LAND
USE RIGHT AND OTHER INTANGIBLES





The net
book value of intangible assets as of March 31, 2010 and June 30, 2009 was
comprised of the following:





March
      31, 2010
            
            
            June
      30, 2009Cost
      of land use right and other intangibles
            
            $
            3,016,570
            
            
            $
            1,382,114Less:
      accumulated amortization
            
            
            (151,431
            )
            
            
            (275,244
            )Land
      use right and other intangibles, net
            
            $
            2,865,140
            
            
            $
            1,106,870




Total
amortization expense for the nine months ended March 31, 2010 was
$153,281.





9.  INCOME
TAXES




Effective
on January 1, 2007 a new Chinese Tax Law was enacted. Hairong has been subject
to income tax at an effective rate of 25% on income reported in the statutory
financial statements after appropriate tax adjustments.





The
Company’s provisions for income taxes for the nine months ended March 31, 2010
and fiscal year ended June 30, 2009 as follows:





PRC
      only:
            
            March
      31, 2010
            
            
            June
      30, 2009Current
            
            $
            546,250
            
            
            $
            823,142Deferred
            
            
            -
            
            
            
            -Total
            
            $
            546,250
            
            
            $
            823,142






16





CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)




10.
LOAN PAYABLE-RELATED PARTY




As of
March 31, 2010, one of the major shareholders of the company lent the total
amount of $106,000 to pay expenses incurred in the US office. This loan is
interest free and payable on demand.




11
.. STOCKHOLDERS’ EQUITY




500,000,000
shares of common stock have been authorized for issuance. During the three and
nine months ended March 31, 2010, 510,000 shares of common stock were issued. As
of March 31, 2010, 20,510,000 shares are outstanding.




The
Company implemented a 1-for-25 reverse split on January 30, 2009. Retroactive
effect is being given to the reverse split in these financial statement. Income
statements have retroactively used the new outstanding shares to calculate the
EPS. Stated par value in the stockholders’ equity section has been reduced
accordingly.




12.
SEGMENT INFORMATION




Segment
revenue for the nine months ended March 31, 2010 and 2009 was as
follows:




March
      31, 2010
            
            
            March
      31, 2009Revenue:Membership
      Fees
            
            $
            244,162
            
            
            $
            687,563Animation
      Design and Development
            
            
            3,104,331
            
            
            
            2,544,254Consulting
      Service & Others
            
            
            -
            
            
            
            239,314Snow
      & Ice Show
            
            
            708,939
            
            
            
            -Consolidated
            
            
            4,057,432
            
            
            
            3,471,131Revenue
      for the nine months (discontinued)IT
      Construction
            
            
            
            
            
            
            1,584,239Total
            
            $
            4,057,432
            
            
            $
            5,055,370




17





CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)




12.
SEGMENT INFORMATION( continued)




Segment
operating income for the nine months ended March 31, 2010 and 2009 was as
follows:




Operating
      income for the nine months:March
      31, 2010
            
            
            March
      31, 2009Membership
      fees
            
            $
            183,958
            
            
            $
            602,764Animation
      Design and Development
            
            
            1,348,759
            
            
            
            1,704,727Snow
      & Ice Show
            
            
            318,076
            
            
            
            -Consulting
      Service & Others
            
            
            (32,825
            )
            
            
            (34,678
            )Consolidated
            
            
            1,817,968
            
            
            
            2,272,813Operating
      income for the nine months (Discontinued)IT
      Construction
            
            
            -
            
            
            
            58,441Total
            
            $
            1,817,968
            
            
            $
            2,331,254




ASC 280,
Disclosures about Segments of an Enterprise and Related Information, establishes
standards for reporting information about operating segments. This standard
requires segmentation based on our internal organization and reporting of
revenue and operating income based upon internal accounting methods. Our
financial reporting systems present various data for management to operate the
business, including internal profit and loss statements prepared on a basis not
consistent with U.S. GAAP. The segments are designed to allocate resources
internally and provide a framework to determine management responsibility.
Amounts for prior periods have been recast to conform to the current management
view. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. Our chief operating decision
maker is our Chief Executive Officer.




13.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS




The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy.





18





CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)




13.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS (continued)




The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.




Concentration of credit
risk




Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents. As of March 31, 2010,
substantially all of the Company’s cash and cash equivalents were held by major
banks located in the PRC of which the Company’s management believes are of high
credit quality. With respect to accounts receivable, the Company extends credit
based on an evaluation of the customer’s financial condition and customer
payment practices to minimize collection risk on account
receivables.




The major customers
that represented more than 5% of Accounts Receivable




Customer
      Name
            
            Amount(USD)
            
            PercentageBenxi
      Yige Amination Design Ltd
            
            
            528,854
            
            
            
            47.10
            %Shenzhen
      Global Digital Tech Co., Ltd
            
            
            124,695
            
            
            
            11.10
            %Shanghai
      Amination Making Co., Ltd
            
            
            220,050
            
            
            
            19.60
            %Beijing
      Wanfang Xingxing Digital Tech
            
            
            249,390
            
            
            
            22.20
            %Total
            
            
            1,122,989
            
            
            
            100.00
            %







The
major suppliers that represented more than 5% of Accounts Payable




Vendor
      Name
            
            Amount(USD)
            
            PercentageHarbin
      Hengshui Road & Bridge Construction Ltd
            
            
            29,340.00
            
            
            
            51
            %Total
            
            
            29,340.00
            
            
            
            51
            %




19




CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR
THE PERIOD ENDED MARCH 31, 2010
 (UNAUDITED)






The
major clients that represented more than 5% of the total sales




Customer
      Name
            
            Sales
      Amount(USD)
            
            
            PercentageBenxi
      Yige Amination Design Ltd
            
            
            1,393,080.00
            
            
            
            34.31
            %Shanghai
      Amination Making Co., Ltd
            
            
            447,252.00
            
            
            
            11.01
            %Shenzhen
      Global Digital Tech Co., Ltd
            
            
            407,659.20
            
            
            
            10.04
            %Harbin
      Shengwen Amination Co., Ltd
            
            
            344,604.00
            
            
            
            8.49
            %Beijing
      Wanfang Xingxing Digital Tech
            
            
            420,856.80
            
            
            
            10.36
            %Jilin
      Guoji Trading Co., Ltd
            
            
            708,857.76
            
            
            
            17.46
            %













20




ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
      OPERATIONS





Forward-Looking
Statements: No Assurances Intended




In
addition to historical information, this Quarterly Report contains
forward-looking statements, which are generally identifiable by use of the words
“believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,”
“projects,” or similar expressions. These forward-looking statements represent
Management’s belief as to the future of China Digital Animation Development,
Inc.  Whether those beliefs become reality will depend on many factors
that are not under Management’s control.  Many risks and uncertainties
exist that could cause actual results to differ materially from those reflected
in these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in Item 1A - “Risk Factors” in
the Company’s Annual Report on Form 10-K for the year ended June 30,
2009.  Readers are cautioned not to place undue reliance on these
forward-looking statements. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking
statements.







Outline
of Our Business





China
Digital Animation Development Inc. (“China Digital”), through its operating
company, Heilongjiang Hairong Science and Technology Development Co., Ltd., a
joint stock company organized under the laws of The People’s Republic of China
(“Hairong”), engages in the business of digital animation production, financial
information services, and cultural productions in China.





Hairong
was organized in 1999.  From 1999 until 2006 Hairong was engaged
exclusively in the business of developing and installing business networks and
related software.  During that period we developed a reputation in the
Chinese business community for our ability to provide efficient solutions to
complex integration problems.





Since
2007, however, Hairong has evolved from the network engineering business into
other businesses that utilize our managerial skills, in particular the animation
development business. The primary reason for the entry into this industry is
because animation development is now more profitable in China than network
engineering. Due to the intense competition in the IT industry as a result of
influx of college graduates with training in network and software design in
China, competition in the network engineering business forces us to reduce
margins. In contrast, the animation industry is facing great opportunities in
China, with the increasing customer demand and especially favorable treatment by
the government of China.




21





The
government of China is actively supporting the development of the animation
industry in China.  Among the stimuli provided for development of the
industry:




·
            Heilongjiang
      Province has developed an Animation Development Area, in which
      participants in the industry are provided subsidized
      property.  We are currently the beneficiaries of 2,000 square
      meters in the Animation Development Area, which we occupy rent-free until
      February 2011.




·
            The
      local government provides subsidies for animation productions broadcast in
      China, from 300 RMB per minute for broadcasts on provincial television
      stations up to 50 million RMB for productions in prime time on China
      Central Television or overseas mainstream
media.




·
            Animation
      companies receive reductions in value-added tax, income tax, sales tax,
      and import duties.




For this
reason, when our fiscal year ended on June 30, 2009, we terminated all of our
network engineering activities, and sold the related property and
equipment.  The results of this business during the 2009 fiscal year
are now classified on our statement of operations as “income from discontinued
operations.”





Hairong
now offers services in three distinct market segments:




§
            Animation.  Our
      team of 30 animation technicians offers digital animation services to the
      movie, television and Internet industries, specializing in high end
      special effects, including 3-D animation.  We also offer
      non-media businesses animated products for advertising, branding and
      education purposes.




The
animation industry is growing rapidly in China.  Because we have
developed a state-of-the-art facility with personnel recognized in the industry,
we expect to participate in that growth in a leadership position.  For
that reason, we expect that animation development will be the primary source of
our revenues for the foreseeable future.




§
            Financial Information
      Delivery.  With our Trans World Financial Website as the
      foundation, we offer investors and issuers a wide variety of financial
      data and information useful to individuals concerned with the
      international capital markets.




§
            Cultural
      Productions.  Commencing with the Great Wall Ice Tour, a
      travelling multimedia entertainment facility constructed of snow and ice,
      we intend to mine the rich cultural heritage of China to produce and
      distribute a wide variety of cultural
  entertainments.





Results
of Operations




Our
revenue grew by 74% during the three months ended March 31, 2010, and by 17%
during the nine months ended March 31, 2010.  The growth is primarily
attributable to the expansion of our animation development business, although
third quarter growth was also abetted by revenue from our cultural production
department, which has brought the Great Wall Ice Tour into full
production.




During
the nine months ended March 31, 2010, animation design and development accounted
for $3,104,331 of our revenues (77% of our total revenues) and generated
$1,348,759 in
operating income (74% of our operating income). Membership fees relating to our
Trans World Financial Website accounted for the $244,162 in revenue and
generated $183,958 in operating income, which was a significant reduction from
the $687,563 in revenue and $602,764 in operating income that the Website
produced in the nine months ended March 31, 2009.  The remaining
$708,939 in revenue was primarily attributable to the Great Wall Ice Tour, which
yielded $318,076 in operating income, primarily in the third
quarter.





22




We expect
that animation development will continue to provide the largest portion of our
financial results, particularly as we are experiencing a decline in utilization
of our financial information website.   Our animation development
operations will be significantly expanded when we complete the acquisition of
Chongqing Dinv Ares Filming Production Co., Ltd.  (“Dinv
Ares”).  In March 2010 we deposited the purchase price - 500,000
shares of our common stock - with the owner of Dinv Ares, and we expect that we
will be able to complete the acquisition of Dinv Ares during the quarter ending
on June 30, 2010.  The acquisition will expand the range of our
company’s service offerings and increase animation development
revenue.





Because
our current operations are focused on service industries, we record a low cost
of goods sold, compared to the cost of goods sold recorded by our
now-discontinued network engineering business.  During the three
months ended December 31, 2009, however, we completed some relatively low-profit
animation projects, with the result that our operating income from animation
development in that quarter was only 16% of animation revenues.  We
remedied that problem in the third quarter, which ended on March 31, 2010, as
our animation development projects achieved margins more in line with
traditional levels.  This brought overall gross margin for the third
quarter up to 74%, which compared favorably with the 44% margin we achieved in
the second quarter, although falling short of the 85% revenue we achieved in the
three months ended March 31, 2009, when a significant portion of our revenue
came from our financial information business, which tends to be very high
margin.  Our gross margin will vary from one period to another,
depending on our success in pricing the animation contracts we
perform.  In general, however, we expect our gross margin ratio to
remain high.





On the
other hand, the overhead required to maintain an animation development business
is greater than that required by the network engineering business.  We
currently have a staff of 129 employees dedicated to the animation development
business, and their salaries are accounted for as general and administrative
expense.  For that reason, our general and administrative expenses
during the nine months ended March 31, 2010 increased by 47%, from $464,500 in
the first nine months of fiscal year 2009 to $683,626 in the first nine months
of fiscal year 2010.  G&A expenses grew in the third quarter by
78%.





In April
2009 we determined that our cash assets exceeded our immediate
needs.  Therefore we invested $2.1 million of our cash with an
investment management company that contracted to provide us a 15% annual
return.  Primarily as a result of this investment, we accrued interest
income of $251,039 in the nine months ended March 31, 2010.  In the
nine months ended March 31, 2010, when our cash was deposited in bank accounts
only, our interest income was only $14,256.  In April 2010 the
investment management company returned the principal of our
investment.  Our interest income for future periods, therefore, will
be lower than in the past 12 months.





23




Due
primarily to the low margin contracts that we completed in the second quarter of
the current year, our gross margin in the nine months ended March 31, 2009 (87%)
substantially exceeded our gross margin in the nine months ended March 31, 2010
(67%).  As a result, our income before income taxes for the nine
months ended March 31, 2010, $2,065,649, was 12% lower than the income before
income taxes of $2,356,665 realized during the nine months ended March 31,
2009.  However, third quarter 2010 pre-tax income ($937,954) exceeded
third quarter 2009 pre-tax income ($592,208) by 58%.  After accruing
income taxes at the national rate of 25%, we recorded net income of $1,519,399
($.07 per share) for the first nine months of fiscal 2010, a 13% decline from
the first nine months of our last fiscal year.  We do not expect the
decline to continue, however, since our animation business is already producing
better and more profitable revenue.





Liquidity
and Capital Resources





To date,
our operations have been funded by capital contributions from Hairong’s
management and employees.  Approximately 54% of the capital
contribution has been made by members of management and their business
associates.  The remaining 46% was contributed by the employees,
acting through a trustee.  The Company expects that in the future it
will issue equity to the employees to compensate them for their financial
contributions to the growth of Hairong, and to incentivize them for future
loyalty to Hairong.




At March
31, 2010, our working capital was $6,411,859, including $2,181,877 in
cash.  Working capital increased by $1,469,466 during the first nine
months of fiscal 2010.  Our issuance of 500,000 shares as a deposit
against the purchase of Dinv Ares contributed to the increase, as did the
profits from our operations.  On the other hand, during the current
year we have used $4,147,536 in cash to purchase new technology for our
animation department and to construct a school for training animation designers,
reducing our working capital by those amounts.  In April 2010 we
liquidated our short-term investment of $2,200,500, thereby adding to our cash
assets.


Our
operations during the first nine months of fiscal 2010 produced $3,904,600 in
cash.  Cash flow from operations exceeded net income primarily
because, during the nine months ended March 31, 2010, we utilized $1,443,440 in
credits due to us as a result of prepayments to our suppliers in prior
periods.  Our operations were also cash-positive in each of the past
two fiscal years -providing $819,226 in cash during the 2009 fiscal year and $2,030,233 in
cash during the 2008 fiscal year.  For this reason, we believe that
our cash resources are adequate to fund our operations for the foreseeable
future.




We expect
to fund several significant capital improvements during the next twelve
months:




·
            a
      significant upgrade to our Website’s infrastructure, in order to
      facilitate a rapid expansion of the user
base;


·
            acquisition
      of additional specialized equipment for our Ice
  Tour;


·
            additional
      animation equipment; and


·
            completion
      of a dedicated education facility for the training center associated with
      our animation department.





At present, we anticipate that we will
finance these projects from our capital resources.  However, if we are
able to obtain financing on favorable terms, we may use external financing for
one
or more of the projects.  Currently we have fixed assets with a book
value of $8,600,235, on which there is no lien.  This provides us the
ability to obtain secured debt financing, if we decided to preserve our working
capital. Based on this experience, we anticipate that our capital resources will
be adequate to fund our operations and our anticipated growth for the
foreseeable future.





24




Off-Balance Sheet
Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.








ITEM
      3
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
applicable.





ITEM
4.                 CONTROLS
AND PROCEDURES





Evaluation of Disclosure Controls
and Procedures.  Our Chief Executive Officer and Chief Financial
Officer carried out an evaluation of the effectiveness of the Company’s
disclosure controls and procedures as of March 31, 2010.  Pursuant to
Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, “disclosure controls and procedures” means
controls and other procedures that are designed to insure that information
required to be disclosed by the Company in the reports that it files with the
Securities and Exchange Commission is recorded, processed, summarized and
reported within the time limits specified in the Commission’s rules.
 “Disclosure controls and procedures” include, without limitation, controls
and procedures designed to insure that information the Company is required to
disclose in the reports it files with the Commission is accumulated and
communicated to our Chief Executive Officer and Chief Financial Officer as
appropriate to allow timely decisions regarding required disclosure.  Based
on their evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company’s system of disclosure controls and procedures was
effective as of March 31, 2010 for the purposes described in this
paragraph.





Changes in Internal Controls.
 There was no change in internal controls over financial reporting (as
defined in Rule 13a-15(f) promulgated under the Securities Exchange Act or 1934)
identified in connection with the evaluation described in the preceding
paragraph that occurred during the Company’s third fiscal quarter that has
materially affected or is reasonably likely to materially affect the Company’s
internal control over financial reporting.





PART II   -
  OTHER INFORMATION




Item
1A                   Risk
Factors




There have been no material changes
from the risk factors included in the Annual Report on Form 10-K for the year
ended June 30, 2009.




Item
6.                     Exhibits




31.1           Rule
13a-14(a) Certification – CEO


31.2           Rule
13a-14(a) Certification – CFO


32  
           Rule 13a-14(b)
Certification





25




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.





CHINA
      DIGITAL ANIMATION DEVELOPMENT INC.Date:
      May 17, 2010
            By:
      /s/ Fu
      QiangFu
      Qiang, Chief Executive OfficerBy:
      /s/ Hu
      YumeiHu
      Yumei, Chief Financial Officer









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